New PDF release: A Demon of Our Own Design: Markets, Hedge Funds, and the

By Richard Bookstaber

ISBN-10: 0470393750

ISBN-13: 9780470393758

Inside markets, innovation, and risk
Why do markets hold crashing and why are monetary crises more than ever sooner than? because the probability supervisor to a couple of the prime companies on Wall Street–from Morgan Stanley to Salomon and Citigroup–and a member of a few of the world’s greatest hedge money, from Moore Capital to Ziff Brothers and FrontPoint companions, Rick Bookstaber has visible the ghost contained in the laptop and vividly indicates us an international that's even riskier than we expect. The very issues performed to make markets more secure, have, in reality, created an international that's way more harmful. From the 1987 crash to Citigroup remaining the Salomon Arb unit, from fabulous losses at UBS to the death of long term Capital administration, Bookstaber offers readers a entrance row seat to the administration judgements made via probably the most strong monetary figures on the planet that ended in disaster, and describes the effect of his personal actions on markets and marketplace crashes. a lot of the innovation of the final 30 years has wreaked havoc at the markets and price trillions of greenbacks. A Demon of Our personal Design tells the tale of man’s try and deal with industry danger and what it has wrought. within the strategy of exhibiting what we now have performed, Bookstaber shines a mild on what the longer term holds for an international the place capital and tool have moved from Wall road associations to elite and hugely leveraged hedge cash.

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Additional resources for A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation

Sample text

The problem was, as it almost always is, that during the crisis there was not enough time to worry about the costs, and those who were the most knowledgeable at assessing the costs, like me, were also the ones in the middle of the losses, our judgments discredited. In any case, the options Palmedo had bought a few weeks earlier for pennies had now grown in value to $20 to $30 each. When the dust settled at the end of the week, Palmedo, at age 27, made his farewells and retired to Sun Valley, Idaho, with his family and $7 million in profits.

The stripping and reconstitution of Treasuries are noncash exchanges of essentially economically equivalent securities that are easily processed, but for accounting purposes at Kidder a transaction that reconstituted a Treasury was entered as a sale of the STRIPS and the purchase of the bond. As with a real trade, Jett could enter a trade date and a settlement date for the exchange. As there was no real purchase or sale and no price or date set by counterparties, these profit and loss (P&L) figures were purely mathematical constructs that would finally converge to equal one another by the time the settlement date arrived.

On a so-called fair value basis—that is, priced based on a Black-Scholes methodology with reasonable assumptions for the postcrash volatility—we ended up overpaying for these options by $3 million. The problem was, as it almost always is, that during the crisis there was not enough time to worry about the costs, and those who were the most knowledgeable at assessing the costs, like me, were also the ones in the middle of the losses, our judgments discredited. In any case, the options Palmedo had bought a few weeks earlier for pennies had now grown in value to $20 to $30 each.

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A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber


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