Hi @NAndr5521 Yes, sounds like a typo. We expect a good (aka, accurate) VaR model to generate (1-confidence)% exceptions under the typical (i.i.d.) assumption such that we expect a good 95.0% VaR to generate 12.5 exceptions over 250 days, or 25.0 exceptions over 500 days. This is because (if...
HI @PKuma9691 We've discussed this problematic question extensively. GARP seems to have revised it multiple times, but I think I generally concluded that it has problems in the wording. Put simply, it's GARP's fault if the PQ is not clear, and it ends up wasting people's time when they assume...
Hi @SKuma2148 I'm not sure to which text you refer, sorry, but duration, DV01 and KR01 all have the same signage (+/- ) dynamic; i.e., their "natural state" is a positive value to reflect the inverse relationship between price and yield. You can explore the detail in this technical note at...
Hi @dla00 Yes, definitely agree as "real-neutral" is not a word. It should read "The risk-neutral probabilities ..." as you suggest. Source is here https://forum.bionicturtle.com/threads/p2-t5-23-1-risk-neutral-interest-rate-term-structure.24361/
Hi @hiimdzun copy (@Clay Carter ) PD(1,2) looks correct to me as an unconditional (aka, joint) probability, but to your point PD(2,3) looks incorrect because the unconditional PD(2,3) wants to be PD(0,3) - PD(0,2) but notice that 0.995% ≈ 5.82 - 4.88% so I think it's just that "1 - exp(-0.01*1)"...
Hi @kc I agree with you through step 4 ("when reaches year 6.5, total (6.5-5)*0.2 b.p. = 0.3 b.p. has already be gone"). However, because 0.3 bp are gone (aka, reduced), there are 1 = 0.3 = 0.7 bps remaining!
Look at this way, between 5 and 10, 6.5 is 30% the distance from the 5 and toward the...
@Varun Momaya If you immediately buy and sell an asset (aka, round trip) your loss the bid-ask spread, by definition. The cost of liquidation, however, assumes that you already own the asset such that your cost is one-half the round trip. Hope that's helpful!
Hi @chankiki23893 Personally I do not use foreign/domestic semantics because I find them confusing; e.g., your title mention of "base/foreign" is problematic to me. Rather, FX questions are always BASEQUOTE (aka, BASE/QUOTE) such that the first current ticker is the base, so it's always N quote...
Hi @SPate5068 The key idea to the solution is that the PV(expected premium payments by the insurance customer) = PV(expected payouts by the company). It's the same equality we find in credit defaults swaps (CDS): PV(expected payments) = PV(expected payouts). In addition to discounted each...
HI @ISiko1513 That's a fair precision TBH. "Market return" might refer to either expected (ex ante) or realized (ex post) and it's my opinion that neither is the default. Hopefully you understand it's an item for improvement ... Thanks for the feedback
Hi @BHeng9611
(1) The formula here is (4.0 - 6.75)*(3.0 - 4.00)*30% = 0.8250 which rounds to 0.83. It's contributing to a summation: 0.83 + -0.41 + -0.45 + 0.79 = 0.75 because covariance is the expected cross product. Instead of summing and dividing by (n), we're just multiplying by the...
HI @AUola2165
@Nicole Seaman do you happen to know the answer to this ...
The PQs (including Mock) are always written against the then-prevailing assigned material. If a PQ was written in 2019 but GARP switched authors/assignments, some terminology will "leak". All EPPs have this problem, but...
Hi @TG2323 The FRM exam does like Bayesian problems, although the one you cite is a notch (or two notches) more difficult than you can expect on the exam. The exam has a time limit is one factor. But that question was inspired by previous author Miller, and it was among a set that was closely...
HI @gsarm1987 Not overthinking it, to me! I agree 100% with what you wrote, and with your spreadsheet. It really is the difference between an ex post versus ex ante tracking error. In my opinion, TE is truly meant to be an ex post measure. The ex ante version is just if you aren't able to (i.e...
Hi @BHeng9611 We clearly could have done a better job in that transition (apologies) but it's a common problem with TRS. Here is why:
Typically, the "buyer" of the TRS is buying the credit risk which is the same as selling credit protection: they are making the period fixed/floating payments...
Hi @AUola2165 As I mentioned, because N(.) is a cumulative standard normal distribution function, both N(d1) and N(d2) are instances of N(Z); i.e., both d1 and d2 are quantiles of a cumulative standard normal. For example, as N(2.33) = 99%, the 2.33 is a Z-value (i.e., a quantile on the standard...
Hi @AUola2165 The d1 is effectively a standardized Z such that N(d1) is the CDF for a standard normal distribution. Like the d2 (which has a more intuitive direct interpretation: d2 is the normalized distance-to-strike price or, in the Merton model, distance-to-default). Both d1 and d2 have in...
Hi @AUola2165 I must have replied (effectively) prior to your edit. To respond to
The question only specifies to key rates:
For the 1.0 year KR: shift from 0 to 1.0 year; then interpolate down to 2.5 because it is the nearest neighbor
For the 2.5 year KR: interpolate up from 1.0 because it is...
Hi @AUola2165 It's on the next page. I think it would be better if the solution showed a single graph with two lines, where the span from 1.0 year to 2.5 years ( = 30 months) showed the overlapping lines. But those lines do look correct to me. A way to "check" the solution is to verify that any...
Hi @AUola2165 You aren't confused, you are observant and I agree with you. How GARP can get the first wrong is beyond me. Briefly:
The zero duration position implies approximately zero value change for a small parallel shift per the definition of duration. The correct answer to 12.6 is...
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