Blog Week in risk (September 23rd)

[David Harper CFA FRM]

New Practice Questions

• P1.T4.817. Option delta (Hull Ch.19) https://trtl.bz/2xhIBds
• P2.T7.811. The risks that arise from outsourcing to third-party service providers https://trtl.bz/2PLS4Rh

New YouTube

• Plain vanilla interest rate swap (T3-30) https://trtl.bz/2D5oODr
• Comparative advantage in an interest rate swap (FRM T3-31) https://trtl.bz/2ODBTWa

In the forum

• [GARP P2] Liquidity at risk (LaR) https://trtl.bz/2xhvuJE
• [P1.T2] @agattik makes a good point: there are two possible correlations implied by the coefficient of determination (R^2) in a univariate regression https://trtl.bz/2xhvRUy
• [P1.T2] Properties of an internally consistent (aka, positive semi-definite) variance-covariance matrix https://trtl.bz/2xmUHCj
• [P1.T3] Why is the American put's lower bound different than (asymmetric to) the call's lower bound? https://trtl.bz/2NZm6DS
• [P1.T3] Why is LIBID less than LIBOR? https://trtl.bz/2xoIr4d
• [P1.T3] Why does liquidity preference imply that the expected future spot interest rate is less than the observed forward rate, E[S(2.0, 2.5)] < F(2.0, 2.5)? https://trtl.bz/2xkTIT8
• [P1.T3] To my knowledge, the calculator's TVM keystrokes do not accommodate continuous yields https://trtl.bz/2PR94pm
• [P1.T3] The dividend's role in put-call parity https://trtl.bz/2PPJ2mq
• [P1.T3] Understanding the US T-bond futures conversion factor (CF) calculation https://trtl.bz/2OGfDe1
• [P1.T3] How do we know which day count conventions and compound frequencies to assume? https://trtl.bz/2PZNOxw
• [P1.T3] Knock versus knock-in barrier options https://trtl.bz/2PYOVxC
• [P2.T5] Recursive specification of interest rate trees https://trtl.bz/2xqDfNt
• [P2.T5*] Is there an easy way to know which units (i.e., percentage, decimal, basis points) apply in each of the interest rate model parameters? https://trtl.bz/2xmby88
• [P2.T5] A common fixed-income mapping motif is government bonds (market risk) plus credit spreads https://trtl.bz/2O3l4Xi
• [P2.T5] The equity (implied volatility) skew and its relationship to Hull's capital structure leverage argument https://trtl.bz/2Q2ht9z
• [P2.T5] Is Vasicek an equilibrium or no-arbitrage model? https://trtl.bz/2Q1gFSe
• [P2.T6] Counting the number of possible paths in a credit rating migration matrix https://trtl.bz/2xkMKNN
• [P2.T6] The signs (+/-) in Gregory's CVA and DVA https://forum.bionicturtle.com/threads/cva-and-dva.20242
• [P2.T6] Jorion's EOC PQ (Chapter 6, Question 10) https://trtl.bz/2PNIrkS
• [P2.T6] De Laurentis' default rate terminology differs from the others https://trtl.bz/2PQjB3R
• [P2.T6] Typical credit spread calculation https://trtl.bz/2OF8QkP

External

Financial Crisis Anniversary

• BIS Quarterly Review, September 2018 https://www.bis.org/publ/qtrpdf/r_qt1809.htm
• [Larry Summers] The financial crisis and the foundations for macroeconomics http://larrysummers.com/2018/09/13/the-financial-crisis-and-the-foundations-for-macroeconomics/ Refers to book: A Crisis of Beliefs: Investor Psychology and Financial Fragility https://amzn.to/2D6ZX2g
• Reflections on the Lehman collapse, 10 years later https://www.bis.org/speeches/sp180917.htm
• Unprecedented amount of fraud: Decade after Great Recession, Denver attorney still cleaning up Lehman mortgage mess. https://www.denverpost.com/2018/09/15/denver-attorney-still-cleaning-up-lehman-mortgage-mess/

Risk and banking

• Danske Bank money laundering 'is biggest scandal in Europe' https://trtl.bz/2Oa7CRw
• A 6-Part Tool for Ranking and Assessing Risks (aka, CARVER) https://hbr.org/2018/09/a-6-part-tool-for-ranking-and-assessing-risks
• Moody’s Pegs Florence’s Economic Cost at $38 Billion to $50 Billion https://trtl.bz/2O1R5PP
• Libor Replacement Carries Risk for States and Cities, Group Says https://trtl.bz/2O5s463
• Analysis: How data breaches affect stock market share prices (2018 update) https://www.comparitech.com/blog/information-security/data-breach-share-price-2018/
• Mapping 500 Trillion Dollars of Insured Exposure http://www.rms.com/blog/2018/09/19/mapping-500-trillion-dollars-of-insured-exposure/ "RMS has just completed a two-year exercise documenting all the different types of insurance that are available in the market and a classification system for all the assets that they protect. This is published as a data definitions document v1.0 as a standardized schema for insurance companies to have a consistent method of evaluating their exposure."
• The Risk of Derivatives Isn’t Gone. It’s Merely Morphed (Satyajit Das) https://trtl.bz/2xiz1am For FRM candidates, this is an excellent summary of CCP waterfall and its risks: "If a counterparty fails to meet a margin call, its positions are closed out, with the pool of already-provided deposits applied to its losses. If the amount held is insufficient, the clearing house covers losses from three possible sources, in a prescribed order: its own capital; contributions from non-defaulting members; or assessments against clearing members to inject additional funds. The hierarchy of risk-bearing resembles the loss-absorbing capital layers in a collateralized debt obligation, the problem child of 2008."

Quantitative

• Probability and Statistics for computer vision 101 — Part 2 https://trtl.bz/2Q22wV3
• Mosaic Plot and Chi-Square Test https://trtl.bz/2O4eC2h
• One simple way for CFOs to manage forecast uncertainties (using Monte Carlo and R) https://trtl.bz/2PZztRI
• Understanding Cryptography (From Math to Physics) https://trtl.bz/2O3UUE8

New books

• [book] Credit-Risk Modelling: Theoretical Foundations, Diagnostic Tools, Practical Examples, and Numerical Recipes in Python https://amzn.to/2xNY7O2
• [book] Agricultural Risk Transfer: From Insurance to Reinsurance to Capital Markets https://amzn.to/2DoL0Zn

Other

• CFA Institute Writes the Book on Corporate Governance Analysis https://blogs.cfainstitute.org/mark...es-the-book-on-corporate-governance-analysis/
• Genius after the fact by McKinsey (Did you know it all along? Then you may be a victim of hindsight bias) https://trtl.bz/2OaK7bm
• Accelerated Share Repurchases (ASRs): Managing EPS? https://blogs.cfainstitute.org/investor/2018/09/21/accelerated-share-repurchases-asrs-managing-eps/
• Mental Models: Look At Your Decision-Making Process, Not The Outcome https://trtl.bz/2O5nS6j