Posts Tagged ‘Derivatives’
Falling LIBOR Spells Relief
Tuesday, October 21st, 2008
Plop, Plop, Fizz, Fizz, Oh what a relief it is…
Finally LIBOR rates have fallen meaningfully, and that spells relief. The credit freeze is finally showing real signs of thawing.
Libor-OIS: 2.71% (previous 2.93%)
TED Spread: 2.61 % (previous 3.27%, record was 4.63%)
Rates used:
Libor: 3.83% (previous 4.06%)
OIS: 1.12% (previous 1.13%)
T-bills: 1.22% (previous 0.79%)
Here is a selection of some decent articles on the subject:
Fears about Lehman CDS deadline seen as overstated
Today’s deadline to settle an estimated $400 billion in credit default swaps on debt in failed investment bank Lehman Brothers is unlikely to trigger new havoc in the market, derivatives analysts said.
The world’s most important number?
On the fifth floor of an imposing building in London’s Canary Wharf, six people are putting together one of the world’s most important numbers: L I B O R.
Porsche, Volkswagen - and hedge funds
Porsche used to be the emblem of a go-go City trader. Recently it has become one.
FDIC forgot
$4.4 billion
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Tags: CDS, Chart, Credit, Derivatives, FT.com, UK
Posted in Commodities, Credit Markets, Economy, Emerging Markets, Markets, Oil & Gas, inflation | No Comments »
Let Fannie, Freddie Fail: Jim Rogers
Monday, September 1st, 2008
Fannie Mae and Freddie Mac should not be saved if they go bankrupt, and economic stimulus packages do more harm to economies in the long run than good in the short term, Jim Rogers, CEO of Rogers Holdings, told CNBC Friday, August 29, 2008 at 3:15AM from Singapore.
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Tags: Derivatives, Fannie Mae, Financials, Freddie Mac, Jim Rogers, Mortgage
Posted in Banks, Credit Markets, Economy, Financials, Geo-political, Gold, Markets, Monetary Policy, Strategy, US Stocks, wisdom | No Comments »
The Devil’s Dictionary for Financial Markets
Monday, September 1st, 2008
The Devil’s Dictionary, was originally published by Ambrose Bierce. Think of him as the forgotten brother of Mark Twain. Both had remarkably similar lives, were good friends, and lived in San Francisco around the same time. Bierce, however, followed a different path than Twain. While both had similar humour, and were equals in their genius, Bierce clearly was the better when it came to wit. Public figures quaked in fear of his satirical pen, and newspapers sales soared when he was published. Over the years, many of his jabs at the establishment appeared in local newspapers and were later collected into The Devil’s Dictionary, one of the greatest works of satire of the 19th century.
We present you with Norgate Investors’ Services version of the Devils Dictionary for financial markets.
Analyst recommendations: –
Strong Buy – Buy
Buy - Hold
Hold – Sell
Sell – It’s too late.
Arbitrageurs: – large traders who feed on plankton.
Averaging down: - lowering the average price of entry by adding to a losing position.
Averaging down should only be attempted when you are really angry at a market.
Back–testing: – the art of adjusting trading system parameters so as to ensure maximum profit in the past and zero profit in the future.
Black-box system: – a trading system that is available for sale, but is so good that its rules can’t be disclosed. Black-box systems are generally only available for sale because the vendors have a sense of philanthropy.
Cancel-if-close: - a limit order that is cancelled if it appears likely to be hit. Some brokers do not accept cancel-if-close orders.
Carbon credits: - A scheme developed by brokers requiring traders to purchase millions of dollars of carbon credits at the end of each financial year to offset the printing of their contract notes.
Charting: - “join-the-dots” for adults.
Central Banks: - big market players, with no stop-losses. The Bank of Thailand once bet 40% of its foreign reserves in a day. It lost.
Computerised system testing: - torturing the data until it confesses. See: back-testing
Contrary opinion: - the idea that when the market dumps a security, you should look to buy it. The trick appears to be to make sure that the market has finished doing the dumping, and is not just waiting for you to buy so that it can really start dumping. See: Institutional investor.
Cycle analysis: - a method of analysis that allows losing trades to be organised into regular patterns.
Derivatives: – securities that are identified by acronyms - CHIPS, COBRAS, LEAPS, PERQS, STEERS, TRIPS, ZEPOS – all of these things are derivatives. Unfortunately, little else is known about them.
Daytrading: - an activity that takes place in between meaningful periods of employment.
Dot.com bubble: - tulip-mania for the X-generation.
Dow Jones Industrial Average: – a widely reported stock index that was designed in the late 11th century and has stood the test of time.
Drawdown: - A figure that immediately grows when a trading system transitions from paper trading to real trading.
Eurodollars: - U.S. Dollars, of course.
False Break: – an actual break of a trendline that triggers a losing trade. False breaks confirm the usefulness of trendline analysis. Only those breaks that are false cause problems, and those breaks don’t count, because they are false.
Fast market: - an official market condition, during which floor brokers may scalp you with impunity. At other times, they have to be careful about it. See: slippage
Figures: - market-sensitive measures of economic activity, such as “Non-Farm Payrolls” and “Durable Goods Orders”, that are published every day in the U.S., much to the annoyance of players on the other side of the world, who can’t get to sleep.
Float (initial public offering): - stock that is offered to you because other people have turned it down. The guiding principle in relation to floats is as follows: “never participate in a float that you are able to participate in.”
Forex market: - a private casino, which is run by large international banks, mainly so that they can have some fun.
Fundmental analysis: – a method of analysis that provides compelling reasons for why a stock shouldn’t fall in price when it does.
“Fundamentally sound”: - the condition in which an economy finds itself immediately after a stock market collapse.
Gold carry trade: - in the gold carry trade, institutions called gold banks borrow gold from the central bank at the gold lease rate, which may be 1%. They can then sell this gold and invest the proceeds in Treasury Bills, which may yield 4%. The central bank keeps the gold on its books, figuring that it can trust a gold bank. Of course, the gold bank is “short” the gold until it pays it back, and it must take care that the gold price doesn’t get away from it. This may, or may not, explain a lot about the gold market of the 1990s.
Greeks, the: - Delta, Gamma, Rho, Theta and Vega. In option pricing models, the Greeks are partial derivatives that express local sensitivities. Just remember the names of about three of them, and then slip them into the conversation occasionally. No one will pick you up on it.
Hedge Fund: - a fund that pools money from rich investors, in order to play with it. Hedge Funds are private concerns, which means that they can play wherever they like. Mutual Funds, on the other hand, accept money from the public, and can only play where they are supervised.
Hedger: - a guy you can’t beat when you’re playing him at futures. When a hedger loses a bet in the futures market, he makes up for it in the cash market. When a speculator loses a bet in the futures market, he really loses it.
Index Funds: – funds with no sense of fun.
In-house analyst: – an employee of a broking house who dresses mutton up as lamb and advertises it on special.
Institutional investor: - someone who dumps a stock big-time, a day or two after you’ve bought it, for no apparent reason.
Limit moves: - An unexpected but welcome holiday for pit traders invariably caused by fat-finger-syndrome-suffering Japanese traders.
Live feed: - a technology that enables the instant incorporation of bad ticks into a charting program.
Long Term Capital Management: - a large hedge fund, whose capital only managed to last for a short time.
Lunch: – when you ring your broker on a Friday afternoon to be told he’s still at lunch, it means he’s still drinking.
Market Depth: - a trading screen that shows orders queued up on both sides of a market. Unfortunately, it doesn’t show the orders belonging to people who don’t like to queue.
Market report: - a concise explanation of why a market traded up or down. 99% of market reports are drawn from other market reports. The remainder are whimsical.
Maximum Adverse Exeuction: - The employment status of a trader at Société Générale in January 2008 after losing the bank €4.9 billion.
Money-management: - the art of hiding trading losses from a spouse.
Non–executive Director: – a person who’s job it is to fill a chair at a Board meeting, so that no chairs are empty.
Option Pricing Model: - a mathematical model, that can calculate the fair price of an option. If the market price differs from the fair price, you can bet accordingly. If the market price then moves further away from the fair price, you can say: “Hey, that’s not fair!”
Over-bought: – a market is considered to be in an over-bought condition when everyone else appears to have bought it, but you haven’t.
Peak oil: - The point in time at which your highly leveraged long crude oil position enters an impossibly steep downtrend.
Personal computer: - an indispensable aid to the modern investor. Investors who are new to computers should consider the following advice:
Always approach your P.C. in a confident manner. Computers can sense fear and indecision. Remember – you are in charge! You can always shut the thing down (unless you’re using Win98).
Position trade: - a short-term trade that is in deficit, and will be closed out as soon as it breaks even, however long that takes.
Price/Earnings Ratio: - a ratio that indicates whether the price of a stock is attractive in relation to last year’s earnings. A low number indicates a bargain. However a low number can also indicate a lemon. If a company starts going down the tube, its stock price will appear very attractive in relation to last year’s earnings. The P/E Ratio is a versatile indicator.
Random Walk Theory: – the theory that market prices follow a random walk, much like that of a drunken sailor. The weakness of the theory lies in the fact that little scientific research has been done into drunken sailors.
Rumours: - the time-honoured basis for the making of trading decisions. Rumours about stocks tend to get thicker as they are spread.
Seasonal analysis: - the assumption that other people who trade Heating Oil Futures know nothing about winter.
Slippage: - the difference between the price at which you expect a market order to be filled and the price at which it is actually filled. See: Orange Juice Futures.
Stochastics: – a technical indicator so-named because the name sounds technical.
Stop-loss: – the trader’s equivalent of a condom. It’s something you know you should have used after it’s too late.
Support: - a line drawn on a chart, the breaking of which is deemed extremely significant, even if the only people trading the stock at the time are two of three ladies at the tennis club.
Support/Resistance: - supposed allies that flee at the first sign of trouble.
Tankan Index: - a closely watched figure, that measures the extent to which the Japanese economy is tanking.
Technical analysis: – subjective analysis of the markets dressed up in a lab coat.
Technical indicator: – a transformation of a price series that contains less information than the series itself. Different technical indicators throw away information in different ways.
Tech wreck: - the end of the dot.com bubble. Surprisingly enough, many observers predicted the wreck accurately. As time goes on, more and more of these observers come forward.
They: - the members of a powerful international conspiracy who target small, private traders in order to make their lives miserable. For instance, “they ran the market to my stop and then turned it around.”
Trading floor: - the traditional venue for the negotiation of securities, now made redundant by screen trading. Trading floors that remain open serve a valuable purpose as colorful backdrops to market reports on television.
Trading genius: - a reckless spirit in a bull market.
Trendline analysis: – a form of analysis that works best on a computer screen, where lines can be erased and re-drawn without trace.
Zero-sum game: – a game in which the players slug it out and the broker wins.
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Tags: Banks, Brokers, Carry Trade, Chart, Credit, Crude Oil, Derivatives, Dollar, Economy, EFU, energy, Euro, Gold, humour, Information, International, Japan, Markets, Technical Analysis, Trading
Posted in Markets | No Comments »
PIMCO Co-CEO: When Markets Collide
Sunday, August 31st, 2008
About a month ago, Charlie Rose interviewed PIMCO’s Mohamed El Erian. El Erian is one of the country’s most successful money managers. He’s the co-CEO of the Pacific Investment Management Company, better known as PIMCO which oversees more than 829 billion dollars. He previously led Harvard University’s endowment to substantial returns on investment. In the interview, which is available below, Charlie Rose speaks to him about his new book “When Markets Collide” and how he sees the global economy today.
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Tags: Credit Market, Derivatives, El-Erian, PIMCO
Posted in Banks, China, Credit Markets, Economy, Emerging Markets, Financials, Fixed Income, Gold, India, Investment Strategy, Markets, Monetary Policy | No Comments »
Is Black-Scholes a Black Hole?
Monday, March 3rd, 2008
In a fascinating article, Inside Wall Street’s Black Hole, Michael Lewis bestselling author of Liar’s Poker, discusses the flaws in the Black-Scholes theory. Its a must read. Here are some excerpts:
…The striking thing about the seemingly endless collapse of the subprime-mortgage market is how egalitarian it has been. It’s nearly impossible to draw a demographic line between the victims and the perps. Millions of ordinary people ignorant of high finance have lost billions of dollars, but so have the biggest names on Wall Street, and both groups made exactly the same bet: that real estate values would never fall.
…Portfolio insurance evolved from the most influential idea on Wall Street, an options-pricing model called Black-Scholes. The model is based on the assumption that a trader can suck all the risk out of the market by taking a short position and increasing that position as the market falls, thus protecting against losses, no matter how steep.
…That’s what happened on October 19, 1987, when the sweet logic of Black-Scholes was shown to be irrelevant in the real world of crashes and panics. Even the biggest portfolio insurance firm, Leland O’Brien Rubinstein Associates (co-founded and run by the same finance professors who invented portfolio insurance), tried to sell as the market crashed and couldn’t.
Oddly, this failure of financial theory didn’t lead Wall Street to question Black-Scholes in general. “If you try to attack it,” says one longtime trader of abstruse financial options, “you’re making a case for your own unintelligence.”
…Black-Scholes didn’t work; trillions of dollars’ worth of securities may have been priced without regard to the possibility of crashes and panics. But until very recently, no one has bitched and moaned about this problem too loudly. Lay folk might harbor private misgivings about the clergy, but as lay folk, they are reluctant to express them. Now, however, as the subprime market unravels, the beginnings of a revolt against the church seem to be taking shape.
…One of the revolt’s leaders is Nassim Nicholas Taleb, the bestselling author of The Black Swan and Fooled by Randomness and a former trader of currency options for a big French bank. Taleb can precisely date the origin of his own personal gripe with Black-Scholes: September 22, 1985. On that day, central bankers from Japan, France, Germany, Britain, and the United States announced their intention to torpedo the U.S. dollar—to reduce its value in relation to the other countries’ currencies. Every day, Taleb received a list of his trading positions from his firm and a matrix describing his risks. The matrix told him how much money he stood to make or lose, given various currency fluctuations. That September 22, when the central bankers announced their plan to lower the dollar’s value, he made money but didn’t know it. “I didn’t know what my position was,” he says, “because the movement was outside the matrix they’d given me.” The French bank’s risk-analysis program assumed that a currency crash of this magnitude would occur once in several million years and therefore wasn’t worth considering.
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Tags: Derivatives, Markets
Posted in Markets | No Comments »
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