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There is something inconsistent in the way Hull says these two are related. At the beginning of either Ch 22 or 23 he says that as default rate increases, Recovery rates decrease. Then, when talking about pricing CDSs, he says that the PD is appx proportional to 1/(1-RR). This says the...

Hello, I have seen "reserves" listed as Tier 1 capital and tier 2 capital. Tier 1 says "disclosed reserves" while Tier 2 says "undisclosed reserves", so I guess that makes sense. My question is, what distinguishes a "disclosed reserve" from "asset revaluation reserves" and "General provisions...

Nevermind. Thanks! SHannon

That makes perfect sense. Thanks! Shannon

That makes sense, except for the random spread scenario. If the volatility of the spread is, say, 1% per day, wouldn't this imply that over the course of one week the spread volatility would be sqrt(5) * 1% or am I looking at this incorrectly? Thanks! Shannon

Hello, Can LVaR be time scaled? If so, how? It just seems strange because it is dealing with a spread and that the spread really wouldn't change as time goes on. We could obviously scale the "regular" VaR and then add the LC, but If we are given a constant spread would the LC just stay at...

Hello, This may be another silly question, but when we duration map a portfolio of bonds, is this according to the Dmod or Dmac? Thanks! SHannon

Hello, A friend told me that it was stated on here for part 1 that Hull was the primary source for a lot of the questions. Is there any way to know which texts could possibly be the most important for part 2? It just seems like there is SO MUCH detail in some of these chapters that I could...

That makes sense. Thanks! SHannon

Fantastic. I know that this is getting alittle deep into CM, but I figured that I should look at it because it is really the only complete example of credit VaR anywhere in the curriculum. Thanks! Shannon

First of all, thank you for your help and your insights. This has been a really tough process. These are both in the 2012 readings. Allen Ch 4 "Exending the Var Approach..." and Stulz Ch 18 "Crdit risks and credit derivatives". Both of them are in the section that describes CrdeitMetrics...

Hello, As I am going over my notes again I noticed that there are two different ways of getting a value for CVaR from Stulz and from Allen (to be fair, Stulz never uses the term Credit VaR, just says "a typical VaR calculation..."). I just noticed that they are using the EXACT same transition...

Hello, I am sorry to ask another bad question, but I keep reading about the use of specific and incremental risks in capital charges but cannot see exactly where they fit in as far as the standardized approach or IMA is concerned. Do these two charges just get added to the VaR + Stressed VaR...

Hello, I believe I understand the main idea behind this: if there is autocorrelation in the returns, this means there is a significant chance that the investment vehicle is in some way illiquid. The other idea (I thought) was that if an asset was illiquid the returns should be higher...

Makes complete sense. Thanks! Shannon

Hello, What does it mean when it says that stub equity holders "do not participate in carry"? Does this just mean that the managers of the fund do not get the 20-30% performance fee? Thanks! Shannon

Hello, There is a lot of vocabulary about the market risk charges but I have not seen a formula that incorporates all of it. One is the max of yesterdays VaR or the ave VaR *K plus a specific risk factor. (p 86) This was original Basel II. Another (from the revision to Basel II) is the...

I am not sure if your explanation about Cat bond is correct. Cat bonds are priced at a discount because of the high amount of credit risk. If an earthquake already happened, that is the trigger that allows the seller of the bond not to repay the loan or to only repay a portion of the loan...

Hello, In the notes it says that for AMA a firm will not have to hold capital against unexpected losses if they are provisioned for correctly. In one of the problems in that section it says that the "default" is EL+UL and then only for UL if the firm can show that expected losses are properly...

I think its a bit different than that, because a cat bond is almost like a credit linked note in that the protection is funded. Of course you would have to sell it at a discount. Maybe I a missing (or implying) a cause/effect relationship that does not exist. I was reading this as saying...