Identifier: C5T2L5 · Revision: 2026-10-26 · Classification: domestic

Decision and objectives

The practical task is to stress issuer, provider, liquidity and model failures together. Make the decision reproducible: name the exposure, time horizon, cash requirement and comparison baseline before selecting a product.

Objectives: Stress issuer, provider, liquidity and model failures together; Avoid double counting losses and temporary cash freezes; Compare combined stress with risk and cash limits.

Prerequisite: C5T2L4; completed Classes 1–4 and the Stock Market School foundation or Forex School foundation. Every example is hypothetical. Prices, dates, rates, fees, contract factors, policies and tax schedules are supplied teaching inputs, not current offers or legal parameters. No live account is needed.

Mechanics

Risk categories interact. An issuer shock can depress assets held directly and through a fund, raise collateral needs and reduce market depth. Provider failure can delay a positive derivative receivable exactly when its underlying asset loses. A model using normal-market correlations can then overstate both diversification and cash offsets.

Map claims by legal counterparty as well as economic driver. Custody records help identify holdings, but do not guarantee issuer solvency, immediate cash or the collectability of an OTC provider claim. Distinguish a temporary freeze from an assumed permanent loss so the same money is not written off twice.

Price and return drivers

Scenario loss = sum(nonoverlapping asset-value reductions and claim shortfalls) + stated incremental execution/funding costs. Available cash excludes frozen balances until released. Recovery assumptions need an explicit claim amount, recovery fraction and date; no real resolution recovery is supplied here.

Worked case

Hypothetical TRY 500,000 portfolio: issuer bond TRY 200,000; diversified fund TRY 150,000; cash TRY 100,000; positive OTC receivable TRY 50,000. Joint stress: issuer bond loses 35% = TRY 70,000; fund loses 10% = TRY 15,000; provider claim is valued at an expected 20% recovery, TRY 10,000 due on day five, implying a TRY 40,000 claim-value loss today. Wealth before extra costs is TRY 375,000, a 25% loss. Emergency execution and funding TRY 5,000 are paid today and reduce it to TRY 370,000, or 26% drawdown. Of the TRY 100,000 cash, TRY 60,000 is temporarily unavailable for three days; free today before costs is TRY 40,000; after the TRY 5,000 paid today it is TRY 35,000. The TRY 10,000 recovery is still a day-five receivable. Against TRY 70,000 due today, the gap is TRY 35,000. The temporary freeze is not an additional TRY 60,000 permanent loss in this valuation.

Adverse case

If provider recovery is delayed from day five to day twenty, it remains unavailable for today’s payment and can require still longer bridging. Neither the original nor delayed receipt cures today’s TRY 35,000 gap. A more severe 50% issuer decline increases bond loss to TRY 100,000 and reduces wealth to TRY 340,000 after the same other losses/costs. A historical low-correlation estimate cannot exclude this joint state. Selling the fund at an assumed unit value may also be unavailable before its redemption date.

Practical use

Review issuer terms, fund look-through, provider entity and closeout/netting, actual custody location and operational access. Preserve source timestamps and uncertainty ranges. Verify legal recoverability rather than assume segregated assets or a domestic record covers all OTC cash. Include funding during delays, stressed bid/ask, taxes and legal/administrative charges where supplied; do not invent a compensation ceiling.

Use permitted domestic access routes and the actual instrument documents. Verify intermediary authority, investor eligibility, order/redemption terms, settlement, custody and executable size before implementation. Reconcile spread and commissions, funding, collateral, custody, product expenses, conversion and exit charges; an amount already embedded in a fill or fund unit price is not deducted again. A published mark or product description does not promise an executable price or liquidity.

Tax is excluded unless a numerical schedule is expressly supplied as hypothetical. For actual rules record income year, residence and individual/corporate status, instrument and acquisition/contract dates, taxable event and rule effective date. The GIB investment-income guide, checked 2026-10-26, covers 2025 individual income; its 2026 publication date alone cannot settle a 2026 liability.

Decision boundaries

Select an allocation that meets both wealth-loss and payment constraints under the stated plausible shock. A lower headline return may be worth a truly accessible reserve or less provider concentration. Decline a protection strategy whose only payoff is an unsecured claim on the same stressed group as the asset.

Practice and references

Exercise: hypothetical issuer holding TRY 80,000 loses 25%; provider claim TRY 20,000 has a valued 50% recovery receivable due after today’s payment and excluded from today’s available cash; incremental costs TRY 2,000 are paid today. Solution: loss 20,000 + 10,000 + 2,000 = TRY 32,000. If cash TRY 30,000 is frozen except TRY 12,000 available before the TRY 2,000 costs paid today, free cash after those costs is TRY 10,000. A TRY 18,000 bill due today therefore leaves TRY 8,000 timing gap; do not add the frozen TRY 18,000 as a permanent loss without evidence.

Takeaway: Compare combined stress with risk and cash limits with the cash dates, costs and remaining risks stated.

Product card: portfolio-decision-record. Formula: Joint scenario loss. Glossary: Wrong-way risk, Recovery assumption. Next lesson: C5T3L1. Topic test.

Sources checked 2026-10-26:

Shared reference guide | Class examination