Archive for July, 2013

This is the simplest I can read on this topic.images

Suppose you and I live in adjacent apartments. Now consider the following ways in which we might satisfy two of our needs: food and a clean habitat.

In scenario A, I cook my own meals and clean my own bathroom, and you do the same for yourself.

In scenario B, you pay me to cook your meals, and I pay you to clean my bathroom.

In scenario C, I pay you to cook for me and clean my bathroom, and you pay me to cook your meals and clean your bathroom… What might make each of these three scenarios desirable? Continue reading


Recently Jörg Bibow was interviewed have tried to put the points in English stating that Mario Draghi’s announcement promise of ECB supportimages for government bond markets seems to have calmed fears of an imminent euro breakup, at least for the time being. That does not mean the euro crisis is over though. Not at all, as the underlying problems remain largely unresolved. Liquidity can buy time but it cannot solve the imbalances inside the euro area and related debt overhangs that are the deeper cause behind the euro crisis. It is important in this context that the ECB promise is for conditional support. As liquidity support comes along with mindless austerity and asymmetric adjustment pressures imposed on debtor countries, debt problems are bound to get worse rather than better. Markets are currently in complacency mode about these prospects. The crisis may resurface at any time.

He pointed out Germany as the main culprit behind the euro crisis. Being the largest economy in Europe, Germany’s performance and policies inevitably impact Europe. In the currency sphere Germany is also Europe’s traditional anchor of stability. As a result, the policy regime of Economic and Monetary Union agreed at Maastricht is largely of German design, based on the Bundesbank success story and deutschmark stability. It was not understood that the pre-EMU success of the German model of export-led growth required that other countries behaved different from Germany. Continue reading

All valuation classes teach the equity market correlation method so it would be interesting to hear your views. Equity exists in many forms. In imagessecuritization, equity is the tranche that takes the first loss and controls the deal. In a mutual insurer/bank/thrift, etc., the book equity is held by the dividend-receiving policyholders. The real equity is held by management, who actually control the place, because the dividend-receiving policyholders will not vote them out. In a credit tenant lease, there is the guy that owns the property, and typically he puts up a teensy amount of equity, because there is a “credit tenant,” one that has an investment grade rating, and the mortgage is secured by:

  • the property
  • the senior unsecured credit of the “credit tenant,” whose lease payments pay the mortgage, and go directly to the lender, and
  • the equity owner.  Continue reading

Investment Fashions

Sharing one of the extract that I liked in Traders Guns and Money – From the Investment bankers prospective all clients are real arseholes but imagesinvestors are real arseholes. If the buy side say F*** you, before they hang up, investors also say F*** you when they pick up the phone. Here are some key principles for fund management:

1) Diversification: Harry Markowitz proved that putting all your eggs in one basket was risky. Warren buffet continues to defy this successfully. He argues you are better off putting your money into a few things you know and understand, and that are cheap. He doesn’t like the thought of buying all the stuff you know nothing about.  Continue reading

Trading and Risk

Time and Tide waits for no man…images

Was going through a post on Black Scholes and the normal distribution By Cathy O’Neil, a data scientist from mathbabe.
Its surprise to notice that what people in finance do or do not assume about how the markets work. I wanted to dispel some myths (at the risk of creating more).

Quantitative trading and Quantitative risk has big difference in them so let’s try to figure it out.

Markets are not efficient

In quantitative trading, nobody really thinks that “markets are efficient.” That’s kind of ridiculous, since then what would be the point of trying to make money through trading? Continue reading

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