I aitn't dead

Yet. But I have been slacking off mightily. The new term is swimming along. Finance is currently a bit of a bore and if it reaches the same level of syllabus coverage and depth as CT2 is supposed to, I will frankly be surprised.

In the meantime, an interesting article from the BBC on questioning your assumptions.

Edit: Dur-boy here forgot to include the href to the above link, and cannot now remember what it referred to. Oh well. Tiddly pom.

One question

Why, oh why, is it called the "Yellow book" when it is so very clearly orange?

The new gold standard

An interesting piece from the Economist's Buttonwood blog talks about currency markets. The main point of the post is that in a world of low inflation and interest, relative movements in exchange rates are likely to be amplified. But the interesting point to me was the suggestion that the introduction of the Euro has created a new gold standard: smaller Euro-economies are forced to keep competitiveness with the big beasts of Germany and France, or they are forced to take the same measures that gold standard economies did in the thirties. In essence, devaluation is removed as an option and instead they are forced to shed jobs.

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.

Exams

Start tomorrow. I will be answering questions about financial maths: bond prices, inflation, cash flows, annuities, and other arcana. On Friday, I shall display my expertise in probability theory, and next week I will sit papers on multivariable calculus and on linear algebra. Following that, I shall imbibe some alcoholic liquids, and, should all go well, return in January for more multivariable calculus, more probability and statistics, more financial maths, and a course in "Finance and Financial Reporting", or more accurately "Accounting but it's not called accounting or none of you would sign up for it".

So until next time, here is the first appearance of the Stone Roses on television:



Amateurs!

Pricing immortality

By way of the excellent economics clearing house that is The Economist's Free Exchange comes an interesting piece of research.

One of the big talking points of the financial crisis has been the idea that institutions can be too big to be allowed to fail - and hence, must be rescued whenever they encounter difficulty. This has some very straightforward consequences. If I know that I will never be bankrupted, I can borrow more cheaply, as there is less risk that I will default compared to a normal institution. In turn, I will have higher profits and in the long run take an even larger market share. This is often called the moral hazard problem, although the term is more commonly used in relation to whole-of-market regulation.

So, given that being too big to fail is an attractive status to have, it must be worth something. That's where the American economists Elijah Brewer and Julapa Jagtiani have stepped in. Their paper examines mergers from 1991-2004, and calculates the extra price paid in order to create companies that were newly too big to fail. On average, getting over the threshold costs around $1.75bn a time. In exchange for corporate immortality, that's quite a cheap insurance policy.

Schadenfreude

We haven't all worked in commodities trading, but I think we've all worked with someone we would like something like this to happen to:

“You mus’ be Brad,” a cheerful voice jumped in. Brad’s eye’s shifted towards the scruffy fellow wearing some sort of workman’s uniform who was sitting in one of the reception chairs. “Now first and foremost, how in the Sam Hill are we ‘sposed to moor this boat? I count two cleats, but we sure as heck can’t hitch these. And, shoot, do you even have a bulk berth?”

For once, Brad was speechless. He had absolutely no idea who that man was and he could hardly understand a word he said. Plus, there was that gargantuan vessel that was slowly moving towards the building. “Uhh,” he stuttered, “wait. Are you delivering… coal? To… uhh, us?”

“Well, yeah! Twenty-eight thousand tons of the good ol’ black gold!” The workman sarcastically furrowed his brow adding, “I mean, we did get the right address, har har. This is Æxecor? And this is Pier 53? And you are Brad, the fella who ordered it, right?”

It was that moment that Brad’s palm almost immediately made contact with his forehead. He realized that something must have really gone awry: instead of virtually trading 28,000 tons of coal, Brad had somehow ended up with 28,000 tons of real coal.

This story doesn't have a Wikipedia standard citation to back it up, but the article goes into sufficient detail to make it convincing. Most commodity trading is carefully set up to avoid the possibility of ever taking physical ownership. You can see why...

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...

Frist Psot!

Hello! I'm an student at Heriot Watt University, Edinburgh, Scotland, in the second year of a four year undergraduate degree in Actuarial Science (the teaching pages for current students, probably more interesting than the front-end fluff, is here). I intend to blog about anything of relevance to my studies and intended career - who knows, someone may even find it useful.

The somewhat cryptic title of this blog is a reference to Edmond Halley's 1693 paper, published by the Royal Society, briefly titled "An Estimate of the Degrees of the Mortality of Mankind, Drawn from Curious Tables of the Births and Funerals at the City of Breslaw; With an Attempt to Ascertain the Price of Annuities upon Lives". This short paper was one of the first to tease a structured approach to pricing life insurance and annuities from a set of data describing life expectancy for a large population. The paper can be read online and Halley's insight and ability to recognise his assumptions are well worth the battle with seventeenth century English.