I've been studying more for my next RL actuarial exam, Modeling Financial Economics, and it always makes me think about the depth of subtleties of markets. The lesson on equivalent, or replicating, portfolios that I gave in a Lessons in FM has so much power to it, but is something that is also so hidden very few can see it. Did you know, for example, that you can replicate a call option by simply buying and selling stocks and low-risk bonds? (Specifically, for call options, you borrow some money, aka sell a bond, to buy the stock, and then they become equivalent. Of course, you have to get the proportions right, and that's not exactly easy to do...)
Yet, despite the depth and breadth of these studies, which I just get exposed to the tip of the iceberg on, it saddens me that so few are in on these great secrets. I doubt less than 1% of the avatars involved in the SL finances could tell me what an option delta is. If we make it only CEOs, maybe we can move that up to 20%. Can any fund managers in SL tell me what the volatility of their portfolio is? How is it correlated to the market (aka its beta)? Where is the greatest risk exposure? I laugh (usually aloud) at any prospectus which simply lists SL closing down or the devaluation of the Linden Dollar as the lone risk factors to their business.
Please note, I'm not trying to criticize anyone here. The subjects I'm talking about are definitely high-end mathematics, and would require some study which is not required of CEOs in SL. I'm only sad that although the SL capital markets have come so far in the past year, they still have so very far to go.
3 comments:
I agree with you 100%. I have been out of school for several years and have entered a new discipline, but I used to know the terms that you are talking about! Especially the Beta thingy! lol!
But i think the more subtle point about your post is that the SL CEO's have the vision of what they want to do. They have the talent to carry it out. But as RL CEO's realize, the SL CEO's have to realize that they need the "nerds" to carry the thought forward and make a profit! Maybe that is too strong a statement. I hope you catch my drift.
I am not demeaning the founders(CEOs) of their companies but they need to realize that in order to be truly successfull and to crank it up a notch, they need a team of specialists to look after the little things, like financial statements, balancing production portfolios, sales portfolios, pr, customer service, etc.
Just some thoughts.
Thanks for the insights.
I forgot to add, congratulations on your progress in the Actuarial Exams thus far! I know that they are tough. I dropped out after the second and dedicated my life to programming! In other words I wrote a lot of programs to support the actuaries! lol!
Some CEOs realize they need help and work with those that know what they're doing. I've been recruited as SLR's CFO because I can quickly, and I think accurately, prepare the financial statements required by CapEx. Other firms would be well-off to find people who can do the same.
The stuff about beta and other, more advanced topics sometimes falls apart in SL as a practical matter, though. For example, suppose your risk analysis called for you to sell short a stock. We'll, you're pretty much stuck with that risk then. I keep hoping derivatives will pop up, but they just don't. Anyone wanna make a currency futures and options exchange? Just give me an IM - I'd love to help!
Oh, and thank you for the encouragement on the exams, Arnaud. Three down, and at least three more to go.
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