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Learn comprehensive approaches to financial risk assessment. Master risk measurement and management techniques.

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Factors Affecting Recovery Rates

It is practically impossible to accurately predict the recovery rates. There are various factors that will affect the recovery rates of a defaulted loan.

May 17, 2011 · Lesson

Using Beta Distribution for Estimating Recovery Rates

Most of the people use the beta distribution to model recovery rates. In probability theory and statistics, the beta distribution is a family of continuous probability distributions defined on the interval (0, 1) parameterized by two positive shape parameters, typically denoted by alpha and beta.

May 17, 2011 · Lesson

Exposure, Default and Recovery Rates

In order to understand default risk, we will analyze the its key components: Default arrival, exposure at default, and loss given default.

May 16, 2011 · Lesson

Understanding Recovery Rates

The recovery rates are a crucial element for calculating credit risk. The loss given default of an asset or a portfolio is calculated as 1 minus the recovery rate.

May 16, 2011 · Lesson

What is Default Risk?

Default risk can be defined as the risk that the counterparty to a transaction does not honour its obligation. Default could be both in terms on monetary and non-monetary terms, and it's a part of every transaction.

May 13, 2011 · Lesson

Calculating VaR using Monte Carlo Simulation

Computing VaR with Monte Carlo Simulations very similar to Historical Simulations. The main difference lies in the first step of the algorithm – instead of using the historical data for the price (or returns) of the asset and assuming that this return (or price) can re-occur in the next time interval, we generate a random number that will be used to estimate the return (or price) of the asset at the end of the analysis horizon.

July 19, 2010 · Lesson

Monte Carlo Simulation - Example

In the previous post, we learned the algorithm to compute VaR using Monte Carlo Simulation. Let us compute VaR for one share to illustrate the algorithm. We apply the algorithm to compute the monthly VaR for one stock. We will only consider the share price and thus work with the assumption we have only one share in our portfolio. Therefore the value of the portfolio corresponds to the value of one share.

July 19, 2010 · Lesson

Calculating VaR Using Historical Simulation

The fundamental assumption of the Historical Simulations methodology is that you base your results on the past performance of your portfolio and make the assumption that the past is a good indicator of the near-future. The below algorithm illustrates the straightforwardness of this methodology. It is called Full Valuation because we will re-price the asset or the portfolio after every run. This differs from a Local Valuation method in which we only use the information about the initial price and the exposure at the origin to deduce VaR.

July 11, 2010 · Lesson