Community Q&A
Expert-verified answers to your financial certification questions. Ask, learn, and connect with fellow candidates.
FRM Updated
What should a Contingency Funding Plan contain?
A Contingency Funding Plan has governance, early warning indicators, funding options, scenario-action matrix, and testing. Activated when EWIs trigger.
What happens when a CMBS loan defaults at maturity — extension or modification?
CMBS special servicers extend, modify, DPO, or foreclose on defaulted loans. Senior investors favor quick resolution; subordinates favor extension. PSAs constrain servicer discretion.
What is lower partial moment and how is it used in risk measurement?
Lower partial moment of order n around threshold tau captures only downside deviations raised to power n...
How is the standardized CDS upfront payment calculated?
Upfront equals approximately (par spread minus fixed coupon) times risky PV01. For Castelwood at 210bp par with 100bp fixed coupon and 4.35 risky PV01, the buyer pays about 4.78 points upfront per $100M. Negative upfronts flip direction.
What is a conventional CDS spread and how does it differ from the par spread?
The conventional CDS spread uses the ISDA Standard Model with a flat hazard rate and fixed 40% recovery — it's standardized for comparability. The par spread more broadly can use a full term structure. Dealer quotes are conventional spreads.
How do we aggregate model risk across the enterprise?
Enterprise model risk aggregates through findings severity, tier distribution, limitation overrides, explicit reserves, and qualitative heat maps. No single scalar — structured combinations.
How do variance swaps let traders bet on realized volatility?
A variance swap pays the difference between realized variance and a variance strike, times a notional.
How does a total return swap transfer credit risk on a reference bond?
A total return swap transfers both market and credit risk on a reference asset.
How do storage costs shape the commodity futures curve?
Storage costs drive a persistent upward tilt in commodity forward curves, but the magnitude varies enormously by commodity type due to physical and economic storage differences...
Why do cross-currency swaps exchange principal while single-currency swaps don't?
Cross-currency swaps exchange principal because legs are in different currencies — FX risk is real. Single-currency swaps skip it because identical notionals cancel...
What is BA-CVA and when do banks use it?
BA-CVA (Basic Approach CVA) is the simpler regulatory CVA capital method for banks that don't qualify for or elect SA-CVA. Mandatory for small derivatives books. Formula: K_reduced based on EAD, rating-based risk weights, maturity factor, with ρ = 0.5 correlation...
What is the CMBS B-piece and why is it a specialized market?
The B-piece is the first-loss subordinate class in a CMBS, bought by specialized investors who kick out weak loans pre-close and typically name the special servicer.
What is tail correlation and why differ from normal correlation?
Pearson correlation measures linear co-movement averaged across all observations. Tail correlation captures co-movement conditional on extreme returns...
What is a par equivalent CDS spread and why do practitioners use it?
PECS is the single running coupon making a CDS zero-PV today, translating the post-2009 standard fixed-coupon-plus-upfront quote into a comparable par spread. A 4.2pt upfront plus 100bp running might equal roughly 192bp par spread.
How is a CDS spread decomposed into its components?
CDS spread equals expected loss plus risk premium plus liquidity premium. A 210bp spread on Vanora Logistics might be 120bp expected loss, 60bp risk premium, 30bp liquidity. Risk-neutral PDs are typically 2-4x physical PDs for IG.
How should models be tiered for validation priority?
Tier classification scales validation effort to model risk. Tier 1 (high) gets annual full revalidation; Tier 2 biennial; Tier 3 triennial light-touch. Scored across impact, reliance, complexity.
Why do currency swaps exchange principal at both start and maturity?
A currency swap exchanges principal and interest payments in two currencies because each leg cannot net against the other.
How do commodity swaps provide index exposure without storing physical goods?
A commodity swap exchanges a fixed commodity price for a floating index price on a notional quantity.
What exactly is convenience yield and why does it matter for commodity risk?
Convenience yield is the implicit, non-pecuniary benefit a holder of a physical commodity receives from having the inventory on hand rather than holding a forward contract...
How does mortgage prepayment risk affect a bank's ALM?
Prepayment risk is the option mortgage borrowers hold to repay early, typically by refinancing when rates fall.
Want unlimited access?
You've browsed several pages. Sign in to save your spot, bookmark questions, and unlock all 807 FRM community questions plus expert-verified study materials.
Have a Question? Ask Our Experts
Register to ask questions, get expert-verified answers, and connect with fellow certification candidates preparing for CFA, FRM, CIA, CPA, and EA exams.