Hiba Chaudhry
Personal Finance
12/15/2015
Article 5
This class is mostly based on financial decisions, and the next article exemplifies a major financial
decision that was made by well know founders of Facebook. Mark and his wife Chan decided to slowly
gi
We consider first informed financiers who know the fundamental values v1 and, hence,
price divergence from fundamentals 1 . Since 2 = 0, they set margins on long positions at
t = 1 according to
= P r(pj2 > mj+
1 | F1 )
= P r(v2j + j1 > mj+
| F1 )
!1
j
j+
At time 0, customer k = 0 arrives in the market and maximizes E0 [1 (W1k , p1 , v1 )].
At time t = 1, if the market is perfectly liquid so that pj1 = v1j for all j, then the
speculator is indifferent among all possible positions x1 . If some securities ha
(2005) document empirical evidence consistent with flight to liquidity and the pricing of this
liquidity risk.
Market-making firms are often net long in the market. For instance, Ibbotson (1999)
reports that security brokers and speculators have median ma
stabilizing. This happens when financiers know that prices diverge due to temporary market illiquidity and know that liquidity will be improved shortly as complementary customers
arrive. This is because a current price divergence from fundamentals provide
Trading requires capital. When a trader e.g. a dealer, hedge fund, or investment
bank buys a security, he can use the security as collateral and borrow against it, but he
cannot borrow the entire price. The difference between the securitys price and colla
most likely due to a change in fundamentals, and hence the margin setting is similar to the
case of a = 0. This is why speculators demand curve for prices above 100 almost perfectly
overlays the relevant part of the hyperbolic star in Figure 2. However, f
where all jt are i.i.d. across time and assets with a standard normal cumulative distribution
function with zero mean and unit variance, and the volatility tj has dynamics
j
t+1
= j + j |vtj |,
(2)
where j , j 0. A positive j implies that shocks to fundam
and studies what happens when trading losses cause agents to hit this constraint, whereas
we study how market conditions lead to changes in the margin requirement itself e.g., an
increase from $5,000 to $15,000 per futures contract as happened in October
is a non-negative number close to zero, e.g., 1%):
= P r(pjt+1 > mj+
t | Ft )
(6)
= P r( pjt+1 > mj
t | Ft ) .
(7)
Equation (6) means that the margin on a long position m+ is set such that price drops larger
than the margin only happen with a small pro
parameter is larger than and the probability, a, of sequential arrival of customers is smaller
than a.
Numerical Example. We illustrate how fragility arises due to destabilizing margins or
dealer losses by way of a numerical example. We consider the more
caused a shiver in world financial markets.
Further, when markets are illiquid, market liquidity is highly sensitive to further changes
in funding conditions. This is due to two liquidity spirals: first, a margin spiral emerges
if margins are increasing i
by Zt :=
Pt
k
k=0 z .
The early customers trading need is accommodated by speculators who provide liquidity/immediacy. Speculators are risk-neutral and maximize expected final wealth W3 . Speculators face the constraint that the total margin on their posi
(Chordia, Sarkar, and Subrahmanyam (2005). In support of the idea that commonality is
driven at least in part by our funding-liquidity mechanism, Chordia, Sarkar, and Subrahmanyam (2005) find that money flows . account for part of the commonality in stock
j
mj+
1 , and the more prices are above fundamentals 1 > 0, the lower is the margin on a short
position mj
1 . Hence, in this case illiquidity reduces margins for speculators who buy low and
sell high.
The margins are reduced by illiquidity because the sp
margins when the liquidity shock j1 has the same sign as the fundamental shock v1j or
is greater in magnitude, but margins are reduced if the liquidity shock counterbalances a
fundamental move. We denote the phenomenon that margins can increase as illiqui
Outline of Equilibrium. We derive the optimal strategies for customers and speculators
using dynamic programming, starting from time 2, and working backwards. A customers
value function is denoted and a speculators value function is denoted J. At time 2,
who set the margins to control their value-at-risk (VaR). We derive the competitive equilibrium of the model and explore its liquidity implications. We define market liquidity as the
difference between the transaction price and the fundamental value, and
On the Risk of Stocks in the Long-Run
Page 2
presented by Merton and Samuelson rely on the theory of expected utility maximization.
In this paper I use option pricing theory to demonstrate the fallacy. Taking as the measure
of the riskiness of an investme
On the Risk of Stocks in the Long-Run
Page 3
increasing length. For a 1-year horizon one can lose 20% of the initial investment, for a 2year period 36%, and for a 20-year period as much as 99%. Using the probability of a
shortfall as the measure of risk,
Hiba Chaudhry
Personal Finance
12/15/2015
Article 7
In this class we learned about how to deal with our finances and how to be stable. This article talks
about how England is worried about the financial situations in parts of the country. The economy keep
FINA380 Project # 1
Ahmer Mumtaz
Hiba Chaudhry
Project 1
Benedictine University
Part 1: From Chapter 10: Page 364
A. What sources of capital should be included when you estimate Colemans WACC?
The sources that should be used when you estimate Coleman's WA
Hiba Chaudhry
Personal Finance
12/15/2015
Article 9
The article talks about the different things to keep in mind before investing. The four rules that this
article mentions is Diversify, Re balance, Dollar-cost average, and Keep costs down. Diversify is w
Hiba Chaudhry
Personal Finance
12/15/2015
Article 2
This article talks about the credit card fees and rates being lower at the moment for the people that
want a credit card but do not have one yet due to high fees and rates. People have more easy access t
Hiba Chaudhry
Personal Finance
12/15/2015
Article 6
The Chief executive officer of Third Avenue Management has decided to leave the company after looking
after it since 1991. It was a mutual agreement between Barse and the firm, a few days he had said tha
Hiba Chaudhry
Personal Finance
12/15/2015
Article 8
The rates that will be going up this week is a big topic in the news because it is going to effect many
people nationwide but it is for the financial situation that we are, which is that we have more dem
Hiba Chaudhry
Personal Finance
12/15/2015
Article 4
The article is based on the fact that inequality makes wealthy people less generous in the United States,
but Europe and Japan seem to differ. They did a study and came up with a 'factor that seemed to a
Hiba Chaudhry
Personal Finance
12/15/2015
Article 3
This article is based on Mortgages and how the rate is increasing in the coming years. People that have
had low rates for the last 10 years are now worrying about the raise in interest rates that is abou
Hiba Chaudhry
Personal Finance
12/15/2015
Article 1
The Article talks about the job growth in the US that had exceeded the forecast in November.
The
raise in jobs opportunities seems to be leading to a raise in interest rates as well, which was last done