Search results for

In 1952 Harry Markowitz showed that the most revelant risk for an investor is generally not the risk of any one investment by itself but rather it is that of the aggregate portfolio of investments. As a result of this seminal work the standard deviation of this aggregate portfolio's return, or of its excess return relative to a benchmark, was for many years the principle measure of investment risk. It was an essential component of the Nobel prize-winning theory of asset pricing by William Sharpe. It was also a key building block of Stephen Ross' arbitrage pricing theory. Value at Risk or VaR has recently supplanted the standard deviation as the preferred measure of risk. VaR can often be interpreted as a multiple of the standard deviation assuming that a portfolio's returns follow a normal, or log normal, probability distribution.

BRE Bank will start pitching barrier options in the Polish zloty against the dollar and the euro within the next six months. Piotr Mielus, head of foreign exchange in Warsaw, said it has not offered exotic derivatives before because the underlying foreign exchange spot market was not liquid enough, adding that the zloty has only been fully convertible for one and a half years.

Senior staff at Cygnifi, a Web-based independent derivatives services company created and spun off by J.P. Morgan last year, are considering jumping ship following the company's decision to narrow its focus a few months ago by eliminating counterparty risk management and several other services, according to market officials. The move to change the focus was due to a slowdown in business, according to one official.

One-month Japanese yen/U.S. dollar implied volatility rose to 11.5% Wednesday from about 9% a week earlier as demand for yen calls/dollar puts increased and fears over a weakening dollar continued to grow. Hedge funds and investment banks were most active buying one-week yen calls/dollar puts last week as the one-month risk reversal moved further in favor of yen calls. The options typically had strikes around JPY122.50 when spot was trading at around JPY121.75.

Volvo Treasury, a subsidiary of the Swedish car manufacturer, plans to use credit derivatives for the first time to hedge counterparty risk on its financial liabilities and expects to enter its debut transaction after the summer vacation. Magnus Jarlen, manager of risk control in Gothenburg, said it will hedge risk originating from loans to partly owned subsidiaries. It may also hedge sovereign risk, for example, if the company decided to build a car plant in Eastern Europe it would consider taking out credit protection on the sovereign. He declined to detail the size of its financial liabilities.

UBS Warburg has added structured credit products to its credit derivatives trading operation and plans to make additional hires to boost the effort. Hugh Evans, managing director and co-head of global credit derivatives trading in London, said the trading department priced its first synthetic CDO last week. The hire is part of an ongoing effort to beef up the department, which started in March. Evans plans to hire another five to 10 structurers and traders in London, Stamford, Conn., and Tokyo within the next 12 months.

Due to weaker than expected recent economic numbers,Groupama Asset Management has begun to swap 15%, or $45 million, of its portfolio out of corporate bonds into Treasuries and will pursue this strategy over the next two months, says portfolio manager Dan Portanova.

The Texas Permanent School Fund has been taking profits in financial services industry paper as spreads have narrowed in response to the Federal Reserve Board's easing of interest rates. Carlos Veintemilles, who manages $4.5 billion for the $7 billion fixed-income fund, says he has sold $20-25 million each in names including Bank One, Wells Fargo and Bank of America. The Bank One 7.12% notes of '11 (A1/A-) traded at 173 basis points over Treasuries on March 23, and came in to 129 over on July 27 before he sold them. The Bank of America 6% of '09 (AA3/A) followed a similar trajectory, going from 180 to 137 in the same time frame. Veintemilles says the fund is currently keeping the assets raised from the sales in cash.

Nowhere is the world's oldest profession more legal than in the Netherlands where the booming sex industry pays tax, but prostitutes say they still struggle to gain the financial acceptance they need from Dutch banks. According to Reuters, Amsterdam's ladies of the night consider themselves small business entrepreneurs, and want bank accounts which show their income is not personal so that expenses like condoms and sex toys can be tax-deductible. A complaint against ING Group with the Office of Fair Treatment, claiming sexual discrimination. ING claims it's policy has never been to do business with any persons from the sex industry, as this might offend other clients in the 65 countries it operates, which might not be as liberal as the Dutch.

Richard Litchfield, portfolio manager with Allmerica Asset Management, says the firm will rotate 5%, or $50 million, of its portfolio from mortgage-backed securities (MBS) into Treasuries if the Federal Reserve cuts rates by only 25 basis points this week, which is what he anticipates. Such a small cut by the Fed means the market will continue to demand another cut in September, leading to a second refinancing wave and causing mortgages to underperform.

Bank of Oklahoma Financial Corporation, the holding company that includes the Bank's funds from Oklahoma and several other states, is considering selling $200-300 million worth of 15-year, 6.5% Fannie Mae or Freddie Mac collateralized mortgage obligation bonds in order to buy similar 5.5% CMO paper. Lee Allen, portfolio manager of $3.1 billion in taxable fixed-income, says he is concerned the low-interest-rate environment will lead to a rise in prepayments. He said if the 10-year Treasury yield stayed below 5% for the next few weeks, or if the Federal Reserve cut rates by 50 basis points this Tuesday, he would take the plunge. Last Thursday, the 10-year Treasury was yielding 4.95%. Allen uses three-year PAC CMOs as a benchmark, and says his duration is roughly 3.0 years.