Measuring Credit Risk
After completing this reading, you should be able to: Explain the distinctions between economic capital and regulatory capital and describe how economic capital is derived. Describe the degree of dependence typically observed among the loan defaults in a bank’s loan…
Observations on Development in Risk Appetite and IT Infrastructure
In this chapter, the concept of a Risk Appetite Framework (RAF) is described and its elements are identified. An explanation of a well-developed RAF’s benefits will also be given and the best practices for a firm’s Chief Risk Officer (CRO),…
The Black-Scholes-Merton Model
After completing this reading you should be able to: Explain the lognormal property of stock prices, the distribution of rates of return, and the calculation of expected return. Compute the realized return and historical volatility of a stock. Describe the…
Modeling and Hedging Non-Parallel Term Structure Shifts
After completing this reading you should be able to: Describe principal components analysis and explain its use in understanding term structure movements. Describe key rate shift analysis and define key rate 01 (KR01). Calculate the KR01s of a portfolio given…
Portfolio Credit Risk
After completing this reading, you should be able to: Define and calculate default correlation for credit portfolios. Identify drawbacks in using the correlation-based credit portfolio framework. Assess the impact of correlation on a credit portfolio and its Credit VaR….
The Credit Transfer Markets and Their Implications
After completing this reading, you should be able to: Discuss the flaws in the securitization of subprime mortgages prior to the financial crisis of 2007-2009. Identify and explain the different techniques used to mitigate credit risk and describe how some…
Correlation Basics: Definitions, Applications, and Terminology
After completing this reading, you should be able to: Describe financial correlation risk and the areas in which it appears in finance. Explain how correlation contributed to the global financial crisis of 2007 to 2009. Describe how correlation impacts the…
Operational Risk
After completing this reading, you should be able to: Describe the different categories of operational risk and explain how each type of risk can arise. Compare the basic indicator approach, the standardized approach, and the advanced measurement approach for calculating…
Capital Modeling
In this chapter, we provide a comparison of the standardized approach, the alternative standardized approach, and the basic indicator approach for the computation of the operational risk capital charge. The modeling necessities for a bank to apply the advanced measurement…
Principles for Sound Stress Testing – Practices and Supervision
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 weaknesses identified and recommendations for improvement in: The use of stress testing and integration in…
