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Soon to be Twol84, CFA, FRM :)

It's the same thing. Pull-to-par is the biggest reason BSM cannot be used to value bonds because BSM has a set of assumptions, including flat interest rates and constant vol, that allow it to be an arbitrage model. A bond pulling to par violates both assumptions, especially the former -- a flat...

Some of the answers in that document are debatable, I think. The answer the document has for this question is the same as what you have, though.

Yes. For example, if you have a derivative where payoffs are not linear, like even a cds, DVA =/= CVA.

It's adjust CVA from what I gather here. In general, the CVA is simply whatever the PV of the expected credit loss is, to be deducted from trade value. If a counterparty's worthiness decreases, CVA increases. DVA is not adjusted because the worthiness of the company itself has not changed. The...

Can't remember the question, but FVA is definitely wrong as per Hull. The answer depends on whether the question is asking for bilateral exposures. If so, DVA will need to be considered. If it is asking for a change in exposures, then only the CVA change needs to be considered.

I think you misunderstood. Insurance premiums should not be added. Mitigation by insurance is allowed, however, up to 20% and with several restrictions, but only under AMA. Operational loss cannot count either premiums or insurance mitigation. You'll probably get the question right anyway, so...

Pretty sure adding insurance is wrong. We are asked (if I recall correctly) to qualify what counts as an operational loss, towards which insurance cannot count. Insurance is only allowed as a mitigant under AMA.

Read Malz. And Fabozzi. They both have google books that speak about this. I'm not sure what Schweser was saying in the example, but this is how I know it to typically work in the market and in prominent literature. If the assigned reading takes o/c to happen before excess spreads are paid to...

That's just not true. The assigned reading alone has a very clear example of how the excess spread builds loss reserves before distribution to equity tranches. Typical CLOs have carry spreads of 300-400 bps. If this isn't used to build reserves, do you realise how profitable holding the equity...

O/C limits are yearly. The Malz reading has an example of the sequential cash flows, and excess spread flowing to equity is definitely after reaching the O/C limit, but adding recoveries.

Can't remember the numbers, but in decreasing order: senior => mezzanine => O/C => excess + recovery => equity.

It's a CLN. A CLN is fully funded, which means it's the equivalent of a long bond + short cds position by the investors.

As I said, I can't recall the question, but I recall that option making absolute sense, at least during the exam, ie wording etc seemed to check out. No, Libor is correlated with decreasing credit quality, which is the point of trading on the ois-libor basis in the first place. It holds true for...

No, the decimal places are correct because you can replicate this by constructing two sets of trees, one with 1.05/1.05 and one with 1.05=>1.04&1.06. Discount $1 and get the differences yourself. FWIW, not sure if it's a quirk of the question, but 86 bps is actually what you will get if you...

Yeah GARP is very far behind CFAI in the ways questions are worded, practice papers are designed, and sometimes even on how topics are chosen. Tuckman deserved at least ONE question outside of Jensen's inequality. I think that question wanted to test that the candidate understood that netting...

Premiums should not be included -- they are indirect costs. Diversification benefit is the graph that increases and plateaus. I think the answer to the bootstrap question is they are not normal (if that is the same question) Convexity is 0.86.

Both graphs are fine if you can interpret them properly. To illustrate: Strike is 50 for both, the price can be either 5 or 95 for the underlying. Price = 95 Call delta: close to 1 Put delta: close to 0 Price = 5 Call delta: Close to 0 Put delta: Close to -1 Call delta going down is coupled...

It is decrease/decrease because moving closer to -1 for a put, which happens as the underlying is devalued and a call's delta moves to 0, is a DECREASE, not an increase.

Yes, decrease/decrease. If you decrease the underlying's price, call delta decreases as the call becomes less likely to be in the money. A put's delta ranges from 0 to -1, so if the underlying decreases in price, the put's delta becomes more negative (ie decreases) to reflect the increased...