Blog Week in Risk (November 18th)

[David Harper CFA FRM]

New YouTube

• Combination option trades: straddle, strangle, strip/strap (FRM T3-39) https://trtl.bz/2S1mFv4
• Calendar and butterfly spread option trades (FRM T3-40) https://trtl.bz/2zgRPYJ The final video in T3 sub-series on Option Trading Strategies series
• Three approaches to value at risk (VaR) and volatility (FRM T4-1) https://trtl.bz/2A73iK5 The first video in new P1.T4 series
• Exotic options: compound option (e.g., call on a call) FRM T3-41 https://trtl.bz/2PH19PR The first video is T3 sub-series exotic option sub-series

In the forum

• [exam] Thank you @ag0511 for Part 1 tips https://trtl.bz/2LtK88G and Part 2 tips https://trtl.bz/2LtKlbY
• [career] Career path for a former actuary https://forum.bionicturtle.com/threads/career-path-for-a-former-actuary.21992/
• [P1 and P2] Thank you @Nicole Seaman for new full-length mock exams! Part 1 https://trtl.bz/2FmAlzz and Part 2 https://trtl.bz/2FnjRHt
• [GARP P1] GARP's challenging practice question on negative duration https://trtl.bz/2qI2abv
• [P1.T2] We only need a single violation of independence in the joint probability matrix to render the variables dependent https://trtl.bz/2qJxrec
• [P1.T2] Does our use of the chi-squared distribution require the i.i.d. assumption? https://trtl.bz/2qKuERZ
• [Hull T2] Hull EOC Q&A Chapter 10 https://trtl.bz/2qI5yTL
• {P1.T2] Why does one version of 2-asset portfolio value at risk (VaR) APPEAR to exclude individual volatilities? https://trtl.bz/2FvWj2W
• [P1.T3] Is there an intuition to the calculation of Macaulay duration? https://trtl.bz/2qJPxwo
• [P1.T3] Example of a two-step binomial pricing model question https://forum.bionicturtle.com/thre...-a-2-year-american-put-option.9259/post-72033
• [P1.T3] The time-additive property of continuous compounding renders Hull's cost of carry (COC) model flexible https://trtl.bz/2FnhwMH
• [P1.T4] What is Damodaran's primary argument AGAINST sovereign credit ratings? https://trtl.bz/2qKxW7q
• [P1.T4] In computing effective duration, the bond's yield and coupon have a specified compound frequency (e.g., semi-annual) but that's different than the "yield shock value" which is arbitrary and should be small; i.e., less than 100 basis points https://trtl.bz/2qIOr42
• [P1.T4] Understanding the assumption of unchanged term structure in bond pricing https://trtl.bz/2qKTt03
• [P1.T4] An FRM candidate definitely needs to know how to scale parametric normal VaR https://forum.bionicturtle.com/threads/delta-normal-var.21988/
• [P1.T4] Thank you @jwagner88 for identifying a mistake in my T4.812.2 binomial Q&A https://trtl.bz/2Fpw0M2
• [P2.T5] The only obvious way to decrease both error rates is to increase the sample size https://trtl.bz/2FnuQk8
• [P2.T5] Do big jump(s) imply an implied volatility frown or smile? https://trtl.bz/2FyAfom
• [P2.T5] Mapping a corporate bond https://trtl.bz/2qNiGa3
• [P2.T5] Why does the DV01 work when the hedge is a US Treasury bond against a Treasury Inflation Protected Security (TIPS)? https://trtl.bz/2qP2IfO
• [P2.T6] Thank you @Marco.Musci for a sweet decomposition (synthesis) of asset/interest rate swap https://trtl.bz/2qJ2s1F
• [P2.T6] Thank you @bzauski for the insight on the potential future exposure (PFE) of a loan https://trtl.bz/2qLydqM
• [P2.T7] There is really only one spread calculation in the FRM although (as is often the case) it can be expressed in dollar or percentage terms https://trtl.bz/2qKDD5y
• [P2.T7] The two versions of ARAROC are identical with respect to the accept/reject decision https://trtl.bz/2qHw8ft
• [P2.T8] We agree that Jorion's "expected return on the surplus scaled by assets" is awkward https://trtl.bz/2qIpvtr
• [P2.T8[ Jorion explains that if we maximize the portfolio information ratio subject to a fixed tracking error volatility (TEV), the relative risk budgets should be proportional to the information ratios https://trtl.bz/2qPijM3
• [P2.T8] The time-weighted return (TWR; aka, geometric average) chains together holding period returns (HPRs) https://trtl.bz/2FpvoWK

External Links

Banking and regulations

• [GARP] Risk-Management Weaknesses Persist Despite Profitability, Fed Says https://trtl.bz/2FqQjIS Here is the Fed's inaugural Supervision and Regulation Report https://trtl.bz/2Fv5z7v
• [GARP] EBA’s 2018 Stress Test: Better Results, But Still Cause for Concern https://trtl.bz/2FtyY1S
• FSB and BCBS publish final report on effects of reforms on incentives to centrally clear over-the-counter derivatives https://trtl.bz/2FwWxqM
• FSB publishes Cyber Lexicon http://www.fsb.org/2018/11/fsb-publishes-cyber-lexicon/
• FSB publishes 2018 G-SIB list http://www.fsb.org/2018/11/fsb-publishes-2018-g-sib-list/ BIS press release https://www.bis.org/press/p181116.htm
• FSB publishes progress report on reforming major interest rate benchmarks https://trtl.bz/2FvCN6K
• Banks Have a Solution for Their Identity-Fraud Woes: The DMV https://trtl.bz/2FFsm0q
• Bank Boards Continue to Fall Short Against Money Laundering, Survey Finds https://trtl.bz/2FvSwmu
• U.S. Expands Coverage of Real Estate Anti-Money Laundering Program https://trtl.bz/2FxiGoM
• Office of Financial Research (OFR) 2018 Annual Report to Congress https://www.financialresearch.gov/annual-reports/2018-annual-report/
• Inflated Home Appraisals Drain Billions From Government Insurance Fund https://trtl.bz/2Fvq4kx
• Ten Years after the Crisis, Is the Banking System Safer? (New York Fed) https://trtl.bz/2FxcHjW

Governance

• The 2018 U.S. Spencer Stuart Board Index https://corpgov.law.harvard.edu/2018/11/13/the-2018-u-s-spencer-stuart-board-index/
• The Red Flags of Fraud You May Not Know http://blog.lowersrisk.com/red-flags-of-fraud/
• AGCS D&O Insurance Insights: 10 Key Takeaways for 2019 https://trtl.bz/2FxemWG

Technology and Cyber

• Cybersecurity and the risk function (McKinsey) https://trtl.bz/2Fwr8EZ
• How to Audit Cyber Risk https://www.insblogs.com/technology/how-to-audit-cyber-risk/8597
• The Biggest Cyber Threats to Watch Out for in 2019 https://trtl.bz/2FqUCE2
• Facebook’s Failure to Mitigate Cyber Risks Could Cost Billions https://trtl.bz/2Fxp13y
• Money in a digital age: 10 thoughts https://www.bis.org/speeches/sp181115a.htm Interesting summary of the case against cryptocurrencies
• Meet the Robot Who Knows How to Trade Bonds Better Than You Do https://trtl.bz/2Fz2Hqj
• What Are We Learning about Artificial Intelligence in Financial Services? (Fed Governor Brainard's speech) https://trtl.bz/2FxXqzv

Risk

• Life Insurance Companies Are Luring Fitbit and Apple Watch Users With Deals https://trtl.bz/2Fx54tU
• SEC Whistleblower Program Has Record-Breaking Year https://trtl.bz/2FsYowU "The SEC, which established the program in 2011 as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, awarded more than $168 million to 13 individuals in the last fiscal year … more than all of the prior six years combined."
• [new book] Analytical Techniques in the Assessment of Credit Risk: An Overview of Methodologies and Applications https://amzn.to/2Tsz9hc

Natural

• Fires in Paradise: Exposure Growth and Catastrophe Risk in the Wildland-Urban Interface https://trtl.bz/2Ftcs9l
• How Catastrophe Models Help Cities Boost Resilience https://www.air-worldwide.com/Blog/How-Catastrophe-Models-Help-Cities-Boost-Resilience/
• Financing Resilience https://www.rms.com/blog/2018/11/13/financing-resilience/

Quantitative

• Measuring Model Goodness https://trtl.bz/2FkJt7W Part 2 of a dense, superior introduction
• Inferential Statistics for Data Science https://trtl.bz/2Ft2PI4
• Understanding Descriptive Statistics https://trtl.bz/2Fxp9jy
• How to Use and Create a Z-Table (Standard Normal Table) https://trtl.bz/2FFsj4K
• Bayesian Musings from a Non-Statistician https://trtl.bz/2FtgSNH

Investing and Personal Finance

• Momentum Investing: It Works, But Why? http://www.anderson.ucla.edu/faculty-and-research/anderson-review/momentum
• The Case of the Disappearing Collateral (Investors’ hunger for riskier debt allows companies to shift assets away from lenders) https://trtl.bz/2FtidUQ
• The Defining Personality Traits Of (Successful) Financial Planners https://trtl.bz/2qOwzVy
• The new Great Game in North American asset management (McKinsey) https://trtl.bz/2qWBq6U
• Our Fortunetelling Genes https://www.wsj.com/articles/our-fortunetelling-genes-1542298010
• I Was Hoping to Be Retired: The Cost of Supporting Parents and Adult Children (WSJ) https://trtl.bz/2FuZckL follows last month's Retirement Wealth Gap Adds a New Indignity to Old Age https://trtl.bz/2y0HRtO
• [General Electric] Don’t Make These Five Investing Mistakes That General Electric Investors Made https://trtl.bz/2qWxiEi and also: Aswath Damodaran (who is author of Country Risk in FRM P1.T4) on The GE End Game: Bataan Death March or Turnaround Play? https://trtl.bz/2qSaLby