Questions tagged [risk-management]

The identification, assessment, and prioritization of risks, followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities.

Filter by
Sorted by
Tagged with
0
votes
1answer
53 views

Optimize risk return of portfolio

I have gathered stock prices from 15 companies over a year. I calculated the averages, yearly volatilizes, and the correlation matrix. I was asked to find the optimum weight for each stock with a ...
1
vote
0answers
20 views

conditional or unconditional probability in the calculation of LGD

lifetime LGD is calculated by the way of a term structure of PD. But this PD at the end are calculated using conditional or unconditional PD? I have found a Lot of different And confusing definition ...
0
votes
0answers
34 views

FRTB Spearman correlation coefficient definition

I am just writing my thesis and would like to understand the spearman correlation coefficient definition within the FRTB. Somehow it is not clear from the definition. The reason what I don't ...
1
vote
1answer
55 views

Jensen’s inequality in Convexity adjustment premium

I'm preparing for my FRM II test in May. Could someone help to explain where does the 0.0823 come from? 😥
0
votes
1answer
45 views

Highest asset allocation contribution to the fund’s performance

I am preparing for 2020 May FRM II test and will appreciate any explanation for this question: In terms of asset allocation contribution, why is real estate made the highest asset allocation ...
1
vote
2answers
90 views

Outperform the market with a Beta lower than 1, is it possible? [closed]

I have a portfolio which seems to have outperformed the benchmark for the past 2 years however the risk system I use advises that using recent past data (lookback period of 2 years) the Beta to this ...
6
votes
0answers
99 views

Intuition behind the Carr and Wu (2014) static hedging for ordinary options

Let $(S_t)_{t \geq 0}$ be the price of an underlying asset, $r$ be the risk-free rate of return, $q$ the dividend yield, $C_t(K,T)$ is the price of a call option written on $S_t$ at time $t$ with ...
0
votes
0answers
33 views

Hedging Strategy for European Call Option (Single period Binomial Model)

I am hoping to gain some insight to an exercise from my undergraduate Mathematics of Finance class. (This is my first course ever in finance, so bear with me.) The exercise is: Consider a single ...
1
vote
1answer
92 views

What is the SDE of this equation? [closed]

I am new and struggling to understand how to solve this using Ito lemma. Can someone please explain it to me: $$dS_t=-\frac{1}{2}\sigma^2 S_t dW_t$$ what is the solution with explanation please
0
votes
1answer
47 views

What is Variance of delta of brownian motion [closed]

I am new to this. If variance of Brownian motion b is t, what is the variance of db? db is delta of b
0
votes
1answer
106 views

Calculate duration of zero coupon bond

I am currently studying interest rate risk management, and i can't seem to get the derivation right, and I would like to do all of the steps, to be sure that I understand what is going on. Let Pz (t, ...
2
votes
1answer
114 views

Credit VaR Formula

in Chapter 23 of Hull's Options, Futures, and Derivatives he has an example (i.e. example 23.4) which shows how the Credit VaR formula is applied. The answer in the formula is 0.128. I can't seem to ...
1
vote
3answers
78 views

Calculate uncertainty of option expiring ITM

I know it is pretty straightforward to determine the probability that an option will expire OTM -- basically a 0.10 delta call will have a 10% probability of being ITM at expiration (see this question)...
0
votes
0answers
30 views

How to calculate R for strategies with dynamic exit points

Calculating R is easy when trading a straight forward strategy which has its entry and exit points clear: ...
0
votes
0answers
74 views

Portfolio and Risk Management: Total Return Index vs Price Index

For portfolio construction and risk management purposes, when one should use Total Return based Index instead of Price Index? I am looking for pros and cons of using either Total Return and/or Price ...
2
votes
1answer
136 views

Stop-Loss strategies

Does anyone know some bibliography about the problems or limitations of using Stop-Loss strategies in a portfolio? Let me explain better: for example you can have a portfolio of 30 stocks from ...
1
vote
1answer
131 views

Market risk FRTB: calculation of Vega risk charge

I recently started working on a project that requires me to deal with the new market risk standard issued by the Basel Committe: https://www.bis.org/bcbs/publ/d457_faq.pdf I am trying to calculate ...
0
votes
1answer
64 views

Time to Put or Call a Bond

I was studying putable bond and callable bond on my own, there is an exercise question that was a little confusing to me: I understand what the answer explains, but I am confused that, is a bond "...
1
vote
2answers
75 views

Why is higher the call price, the higher the price of a callable bond?

I am preparing for FRM level 2, but I ran into a question whose answer was confusing to me: In the answer, it says "all other things remaining the same, the higher the call price, the higher the ...
0
votes
0answers
44 views

Pca for Portfolio Theory

given the fact that if you take the portfolio returns for different assets in a portfolio the first principle component represents the market exposure of the portfolio and the second principle ...
6
votes
3answers
329 views

Is there a way to figure out “hot” strategies?

Apparently, short vol strategies have gotten crowded, according to the recent Bloomberg piece. When I read this, I thought how about factor based strategies -- value, growth, etc.? Aren't they ...
-1
votes
1answer
87 views

Backtesting a stock scoring model

I'm working on a simple stock scoring model consisiting of 3 factors: 1.market cap 2.liquidity of the stock 3.the value at risk we defined 3 intervals for each factor and we assigned the ...
1
vote
1answer
108 views

Portfolio Systematic Risk, Breaking it down into factor % contributions

I have a portfolio (p) of N equities, with let's say weights vector (m) at the start of the calculation period. Each equity has its own set of factors (like corresponding country, industry index, etc.)...
2
votes
0answers
19 views

Formulating Deposit Rate Sensitivity to Market Rate Changes

I have historical deposit rate data for a specific bank. I want to determine the sensitivity of deposit rates to market rate changes (I'll be using Fed Funds rate). My question is, what would be an ...
2
votes
0answers
33 views

To price Municipal Bonds and risks I want to know the percent of unfunded pension liabilities ($3.8T) to total state and local gov liabilities

Unfunded pension liabilities keep growing and this seems alarming to both pension holders but also Municipal Bond holders. I would like to know how large this problem is to better price Munis and ...
5
votes
0answers
131 views

First principles in Finance

Every so often I hear people referring to the term "first principles". It seems to me that this term does not necessarily have a universally accepted connotation in Finance. Here is the general ...
1
vote
1answer
125 views

Manually calculating and backtesting VaR and CVaR from DCC-GARCH R

I estimated a GARCH fit to the log returns of three series (CAC 40, a french real estate index and french T10 bond yield series) using rugarch. I then manually ...
3
votes
0answers
56 views

Using transaction data to predict default of the customer

I am trying to build a prediction model that utilize the huge transaction database of all the customers of a bank. My dataset currently looks like this: ...
0
votes
0answers
55 views

Options trade - statistically expected return calculation?

I am calculating expected return for composite option strategies based on event probabilities provided by the broker. For example, consider the following spread On the left hand side we see: maximal ...
2
votes
0answers
44 views

Why not to maximize Sharpe Ratio directly when computing optimal allocation of an order?

I was reading the following paper of Engle about balancing transaction costs performance and risk: https://www.nber.org/papers/w12165.pdf He deals with finding the optimal placement of the child ...
2
votes
0answers
46 views

Mean Variance Optimization vs Risk Scaling

What would be the difference between the following. Both techniques will result is an ex-ante risk of $\sigma$. However, that would be achieved via two different values of h. I want to understand ...
2
votes
1answer
105 views

Allow drift in weights in a risk benchmark?

I am tracking the risk of portfolios using a standard 2-asset benchmark (S&P500 / Agg bond) and I want to throw a flag if the risk of a portfolio goes outside of a certain range relative to that ...
1
vote
0answers
17 views

single period security market with two assets

Consider a single period security market with two assets. Assume the current prices are There are two states at time one and the payoff matrix is 1.Suppose the investor believes that each state has ...
1
vote
0answers
71 views

Normal default probability vs forward default probability/conditional default

is the diagram correct in calculating foward PD(conditional default) ? Or should the formula be Probability of default = probability of survival x forward PD Which of this is equal to marginal PD(...
1
vote
2answers
349 views

Absorption Ratio

I'm actually trying to implement Mark Kritzman's absorption ratio (Principal Components as a Measure of Systemic Risk by Kritzmam, Li, Page and Rigobon, 2010, SSRN 1633027) using Python, but I'm not ...
3
votes
1answer
72 views

How to model the maturity term of non maturing deposit accounts

My client (bank) currently follows a naive method to model the maturity term of chequing accounts. We need to model the maturity to correctly calculate the FTP pricing of these chequing accounts. The ...
1
vote
1answer
167 views

Barra model: why standardize the fundamental risk factors?

The two main types of risk factors included in the famous Barra model are called the "fundamental factors", and "industry factors," and the thing that I do not understand is why are only the former ...
1
vote
1answer
109 views

Applying Interest Rate Shock to Equities, FX, etc

I am looking for resources on practical applications of non-parallel Interest Rate shock for a portfolio that contains different types of investments. Specifically: how to identify the tenors and how ...
1
vote
0answers
55 views

What variables are important to describe a loan dataset?

I have a dataset of loans currently paid or charged off and as the dataset is very large I would like to to do a short summary of things I would think is worth knowing about. Yet I don't know a lot ...
0
votes
0answers
20 views

Portfolio Values based on reference interest rates

How do I approach the following question? A portfolio has 100 million invested in equities. It has also transacted an interest rate derivative issued by counterparty X, which the value is 0 if the ...
0
votes
0answers
22 views

Operational Risk Loss Distribution with Insurance

** Referring to part (c) First is 5000. Am I supposed to replace the 8000 with 5000 while maintaining its probability? For the second part, which includes the cost of insurance, do I add it to the ...
2
votes
1answer
278 views

How to derive portfolio weights from risk budget

Goal: I'm trying to frame target volatility investments given some view on what asset to overweight. For example, starting with a risk-parity allocation, tweak the marginal risk contribution of each ...
0
votes
1answer
85 views

Having only 2 Industry risk factors?

Is it possible to build a risk model that only has 2 industry risk factors? For example, if I wanted just Tobacco and Healthcare industries as risk factors can I do that? If I did that do I have to ...
0
votes
1answer
90 views

Why does risk aversion use variance instead of standard deviation?

The risk-aversion component of a portfolio utility function is expressed as the variance of the portfolio. Why the variance, instead of standard deviation, is used in here? I'm asking this question ...
5
votes
1answer
194 views

How frequently is local volatility calibrated to implied vol surface, in practice?

This has two related questions - How frequently do equity derivative traders re-mark the implied volatility surface - (i) once a day (e.g. at start of trading day, or end-of-day), or (ii) ...
3
votes
1answer
135 views

CVaR formulation

I am a research intern and I am working on a topic about a profit maximization of a risk-averse newsvendor by using Conditional Value-at-Risk.The problem is that I found different expressions of CVaR. ...
3
votes
1answer
281 views

What's Hedge Curve Template

what's a Hedge Curve Template (HCT)? How does it help value a bond? It appears to me it normally is used together with another curve where x,y-axis being maturity dates and discount factors ...
0
votes
2answers
53 views

From risk limits to pnl projection?

As a fresh risk manager, today I got an assignment to check whether our risk measurements / limits are setup properly (whether the limits are so tight that affect our p&l) . Better if I can ...
4
votes
2answers
1k views

How to add Risks-Not-In-VaR (RNIV) to VaR under Basel III

I am trying to generate/prove the magnitude of the over-conservativeness of the regulatory VaR (internal models) under Basel III against what a more accurate VaR would be. However, I can't seem to ...
1
vote
2answers
215 views

Portfolio - Default Probability

Suppose we want to identify the frequency of default on a portfolio with a 1000 loans. In the independence case, each firm’s default process follows a Bernoulli distribution with parameter $p = 0.01$. ...

1
2 3 4 5
7