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Reading a bit further I found the extra example @David Harper CFA FRM CIPM worked up which for a surplus of $20 and SaR of $18 says "worst expected, surplus drops $18.1 ..worst expected, +$1.9 funded." This seems to tell us that with 1-alpha % probability we can expect the surplus to be...

I'm confused at the interpretation of Surplus at Risk. Does it tell us the worst expected deficit over the holding period for a given confidence level? That understanding seems to fit with Jorion's statement "Taking the deviation between the expected surplus and VAR, we find that there is a 1...

I was positive I saw this, but will double check and post back. Thanks!

Hi Shirley, That's a tough question to answer. It depends a lot on you and what you are trying to achieve. The FRM charter (which this site is dedicated towards) is a rather specific corse of study in risk; that said risk management is not an island and the course covers topics outside of risk...

Hi @David Harper CFA FRM CIPM , The loss distribution for operational risk is not normal, it has a very heavy right tail for high severity low probability losses. In the topic review for operational risk, we see that when calculating a VaR for operational risk, we use a normal deviate for the...

Basel III defines a leverage ration as Total Capital / Total Exposure which should be no more than 3%. Malz defines the leverage ratio of a firm as 1+(Debt/Equity). Is there a more proper name for the leverage ratio Malz defines ?

As far as I recall (someone please correct me if I am wrong), Basel doesn't allow diversification benefits between risk types. I don't know about Solvency's treatment though.

Hi Vijay, whereas I can't speak to what current material BT has, if you have a specific question about OIS discounting, I can try and answer it for you. I can't speak to it showing up on past exams, but the topic is an important one (in my opinion) and good to know.

@ShaktiRathore , great answer. Helped me a lot. Thanks.

I have the same questions about this reading. It seems to have come out of nowhere.

This is great, thanks very much. BT should give you multiple "winner" awards for this one.

Hi @Nicole Manley and @David Harper CFA FRM CIPM, I've got another one for you from the same Hull reading (chapter 13 this time, page 28) The notes read as follows "Assuming that the liquidity horizon for an A rated bond is three months. For the calculation of VaR over a one-year time...

Coming back to this, I can see now that ∑EADi∗LGDi∗(WCDRi−PDi) is indeed the capital which = 8% of the RWA. A case of not being able to see the forest for the trees I'm afraid.

Hi @David Harper CFA FRM CIPM , Little confused with terminology in the Hull reading on RWA. First Hull says The capital required is derived as the excess of 99.9% worst-case loss over the expected loss i.e ∑EADi∗LGDi∗(WCDRi−PDi) Then he gives us a means to calculate RWA for bank, sovereign...

Sorry, me again. The formatting of the AIM "Define in the context of Basel II and calculate where appropriate: probability of default (PD), Loss given default (LGD), Exposure at default (EAD) & Worst-case probability of default" is a bit confusing. It starts out with "In Basel II Accord, there...

Appreciate the very detailed answer! I'll look it over and digest it and post back if I have further questions.

I think I've found another typo in the notes for Hull (BT notes page 9) (not sure if it's in the source). I feel a bit silly in that I'm not 1000% on this, but it seems wrong. It should be rise in rates has a negative impact on bond's price (which has a positive impact on bond's yield) right...

When calculating economic capital, how can we underestimate risk by ignoring the diversification benefits? I can see how we can overestimate by ignoring the correlation between the risk types (credit, market, operational), but I don't see how we can underestimate. From the notes: Thanks in...

Basel is concerned with regulatory capital. RAROC, and this part of the reading, is concerned with economic capital. Hence the different measures.

Hi @David Harper CFA FRM CIPM , After reading the notes for Tuckman Chapter 12, I'd like to recommend a couple of edits, that I believe aid in the understanding of the content. (Apologies if you've already made these updates, my copy is from the Spring when my membership was last active). AIM...