Blog Week in risk (ending September 16th)

[David Harper CFA FRM]

New Practice Questions

• P1.T4.816. Black-Scholes-Merton (BSM) for dividend-paying stocks and the early exercise decision for American-style options (Hull Ch.15) https://trtl.bz/2O81g1P
• P2.T7.810. Stress testing banks (Schuermann) https://trtl.bz/2x5KVEj

New YouTube

• Eurodollar futures contract (FRM T3-28) https://trtl.bz/2NGIwcM
• Hedge interest rate exposure with Eurodollar futures contract (FRM T3-29) https://trtl.bz/2QqWf6j

In the forum

• [GARP P2] Would we ever map an equity index to a single stock? https://forum.bionicturtle.com/threads/garp-2015-p2-13.10332/
• [P1.T2] Omitted variable bias and its implications https://trtl.bz/2x58qxp
• [P1.T2] The difference between a sample variance and variance of the sample mean https://trtl.bz/2O83nTj
• [P1.T2] Do we require normality to make regression inferences? https://trtl.bz/2O9u2PQ
• [P1.T2] You need to know that beta is correlation scaled by cross-volatility, β(s, i) = ρ(s, i)*σ(s)/ σ(i) https://trtl.bz/2Ob5SEw
• [P1.T2] The chi-squared distribution is one of the four fundamental sampling distributions https://trtl.bz/2Ors0KS
• [P1.T3] When is an apparent arbitrage opportunity really just masking a convenience yield? https://trtl.bz/2x1wTUy
• [P1.T3] Basic properties of contango and backwardation https://trtl.bz/2x4T385
• [P1.T3] Translating commodity income from discrete to continuous to lump-sum PV/FV in the COC model https://trtl.bz/2x6F29W
• [P1.T3] This Question by Hull (EOC 6.8) is very instructive on the fundamentals: The price of a 90-day Treasury bill is quoted as 10.00. What continuously compounded return (on an actual/365 basis) does an investor earn on the Treasury bill for the 90-day period? https://trtl.bz/2xaGZCy
• [P1.T3] In an interest rate swap (IRS) valuation, the FRA approach will match the "as if two bonds" approach, but you need to check compound frequencies https://trtl.bz/2NNMGQc
• [P1.T4] Understanding Tuckman's illustration (in Chapter 5) of hedging key-rate (KR01) exposures https://trtl.bz/2xboXjp
• [P1.T4] Is it true that economic capital is equal to (synonymous with) unexpected loss? https://trtl.bz/2OljsoS
• [P2.T5] Is Tuckman's dw already time-scaled? https://forum.bionicturtle.com/threads/dw-factor.20139/
• [P2.T5] @David1973 describes the implication on the volatility smile of negative correlation between asset price and volatility https://trtl.bz/2x6Hb5u
• [P2.T5] An example of a lazy correlation question https://forum.bionicturtle.com/threads/pearson-vrs-kendalls-t-correlation.20320/
• [P2.T6] The negative sign in CVA https://forum.bionicturtle.com/threads/cva-and-dva.20242
• [P2.T6*] How can Gregory claim that an increase in LGD reduces the risk-neutral default probability? https://forum.bionicturtle.com/threads/gregory-recovery-impact-on-cva.20321/

External

Crisis anniversary

• Impressive collection of 60+ charts that capture essential features of the crisis, by Hutchins Center https://trtl.bz/2NAgJLj See also (Day 1) Responding to the Global Financial Crisis https://www.brookings.edu/events/day-1-responding-to-the-global-financial-crisis/; Eight lessons for fighting the next financial crisis https://trtl.bz/2NP3p5N
• Can We Survive the Next Financial Crisis? https://www.bloomberg.com/graphics/2018-lehman-anniversary/
• Maybe This Financial System Can’t Be Fixed https://trtl.bz/2NMphys "This raises two philosophical questions. First, is it even possible to model risk? I doubt it."
• JPMorgan: defying attempts to end too big to fail (ft.com pdf) https://trtl.bz/2OnhvrZ
• What Caused the Financial Crisis? (David Merkel) https://alephblog.com/2018/09/15/what-caused-the-financial-crisis/
• What Can Cause the Next Mortgage Crisis in the US? https://wolfstreet.com/2018/09/16/what-can-cause-the-next-mortgage-crisis-in-the-us/ Are mortgage delinquencies merely a lagging indicator?
• The Next Financial Crisis Lurks Underground https://www.nytimes.com/2018/09/01/opinion/the-next-financial-crisis-lurks-underground.html From Bethany McLean's new book about the fracking industry.
• Decade After Repos Hastened Lehman’s Fall, the Coast Isn’t Clear https://trtl.bz/2NNJMLr
• We Never Learned From Lehman (bloomberg editorial board) https://trtl.bz/2xla0eC
• ’08 Autopsies Ask the Wrong Questions by Aaron Brown https://trtl.bz/2xhAyh8 Fascinating housing price graph

Risk and banking

• [GARP] Normal Catastrophes: Large-Scale Disasters Make Their Way into Risk Management Consciousness https://trtl.bz/2OrBeqt This dense article is chock-full of useful references
• Risk, Uncertainty and Ignorance in Investing and Business – Lessons from Richard Zeckhauser https://trtl.bz/2OArYAk
• The Catastrophe Bond Business Is Booming https://trtl.bz/2NMvXwI
• Understanding your Net Interest Margin (NIM) by Moorad Choudhry (T6 FRM author of An Introduction to Securitization) https://btrm.org/thought-leadership
• Speaking of Moorad Choudhry, his latest book looks like a keeper: The Moorad Choudhry Anthology: Past, Present and Future Principles of Banking and Finance https://amzn.to/2xmNcdB
• Do You Know How Your Treasury Trades Are Cleared and Settled? https://trtl.bz/2OADH1O

Quantitative

• Where did the least-squares come from? https://trtl.bz/2NMq96m
• Understanding Boxplots https://trtl.bz/2OuFZ2O

Technology

• The Rise of Drones (What's the risk?) https://enterpriseriskmag.com/rise-drones-whats-risk/
• What 5G Will Mean to Consumers—and When https://www.wsj.com/articles/what-5g-will-mean-to-consumersand-when-1536804241
• Driverless Hype Collides With Merciless Reality https://trtl.bz/2Ou399l
• Machine Learning Basics with the K-Nearest Neighbors Algorithm https://trtl.bz/2NNLEnr
• What Is Blockchain Technology? https://www.cbinsights.com/research/what-is-blockchain-technology/
• 50+ Examples of How Blockchains are Taking Over the World https://trtl.bz/2NTIJd2

Case studies

• A Retrospective on the Demise of Long-Term Capital Management https://trtl.bz/2NMwoHm
• How Goldman Sachs facilitated the heist of the century [1MDB scandal] https://trtl.bz/2OuvoF5
• Threats and Deception: Why CBS’s Board Turned Against Leslie Moonves https://www.nytimes.com/2018/09/12/business/cbs-les-moonves-board.html

Other

• Flash Boys Exchange IEX Wins First Listing [Interactive Brokers] https://www.wsj.com/articles/flash-boys-exchange-iex-wins-first-listing-1536763400 "The U.S. corporate-listings business, in which companies pay fees to an exchange for services tied to being the primary venue for the company’s stock trading, has for years been an effective duopoly of the NYSE and Nasdaq."
• The map we need if we want to think about how global living conditions are changing https://ourworldindata.org/world-population-cartogram Amazing world population cartogram.
• How to Become a More Effective Learner https://trtl.bz/2NJrBXh
• The most difficult things about learning to code by yourself — and how to tackle them https://trtl.bz/2NN1deW