Regression with a Single Regressor – Hypothesis Tests and Confidence Intervals
After completing this reading you should be able to: Calculate and interpret confidence intervals for regression coefficients. Interpret the \(p-value\). Interpret hypothesis tests about regression coefficients. Evaluate the implications of homoskedasticity and heteroskedasticity. Determine the conditions under which the OLS…
Properties of Options
After completing this reading, you should be able to: Identify the six factors that affect an option’s price. Identify and compute upper and lower bounds for option prices on non-dividend and dividend-paying stocks. Explain put-call parity and apply it to…
Bayesian Analysis
After completing this reading you should be able to: Describe Bayes’ theorem and apply this theorem in the calculation of conditional probabilities. Compare the Bayesian approach to the frequentist approach. Apply Bayes’ theorem to scenarios with more than two possible…
Linear Regression
After completing this reading, you should be able to: Describe the models that can be estimated using linear regression and differentiate them from those which cannot. Interpret the results of an OLS regression with a single explanatory variable. Describe the…
Validating Rating Models
After completing this reading, you should be able to: Explain the process of model validation and describe the best practices for the roles of internal organizational units in the validation process. Compare qualitative and quantitative processes to validate internal ratings…
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…
Country Risk: Determinants, Measures, and Implications
After completing this reading you should be able to: 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 risk that incorporate all major…
Commodity Forwards and Futures
After completing this reading, you should be able to: Explain the key differences between commodities and financial assets. Define and apply commodity concepts such as storage costs, carry markets, lease rate, and convenience yield. Identify factors that impact prices on…
Common Univariate Random Variables
After completing this reading, you should be able to: Distinguish the key properties among the following distributions: uniform distribution, Bernoulli distribution, Binomial distribution, Poisson distribution, normal distribution, lognormal distribution, Chi-squared distribution, student’s t, and F-distributions, and identify common occurrences of…
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…
