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How do I calculate single-name credit VaR for an FRM Part II question?
Single-name credit VaR with PD = 2.3% at 99% confidence captures the default branch giving EAD*LGD minus expected loss...
What is a shark-fin note and why is it called that?
Shark-fin notes pay participation up to a barrier, then collapse to a small rebate if breached. Structurally a bond plus up-and-out call plus digital rebate.
How does Student-t VaR handle fat tails compared to normal VaR?
The Student-t distribution has a parameter nu (degrees of freedom) that governs tail thickness: lower nu means fatter tails.
What does it mean to calibrate an interest rate model to no-arbitrage conditions?
No-arbitrage calibration matches model prices to benchmark instrument prices across three tiers: bonds, vanilla vols, exotics...
What are structured deposits and how do they differ from regular CDs?
Structured deposits combine FDIC-protected principal with market upside but have zero coupon, caps, and opportunity cost vs. regular CDs.
Can you walk me through the normal VaR formula with a concrete example?
For a portfolio with mean return mu and standard deviation sigma over the horizon, the normal VaR at confidence level c is VaR = -(mu + z * sigma) * V.
When should I use a lognormal interest rate model instead of Gaussian?
Lognormal models keep rates positive and match observed skew but sacrifice analytic tractability and need numerical methods...
How does a barrier note with knock-in protection create cliff risk for investors?
Barrier notes have a knock-in put that activates if the underlying breaches a barrier, creating cliff risk where small moves cause large payoff changes.
What are the most common problems when scaling VaR across time?
Three structural issues plague time scaling. First, volatility is time-varying; a ten-day horizon almost certainly spans regime shifts that a daily vol does not reflect.
Is the Ho-Lee model still relevant or just a historical stepping stone?
Ho-Lee is the simplest no-arbitrage model with no mean reversion, mostly historical but useful for pedagogy and short horizons...
What are the key components of a risk appetite statement and how does it differ from risk tolerance and risk capacity?
A Risk Appetite Statement (RAS) is a formal board-level document that articulates the types and aggregate level of risk a firm is willing to accept in pursuit of its strategic objectives.
How do buffer notes differ from principal protected notes in downside protection?
Buffer notes absorb the first X% of losses but expose the investor to declines beyond. They combine a call spread with a short OTM put.
How do I decide between 95%, 99%, and 99.9% confidence for VaR?
The confidence level answers 'how often am I willing to breach VaR?' A 95% daily VaR is breached on average 13 times per year; 99% once every 100 trading days.
What's the advantage of the Hull-White one-factor model over Vasicek?
Hull-White makes the long-run mean time-dependent to exactly match the observed curve, enabling no-arbitrage calibration...
How do you design effective Key Risk Indicators (KRIs) and what distinguishes a good KRI from a bad one?
Key Risk Indicators (KRIs) are quantitative metrics that provide early warning signals of increasing risk exposure or weakening controls. They sit between risk identification and loss events.
What is a callable yield note and how does the issuer's call right affect pricing?
A callable yield note embeds a short Bermudan call sold by the investor. The enhanced coupon compensates for negative convexity and reinvestment risk.
Why can we scale VaR using the square root of time, and when does it fail?
Square-root-of-time scaling rests on three assumptions: returns are independently distributed, returns have constant volatility, and the mean is negligible over the horizon.
Why does the CIR model prevent negative rates and how does it differ from Vasicek?
CIR replaces constant volatility with sigma*sqrt(r), which vanishes at zero, preventing negative rates under Feller...
How do firms use internal and external loss data for operational risk management?
Loss data is the empirical backbone of operational risk measurement. Without reliable loss data, all the models and frameworks are built on guesswork. The FRM curriculum emphasizes both internal and external data sources.
How does a range accrual note pay coupon based on an index staying within a range?
Range accruals pay coupon based on days inside a reference range. Structurally they are strips of digital options, winning when rates are stable.
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