CVA (Part A)
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 the CVA spread with no wrong-way risk, netting, or collateralization. Evaluate the…
Basel II.5, Basel III, and Other Post-crisis Changes
In this chapter, we begin by discussing what Basel II.5 is all about. This is a collection of changes to the Market risk capital computation put in place by the Basel Committee due to the large losses banks experienced during…
External Loss Data
External loss data is used in the operational risk framework to provide input to any operational risk calculation and valuable insights into these different forms of the risks. This external data in the advanced measurement approach (AMA) capital calculation is…
Credit Risks and Credit Derivatives
After completing this reading, you should be able to: Use the Merton model to calculate the value of a firm’s debt and equity and the volatility of firm value. Explain the relationship between credit spreads, time to maturity, and interest…
Repurchase Agreements and Financing
After completing this reading, you should be able to: Describe the mechanics of repurchase agreements (repos) and calculate the settlement for a repo transaction. Discuss common motivations for entering into repos, including their use in cash management and liquidity management….
Credit Scoring and Retail Credit Risk Management
After completing this reading, you should be able to: Analyze the credit risks and other risks generated by retail banking. Explain the differences between retail credit risk and corporate credit risk. Discuss the “dark side” of retail credit risk and…
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…
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…
