Financial Risk Management Study Guide 2026

In a payer swap, the manager pays fixed and receives floating, which offsets the fixed-rate exposure of the bond portfolio and reduces duration.

Scenario analysis supplements internal loss data by capturing low-frequency/high-severity events (e.g., a major cyber attack or rogue trader) that haven't occurred recently but could happen.

When correlations are perfectly positive (1.0), all assets move identically, so combining them provides no reduction in risk relative to holding any single asset.

The floating payment received from the swap offsets the floating payment owed on the debt, leaving only the fixed payment due on the swap — converting the exposure to fixed rate.

The approximate price change equals negative duration times the change in yield, so −5 × 0.01 = −5%.

Historical Simulation re-prices today's portfolio using actual historical changes in risk factors (e.g., rates, FX, prices), generating an empirical distribution of P&L.