Value at risk, stress testing, credit scoring, counterparty risk and structured credit.
40 cards · basic cards · AI-written, checked twice. Edit anything.
- What is Value at Risk (VaR)?
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The maximum loss expected over a given time period at a specified confidence level- What are the three main methods for calculating VaR?
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Historical simulation, Parametric (variance-covariance), and Monte Carlo simulation- What does the confidence level in VaR represent?
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The probability that actual losses will not exceed the VaR estimate- What is the main limitation of Value at Risk?
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VaR does not measure losses beyond the confidence level, ignoring tail risk- What is Expected Shortfall (ES)?
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The average loss expected when losses exceed the VaR threshold- What is backtesting in the context of VaR?
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Comparing VaR estimates to actual realized losses to verify model accuracy- What is stress testing?
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Evaluating portfolio performance under extreme but plausible market scenarios- What is the difference between historical and hypothetical stress scenarios?
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Historical scenarios are based on past events, hypothetical scenarios are constructed artificially- What is reverse stress testing?
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Identifying scenarios that would cause unacceptable losses to the firm- How does stress testing differ from Value at Risk?
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Stress testing examines specific scenarios; VaR estimates losses at a confidence level- What is credit risk?
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The risk that a borrower or counterparty fails to meet their obligations- What is a credit scoring model?
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A statistical model that estimates the probability of default for a borrower- What is a credit spread?
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The difference in yield between a corporate bond and a risk-free bond of similar maturity- What is the probability of default (PD)?
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The likelihood that a borrower will fail to meet their obligations within a given time period- What is Loss Given Default (LGD)?
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The percentage of exposure lost if a borrower defaults, accounting for recovery
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