1. Examination Announcement 3rd Exam (25%) –January 12nd (Monday), 2009 –1:10 PM to 3:00 PM –Ch 12-Ch 15 (ALM risk) + Ch18-19 (credit risk)

2. Quick Review Tow types of ALM risk –Definition –The two types of liquidity risk: trading versus funding –Risk measurement: Duration gap –Economic capital The impact of prepayment behavior on the NPV of the MBS –I.O. versus P.O. –Constant prepayment rate versus non-constant prepayment rate –Prepayment function: logistic function

3. Quick Review ALM risks management –Traditional transfer pricing and its limitations –Transfer pricing via the interbank and its limitations –Matched-funds-transfer pricing –Risk allocations after transfer pricing

4. Quick Review Three parameters for credit risk measurement –Exposure at default (E) –The loss in the event of default (LIED) or severity (S) –The default probability (P) The calculation of EL and UL –E and S are fixed values –E and S are random variable

5. Quick Review Losses due default against losses due to downgrade Losses in one year against losses over multiple years Probability of grade migration (Table 18-1) Three types of default probability: cumulative, marginal and conditional

6. Quick Review Estimating the default probability –expert credit grading – quantitative scores based on customer data – equity-based credit scoring The z-score versus the DD (distance to default)