Blog Week in Risk (June 17th)

[David Harper CFA FRM]

Thank you @Nicole Seaman for cataloging our practice question in an Airtable (we hope this might eventually develop into a helpful supplementary tool, given we have over 4,000 practice questions in our database)! https://www.bionicturtle.com/bionic-turtles-practice-questions/

New practice questions

• P1.T4.808. The limitations of value at risk (VaR) (Dowd Ch 2) https://trtl.bz/2K0tInz
• P2.T7.801. Principles for the sound management of operational risk: Tools https://trtl.bz/2K2aMov

New YouTube videos

• Volatility: Exponentially weighted moving average, EWMA (FRM T2-22) https://trtl.bz/2LYKukx
• Commodity Cost of Carry: Storage Cost (FRM T3-14) https://trtl.bz/2JLO3hi

In the forum

• [P1.T1] Is it true that efficient portfolios are well-diversified, but well-diversified portfolios may not be efficient? https://trtl.bz/2HWgl2w
• [P1.T3] Overcoming the TI BA II+ calculator's inability to accept non-integer periods in its time value of money (TVM) worksheet https://trtl.bz/2HWgsLu
• [P1.T3] There is a pattern to solving a typical swap-gains-advantage question: 1. identify each company's comparative advantage; this should be the external trade, 2. Use the share of net gain to determine each company's net trade, 3. Size the swap accordingly https://trtl.bz/2K1ioHY
• [P1.T3] Unless specified otherwise, assume interest rates are expressed in per annum terms. For example, "six-month LIBOR is 4.0%" refers to a six-month rate of 4.0% per annum https://trtl.bz/2JZnvs4
• [P1.T3] In a vanilla swap, the floating rate is observed at the beginning of the (six-month, in this case) period, but paid at the end of the (six-month) period; aka, the cash settles in arrears https://trtl.bz/2K2ba6r
• [P1.T4] A good and common question about Black-Scholes and dividends https://trtl.bz/2JUZXol The dividend subtracts from the stock price in both the "outer" and inner N(d1) formulas. Further, dividend can be subtracted in either lumpy or continuous form, but don't do both because that double-subtracts! And, an option on a foreign currency is just a special case where the asset is a currency such that its "dividend" is its own risk-free rate https://trtl.bz/2JWPZTb
• [P1.T4] Tuckman's explanation of the regression hedge https://trtl.bz/2K1zxB6
• [P1.T5] Value at risk (VaR) backtest intervals have a lower or upper cutoff, it depends on the context https://trtl.bz/2JViz7w

External

Banking and geopolitics

• Thousands of Bank Branches are Closing, Just Not at These Banks https://www.wsj.com/articles/the-bank-branch-is-dyingjust-not-at-these-banks-1529055000
• Angelo Mozilo [ex CEO Countrywide] Is Unrepentant. But There’s No Second Act for the Head of Defunct Lender. https://trtl.bz/2HWU70D
• The Fed raises the federal-funds rate 25 basis points to a range between 1.75% and 2.00% https://www.federalreserve.gov/newsevents/pressreleases/monetary20180613a.htm; Federal Reserve Board approves rule to prevent concentrations of risk between large banking organizations and their counterparties from undermining financial stability https://www.federalreserve.gov/newsevents/pressreleases/bcreg20180614a.htm; and PIMCO: The Fed Raises Rates as Expected but the Path of Future Hikes Grows More Uncertain https://trtl.bz/2HUjG2l
• E-Commerce Might Help Solve the Mystery of Low Inflation https://www.nytimes.com/2018/06/11/business/economy/inflation-internet.html
• Geopolitical Uncertainty Wanes, Pushing Mortgage Rates Back Up https://www.zillow.com/research/mortgage-rates-june-6-20258/ Geopolitical uncertainty spurs a flight to quality which puts downward pressure on longer-term U.S. Treasury rates such that "aspiring homebuyers in the U.S. are indirect beneficiaries of turbulent global politics."
• The Return of the Political-Risk Trade https://www.wsj.com/articles/political-risk-returns-to-markets-as-tide-of-stimulus-wanes-1528719648 I didn't realize there existed a "widely used Global Economic Policy Uncertainty Index" found at http://www.policyuncertainty.com (methodology: "to measure policy-related economic uncertainty, we construct an index from three types of underlying components. One component quantifies newspaper coverage of policy-related economic uncertainty. A second component reflects the number of federal tax code provisions set to expire in future years. The third component uses disagreement among economic forecasters as a proxy for uncertainty.")

Risk and risks

• BlackRock Woos Wealth Managers With Risk ‘X-Ray’ Tool https://www.bloomberg.com/news/arti...-wealth-managers-with-aladdin-risk-x-ray-tool
• Scarce Liquidity Is a Growing Risk https://www.bloomberg.com/view/articles/2018-06-12/scarce-liquidity-is-a-growing-risk
• Gartner Names Risk Quantification a Critical Capability of Integrated Risk Management https://trtl.bz/2I11gge
• The Next Plague Is Coming. Is America Ready? https://www.theatlantic.com/magazine/archive/2018/07/when-the-next-plague-hits/561734/
• Betting on Disaster: Why Risk Management Is a Leadership Issue http://knowledge.wharton.upenn.edu/article/companies-prep-natural-disasters/
• Operational Re II Ltd., a second operational risk cat bond, closes at CHF146m https://trtl.bz/2HWp7O0 "This is only the second operational risk ILS or catastrophe bond deal we’ve seen in our twenty plus years tracking ILS market deals"
• Goldman: Upside Risk to Home Prices http://www.calculatedriskblog.com/2018/06/goldman-upside-risk-to-home-prices.html

Careers

• Investment banking: stronger franchises emerge 10 years after crisis (ft.com, pdf) https://trtl.bz/2t3ZPsH
• Q&A: Machine Learning in Finance https://blog.coursera.org/gain-career-edge-with-machine-learning-in-finance/

Investing

• Why Commodity-Index Investing May Be Futile https://www.wsj.com/articles/why-commodity-index-investing-may-be-futile-1491789841 Reason #4 (aka, contango's negative roll return): "4. Storage costs. When investors buy commodities, they sometimes end up paying for the cost of storage. For example, the cost of storage is baked into a futures contract for 1,000 barrels of crude oil." And [CFA Institute's In Practice Summary] Reassessing the Drivers of Commodity Futures Returns https://trtl.bz/2HZuaxh
• Structuring adjusted EBITDA now exists (ft.com alphaville) https://trtl.bz/2JYGfIk
• The Future of Global Investing [71st CFA Institute Annual Conference] https://annual.cfainstitute.org/2018/06/11/the-future-of-global-investing/
• How To Make Lots Of Money During The Next Downturn https://www.financialsamurai.com/how-to-make-lots-of-money-during-the-next-downturn/

Personal Finance

• Next Stop for Mutual-Fund Fees: Zero https://www.wsj.com/articles/next-stop-for-mutual-fund-fees-zero-1528652532, and: Here's how it works now http://thereformedbroker.com/2018/06/11/heres-how-it-works-now/
• Auto Lenders Ramp Up Risk to Win More Customers https://www.wsj.com/articles/auto-lenders-ramp-up-risk-to-win-more-customers-1528639200 "In the first quarter, the average loan term for a new car exceeded 69 months, the second consecutive quarter it had ever been above that level … new car loans originated with repayment periods of between 73 and 84 months represented more than a third of total new car loans, up from 7% of loans in late 2009."
• Merrill Considers Lifting Ban on Commission-Based Retirement Accounts https://trtl.bz/2HXzq4s
• Standing Up for the Retail Investor https://corpgov.law.harvard.edu/2018/06/10/standing-up-for-the-retail-investor/ Introduces https://mainstreetinvestors.org/
• Celebrating 10 Years Of Kitces.com And Hiring For The Future https://www.kitces.com/blog/celebrating-10-years-kitces-nerds-eye-view-hiring-career-opportunities/

Tech

• The Law and Finance of Initial Coin Offerings https://corpgov.law.harvard.edu/2018/06/16/the-law-and-finance-of-initial-coin-offerings/
• Cryptocurrencies: What Is Blockchain? https://blogs.cfainstitute.org/investor/2018/06/11/cryptocurrenices-blockchains-value/
• The world may soon be awash in advanced, lethal drones https://trtl.bz/2HYiT0i

Quant

• Discrete or continuous modeling? https://freakonometrics.hypotheses.org/53197
• None of us understand probability https://www.rcmalternatives.com/2018/06/none-of-us-understand-probability/
• Monte Carlo Part Two https://rviews.rstudio.com/2018/06/13/monte-carlo-part-two/
• Prediction Interval, the wider sister of Confidence Interval https://datascienceplus.com/prediction-interval-the-wider-sister-of-confidence-interval/

Book

• [book review] Bad Blood https://valueandopportunity.com/201...secrets-and-lies-in-a-silicon-valley-startup/
• [book review] 6 Things I Learned From Big Mistakes http://awealthofcommonsense.com/2018/06/6-things-i-learned-from-big-mistakes/ Batnick, Big Mistakes http://readingthemarkets.blogspot.com/2018/06/batnick-big-mistakes.html

Other

• Upgrade Your Brain: 9 Mental Models that Help you Think Clearly https://trtl.bz/2JWevDZ
• New Accounting Rules Change How Some Companies Sell Goods, Services https://trtl.bz/2HYt70u
• Introducing Currents: a view of 1 billion people’s attention https://blog.parse.ly/post/7408/introducing-currents-a-view-of-1-billion-peoples-attention/
• Coastal High Tide Flooding Escalates, NOAA Reports http://www.riskmanagementmonitor.com/coastal-high-tide-flooding-escalates-noaa-reports/ "The projected increase in high tide flooding in 2018 may be as much as 60% higher across U.S. coastlines as compared to typical flooding about 20 years ago and 100% higher than 30 years ago. This is due to long-term sea level rise trends and, in part, by El Nino conditions that may develop later this year."