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How do I simulate path-dependent exotics like Asian and lookback options?
Path-dependent options require simulating full price trajectories and computing payoff from path statistics...
How do I identify binding constraints in a stress test?
Enumerate constraints, compute stressed ratios, rank by distance-to-breach. Smallest headroom wins. Recovery actions must target the binding constraint.
How should I define the loss threshold for a reverse stress test?
Thresholds are capital (CET1 to minimum), liquidity (LCR breach), or franchise (rating downgrade, counterparty loss). Typically the minimum across all three.
How do I run an effective Risk and Control Self-Assessment (RCSA) that doesn't become a check-the-box exercise?
Effective RCSAs use facilitated workshops, inherent/residual assessment, control testing, and action plans — not questionnaire check-boxes.
What are the three components of the bid-ask spread?
Three components: order processing (fixed), inventory (position risk), adverse selection (informed trading)...
How is the Amihud illiquidity ratio calculated and used?
Amihud ILLIQ = average |daily return| / daily dollar volume; simple robust liquidity measure...
How is net interest income (NII) sensitivity modeled?
NII sensitivity projects net interest income over a 12-month horizon under rate shocks and compares it to a base case.
What are the benefits of multilateral netting at a CCP?
Multilateral netting collapses gross bilateral exposures into net amounts through the CCP, delivering major collateral savings, Basel capital relief, and simpler operations.
What role does the clearing house play in futures markets?
The clearing house novates trades, becoming buyer to every seller and seller to every buyer. It manages margining, default waterfalls, multilateral netting, and reporting.
How do Greeks behave for knock-in and knock-out barrier options?
Barrier-option Greeks go wild near the barrier: gamma spikes, delta jumps, vega can flip sign. Desks shift internal barriers and use touch-option overlays.
How does a TAC tranche differ from a PAC, and what protection do you actually get?
A TAC targets a single PSA speed. It protects against contraction (fast prepay diverted to support) but offers no extension protection if speeds slow.
What are the tradeoffs between implicit and explicit finite difference schemes?
Explicit FD computes each new node directly from known adjacent nodes - simple, fast per step, but conditionally stable...
What are the SABR model parameters and how are they interpreted?
SABR has four parameters: alpha (ATM vol level), beta (elasticity/backbone), rho (correlation controlling skew), nu (vol of vol controlling smile curvature).
How does reverse stress testing differ from traditional stress testing?
Reverse stress testing starts from failure and solves backward for the scenarios causing it, exposing hidden vulnerabilities...
What is reverse stress testing and how do I actually run one?
Reverse stress testing finds scenarios that break the firm, via analytical search, expert workshops, or Monte Carlo clustering. Outputs feed recovery planning.
How do I design hypothetical stress scenarios with a narrative and calibrated shocks?
Narrative, anchor shocks, propagate remaining factors via conditional models, validate plausibility, committee sign-off.
What is Kyle's lambda and how does it measure market impact?
Kyle's lambda = price impact per unit signed order flow; measures market depth and adverse selection...
What is price slippage and how do we model it?
Slippage = spread + impact + timing + opportunity costs; modeled as linear function of order size, vol, liquidity...
How do I track a futures margin account balance across multiple days?
Track the margin account day by day: add daily MTM to the balance, check against maintenance, record margin calls that restore the balance to initial margin.
How do variation margin calls work during volatile markets?
Variation margin settles MTM changes in cash. Beyond normal end-of-day flows, clearing houses can issue intraday calls during stress events, payable within hours.
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