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The death of derivatives
- Thread starter bigbadwolf
- Start date
I would be very curious to hear a response to this article from those who are presently engaged in MFE programs as either students or directors!
It seems to me that the mathematics of derivatives pricing has failed to evolve as quickly as the desire for complexity to enhance returns. The correlation markets were built with a blind eye cast on the tail event where correlation is unity, which is what is essentially occurring. Answer: fatten the tails! Still, I see where Buffet is coming from in that such products are too far removed from their underlyings, but of course in this case the underlyings themselves were fraudulently valued.
Whilst greed remains imprinted in humanity, the market for derivatives will exist, perhaps after a brief hiatus. But, when these derivatives flourish again into complexity which defies their mathematical basis (and I'm talking anything up to 50 years here), then we may well repeat what we are seeing at present.
It seems to me that the mathematics of derivatives pricing has failed to evolve as quickly as the desire for complexity to enhance returns. The correlation markets were built with a blind eye cast on the tail event where correlation is unity, which is what is essentially occurring. Answer: fatten the tails! Still, I see where Buffet is coming from in that such products are too far removed from their underlyings, but of course in this case the underlyings themselves were fraudulently valued.
Whilst greed remains imprinted in humanity, the market for derivatives will exist, perhaps after a brief hiatus. But, when these derivatives flourish again into complexity which defies their mathematical basis (and I'm talking anything up to 50 years here), then we may well repeat what we are seeing at present.
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Right. Like handguns are responsible for crime.
Leverage can make a share of stock deadly, if you employ enough of it. Bad money is like bad morals. You can melt down every gun in existence, and people will turn to bats and pencils to dominate each other, if they have no sense of moral restraint.
This fact does not equate a share of stock with a CDO^2, of course, anymore than a gun can be equated to a pencil. Complex derivatives that exist only as algorithms are not to be dabbled with casually; but neither are they going away. As long as people are free to choose how they will employ their capital, derivatives will be entered into where it makes sense to both parties.
However, if regulated pools of fiduciary capital (pension funds) are exposed to levered, algorithmic risk, you can be sure very heavy regulation will be the result of this year's events.
However, if regulated pools of fiduciary capital (pension funds) are exposed to levered, algorithmic risk, you can be sure very heavy regulation will be the result of this year's events.
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The benefits of Derivatives will ensure their survival and growth, but with changes, like exchange traded instruments would be high on my list to mitigate the counter party risk that is so obvious right now.
Per the media, the crash of 1987 was going to be the death of automated trading programs, and half the trading is now initiated by algo's. What meltdowns do is introduce more controls which dampen the volatility to the same sequence of events should they arise. The 1987 crash introduced the time out triggers at the exchanges and proved "portfolio insurance" was a difficult business, not unlike the lesson some option writers have learned over the last year.
Too bad history only rhymes with the past and does not exactly repeat! .
Per the media, the crash of 1987 was going to be the death of automated trading programs, and half the trading is now initiated by algo's. What meltdowns do is introduce more controls which dampen the volatility to the same sequence of events should they arise. The 1987 crash introduced the time out triggers at the exchanges and proved "portfolio insurance" was a difficult business, not unlike the lesson some option writers have learned over the last year.
Too bad history only rhymes with the past and does not exactly repeat! .
As an outsider of the field, I am curious to know what the job market is like for starting quants in derivatives. I would imagine it's not very good at the moment. Or maybe there is a greater demand with all the calls for better risk management? Thanks in advance.
myquee
myquee
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Nothing right now, something eventually. The only stock market up YTD is Tunisia. These micro-markets(I forgot what the actual term is super-emerging/developing) are the future. And btw this is not the end of derivatives. 1) Know what you're buying/selling 2) know what the risks are (back to point 1).
doug reich
Some guy
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Isaac, I request that you stick to the conventions of this board and refrain from using confusing shorthand in your posts, and instead spell out words.
Absolutly agree, the focus will return to risks and offsets.
Especially liquidity risk.
What is the effect of a stop order on the market?
This is a risk that is new...
The three business tech risks you don't know about,
http://news.yahoo.com/s/infoworld/20080917/tc_infoworld/111107;_ylt=AqDEIxx1aaS60n9SiZbkddYDW7oF
"Business travelers will soon need to carry the name of their corporate lawyer in addition to their passport when returning home to the United States, and they may need to bring with them a different business laptop as well. This is because U.S. Customs can search and confiscate your laptop without any prior cause, according to policies that have been posted online since a Ninth U.S. Circuit Court ruling in April"
Is this country risk, technology risk, political risk...or just plain silly?
:-k
