My quant friend told me that the Hull-white model requires calibration via PDE solver. It can take a few seconds just to price a deal. If a spreadsheet has many deals the computational cost can add p to become non-trivial.
In contrast, the SABR model is much simpler – find a vol and plug it into BS formula.
Real story — you buy some landed asset which causes pollution. You are liable for the clean-up cost.
Real story — buy a rundown house at a dirty cheap price. Unable to sell, you still need to pay property tax.
- 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”
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.
… = $18972 vdate:17/12/2013
Background — in valuing future cashflows, we often need to discount some amount of dollars to some date ..
I don’t know why many money market trading desks cut across asset classes and trade, in addition to money market instruments,
Many companies bundle MM and FX together. I feel they are closesly related.
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.
Monitor the index (say spx) value now and 12M later. If that return is, say, 22%, then I pay you 22% of notional, on that future date.
Today, however, you pay me a fixed x% of the notional.
So the contract always references some index.
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)
I feel a financial model is any math that describes/explains/relates/predicts economic numbers.
A “model” means something different in buy-side than in derivative pricing including complex structured products.
On the buy-side, I feel a model is like a regression formula that Predicts a (single?) dependent variable using several explanatory variables. In simple words, such a model is an alpha model, which is related to a trading strategy.