Talking about Arbitrage – drama film directed by Nicholas Jarecki and starring Richard Gere. A troubled hedge fund magnate desperate to complete the sale of his trading empire makes an error that forces him to turn to an unlikely person for help.
It is well-known that risk arbitrageur play an important role in the market for corporate control. After a tender offer, the trading volume increases dramatically in large part because of risk arbitrageurs activity. They take long positions in the target stock, in the hope that the takeover will go through. They are also usually hedged by taking short positions in the acquirer’s stock.
Risk arbitrage used to be a very inconspicuous activity, but in mid-70s, the emergence of Ivan Boesky and the increasing volume of corporate takeover deals contributed to make it more visible. Attracted by the high rewards, many firms started new arbitrage departments and more people became involved in this activity. Continue reading “Arbitrage and the Risk”
I am a big fan of Traders Guns and Money the book written by Satyajit Das, the definitions Knowns and Unknowns revealed by him is the classic work. The reality is always to make sure that you have a seat when the music in this game of musical chairs for high stakes stops (referring to the examples for the crisis happened in the past). As a result of it some interesting statements the management of the firms make but the intensity is something to thought about:-
Statement: As a Leading dealer with a global platform, we are the major player in the market.
- Translation: We have spent a fortune to build this business and are now prepared to spend millions more subsidizing your requirements.
Continue reading “Derivative Players and blunders”
“Size is too simple a metric… It really doesn’t matter from a systemic point of view whether you have four banks or forty banks in a market. It’s the system’s asset concentration – principally in government debt and in mortgage debt – that can be dangerous.”
Sometimes it’s always good to keep brushing yourself, thought of sharing some important glossary on the OTC Market as I was refreshing self on last night:
- Back loading: The action of clearing already existing bilateral OTC derivatives positions.
- Collateral management : Typically, two parties enter into an OTC transaction under an Agreement (ISDA framework mainly) that specifies the contractual relationship between the two parties. As part of this Agreement, a specific document (Credit Support Annex/Deed under the ISDA framework) stipulates that some collateral will be exchanged between them to mitigate counterparty risk. Collateral, in the form of cash or securities, is mainly exchanged on the basis of the variation in the value of the exposure between the parties (value of all OTC contracts under the Agreement). This is often referred to as Variation Margin. In addition, Independent Amounts can be requested by one of the parties.
Continue reading “Collateral and OTC derivatives”
Bubbles’ are much in debate by the Analysts,Economists and the fellow financial media, Emerging markets, NAMO wave, FIFA 2014, Dubai Property prices and so on.
A key issue, obviously, is what is a bubble.
The Brunnermaier definition is
Bubbles are typically associated with dramatic asset price increases followed by a collapse. Bubbles arise if the price exceeds the asset’s fundamental value. This can occur if investors hold the asset because they believe that they can sell it at a higher price to some other investor even though the asset’s price exceeds its fundamental value. Continue reading “Bubble to me”
Zero Hedge is one of my favorite blog on the risk analysis and for the global events, the blog argues that we are living in the Golden Age of Central Bankers, and that wreaks havoc on the fundamental nature of market expectations data.
- The VIX (Volatility Index) is not a reliable measure of market complacency.
- The wisdom of crowds is non-existent.
- Fundamental risk/reward calculations for directional exposure to any security are problematic on anything other than a VERY long time horizon.
- I’d rather be reactive and right in my portfolio than proactive and wrong.
The Golden Age of the Central Banker is a time for survivors, not heroes. And that’s the real moral of this story.
Let’s dig deep to understand the most basic question in risk management. Continue reading “Risk Analysis – Central banks and Volatility”