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FRM Part I / Part II bridge Updated
Why does stress testing not replace VaR for an option-heavy portfolio?
Because the two tools answer different governance questions. Stress testing tells you what happens under selected severe scenarios. That is excellent for exposing vulnerability to curve shocks, volatility jumps, or liquidity breaks. But it does not t
How do I fix a Monte Carlo VaR workflow that mixes log returns and simple returns?
The fix is to be consistent about what object you are aggregating. For multi-asset portfolios, the weighted sum relationship applies cleanly to simple returns, not to log returns. A safer workflow is: 1. Simulate correlated log returns for each asset
Why can expected shortfall move a lot even when VaR barely changes?
VaR and expected shortfall look at different parts of the loss distribution. - VaR asks for the cutoff. - Expected shortfall asks for the average loss after the cutoff has already been breached. So two portfolios can share the same `99%` VaR and stil
When should I prefer historical simulation VaR over delta-normal VaR?
Historical simulation becomes more attractive when the portfolio cannot be summarized reliably with a small-move linear approximation. That usually happens when: - options or callable instruments make payoffs curved rather than linear - current holdi
Why do hedge calculations often use dollar duration or DV01 instead of just modified duration?
Modified duration gives relative sensitivity. Hedging needs absolute exposure. Suppose one position is `3,000,000` par and another is `12,000,000` par. Even if the first bond has slightly higher modified duration, the second position may create more
How should I think about the relationship between Macaulay duration and modified duration instead of memorizing two separate definitions?
Start with Macaulay duration as the time structure of the bond, then view modified duration as that timing structure translated into local price sensitivity. Macaulay duration answers: "On a present-value-weighted basis, how far away are the cash flo
When should I stop using modified duration and switch to effective duration?
Switch to effective duration when a rate move can change expected cash flows, not just discount rates. Modified duration works best when promised cash flows stay fixed. That is usually fine for a plain corporate bond. It becomes unreliable for callab
Why is DV01 so much smaller than dollar duration if both are supposed to measure rate risk?
DV01 is not a different risk from dollar duration. It is the same first-order rate exposure shown on a practical basis-point scale. Suppose **Lakeshore Transit Finance 2032** has: - full price `98.50` - modified duration `4.4` Dollar duration per `10
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