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What are the main methodologies for aggregating risks across different risk types and business units?
Aggregation methods range from simple summation to copula-based Monte Carlo, balancing diversification capture with tail risk realism and regulatory constraints.
How do I calculate the duration gap for a bank balance sheet?
Duration gap = D_A - (L/A) * D_L, where D_A is the dollar-weighted duration of assets, D_L is the dollar-weighted duration of liabilities.
How do I quantify the opportunity cost of unexecuted trades?
Opportunity cost is (close − decision price) × unfilled shares. It captures the return missed on unexecuted portions and is essential to the implementation shortfall framework.
What is the arrival price benchmark and when is it used?
Arrival price is the mid when an order reaches the desk. It isolates execution-team controllable cost, separating desk performance from PM delay.
How does counterparty credit risk specifically differ from issuer default risk?
Consider two exposures to hypothetical Briardale Holdings: Bond vs Swap. Five key differences: exposure magnitude (face value vs MtM), direction uncertainty (always asset vs flip direction), time variation (declining vs tent-shaped)...
What is a liquidity horizon and how does FRTB assign them?
Liquidity horizons are FRTB's regulatory days-to-exit (10/20/40/60/120) applied to risk factors. Illiquid factors get longer horizons, scaling ES and capital.
How do auto loan ABS work and what credit enhancement is typical?
Auto loan ABS pool retail loans into senior/subordinate notes supported by subordination, overcollateralization, reserves, and excess spread. Short loss curves and essential-asset collateral make them resilient.
What is stratified sampling and when should I use it in option pricing?
Stratified sampling divides the sampling space into strata and allocates samples proportionally, ensuring tail regions get representation...
How should a model inventory be structured under SR 11-7?
A compliant model inventory captures ID, classification, tier, ownership, technical metadata, validation status, and performance. It drives validation planning and findings tracking.
What's the Monte Carlo workflow for simulating credit portfolio losses?
Factor-based Monte Carlo simulates systematic and idiosyncratic returns, marks defaults against thresholds, aggregates losses...
How does Perold's implementation shortfall framework measure execution cost?
Implementation shortfall measures total cost from investment decision to close. Its four components — delay, impact, opportunity, explicit — capture what VWAP misses.
When is TWAP a better benchmark than VWAP?
TWAP weights prices equally over time. It beats VWAP for thin stocks, evenly split orders, and when volume is unstable. VWAP fits liquid stocks with stable volume profiles.
What is counterparty credit risk (CCR) and why is it different from regular credit risk?
Counterparty credit risk (CCR) is the risk that the counterparty to a bilateral derivative or securities financing transaction will default before settling the transaction's final cash flows, causing an economic loss. It differs from issuer credit risk in four fundamental ways...
How does the bid-ask spread approach to liquidity-adjusted VaR work?
LVaR = VaR + 0.5·P·(μ_s + k·σ_s). Adds bid-ask liquidity cost using spread mean and stdev at the VaR confidence level. Known as BDSS.
What are the main ABS types outside of mortgages and how do they differ structurally?
Non-mortgage ABS securitize auto, card, student, equipment, and esoteric receivables in bankruptcy-remote SPVs. Weak prepay options shift the analytical focus to credit loss curves.
How does the control variate technique work in Monte Carlo?
Control variates exploit a correlated auxiliary payoff Y with known analytical value E[Y]. Your control variate estimator has reduced variance...
What does SR 11-7 require for model validation governance?
SR 11-7 establishes three pillars: development/implementation/use, independent validation, and governance. Effective challenge requires authority, stature, and independence.
How is the Stress Capital Buffer (SCB) calculated and what are its implications?
SCB = max(starting CET1 - trough CET1, 2.5%) + 4 quarters of dividends. Sets firm-specific buffer above 4.5% minimum plus G-SIB surcharge.
What is DFAST and how does it differ from CCAR?
DFAST is statutory with standardized capital actions; CCAR is supervisory with planned capital actions and drives the SCB. DFAST applies to Cat I-IV, CCAR historically to largest.
How do you run operational risk scenario analysis workshops that produce credible loss estimates?
Use structured elicitation with independent estimation, anonymous dispersion display, and bias awareness to produce defensible operational risk scenario estimates.
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