Option Sensitivity Measures: The “Greeks”
After completing this reading you should be able to: Describe and assess the risks associated with naked and covered option positions. Describe the use of a stop-loss hedging strategy, including its advantages and disadvantages, and explain how this strategy can…
Sound Management of Risk Related to Money Laundering and Financing of Terrorism
After completing this reading, the candidate should be able to: Explain the best practices the Basel Committee recommends for the assessment, management, mitigation, and monitoring of money laundering and financing of terrorism (ML/FT) risks. Describe recommended practices for the acceptance,…
Common Behavioral Biases
Mnemonic Devices for Easy Recall Cognitive: The cognitive biases can be remembered with the following mnemonic device: Con-Con-Con-Rep-Hind + FAMA (think Fama and French). Emotional: The emotional biases can be remembered with the following mnemonic device: LESSOR (the owner of…
Stress Testing Banks
After completing this reading, you should be able to: Describe the historical evolution of the stress testing process and compare methodologies of historical EBA, CCAR, and SCAP stress tests. Explain challenges in designing stress test scenarios, including the problem of…
How Current Rate Method and the Temporal Method Affect Financial Statements and Ratios
Both the current rate and temporal methods have a significant impact on the parent company’s financial statements and ratios. The following example demonstrates the effects under each translation method. Master currency translation methods and ratio effects with our free trial…
Applying Duration, Convexity, and DV01
After completing this reading, you should be able to: Describe a one-factor interest rate model and identify common examples of interest rate factors. Define and compute the DV01 of a fixed-income security given a change in rates and the resulting…
Effects of a Defined Benefit Plan’s Assumptions on the Defined Benefit Obligation and Periodic Pension Cost
Understanding the effects of assumptions on the estimated pension obligation and periodic pension costs helps in the interpretation of a company’s financial statements. Moreover, it aids in the evaluation of whether the assumptions are relatively conservative or aggressive. The amount…
