Risk Capital Attribution and Risk-Adjusted Performance Measurement

The objective of this chapter is to define, compare and contrast risk capital, economic capital, and regulatory capital and to give an explanation of the models and motivation allocating risk capital through the use of economic capital models. The Risk-Adjusted…

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VaR and Risk Budgeting in Investment Management

This chapter focuses on risk budgeting in the investment management industry, a practice that is somewhat new. The learner will be asked to identify the investment process and understand policy mix risk and active management risk. Funding risk and sponsor…

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Rating Assignments Methodologies

After completing this reading you should be able to: Explain the key features of a good rating system. Describe the experts-based approaches, statistical-based models and numerical approaches to predicting default. Describe a rating migration matrix and calculate the probability of…

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The Science of Term Structure Models

After completing this reading you should be able to: Calculate the expected discounted value of a zero-coupon security using a binomial tree. Construct and apply an arbitrage argument to price a call option on a zero-coupon security using replicating portfolios….

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Alpha (and the Low-Risk Anatomy)

From alpha, we learn more about the set of factors applicable to the construction of a benchmark as compared to the skills involved in beating it. Under one set of factors, there is the possibility of a positive turning negative….

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Wrong-Way Risk

In this chapter, the associated implications on exposure estimation and CVA determination by wrong-way risk (WWR) will be discussed and its causes identified. The quantitative approaches used will then be outlined. Moreover, we will analyze how collateral affects WWR and…

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Swaps

After completing this reading, you should be able to: Explain the mechanics of a plain vanilla interest rate swap and compute its cash flows. Explain how a plain vanilla interest rate swap can be used to transform an asset or…

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The Art of Term Structure Models: Volatility and Distribution

After completing this reading you should be able to: Describe the short-term rate process under a model with time-dependent volatility. Calculate the short-term rate change and determine the behavior of the standard deviation of the rate change using a model…

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Non-Parametric Approaches

After completing this reading you should be able to: Apply the bootstrap historical simulation approach to estimate coherent risk measures. Describe historical simulation using non-parametric density estimation. Compare and contrast the age-weighted, the volatility-weighted, the correlation-weighted, and the filtered historical…

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Applying Duration, Convexity, and DV01

After completing this reading you should be able to: Describe a one-factor interest rate model and identify common examples of interest rate factors. Define and compute the DV01 of a fixed income security given a change in yield and the…

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