Learning Curve

Prior to the credit crisis, interest rate modelling was generally well understood. The underlying fundamental principles had existed for over 30 years with steady evolutions in areas that were most relevant to options and complex products.

In September 2009, the leaders of the G-20 stated that “all standardized OTC derivatives contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest.”

Before The Dodd-Frank Wall Street Reform and Consumer Protection Act, loan credit default swaps and loan total return swaps were outside the ambit of each of the Commodity Exchange Act, the Securities Act of 1933 and the Securities Exchange Act of 1934.

The over-the-counter derivatives market in Brazil has similar characteristics to the international market and the exchange-traded market. Regulated by the Central Bank of Brazil since 1994, the market has been in continuous development in the past few years and gaining sophistication.

A marketplace for trading of OTC derivatives is a very peculiar and fascinating place these days. On the one side we have more or less vertically layered market structures where liquidity is provided by a limited number of market makers and there is a strong profit and loss element in the price spread. On the other side there are more flattened market structures where all participants equally contribute liquidity when providing liquidity and take it out when aggressing other dealers’ prices.

Mr. Justice Hamblen of the Commercial Court in London recently handed down a judgment in which he dismissed all claims that had been brought against Barclays Bank. This Learning Curve gives a brief summary of the transactions underlying the case, the key findings by the judge, and some of the implications of the judgment.

The 1973 paper by Black and Scholes on pricing financial derivatives led to an explosion in the volumes of traded options. It demonstrated that after hedging all dependence on the underlying asset, the main driver on the value of the option becomes its dependence on volatility. Today, volatility represents the price of the option and is traded increasingly in pure form that does not depend on the actual move of the underlying.

Vanna is a greatly under-used, higher-order option tool. Apart from being useful in its own right by virtue of its plain definition, it is also a valuable indicator that reveals information about the structure of an option portfolio, as well as the dynamic properties of a portfolio with respect to time. It remains, however, conspicuous by its absence from many traders' and risk managers' typical risk profile matrices. This Learning Curve aims to explain the advantages of vanna and combining it with vomma, another higher-order option.

This Learning Curve seeks to describe some of the unique features of London Metal Exchange options to a practitioner familiar with options, but new to the LME options market.

The bankruptcies of several large institutions have highlighted a potential ambiguity within the International Swaps and Derivatives Association’s Master Agreement relating to Section 2(a)(iii). Specifically, several courts have addressed the issue of whether a party can exercise its rights under Section 2(a)(iii) to withhold payment indefinitely following the bankruptcy of its counterparty without declaring an Early Termination Date. This article compares the recent rulings and offers some negotiating options for counterparties to consider.

Treasury Secretary Timothy Geithner is expected to decide as early as this week whether fx swaps should be regulated as strictly as other derivatives.

Chicago Board Options Exchange will begin trading options and futures on its CBOE Gold ETF Volatility Index beginning March 25.