Archive for Derivatives and hedge funds

Credit Insurance Defaulted on Greece

Nothing seems to work anymore as it used to do in the past. There was a time, not long ago, when a credit default swap was always issued by a smart bank and had always a counterparty which was not so smart to underwrite it. Usually the counterparty was AIG, or some other big insurer who thought it could manage any imaginable risk. But the International Swaps and Derivatives Association just changed this rule today, by deciding that the CDS was not triggered yet, despite the huge decline of 90% in the last months. The debt of Greece now stands at “only” $3.2 billion and is basically covered by no insurance or other type of derivative. This makes the sellers and the consulting banks to look very smart, since they do not have to pay anything… yet.
Actually the various rounds of debt reductions have made only a couple of winners so far – namely the Greek government and the Goldman Sachs and other intermediaries who have already cashed in their advisory fees long time ago. Imagine this – wouldn’t you like to run a big corporation, borrow $32 billion, do whatever you want with it and then get away with only 10% of it because you “are too big to fail”?
Hmmm, I would like to be a government like this one. And take the population on the streets if somebody tries to corner me and ask for the WHOLE amount of money back…

How to Loose $1.2 Billion – Without Excuses

I was today reading a Financial Times article about the collapse of MF Global, a global broker dealer. If you did not know the story, here’s a short history:
On October 31st MF Global reviewed that the company lost $1.2 billion from various trades going the wrong direction. The problem was that no warning was issued in advance, making the sudden collapse a shock.
What is interesting is that Mr. Corzine, MF’s previous chief executive, maintains that “I simply do not know where the money is”. Apparently, multiple separation of trading rules were breached and the money in these trades disappeared…
Mr. Corzine’s testimony of today in front House Committee on Agriculture will be enlightning (if he decides to say anything, given his wish to prevail on the 5th amendment). However, it also highlights some equally unbelievable possibilities:
– either the trades (especially the millisecond electronic trades that now most of the brokers undertake) are uncontrollable sometimes (which we testified twice this year with the flash crashes)
– either the money were hidden by the company and the personnel is not willing to disclose,
– either some other (equally unbelievable) possibility.
I am very curious to hear what the characters involved have to say about this and how the story will unfold. Until then, I still hold my belief that at such scale it is possible that something went terribly wrong… or terribly well for somebody else.

“Forex Chartist Companion – A Visual Approach To Technical Analysis” by Michael Duane and James Lauren Bickford – A Book Review

If you read my previous book reviews, then you certainly know how much I like this type of companion books. Mostly I enjoy the graphs and seeing the logic behind- and the more I see, the more puzzled I am (but this is another topic). “Forex Chartist Companion – A Visual Approach To Technical Analysis” was no exception to the rule – I enjoyed massively the approach laid out into its pages.

“Forex Chartist Companion – A Visual Approach To Technical Analysis” is written at a basic level which builds up to higher (more advanced) topics. In this respect, the book is somehow typical for the American educational books (it could have easily been called “Charting for Dummies”). It has also some advanced features, but overall it is written at an intermediate level.

The book is written with the average trader’s needs in mind – you should not expect advanced techniques described there. It could not do it without sacrificing the width of treating the topic – and here the book does a fantastic job in listing almost any imaginable type of forex chart. If you thought you knew them all, “Forex Chartist Companion – A Visual Approach To Technical Analysis” can prove you wrong.

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Book Review – “Handbook of Finance, Volume III – Valuation, Financial Modeling and Quantitative Tools” by Frank J. Fabozzi (editor)

This week I managed to get over another monster book in finance – the third volume of a well respected series of handbooks put together by the Yale Professor in the Practice of Finance, Frank. J. Fabozzi. It is hard not to be impressed when you first look at such a book – it is a massive tome of 835 thin pages, premium quality paper and full of articles by various authors. So at first I was very curious – what is inside?

I was quite surprised – the book is quite comprehensive. I would say that it is maybe a bit too comprehensive for the finance practitioner who wants a quick reference for an expert issue in the field. Just for your broad idea, here’s the book’s summary listed shortly:

Volume III. Valuation, Financial Modeling, And Quantitative Tools. Read more

Book Review – “Derivatives- Principles and Practice” by Rangarajan K. Sundaram and Sanjiv R. Das

If until now I focused my readings on application oriented stuff on technical analysis, with “Derivatives- Principles and Practice” my lectures took a 360 degrees turn. McGraw-Hill Professional is well known for publishing as-academic-as-possible books in the finance area (and not only). I used to study on some of their books for my MBA and I knew that they are a different class.

So, if you are used with books which focus on stories and on easy to understand graphics. Well, “Derivatives- Principles and Practice” is much more complex for several reasons.

First of all, this is an academic book written with motivated and well-informed students on mind. Although the authors specify that you need to know only high-school mathematics and that everything else is within the covers of the book, it might be very hard for the reader to progress if he/she does not grasp well the basic mathematical concepts. After all, this is a book on derivatives – which represent one of the most complex financial subject on planet Earth. Read more

IMF Reccomends Stronger Measures to Fight the Global Financial Crisis

imf-building-2The International Monetary Fund (IMF) has recently published a comprehensive report called “Global Financial Stability Report – Responding to the Financial Crisis and Measuring the Systemic Risk.”. The IMF paper covers the history of the recent global financial crisis, as well as the measures taken by the governments and the companies to fight against it.

The report analyzes why the financial institutions have all been hit so hard by the current financial crisis, from the pension funds to the life insurance companies. These institutions were impacted despite the fact that most of them took preventive measures to manage potential surges in the risks of their assets. The report also underlines that there is a strong retrenchment from foreign markets, which outpaces strongly the overall de-leveraging process. The sharp decline of the cross border funding actuall created the crisis in the emerging markets, whilst the re-financing needs of those markets are still very large (estimated by the IMF at $1.8 trillion in 2009). Read more

Stock trading in the global circus

As mentioned before on doitinvest, DJIA looks like a yo-yo. The same for the oil price and for the profits of the companies today…

DJIA plunged again on a panic access to 8,600 points, after a big gain which was driving it just a few days ago up to 9,500. Looking at this yo-yo of trading a wild idea came to me – what if the news sources do not really get it and the causes of this stocks variations are not a result of the panic? Read more