Happy New Year: catchup time

Celebration and the resultant recovery has taken up much of my time recently, to the detriment of blog posting. Time, then, for a brief round-up of interesting things that have come my way recently.

• Being an actuary still one of the best jobs around.
• The EU will probably never have a rational system of government.
• Bond yields at the moment are closely correlated with the relative probabilities of who will win the General Election, and what their approach to deficit reduction will be. Today's auction of £4bn of short dated bonds went well and was oversubscribed by some way.
• Derivatives are supposed to make it safer to invest in an asset by parcelling out the risk. However, this paper from Princeton demonstrates that it is fairly easy to construct a seemingly simple derivative whose behaviour requires unattainable amounts of computation to model. In short, you can booby-trap a derivative.
• A solid analysis of operational risk management in the light of the economic experience of the last few years. It was commissioned by the main North American actuarial bodies, and is a solid and not overly technical read.
• Whatever your problem, the chances are it's been solved before. Take note, TSA.
• And of course, some 2010 predictions.

The benefits of financial innovation

As an idea, financial innovation is probably as unpopular as it gets right now. However, whenever you have a demand for capital and an unused supply, you can bet a market connecting the two will emerge.

And so it has come to pass in a small East African town called Haradheere. If you're not familiar with the name, you're surely familiar with its occupants - Somali pirates. Demand for cash and equipment to power their operations is so high, a stock market has sprung up. One participant invested a rocket propelled grenade and has so far been repaid $75,000 in 38 days. Given that an RPG costs about $3000 (according to Google), that makes for an annualised IRR of roughly 13,749,518,825,092,100,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000% per annum.

No doubt the smart money is already there...