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But this is a really important client: Difference between revisions
But this is a really important client (view source)
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Precisely when those big risks come about, its counterparties will be the other side, making ''big'' rewards which, if that juicy big goose has just nose-dived into a hole in the ground, they will not be able to recover. This might leave them with a ''big'' hedging problem. | Precisely when those big risks come about, its counterparties will be the other side, making ''big'' rewards which, if that juicy big goose has just nose-dived into a hole in the ground, they will not be able to recover. This might leave them with a ''big'' hedging problem. | ||
There is no economy of scale when it comes to risk management, folks. It is a ''dis''economy of scale. The risk is [[convex]]. In a bad way. It might be a risk you were prepared to take, in small size, among a diverse and de-correlated group of small clients — and even then it is amazing how those correlations suddenly invert — but taking it in ''big'' size, against a ''single'' player —is that not the lesson of [[LTCM]], [[Amaranth]] and [[Enron]]? | There is no economy of scale when it comes to risk management, folks. It is a ''dis''economy of scale. The risk is [[convex]]. In a bad way. It might be a risk you were prepared to take, in small size, among a diverse and de-correlated group of small clients — and even then it is amazing how those correlations suddenly invert — but taking it in ''big'' size, against a ''single'' player —is that not the lesson of [[LTCM]], [[Amaranth]]{{strike| and|,}} [[Enron]] {{insert|and [[Archegos]]}}? | ||
Yet, the world-weary old codger sits down on a rock and sets down his staff: for this, my friends, is the immutable way of the universe. We may not like it, but we cannot change it. It leads to two conclusions, neither enormously becoming for your risk management teams. ''Either'' we ''still'' haven’t learned the lessons of [[Enron]], [[Amaranth]] and [[LTCM]], and rely blindly on [[Black-Scholes]] models that, as we now know, only work until the point where you really wish they were working — ''or'' the sacred protections we carve into those granite [[master trading agreement]]s carry a lot less real value than we generally care to admit. | Yet, the world-weary old codger sits down on a rock and sets down his staff: for this, my friends, is the immutable way of the universe. We may not like it, but we cannot change it. It leads to two conclusions, neither enormously becoming for your risk management teams. ''Either'' we ''still'' haven’t learned the lessons of [[Enron]], [[Amaranth]] and [[LTCM]], and rely blindly on [[Black-Scholes]] models that, as we now know, only work until the point where you really wish they were working — ''or'' the sacred protections we carve into those granite [[master trading agreement]]s carry a lot less real value than we generally care to admit. | ||