# Tagged Questions

The possibility that a negative event (such as a loss) will happen.

78 views

### Option analysis

Assume zero dividend and that the strike price for a European call option on a stock at a fixed maturity T and strike price K is given by C(K).Suppose that $C(K)=e^{-k}$ for all $K\geq 0$ ,then, I ...
139 views

### Calculate VaR for a liabilty taking a exponential distribution?

An insurance company faces the liability loss off $L = \begin{cases} 0, & \mbox{with probability } 0.75 \\ Z, & \mbox{with probability } 0.25\end{cases}$ where $Z\sim Exp(\mu)$. I want to ...
45 views

### Convex risk measure and a coherent risk measure?

A coherent risk measure is: $\rho(\lambda X_1+(1-\lambda X_2))$ How can it be shown that everey convex risk measure is indeed a coherent risk measure? I assume that it is enough to show that a ...
100 views

### Futures Parameters for Value at Risk

I am new to risk management. I am calculating the VaR for a portfolio of futures contracts, long and shorts. I calculated it using the historical, parametric, and ...
527 views

### performance of historical VaR parameters

An historical VaR measure is parameterized in terms of the confidence level and also number of periods. Specifically, the $\alpha$% T-period VaR is defined as the portfolio loss x in market value over ...
308 views

### Difference between Risk avoidance and Risk transfer

I was hoping some could explain the two terms namely, risk avoidance and risk transfer. Also, can a risk be avoided by transferring it?
80 views

### Finding Credit Risk Population Data

Are there any free or relatively cheap sources of aggregate data on credit risk for specific geographic regions, ages, and so on?
90 views

### Meaning of conservative in risk management?

I believe this question is best asked here, as it pertains to risk, rather than English SE. What is the meaning of conservative in the context of risk management? In general, conservative would mean ...
49 views

### What risks is an exchange exposed to?

Putting aside operational/reputational/business risks for a minute, a financial institution is concerned with the risk of losing money on their positions. What about an exchange ? I can only think of ...
85 views

### CVA using difference between 2 counterparty's spreads

The approximation to calculate CVA as a spread is $CVA = Spread * Expected$ $Exposure$. I assume this means the counterparty's spread over a proxy for the risk free rate such as LIBOR or OIS. Is this ...
36 views

### efficient portfolio with given risk

Is there a formula to derive an efficient portfolio to maximise the return, x'mu, for a given risk, x'S x (where x are the portfolio coefficients, mu is the mean return for each asset and S is the var-...
222 views

### Is marginal probability of default the same as conditional probability of default?

I'm thrown off by the term marginal probability of default. I've seen it defined by some authors as synonymous term for conditional probability of default conditional probability of default: ...
26 views

### Credit risk terms differences:

What are the differences between these terms: Contingent Credit Exposure Exposure profiles, Settlement Exposure, Negotiable Paper Exposure. Many thanks!
1k views

### Cumulative vs marginal probability of default

I understood the cumulative (aka unconditional) probability of default to be the probability of defaulting in a given period eg: between years 1 and 5. Further $\pi_{cumulative} = 1-e^{-\lambda*t}$ ...
63 views

### Calculating probability of default with no recovery

Given two methods to calculate the 1 year conditional probability of default of a zero coupon bond, I've come up with slightly different but close results. From my approaches below, is it reasonable ...
37 views

### Lambda in RiskMetrics for fixed income

What is the default lambda proposed in RiskMetrics for fixed income?
145 views

### Calculating expected shortfall

I'm trying to calculate the expected shortfall for the below scenario. I don't understand why the 1.04% probability of 0 bonds defaulting is used as a weight when calculating ES, since the binomial ...
314 views

### What are the pros and cons of historial and Gaussian approaches to VaR?

What is the difference between historical and Gaussian method of VaR estimation? I know how they are calculated, but what are the pros and cons of each?
29 views

### How does risk attitude influence trading? (Bibliography seeking)

I wonder how risk-averse or risk-seeking investors behave in a stock market. Is there any bibliography that deals with that? For example, suppose that we have a risk-averse investor that buys a ...
119 views

### Where can I find data source for structural models?

I am starting a project to implement the Black-Merton-Scholes model from this book in R. However, I am looking for, ideally free, data sources. Still I have access to a Bloomberg terminal. Can you ...
56 views

590 views

### How to treat large (5K-10K) non-positive-definite (particularly near-singular) covariance matrices for Cholesky decomposition?

I have a very large covariance matrix (around 10000x10000) of returns, which is constructed using a sample size of 1000 for 10000 variables. My goal is to perform a (good-looking) Cholesky ...
58 views

### Why is credit exposure higher for a smaller probability of default than for a larger default?

I'm having trouble grasping this concept; I don't see the relevance of the explanation given in the text (Gregory, Counterparty Credit Risk and CVA) either. When expected exposure and probability of ...
65 views

### What information should be delivered to the client so they have enough information to manage their exchange rate risks? [closed]

The client can be a CFO or CEO. The information can indicators, charts, graphs, statistics, ratios, etc. I know the VaR is one of them.
84 views

### Is credit exposure conditional on default?

Credit exposure defines the loss in the event of a counterparty defaulting, and expected exposure is the average of all credit exposures. BUT When adjusting the CVA calculation to account for wrong-...
263 views

### Why can't marginal CVA be used in pricing?

"Marginal CVA may be useful to breakdown a CVA for any number of netted trades into trade-level contributions that sum to the total CVA. Whilst it might not be used for pricing new transactions (due ...
234 views

### Risk neutral drift vs real world

I was of the understanding that risk neutral drift was always the risk free rate. A section from Gregory's book on Credit Value Adjustment seems to say risk neutral drifts are typically estimated from ...
201 views

### How does rehypothecation cause systemic risk?

I've read in many places that rehypothecation causes systemic risk (not to be confused with systematic risk), but none offer an explanation. Is this because of the daisy-chain effect that would happen ...
57 views

### Cross-sectional moments

I got a seminar topic named Forecasting risk from cross sectional moments? Could at least someone tell me what should I write about and if there is any paper that I could read. Thank you very much in ...
1k views

### Do binary options make any sense?

Reading from "www.nadex.com" - the copy reads "Binaries are similar to traditional options but with one key difference: their final settlement value will be 0 or 100. This means your maximum risk and ...
129 views

### Estimating an appropriate haircut for illiquid stocks

I am trying to determine an appropriate haircut for a basket of illiquid stocks that barely traded during the year. Can someone suggest me an approach to estimate the risk? My dataset has a lot of ...
70 views

### Rebucketing Risk using PCA/other methods

was working on a project and could use some help. New to the community and looking fwd to being an active part of it. My question is, let's say we have a vector of securities V, and it trades with ...
69 views

### how best to equalize individual pair risk in a portfolio of stock pairs?

I am building a portfolio of stock pairs in which each pair is individually hedged via beta/hedge ratio adjustment. I am looking for a method to ensure that I am taking the same risk in each pair that ...
258 views

### Semi-variance/Downside Risk, what about the rest of the covariance matrix?

I just bumped into a rather interesting article from wikipedia : http://en.wikipedia.org/wiki/Downside_risk where they define the semi-variance also called Downside risk, which bascially only ...
105 views

### GARCH filtering and extreme value theory

We are evaluating a model for risk management based on extreme value theory using peaks over threshold and markov chain monte carlo methods. In doing this, we are firstly fitting a GARCH (we have ...
71 views

### How to measure the volatility of illiquid bond with no historical prices

The basket of corporate bonds that I am following barely traded after the issuance. Hence, there is no historical data to estimate the volatility. Can you suggest me a different approach to come up ...
249 views

### Factoring risk premium in to Forward Rate calculation

This is a self study question. I'm calculating a forward rate. Specifically, I have that in a country X, the Spot Rate is 5X/1US. I also have that the 1 year interest rate is 13% in country X and ...
126 views

### To currency hedge or not to currency hedge (ETFs)?

When is it preferable to use a currency hedged ETF over a none currency hedged ETF? There has been studies which have shown over the longer term currency hedging does not make a difference. "...
67 views

### calculating portfolio volatility [closed]

Given: vector of portfolio weights $W = [w_1 w_1 ]$ correlation matrix $C = \left( \begin{array}{ccc} a & b \\ d & e \end{array} \right)$ standard deviation of the asset returns \$S = [s_1 ...
452 views

### Definition of risk factors for market risk scenario testing

I am doing a research for stress testing in market risk. The usual process I found out for scenario testing is: Define risk factors upon the portfolio Define the desired scenarios Vary the risk ...