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I passed level II with 2,2,1,2,2. Thank you David and BT for very useful and informative material available on this website. I strongly refer aspiring FRM candidates to go through this website before sitting for exams.

@kchristo Your question is interesting; therefore, I like to try the derivations, if it works: I will take, Z=confidence level; V=value of Portfolio Taking these two formulae on both sides of the equation: Portfolio VaR (using portfolio SD) = Portfolio VaR (using individual VaRs) Step 1)...

It was 1 year spot rate at 3% initially, and then 1 year forward rates (1 year from now) are given as 3.8% (up node) and 2.8% (down node). The compounding is to be done semi annually. Equal real world probabilities are to be assumed to get present value of 2 year ZCB.

Hi David The below snapshot is a table given by Jon Gregory, citing example to calculate historical default probability from rating transition matrix, He gave the following table as default probabilities of different rating categories for various years: I understand that the table of PDs...

Thanks David. Your explanations really help in understanding difficult concepts.

Hi David It means that PD is only used in calculating average (to reach ES) and it is recovery rate that matters to calculate loss. Can you please clear that in above case, if PD=3% then at 96% ES would be (0*1%+6.5*3%)/4%= $4.875 million?