Monitoring Liquidity
After completing this chapter, you should be in a position to: Distinguish between deterministic and stochastic cash flows and provide examples of each. Describe and provide examples of liquidity options and explain the impact of liquidity options on a bank’s…
Factors
After completing this reading, you should be able to: Describe the process of value investing and explain the reasons why a value premium may exist. Explain how different macroeconomic risk factors, including economic growth, inflation, and volatility affect risk premiums…
Backtesting VaR
After completing this reading, you should be able to: Describe backtesting and exceptions and explain the importance of backtesting VaR models. Explain the significant difficulties in backtesting a VaR model. Verify a model based on exceptions or failure rates. Identify…
Credit Value Adjustment (CVA)
After completing this reading, you should be able to: Explain the motivation for and the challenges of pricing counterparty risk. Describe credit value adjustment (CVA). Calculate CVA and CVA as a spread with no wrong-way risk, netting, or collateralization. Evaluate…
Counterparty Risk and Beyond
After completing this reading, you should be able to: Describe counterparty risk and differentiate it from lending risk. Describe transactions that carry counterparty risk and explain how counterparty risk can arise in each transaction. Identify and describe institutions that…
Illiquid Assets
After completing this reading, you should be able to: Explain the essential features of illiquid markets. Explain the effects of market imperfections on illiquidity. Assess the effects of biases on the reported illiquid asset returns. Explain the Geltner-Ross-Zisler unsmoothing process…
Early Warning Indicators
After completing this reading, you should be able to: Evaluate the characteristics of sound Early Warning Indicators (EWI) measures. Identify EWI guidelines from banking regulators and supervisors (OCC, BCBS, Federal Reserve). Discuss the applications of EWIs in the context of…
Financial Correlation Modeling – Bottom-Up Approaches
After completing this reading, you should be able to: Explain the purpose of copula functions and the translation of the copula equation. Describe the Gaussian copula and explain how to use it to derive the joint probability of default of…
Empirical Properties of Correlation: Behaviors of Correlation in the Real World
After completing this reading, you should be able to: Describe how equity correlations and correlation volatilities behave throughout various economic states. Calculate a mean reversion rate using standard regression and calculate the corresponding autocorrelation. Identify the best-fit distribution for equity,…
The Credit Decision
After completing this reading, you should be able to: Define credit risk and use examples to explain how it arises. Explain the components of credit risk evaluation. Describe, compare, and contrast various credit risk mitigants and their role in credit…
