# Tag Info

## New answers tagged risk

1

Markets can disappear or go elsewhere. An example from Wikipedia: "LIFFE's most-traded product was a futures contract on Bunds, the 10-year German Government Bond. The DTB offered an identical product but, as an electronic exchange, it had a lower cost base. The progress of DTB can be gauged from the fact that in mid-1997 the DTB had less than 25% of the ...

1

One of the risks that an exchange (i.e. the clearing corporation associated with it) faces is 'last-trade' risk. When an order from a trading member hits an exchange, the exchange does not verify the trade against the trading member's remaining exposure limit before-hand. This is because it takes some time to cross-verify from the risk system, and since ...

3

This is an oft-debated topic among CVA/DVA professionals at banks. The key question, as pointed out by one of the comments, is whether a bank can derive some type of benefit from the increase in its own credit spread (and thereby make less of a CVA charge on the proposed transaction). The two sides to the argument are (a) on the one hand, surely by ...

2

Yes, this is the simple markowitz optimization. Denote $\Sigma$ as the variance-covariance matrix of returns and $\bar{R}$ as a vector of expected returns. The tangency portfolio weights are given by $\omega_{tan}=\frac{\textbf{{1}'}\Sigma^{-1}}{\textbf{{1}'}\Sigma^{-1}\textbf{1}}$. The minimum-variance portfolio is ...

-1

Systematic risk and unsystematic risk 1) when total risk assume to be equal to standard deviation of portfolio Systematic risk= B × standard deviation of market portfolio And unsystematic risk = standard deviation of portfolio - syetamatic risk ( i.e total risk - systamatic risk)

2

Based on your definition, they are certainly not the same. Generally, the marginal default probability is the probability that the default happens in a given time period, such as $[t, t+\Delta]$, that is, $P(t < \tau \le t+\Delta)$. Here, $\tau$ is the default time. See Chapter 10 of the book Counterparty Credit Risk and Credit Value Adjustment for ...

2

The question sounds like a conditional probability problem. However, note that, for conditional probability, people will generally say if survived to or conditional on. Here it says that survived in year one and (i.e., followed by) will default in year two. Then we should not treat this as a conditional or marginal probability. Based on the above ...

3

Let $\tau$ be the default time, $\lambda$ be the constant hazard rate, and $T=1.0$ be the bond maturity. The value of the defaultable zero-coupon bond is given by \begin{align*} D(0, T) &= e^{-rT}P(\tau > T). \end{align*} Then the default probability is given by \begin{align*} P(\tau \le T) &= 1- P(\tau > T)\\ &=1-D(0, T) \times e^{rT}\\ ...

0

the simple answer is to make an adjustment to the beta of company. let me give you an example say, beta is 1.0 & correlation of the company with market is 0.5 (which is 50% of the movement in the prices is explained by the market and rest is because of some other reason). so, now one thing is clear that if we some how make this correlation equals to 1 ...

1

The 1.04% are used in the calculation because it is 95% expected shortfall so you want to calculate the expectation on the 5% worst loss. In your problem there is 3 possible outcomes: loss of 200, 100 or 0. As the probability of loss of 200 or 100 is 0.04+3.92 = 3.96% < 5%, you need to take account of the loss of 0\$ for 1.04% part to reach the 5%.

0

One last question, if i have a short position, i should just add a minus in front my position right for the VaR calculation right? When calculating VaR and expressing as a notional amount (as opposed to a percentage), you always use the absolute value of the position. So if your portfolio consists of short 100 EUR and long 150 EUR you do not ...

3

Historical Simulation Pros: Easy to calculate Doesn't make assumptions about distribution of returns (uses empirical distribution) Can add some enhancements onto it such as giving a higher weighting to more recent returns (prevents ghosting mentioned below) or a weighting by volatility where more volatile returns get a higher weight. Cons: Assumes the ...

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