The Credit Decision

Definition of Credit The expectation that advanced funds will be repaid in full and in honor of the conditions agreed upon by the lending party and the borrower of funds, upon which a lender is willing to act, is the…

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Properties of Stock Options

After completing this reading, you should be able to: Identify the six factors that affect an option’s price and describe how these six factors affect the price for both European and American options. Identify and compute upper and lower bounds…

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Validating Rating Models

By the end of the chapter, the candidate should be able to give an explanation of the model validation process. The procedures for the roles of internal organizational units in the process of validation should be well described by the…

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Default Probability, Credit Spreads and Funding Costs

For credit valuation adjustments (CVA) and debt valuation adjustments (DVA) in the qualification of counterparty risk to be defined comprehensively, default probability and recovery rates associated with those are required. Relevant funding costs that are required when a position is…

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Country Risk: Determinants, Measures, and Implications

After completing this reading you should be able to: Identify sources of country risk. Explain how a country’s position in the economic growth life cycle, political risk, legal risk, and economic structure affect its risk exposure. Evaluate composite measures of…

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Structured Credit Risk

This chapter we will emphasize two main classes of credit risky securities that are securitizations and structured credit products. They are important in contemporary finance and they have been in existence for a while. The development of the market based…

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Parametric Approaches (II): Extreme Value

In this chapter, the importance and challenges of extreme values in risk management will be explained. The extreme value theory will be explained and its application to risk management will be studied. Furthermore, the generalized extreme value and peaks-over-threshold (POT)…

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Commodity Futures and Forwards

After completing this reading, you should be able to: Apply commodity concepts such as storage costs, carry markets, lease rate, and convenience yield. Explain the basic equilibrium formula for pricing commodity forwards. Describe an arbitrage transaction in commodity forwards, and…

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Range of Practices and Issues in Economic Capital Frameworks

There are methods and practices that allow banks to assess risks effectively and to cover for the economic effects associated with risk-taking. These methods can be referred to as Economic Capital. In this chapter, the importance of understanding the relationship…

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Model Risk

The objective of this chapter is to identify and explain modeling assumption errors through which model risk can be introduced. The arising of model risk in a model’s implementation will be studied. Furthermore, in risk mitigation, risk managers can apply…

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