valuation and risk models 20feb
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Valuation and Risk Models for FRM ExamTRANSCRIPT
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Valuation and Risk Models
By Shivgan Joshihttp://stockcreditfinancecfa.blogspot.in/
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Content
• Binomial trees• Delta Hedging• Coherent Risk• Black Scholes • Worst case distribution & Concept
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Risk Neutral Approach using binomial tree
• Binomial trees• Single step model• Esd*(t)^.5
http://en.wikipedia.org/wiki/Binomial_options_pricing_model
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Delta Hedging and Ratios
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Coherent Risk
http://en.wikipedia.org/wiki/Coherent_risk_measure
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Black Scholes (BSM Models)
• Lor normal distributed stock prices • D1• D2
• How these things comes from Stochastic Calculus
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Worst case distribution
• Intensity of distribution for losses• Solution pp 124 Scz
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VAR
• Volatility calculation models • ARCH (m), GARCH (1,1)• EWMA• Computing VAR with Correlations
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Quantifying Volatility in VAR (a big and tough one)
• Multivariate density estimation (Kernel is an interesting thing to find)
• Back testing
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Video VAR (FRM Level 1)
• Binomial• Black Scholes• Greeks• Delta normal Method• VAR at work
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Video 0 VAR Methods
1. Estimating Volatilities and Correlation 2. Quantifying Volatility in VAR (a big and tough
one, and have many things)3. Monte Carlo Methods (Most interesting)
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Video Lesson 1
• Strips and Arbitrage • One step Binomial Model• Risk neutral approach to option valuation• Aim 41, Recommended book Hull• Schewser
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Video Lesson 2
• Story of Black Scholes• Log Normal distribution • Normal Distribution
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Video lesson 3
• Greek Letters• Partial Derivatives• Hedging risk using Greeks
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Video 4
• Delta Hedging• Commodity• etc
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Video 5
• VAR Work• Expected Loss and Unexpected Loss
• Topic 45
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Delta Normal Method
• Correlation matrix• Linear & Non linear Derivatives • Page 88 of the core readings • More of Pristine stuff than in the real book
• From Philip Zorian
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VAR Historical Simulation
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Known and unknown
• Expected and Unexpected
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VAR Models
• Most basic formula and why root of days
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Expected Shortfall
http://en.wikipedia.org/wiki/Expected_shortfall
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Expected & Unexpected Loss
• Numerical
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Somethings are in level 2 which may provide motivation
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References