An Introduction to Quantitative Finance

27 June 2014Book Reviewsderivatives, quantitative analysis, Stephen Blyth, textbookNick Dunbar

Stephen Blyth Oxford University Press, 175pp If one were to write a creation myth for modern finance, the wave of mathematicians and physicists who left academia for Wall Street from the mid-1980s onwards would be at the heart of it. As Stephen Blyth recounts in the preface to his book, these quant pioneers knew virtually…

Quantitative Easing, Interest-Rate Derivatives: A Toxic Combination

17 May 2013Banks, Commentderivatives, interest rate risk, litigation, municipal finance, RBSNick Dunbar

Quantitative easing has resulted in collateral damage. Municipalities, public-owned entities and small companies have been damaged as a result of derivatives contracts that locked them into paying high interest rates before the full effect of QE became apparent. Investment banks that sold such contracts have been accused of mis-selling them, lawsuits are winding their way…

A week in banking: what have we learned?

2 July 2012Articles, Banksbanking, Barclays, derivatives, interest rate benchmarks, JP Morgan, RBS, regulationNick Dunbar

In the last week, we saw major developments in two big scandals - Libor rigging and swap mis-selling in the UK - and the end of the second quarter which is likely to draw a line under a third big scandal - the 'London Whale' losses at JP Morgan. I have some thoughts about these…

Nature Bites Back In New, Messy World of Derivatives

4 May 2012Bankscredit valuation adjustment, derivatives, physics, risk modelsNick Dunbar

Twelve years ago, in 'Inventing Money' I explained the principles of option pricing to a general audience. Although the maths looked complicated, the financial market that Fischer Black, Robert Merton and Myron Scholes modeled in the early 1970s was really quite simple. You bought and sold derivatives, such as options or forward contracts, and traded…

From the UK to Italy, an interest rate derivatives headache

19 March 2012Economics, Insurancebanking, behavioural economics, derivatives, interest rate risk, Italy, Morgan StanleyNick Dunbar

My story (with Elisa Martinuzzi) about Italy admitting it paid Morgan Stanley billions to unwind derivatives, and the UK newspaper coverage reporting on the alleged mis-selling of derivatives by banks like Barclays to small British companies, have something in common. Small British companies and Italy share an environment where both of them are finding it…

Goldman and Greece revisited

12 March 2012Articles, Banksderivatives, eurozone, Goldman Sachs, Greece, sovereign debtNick Dunbar

Most journalism is a hit-and-run affair. We talk to sources, check facts, agree quotes, wrestle with editors and lawyers; the excitement builds up to the point the story appears...and then we drop the whole thing and move on. When I published my story on Goldman Sachs and Greece in July 2003, the almost-universal reaction was:…

Goldman swap shows Greece was Europe’s subprime nation

24 January 2012Articles, Banksderivatives, eurozone, Goldman Sachs, sovereign debtNick Dunbar

All the talk about Greece trying to persuade its creditors to swap some once-valuable bonds for new ones worth much less reminds me of another Greek swap that I wrote about in 2003. That deal with Goldman Sachs, designed to conceal part of the country's ballooning debt-to-GDP ratio in order to conform to the rules…

From hedge fund manager invective to EU veto

13 December 2011Articlesderivatives, eurozone, hedge fundsNick Dunbar

Hearing David Cameron's justification for his rejection of last week's proposed EU treaty changes on the basis that he was defending the City of London as a financial centre, I was reminded of a talk given back in April by Michael Hintze, the head of $11 billion hedge fund CQS and a major Conservative party…

We Need to Talk About Sovereign Credit Default Swaps

31 October 2011Articlesderivatives, eurozone, sovereign debtNick Dunbar

You've seen the movie. Some bankers become the proud parents of a new-born financial instrument. At first, little CDS seems like everything a parent could want "“ a hedge against the downsides of middle-class existence. But as CDS gets older, disturbing signs appear. CDS is too knowing, too negative "“ focused on the financial death…

The Eurozone, political dreams and financial engineering

24 October 2011Articlesderivatives, eurozone, sovereign debtNick Dunbar

How do you turn uncertainty into safety? The euro was supposed to replace the uncertainty of doing business between multiple countries with a single economic entity, so safe that its members could borrow money close to the price paid by the strongest, Germany. One good thing about financial markets is that they put a price…