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FRM Updated
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...
How do regime-dependent correlation models work?
Regime-dependent correlation models recognize that correlation parameters shift across market states, captured via DCC-GARCH, Markov-switching, or copula regime models...
How do I interpret and compute an expected exposure profile?
EE(t) is E[max(0, MTM(t))] averaged over Monte Carlo paths. For a 5y IRS with Kestrelbay, EE peaks mid-life. Interpret peak timing, compare to PFE for tail behavior, and recognize netting benefits typically cut EE 40-60%.
How do I describe the distribution of counterparty credit exposure over time?
Exposure distribution evolves as max(0, MTM) from surviving party's view. For a 10y IRS with Ironwood Capital, EE peaks around year 3-4 and declines. We summarize with EE (mean), PFE (high percentile), and EPE (time-average of EE).
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 difference between upside and downside beta?
Upside and downside betas decompose total beta by sign of market return, capturing asymmetric systematic risk...
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...
What is convexity risk in bank assets and how is it measured?
Convexity risk is the second-order sensitivity of asset value to interest rate changes.
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 do banks backtest CVA models?
CVA backtesting is challenging because CVA is risk-neutral and forward-looking. Banks break backtesting into three components: exposure model backtesting (compare simulated EE to realized MtM), PD/credit spread backtesting, and CVA sensitivities backtesting via P&L attribution...
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