Exercise Solution 1.5

Many solutions are possible. Here are two possible answers for each of the three items:

Exposure

  • Delta quantifies exposure to the value of an underlier.
  • Duration quantifies exposure to shifts in a yield curve.

Uncertainty

  • Standard deviation of a commodity’s spot price quantifies uncertainty.
  • Probability of default quantifies uncertainty.

Uncertainty combined with exposure

  • Variance of a portfolio’s return quantifies uncertainty combined with exposure.
  • Expected credit loss quantifies uncertainty combined with exposure.

 

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