This one should be volatility weighting. It was mentioned in the text that if historical volatility was 4% and current volatility is say 2% then the historical moves will be multiplied by a factor 4%/2% = 2.
Page 4 here: http://www.smartquant.com/references/VaR/var32.pdf
The first objective of bank will be to meet 8% capital, since there is no Tier2, entire common equity will be used there meaning not enough capital left for 2.5% common equity countercyclical buffer
There was one which compared the yield of mbs and treasury bond both without default risk, I marked the convexity option in the answer coz even though mbs might have higher yield it also has a call option.
I calculated prob of 8 exceptions and then found the z score from the table given, was getting around 2.7 something, not sure what is wrong with this approach
I wasnt able to get the exact answers for below, any hints on how you solved them.
back testing there are 8 exceptions in a 99% VAR model - ~3.47
Pool of 15 assets with no correlation - I think 83333
Option value of a bond(2nd Q) - 5.94
1. Portfolio of 100mn has volatility 30%, how much should we short an asset with volatility 20%.
2. A 2yr zero coupon bond is priced at 952.48, risk free rate is 1%. The price can be 970 or 950 after 1yr depending on how interest rate change. Use risk neutral probability of interest rate move...
In which of the below the assets remain on the balance sheet of the institution
- CMO
- CLO
- MBS
- Covered Bond
Answer is covered bond
Which of the below has minimum counterparty credit risk
- Equity CDS
- Total Return Swaps
- Credit Linked Note
Answer is credit linked note
For stress...
For some of the questions, it was impossible to get the exact answer, also when GARP says what will be the closest value of so and so, really difficult to get the correct one.
1. The change in monthly payment of MBS to be calculated for a 5mn mortgage, LTV is 80%, initially it is interest only...
Are these answers correct?
1. d Both
2. 6%*250bps-4.2%*100bps = 10.8 bps doesn't match any of the options
3. Again cannot get to any of the answers. I calculate value of put = X*E ^(-r*t)*N(-d2) - S*N(-d1)= 19.96
Spread = PD * LGD = 0.75*0.08 = 6 bps. How do I get the dollar value of CVA?
Any clues on how we can work out the 3rd problem?
I can calculate the no of contracts = 0.72*5mn/(1800*250) = 8
The futures contract can only hedge the beta exposure hence multiplied by 0.72. How do we calculate the probability?
The material mentions that the volatility of the derivative is Duration multiplied by the volatility of underlying. E.g Interest rate volatility is 0.5% and duration of gov bond is 8, then volatility of gov bond will be 8*0.5% = 4%.
Any leads as to how this is derived?
Is it calculated using GARCH? So from the historical interest rates, we can calculate the long run volatility of interest rates and the new volatility figure is plus 1 bps (if you want to measure vega of IRS). Back calculating, can we get the return due to the volatility change from the...
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