Papers, wiki, Option Blackboard, encyclopedia, and cards.
In FX cash markets, market makers provide liquidity to clients for a wide variety of currency pairs. Because of flow uncertainty and market volatility, they face inventory risk. To mitigate this risk, they typically skew their prices to attract or divert the flow and trade with their peers on the dealer-to-dealer segment of the market for hedging purposes. This paper offers a mathematical framework to FX dealers will…
This paper studies a modular cash-overlay rule for allocating between a fixed growth-defensive risky sleeve R and interest-bearing cash C. The risky sleeve is a static 50/50 combination of equal-weight growth/technology and defensive income/value ETF baskets; the target is future R-C return, with the cash leg earning the contemporaneous cash rate. Two independent filters are tested. The slow-tail filter maps continuo…
Prudent management of insurance investment portfolios requires competent asset pricing of fixed-income assets with time-to-event contingent cash flows, such as consumer asset-backed securities (ABS). Current market pricing techniques for these assets either rely on a non-random time-to-event model or may not utilize detailed asset-level data that is now available with most public transactions. We first establish a fr…
Haircutting non-cash collateral has become a key element of the post-crisis reform of the shadow banking system and OTC derivatives markets. This article develops a parametric haircut model by expanding haircut definitions beyond the traditional value-at-risk measure and employing a double-exponential jump-diffusion model for collateral market risk. Haircuts are solved to target credit risk measurements, including pr…
A new class of software systems is transforming investment analysis. Large language model agents assembled into collaborative team structures including analysts, researchers, and risk managers are increasingly deployed across financial markets. Yet current multi-agent frameworks share a critical limitation: they rely on the foundational assumption that companies can be valued through traditional cash flows. This para…
The scope for the accurate calculation of the Loss Given Default (LGD) parameter is comprehensive in terms of financial data. In this research, we aim to explore methods for improving the approximation of realized LGD in conditions of limited access to the cash-flow data. We enhance the performance of the method which relies on the differences between exposure values (delta outstanding approach) by employing machine …
A theoretical method is empirically illustrated in finding the best time to forsake a loan such that the overall credit loss is minimised. This is predicated by forecasting the future cash flows of a loan portfolio up to the contractual term, as a remedy to the inherent right-censoring of real-world `incomplete' portfolios. Two techniques, a simple probabilistic model as well as an eight-state Markov chain, are used …
In this article, we combine replication pricing with expectation pricing for derivative trades that are partially collateralized by cash. The derivatives are replicated by underlying assets and cash, using repurchasing agreement (repo) and margining, which incur funding costs. We derive a partial differential equation (PDE) for the derivatives price, obtain and decompose its solution into the risk-free value of the d…
This study examines active liquidity management by Indian open-ended equity mutual funds. We find that fund managers respond to inflows by increasing cash holdings, which are later used to purchase less-liquid stocks at favourable valuations. Funds with less liquid portfolios tend to maintain larger cash reserves to manage flows. Funds that make active liquidity choices yield statistically and economically significan…
The standard approach for compensating liquidity providers on many decentralized exchanges (DEX) for serving as counter-party to swaps is through charging a small percentage of fees. The expected payoff from the cash flow of this mode of market making has yet to be mathematically formulated in terms of volatility in the existing literature. We provide here a preliminary derivation of the payoff formula, by making the…
We present a simulation-and-regression method for solving dynamic portfolio allocation problems in the presence of general transaction costs, liquidity costs and market impacts. This method extends the classical least squares Monte Carlo algorithm to incorporate switching costs, corresponding to transaction costs and transient liquidity costs, as well as multiple endogenous state variables, namely the portfolio value…
Current post-trade clearing systems rely almost exclusively on cash or cash-like collateral, leaving vast reserves of short-term liquidity embedded in trade credit outside formal settlement infrastructures. A key barrier to integrating this liquidity is the near-universal dependence of clearing services on novation, which imposes institutional overhead that restricts accessibility and limits the range of obligations …
This book, which is in Spanish, provides detailed descriptions, including over 550 mathematical formulas, for over 150 trading strategies across a host of asset classes (and trading styles). This includes stocks, options, fixed income, futures, ETFs, indexes, commodities, foreign exchange, convertibles, structured assets, volatility (as an asset class), real estate, distressed assets, cash, cryptocurrencies, miscella…
A first attempt at obtaining market--directional information from a non--stationary solution of the dynamic equation "future price tends to the value that maximizes the number of shares traded per unit time" [1] is presented. We demonstrate that the concept of price impact is poorly applicable to market dynamics. Instead, we consider the execution flow $I=dV/dt$ operator with the "impact from the future" term providi…
With the recent advancements in machine learning (ML), artificial neural networks (ANN) are starting to play an increasingly important role in quantitative finance. Dynamic portfolio optimization is among many problems that have significantly benefited from a wider adoption of deep learning (DL). While most existing research has primarily focused on how DL can alleviate the curse of dimensionality when solving the Ha…
The financial industry has undergone a significant transition from the London Interbank Offered Rates (LIBORs) to Risk Free Rates (RFRs) such as, e.g., the Secured Overnight Financing Rate (SOFR) in the U.S. and the Cash Rate (AONIA) in Australia, as primary benchmark rates for borrowing costs. The paper examines the pricing and hedging method for financial products in a cross-currency framework with the special emph…
This article examines the economic effects of an increase in the duration of home loans on households, focusing on the French real estate market. It highlights trends in the property market, existing loan systems in other countries (such as bullet loans in Sweden and Japanese home loans), the current state of the property market in France, the potential effects of an increase in the amortization period of home loans,…
We study cash-flow forecasting for derivatives used in liquidity management and clarify its relation to risk-neutral valuation and replication. While it is well known that expectations under different measures (e.g., $\mathbb{P}$ vs. $\mathbb{Q}$) can yield different undiscounted cash-flows, further inconsistencies arise when payment times are stochastic. We show that using discounting sensitivities (funding-curve he…
A leveraged buyout is a purchase financed mostly with debt on the target’s cash flows — private equity’s standard carry trade on coverage.
Notional value is the face amount a derivative references — the exposure scale, not the cash outlay or the market value.
Put-call parity is the no-arbitrage link C − P = F − K (discounted) — a European call and put with the same K and T are one instrument plus cash.
Animal spirits is Keynes’s name for the non-model confidence that makes people invest or refuse to — the residual when rates and cash flows are not enough to explain the tape.
TINA — There Is No Alternative — was the 2010s slogan that zero rates left no choice but equities (or credit), compressing risk premia because cash paid nothing.
Window dressing is quarter- or year-end portfolio cosmetics: dump the losers, buy the winners or the cash, so the snapshot holdings look like the brochure.
An asset is a present economic resource controlled by an entity from which future cash or service is expected — the left-hand side of the balance sheet.
Capital expenditure is cash spent to buy or extend long-lived assets — the investing outflow that depreciation later shadows.
The cash-flow statement splits period cash into operating, investing, and financing — the bridge from accrual earnings to the bank account.
Depreciation is the allocation of a tangible asset’s cost over its useful life — a non-cash expense that still points at replacement capex.
A dividend is a cash (or stock) distribution of residual earnings to shareholders, declared by the board and not a contractual coupon.
Enterprise value is the market value of operating assets — equity plus net debt and other non-equity claims, minus non-operating cash.
Free cash flow is cash from operations minus the capex needed to keep and grow the business — cash that could leave the firm.
The income statement is the period’s revenues minus expenses — accrual earnings, not cash.
A market bubble is a price path driven more by narrative, leverage, and new buyers than by discounted cash flow — obvious after, argued during.
The quick ratio is cash, marketable securities, and receivables over current liabilities — current ratio without inventory.
A share buyback is the firm purchasing its own stock, shrinking share count and distributing cash without calling it a dividend.
A value stock screens cheap on book, earnings, or cash flow — a low multiple that can be a bargain or a melting ice cube.
Working capital is current operating assets minus current operating liabilities — the cash tied in the operating cycle.
The February–March 2020 COVID crash was a dash-for-cash that hit even Treasuries, ended by an unprecedented joint monetary-fiscal backstop — a health shock that became a market-function crisis.
Bernie Madoff’s 2008 confession revealed a decades-long Ponzi whose redemption run arrived when the GFC made people ask for cash — fraud that needed a crash to be discovered, not a crash caused by the fraud.
CDS Basis Trade — Arbitrage between cash bonds and CDS contracts revealing funding and counterparty frictions.
Macaulay duration is the present-value-weighted average time to receive a bond’s cash flows — duration in years, before the modified-duration hedge ratio.
MBS Prepayment Speed — Refinancing and turnover driven cash-flow uncertainty in agency mortgages.
Yield to maturity is the constant discount rate that sets the bond’s dirty price equal to its remaining cash flows if held to maturity and coupons are reinvested at that same rate.
A zero-coupon bond pays no coupon and one cash flow at maturity — duration equals maturity, and the whole return is pull-to-par plus yield change.
Cash Market Liquidity Premium — Extra yield demanded for holding less liquid cash instruments.
Margin is collateral posted against a leveraged position — the cash or securities that keep the broker or CCP whole.
Money market fund assets track the amount of cash parked in short-term low-risk vehicles, providing insight into liquidity preference, deposit substitution, and defensive positioning.
Reverse Repo Facility usage shows how much cash is being parked at the Federal Reserve overnight and helps track reserve distribution, collateral demand, and system liquidity conditions.
Treasury General Account tracks the U.S. Treasury’s cash balance at the Federal Reserve and influences system liquidity by absorbing or releasing reserves.
Asset allocation is the split of a portfolio across stocks, bonds, cash, and alternatives — the decision that usually dwarfs manager selection.
Dollar-cost averaging is investing a fixed cash amount on a schedule — you buy more shares when price is down, fewer when up.
Short high-accrual (low cash-earnings-quality) firms and long low-accrual firms — Sloan’s earnings-quality sort.
Hold each broad asset class only when it is in an uptrend (typically above a long moving average); otherwise sit in cash or bills.
Combine relative momentum (which asset) with absolute momentum (whether to be in cash) — Antonacci’s two-filter TAA.
Short high-accrual (low cash-earnings-quality) firms and long low-accrual firms — Sloan’s earnings-quality sort.
Animal spirits is Keynes’s name for the non-model confidence that makes people invest or refuse to — the residual when rates and cash flows are not enough to explain the tape.
An asset is a present economic resource controlled by an entity from which future cash or service is expected — the left-hand side of the balance sheet.
Asset allocation is the split of a portfolio across stocks, bonds, cash, and alternatives — the decision that usually dwarfs manager selection.
Hold each broad asset class only when it is in an uptrend (typically above a long moving average); otherwise sit in cash or bills.
Capital expenditure is cash spent to buy or extend long-lived assets — the investing outflow that depreciation later shadows.
The cash-flow statement splits period cash into operating, investing, and financing — the bridge from accrual earnings to the bank account.
Cash Market Liquidity Premium — Extra yield demanded for holding less liquid cash instruments.
CDS Basis Trade — Arbitrage between cash bonds and CDS contracts revealing funding and counterparty frictions.
The February–March 2020 COVID crash was a dash-for-cash that hit even Treasuries, ended by an unprecedented joint monetary-fiscal backstop — a health shock that became a market-function crisis.
Depreciation is the allocation of a tangible asset’s cost over its useful life — a non-cash expense that still points at replacement capex.
A dividend is a cash (or stock) distribution of residual earnings to shareholders, declared by the board and not a contractual coupon.
Dollar-cost averaging is investing a fixed cash amount on a schedule — you buy more shares when price is down, fewer when up.
Combine relative momentum (which asset) with absolute momentum (whether to be in cash) — Antonacci’s two-filter TAA.
Enterprise value is the market value of operating assets — equity plus net debt and other non-equity claims, minus non-operating cash.
Free cash flow is cash from operations minus the capex needed to keep and grow the business — cash that could leave the firm.
The income statement is the period’s revenues minus expenses — accrual earnings, not cash.
A leveraged buyout is a purchase financed mostly with debt on the target’s cash flows — private equity’s standard carry trade on coverage.
Macaulay duration is the present-value-weighted average time to receive a bond’s cash flows — duration in years, before the modified-duration hedge ratio.
Bernie Madoff’s 2008 confession revealed a decades-long Ponzi whose redemption run arrived when the GFC made people ask for cash — fraud that needed a crash to be discovered, not a crash caused by the fraud.
Margin is collateral posted against a leveraged position — the cash or securities that keep the broker or CCP whole.
A market bubble is a price path driven more by narrative, leverage, and new buyers than by discounted cash flow — obvious after, argued during.
MBS Prepayment Speed — Refinancing and turnover driven cash-flow uncertainty in agency mortgages.
Money market fund assets track the amount of cash parked in short-term low-risk vehicles, providing insight into liquidity preference, deposit substitution, and defensive positioning.