Principles for the Sound Management of Operational Risk
After completing this reading you should be able to: Describe the three “lines of defense” in the Basel model for operational risk governance. Summarize the fundamental principles of operational risk management as suggested by the Basel Committee. Explain guidelines for…
Assessing the Quality of Risk Measures
After completing this reading, you should be able to: Describe ways that errors can be introduced into models. Explain how model risk and variability can arise through the implementation of VaR models and the mapping of risk factors to portfolio…
Messages from the Academic Literature on Risk Management for the Trading Book
After completing this reading, you should be able to: Explain the following lessons on VaR implementation: time horizon over which VaR is estimated, the recognition of time-varying volatility in VaR risk factors, and VaR backtesting. Describe exogenous and endogenous liquidity…
Deciphering the Liquidity and Credit Crunch 2007-2008
After completing this reading, you should be able to: Describe the key factors that contributed to the lending boom housing frenzy. Explain the banking industry trends leading up to the financial crisis and assess the triggers for the liquidity crisis….
Volatility Smiles
After completing this reading, you should be able to: Define volatility smile and volatility skew. Explain the implications of put-call parity on the implied volatility of call and put options. Compare the shape of the volatility smile (or skew) to…
Portfolio Risk: Analytical Methods
After completing this reading, you should be able to: Define, calculate, and distinguish between the following portfolio VaR measures: individual VaR, incremental VaR, marginal VaR, component VaR, undiversified portfolio VaR, and diversified portfolio VaR. Explain the role of correlation on…
Expectations, Risk Premium, Convexity, and the Shape of the Term Structure
After completing this reading, you should be able to: Explain the role of interest rate expectations in determining the shape of the term structure. Apply a risk-neutral interest rate tree to assess the effect of volatility on the shape of…
Empirical Approaches to Risk Metrics and Hedging
After completing this reading, you should be able to: Explain the drawbacks to using a DV01-neutral hedge for a bond position. Describe a regression hedge and explain how it can improve a standard DV01-neutral hedge. Calculate the regression hedge adjustment…
Hypothesis Tests and Confidence Intervals in Multiple Regression
After completing this reading you should be able to: Construct, apply, and interpret hypothesis tests and confidence intervals for a single coefficient in a multiple regression. Construct, apply, and interpret joint hypothesis tests and confidence intervals for multiple coefficients in…
Modeling Cycles: MA, AR, and ARMA Models
After completing this reading you should be able to: Describe the properties of the first-order moving average (MA(1)) process, and distinguish between autoregressive representation and moving average representation. Describe the properties of a general finite-order process of order \(q\) (MA(\(q\)))…
