Course Errors Found in 2021/2022 Study Materials P2.T8. Liquidity and Treasury Risk

[Nicole Seaman]

Please use this new thread to let David and I know about any errors, missing/broken links, etc. that you find in the 2021/2022 materials that are published in the study planner under P2.T8. Liquidity and Treasury Risk. This will keep our forum much more organized. We appreciate your cooperation!

PLEASE NOTE: Our Practice Question sets already have links to their specific forum threads where you can post about any errors that you find. This thread is for any other materials (notes, spreadsheets, videos, etc.) where you might find errors.

Information needed for us to correct errors:

• Reading
• Page number
• Error

 

[sohinichowdhury]

Reading: Ang, Illiquid Assets (Chapter 13).
Page 16
In the third equation, the coefficient on the lagged observed return is missing a theta in the numerator.

 

[sohinichowdhury]

I believe this is an error (can someone please confirm?)

Reading: Rose & Hudgins Chapter 7
Page: Top lines of page 26
Error: The 4 words with a strike out in these lines should read the opposite.

Essentially, if the leverage duration gap is positive, then a parallel change in all interest rates will cause liabilities to change by less than assets. Consequently, if interest rates fall, liabilities will increase more than assets and the firm’s net worth will decline. On the flip side, if interest rates rise, liability values will fall faster than asset values and the net worth of the firm will increase.

 

[Branislav]

Dear @Nicole Seaman , I think this should be Net after - tax return on municipals ( if irrelevant please disregard):
kind regards

 

[Hamam]

Hi David,
Just wanted to let you know that the study notes (Castagna Ch.6) need to be amended slightly, the chart on the last page ( I think this table were from the books) says that the TSECF & the TSECCF is changed for the reverse repo agreement, but in this transaction ownership is with the counter party so actually for the bank these term structures don't change.
Thanks

 

[NChen4707]

Hi all,

Rose, Chapter 7. Risk management for Changing Interest
Page 8
Formula for Fisher equation is wrong - it should be: Real Interest = Nominal Interest Rate - Inflation Rate rather than

 

[NChen4707]

In addition to above:
Page 26 for Rose, Chapter 7. Risk management for Changing Interest

See the paragraph at the top. It started by saying that positive gap = liabilities less sensitive than asset. But subsequent statements talked about how liabilities increase more or fall faster than asset. I feel like it's the other way around and it's a typo.

 

[bollengc]

hello,

in T8-R44-P2-Hull-RMFI-Ch24-v3.pdf, page 3, s notation is used for both the spread and the proportional bid-offer spread.

as well, there might be some typo in the sentence highlighted in yellow. I guess what was meant was "the proportional bid-offer spread is simply this equation divided by the mid-market price."



As well, as mentioned in https://forum.bionicturtle.com/thre...and-treasury-risk-old-thread.23017/post-85229, the numerical example on page 4 and 5 is not good.
Mid market values on page 4 are ok but the rest of the computation does not make sense.



If you were to apply the computation of the last line, you would even get $150,000,000 and not $105,011,875.

but the good value should be: (100.5-100)/100.25*(100 mil/2*100.25) + (20.1-20)/20.05*(200mil/2*20.05)

 

[AChau2828]

Liquidity practice question --

20.2.2. A position with a value of $2.0 million consists of 50,000 shares of stock. The stock is quoted bid $39.00, offer $41.00. The bid-offer spread has a volatility of 2.0%. The stock's daily volatility is 2.00% or 200 basis points. For purposes of value at risk (VaR), assume the stock's arithmetic returns are normally distributed (aka, normal VaR) and the expected daily return rounds to zero (under these assumptions absolute VaR is identical to relative VaR). We want to measure the cost of liquidity under stressed market conditions; aka, we will assume a worst- case volatile spread rather than a static spread.
Which is NEAREST to the position's one-day 95.0% confident liquidity-adjusted value at risk (LVaR)? (Please assume a rounded normal deviate of 1.65).
$76,300
$149,000
$318,000
$755,000
.

1. Solution - B. True: $149,000
   
   •  The one-day 95.0% VaR is given by -0 + 2.00% * 1.65 * 2.0 million = $66,000.
   •  The volatile-spread liquidity cost (LC) in percentage terms is given by 0.5 * (5.0% + 2.0% * 1.65) = 4.150%, such that the liquidity cost equals $2.0 million * 4.150% = $83,000.
   •  Therefore, the one-day 95.0% LVaR equals $66,000 + $83,000 = $149,000 (using an exact normal deviate, the answer is $148,691).

Question - how was the 5% mean spread % was calculated or was it assumed?

 

[bollengc]

Liquidity practice question --

20.2.2. A position with a value of $2.0 million consists of 50,000 shares of stock. The stock is quoted bid $39.00, offer $41.00. The bid-offer spread has a volatility of 2.0%. The stock's daily volatility is 2.00% or 200 basis points. For purposes of value at risk (VaR), assume the stock's arithmetic returns are normally distributed (aka, normal VaR) and the expected daily return rounds to zero (under these assumptions absolute VaR is identical to relative VaR). We want to measure the cost of liquidity under stressed market conditions; aka, we will assume a worst- case volatile spread rather than a static spread.
Which is NEAREST to the position's one-day 95.0% confident liquidity-adjusted value at risk (LVaR)? (Please assume a rounded normal deviate of 1.65).
$76,300
$149,000
$318,000
$755,000
.

1. Solution - B. True: $149,000
   •  The one-day 95.0% VaR is given by -0 + 2.00% * 1.65 * 2.0 million = $66,000.
   •  The volatile-spread liquidity cost (LC) in percentage terms is given by 0.5 * (5.0% + 2.0% * 1.65) = 4.150%, such that the liquidity cost equals $2.0 million * 4.150% = $83,000.
   •  Therefore, the one-day 95.0% LVaR equals $66,000 + $83,000 = $149,000 (using an exact normal deviate, the answer is $148,691).

Question - how was the 5% mean spread % was calculated or was it assumed?

the mean spread = spread (41-39) / mid price (40)=2/40=5%

 

[bollengc]

hello David (@David Harper CFA FRM )

in T8-R58-P2-Borio-v3, bottom of page 4 + part up of page 5, I really have difficulty understanding the different steps

starting point:


Suppose for simplicity that the real interest rate in the foreign currency is sufficiently small to be
negligible.



how do we end up to the first part of the equation, and then to the part but the bid and ask values?


thanks,
Camille

 

[David Harper CFA FRM]

David's Notes (2023-01-30)

• Re #2 [updated file = T8-R61-P2-Ang-Ch13-v9-1] Ang's observed return process: this is an error. Fixed. https://forum.bionicturtle.com/thre...-liquidity-and-treasury-risk.23688/post-86952
• Re #3 [updated file = T8-R60-P2-Rose-Ch7-v3-1] Rose and Hudgins. User is exactly correct: all four words Fixed https://forum.bionicturtle.com/thre...-liquidity-and-treasury-risk.23688/post-86970
• Re #4 [updated file = T8-R48-P2-Rose-Ch10-Ch11-v3-1] Bank qualified bond: the formula's text was incorrect and should read "Net after-tax return". Fixed per https://forum.bionicturtle.com/thre...-liquidity-and-treasury-risk.23688/post-89241
• Re #5 [updated file = T8-R50-P2-Castagna-Ch6-v3-1] Added caveat ("Please note: In regard to “Reverse repo” above, Castagna’s Table 6.4. contains a likely error: The TSECF/TSECCF column should read “No” per their unchanged status in a reverse repo transaction.")
• Re #6 [same updated Rose above] Fisher equation fixed
• Re #7 same as #3
• Re #8 [updated file = T8-R45-P2-Hull-RMFI-Ch24-v3-1] . Member is correct. Was mistake but I revised symbol notation and fixed.
• Re #11 [updated file = T8-R59-P2-Borio-v3-1] Member is totally correct. I reduced to much simpler representation of same confusing Borio

 

[enjofaes]

Hi David, sentencing in yellow below mentioned above by @bollengc is still used in the notes. Mid-market price should be proportional bid-offer spread which is the equation divided by mid-market price

 

[David Harper CFA FRM]

Hi @enjofaes Yes, thank you! This mistake (these mistakes) for this LOS have been fixed, but the updated Note has not been published yet. ASAP. Sorry for the inconvenience.

 

[JLafr0337]

There's an error in the vitalsource notes regarding nominal interest rates.

reading 60, p.8 (337 in vitalsource) states : nominal interest rate = real rate - inflation rate




However, nominal insterest rate is real + inflation, as confirmed by GARP's Liquidity and treasury risk p.354

 

[JLafr0337]

Another error in Reading 60
p. 22 (p.351 in VitalSource)

The formula for Macaulay Duration in the notes has a mistake. The period exponent applies to the whole t/(1+YTM), while it should only apply to the denominator (1+YTM)

Notes in VitalSource:



Correct formula should be (as validated in GARP's p.365):

 

[prianthar]

Hi,
Pg 148 in the Liquidity risk notes are blank, it jumps straight to a graph, think its meant to elabourate on the liquidity option.

 

[Nicole Seaman]

Hi,
Pg 148 in the Liquidity risk notes are blank, it jumps straight to a graph, think its meant to elabourate on the liquidity option.View attachment 3907

@prianthar I just opened the Liquidity Risk PDF in Vital Source, and there are no blank pages showing. I'm not sure if others have had this issue, but nobody else has pointed it out. Page 148 correctly shows the full text in the notes on my end. I suggest trying another browser to see if that may be the issue. I've tested Microsoft Edge and Google Chrome with no issues.

 

[Nicole Seaman]

Moving forward, this is the new error thread for the 2023 materials in Liquidity Risk: https://forum.bionicturtle.com/thre...ials-p2-t8-liquidity-and-treasury-risk.24427/