WIFE Week in risk (October 21st)

[David Harper CFA FRM]

New Video

• T1-1: What is financial risk? https://forum.bionicturtle.com/threads/t1-1-what-is-financial-risk.21074/ This is the first post in our new forum section that is devoted to a comprehensive review, in sequence, of our FRM video library in YouTube. The featured video were previously published, but the forum contains a new summary note that aims to efficiently convey essential elements and lessons that we've learned along the way via interaction with the community; for example, we are likely to post links to related issues, key lessons learned, representative practice questions and/or common misconceptions. We hope you enjoy this new resource!
• Simple option trading strategies: an option plus the underlying asset (FRM T3-37) https://trtl.bz/2CRspV1
• Vertical option spread trades: bull spread and bear spread (FRM T3-38) https://trtl.bz/2J66WYp

In the forum

• [GARP 2018.P2] Bilateral and multilateral netting https://trtl.bz/2pQ5ReK
• [GARP 2018.P2*] https://forum.bionicturtle.com/threads/garp-2018-p2-15-garp18-p2-15.21006/
• [Calculator] Another bump for a terrifically helpful tip of retrieving day count with the TI BA II+ calculator's built-in function https://forum.bionicturtle.com/threads/day-counting.4820/
• [P1.T1] FRM candidates should be able to break-down CAPM beta with cold confidence https://forum.bionicturtle.com/threads/capm.21062/
• [P1.T2] Given a scenario that can be represented by a probability matrix, every possible Bayes Theorem should work; Bayes simply explicates the tautology that Pr(Unconditional)*Pr(Conditional) = Pr(Joint) https://trtl.bz/2NMYsGt
• [P1.T2] A confidence interval is a "random interval" around the sample mean https://trtl.bz/2pWO4lT
• [P1.T2] Thank you @emilioalzamora1 for your answer to the question: what renders a matrix no longer positive semidefinite? https://trtl.bz/2pWfEzJ
• [P1.T3] The key to understanding the mortality table is understanding the definitions of conditional probability of death and cumulative (versus unconditional) probabilities of survival https://trtl.bz/2NMYmi5
• [P1.T3] In bond default problems, unconditional default probability is a synonym for joint probability; i.e., joint probability of survival for T-years followed by default in the subsequent year https://trtl.bz/2pST4YT
• [P1.T3] Do Saunders' FX hedge scenarios hold up to the CFA's FX translation rule of thumb (triangular arbitrage)? https://trtl.bz/2NGJ1Qd
• [P1.T3] This FX futures contract question (inspired by Hull's EOC P! 5.14) is not as difficult as it seems; as is often the case, the hard part is understanding the setup https://trtl.bz/2R65SXh
• [P1.T3] Why does an increase in the provision for loan losses decrease book equity? https://trtl.bz/2Rb5KGn
• [P1.T4] You cannot solve fixed income hedging problems with (modified) duration alone because this measure does not account for the relative size(s) of the underlying and hedge positions; we solve with dollar duration, or its re-scaled equivalent, DV01 https://trtl.bz/2pVFMek
• [P1.T4] What is "Markovian independence" and why is it an assumption (even if implicitly) in credit rating transition (aka, migration) matrix problems? https://trtl.bz/2pTLxJj
• [P1.T4] The relationship between volatility and delta https://trtl.bz/2NKEfkH
• [P1.T4] Dissecting the delta-hedge of a forex position (my question 821.1 this is inspired by Hull's EOC PQ 19.22) https://trtl.bz/2NISTcc
• [P1.T4] When do we include or exclude the sample mean in our estimation of volatility? https://trtl.bz/2q2ptw6
• [P1.T4] Understanding the particulars of the probability that a stock price will breach the exercise when the price exhibits a lognormal property https://trtl.bz/2R2TK9y
• [P1.T4] An FRM candidate should be a master of using duration to estimate the bond price change implied by a yield shock https://trtl.bz/2R89AA1
• [P2.T5] A good follow-up question to a SIMPLE expected shortfall (ES) exercise, all FRM candidates should be able to retrieve ES at various confidence levels for a single bond https://trtl.bz/2NMOgOh
• [P2.T5] A key, classic contrast between exotic and standard options is the trade-off between liquidity and basis risk https://trtl.bz/2NP2rT4
• [P2.T5] What does Meissner mean by "buying correlation" in a trade that is long index call options plus short the individual components https://trtl.bz/2R3UX0l
• [P2.T5] Why does Jorion pre- and post-multiply the vector of cash flows in fixed income VaR mapping? https://trtl.bz/2Rb5gQz
• [P2.T5] More on implied volatility and the challenge of interpretations in comparison to the flat volatility smile that is natural to the BSM https://trtl.bz/2R0JDSG
• [P2.T5] The inverse of the true statement "if independent → ρ(.) = 0" is false but the contrapositive is true https://trtl.bz/2R45hFK
• [P2.T5*] Seeking clarity on when, if ever, to use a normal two-sided deviate of 1.96 rather than the standard one-sided 1.645 for value at risk (VaR) calculations https://forum.bionicturtle.com/thre...-backtest-significance-jorion.3604/post-70630
• [P2.T6] Are EAD and especially loss given default (LGD) truly time-dependent? https://trtl.bz/2pQ5u3Q
• [P2.T6] Fundamental skill: VaR backtest is (just) an application of the binomial distribution https://trtl.bz/2pV3lDK
• [P2.T6*] How can we use credit derivatives to hedge counterparty risk, considered that the exposure will fluctuate through time? And what are the feedback effects? https://trtl.bz/2NMtnCW
• [P2.T6] Elaborating on the moral hazard and asymmetric information problems inherent to a central counterparty (CCP) https://trtl.bz/2NMQKfz
• [P2.T6] In regard to the credit exposure profile of a CDS, there is a difference between a FLAT credit curve and a CONSTANT credit spread; i.e., Gregory's example assumes a volatile spread but a flat credit curve https://trtl.bz/2NOWXaO
• [P2.T6] Thank you @Marco.Musci for your keen observation that my term "expected future MTM" is mistaken https://trtl.bz/2NPp6i1
• [P2.T6] Thank you again @emilioalzamora1 for your answer to the question, Why does deleveraging increase the cost of funds? https://trtl.bz/2NOpwW3
• [P2.T6] What is the impact of an increase in demand from CDS protection buyers on the CDS-bond basis https://trtl.bz/2q0bUgL
• [P2.T8] Surplus value at risk (SVaR) in GARP's practice papers https://trtl.bz/2pXOs3T
• [P2.T6] The three classic zones in the Altman's Z model https://trtl.bz/2R05gCK
• [P2.T7] Is there a difference between our Adjusted RAROC = (RAROC - Rf)/β and another provider's Adjusted RAROC=RAROC β*(E(Rm)-Rf)? https://trtl.bz/2R5KaCN

External

Banking

• Basel Committee issues final "Stress testing principles" https://www.bis.org/press/p181017.htm
• Leverage ratio treatment of client cleared derivatives https://www.bis.org/bcbs/publ/d451.htm
• Basel standards and developing countries: A difficult relationship https://voxeu.org/article/basel-standards-and-developing-countries
• Dangerous non-banks https://trtl.bz/2q5ULlU "The most likely cause of a future financial crisis isn't the banks, it's the non-banks. They're enormous, they're much less regulated than banks are, and they tend to have much greater leverage."
• Bank-Intermediated Arbitrage http://libertystreeteconomics.newyorkfed.org/2018/10/bank-intermediated-arbitrage.html "The law of one price—that a replicating portfolio producing the same payoff as an underlying asset be priced the same as the underlying asset—is one of the fundamental tenets of finance."

Risk

• Risk of Bank-Like Regulation Fades for Big Financial Firms (The federal council overseeing financial stability rescinded oversight of Prudential Financial) https://trtl.bz/2NN4NSh
• Wall St. Journal Says FAIR Helps Companies ‘Better Understand Cost of Cyber Threats’ https://trtl.bz/2NOZAJF
• The Crisis Next Time (What We Should Have Learned From 2008) by Carmen Reinhart https://www.foreignaffairs.com/articles/2018-09-13/crisis-next-time
• The Student Loan Debt Crisis Is About to Get Worse https://trtl.bz/2pYcICO
• PRMIA Risk Management Challenge 2019 https://www.prmia.org/prmc
• ISDA Publishes Updated Model Netting Act https://www.isda.org/2018/10/16/isda-publishes-updated-model-netting-act/
• Global Risk Dialogue Summer/Fall 2018 [Allianz biannual magazine] https://www.agcs.allianz.com/insights/global-risk-dialogue/6682/
• Cybersecurity Disclosure Benchmarking https://corpgov.law.harvard.edu/2018/10/21/cybersecurity-disclosure-benchmarking/

Technology including FinTech

• LinkedIn Workforce Report: Data Science Skills are in High Demand Across Industries https://trtl.bz/2NTxT2E
• How do data science projects work? (A primer for managers, stakeholders and those that are interested) https://trtl.bz/2pXpS2Z
• Visualizations for credit modeling in R https://datascienceplus.com/visualizations-for-credit-modeling-in-r/
• SEC Launches New Strategic Hub for Innovation and Financial Technology https://www.sec.gov/news/press-release/2018-240 Finhub is at https://www.sec.gov/finhub
• Payment Decisions: Reflections of Culture, Options, and Self https://trtl.bz/2R2LxT0
• JP Morgan's Jamie Dimon makes his biggest bet on Silicon Valley with new 'fintech campus' https://trtl.bz/2R0vTri
• The promise and challenge of the age of artificial intelligence (McKinsey) https://trtl.bz/2q9EjBj

Climate and Natural

• Analysis: Why the IPCC 1.5C report expanded the carbon budget https://www.carbonbrief.org/analysis-why-the-ipcc-1-5c-report-expanded-the-carbon-budget
• Why People Aren’t Motivated to Address Climate Change https://hbr.org/2018/10/why-people-arent-motivated-to-address-climate-change

Career and Education

• The 3 Most Important Skills to Learn Now to Thrive in 2019 https://trtl.bz/2q5tdwM
• The Machine Learning Institute Certificate in Finance (MLI) https://mlinstitute.org/
• Lessons from Annie Duke (Author of “Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts”) https://trtl.bz/2q5MBKq
• An Introductory Guide to Deep Learning and Neural Networks (Notes from deeplearning.ai Course #1) https://www.analyticsvidhya.com/blog/2018/10/introduction-neural-networks-deep-learning/

Quantitative

• Dimensionality Reduction For Dummies — Part 1: Intuition https://trtl.bz/2NPeAYb
• Linear to Logistic Regression https://trtl.bz/2q2eGC2

Investing and Personal Finance

• Edward Lampert, the Hedge-Fund Star Who Bet on Sears, Is Unrepentant https://trtl.bz/2NMpwG1
• Sears’s Edward Lampert Was a Wizard. Now He’s Coming to Terms With Failure https://trtl.bz/2NPeYWG
• The Weighted Average Cost Of Capital https://www.peakprosperity.com/blog/114462/weighted-average-cost-capital
• O’Shaughnessy Quarterly Investor Letter Q3 2018 https://www.osam.com/Commentary/osam-quarterly-investor-letter-q3-2018
• A Visual Guide to Understanding Your Financial Statement http://www.visualcapitalist.com/visual-guide-understanding-financial-statement/
• FICO Plans Big Shift in Credit-Score Calculations, Potentially Boosting Millions of Borrowers https://trtl.bz/2q4lqiR