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Risk, uncertainty and investment with
shoulder
Problems with any investment in structured products, like CDO tranches, in part
due to the fact that their real value is difficult to calculate. If the
standard contract - conventional bonds, stocks, options and so there is a huge
market and, thus, accurate information about how much they are worth, for
evaluating products perepakovki mortgage bonds needed nontrivial mathematical
models - structure, traded in the market, where a difficult, that I described
above. Note of Bad Credit Mortgage several times, share or poured into a variety ofrisks and so on.
In addition, some models not nablyudaemy parameters, that is the price of these
exotic products can not be uniquely identified on the basis of the prices of
liquid, tradable market instruments. Of course, many of these structures can
estimate, however, and some, but their complexity discourages buyers - with the
exception of the most technically trained, few investors can understand that in
the portfolio - toxic waste (in the words of Baffett) or something safe.
And of course, if someone is trying to sell a similar note at a time when
market sentiment prevails panic, a strong chance that he will get it for much
less than fair prices.
The second problem that perepakovka and further divided the resale
risk borrowers and creditors few additional links in the form of
investbankov exercising perepakovku and funds buying remormed risks. The
ultimate buyer is often not aware of what he is and the risks in their
assessment relies on ratings agencies give and competence lines. A recent far
less interested in a fair evaluation of the risks than the final purchase - not
because they risked their money.
Moral hazard of this type is always and everywhere, and it is very difficult to
resist. The problem of how to make the bank traders not to take excessive risks
from the same opera: for a person, risking other people's money, it is rational
to conclude the transaction, which, with a probability of 95% yield good
profits and with a probability of 5% Remortgage of bank or fund. If all pan, atrader - Star, if not likely, he will find another job (the guys from hedge
fund Amaranth, prosravshie 6 and a half billion, selling gas are already
employed - except for the most important. Recently, however, during work Fund
amassed so much that the worry about the money they do not need and should not
be charged with manipulating prices on the stock exchange brought against the
chief energotreydera, Brian Hunter, one might say that they are easily away.).
But at least the banks have internal divisions, monitor risk, while increasing
complexity of financial structures greatly reduces the effectiveness of
controls. Inside the same system controls not entirely serious.
Nevertheless, we should not think that the only meaning reforming and resale
risk that acquiesce irresponsible managers and bankers. Financial innovations
of recent years have allowed 20 years allocate risk between the much larger
number of investors, and an order of magnitude lower risk premium sellers. In
the book of John Hall "Options, Futures and other derivatives" is a
comparison of different spreads of corporate Mortgage (ie essentially awardrequire investors for the risk that the company might go bankrupt) and the
expected loss due to default (on the basis of recent statistics counted by
default). So, even now, despite cheaper Bad Credit, expected losses in timessmaller prizes - for vysokoreytinovyh bonds difference of more than 10 times.
The reason is obvious - nobody wants to carry a small risk of large losses for
small money. Blurring the risk of a large Pool investors in line with their preferences
enables qualitatively reduce this effect.
Overall, I still think that financial innovation is one of the main engines of
world economic growth, but the side effect is that the complex structure of the
current FY-up. encourage irresponsible behavior of the system.
However, although many loans were issued too cheap and not those who would
issue their expected losses of the magnitude of the same subprime'a (150-300
billion dollars), or in any other sector is not so great in the world economy,
to create serious difficulties.
I think the main reason for the crisis in the high leveridzhe system - too much
invested on borrowed funds. Popular financial instruments (options, or the same Credit-default swaps) allows players to assume risks with a minimum initial investment. In addition, very many Finnish. schemes involve essentially
borrowed funds investing in a risky asset (fall into this category so many
transactions - loans on bail bonds or shares, LBO - leveraged buyout, etc.).
To understand what the risk of such investments can be having considered CDS -
credit default swap.
CDS is an insurance policy in effect from corporations or default state: the
buyer pays the insurance fixed at the time of contract award seller (once every
six months - from the beginning of the contract and the end or before the
default), and the seller in the event of default undertakes random covered by
insurance to buy bonds by denomination (for example, suppose that Argentina
declared default and its bonds traded 30 cents on the dollar - CDS seller will
be forced to buy the bonds from the buyer of 100 cents per dollar).
In order to sell $ 100 CDS absolutely no need to reserve the full amount -
initial margin, especially in a case where the transaction is carried out with a
dealer or a major hedge fund, is very small - units per cent. During the life
of the contract parties to calculate the market value of its side and losing
money on the contract, deposits into the account an amount buys part of the
loss. The cost of contracts is determined primarily current spreads (ie Prize,
which requires sellers of insurance), as well as (to a lesser extent) interest
rates.
Imagine now that the hedge fund trader, John, sold a 5 year old at CDS
Argentina to 1000 dollars (that is, insurance against default Argentina) Pete
dealer for $ 20 a year (2%) and made a $ 50 initial margin. The next day
happened in the market and the insurance crisis of the Argentine default is
already traded on 40 Mortgages a year - that is, if the Vase concluded exactlythe same contract for the day later, he would have received $ 20 a year more.
George should to pay account of Peter the difference in the value of contracts. The
exact difference in the cost depends on the interest rates (which do not have
the problem), but I assume that it is 80 dollars.
But nezadacha have Vasey is only 60 bucks and 80 dovnesti he can not. Contract
forcibly closed. Three days later, the crisis ends, and then all of Argentina 5
years steadily increasing, no default is not. Postfactum it turns out that John
was right in its assessment of the prospects for the Argentine, but it is not
important - the fund Vasey is the world.
As Keynes said, "The market can stay irrational longer than you can stay
solvent." Managers famous hedge fund LTCM suffered major losses in
positions that have brought them to a lot of money if they were able to keep
them until the end. Thus, the level of volatility in which LTCM sold call
options have not been achieved neither before nor after, and yet the creators of
LTCM bankrupt.
Yes, and that there CDS s and options - strangely enough, left without pants
can be even with the positions that are guaranteed to bring money - if we can
not close them until the end.
If in the example with all Vasey merely closing one position, it would be
frightening. The trouble is that Vasya towards bankruptcy will close the entire
position and at any price. Moreover, strangely enough, and good liquidity
position will be closed first - just because closing them would not Vase at least
overpay for liquidity. If such Vas many, the problem is increasing as
snowballed, and everything falling markets, regardless of how they are
reasonably valued - with unpredictable consequences.
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