Posts

Showing posts from 2016

Did the US Treasury read my blog?

In September 2014, in my blog Change of benchmark overnight index is a difficult task , I described why I thought that a change of benchmark for rate paid on collateral or as a reference for swap is a difficult task. The above blog was a reaction to comments from senior derivative figures indicating the opposite. Fast forward two years, it seems that my message has been heard by the US Treasury. Yesterday, in another Risk article titled US Treasury: prepare for a post-Libor world (subscription required), one can read: Daleep Singh, US department of the Treasury: Any transition away from a dominant benchmark will surely be complex and lengthy[…] To compare with my blog: Change of benchmark overnight index is a difficult task. Run, up to the maturity of the longest trade existing in the world linked to fed funds, two parallel markets. Risk magazine Concern among market participants […] A similar move could result in disputes between counterparties about the value of legacy

Writing!

Image
Picture taken in New York on the “ Library Way ”situated on East 41th Street. It summarizes my feeling about writing, except that I have not reach the final stage, the stage of trouble. At least I don’t think so. Writing your name can lead to writing sentences. And the next thing you’ll be doing is writing paragraphs, and then books. And then you’ll be in as much trouble as I am! Jerome Lawrence and Robert E. Lee, The Night Thoreau Spent in Jail.

Public analysis

I have open a new public repository on GitHub. There was already a repository related to the code associated to my forthcoming book Algorithmic Differentiation in Finance Explained . The repository is: https://github.com/marc-henrard/algorithmic-differentiation-book I have made public a second repository, called analysis . The idea of the repository is to share analysis of financial situations by quantitative methods. Instead of simply reporting the description of the results through my blog, I will also made the code of the analysis publicly available when it make sense. The new repository is available at https://github.com/marc-henrard/analysis The first code is the one used in the Imaginary Butterfly blog post. As usual, comments are welcome.

Book on its way!

After stalling for a couple of months, my book “ Algorithmic Differentiation in Finance Explained ” is moving again! I have send the final draft to the editor this week-end. A couple of months for copy-editing and other technical processing are still required. Maybe the book will be available by the end of the year. If you are looking for a useful, timeless, (and cheap) Christmas gift, don’t look further! More details as soon as I receive them from the editor!

Le franc restera-t-il le franc?

Going through boxes of old books inherited from my grand parents, I found a small book from 1945 titled “ Le franc restera-t-il le franc? ” [1]. It could be translated in English and in today’s vocabulary by “ Will the Euro stay the Euro? ” This is a good question! Reading through the introduction and the first chapters, I found it very current. The last sentence of the introduction reads (my translation): Why always bury our heads into the sand, close our eyes, use subterfuges, adopt monetary palliatives instead of taking a dispassionate view to certain truths that are not nice to say but that are inexorably revealed by the mathematical deduction of the laws of economics. Yes, a very current question indeed. [1] Charles Périn, 1945, “ Le franc restera-t-il le franc? ”, Larcier, Bruxelles.

Book review

I have recently found that Massimo Morini wrote a review of my "Multi-curve framework" book in Quantitative Finance. The text of the review can be found on the Quantitative Finance web-site (subscription required). I'm honored by the nice words of Massimo. The only minor point I have to disagree with him, is when he says that " I do not think that Marc possessed any prophetic powers ." As explained in a previous entry of my blog (see the last part of When fiction becomes reality ), the multi-curve framework is not the only proof of my prophetic powers … or of my luck. But consistent above average luck is even more rare than consistent forward thinking, so I'm fine with either!

Good news for AD?

Maybe I did not lose as much as I though in Sometimes you win, sometimes you lose . Maybe Algorithmic Differentiation (AD) is not forbidden by regulators as much as I feared. A couple of months ago I attended and spoke at the 5th xVA conference . I was also part of the panel discussion on “GPU vs AAD” debate. Among the questions opened for the debate was " Can AD be used for regulatory/FRTB purposes? " I explained the reason behind that question in my previous blog and in my comments to the consultative document by the BCBS. My comments can be found, among other comments, on the site of the Bank for International Settlements . The regulatory documents give a precise (but incorrect in my opinion) description of the meaning of sensitivity. The sensitivity for interest rate is the forward differentiation quotient computed with exactly a one basis point shift. The good news , if confirmed, is that the previous bad news may not be true. A staff member from the Federal Reserv

A double MAC, please.

Recently concerns related to MAC swaps and CME swap futures based on those swaps have resurfaced in the press. See the letter from ISDA/CME/SIFMA/FIA and the article in Risk Magazine (subscription required): MAC swaps, swap futures face new tax threat . Similar issues have been discussed in the past: Tax questions cloud prospects for CME swap future and MAC swaps.  MAC what? MAC stands for Market Agreed Coupon . “Market Agreed” is probably a misnomer as nobody other than the trade participants has to agree with the coupon. The real meaning is a swap with a fixed coupon at a rounded figure, usually every 25 bps, and the trade is not done on the fixed rate but on the price. For example a quote can be “a 10Y receiver, 2.25% coupon swap at a price of 97bps” or something similar. The price is paid as a one-off fee at the settlement or effective date of the swap. In the sequel I will call “ continuous coupon swap ”, the swaps where the coupon is not necessarily one of the discrete cou

Continuous dividend v discrete cash flows

Image
Variation margin With the generalization of variation margin collateral, the derivative world is not driven anymore by discrete cash flows but continuous dividend. This can be explained with the following two graphs. Figure 1: Derivative value Suppose that you have entered into a derivative in the past. In the graphs that date was 20 days ago and the X axis represent the time. You entered into the trade at fair price, so the initial value was 0. Time has past and the value has gone up and down. The Y axis of the same graph is the value. The current value is positive. As the party to the trade are uncertain that their counterpart will honor its derivative obligations, it is now standard to ask for variation margin related to the derivative. In this context variation margin is the exchange on a daily basis of collateral to guarantee the obligation. The party out-of-the-money (for which the value is negative) is posting financial instrument with the same value as the trade as a g

Workshop on Margin

In the last years, I have reviewed the methodologies of the world largest OTC swap CCPs , read most of the recent related regulatory changes , research the impact of those changes on valuation and implemented most of them in libraries . Those exercises combined with my background in quantitative analysis and trading give me a unique perspective on the changes in the derivative market infrastructure . As part of the recent advisory engagements related to the above subjects, I ran several workshops on margins in Europe and in the US. Those workshops have been offered as one day or two days programs. Below are a short summary and the agenda of a typical workshop. The workshops are always tailored to the audience. Don't hesitate to contact me for more information or to request a similar workshop in-house. Summary One impact of the crisis has been the increase of the spread between different reference rates. Another impact has been the regulatory efforts to try to reduce the system

Imaginary butterfly

Yesterday night, I finish reading a book. This morning, I was wondering what to do next. Weather is not good enough to play golf, and I was reduced to start a reading a new book or let my imagination wander. I choose the latter, and from imagination to imaginary there was only a short step. And from imaginary to imaginary capital and FRTB another short step. So I decided to create a simple swap position with imaginary capital according to the standard approach of the FRTB. Creating the matrix in rule 77: 10 lines of (Matlab) code. Finding the not positively defined sub-matrices of dimension 3 of the qbove: 10 lines of (Matlab) code Creating an actual position and computing its risk weighted sensitivity and FRTB capital: 50 lines of (Java) code Result: priceless! Priceless has to be understood as the capital required to hold that position is imaginary, and you can not buy imagination for any price! Maybe a little bit more details about the computation. First step is creating

Sometimes you win, sometimes you lose

The BCBS published it new “ Minimum capital requirements for market risk ”. When the last consultative paper on the Fundamental Review of the Trading Book was published in December 2014, I send my comments to the BCBS. The blog related to my comments is here . From my comments, I would say there are some wins and some losses. Unfortunately, the losses outweighs the wins. Win One of my comments was regarding the scaling of the numbers. The Committee had clearly proposed incoherent numbers with final capital 10,000 times larger than the expected numbers. A missing basis point in some formula . Fortunately the Committee has corrected that. The correction was not in the sense I expected. Roughly the capital required for interest rate risk is the “PV01” multiplied by a risk weight. The choice was between describing PV01 as the “present value of one basis point” or dividing the weights by 10,000. The Committee selected the latter! This means that the official definition of PV01 fo

Books - Rant on books

My LinkedIn headline could have been Compulsive buyer, reader and collector of books. I built (or more exactly I designed it and had it built for me) a two storey library. It roughly six meters wide and five meters high. It contains thousand of books and weight several tons . All that to say I love books, I’m addicted to them. My addiction took a new turn recently when I published my first full book. Now I’m also addicted to writing. You may have seen my announcement for a new book . The new headline is Compulsive buyer, reader, collector and writer of books. Being in love and addicted, you could expect subjectivity from me. Nevertheless find below my objective and dispassionate opinion about books. Books are expensive, too expensive , … if you want or need to buy them. For a hardcover book you pay 60 GBP, 15% of it is the actual cost of the physical book, the rest is immaterial: author royalties and services (editor and retailer). And believe me, the author royalties wil

Forthcoming book on Algorithmic Differentiation!

The first draft of my forthcoming book on Algorithmic Differentiation has been send to the editor. The optimistic expectation is that in will be available in print in May 2016 . Only four months to wait!