In a previous post we discussed how IFRS 9 will affect commodity firms through hedge accounting programs. Generally speaking, as pointed out by Thack Brown in this post, IFRS 9 will affect financial and non-financial corporates through: 1-New classification and measurement principles for financial assets, 2- New impairment models that will accelerate recognition of credit…Read More How Will IFRS 9 Affect Financial Institutions?
After an increase in volatility, equity markets seem to be going back into the state of calmness. Additionally, with Easter coming up, volume and volatility are expected to remain low, at least for a couple of weeks. However, beside the equity world, the credit market is experiencing a tightening as well. The graph below shows…Read More Relationship Between Credit Default Swaps and Equity Options
Equity markets were relatively calm after the US election. The recent weeks, however, have seen some increase in volatility. Is this just a blip or the start of a volatile period? Nobody knows the exact answer. But Gregory Meyer et al of FT.com reported that there are firms, notably DRW, based in Chicago, that already…Read More Hedging in the Mortgage Backed Securities Market Can Increase Volatilities
A common belief among commodity producers, importers and exporters is that hedging should be based on analysts’ expectations. Hence, they often attend meetings where they expect to hear forecasts from analysts and experts. For example, Ed White recently wrote Meeting halls at farm conferences are packed when the market analysis session is scheduled with farmers…Read More Hedging Should be Based on Risks and Not on Forecasts
With the VIX being so low, many investors believe that now is the time to go long volatility. This belief mainly stems from the mean reversion property of the VIX. However, we should note that The speed of mean reversion in the low volatility regime is slower than it is in the high volatility one…Read More Should We Buy VIX Futures When The Spot VIX is Low?
At the close of today, the VIX finished at 11.23%, so on the surface everything seems to be calm and normal. However, the low VIX is making some investors nervous. Why is the VIX so low? In this post Dani Burger , Cecile Vannucci , and Liz McCormick cited some reasons for the low VIX: The…Read More Why Is VIX So Low and What To Do About It?
At the beginning of the year, as the markets reached new highs, investors became more complacent. Early this month, Rupert Hargreaves noted: Investors have plowed billions into stocks over the past few months while the generally positive sentiment within markets has helped pull central banks back into the shadows. Central bank decisions no longer have…Read More Now Is The Time to Hedge, But The Cost of Insurance Can Be Expensive
About a year ago, the financial world witnessed another “Lehman moment”. It was the “near collapse” of Deutsche Bank (DB). The financial press quickly pointed out the main reason for DB’s plunging stock price. John Glover wrote Yield-starved investors bought $102 billion of the contingent convertible bonds, securities created to help troubled banks hang onto…Read More What Is a Contingent Convertible Bond and How to Price It ?
As a firm with emphasis on risk management, we always advise our clients to hedge their portfolios in order to reduce the PnL volatilities. However, recently Metlife, the largest insurer in the US, was hit by a $3.2 billion loss in derivatives that were used to hedge the rising interest rates, causing a $2.1 billion…Read More Do Derivative Accounting Rules Make Sense?
What is a convertible bond? A convertible bond (or preferred share) is a hybrid security, part debt and part equity. Its valuation is derived from both the level of interest rates and the price of the underlying equity. Several convertible bond pricing approaches are available to value these complex hybrid securities such as Binomial Tree,…Read More Convertible Bond Pricing-Derivative Valuation Example