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Videos uploaded by user “Bionic Turtle”
FRM: Eurodollar futures: introduction
 
06:44
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
FRM: Why we use log returns in finance
 
06:18
Explanation of why we use log returns in finance. For more financial risk videos, visit our website! http://www.bionicturtle.com
Views: 97016 Bionic Turtle
FRM: Black-Scholes versus Binomial
 
05:47
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
FRM: Collateralized debt obligation (Balance Sheet CDO)
 
07:36
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
FRM: Three approaches to value at risk (VaR)
 
05:56
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!
Views: 174417 Bionic Turtle
Metallgesellschaft case on hedging disasters
 
06:20
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
FRM: Extreme Value Theory (EVT) - Intro
 
08:34
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
FRM: Covered call versus protective put
 
07:46
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
FRM: Treasury bond futures: conversion factor
 
06:41
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
FRM: Terms about distributions: PDF, PMF and CDF
 
09:58
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
Bond DV01 and duration
 
06:31
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
FRM: Contango & backwardation in commodity forward markets
 
07:48
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
FRM: Interest rate swap (IRS) valuation: as two bonds
 
08:05
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
FRM: Order Types (market, limit, stop, stop-limit)
 
06:17
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
Barrier stock option
 
03:46
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
FRM: Counterparty credit exposure
 
07:41
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
FRM: Intro to Linear Regression
 
05:16
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!
Views: 363489 Bionic Turtle
FRM: Treasury STRIPS
 
03:55
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
FRM: Why a futures price differs from a forward price
 
07:11
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
FRM: Basel internal ratings-based (IRB) risk weight function
 
09:16
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
FRM: Put call parity
 
06:51
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
FRM: Monte carlo simulation: Brownian motion
 
09:28
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
FRM: Expected default frequency (EDF, PD) with Merton Model
 
09:29
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
FRM: How to value an interest rate swap
 
09:14
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
FRM: Implied volatility smile
 
09:24
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
FRM: Bayes' Formula
 
06:39
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!
Views: 166484 Bionic Turtle
FRM: Binomial (one step) for option price
 
06:53
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
Views: 127822 Bionic Turtle
FRM: Auto lease payment math
 
09:16
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
FRM: Z-spread (versus bond's nominal credit spread)
 
08:20
(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
Views: 23849 Bionic Turtle
Gaussian copula
 
07:30
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.
Views: 68161 Bionic Turtle
FRM: Basket credit default swap (CDS)
 
07:01
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
FRM: Basel II Overview
 
09:58
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
FRM: Repo (repurchase agreement)
 
04:38
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
FRM: Key players in securitization
 
06:00
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
FRM: Expected Shortfall (ES)
 
07:29
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
FRM: Correlation & Covariance
 
09:54
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
FRM: Optimal number of futures contracts in a cross hedge
 
08:21
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
Views: 31408 Bionic Turtle
FRM: Exponentially weighted moving average (EWMA)
 
08:56
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
Views: 95343 Bionic Turtle
FRM: GARCH(1,1) to estimate volatility
 
07:52
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
FRM: Valuation of credit default swap (CDS)
 
09:25
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 Bionic Turtle
Compound stock option (exotic)
 
03:35
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
Total rate of return (TROR) swap
 
03:55
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
FRM: Volatility approaches
 
09:35
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
FRM: Hypothesis Testing
 
08:55
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. For more financial risk management videos subscribe to our channel!!
Views: 241214 Bionic Turtle
Variance swap
 
08:28
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
Convexity adjustment for Eurodollar futures
 
05:12
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
FRM: How d2 in Black-Scholes becomes PD in Merton model
 
10:01
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
FRM: Why delta-neutral hedge is insufficient
 
07:01
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
FRM: Hedging equity portfolio with S&P index futures
 
05:30
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
FRM: Central counterparty (CCP)
 
06:54
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