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FRM Updated
What are the three types of multifactor models and how do they differ?
Multifactor models explain asset returns using multiple systematic risk factors. The three types — macroeconomic, fundamental, and statistical — differ in how factors are identified: from economic variables, company attributes, or statistical extraction from return data.
How does the SREP aggregate risk and assign a supervisory score?
SREP is a holistic supervisory assessment across four blocks resulting in capital and liquidity decisions.
What does ILAAP cover and how does it differ from ICAAP?
ILAAP documents how banks identify, measure, and manage liquidity risk including intraday needs and stress scenarios.
How does the Bloomberg Commodity Index (BCOM) differ from the GSCI?
The Bloomberg Commodity Index (BCOM), formerly Dow Jones-UBS Commodity Index, uses liquidity-plus-production weighting combined with strict diversification caps...
How does quota share reinsurance work and when is it used?
Quota share cedes a fixed percentage of every risk in a portfolio, returning a ceding commission and sharing losses pro-rata.
What is a blended rate swaption and when would a corporate treasurer use one?
Blended rate swaption gives exercise over a window, not a single date. Tradewind locks 4.65% across a 6-18 month bond issuance window for $1.3M premium on $200M notional...
How do threshold and MTA combine to affect collateralized exposure?
Threshold creates uncollateralized buffer; MTA delays small calls. For a $3M threshold, $500K MTA CSA with Orion Fairbank, residual peak PFE roughly equals threshold plus MTA plus MPR-diffusion — about $5.5M if diffusion is $2M.
How does collateral change the exposure profile of a trade?
Collateral with daily exchange compresses exposure dramatically, but the margin period of risk (10 days bilateral, 5 days cleared) sets a floor. For Cascadia, uncollateralized PFE of $48M drops to $9M with zero-threshold daily CSA.
How do you price a bond using a binomial interest rate tree?
Binomial interest rate trees price bonds by modeling the possible evolution of short-term interest rates and working backward to determine present value. For callable bonds, at each node you take the minimum of the calculated value and the call price.
What is ICAAP and how do banks run internal capital adequacy assessments?
ICAAP is the bank's own process for identifying, measuring, and managing all material risks with capital planning and stress testing.
How does Pillar 3 market discipline work and what disclosures are required?
Pillar 3 requires banks to publish standardized disclosures so markets can evaluate risk and discipline excessive risk-taking.
How is the S&P GSCI commodity index constructed?
The S&P Goldman Sachs Commodity Index (GSCI) is a world-production-weighted index covering 24 commodities across energy, metals, agriculture, and livestock...
How are property and casualty insurance risks different from life risks?
P&C risks are premium, reserve, catastrophe, and latent liability — driven by short-tail volatility and correlated event exposure.
How is the unwind or termination value of a swap calculated?
Termination value = current MTM. Emberline's 10Y receive-fixed IRS at 3.95% with 6Y remaining and current 4.42% rate has negative $3.72M MTM — pays counterparty to exit...
PFE vs EPE — what's the difference and when do I use each?
PFE is a high-percentile tail measure at a point in time used for credit limits. EPE is the time-average of EE used for regulatory capital (EAD = 1.4 x effective EPE). For Vanguard Helix, 97.5% PFE of $42M vs 1y EPE of $8M.
What percentile defines potential future exposure and how is it used for limits?
PFE is typically the 95% or 97.5% percentile; some banks use 99% for stress. For a 7y cross-currency swap with Nordhaven, 95% PFE of $28M, 97.5% of $34M, 99% of $42M. Set limits at netting-set level tiered by counterparty quality.
What causes the volatility smile and skew in options markets?
The volatility smile and skew refer to the pattern of implied volatility varying across strike prices for options with the same expiration. In equity markets, the skew shows higher implied vol for low strikes due to crashophobia, leverage effects, fat tails, and jump risk.
What is Pillar 2 supervisory review and how does it complement Pillar 1 minimums?
Pillar 2 is the supervisory review process addressing risks not fully captured in Pillar 1.
What does Pillar 1 of the Basel framework require for minimum regulatory capital?
Pillar 1 establishes minimum capital requirements as ratios of eligible capital to risk-weighted assets.
How does roll yield work and when is it positive versus negative?
Roll yield is the return component a futures investor earns (or loses) from closing an expiring contract and reopening the position in the next contract along the curve...
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