Meissner, Correlation Risk Modeling and Management Study Notes cover the following learning objectives:
Chapter 1: Correlation Basics
Describe financial correlation risk and the areas in which it appears in finance.
Explain how correlation contributed to the global financial crisis of 2007 to 2009.
Describe how correlation impacts the price of quanto options as well as other multi-asset exotic options
Describe the structure, uses, and payoffs of a correlation swap.
Estimate the impact of different correlations between assets in the trading book on the VaR capital charge.
Explain the role of correlation risk in market risk and credit risk.
Explain how correlation risk relates to systemic and concentration risk.
Chapter 2: Empirical Properties of Correlation
Describe how equity correlations and correlation volatilities behave throughout various economic states.
Calculate a mean reversion rate using standard regression and calculate the corresponding autocorrelation.
Identify the best-fit distribution for equity, bond, and default correlations.
Chapter 5: Financial Correlation Modeling – Bottom-Up Approaches
Explain the purpose of copula functions and the translation of the copula equation.
Describe the Gaussian copula and explain how to use it to derive the joint probability of default of two assets.
Summarize the process of finding the default time of an asset correlated to all other assets in a portfolio using the Gaussian copula.