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Considerations when Adding Equity Volatility Instruments to Your Portfolio
Markets across the world were rocked last year by the COVID-19 pandemic. Between February and March of 2020 tumbling equity markets combined with high correlations hit issuers of structured equity products especially hard. In particular, a number of European “Blue Chips” announced freezes or cuts to their dividend payouts as regulators pressured their respective banking sectors into holding
Financial Architecture Series, Part 4: Complex Payoffs
Part 3 in the Financial Architecture series tacked the index concept, explaining the distinction between the definition of the value (the index concept) and the value itself. This post will further examine this topic, and explain how the index concept relates to complex payoffs. Derivative contracts often oblige parties to make payments that depend on a collection of underlyings in complex ways
April 29, 2013
Financial Architecture Series, Part 3: Payment Amounts - The Index Concept
In part 1 and part 2, I described how parties to a contract may be obliged to make payments and described the basic anatomy of a payment, but deferred the topic of exactly how the payment amount is specified, until now. The key requirement for the definition of a payment is unambiguous determination of the amount to be paid, when required. When the payment amount is determined and when the payment
April 4, 2013
Financial Architecture Series, Part 2: Anatomy of a Cash Flow
The only essential content of a Product is the list of payment obligations and rights to make choices which it assigns. Given how important payments are in this conceptual framework, it is worth spending examining their structure. To specify a single cash flow, we need to know how much is paid when, and to whom. It is useful to divide the information this conveys into some distinct components: The
February 26, 2013
Financial Architecture Series, Part 1: The Product Concept
In this series of posts, I intend to consider financial derivatives as a whole and develop a conceptual framework in which any such derivative can be described. In doing so, I will focus on the information content of the relevant legal documents that is pertinent to the problem of calculating the derivative’s value. An important subsequent step is the development of the conceptual structure of the
February 18, 2013
Error: Negative Rate Whilst Building Model
Interest rates are always positive. Or maybe zero. But never negative. This assumption is so common, it is often unwritten or implied. And the implications for pricing financial contracts when the assumption no longer holds are significant. However, surely this assumption always holds? Hard cash is a classic example of a zero-rate investment. Just store your currency in a strongbox, and your rate
January 16, 2013