Community Q&A
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What's the best way to estimate realized volatility from high-frequency data?
Each estimator trades bias against variance and microstructure noise. Close-to-close is unbiased but noisy; Parkinson uses daily high-low and is 5x more efficient.
What's the practical difference between regulatory and economic capital?
Regulatory capital is a Basel-prescribed floor; economic capital is internal, covers more risks, and allows diversification...
What information appears on a credit bureau report and how do lenders use it?
Bureau reports contain identifiers, trade lines, public records, inquiries, and collections. Lenders use both the composite score and derived attributes for application scoring.
What is a commercial credit risk model (KRM) score and when should I use it?
Commercial scores like RiskCalc, PAYDEX, SBSS, and Intelliscore use financial statements and trade data rather than consumer bureau files, and typically output PDs directly.
What are the lower bounds on European call and put prices?
Lower bound: c >= max(S - K*e^(-rT), 0) for calls, derived via replicating portfolios...
How do I construct a synthetic call from a put?
Synthetic call = long put + long stock + short bond (borrow PV of K)...
How does S&P's corporate rating methodology differ from Moody's?
S&P uses a two-step framework that is more explicit than Moody's. Step 1 is the Business Risk Profile (BRP), which combines Country Risk + Industry Risk + Competitive Position. Step 2 is the Financial Risk Profile (FRP)...
What does gamma actually tell a hedger, and how is it used in practice?
Gamma measures how fast delta changes. Long-gamma books profit from realized volatility via rebalancing; short-gamma books bleed when markets move.
How does the PSA prepayment model work and why is 100 PSA the benchmark?
PSA standardizes prepayment speed. 100 PSA ramps CPR from 0.2% to 6% over 30 months. Multiples like 165 PSA scale both the ramp slope and plateau proportionally.
How do I price an American put option using a binomial tree?
American put pricing on a binomial tree requires checking the early exercise condition at every node during backward induction...
How is the VIX actually calculated from option prices?
The VIX is a model-free estimate of 30-day risk-neutral variance, computed as a weighted sum of out-of-the-money SPX option prices weighted by 1/K^2.
How does KMV-Moody's EDF differ from the plain Merton model?
KMV uses short-term debt plus half long-term as the default point, iterates for asset value, and maps DD to empirical EDF from historical defaults — not N(-DD).
How do I calculate Merton model distance to default step by step?
DD = [ln(V/D) + (r - 0.5 sigma^2)T] / (sigma sqrt(T)). PD = N(-DD) under the risk-neutral measure.
How do I construct a meaningful risk heat map instead of a subjective color chart?
Rigorous heat maps use quantitative impact/likelihood ranges, distinguish inherent vs. residual, and are calibrated with data rather than gut feel.
How do I construct a synthetic put from a call?
Synthetic put = long call + short stock + long bond paying K, from rearranging parity...
How do dividends create a case for early exercise of American calls?
Dividends create early-exercise cases for American calls when D > K*(1-e^(-rt))...
What is asset-liability management and why do banks need a dedicated ALM function?
Asset-liability management coordinates the structure of a bank's balance sheet so that interest rate, liquidity, and currency mismatches between assets and liabilities do not threaten earnings or solvency.
How do I calculate delta for a European call step by step?
Delta = N(d1) for a European call. Walk through a Brindle Motors example: d1 = 0.3247 gives delta ≈ 0.626, so hedge 1,000 calls with 626 short shares.
How is a pass-through security structured and what does the investor actually own?
A pass-through gives investors a pro-rata undivided interest in a mortgage pool. WAC is the gross mortgage rate; the pass-through rate is WAC minus servicing and guarantee fees.
How is the variance risk premium different from the volatility risk premium?
The variance risk premium is the gap between the variance swap rate K_var and expected realized variance. The volatility risk premium is the same idea in vol units.
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