Community Q&A
Expert-verified answers to your financial certification questions. Ask, learn, and connect with fellow candidates.
FRM Part I Updated
What causes the volatility smile and skew in options markets?
The volatility smile and skew refer to the pattern of implied volatility varying across strike prices for options with the same expiration. In equity markets, the skew shows higher implied vol for low strikes due to crashophobia, leverage effects, fat tails, and jump risk.
How does roll yield work and when is it positive versus negative?
Roll yield is the return component a futures investor earns (or loses) from closing an expiring contract and reopening the position in the next contract along the curve...
What actuarial risks dominate a life insurance portfolio?
Life insurance actuarial risk decomposes into mortality, longevity, lapse, and expense drivers, each with distinct stress sensitivities.
How does a swap's mark-to-market evolve over its lifecycle and what drives MTM swings?
Swap MTM evolves with curve moves. Silverbrook's 5Y pay-fixed gains $1.58M when 4.75Y rate rises 50bp. MTM = notional × rate change × annuity factor...
What is the term structure of volatility and how does it affect options risk management?
The term structure of volatility describes how implied volatility varies across different expiration dates for options at the same strike. It can slope upward, downward, or be humped, and its shape critically affects vega risk management because different tenors respond differently to market events.
How do zero-coupon and year-over-year inflation swaps hedge CPI exposure?
Inflation swaps exchange fixed payments for inflation-linked payments referencing a price index.
How does a volatility swap differ from a variance swap and why is it harder to hedge?
A volatility swap pays realized minus strike volatility linearly, but the payoff is concave in variance and hard to replicate.
What are contango super-cycles and why do they matter for long-term commodity investors?
A contango super-cycle is an extended period — often three to seven years — where commodity forward curves slope steeply upward, persistently eroding returns for long-only index investors through negative roll yield...
How do insurance companies structure their enterprise risk management framework?
Insurance ERM sits on three pillars: underwriting risk, investment risk, and operational risk, governed through ORSA and three lines of defense.
Why is the value of a swap zero at inception and what does this imply?
Mid-market swap value is zero at inception by no-arbitrage. Real trades execute at bid or offer, creating small negative MTM immediately from the half-spread...
What is the ISDA Determinations Committee and what does it do?
The ISDA DC is a 15-member panel (10 dealers, 5 buy-side) making binding decisions on credit events, deliverable obligations, and succession. Supermajority 80% vote binds everyone. Five regional DCs cover different geographies.
How does the CDS credit event auction work?
The ISDA-Creditex auction has two stages: dealer quotes establish an initial midpoint, then a Dutch auction clears physical delivery requests, setting a single final price. Recovery of 37.25 means protection buyers receive 62.75% of notional.
How do dividend swaps let investors isolate dividend payment expectations?
A dividend swap pays the difference between realized index dividends for a calendar year and a fixed strike.
What does a correlation swap pay out and how do dispersion traders use it?
A correlation swap pays the difference between realized average pairwise correlation of an index basket and a correlation strike.
What causes a commodity futures curve to go into backwardation?
Backwardation occurs when near-dated futures trade above longer-dated futures, producing a downward-sloping curve. The immediate cause is always the same: convenience yield exceeds the sum of financing cost and storage cost...
How does a total return equity swap replicate stock ownership without buying shares?
Total return equity swap transfers complete stock economics without ownership. Westbridge pays SOFR+85bp financing, receives dividends + price appreciation on 1.2M Ironwood shares...
How is the standardized CDS upfront payment calculated?
Upfront equals approximately (par spread minus fixed coupon) times risky PV01. For Castelwood at 210bp par with 100bp fixed coupon and 4.35 risky PV01, the buyer pays about 4.78 points upfront per $100M. Negative upfronts flip direction.
What is a conventional CDS spread and how does it differ from the par spread?
The conventional CDS spread uses the ISDA Standard Model with a flat hazard rate and fixed 40% recovery — it's standardized for comparability. The par spread more broadly can use a full term structure. Dealer quotes are conventional spreads.
How do variance swaps let traders bet on realized volatility?
A variance swap pays the difference between realized variance and a variance strike, times a notional.
How does a total return swap transfer credit risk on a reference bond?
A total return swap transfers both market and credit risk on a reference asset.
Want unlimited access?
You've browsed several pages. Sign in to save your spot, bookmark questions, and unlock all 385 FRM Part I community questions plus expert-verified study materials.
Have a Question? Ask Our Experts
Register to ask questions, get expert-verified answers, and connect with fellow certification candidates preparing for CFA, FRM, CIA, CPA, and EA exams.