On Black Scholes Hedging

Further to yesterday’s post about CB arb, a short note on hedging options. If you sell an option at an implied vol of v, and the Black-Scholes assumptions hold (in particular the underlying is a diffusion with constant delivered volatility w, and you can trade instantaneously at zero spread) then the expected P/L of a […]

CB arb

FT alphaville comments on convertible bond arbitrage (in connection with VW, but that need not detain us here). A few points. First the article says CB arb had sizzled out post-2005 due to lack of issuance. Is that really true? I always thought it had sizzled out because CBs were more fairly priced, so it […]

Blood and guts on Wall Street

I don’t usually post video links, but as it is Halloween and many market participants are white as Zombies…

Your friend Ted

Margin Revolution has an interesting piece on the TED spread. They take St. Louis FED data on the 3 month T-bill series and 3m Eurodollar deposits (rather than BBA Libor) to get a long term view of the TED spread. That does put the current travails in perspective slightly.

Whither volatility?

The VIX opened on Friday 24th at 89.03. What does that mean? Using the root-t rule (which is extremely questionable at the moment, admittedly) that scales to an average daily move of 5.6%. Now admittedly things have been volatile recently. But even taking the period from 6th-24th October, the daily move in the S&P was […]

The Bull must die

From the FED, Information on Principal Accounts of Maiden Lane LLC as at Wednesday, Oct 22, 2008 Net portfolio holdings of Maiden Lane LLC: $26,802M Outstanding principal amount of loan extended by the Federal Reserve Bank of New York: $28,820M So the FED is a couple of billion underwater. On October 16th, the assets were […]

A Question of Etiquette

Is it acceptable to go to a Halloween party dressed as Dick Fuld, or is that just too scary?

Swaps spreads and other lunch toppings

Why, sometimes I’ve believed as many as six impossible things before breakfast said Alice. This quotation came to mind in the discussion of the 30y dollar swap spread in the FT recently: “Negative swap spreads have been considered by many to be a mathematical impossibility, just like negative probabilities or negative interest rates,” said Fidelio […]

Chart of the day

This, originally from Bloomberg and then picked up by FT alphaville and many others, is attracting a lot of attention: Despite some rather histrionic claims that it `proves’ the bailout is inadequate and much more money is needed, I am not so sure. For one thing, banks are deleveraging, so they will need less capital. […]

Basel 3

I have sniped, perhaps too much, at Basel 2. So it only seems reasonable to outline some alternative proposals, particularly as Lord Turner is apparently open to significant change. Here goes. Scope. Capital charges should apply to assets, derivatives, and to asset/liability mismatch. In particular funding mismatch and the heavy use of confidence sensitive short […]

One Night In New York

In my defense, I was on a train and running out of reading matter. So another lyric rewrite happened. New York, occidental settingAnd the city don’t know that the city is gettingThe creme de la creme of the bank worldIn a show with everything but Alan GreenspanTime flies, doesn’t seem a minuteSince the Tirolean spa […]

On the value of uncertainty

Long, long ago, when I was responsible for the valuation of a lot of financial instruments at an investment bank, I used to set a lot of store in valuation adjustments. The basic idea is that the precise fair value of many instruments is uncertain. You value them at your best guess, and you take […]

Peston picked off

Robert Peston, it seems, may be getting a dose of the scrutiny he has been afforded to the banks. The Observer reported on Sunday that Serious Fraud Office could launch an inquiry into his recent scoops. I don’t have anything against Peston personally, but I do think he has shown a persistent lack of judgment […]

The Last War

The WSJ has an interview with Anna Schwartz, Friedman’s coauthor on A Monetary History of the United States. She has some interesting remarks. Today, the banks have a problem on the asset side of their ledgers — “all these exotic securities that the market does not know how to value.” “Why are they ‘toxic’?” Ms. […]

What Pleasure It Is To Be A Real Keynesian Now

Finally the tide seems to be turning. Bernanke is talking about the need for central bankers to be mindful of asset price bubbles. Darling is reprioritising spending to produce a classic Keynesian stimulus. But isn’t it bizarre that we now have nationalised banks and privatised railways? If ever there was one industry that the state […]

Credit Derivatives Unfairly Scapegoated

From Reuters: Credit strategists at ING said on Thursday that credit derivatives were being unfairly blamed by politicians and commentators for the near meltdown of financial markets…”The CDS (credit default swaps) market is being used as a scapegoat for political and economic goals,” ING credit strategist Jeroen van den Broek wrote in a note to […]

Two sensible comments

The first from Clusterstock: Many of our financial institutions are insolvent. They aren’t healthy victims of bank runs. They are ailing institutions barely kept alive by frantic rounds of capital raising. The lessons of the Great Depression simply don’t apply here. In fact, we’re probably making things worse. Allowing insolvent institutions to fail and requiring […]

Any old bonds

Any old bonds? Any old bonds?Any, any, any old bonds?You look neat. Talk about a treat!You look so dapper from your napper to your feet.Dressed in style, brand-new tile,And your father’s old repo on.But I wouldn’t give you tuppence for your old MBS,Old MBS, old MBS. This is one in a series of bad lyric […]

Being Boring

Contrary to the Pet Shop Boys, I came across a cache of old photos, and the markets were often boring. A graphic from the WSJ makes the point well: It is not the big swings that get you. It is the years and years of returns close to zero. Less than 2% for 15 years […]

Basel 2: Installing smoke alarms while Rome burns

I have detected a slightly more sarcastic tone than usual in my recent posts and I had resolved to be nicer. But then something like this comes along: The Basel Committee/IOSCO Agreement reached in July 2005 contained several improvements to the capital regime for trading book positions. Among the revisions was a new requirement for […]