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Basic probability

Part 1: Probability

Probability distribution
Special distributions

Economic Capital
Strategic Capital Allocation

Descriptive statistic

Reasons for Banking Regulation

Basel I

Quantitative Analysis
Regulatory Capital

Capital Allocation

Sampling Theory
Estimation Theory

Part 2: Statistic Theory

Basel II

Hypothesis Testing

Financial Conglomerate Regulation

Regression and correlation

Market Risk
Market Risk Management

Foreign Exchange Risk

Define Operation Risk


Measuring Operational Risk

Bond Valuation with a Parallel Term Structure

Define and Measuring Operation Risk

Operation Risk Management

Bond Valuation with a Non-Parallel Term Structure

Operation Risk

Operational Risk and Economic Capital

Interest Rate Risk

Fixed income securities

Case Studies

Interest Rate Sensitivity

Best Practices for Risk management

Bond Pricing
Mortgage-Backed Securities
Determination of Forward and Futures Prices





Hedging Strategies Using Futures

Forwards and Futures, Swaps
Interest Rate Futures

Default Risk
Recovery Rate and Recovery Function

Mechanics of Options Markets

Probability Default And Loss Given Default


Properties of Stock Options


Option Pricing

Counterparty Risk

Credit Risk

Credit Risk Portfolio Models


Market Risk

The Greek Letters

Option Strategies

Sovereign Risk

Volatility Smile
Loan Sales

Complex Derivatives

Introduction to VaR

Credit Derivatives

Quantifying Volatility in VaR

Putting VaR to Work

VaR Methods
Portfolio Theory
Creating Firm Value


Historical Simulation
Monte Carlo Simulation

Portfolio Management


Performance Analysis

Methods Comparison and Appropriate Uses

A Firm-Wide Approach to Risk Management

Hedge Fund Classifications

Investment and
Risk Management

Hedge Fund Benchmarks

Hedge Fund Management

Role of Stress testing

Stress Testing

Primary Approaches to Stress Testing

Scenario Analysis

Hedge Fund Risks

Large Stress Losses
Hedge Fund Developments

Extreme Value Theory

Risk Budget


.mmap - 2007-8-22 -

random variables
important terms

mutually exclusive events

Basic probability

exhaustive events
Total Probability Rule
Important rules

Bay's Rules
unconditional and conditional Probabilities

Part 1: Probability

Univariate probability distribution

Probability distribution

Joint distribution for two random variables

Uniform distribution
Binomial distribution
Normal distribution
Special distributions

Poisson distribution
Lognormal distribution

the relationship between normal and lognormal

T , chi and F distribution

the relationship between distributions

Quantitative Analysis

Frequency Distribution
Measures of central tendency


Descriptive statistic

The Expectation of a Random Variable

E(cX)=cE(X), E(X+Y)=E(X)+E(Y),

Measures of variance and derivation

Covariance and correlation
Chebyshev's inequality
Skewness and kurtosis
The law of large number
Population, sample and parameters
Central Limit Theorem
Sampling Theory

The Sample Mean and the Distribution of the Sample Mean

standard error of the sample mean

The Sample Proportion and the Distribution of the Sample Proportion

The Sample Difference and the Distribution of the Sample Difference
The Sample Variance and the Distribution of the Sample Variance
population mean
Point Estimate

population proportion
difference between the means of two populations
the properties of an efficient point estimate

Part 2: Statistic Theory

Estimation Theory

population mean with known population variance

Confidence interval estimate

population mean with unknown population variance

population proportion
difference between the means of two populations

The difference between point and confidence interval estimate

Basic Concepts

Null Hypothesis and Alternative Hypothesis

One-tail test vs. Two-tail test

Type I and a Type II error and Significance level

The p-value
Hypothesis Testing

Test Statistic and Critical Value and Decision Rule

Test of Single Population Mean
Test of Differences between Means
Test of Single Population Variance
Test of Variances Difference
Summary of Hypothesis Testing
the standard error of estimate(SEE)
Coefficient of Determination( R2), SST, SSR and SSE

Regression and correlation

Test of Significance of Regression Coefficients

Predicted value for dependent variable
Significance Test of The Correlation Coefficient

1.Quantitative Analysis.mmap - 2007-8-22 -

The reasons for widespread adoption of VaR

Definition and assumptions
Calculate a single period VaR for single asset
Diversified Portfolio VaR
Individual VaR
Marginal VaR

Portfolio Risk Analysis

Introduction to VaR

Use of Marginal VaR

Incremental VaR
Portfolio VaR

Variance Minimizing Allocation or "Best Hedge"

Two-Assets Have a Zero Correlation
Calculate the Portfolio VaR

Two-Assets Have a Correlation of One

Equally Weighted Portfolio

Estimate Component VaR

Time Conversion for VaR
The Stochastic Behavior of Returns
Deviation from the Normal Distribution

Fat tail
Left skewed
Standard Approach

Simplification Usually Made


Estimating Volatilities and Correlations


Approaches to Estimate Volatility

Attractions of EWMA

Choose between the Models
Forecasting Correlations Can be More Important that Forecasting Volatilities
Quantifying Volatility in VaR

RiskMetrics Approach (EWMA Model)


Historical Standard Deviation Approach

Historical-based Approaches

Historic Simulation

Multivariate Density Estimation

Approaches for Estimate VaR


Implied-Volatility Based Approaches

Implications of Mean Reversion in Returns and Return Volatility
for Forecasting VaR Over Long Time Horizons
The Non-synchronous Data Problem
Differentiate between linear and non-linear derivatives
Calculating the VaR for a Linear Derivatives
Putting VaR to Work


VaR for Derivatives

Calculating the VaR for a non-linear Derivatives

Taylor Approximation
The Limitation of Taylor Approximation
The Difference Between Full-revaluation Method and Delta-normal Method for
Measuring the Risk of Non-linear Derivatives

Components of a VaR Model


Model Itself
Mapping System

Four Steps to Determining VaR

Three Qualities of Successful Futures contracts

Choosing Primitive Risk Factors

Three Approaches for Mapping

Market Risk 1



Delta-Normal Method for Fixed-Income Portfolios

Mapping Approaches for Fixed-Income Portfolios

Mapping Interest Rate Swap and Options

Delta-Normal VaR with Linear Derivatives

Delta-Normal Method Can Provide Accurate estimates of VaR for

Many Types of Financial Instruments

Derivatives and Option: A Note of Caution

VaR Methods

Benchmarking a Portfolio
Historical Simulation
Compute VaR Using Monte Carlo Simulation

Monte Carlo Simulation Using Single Variable

Using Monte Carlo Method Value an Option


Models of Interest Rate Dynamics

Monte Carlo Simulation

Monte Carlo Simulation Using Multiple Variable

Correlation Among the Variable

Tradeoff btw Speed and Accuracy

Structured Monte Carlo (SMC) Approach to Measuring VaR
Methods Comparison and Appropriate Uses
VaR and CFaR
VaR impact of Small Trade

Project impact on VaR and CFaR

Project Impact on CFaR

A Firm-Wide Approach to Risk Management

Allocating the Costs of CFaR and VaR

Reducing the cost of risk for a given level of VaR or CFaR
Reducing the Costs of CFaR and VaR

limitations on project selection and the use of derivative

instruments as ways to decrease

Role of Stress testing

Primary Approaches to Stress Testing
Unidimensional Scenario Analysis
Stress Testing

Scenario Analysis

Prospective Scenarios
Multidimensional Scenario Analysis
Historical Scenarios
Worst Case Scenario Measure as an Extension to VaR

Large Stress Losses

Role of EVT
Extreme Value Theory

Block Maxima Models

Two broad classed of models in EVT

Peaks-Over-Threshold(POT) Models
Tail Size and Time Dependency

Clustering Analysis

Risk Budget

Use VaR to Design Better Investment Guidelines

Budget Risk across Asset Classes
Budget Risk across Active Managers

Market Risk 1.mmap - 2007-8-22 -

Conditional Scenario

Define Market Risk

Five Reasons Why Market Risk Measurement Is Important
Market Risk

Models Beings Used to Calculate Market Risk Exposure

Methods The Bank for International Settlement (BIS) Uses
to Regulate Market Risks
Different Sources of Foreign Exchange Risk Exposure
Different Types of Foreign Trading Activities
Sources of Most Profits and Losses on Foreign Exchange Trading
Mismatches Between Foreign Financial Asset and Liability Portfolios

Foreign Exchange Risk

On-Balance-Sheet Hedging
Off-Balance-Sheet Hedging With Forwards

Market Risk Management

Diversification in Multicurrency Foreign Asset-Liability Positions

Identifying and Managing Cash Flow Exposures

Estimate Cash Flow Exposures

Calculate Optimal Hedge Ratios

Know that Liquidity Risk is Comprised of Funding Risk and Market Liquidity Risk
Alternatives for Measuring Liquidity Risk lnclude: Liquidity Gap and Liquidity Risk Elasticity
Asset's Liquidation Cost


VaR Can Be Adjused for Liquidity Risk (LVaR) By Incorporating the

Impact of the Bid-Ask Spread
Ways Firms Can Minimize Their Exposure to Liquidity Risk

Fundamentals of Bond Valuation(three steps)

Determining the Cash Flows
Price Quotations
Treasury Coupon Bonds and Treasury Strips

Differentiate between P-Strips and C-Strips

Bond Valuation with a Parallel Term Structure

Yield to Maturity

Calculate a bond's YTM

Calculate the Price of an Annuity and a Perpetuity
Relationship between Par Value, Coupon Rate, and Price

Price between Coupon Dates

Market Risk 2

Accrued Interest
Clean and Dirty(Invoice) Prices

Compounding Conventions

Effective Annual Yield(EAY)

Discount Factors
Spot Rate Curve

Calculate a Series of Spot Rates

Bond Valuation with a Non-Parallel Term Structure

Forward Rates
Pricing a Bond
Determining Value Using Discount Functions
Linear Yield Interpolation

Fixed income securities

Dollar Value of a Basis Point and Price Change

Hedge Ratio
Duration, Convexity and Price Change
Interest Rate Risk

Convexity's Role and Portfolio Duration, Effective Duration

Yield-Based DV01, Modified and Macaulay Duration
Effect of Coupon Rates, and Maturity
Yield-Based Convexity and Maturity, Barbells and Bullets
Single-Factor Approaches, Key Rate Shift Technique

Interest Rate Sensitivity

Key Rate Exposure, Hedging Based on Key Rates

Key Rate Shift vs. Bucket Shift Approaches

Interest Rate Tree (Binomial) Model and Risk-Neutral Interest Rate Tree
Bond Pricing

Fixed-Income Securities and Black-Scholes-Merton

Bonds with Embedded Options
Mortgages, Fixed Rate, Level Payment Mortgage, Prepayment Option
Static Cash Flow Models, Implied Models, Prepayment Models
Price- Rate Curve of Mortgage Pass-Through

Mortgage-Backed Securities

Planned Amortization Class(PAC)

Prepayment Risk

Principal Only(PO) Strips

Interest Only Strip

Monte Carlo Simulation for Valuing MBS

Market Risk 2.mmap - 2007-8-22 -

Arbitrage Strategy

Whether a Bond Is Trading Cheap or Rich

A Long(Short) Futures Positions

Characteristics of a Futures
Marking-to-Market, Initial Margin and Maintenance Margin


Variation Margin
Role of the Clearinghouse
With No Cash Flows
Cost-of-Carry Model

With Cash Flows

With a Continuous Dividend Yield

Value of a Forward Contract

Determination of Forward and Futures Prices

Forward and Futures Contracts

Basic Equilibrium Formula for Pricing Commodity Forwards and Futures
Lease Rate

Calculating Lease Rate for Commodity Forwards and Futures

Determine the Contango or Backwardation of Forward Market Using Lease Rate

Calculate the Forward Price of Commodity with Storage Costs

Pricing Commodity Forwards and Futures

The No-Arbitrage Bounds for the Forward Price of Commodity when Considering
a Convenience Yield
The Factors that Impact the Pricing of Gold, Corn, Natural Gas and Oil Futures
Calculate a Commodity Spread
Basis Risk and the Differential between a Strip Hedge and a Stack Hedge

A Short Hedge and a Long Hedge

Hedging with Futures

Forwards and Futures, Swaps

Basis Risk

Types of Basis Risk

Hedging Strategies Using Futures

Optimal Hedge Ratio
Hedging with Stock Index Futures
Rolling a Hedge Forward
Day Count Conventions

U.S Treasury Bond (T-Bond) Futures Contract Conversion Factor

T-Bond Futures

Cheapest-to-Deliver Bond
Interest Rate Futures
Eurodollar Futures

Futures Contract Convexity Adjustment

Formulate a Duration-Based Hedging Strategy Using Interest Rate Futures

Limitations of Using a Duration-Based Hedging Strategy
Mechanics and Cash Flow of a Plain Vanilla
Interest Rate Swap

Mechanics of Interest Rate Swaps

Interest Rate Swap combined with an Existing Asset or Liability

Comparative Advantage
Discount Rate

Equivalent to a Simultaneous Position in Two Bonds

or a Series of FRAs

Valuing Interest Rate Swaps

Calculate the Value of an Interest Rate Swap

Currency Swaps

Mechanics and Calculate the Value of Currency Swap

Swap Credit Risk

Strike Prices
Stock Options Specifications

Moneyness, Time Value, and Intrinsic Value

The Effect of Dividends and Stock Splits

Mechanics of Options Markets

Position and Exercise Limits

Option Trading

Market Risk 3

Other Option-Like Securities

Six Factors that Affect Option Prices

Upper and Lower Pricing Bound
Properties of Stock Options

Computing Option Value Using Put-Call Parity

Call on a Non-dividend-Paying Stock
European and American Option

Early Exercise Features of American Call and Put Options

Prices of American Call and Put Options

Calculate the Value of a European Call or Put Option

One-Step Binomial Model

Hedge Ratio
American Options

Calculate the Value of a European Call or Put Option Using a Two-Step Binomial Model

Option Pricing

Binomial Model Value Converges

The Black-Scholes-Merton Model

Value of a European Option Using BSM Model

BSM Model with Dividends
Use BSM Model to Estimate Future Volatility

Naked Position and Covered Position

Optimal Hedge

Optimal Duration Hedges

Delta-Neutral Hedges


The Greek Letters

Stop-Loss Trading Strategies


Scenario Analysis
Portfolio Insurance

A Covered Call or A Protective Put Strategy

Option Strategies

Spread Strategy
Combination Strategy
Volatility Smile for Foreign Currency

Volatility Smile

Volatility Smile for Equities

Volatility Smile with Price Jump
Use of Packages
Various Option Characteristics Can Transform Standard
American Options into Nonstandard American Options
Forward Start Options
Compound Option
Exotic Derivatives

Chooser Option
Barrier Option
Binary Option

Complex Derivatives

Lookback Option
Shout Option
Asian Option
Basket Options
Costs and Risks of Alternative Types of Options for Hedging
Financial Intermediaries that Sell Complex Derivatives
Issues in Hedging Exotic Options

Financial Engineering and Innovations in Derivatives

Securities with Embedded Derivatives
Selecting Derivatives Hedges to Maximize Firm Value

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Risk and Return of Portfolios of Risky Assets

Portfolio Theory

The Efficient Frontier and the Capital Market Line

The Security Market Line (SML)
Market Efficiency
Strategies that Reduce the Firm's Diversifiable Risk Do Not Increase Firm Value
Hedging Strategies and Firm Value

Differentiate btw. Firm Strategies and Policies to Reduce the Firm's Systematic Risk
Hedging a Firm's Price Risk with Respect to Its Output Will Not Affect Firm Value
Reducing the Potential Costs of Financial Distress and Bankruptcy
Reducing the Volatility of Taxable Income

Creating Firm Value

Reducing the Weighted Average Cost of Capital

Ways to Increase the Firm Value

Reducing Diversifiable Risk

Improving Management Incentives
Reducing Probability of Debt Overhang
Reducing Information Asymmetries

Portfolio Management

Treynor Measure, the Sharp Measure, and Jensen's Alpha

Measures of Performance

Extensions to Jensen's Alpha

Tracking Error, The Information Ratio, and The Sortino Ratio

Measuring Performance with Multifactor Models

Explicit and Implicit Factor Methods for Determining Factors in Multifactor Models

Comparison of Approaches

Three Categories of Multifactor Models

Performance Analysis

Portfolio Risk Analysis

Application of Multifactor

Portfolio Performance Decomposition

Returns vs.Protfolio-Based Style Analysis
Modeling the Yield Curve

Managing the Risk of Bond Portfolios

Yield to Maturity Method

Zero-Coupon Rate Method

Analyzing Bond Portfolio Performance

Equity Long/Short Strategies
Equity Market Neutral Strategies
Equity Market Timing Strategies
Short-Selling Strategies
Convertible Arbitrage Strategies
Fixed-Income Arbitrage Strategies
Volatility Arbitrage Strategies
Hedge Fund Classifications

Capital Structure Arbitrage Strategies

Event-Driven Strategies
Merger Arbitrage Strategies
Distressed Securities Strategies
Regulation D Strategies

Investment and Risk


Global Macro Strategies

Managed Futures Strategies
Fund of Hedge Funds
Alpha Returns

Problems with Existing Hedge Fund Indices

Hedge Fund Indices

Attributes of A Good Hedge Fund Index

Creating A More Useful Hedge Fund Index

Hedge Fund Benchmarks

Convergence Trading Strategy and

Trend-Following Strategy
The Risk in Fixed-Income Hedge Fund Strategies

Strategies Using Options

Five Primary HFR Fixed-Income Index Categories

Actual and Hypothetical Performance of Fixed-Income Hedge Funds
During Market Extremes
Fixed-Income Hedge Fund Asset-Based Style (ABS)

Types of Risk

Hedge Fund Management

Primary Risk Factors

The Role of Leverage
Hedge Fund Transparency
Proactive Risk Management

Asset Allocation
Due Diligence

Hedge Fund Risks

Risk Monitoring and Management

Investment Level
Portfolio Level

Investment Style
Style Drift

Reasons for Style Drift

Approaches for Monitoring and Detecting Style Drift
The Economic Function and Most Basic Choices

Hedge Funds and Mutual Funds

How Hedge Funds are Usually Organized

Symmetric Compensation and Asymmetric Compensation
Withdrawing Capital
Hedge Fund Diversification
Hedge Fund Developments

Hedge Funds Might Make Markets More Efficient

Hedge Fund Returns and Volatility
Gauging Hedge Fund Performance
Alpha of Hedge Funds
Risk Considerations
The Future of Hedge Funds


Trends in Hedge Funds and Mutual Funds

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Gross Rate Of Return
Marginal Default Probability

Individual Loan Credit Risk


Cumulative Default Probability

Credit Deviling
Loan Portfolio Credit Risk

Recovery Rate and Recovery Function

Default Risk

Probability Default And Loss Given Default

Linear Discriminant Analysis
Parametric Discrimination

Credit Scoring Models

K-nearest Neighbor
Support Vector Machines


Minimum Error
Decision Rules In Credit Analysis

Minimum Risk
Minimax for Classification

Terms Related to Counterparty Risk / Lending Risk VS Counterparty Risk

Potential Future Exposure


Mean Loss Rate

Mean Loss Rate=PD(1-Recovery Rate)

Counterparty Risk

One side


Two side


Market Value Of Credit Risk

Current Exposure For A Counterparty

Simple Transaction Method/Portfolio Simulation Method

Compute Equity and Debt Value/Firm Value and Volatility

Merton Models

Subordinate Debt/Interest Rate Dynamic


Credit Risk Portfolio Models

Credit Metrics
Portfolio Manager
Portfolio Risk tracker
Credit Portfolio View

Difference Between Credit and Sovereign Risk

Credit Risk
Sovereign Risk

Debt Repudiation And Debt Rescheduling

Country Risk Analysis (CAR) Model
Address Sovereign Risk

Loan Sales


Participation VS. Assignment

The Buyer and The Seller




Securitization Guidelines


Internal and External Credit Enhancements

liquidity Risk/Interest Risk
Credit Default Swaps

Default Events of ISDA

Total Rate Of Return Swaps

Types of Credit Derivatives

Credit Spread Option And Forward

Synthetic Structures


Credit-Linked Notes
Collateralized Debt Obligations
Market Risk

Credit Risk
Operational Risk
Using a TROR

Credit Derivatives

Cost Reduction

Using Credit Spread Options

Using Repo


Using Other Credit Derivatives

Application Of Credit Derivatives

Using Default Swaps


Using TRORs
Using Credit Spread Options

Basel II Risk Weights

VaR For Options

Portfolio CAR

4.Credit Risk.mmap - 2007-8-22 -

Using Default Swaps to Reduce Capital Requirements

BIS definition
Incorrect Model Specification
Incorrect Model Application
Implementation Risk

Model Risk

Calibration Error
Programming Errors

Define Operation Risk

Data Problems
Under the Efficient Market Hypothesis


Outside Of the Efficient Market Hypothesis

Technology On Revenues and Costs

Technology Risk

Economic Of Scale and Scope

Daylight Overdraft Risk
Multifactor Models
Income-Based Models
Top Down

Expense-Based Models
Operating Leverage Models
Scenario Analysis

Define and Measuring Operation Risk

Measuring Operational Risk

Risk Profiling Models

Causal Networks
Connectivity Models

Reliability Models
Empirical Loss Distributions
Parametric Loss Distributions
Extreme Value Theory


Operation Risk
Operational Risk Hedging


Catastrophe Options and Catastrophe Bonds

Operation Risk Management

Basic Indicator Approach
Basel II Related

The Standardized Approach

Internal Measurement Approach

Loss Data
Operational Risk and Economic Capital

Tail-Adjust Normal Distribution Binomial and Poisson Distributions

Models For Determining OpRisk Economic Capital

Sumitomo Bank

Case Studies

Long-Term Capital Management

Bankruptcy Of Barrings
The Amarranth Debacle
The Value Of Reducing Corporate Diversifiable Risk
Enterprise Risk Management

Determining The Optimal Amount Of Corporate Risk

The Conceptual Framework For ERM

Best Practices for Risk management

The Counterparty Risk Management Policy Group II Report

The common Traits Associated With Past Major Financial Shocks

Supervisory Challenges

Key Principles
Private Pools of Capital-PW G

Principles For Protecting Investors

Principles For Reducing Systemic Risk

- -

RAROC=(revenues-expected loss-expenses+return on economic capital +transfer price)/economic capital


RAROC=F1*VaR+F2*MAX(VaR Limit-VaR,0)+F3[MAX(VaR-VaR Limit),0]

Capital Attributed To Market,Credit,Operational Risk

Credit Capital Charge=Capital Factor*Market Value Of Position

First and Second Generation of RAROC


Stand-alone Method
Scaling Method

Economic Capital
Top-Down and Bottom-Up

Strategic Capital Allocation

Allocating Economic Capital

Six Methods

Internal Betas Method

Marginal Capital Method
Arbitrage Pricing Theory
Fair Value Method

Liquidity and Information

Protect Bank Depositor From Loss In Bankruptcy
Provide Stability For Transactions

Reasons for Banking Regulation

Avoid Contagion Effects In The Banking Industry

Maintain Stability In The Economy
Basel I

Capital Allocation

Benefit and Weakness

Type Of Capital
Minimum Capital Requirements
Three Pillar

Supervisory Review Process

Market discipline
The Standardized Approach
Risk Components

Regulatory Capital

Internal Rating-based Approaches

Credit Risk
Basel II

Risk-weight Functions
Minimum Requirements

Credit Risk Concentration

Credit Risk Mitigation
Asset Securitization
Basic Indicator Approach (BIA)
Operational Risk

Standardized Approach(AS)
Advanced Measurement Approach(AMA)
Negative Bank Behaviors

Areas Of Continuing Research

Potential Problems
Issues About Pillar2 and Pillar 3

Silo Approach

Financial Conglomerate Regulation

- -

Building-block Approach
3+1 Pillars Approach