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One of the BCBS papers on operational risk says the following: Consistent with other operational risk losses, a bank should use a date no later than the date of reserve for including legal related …

I've read that a hybrid approach combing scenario analysis and loss distribution analysis can be used to calculate operational risk capital under the advanced models approach. …

I think I've found the answer in another Basel paper. This second paper is talking about the treatment of pending losses (losses where the financial impact is not certain at this point e.g. litigation …

Malz explains that marking to model can underestimate liquidity risk. From his example, I don't see it. I can see us underestimating market risk because we are using an incorrect price. … These divergences are liquidity risk events that are hard to capture with market data, so VaR based on the replicating portfolio alone can drastically understate risk. …

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? …

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 ? …

TL;DR Risk avoidance is not taking on the risk in the first place by not investing in the product that has the said risks.Risk transfer is akin to buying insurance. … This is retaining the risk For the risks the firm chose not to be exposed to, they have avoided them (risk avoidance) by not being exposed to them in the first place. …

If economic capital is set by the institution to cover unexpected loss (given a confidence level) and regulatory capital is set by the regulator, can one "absorb" the other? For example, if I determi …

Is it just a matter of solving for the required economic capital level to obtain a desired risk adjusted return on capital with a given risk adjusted return or is there more to it? … $RAROC = \frac{Risk\ adjusted \ return}{Economic\ Capital}$ …

(Also, I'm not sure if the terms are gross enterprise wide risk and net enterprise wide risk or gross risk and net enterprise wide risk) The paper is Range of practices and issues in economic capital … define and communicate measures of the bank’s risk appetite on a net basis. …

to calculate (more work than historical, but less compared to monte carlo) Cons: Assumes returns are normally distributed, which is often incorrect Assumes delta sensitivity accounts for all the risk …

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 pr …

I was of the understanding that risk neutral drift was always the risk free rate. … If risk neutral drifts can be different than the risk free rate and risk neutral drift can be estimated from futures, how then do we observe real world drifts? …

Assuming 0 recovery and a risk free rate of 5%. 1 year conditional (on no prior defaults) probability of default: Method 1 Obtain the probability of default from a hazard rate (instantaneous conditional … = 5\%$ $\lambda = \frac{spread}{1-Recovery} = 20\%$ $\pi_{1 year} = 1 - e^{-\lambda} = 18.13%$ Method 2 Equate the future value of a risky bond with yield (y) and default probability ($\pi$) to a risk …

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 $\pi_{cumulative} = 1-e^{-\lambda*t}$ wh …