collateral: trade booked before confirmation

In collateral system, a margin call requires the counter party to post additional collateral (within a short window like a day). If the collateral is in the form of a bond (or another security), then it’s considered a “trade”. There are often pre-agreed procedures to automatically transfer the bond.

So the IT system actually books the trade automatically, even before the collateral operations team gets to confirm the trade with the counter party. That’s what I heard from an application owner. However, I suspect these bonds could be held in some special account and transferred and confirmed automatically when required. In such a case, the trade booking is kind of straight-through-processing.

I guess the counter-party is often an margin account owner, perhaps hedge funds in a prime brokerage system.

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CAPM beta – phrasebook

 

  • regression — beta is named in the context of a regression against the market factor
  • cov/var — beta is defined mathematically as this ratio
  • excess return — in the regression, both the explanatory variable and the dependent variable are excess returns.
  • portfolio — (due to regression) a portfolio beta can be computed from weighted average

above 1 — means the regression slope is steeper than the “market”
equals 1 — is the market itself or any “normal” security
below 1 — means the regression slope is more gentle than the “market”

fwd contract often has negative value, briefly

An option “paper” is a right but not an obligation, so its holder has no obligation, so this paper is always worth a non-negative value.

if the option holder forgets it, she could get automatically exercised or receive the cash-settlement income. No one would go after her.

In contrast, an obligation requires you to fulfill your duty.

A fwd contract to buy some asset (say oil) is an obligation, so the pre-maturity value can be negative or positive. Example – a contract to “buy oil at $3333” but now the price is below $50. Who wants this obligation? This paper is a liability not an asset, so its value is negative.

fwd contract arbitrage concept – less useful

label – fwd deal

The basic relationship (between spot price, fwd contract price, T-maturity bond price..) is intuitive, low-math, quite accessible to the layman, so I decided to really understand it, but failed repeatedly. Now I feel it’s not worth any further effort. It’s not quitting. It’s saving effort.

– interviewers won’t ask this
– real projects won’t deal with it, because the (arbitrage-enforced) precision mathematics simply doesn’t manifest in the real data, perhaps due to bid/ask spread
– Only financial math literature makes extensive use of it

I think this is like the trigonometry or the integration techniques — you seldom need them outside academics.

a few benchmarks in finance #vwap, sharpe…

Investment Performance benchmark – Sharpe
Investment performance benchmark – various indices
Investment performance benchmark – risk free rate
Investment performance benchmark – value benchmark and size benchmark. See the construction http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library/f-f_bench_factor.html

Execution benchmark – vwap. I feel this is the natural, logical benchmark. “Did I sell my 5000 shares at yesterday morning’s average price?”
Execution benchmark (2nd most common) — implementation shortfall (very similar to arrival price)