Posts tagged risk management

Hi David,

I went thru this case and also your and Jacks discussion on the same but i could not get 1 simple concept clear. can you pls help me with a simple example

1) MG had Long position in short term futures.

2) Markets went into Contango.

3) Now if MG is in a long position he is locked it at a price say 20$.

4) Market goes into contango i.e futures price is above spot lets assume now its 25$.

5) Then actually MG is gaining as it had bought futures at 20$ and now the same is 25$

How is MG losing? Can you pls explain me in layman terms with the same example as i gave as i got utterly confused after i went thru the earlier thread.

Thx & Rgds
Amit

Hi David,

Could you pls clarify this question? I wonder why “as yields lower than 6% imply that the CF for long-term bonds is lower than otherwise. This will tend to favor bonds with high conversion factors, or shorter bonds”? what is the relationship between CF and maturity? 
Thanks.

  The Chicago Board of Trade has reduced the notional coupon of its Treasury
  futures contracts from 8% to 6%. Which of the following statements are
  likely to be true as a result of the change?
  a. The cheapest-to-deliver status will become more unstable if yields hover
  near the 6% range.
  b. When yields fall below 6%, higher-duration bonds will become cheapest
  to deliver, whereas lower-duration bonds will become cheapest to deliver
  when yields range above 6%.
  c. The 6% coupon would decrease the duration of the contract, making it
  a more effective hedge for the long end of the yield curve.
  d. There will be no impact at all by the change.

  a. The goal of the CF is to equalize differences between various deliverable bonds.
  In the extreme, if we discounted all bonds using the current term structure, the
  CF would provide an exact offset to all bond prices, making all of the deliverable
  bonds equivalent. This reduction from 8% to 6% notional reflects more closely
  recent interest rates. It will lead to more instability in the CTD, which is exactly
  the effect intended. Answer b) is not correct, as yields lower than 6% imply that
  the CF for long-term bonds is lower than otherwise. This will tend to favor bonds
  with high conversion factors, or shorter bonds. Also, a lower coupon increases the
  duration of the contract, so c) is not correct.

Hi all,

Are the core readings supposed to exactly mirror the reading lists given in the AIMS?

I purchased – and subsequently read – the printed copy of the Core readings for the Level 1 exam. However, looking through the AIMS I can see a lot of extra readings that weren’t provided in the Core reading pack. In particular, the Financial Markets & Products AIMS lists chapters 1,2,3,4,5,6,7,9,10 of Hull!! These were not provided in the Core readings pack – and translates into a lot of extra reading in very little time!

Thanks,
John

Consider 3 random variables X,Y,Z Suppose corr(x,y) =0.4 and corr(z,y)=0.3 which of the following statements is true?

a) corr(x,z) cannot be negative.
b) corr(x,z) has to be larger than 0.3
c) corr(x,z) cannot be negative
d) none of the above.

can u throw some light on this question.

thanks and do reply soon.

Hi there,
I have a question about the exam format for the L1.
I noticed that there will be 2 sessions (morning and afternoon), will this sessions have different chapters? (ie. morning session covers Foundation of RM and QA, afternoon session covers M&P and Valuation) or they are all mixed and have same format for the morning and afternoon.

Thanks in advance,
Jason

Dear David,

        Appreciate your enlightenment on the FRM handbook question (page 335 Example 13.3 5th edition) below. The book’s explanation is that the long call position is profitable when the actual volatility is small but this statement seems contradictory to what I’ve learned about long options that long a option is long implied volatility therefore it benefits from increasing volatility?

        Example 13.3
        A trader buys an at-the-money call option with the intention of delta-hedging it to maturity. Which one of the following is likely to be the most profitable over the life of the option?
        A. An increase in implied volatility
        B. The underlying price steadily rising over the life of the option
        C. The underlying price steadily decreasing over the life of the option
        D. The underlying price drifting back and forth around the strike over the life of the option
        Answer Provided: D

Thanks
Liming
19/11/09

Hi David.

I have some questions.

In practice, can you teach me in spreedsheet, how changue the black & Schoels formula for: Options for shares that pays dividens, options on indexes and options on currency or Foreign Exchangue.

Saludos from MEXICO
GABRIEL

Hi David,

I wonder if ABX protection buyer shorts ABX? If so, if there is any credit loss, the protection buyer will compensate the buyer, and meanwhile the ABX price also drops, so the ABX protection buyer who shorts ABX also gains.. is this a double-dip? or I misunderstand something?

Thanks.

1) The provision for credit risk in calculated to cover

a.    Expected losses
b.    Expected and unexpected
c.    Unexpected
d.    None of the above

2) Marginal Economic Capital is a suboptimal method to analyze
a.    The amount of capital consumed by an instrument
b.    The movements of economic capital from one business to another on a
marginal basis
c.    The marginal increase in the overall risk
d.    The removal of the entire business which represents a significant
share of the total economic capital

3) Which of the following should be considered to compute the Gross
income indicator when using Basic indicator Approach as per BASEL 2

a.    Income from Insurance
b.    Operating expenses
c.    Unrealized income and expenses
d.    None of the above

4) Which of the following should be considered to compute the Gross
Income Indicator?

a.    Income From insurance
b.    Operating Expenses
c.    Realized P&L from securities in the banking book
d.    Unrealized P&L from securities in the banking book

5.  Which is not typically included in casual based definition of OR
a.    Strategic Planning
b.    Legal Planning
c.    People Systems
d.    Inadequate or failed operations

6.    The Altman credit risk approach is modeled by
a.    Focusing only on firms that have defaulted
b.    Focusing only on firms that have survived
c.    Country accounting
d.    Quadratic equation of various accounting measure

7.    LGD is a function of
a.    Capital Adequacy of counterparty
b.    Seniority of the claims
c.    Market movements between now and default
d.    All

8 Let A & B be 2 uncorrelated risky portfolio with Normally
distributed returns.  Their Ceteris Paribus is
a.    VAR (A+B) = >VAR (A) + VAR (B)
b.    VAR (A+B)  < VAR (A) + VAR (B)
c.    VAR (A+B) > = VAR (A) + VAR (B)
d.    VAR (A+B) can be either > or < than VAR (A) + VAR(B)

Email responses to jason dot jason57 at gmail dot com

David,

Does Basel 2 apply to insurance companies in any way…i.e. insurance company as a subsidiary of a bank?

jy