Search results

  1. David Harper CFA FRM

    Backtesting Var models

    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...
  2. David Harper CFA FRM

    Practice question 3 - Backtesting VaR

    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...
  3. David Harper CFA FRM

    Difference between DV01 and Duration

    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...
  4. David Harper CFA FRM

    Errors Found in 2023 Study Materials P2.T5 Market Risk

    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/
  5. David Harper CFA FRM

    Calculating default probabilities given average hazard rates

    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)"...
  6. David Harper CFA FRM

    Trying to understand the key rate contributions calculation

    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...
  7. David Harper CFA FRM

    Cost of liquidation formula

    @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!
  8. David Harper CFA FRM

    Question about the base / foreign currency

    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...
  9. David Harper CFA FRM

    Calculating the Premium Payable

    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...
  10. David Harper CFA FRM

    Course Course Errors Found in 2024 Study Notes P1.T1. Foundations

    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
  11. David Harper CFA FRM

    Understanding covariance formula

    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...
  12. David Harper CFA FRM

    Course Questions about BT Quizzes & PQs

    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...
  13. David Harper CFA FRM

    FRM 1 - Chapter 1 - Book 2 (Quantitative Analysis)

    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...
  14. David Harper CFA FRM

    Question on Tracking Error

    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...
  15. David Harper CFA FRM

    Facing issue with understanding Total return swap

    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...
  16. David Harper CFA FRM

    N(d1) option delta (Instructional Video: Option Sensitivity Measures: The “Greeks”)

    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...
  17. David Harper CFA FRM

    N(d1) option delta (Instructional Video: Option Sensitivity Measures: The “Greeks”)

    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...
  18. David Harper CFA FRM

    P1.T4 "Valuation & Risk Model" EOC 13.14

    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...
  19. David Harper CFA FRM

    P1.T4 "Valuation & Risk Model" EOC 13.14

    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...
  20. David Harper CFA FRM

    P1.T4. EOC 12.6 and 12.9

    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...
Top