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Category Archives: derivatives
How to Test the Accuracy of the ABX
The WSJ takes a look at the notorious ABX today, and although it’s more polite than me, it still shows how bad the index is as a gauge of the subprime mortgage market Wachovia Capital Markets analysts Glenn Schultz and … Continue reading
Posted in derivatives, housing
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When Corporate Treasury is a Profit Center
Two newspapers, two countries, two industries, one story. In the NYT, it’s Southwest, whose oil-price hedges are now worth $2 billion. In the FT, it’s Porsche, whose currency hedges have made $371 million this year, and whose stock-market hedges, linked … Continue reading
Posted in derivatives
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The Future(s) of House Prices
The UK has a new tradeable derivatives contract on house prices, which shows house prices falling by 7% next year. That has Tim Harford worried: futures markets are "better than cheap-talk forecasts" in terms of being right, he says. But … Continue reading
Posted in derivatives, housing, prediction markets
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More Questions Than Answers in CPDO Default
Now that financial reporters are back to work after the Thanksgiving holiday, I’m hoping that somebody will write a story about the CPDO which defaulted last week. The Reuters story raises more questions than it answers, foremost among them the … Continue reading
Posted in derivatives
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Did Anyone Other Than Citigroup Have Liquidity Puts?
Why hasn’t this "liquidity put" thing gotten greater play? I never made it down to the 11th paragraph of Carol Loomis’s interview with Bob Rubin, where she introduces the concept more than 900 words into her article. Floyd Norris, today, … Continue reading
Posted in banking, derivatives
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Has Nassim Taleb Killed Black-Scholes?
Nassim Taleb and Espen Haug have a paper out. Here’s the abstract: Options traders use a pricing formula which they adapt by fudging and changing the tails and skewness by varying one parameter, the standard deviation of a Gaussian. Such … Continue reading
Posted in derivatives
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Warren Buffett, Derivatives Speculator
There are nice safe hedgy options, and then there are dangerous, volatile, and prone-to-blowing-up options, the kind of things which have a habit of biting Victor Niederhoffer in the ass. It’s these kind of options which Warren Buffett famously referred … Continue reading
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ABX, RIP
Required reading from Alea today on the subject of the notorious ABX subprime indices. We’ve been here before, many times, but no one ever seems to learn: the ABX indices do not measure bond prices. They do not give an … Continue reading
Posted in derivatives, housing
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The Risk Disclosure Problem
Taleb and Greenspan have gotten all the press, but my nomination for book of the year in the finance/economics space (with the important proviso that I haven’t got very far into it yet) is "Plight of the Fortune Tellers" by … Continue reading
Posted in banking, derivatives
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In Defense of Credit Derivatives
You can always tell when the newsflow slows down in the financial world, because invariably some columnist will trot out another brave reëvaluation of credit derivatives. Here’s Scott Patterson: The power of these derivatives — most of which were launched … Continue reading
Posted in derivatives
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How to Break a CPDO
CPDOs, or Constant Proportion Debt Obligations, were briefly popular at the end of 2006 as a way of getting high returns on AAA-rated paper. At the time, many commentators (notably excluding myself) said that CPDOs were too good to be … Continue reading
Posted in derivatives
1 Comment
Our Fragile Financial System
Funny how quickly our financial system went from “robust” and “well-diversified” to “fragile.”
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Posted in banking, derivatives, regulation
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Counterparty Risk in the CDS Market
Yves Smith is worried
about counterparty risk in the credit default swap (CDS) market.
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Posted in derivatives
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In Defense of Credit Indices, Part 2
CDS indices aren’t
perfect. But they’re a darn sight better than the alternative, which is
nothing.
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Posted in derivatives
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In Defense of Credit Indices
I was quite
rude about the ABX.HE indices this morning, but, like all hedging mechanisms,
they do serve an important purpose.
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Posted in derivatives
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The ABX Indices: Making the Bad Seem Worse
The ABX.HE indices are a pretty weak indication of what mortgage-backed
bonds are actually worth.
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Posted in bonds and loans, derivatives
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Why Fed Funds Futures Might Not Reflect Fed Expectations
To
get an idea of where the market thinks that the Fed is going to be in six or
nine months, all you need to do is look at the Fed funds futures contract. Right?
Maybe
not.
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Posted in derivatives, fiscal and monetary policy
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When Mortgage Derivatives Get Included in CDOs
Antony Currie of Breaking Views, who’s been following the
mortgage mess very closely, emails me with some color about the degree to which
derivatives – credit default swaps, or CDSs – are a part of the
CDOs that everybody seems to be so worried about these days.
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Posted in bonds and loans, derivatives, housing
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More on CDOs and Derivatives
There are a lot of CDOs which have a lot of exposure to the CDS market. There are also a lot of CDOs which have a lot of exposure to the subprime market. I just don’t think they’re the same CDOs.
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Posted in bonds and loans, derivatives
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Subprime Mess: It’s Not Derivatives’ Fault
Let’s not start blaming illiquid derivatives for Bear Stearns’ problems. Right now, illiquid derivatives are the least of anybody’s problems.
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Posted in bonds and loans, derivatives, housing
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How Derivatives Traders Can Also Be Heroes
Bear Stearns out-trades John Paulson.
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Posted in derivatives, housing
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Ecuador: The Finance Minister, the Investment Banker, the Scandal, and Me
As far back as December I posted
a blog entry
at rgemonitor.com saying that "a devious Ecuadorean finance minister"
could make quite a lot of money by manipulating the CDS market.
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Posted in derivatives, emerging markets
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On the Edge of Efficient Markets
The Epicurean Dealmaker
is on a roll.
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Posted in derivatives, private equity, stocks
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Bill Downe Still Hasn’t Resigned at Bank of Montreal
A major bank like BMO has no business using a tiny Valhalla-based brokerage to do substantially all of its energy trading.
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Posted in banking, defenestrations, derivatives
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Bob Merton Sees No More Market Panics
Bob Merton seems to believe that panics can’t or won’t happen any more, because certain events (Amaranth, the GM and Ford downgrades) didn’t cause a panic. That’s silly.
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Posted in derivatives
4 Comments