Errors Found in Study Materials P2.T7. Operational & Integrated Risk (OLD thread)

[Nicole Seaman]

Please use this thread to let David and I know about any errors, missing/broken links, etc. that you find in the materials that are published in the study planner under P2.T7. Operational & Integrated 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. The new forum threads are for any other materials (notes, spreadsheets, videos,etc.) where you might find errors.

Information needed for us to correct errors:

• Reading
• Page number
• Error

 

[afterworkguinness]

I think I've found another typo in the notes for Hull (BT notes page 9) (not sure if it's in the source). I feel a bit silly in that I'm not 1000% on this, but it seems wrong.

Let’s consider a corporate bond issued by a company XYZ Ltd. There are two types of risk
associated with the bond:

1. Interest rate risk, as rise in prevailing interest rates can have negative impact of
bond’s yield (value of bond will fall down)

It should be rise in rates has a negative impact on bond's price (which has a positive impact on bond's yield) right?

http://www.investopedia.com/ask/answers/04/031904.asp

 

[afterworkguinness]

Sorry, me again. The formatting of the AIM "Define in the context of Basel II and calculate where appropriate: probability of default (PD), Loss given default (LGD), Exposure at default (EAD) & Worst-case probability of default" is a bit confusing.

It starts out with "In Basel II Accord, there are 3 approaches prescribed for banks to compute their credit risk. In this section, each approach will be covered briefly" and lists #1 as Standardized approach, but IRB and FIRB are not numbered, and have the same emphasis as sub points to standardized.

 

[afterworkguinness]

Hi @Nicole Manley and @David Harper CFA FRM CIPM, I've got another one for you from the same Hull reading (chapter 13 this time, page 28)
The notes read as follows


"Assuming that the liquidity horizon for an A rated bond is three months.

For the calculation of VaR over a one-year time horizon, the bank considers that at
the end of three months, if the bond’s rating has changed or if it has defaulted, it is
replaced by an A- (read as A negative) rated bond similar to that held at the
beginning of the period."

Consulting Hull (the text that is )and the paper C. Finger, CreditMetrics and Constant Level of Risk, MSCI 2010 which Hull sources, I think the reference in parenthesis to interpret as A negative is incorrect. I believe you would sell the A rated bond at the 3 month liquidity horizon and buy another similar rated bond with the same time to maturity the original had at the beginning of the period

See bottom of page 2 here: https://www.msci.com/resources/rese...trics_And_Constant_Level_Of_Risk_Sep_2010.pdf

 

[Roopam]

Hi David,
This is with reference to Study notes for Girling Ch 12. Capital Modeling

1. Example 2 on page 7 of the notes, while calculating Capital using BIA approach calculates average of 3 years by dividing by 2, but when Standardized approach is used, divides by 3, though in both the cases gross value is -ve in one of the previous years. Is this a typo or difference in methodology?

2. Additionally I notice discrepancy in the Standardized Approach Formula vs Calculation done in Ex 2.

As per notes it is:
Sum of [ (3 yr -Avg Gross Revenue LOB1 * Beta 1) +(3 yr- Avg Gross Revenue LOB2 * Beta 2) + (3-yr - Avg Gross Revenue LOB3* Beta 3)+ ..... and so on]

But Example 2, calculates by aggregating all LOBs across year 1 & all LOBs across yr 2 and so on...

Which one is the right approach?( both approaches give different final answer due to presence of -ve gross revenues)

Regards
Roopam

 

[David Harper CFA FRM]

hi @Roopam

1. The notes look correct here. It is a difference between BIA and SA: BIA excludes a negative year (from numerator and denominator) such that dividing by 2 is correct; but SA converts the negative into zero (such that dividing by 3 is correct). If there is a negative, as in the example, there is a different outcome
2. I agree, the text description is incorrect, sorry, but the calculated Example 2 is correct: first, the weighted gross income (GI) for "Year 1" is computed by summing the product of each business lines' [GI_Yr1(1...8) * β(1...8)]; i.e., aggregation of all LOB across year 1; second, the weighted gross income (GI) for "Year 2" is computed by summing the product of each business lines' [GI_Yr2(1...8) * β(1...8)]; i.e., aggregation of all LOB across year 2; finally, same for year 3. Finally, if any of the totals for the year (year 1, year 2, year 3) are negative they are converted to zero and the denominator remains equal to 3. Sorry for the confusion, we will fix this is the next update. Thank you!

 

[Roopam]

Hello David,
So if I have understood it correctly, SIA approach still uses negative values (if any) as-is at LOB level, but after adding them all together for an year if the gross value is negative, than it is ignored. Thanks.

 

[David Harper CFA FRM]

@Roopam yes, exactly!

 

[Kaiser]

Hi,

It seems like the end of the sentence was not properly published.

R61.P2.T7, Study Notes, page 32.



Rgds,

 

[Kaiser]

Hi,

Typo in R64.P2.T7 Hull Study Notes page 6:

"
Solution:
Referring the table 2 above for fetching the add-on factor which comes out to be 0.5% for the
Interest Rate swap contract with remaining maturity (of 3 years) falling in the 1-5 years
bucket. Now the credit equivalent amount can be computed as:
0.5% x 400 + 2 = 2 + 3.5 = $5.5 million."

Should be

"
Now the credit equivalent amount can be computed as:
0.5% x 400 + 3.5 = 2 + 3.5 = $5.5 million."

3.5 being Max (V,0)

Rgds,

 

[Kaiser]

Hi,

I think there is a typo in R61.P2.T7, Study Notes page 26, with Liabilities $100 instead of $50 ?



Rgds,

 

[Kaiser]

Hi,

Minor: something wrong with the "bookmark not defined" in R63.P2.T7 Study Notes, page 2.

Rgds,

 

[Kaiser]

Hi,

Minor typo in R64.P2.T7, Hull Study Notes, page 27, the "}" character is not needed.



Rgds,

 

[Nicole Seaman]

Hi,

I think there is a typo in R61.P2.T7, Study Notes page 26, with Liabilities $100 instead of $50 ?

View attachment 879

Rgds,

Hello @Kaiser

Thank you for pointing this out. There was an error in the table. The correct table is below:



Thank you,

Nicole

 

[Kaiser]

Hi,

Re the working of the leverage ratio. It says that the minimum should be 3% but mathematically it is expressed as Leverage Ration <= 3%.

Mathematically it seems the this is translated as the maximum should be 3%. If the minimum is 3%, should not it be Leverage ratio >= 3% ?

R64.T2.P7 Hull, Study Notes, page 31:



Rgds,

 

[David Harper CFA FRM]

Hi @Kaiser Yes, apologies, as the leverage ratio is a minimum, it should read capital/exposure (≥) 3%. Thank you!

 

[Kaiser]

Hi,

R68.P2.T7 page 11, typo in the formula (note that the same typo is reproduced in the Formula sheet P2_v3 page 91).

It should be sVaR t-1 instead of sVaR t+1




Rgds,

 

[RaDi7]

Hi David, hi Nicole,

in the study notes "Range of Practices and Issues in Economic Capital Frameworks" on page 11 in the end the text ends abruptly as if it was cut off in the middle of the sentense:

Could you please check what is missing here.

Thank you and best regards!

 

[Nicole Seaman]

Hi David, hi Nicole,

in the study notes "Range of Practices and Issues in Economic Capital Frameworks" on page 11 in the end the text ends abruptly as if it was cut off in the middle of the sentense:
View attachment 1346
Could you please check what is missing here.

Thank you and best regards!

@RaDi7

Thank you for pointing this out. It has been fixed in the pdf and updated in the study planner.

Nicole

 

[RaDi7]

@RaDi7

Thank you for pointing this out. It has been fixed in the pdf and updated in the study planner.

Nicole

Thank you!