Posts tagged 'Black Scholes'

Buffett derivatives, feel the (credit) quality

In our exploration so far of the very large put option contracts sold by Berkshire Hathaway, we have looked at the reasons to sell them (cheap float), the potential liabilities created and the mystery of Warren Buffett’s financial disclosure. Given what we thought we knew about the derivatives, it is strange that the accounting liability was not higher in the depths of the financial crisis.

On the way we have explored option pricing and the so-called greeks, as well as the revelation that Mr Buffet appears to have sold Lehman Brothers a rainbow, helped along by a series of smart contributions in the comments.

Indeed, those comments have inspired Professor Pablo Triana, Professor at ESADE business School, to return with another piece looking at the strange role of Berkshire’s own credit quality when it comes to valuing the derivatives, which may be the missing link in this valuation puzzle. Read more

Black Scholes and the formula of doom

It has been argued that one formula known as Black-Scholes, along with its descendants, helped to blow up the financial world.

Well, that got FT Alphaville’s attention this weekend! For a good part of Saturday, the article with the above sentence was among the Most Read on the BBC News website. Not bad for an article about option pricing. Read more

Wall Street’s next top model

No it’s not Tyra Banks. Sorry.

According to a technical paper published on by Alex Langnau, global head of analytics at Allianz Investment Management and Daniel Cangemi, head of FICC trading at EFG Financial Products, Wall Street’s next top (risk) model is actually a copula that attempts to explicitly link correlation skew to systemic risk so as to improve tail risk management of large portfolios. Read more

Vix parity, volatility arbitrage and Japan

Olivier Jakob of Petromatrix is a rare breed of energy market analyst. He believes it’s important to look beyond the immediate scope of the energy complex to really understand what’s going on.

As a result his energy market reports are often filled with valuable little gems of insight. Read more

Volatility as the new Black-Scholes

Here’s a timely discussion following the Vix smashing through the 20 level.

It comes via Euromoney columnist, Theo Casey, and it concerns a 2010 paper by Eckhard Platen, professor of quant finance at the University of Technology, Sydney. Read more

High frequency traders do ‘risk’ better

Perhaps it’s not too astounding a finding…

But a Federal Reserve staff working paper by Dobrislav P. Dobrev and Pawel J. Szerszen has found that using historical high frequency data to forecast equity returns is far more effective than using general daily or monthly data. Read more