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…
Fundamental Review of the Trading Book (FRTB)
After completing this reading, you should be able to: Describe the changes to the Basel framework for calculating market risk capital under the Fundamental Review of the Trading Book (FRTB) and the motivations for these changes. Compare the various liquidity…
Netting, Close-out and Related Aspects
After completing this reading, you should be able to: Explain the purpose of an ISDA master agreement. Summarize netting and close-out procedures (including multilateral netting), explain their advantages and disadvantages, and describe how they fit into the framework of the…
Structured Credit Risk
After completing this reading, you should be able to: Describe common types of structured products. Describe tranching and the distribution of credit losses in a securitization. Describe a waterfall structure in a securitization. Identify the key participants in the securitization…
Margin (Collateral) and Settlement
After completing this reading, you should be able to: Describe the rationale for collateral management. Describe the terms of a collateral and features of a credit support annex (CSA) within the ISDA Master Agreement including threshold, initial margin, minimum transfer…
The Credit Analyst
After completing this reading, you should be able to: Describe the quantitative, qualitative, and research skills a banking credit analyst is expected to have. Assess the quality of various sources of information used by a credit analyst. Explain the CAMEL…
Estimating Market Risk Measures
After completing this reading, you should be able to: Estimate VaR using a historical simulation approach. Estimate VaR using a parametric approach for both normal and lognormal return distributions. Estimate the expected shortfall given P/L or return data. Describe coherent…
Liquidity Risk
After completing this reading, you should be in a position to: Explain and calculate liquidity trading risk via the cost of liquidation and liquidity-adjusted VaR (LVaR). Identify liquidity funding risk, funding sources, and lessons learned from real cases: Northern Rock,…
