Financial information

Weaknesses of VaR Approaches

admin — Mon, 29 Mar 2010 09:58:31 +0000

It is worth concluding on the subject of VaR by reiterating that it is not a panacea and its results must be treated with caution. Ninety-nine percent confidence levels sound very impressive but for a one-day holding period mean that in one day in 100 we should expect greater losses than specified:

Most models assume normal distributions and no serial correlation and this is not always the case.
Correlation coefficients are calculated on the basis of historic data and there is no guarantee that such relationships will persist.
Standard holding periods may be insufficient to liquidate or hedge all positions.
These three concerns are all most likely to exhibit themselves at times of extremes when the level of potential losses is likely to be highest.
The use of VaR techniques does not eliminate the risk that losses will be greater than that expressed at the stated confidence level.
VaR models do not usually capture all material higher order price or realization risk factors.
Most VaR models do not capture intra-day positions and the actual risk profile may be much higher than that suggested by VAR calculated on the basis of open positions at the end of each day.
VaR is a reporting and analytical tool and most banks with active trading books overlay standard VaR approaches with sensitivity analyses and stress testing. None of these remove the need for banks to put other controls in place. Only offices or branches with sufficient derivatives expertise and adequate risk control systems should be allowed to deal in derivatives, for example. Management has to put in place control systems to set and enforce limits on exposures across a range of different dimensions including counterparty, location, product, currency, country, risk type, risk factor, position limits and VAR limits.

Transporting your Shopping

admin — Wed, 27 May 2009 15:15:54 +0000

First a few words about transporting your shopping. If you have a car, then obviously you will have more alternatives, being able to travel further and carry home more on each trip. If you’re dependent on public transport, then you’re limited to buying what you can carry. You will also find yourself making more trips to the shops, with buying groceries becoming an almost weekly exercise. You may spend more time shopping, but you will not usually buy things you don’t need either. If you have to carry your shopping by hand, it may be a good idea to take your daypack with you to the shops and put heavy or soft things in it. It is easier to carry that on your back than in shopping bags.
What some people like to do is to do a large grocery shopping trip and then use a cab to take them and their shopping home in relative comfort. Most supermarkets have payphones or courtesy phones to cab companies in-store. The drivers often help to carry the shopping to your door. This is less hassle, saves you time, is more convenient (than waiting for a bus in the rain) and almost fun. The fare depends on how far it is to your home from the shop, how long it takes given the traffic and the company you use. It should work out to about £4 for a distance of less than a mile if using a mini-cab. This same logic applies to just about anything you buy, especially in London. Buying something small enough to fit in a cab and taking it home is often quicker and cheaper than having it delivered to your home at a later stage.

The Wedge Formation

admin — Tue, 12 May 2009 10:59:22 +0000

Rising wedge formations are created when the following conditions take place:
The stock market (or other markets or individual investments) rises in price. Trend lines drawn that reflect support lines rise at a constant angle.
Trend lines that reflect resistance, where prices turn down, can be drawn at a constant angle as well, but the angle of rise is less than the angle of the support trendline. The result is a converging channel.
Trading volume decreases as the formation develops. This is an important condition because declining volume during uptrends suggests a reduction in buying pressures.
The pattern tells us that although buying pressures are remaining fairly constant, sellers are acting with increasing urgency.
What is actually taking place during the formation of the wedge? Buyers, perhaps to some extent influenced by the rising trendline itself, are buying with consistency and the angle of the supporting trendline remains constant. However, although buying pressures are holding firm, selling pressures are increasing; the descending resistance trendline indicates that selling is coming in earlier in comparison to new buying levels. Sellers are settling for diminishing amounts of profit relative to new buying levels; selling becoming more urgent with each minor market cycle. With net demand and supply relationships weakening, buying and selling pressures converge. The likely resolution is a downside break from the formation.
Please respect the phrase “likely resolution.” Rising wedge formations, which carry bearish implications, usually provide accurate notice that rising price patterns soon will reverse to the downside. Sometimes, however, patterns resolve positively. Positive outcomes are most likely when wedges develop in an area of heavy resistance, a zone in which there has been heavy trading in the past. From time to time, the overhead supply of stocks that creates resistance simply slows but does not permanently impede gains in the market. When the resistance is overcome, stocks burst upward as investors become aware that a bullish breakout is taking place.

The Concept of Synergy

admin — Sat, 09 May 2009 10:59:06 +0000

Synergy is defined as the mutually cooperating action of separate substances that together produce an effect greater than that of any component taken alone. The combined effect is greater than the sum of the two pars taken separately.
In spite of all the research that takes place regarding the movement of stock prices, in spite of all the data available to investors, and in spite of all the charts produced by all the computers traders use, the simple fact remains that there are no “perfect” stock market indicator-d probably not even any near-perfect indicators. Every so often, some indicator becomes popular, usually after only two or three successful predictions. For example, based on a just a few major market cycles that took place after World War II, it was assumed that bear markets “must” take place when dividend yields for stocks decline to below 3% or when price/eamings ratio: rise to 21 or 22. These parameters, which indicated the bear markets of 1966, 1969 and 1970, for example, were again approached during the mid-1990s. However, the time around, the Standard & Poor’s 500 Index did not see its bull market end until the year 2000, by which time its price/eamings ratio had risen to 46 and its dividens yield had declined to just a touch above 1%.
In any event, even if a perfect indicator were discovered, sooner or later its com ponents would become known, with its effectiveness dissipating as investors begar to follow it en masse. (Where would the sellers come from if every investor became a simultaneous buyer?) The simple fact is that, at best, market forecasting is a matter not of perfection, but of probabilities. A realistic set of goals is to be right more often than wrong, to develop the emotional willingness and technical ability to recognize quickly when we are wrong and to take appropriate action, even if that means accepting a stock market loss. (Generally, the best losses in the stock marke are the losses quickly taken.)
Successful investors are not in the stock market at all times. They assess the probabilities of success as carefully as possible and take positions only when the odds an in their favor. One way to improve the odds is to employ the concept of synergy: The likelihood of a successful trade improves considerably if there are multiple indica tions in favor of the stock market action you are contemplating.
How do synergistic indicators compound the favorable probabilities? Well suppose that there are a number of uncorrelated stock market indicators, each of which tends to be correct 60% of the time and incorrect 40% of the time. That probably about as good a batting average as you are likely to see in a stock mar ket timing indicator. (The indicators should be dissimilar to each other in their construction and concept. Otherwise, they might, in reality, simply be the Sam indicator in disguise.)
You normally trade on one indicator that produces a buy signal, which opt to follow. The probabilities of a successful trade are GOo/-actually, pretty decent for stock market trade, particularly if you have an effective exit strategy.
Instead, you change your strategy and begin to maintain two unrelated market indicators, each of which has a 60% success rate. You initiate a plan by which you will take positions only when both indicators produce confirming signals to support your contemplated market action. What effect is this likely to have on the odds of successful trade? The probability of a profitable trade rises from 60% to 84%. If you maintained three indicators, each of which has a 60% accuracy rate, takin positions only when all three suggest similar action, the odds of a successful trad rise even more, this time to 93.6%.
It follows, then, that you should make serious attempts to confirm buy signals with multiple indicators whenever possible and to look for confirming as well as non confirming indications before taking positions. I shall be emphasizing this concept as we move along.

ALAE Methods

admin — Sun, 29 Mar 2009 13:31:27 +0000

ALAE Methods. Methods are similar to the paid loss development method, the reported loss development method, the Bornhuetter-Ferguson paid loss method, the Bornhuetter-Ferguson reported loss method, the reported count and average value method and the reported losses with de-trended average open claim. Average paid ALAE per closed claim was not used because ALAE often involve periodic payments and payments may not be related to the claims that are closed. An additional method, the reported ALAE as a percent of reported loss method, is similar to the reported count and average value method.

Buying Real Estate with Installment Contracts

admin — Sat, 28 Mar 2009 14:14:06 +0000

A wonderful, but not widely known alternative method to purchasing real estate is through the use of an installment contract.
Sometimes called a “land contract” or “warranty agreement,” the installment contract is another creative approach to real estate investing, especially for prospective buyers who are currently unable to qualify for a satisfactory mortgage loan.
As its name implies, the installment contract purchases real estate in installments. It works much like a “lay- away” plan to buying property with the seller retaining ownership of the property until all payment requirements have been satisfied. Unlike the store “lay-away” plan, however, the installment contract approach allows the buyer to occupy and use the property during the contract period.
The main advantage that installment contracts offer is the opportunity to buy the property with a refinance loan, rather than a purchase loan. The benefit of this advantage is that a refinance can eliminate the need for cash to cover the down payment and closing costs.

Reported losses with de-trended average open claim method

admin — Fri, 20 Mar 2009 13:22:41 +0000

Reported losses with de-trended average open claim method. This method is also known as the Berquist-Sherman method. Average case basis reserves at prior levels of maturity are re-stated using an assumed trend rate. The case basis report losses are then adjusted to reflect a more stable average case reserve. Adjusted reported losses equal paid losses plus the number of open claims times the adjusted average open claim value. The trend rate was selected judgmentally based on a review of average paid claim severities and other indications. Methods similar to the reported loss development method, the Bornhuetter-Ferguson reported loss method, and the reported count and average value method are applied to adjusted reported losses. This method adjusts for case reserving methods that may have changed over time.

Reported loss development method

admin — Mon, 16 Mar 2009 13:21:10 +0000

Reported loss development method. Case basis reported losses are projected to ultimate values based on historical development patterns. Historical loss development factors are reviewed and forecasted factors are selected. The selected factors are used to project ultimate paid losses. This method is most reliable when the insurers have stable case reserving practices. The case reserving practices of the participating companies combined are generally stable but at least one major insurer does not have stable case reserving practices.

Paid loss development method

admin — Mon, 09 Mar 2009 13:19:39 +0000

Paid loss development method. Paid losses are projected to ultimate values based on historical development patterns. Historical loss development factors are reviewed and forecasted factors are selected. The selected factors are used to project ultimate paid losses. This method is most reliable when payment patterns are stable over time. The payment patterns for medical malpractice are not generally very stable, particularly for early levels of development.

Exercise purchase with refinance loan after 12 months

admin — Thu, 26 Feb 2009 14:12:57 +0000

Perhaps the most important advantage that the purchase option offers is that the option can be exercised using a refinance loan. Most people don’t realize this, and many who do fail to grasp its implications: refinance loans don’t require down payments!
As long as the property has sufficient equity, a refinance loan avoids the need for down payment. As noted above, however, to use this tactic, the purchase option must be at least 12 months old. Lenders who accept this approach will also place the burden of proof on the investor. It is up to the investor to prove that the purchase option is at least one year old. Investors interested in this approach should follow these tips:
1. Notarize the option contract. The notary public will certify the date; the notary will also record in their files the date that he or she notarized your contract.
2. Record the notarized contract. The option is a legal instrument that can be recorded with the county recorder of deeds. In addition to documenting your contract date, recording the contract notifies other potential sellers that you already have the property under contract, at least through the duration of the option term.
3. Keep option payment check. Obviously, you shouldn’t pay with cash. Most people use a personal check; once this check cycles through your account and is returned to you by the bank, keep it as further proof that you made an option payment. You may also want to consider using a money order or cashier’s check; in such cases, make sure that you keep your check receipt.