Blog Week in Risk (Jan 20th)

[David Harper CFA FRM]

New YouTube

• Binomial tree option price: American-style (FRM T4-8) https://trtl.bz/2T4APgd
• Foreign exchange exposure for the unhedged balance sheet (FRM T3-48) https://trtl.bz/2FMV3Hp

New Practice Questions

• P1.T4.902. Swap rates versus spot rates (Tuckman Ch. 2) https://trtl.bz/2FC5QVv
• P2.T9.902. Big data techniques including machine learning (Varian) https://trtl.bz/2FCMwrd

In the Forum

• [P1.T1] Sample interview questions about the capital asset pricing model (CAPM) https://trtl.bz/2FENm6Z
• [P1.T2] Diebold EOC questions are not exam representative https://trtl.bz/2FDDXN2
• [P1.T2] In most case, the null hypothesis can be deduced from a minimum setup (a key tip is that the null must contain the equality!) https://trtl.bz/2FE1CfZ
• [P1.T2] You definitely need to know how to get the hedged portfolio variance https://trtl.bz/2FEOYh3
• [P1.T3] Hull's define benefit pension calculation and unearned premiums are a function of the revenue recognition policy https://trtl.bz/2FuPWeM
• [P1.T3] Thank you @abhinavkhanna for pointing out that mutual fund NAV is net of liabilities https://trtl.bz/2FE1Kwb
• [P2.T5] In a value at risk (Var) backtest, the sample failure rate is an unbiased estimator https://trtl.bz/2FvsPAI
• [P2.T5] When an alternative swap duration is not really different than our approach https://trtl.bz/2FEi9AW
• [P2.T5] Backtest confidence is different than VaR confidence https://trtl.bz/2FCdKOM
• [P2.T7] Hull's EOC Question 15.6 on capital requirements for derivatives under original Basel https://trtl.bz/2FCZSE2

External

Risk

• World Economic Forum's (WEF) Global Risks Report 2019 https://www.weforum.org/reports/the-global-risks-report-2019 Visual Capitalist with highlights https://www.visualcapitalist.com/top-global-risks-2019/
• Allianz Risk Barometer 2019 https://trtl.bz/2FAagMA "Cyber risk is now a core concern for businesses in 2019 and beyond …"
• [GARP] Strategic Risk Will Be Front and Center in 2019 https://trtl.bz/2FDR3JY
• [GARP] Term Versions of Libor-Replacement Rates Pick Up Steam https://trtl.bz/2FDJAus
• Here’s Why Libor’s End Is a Headache for Switzerland https://trtl.bz/2FR9ri1 "Swiss franc-Libor rates underpin about $6.5 trillion of financial products and are used to price about 80% Swiss banks’ loans."

Banking and Regulatory

• [BIS] Minimum capital requirements for market risk https://www.bis.org/bcbs/publ/d457.htm "At its meeting in Basel on Monday 14 January 2019, the Basel Committee's oversight body … endorsed a set of revisions to the market risk framework." Please note this comes with a 25-page explanatory note https://www.bis.org/bcbs/publ/d457_note.pdf
• [BIS] Basel Committee completes review of Principles for sound liquidity risk management and supervision https://www.bis.org/press/p190117.htm
• [GARP] Regulators Signal Readiness for Artificial Intelligence (AI) in AML https://trtl.bz/2FDhbVg
• OCEI Examination Priorities for 2019 https://corpgov.law.harvard.edu/2019/01/20/ocei-examination-priorities-for-2019/

Quant, code and cyber

• Detecting Credit Card Fraud Using Machine Learning (Catching Bad Guys with Data Science) https://trtl.bz/2FOCbYz This is exactly one of Bart van Liebergen's ML use cases (i.e., fraud) in the FRM P2.T9 assigned reading (Machine Learning: A Revolution in Risk Management and Compliance?)
• An intuitive guide to Gaussian processes https://trtl.bz/2FDOUhl
• Curse of Dimensionality https://towardsdatascience.com/curse-of-dimensionality-2092410f3d27
• ROC Curves https://rviews.rstudio.com/2019/01/17/roc-curves/
• A Gentle Introduction to Exploratory Data Analysis (Includes: pretty drawings, a walkthrough Kaggle example and many a challenge) https://trtl.bz/2FHvJUb
• Making intelligent decisions that consider cyber risk (Norman Marks) https://trtl.bz/2FNHaZp, and Hyperventilating about cyber – Part I https://trtl.bz/2DndNvF

Case studies

• Wells Fargo: Repairing a Damaged Brand (ft.com) https://trtl.bz/2FOgrMg (or pdf here https://trtl.bz/2MkdMLC): "dozens describe a damaged brand, a workforce held back by fear of repeating past mistakes, and the immense difficulty of drawing a line under one of the ugliest banking scandals in an era full of them … A strong culture of credit risk management was matched by precious little culture of operational risk management."
• How Much Value Was Destroyed by the Lehman Bankruptcy? (NY Fed) https://trtl.bz/2FKYNt4 Matt Levine commentary https://trtl.bz/2FS5tpp
• BNP Loses $80 Million on S&P 500-Linked Derivative Trades https://trtl.bz/2FDO4RJ
• 9 Black Swan Events that changed the Financial World https://trtl.bz/2FF1SLI

Investing

• O’Shaughnessy Quarterly Investor Letter Q4 2018 https://www.osam.com/Commentary/osam-quarterly-investor-letter-q4-2018 If you'd like to see Ang's factor theory in action, here is a thought leader
• 10 Tips for 10-Ks and Proxy Statement https://corpgov.law.harvard.edu/2019/01/20/10-tips-for-10-ks-and-proxy-statement/
• Agency MBS: Time to Rethink Prepayments (PIMCO) https://trtl.bz/2FNKBPZ

Other

• US Government Shutdown: Key Risk and Insurance Considerations (Marsh, pdf) https://trtl.bz/2T3osAX
• The mortgage industry isn’t ready for a foreclosure crisis created by climate change https://trtl.bz/2FEopZs