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…
Define independence and calculate probability of independent events
Define independence and calculate probabilities of independent events 1.1 Defining Independence In probability and statistics, two events, \(A\) and \(B\), are said to be independent if the occurrence of event A does not affect the probability that the other event…
Calculate Probabilities Using Addition and Multiplication Rules
The Addition Rule The Addition Rule of Probability is a rule for determining is used to find the probability that event A or event B happens. It’s associated with the use of the conjunction “or.” For example, We may want…
Calculate probabilities of mutually exclusive events
Mutually Exclusive Events \(A\) and \(B\) are mutually exclusive events if \(A\) and \(B\) cannot both occur at the same time. For example, when a coin is flipped, it cannot land on both the head and tail simultaneously. Therefore, we…
Define set functions, Venn diagrams, sample space, and events & define probability as a set function on a collection of events and state the basic axioms of probability.
What Is Probability? In mathematics, probability is the branch that deals with numerical descriptions of the likelihood that events will occur or that propositions are true. Probability is a number between 0 and 1, with 0 representing impossibility and 1…
Assessing the Quality of Risk Measures
[vsw id=”x_FZqIH8Db0″ source=”youtube” width=”611″ height=”344″ autoplay=”no”] 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…
What is ERM?
[vsw id=”653Qn1_4pmY” source=”youtube” width=”611″ height=”344″ autoplay=”no”] After completing this reading, you should be able to: Describe enterprise risk management (ERM) and compare and contrast differing definitions of ERM. Compare the benefits and costs of ERM and describe the motivations for…
Deciphering the Liquidity and Credit Crunch 2007-2008
[vsw id=”_sLzMHtACzM” source=”youtube” width=”611″ height=”344″ autoplay=”no”] 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…
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…
