Exercise Solution 1.5
Many solutions are possible. Here are two possible answers for each of the three items:
- Delta quantifies exposure to the value of an underlier.
- Duration quantifies exposure to shifts in a yield curve.
- 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.