Videos uploaded by user “Bionic Turtle”

Here is an introduction to the Eurodollar futures contract using current quotes to illustrate: Assume we take a long position in a December 2008 Eurodollar futures contract. The quote is 97.005. That means we are "locking in" an annualized LIBOR rate of 2.995% (1100 -- 97.005). The quote of 97.005 corresponds to a contract price of $992,513 (the contract is on a par of $1 million). If the LIBOR rate declines to, say, 2.0% in December, the quote goes up to 98 (100 -- 2) and contract price goes up to $995,000. As a long position, we gained (by design) $25 per 1 basis point decline in the LIBOR. For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 41076
Bionic Turtle

Explanation of why we use log returns in finance. For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 97016
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The world's quickest summary comparison between the two common ways to price an option: Black-Scholes vs. Binomial. For more financial risk videos, visit our website! http://www.bionicturtle.com.

Views: 61835
Bionic Turtle

A balance sheet CDO transfers credit risk from the bank (originator) to investors. A key aspect of a CDO is that investors have different (tranched) securities. For more financial risk videos or to join in on our forum discussions, visit our website! http://www.bionicturtle.com

Views: 47709
Bionic Turtle

This is a brief introduction to the three basic approaches to value at risk (VaR): Historical simulation, Monte Carlo simulation, Parametric VaR (e.g., delta normal). For more financial risk videos, visit our website at http://www.bionicturtle.com!

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Bionic Turtle

In MG, the underlyings were short positions in long-term forward contracts to deliver oil. The hedge was a stack-and-roll hedge: long positions in short-term futures contracts that were rolled over consecutively. The strategy depended on the continuation of (i) stable or gently increasing spot oil prices and (ii) backwardation

Views: 41535
Bionic Turtle

Extreme value theory (EVT) aims to remedy a deficiency with value at risk (i.e., it gives no information about losses that breach the VaR) and glaring weakness of delta normal value at risk (VaR): the dreaded-fat tails. The key is idea is that the tail has it's own "child" distribution. For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 49004
Bionic Turtle

The covered call is an income strategy, but the protective put is an insurance strategy. Note the y-axis is a plot of position profit, where option profit = option payoff -- option premium. For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 52366
Bionic Turtle

The short position in a US Treasury bond futures contract can select among many different eligible (maturity greater than 15 years) bonds for delivery. This is by design; the Fed and Treasury do NOT want to see a "run on the issue" if only one bond can be delivered. The conversion factor puts the eligible bonds on a level playing field, making the short almost (but not quite) indifferent to which bond is delivered. For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 37790
Bionic Turtle

Distributions characterize random variables. Random variables are either discrete (PMF) or continuous (PDF). About these distributions, we can ask either an "equal to" (PDF/PMF) question or a "less than" question (CDF). But all distributions have the same job: characterize the random variable. For more financial risk videos visit our website! http://www.bionicturtle.com

Views: 104608
Bionic Turtle

The DV01 gives us the dollar change in bond price for a one basis point decline in the rate. We typically assume yield (YTM) is the rate change, so as Tuckman explains this is technically a yield-based DV01; i.e., we could instead shock spot or forward rates instead.

Views: 37272
Bionic Turtle

Contango and backwardation are about the relationship between the spot and forward price. If Forward is greater than Spot, it's contango (upward sloping forward curve). If Forward is less than Spot, it's backwardation (inverted forward curve). The "normal" prefix refers to relationship to expected future spot price and is harder to figure. For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 63108
Bionic Turtle

This video illustrates the valuation of an interest rate swap as two bonds.For more information on interest rate swap (IRS), visit Bionic Turtle at https://www.bionicturtle.com. Bionic Turtle is the best resource to prepare for the Financial Risk Management exam!

Views: 21085
Bionic Turtle

Market order: guaranteed fill, but not price. Limit order: guaranteed "or better" price, but not fill. Stop: After price trigger reached, becomes market. Stop-limit: After price trigger, becomes limit order. For more financial risk management videos visit our website at http://www.bionicturtle.com!

Views: 209716
Bionic Turtle

Relative to plain vanilla options, barrier options have an additional feature: c(S,K, H, volatility, T, r) where H is the barrier. The barrier either knocks-in the option (into existence) or knocks-out (out of existence) the option. Due to this "optionality on the option" the barrier is cheaper (lower premium) than its plain vanilla counterpart. Barrier is either: knock-in (up-and-in, down-and-in) or knock-out (up-and-out, down-and-out)

Views: 19478
Bionic Turtle

Study note: Counterparty credit risk is harder because (i) the initial value is 0 and the future value is highly uncertain and (ii) the contract can gain or lose. Two key metrics are Expected Exposure and Potential Future Exposure (PFE, which is essentially a VaR). For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 36269
Bionic Turtle

This video represents a very brief introduction to the "best fit" line through X:Y data. Subscribe to our channel for more financial risk management videos!

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Bionic Turtle

P-STRIPS and C-STRIPS are popular because: 1. They can be combined or re-constructed into any required sequence of cash flows, and 2. They are more sensitive to interest rates (i.e., higher duration) than coupon-bearing bonds (all other things being equal). For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 26019
Bionic Turtle

Why would the prices differ? The key difference is the daily settlement of the futures contract. The investor in a futures contract must maintain a margin account. The key issue is the correlation between the spot price and the interest rate. If the correlation (spot, interest rate) is strongly positive, an increase in the spot implies an increase in the forward/futures value (recall delta equals approximately 1.0 for both). But only the futures contract is settled daily. In this case, an increase in value implies excess margin; the excess margin can be withdrawn from the margin account and (owing to the positive correlation) invested at a higher interest rate.
For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 87495
Bionic Turtle

Basel's IRB determines a capital charge (K) = Credit Value at Risk (CVaR) @ 99.9% – Expected Loss (UL). This function is estimating an unexpected loss (UL). For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 42988
Bionic Turtle

Put call parity derives from the idea we can have two portfolios (one with an option, the other with a put) that have identical payoffs regardless of what happens to the stock. This gives a way to link the value of a call option with a put option. For more financial risk videos, visit our website at http://www.bionicturtle.com!

Views: 64827
Bionic Turtle

This is a classic building block for Monte Carlos simulation: Brownian motion to model a stock price. The periodic return (note the return is expressed in continuous compounding) is a function of two components: 1. constant drift, and 2. random shock; i.e., volatility multiplied by a randomized critical z value
For more great financial risk management videos, visit the Bionic Turtle website!

Views: 155461
Bionic Turtle

A visual and Excel-based review of the Merton model used to estimate EDF (or probability of default). This is a structural approach; i.e,. default is predicted by the firm's balance sheet properties. For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 53614
Bionic Turtle

At inception, the value of the swap is zero or nearly zero. Subsequently, the value of the swap will differ from zero. Under this approach, we simply treat the swap as two bonds: a fixed-coupon bond and a floating-coupon bond. The value of the swap is difference between the two. For more financial risk videos, visit our website at http://www.bionicturtle.com!

Views: 164201
Bionic Turtle

A plot of implied volatility (i.e., the volatility that forces the BSM model option price to equal the observed market price) against strike price. The smile is proof the model is imprecise (incorrect in some assumption); e.g., returns are not lognormally distributed. For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 34626
Bionic Turtle

Bayes' Theorem formulas an intuitive idea: we adjust our perspective (the probability set) given new, relevant information. Formally, Bayes' Theorem helps us move from an unconditional probability (what are the odds the economy will grow?) to a conditional probability (given new evidence, what are the odds the economy will grow?) For more financial risk management videos, visit our website at http://www.bionicturtle.com!

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Bionic Turtle

The binomial solves for the price of an option by creating a riskless portfolio. For more financial risk videos, visit our website! http://www.bionicturtle.com

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Bionic Turtle

A monthly lease payment has two parts, depreciation and interest. For more financial risk videos, visit our website! http://www.bionicturtle.com Here is the XLS http://trtl.bz/2sMC9KA

Views: 40356
Bionic Turtle

(Please note: spreadsheet is available on the website).
A nominal credit spread is the difference in yields (YTM), which are single factors; therefore, implicitly, the nominal spread compares flat curves. The Z-spread improves by giving the spread that adds across the entire spot (zero) rate curve; if the Z-spread is added to all points on the theoretical spot rate curve, the shift curve discounts the bond's cash flows to a present value that equals the bond's market price. In this way, the Z-spread represents compensation for credit risk across the entire curve. For more financial risk videos, visit our website! http://www.bionicturtle.com

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The Gaussian copula was gainfully employed prior to the credit crisis, and it has pretty much been shamed. Mathematically, it's an elegant way to join marginal distributions and handle default correlation. But it requires too many simplifying assumptions.

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Bionic Turtle

Like a CDS, but the reference is a BASKET of several obligations. A 1st-to-default means that the basket is triggered when the first obligation defaults. For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 18267
Bionic Turtle

Quick overview of Basel II framework that sets capital requirements for banks. Three pillars contains the rules & support (supervisor review, market discipline) that say how much eligible regulatory capital must be held against risk-weighted assets. For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 124158
Bionic Turtle

A repo is a secured loan. In August of 2007, repo lenders increased haircuts (initial margin) on repo transactions. The led to a run on the shadow banking system. For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 39675
Bionic Turtle

Review of key players including special originator, purpose entity, custodian, underwriter, investors, legal, and credit rating agencies. For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 36517
Bionic Turtle

ES is a complement to value at risk (VaR). ES is the average loss in the tail; i.e., the expected loss *conditional* on the loss exceeding the VaR quantile. For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 67219
Bionic Turtle

Covariance is a measure of relationship (or co-movement) between two variables. Correlation is just the translation of covariance into a UNITLESS measure that we can understand (-1.0 to 1.0). For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 224920
Bionic Turtle

If the futures contract moves in lockstep with the spot price of the asset being hedged, the hedge ratio is 1.0; e.g., to hedge 1 million gallons of jet fuel, we might take a long position in 24 heating oil futures contracts: 1 mm / 42,000 gallons per contract = about 24. But jet fuel is not heating oil, so we are cross-hedging. For more financial risk videos, visit our website! http://www.bionicturtle.com

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Bionic Turtle

The EWMA approach to volatility is an improvement over simple volatility because it assigns greater weight to more recent observations (in fact, the weights are proportional). For more financial risk videos, visit our website! http://www.bionicturtle.com

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Bionic Turtle

GARCH(1,1) estimates volatility in a similar way to EWMA (i.e., by conditioning on new information) EXCEPT it adds a term for mean reversion: it says the series is "sticky" or somewhat persistent to a long-run average. For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 146543
Bionic Turtle

The key idea in valuing a CDS is a fair deal: the (probability-adjusted) expected PAYMENTS (i.e., made by protection buyer) should equal the expected PAYOFF (contingent, made by seller). For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 62113
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A compound option has two strike prices (K1, K2). The first exercise triggers ownership of a option, not the asset. Four variations: call on a call, call on a put, put on a call, put on a put.

Views: 8998
Bionic Turtle

Like a credit default swap (CDS), a TROR transfers default risk. But unlike a credit default swap, a TROR also transfers credit deterioration risk (downgrade) and market risk (aka, price risk; interest rate change). The TROR receiver is synthetically long the reference, the payer is synthetically short the reference. The key advantage to the payer is a lack of funding cost (to buy the reference requires funding) which allows for leverage.

Views: 31110
Bionic Turtle

Lots of ways to estimate volatility. In this map, I parse out implied volatility (forward looking) and deterministic (constant) and focus on stochastic volatility: volatility that changes over time, either via (conditional) recent volatility and/or random shocks. For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 33081
Bionic Turtle

This video illustrates two (2.5 really) ways to test the hypothesis: 1. With confidence intervals: is the hypothetical value inside the interval? 2. By computing a t value and comparing it to the critical t (or lookup t). 2.5 Finally, probably the best way is the compute the p value. In Excel, we can use the =TDIST(computed t, d.f., 2 tail) = 1.3%. This returns a significance level (alpha) for us. That means, with 98.7% confidence (1 - alpha) we can reject the null. The advantage is that we do not need to specify a confidence/significance, instead the significance is returned for us (i.e., the point at which we can reject the null) and we can decide whether it's enough.
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Views: 241214
Bionic Turtle

A variance swap can be used to hedge tail risk. One counterparty (Sally the trader, in this example) pays a forward (fixed) variance in exchange for a future, REALIZED variance. So she is "long volatility" and will profit if the realized variance is greater than expected. The advantage of a variance (or volatility) swap is the relatively pure bet on volatility; e.g., it is not a directional bet on price and lacks some of the Greek exposures of (eg) an option.
You can get the spreadsheet I wrote for this on our website!

Views: 13895
Bionic Turtle

A key difference between a futures contract and a forward contract is daily settlement: the instrument is daily marked-to-market. If the value of the futures increases, this creates excess margin cash; if value declines, there will be a margin call (when the maintenance level is reached). Therefore, a Eurodollar futures contract has more volatility than a similar forward rate agreement (FRA). This implies a slightly higher rate.

Views: 18827
Bionic Turtle

In Black-Scholes, N(d2) is the probability that the option will be struck in the risk-neutral world. The Merton model for credit risk uses the Black-Scholes by treating equity as a call option on firm assets. In Merton, d2 becomes the "distance to default" and N(-d2) becomes the probability of default (PD). For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 40682
Bionic Turtle

Delta is not constant. Gamma gives the rate of change of delta (i.e., delta is first derivatives, and Gamma is second derivative). A delta-neutral portfolio is only temporarily (instantaneously) hedged. For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 27448
Bionic Turtle

A simplistic example using futures to bring the portfolio beta from 1.4 to 0 (fully hedged). The problem is this assumes continued perfect correlation between portfolio and index, which is unlikely. For more financial risk videos, visit our website at http://www.bionicturtle.com!

Views: 30630
Bionic Turtle

The key advantage of a central counterparty (CCP) is multi-lateral netting. The two key disadvantages of a CCP are (i) some degree of product standardization is required (because collateralization—daily variation margin—requires a common valuation methodology) and (ii) systemic risk is not eliminated because the CCP itself is not the entity that is "too interconnected to fail." For more financial risk videos, visit our website! http://www.bionicturtle.com

Views: 16879
Bionic Turtle

© 2018 Banking investment question

Underscoring the seriousness of the undertaking, ASX recently produced an 87-page progress report. Roll-out is targeted for late 2020 or early 2021. In the weeds. The enormity of such a project may not be obvious to those unfamiliar with the creaky plumbing of the capital markets. At the completion of phase one, DTCC will have nodes set up internally for every firm that it knows will run one, plus some general nodes that will take care of supporting the transactions and processing for the firms that do not wish to support a node of their own. For this project, DTCC has taken a multi-vendor approach. Ethereum-inspired startup Axoni is providing the technology, with IBM helping to manage the project, and R3 providing best practice guidance on areas like selecting the right data models. Luxembourg is the largest fund management hub outside of the U.S. The jurisdiction holds many trillions of dollars worth of assets under management. The KPMG-led project includes banks like BNP Paribas, Credit Agricole and others, as well as over 400 asset managers. The technology used is ethereum-based Quorum, the popular open-source project run by JP Morgan.