Change Financial Theory and You Change Financial Practice
Changes to modern finance theory (MFT) are afoot and Seven Pillars Institute wants to provide thinking space for the change.
For over fifty years MFT has been dominant. The theory instructs us that free markets are efficient, good, and better if left alone. Underpinning the theory are the three, now questionable, assumptions: economic agents are rational, self-interested, and profit-maximizers. These assumptions have come to pervade our world-view.
We have become what we were assumed to be.
There is a hole in MFT – the theory does ...
A transaction where two parties exchange cash flows in different currencies. Usually the cash flows are fixed to a notional amount, which can also be exchanged. The parties will fix an exchange rate or peg each payment to the current exchange rate. At the end of the swap period, the two parties often exchange the cash amounts back. Organizations whose cash flow and expenditures do not occur in the same currency especially benefit from such trades, which hedge against turbulence in exchange rates.
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A transaction where two parties exchange cash flows with different stipulations attached to them. Two of the most common types are cross-currency swaps and interest rate swaps. Share and Enjoy
The use of information from many sources to construct a portfolio strategy. It is also used as a defense in insider trading cases. Defendants can argue that they traded not on the basis of nonpublic information, but on a broad base of carefully collected public information. Share and Enjoy
The trading of a security while in possession of nonpublic information material to that security. It is illegal in the United States. Share and Enjoy
Also known as volatility trading, traders attempt to construct delta (and gamma) neutral positions. For instance, one could first create a straddle of call and put options that have D = 0. If the market moves sufficiently in either direction, then the value of the position will become positive, as one can exercise one of the options. There are many varieties of Gamma trading. Share and Enjoy
The first derivative of the option price regarding time. This quantity measures the time decay of an option. Share and Enjoy
The first derivative of the option price as regards the volatility of the underlying stock. Share and Enjoy
The first derivative of delta in regards to the price of the underlying security, and therefore the second derivative of the option in regards to the price of the underlying. All long positions have positive gamma (because delta increases as the price increases) and short positions have negative gamma. Share and Enjoy
The first derivative of an option price in regard to the price of the underlying security. It therefore measures how quickly the price of an option changes depending on the price of the underlying stock. Delta always takes a value between 0 and 1 for long call and short put options, and -1 and 0 for short call and long put options. Volatility traders often construct delta neutral positions so that their position neither gains nor loses money (given low volatility). Note that the delta of any position will change ...