Study Session 14: Risk Management

Why is collecting beta a good thing?

“But, as a trader, I love the idea of having a market neutral book that *collects beta in a smart risk-adjusted way.*

Can someone translate this to English please.

Thanks.

which VaR smaller?

for a given portfolio,

5-day 5% VaR vs 5-day 2.5% VaR

other things the same.

which one is smaller?

2.5% VaR has higher z score and thus has smaller VaR? wrong?

VAR

It may be silly but I am freezing on the calculation.

In the CAFI 2013 Am exam, there is a question regarding VAR calculation.

Capital 30 sends its largest client a weekly VAR estimate using a probability of
5%. Currently this estimate is GBP 0.8 million, so Capital 30 has advised the
client to be prepared for losses greater than this amount up to five weeks every
three years.

The correction for the comment is :

Credit Risk Exposure for forwards

I am a bit confused regarding the Credit Risk Exposure for forwards.

1. why there is no risk in this example as per the answer while there was risk borne by the short in the example that was stated in the CAFI book ( included below).

2. And why are we analyizing the risk from the short’s point of view?

3. In the CAFI example why did we divide by two different interest rates and why did we discount the current exchange rate?

forward credit risk exposure

I am having some trouble wrapping my head around this. I am looking at blue box 8 in risk. question #1. I do not understand why the spot rate is discounted at the international rate and the forward rate is discounted at the us rate. it seems to me they should both be discounted at the same rate.  Does anyone have some insight on this to make it easier to understand?

euro rate                       US rate

\$8.62/(1.05)^1.5  -  \$.90/(1.06)^1.5

Settlement Risk vs. Credit Risk R31 P. 142-144

Curriculum says:

credit risk is a financial risk from a loss caused by a counterparty’s or debtor’s failure to make a timely payment or by the change in value of a financial instrument based on changes in default risk. Also called default risk.

settlement risk is a non-financial risk is, when settling a contract, the risk that one party could be in the process of paying the counterparty while the counterparty is declaring bankruptcy.

I’m having trouble understanding the difference can someone clarify? thanks

Risk control of bottom up approach

In Schweser vol2 practise exam, exam 1, afternoon session, it asked:

Which of the following strategies least likely to enhance Risk control of bottom up investing approach.

Contrarian is the advert. The other two are overlay approach and blend of bottom-up and top down approach.

Financial capital

Why is insurance not counted as financial capital?

Futures Contracts

OK I am actually pretty decent on using futures contracts BUT I think I just confused myself. Can someone remind me when the ‘value’ part of the formula below needs to get ridden at the risk-free rate for the period in question- lets call it three months.

So to create synthetic EQ for 3 months- # contracts= beta-beta/beta * value ridden / value of contract used

BUT- if they change it to we want to ‘pre-invest’ \$3M, we do NOT need to ride that \$3M in this case, correct?

Risk Management Reading 31 EOC #12

Question 12, page 199:

How are they determining that the 35th worst return is -2.23? By the data im seeing here, the 35th from the worst -.251…

Same goes for B. Not sure how theyre getting -.347 when in the table it’s clearly -.320…