Tail event: Difference between revisions
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'''Work life''': An unwanted outcome you didn’t expect, to which you weren’t paying attention, and, therefore, for which you don’t think you should be blamed. | '''Work life''': An unwanted outcome you didn’t expect, to which you weren’t paying attention, and, therefore, for which you don’t think you should be blamed. | ||
</Ol> | </Ol> | ||
Now here is the thing. When we calculate probabilities — when we roll dice — we are in situations of known risk. That average means something. It is not just that on some some dice the probability is more like ⅐, on others now like ⅕, but on average the dice work out at all about ⅙. It must be true of every individual die.. | |||
Now here is the thing. When we calculate probabilities — when we roll dice — we are situations of known risk. That average means something. It is not just that on some some dice the probability is more like ⅐, on others now like ⅕, but on average the dice work out at all about ⅙. It must be true of every individual die.. | |||
Rolling dice to ''determine'' an outcome is is quite | Rolling dice to ''determine'' an outcome is is quite | ||
different. We do not build a statistical model that predicts a ⅙ probability: we build the dice to yield the that outcome. The dice are what [[Nancy Cartwright]] calls a “[[nomological machine]]”: a carefully designed, constrained, hermetically-sealed device, designed to generate a specific theoretical outcome. If over time the dice don’t yield a ⅙ outcome we don't chuck out our statistical model: we chuck out the ''dice''. | different. We do not build a statistical model that predicts a ⅙ probability: we build the dice to yield the that outcome. The dice are what [[Nancy Cartwright]] calls a “[[nomological machine]]”: a carefully designed, constrained, hermetically-sealed device, designed to generate a specific theoretical outcome. If over time the dice don’t yield a ⅙ outcome we don't chuck out our statistical model: we chuck out the ''dice''. | ||
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=====Externalities===== | =====Externalities===== | ||
There are a category of events which make it impossible even for a solvent counterparty to perform. Change in law, for example — it is not beyond possibility that certain kinds of swaps might be restricted or outlawed altogether<ref>Not long ago the European Union proposed restricting the carbon market to “end users” to | There are a category of events which make it impossible even for a solvent counterparty to perform. Change in law, for example — it is not beyond possibility that certain kinds of swaps might be restricted or outlawed altogether<ref>Not long ago the European Union proposed restricting the carbon market to “end users” to discourage financial speculation, for example. This would have rendered certain forward contracts in {{euaprov|Allowances}} involving delivery to non-users illegal.</ref> or Tax events that make the transaction uneconomic as originally envisaged. | ||
Secondary events of this kind — things that limit a | Secondary events of this kind — things that limit a dealer’s ability to hedge, or materially increase its costs of doing so, tend not to be Termination Events partly this reflects a fact not often stated, but nonetheless true: there is a price at which the parties will agree to terminate any swap. Just because a party doesn't have an economic option to terminate the trade doesn't mean it can't terminate the trade. It always has an “at market” option. In liquid markets during times of fair weather this is a source of great comfort; in illiquid markets and at times of stress, less so. A dealer will say, “I will always show you a price. You just might not mind the price, is all.” | ||
Customers have less incentive to break trades if it means realising | Customers have less incentive to break trades if it means realising |