Rating Assignment Methodologies
p> After completing this reading, you should be able to: Explain the key features of a good rating system. Describe the expert-based approaches, statistical-based models, and numerical approaches to predicting default. Describe a rating migration matrix and calculate the probability…
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….
CVA (Part B – Wrong-way Risk)
After completing this reading, you should be able to: Describe wrong-way risk and contrast it with right-way risk. Identify examples of wrong-way risk and examples of right-way risk. Discuss the impact of collateral on wrong-way risk. Discuss the impact of…
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…
Non-Parametric Approaches
p> 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…
Stress Testing
After completing this reading, you should be able to: Describe the rationale for the use of stress testing as a risk management tool. Describe the relationship between stress testing and other risk measures, particularly in enterprise-wide stress testing. Describe stressed…
Pricing Conventions, Discounting, and Arbitrage
After completing this reading, you should be able to: Define discount factor and use a discount function to compute present and future values. Define the “law of one price,” explain it using an arbitrage argument, and describe how it can…
Options Markets
After completing this reading, you should be able to: Describe the various types and uses of options, define moneyness. Explain the payoff function and calculate the profit and loss from an options position. Explain how dividends and stock splits can…
Binomial Trees
After completing this reading you should be able to: Calculate the value of an American and a European call or put option using a one-step and two-step binomial model. Describe how volatility is captured in the binomial model. Describe how…
Foreign Exchange Risk
After completing this reading, you should be able to: Calculate a financial institution’s overall foreign exchange exposure. Explain how a financial institution could alter its net position exposure to reduce foreign exchange risk. Calculate a financial institution’s potential dollar gain…
