Pages

  • Sharebar

Mod note: Blast from the Past - "Best of Eddie" - This one was originally posted in March 2011.

The following is an exclusive guest post by Omer Rosen, author of the controversial Legerdemath, originally published in the Boston Review. Omer is a former Citigroup corporate derivatives guy, and this latest piece explains the monkey math that was used to pick clients' pockets by confusing them with yields instead of prices. The scheme's elegance is in its simplicity, as the corporate derivatives desk convinced clients to compare apples to oranges and by doing so think they were getting a square deal.

Omer has graciously agreed to respond personally to your questions and comments in the comments section for the first 24 hours this piece is posted. His blog is located at Legerdemath.com and you can (and should) follow his Twitter feed at @omerrosen. Without further ado...


Legerdemath II: Anatomy of a Banking Trick


In my previous article, "Legerdemath: Tricks of the Banking Trade," I made brief mention of Treasury-rate locks:

Most brazenly, we taught clients phony math that involved settling Treasury-rate locks by referencing Treasury yields rather than prices.

A number of readers expressed a doubt that using a settlement method based on Treasury prices was appropriate. What follows is as good an explanation of Treasury-rate lock settlements as 2,000 words will allow. I have simplified some of the bond math and concepts and will end with an analogy that I hope will elucidate what the math did not. However, as this post hardly qualifies as an easy read, feel free to ask questions in the comments section. Confession: I fudged the word count a few sentences ago to increase the likelihood of you reading on.

Forget for a moment, everything you have heard or think you know about Treasury bonds. Taken in isolation, the purchase of a Treasury bond is nothing more than the purchase of a fixed set of future cash flows. If you find the term "cash flows" confusing, think instead of the following: buy a bond today, receive predetermined amounts of money on predetermined dates in the future.

In this column I will be referencing a 10-year Treasury bond paying a coupon of 5.00%, with a notional amount of $100. For convenience, I will christen this bond "Bondie." Sans jargon, the fixed set of cash flows received when purchasing Bondie would be $2.50 every 6 months for 10 years and an additional $100 at the end of the 10th year.

There are two basic ways to describe the value of this fixed set of cash flows, either by price or by yield. Price answers a simple question: How much would it cost you to purchase this fixed set of cash flows? This price will change over time, in much the same way that the price of a stock changes over time. Yield expresses the return earned by purchasing these cash flows at a certain price.

If you had to pay $100 in order to receive the fixed set of cash flows I described above, then your yield would be 5.00%. If you had to pay more to purchase these same cash flows, say $105, then the return you would be earning (the yield) would be lower than 5.00% - it would be 4.3772%. Intuitively this should make sense - the more you have to pay for a given set of cash flows the lower your return will be. Or, more simply, when prices go up, yields come down. Conversely, if you had to pay only $95 for these same cash flows, the yield earned would be higher than 5.00% - it would be 5.6617%.

Algebraically speaking, price and yield are linked by an equation where all the other variables are known. Therefore, if you know the yield of a given bond you can calculate the price of that bond and vice versa. In plain terms, saying you are willing to pay $100 for Bondie is the same as saying you are willing to buy Bondie at a yield of 5.00% (i.e. at a price that will allow you to earn a return of 5.00%). It is similar to how one can describe the speed of a car either by the number of miles per hour it is traveling at or by the time it takes it to travel one mile - if you know one you can solve for the other, and if one goes up the other comes down.

To belabor the point, if a car is traveling around a 1-mile track at an average speed of 1 mph then it is easy to solve for the time needed to complete a single lap: 60 minutes. Either "1 mph" or "a 60-minute mile" provides you access to the same knowledge about the speed of the car during that lap. And, if the car's speed were to increase, the time it would take to complete another lap would decrease (At 2 mph a mile would only take 30 minutes). The same inverse relationship holds true between prices and yields.

Now back to Treasury-rate locks. When a company puts on a Treasury-rate lock, it is doing nothing more than taking a short position in a Treasury bond. A short position is a bet that will pay off for the company if Treasury prices go down and go against them if prices go up. Why would they do this? That is a subject for another column and I ask that you accept as an article of faith that sometimes this bet, rather than being a gamble, reduces risk and uncertainty for a company.

The short position can be viewed as an agreement under which the client will sell the bank Treasury bonds at a certain price on a set date in the future. This price is determined based on current market conditions. For example, let us say, that based on what current market conditions dictate, the client agrees to sell Bondie to the bank at $95 one month hence. A month passes and Bondie is now trading at $100. The client will have to go into the market, buy Bondie at the current price of $100, and then sell it at a loss of $5 to the bank at the previously agreed upon price of $95. For expediency's sake, the client just pays the bank the $5 it has lost and the bank takes care of all the buying and selling behind the scenes. The calculation of $5 in the above manner - subtraction - is an example of the price-settlement method of Treasury-rate locks.

However, when it comes to bonds, corporate clients do not think in terms of price; they think in terms of yield because yield is expressed in the language of interest rates, the same language companies are familiar with from business concepts such as rates of return and borrowing costs. In theory, this should add only a simple step to the settlement process. The company locks in a sale of Bondie at the same level as before, $95, but rather than quoting them that price the bank quotes them the corresponding yield of 5.6617%. We can refer to this yield as the locked-in yield.

A month passes and the Treasury rate lock is settled. Rather than telling the client that Bondie is now trading at $100, the bank tells them that the yield is now 5.00%, having fallen by 0.6617%. But 0.6617% is not a dollar value that can be paid out as a settlement. To calculate the settlement, both yields, 5.6617% and 5.00%, need to first be converted back to their respective corresponding prices, $95 and $100. Taking the difference between the two prices results in the same settlement value we calculated before: $5.

But the client is never shown how to settle based on prices. Instead they are introduced to a nonsensical and more complicated method called yield settlement. The sole purpose of this settlement method is to trick the client into allowing the bank extra profit.

Whereas price settlement asks the question, "By how much did Treasury prices change?" yield settlement asks, "By how much did Treasury yields change?" As mentioned in the previous paragraph, the yield decreased by 0.6617%. But how does one convert 0.6617% into a dollar value that can be paid out?

First, a unit conversion is necessary. For clarity and convenience, finance makes use of a unit called a basis point. Each basis point is equal to 0.01%. Using this new unit, the above decrease of 0.6617% can be expressed as 66.17 basis points. Of course, this solves nothing, only modifying our most recent question slightly: now we ask, how much is each of the 66.17 basis points worth in dollar terms?

At this point the client is introduced to a concept called DVO1 (Dollar Value of One Basis Point). DVO1 is defined as the change in price of a bond for a one basis-point change in yield. For example, if the yield on a bond changes from 5.00% to 5.01% or from 5.00% to 4.99%, by how much would the corresponding price of that bond change? This change in price is the DVO1. If yields shifted by 66.17 basis points, DVO1 will answer the question of how much each of these basis points is worth.

The starting point for this calculation is the yield at the time of settlement. In our example, the yield at the time of settlement is 5.00%. At this yield, the corresponding price of Bondie is $100. If the yield were to rise by one basis point to 5.01%, the corresponding price of the bond would fall to $99.922091, a decrease of 7.7909 cents. If instead the yield were to decrease by one basis point to 4.99%, the corresponding price would rise to $100.077983, an increase of 7.7983 cents. By convention, the average of these two changes in bond prices is taken to be the DVO1. So, at a yield of 5.00%, the DVO1 would be 7.7946 cents per one basis-point move ((7.7983 7.7909) / 2). If the yield changes by one basis point, price is said to move by 7.7946 cents. Or, in more plain terms, each basis point has been assigned a value of 7.7946 cents.

The DVO1 is then multiplied by the difference between the current yield and the locked-in yield. In our example the difference between 5.00% and 5.6617% is 66.17 basis points. From the previous paragraph we know that each of these 66.17 basis points is worth 7.7946 cents. Multiplying 66.17 by 7.7946 we arrive at a settlement value of $5.1577. This is the yield-settlement method of Treasury-rate locks.

Apart from being confusing, the yield-settlement method has resulted in a settlement value that is greater than the $5 calculated using the price-settlement methodology. For a good-sized rate lock, say $500 million dollars worth of 10-year Treasuries, the client would pay the bank an extra $788,500 (500 million x (5.1577 - 5.00) / 100) when settling using the yield-based methodology. This "extra" is profit for the bank.

I ask that you stop reading here for a moment. I have stated from the beginning that yield settlement is incorrect. However, when reading the explanation of yield settlement, did you find yourself agreeing with the logic? At what point, if any, did you spot the flaw? And can you guess what happens if prices had gone the other way? If prices had gone down instead of up, say to $90, the bank would have owed the client money. However, yield settlement would have allowed the bank to earn a profit by paying the client less than it actually owed them. No matter what happens to prices, yield settlement allows the bank to earn extra profit.

Now picture yourself as a client receiving a tutorial on Treasury-rate locks. You are being instructed by a banker on a matter that seems procedural, in a manner that seems advisory and helpful, without any warning that something might be amiss. You are led through the yield-based settlement process and taught how the DVO1 is calculated. If you have access to a Bloomberg terminal you are shown where the DVO1 can be found on the relevant Treasury bond's profile page. Perhaps presentation materials are sent over detailing the mechanics of rate locks and different possible outcomes depending on various possible market movements. And all this is part of a larger interaction, a relationship even, during which the banker is nothing but genuinely friendly and informative. Furthermore, there is a good chance that someone from a different part of the bank, someone who has advised you before, was the one that introduced the two of you in the first place. Would you question your banker?

Clients, among them some of the largest corporations in the world, never did. Confident in the tools provided them and blinded by specious logic, the client never even thinks to question the underlying methodology. And, especially since the client is never made aware of price settlement, the methodology does sound logical: Check to see by how many basis points Treasury yields moved. Calculate the dollar value of each basis point. Multiply the two and arrive at a settlement value.

However, this methodology is an approximation that always works out in the bank's favor. Why? Because each of the 66.17 basis points has erroneously been assigned the same value of 7.7946 cents. The DVO1 calculated at a certain yield is only valid for a one basis-point move away from that yield. Therefore, while the first basis-point shift away from 5.00% is indeed worth 7.7946 cents, successive ones are not.

Put another way, DVO1 at 5.00% is different than DVO1 at 5.01% is different than DVO1 at 5.02% is different than DVO1 at every other yield. And so the value of the basis-point change from 5.00% to 5.01% is different than the value of the basis-point change from 5.01% to 5.02% is different than the value of all successive basis-point changes. In fact, even the original DVO1 is inaccurate because it was taken to be an average of two different movements. Multiplying the 66.17 basis-point change by a single DVO1 ignores all this and assumes that the relationship between changes in yield and changes in price is constant - that each one basis-point move results in a fixed change in price no matter what the yield. Yield settlement takes the graphical representation of the relationship between prices and yields - a curve - and flattens it into a straight line.

Admittedly, all this can be a bit confusing. After all, if price and yield are both valid ways of expressing the value of a bond, shouldn't you also be able to measure the change in value of a bond by looking at either the change in its price or the change in its yield? The math says no. Resorting to hyperbole, teaching the client yield-based settlement is akin to selling them on time travel.

Return for a moment to the example of a car driving along a 1-mile track (a conceptual, though not mathematical, equivalent to rate lock settlements). In this analogy, "mph" will play the role of "yield" and "travel time" will play the role of "price." Assume the car is traveling at a speed of 1 mph. If the car speeds up to 2 mph, the time required to travel a mile decreases from 60 minutes to only 30 minutes - a 30-minute decrease in travel time. This 30-minute decrease plays the role of "DVO1''.

Now assume that the car is traveling at a speed of 120 mph. If again the car's speed increases by 1 mph, here to 121 miles per hour, does the time needed to travel a mile again decrease by 30 minutes? Since a mile only takes 30 seconds to complete at a speed of 120 miles per hour, short of a DeLorean and some lightning, reducing the completion time by 30 minutes would be impossible. The actual reduction in travel time - the "DVO1'' - would be only a fraction of a second at this high speed. "DVO1'' is not a constant in this analogy either.

To extend the analogy, calculating a rate lock settlement would be akin to calculating the difference in travel times for each of two laps. If lap 1 were completed at a speed of 120 mph and lap 2 at a speed of 1 mph, how would you calculate the difference in travel time between the first and the second lap? Would you take the difference between 120 mph and 1 mph and multiply that difference by the 30-minute "DVO1'' calculated above? Doing so would imply an impossibly high difference between the two lap times: 3,570 minutes ((120 - 1) x 30). This calculation is the parallel of the yield-settlement method.

For makes and models without a flux capacitor, you would simply look at the difference between the times the car took to complete each lap. If a stopwatch is not handy, the following quick math provides the answer: a 120-mph lap takes 30 seconds to complete and a 1-mph lap takes 60 minutes to complete. The difference in travel time between the two laps is therefore 59.5 minutes. This calculation is the parallel of the price-settlement method. As you can see, the 3,570 minutes calculated using the other method is far off the mark.

In price/yield relationships the same problem exists - that problem being the realities of math. Yet banks I encountered almost always instructed clients to use the yield-based settlement method. And so a product that is meant to return the difference between two Treasury prices, a matter of elementary subtraction, is perverted for profit.

If yields change by very little, this profit does not amount to much. Fortunately, depending on one's point of view, banks have other tricks for profiting from rate locks and do not rely solely on yield-based settlement. In fact, miseducating clients with yield-based settlement is almost an afterthought, just a bonus that pays off with large movements in yield. Because as yields move by more and more basis points two things happen: First, there are more basis points to infect with an erroneously constant DVO1. Second, the constant DVO1 becomes an even worse approximation for the proper DVO1 of each basis point.

In behavior that might be considered yet more sinister, sometimes banks had to implicitly agree with one another to use yield settlement. This transpired if a client decided to divvy up a single rate-lock transaction, with each bank getting a piece of the deal and each bank knowing that settlement of the rate lock would have to be a coordinated affair.

All this mathiness is hidden in plain sight. Some examples of yield settlement can be found online. Or you can just ask a company that put on a rate lock to dig up some trade confirmations and see what settlement methodology was used. There are hundreds, if not thousands, such documents in corporate offices around the country, each one part of an unwarranted transfer of millions of dollars from clients to banks.

4

The WSO Advantage - Land Your Dream Job

Financial Modeling Training

IB Templates, M&A, LBO, Valuation. Learn More.

Wall St. Interview Secrets Revealed

30,000+ sold & REAL questions. Learn More.

Resume Help from Finance Pros

Land More Interviews. Learn More.

Find Your Mentor

Realistic Mock Interviews. Learn More.

Comments (82)

  • APAE's picture

    Wow, that's an exceptionally thick read. Very candid and informative, thank you so much for sharing. So how extensive may this deception have been at that point in time? Are there banks still conducting this today?

    Most people do things to add days to their life. I do things to add life to my days.

    Browse my blog as a WSO contributing author

  • TheKing's picture

    Good read. The shit the banks pull never ceases to amaze me. I'm sure their defense would be that "these are big boy clients that should know what they are investing in," when they're really just stealing.

    Does this shit still go on?

  • invictus's picture

    I wonder how many people are going through statements / files and redoing their bond math today...

  • monkeymark's picture

    I wonder if options do something similar, like a "delta settlement". lol. Good and informative read, appreciate the effort.

  • Ludwig Von's picture

    Who in the business usually does the calculations for the yield settlement? Are these the 700 GMAT whiz-kids or just client account stewards?

    What were the boss responses to anyone who tried to use a method that didn't rip people off?

    What did co-workers usually think about practices like these? Were people openly accepting that fraud was used, was it rationalized, was it loved or hated? Did anyone quit or get fired because of it?

    Thanks. It's a shame that the only respectable position in the business world is to do the wrong thing for years and years (as long as it's profitable and prestigious) and then confess, rather than doing the right thing immediately when the first instance of fraud is noticed. What employer would hire the man who quit the first day on principle, or supposedly passed up offers from companies purely because he knows they do wrong?

    "Alas, how many have been persecuted for the wrong of having been right?"
    -Jean-Baptiste Say

  • bankbank's picture

    i'm sure there are some clients that understand this. if you're good at math you can detect it pretty easily without all of the car track analogies. or you could just stumble upon it by running a few scenarios in excel. how does the bank explain this practice to the clients that notice and ask about it?

    i don't think this is that sinister. people should do their own work. caveat emptor and all that.

  • In reply to APAE
    Omer Rosen's picture

    A Posse Ad Esse:
    Wow, that's an exceptionally thick read. Very candid and informative, thank you so much for sharing. So how extensive may this deception have been at that point in time? Are there banks still conducting this today?

    I know from a friend that it was still going on in 2008. I can't verify that it was going on after that but I don't see why it would have suddenly stopped industry-wide. If you search online for Treasury rate lock settlement, while you won't find much, what you will find is always discussed in terms of yield - price is never mentioned. In any case, the goal of this article (and its predecessor) was to describe a type of behavior and a type of thought process - the individual example is less important than the theme that example points towards.

  • In reply to bankbank
    Omer Rosen's picture

    bankbank:
    i'm sure there are some clients that understand this. if you're good at math you can detect it pretty easily without all of the car track analogies. or you could just stumble upon it by running a few scenarios in excel. how does the bank explain this practice to the clients that notice and ask about it?

    i don't think this is that sinister. people should do their own work. caveat emptor and all that.

    I never heard of a client that noticed and asked about it. Also, it is much easier to detect when I state ahead of time that it is wrong...otherwise most people don't even having a passing thought about whether or not it is correct or incorrect - in other words, they don't think about whether or not they should accept it or not, they just accept it.

    As for it being right or wrong, or when people should do their own work and when it is okay to trick them, that is a long and endless debate. However, looking back on my time at work and the nature of the interaction with the client, I do not feel it was appropriate in that context.

  • Dr Joe's picture

    I am sorry but a company that allows a person who doesn't pick up on this enter into contracts is not being fair to its shareholders. This is pretty darn obvious, and as bankbank mentioned, if you fall for this its your own damn fault.

  • In reply to bankbank
    Ludwig Von's picture

    bankbank:

    i don't think this is that sinister. people should do their own work. caveat emptor and all that.

    I agree that it isn't the most sinister practice, but it is still fraud, even if it's something people should check. Professionals are legally bound to do things the correct way because they know better, so this is illegal as well but easily defendable by saying "I had no idea, everyone else was doing it, and my boss told me to do it this way."

    "Alas, how many have been persecuted for the wrong of having been right?"
    -Jean-Baptiste Say

  • CAPM21's picture

    Caveat emptor does not apply when there is an an insitutional lack of transparency as regards yield settlement caluclation as a deliberate means to mislead clients for profit. Caveat emptor is like believing in "prefect markets", where all information is attainable and practices transparent, such a system does not exist in reality.

    Anyways the backlash is coming against this kind of misinformation and its for the best if you want to work somewhere with a half decent reputation. Continuing business practices like this garuntees you the loss of reputation and your client's trust which should be paramount. As a potential client reading the below suit against DB, I would affirm never to do business with them again (even though all the BB's do the same)
    http://online.wsj.com/article/SB100014240527487044...

    Adapt, evolve, compete, or die.

    -PTJ

  • heister's picture

    This is with out a doubt a big problem in the industry, but does it not stem from a general social standard in the country if not the world. That the needs of me (i.e. a company, individual, or small group) out weigh the needs of any other group or individual. While I see this as wrong, I also see it as a natural progression of a self obsessed society. Who are we to tell off others when as a society of individuals as a whole can not regulate their own narcissism. This is really no different, it is just a bunch of bankers who think they are the smartest guys on the plannet fed by the seemingly blind faith that people put in them. I think the problems that lie at the base of actions like this are much deeper than just pure greed.

    Follow the shit your fellow monkeys say @shitWSOsays

    Life is hard, it's even harder when you're stupid - John Wayne

  • In reply to Dr Joe
    Ludwig Von's picture

    Dr Joe:
    I am sorry but a company that allows a person who doesn't pick up on this enter into contracts is not being fair to its shareholders. This is pretty darn obvious, and as bankbank mentioned, if you fall for this its your own damn fault.

    The fool is always at fault for his own victimization but do you really think that removes the guilt of his victimizer?

    "Alas, how many have been persecuted for the wrong of having been right?"
    -Jean-Baptiste Say

  • Dr Joe's picture

    I should add that this is quite similar to a lottery - it is legal to charge people for being stupid.

  • In reply to Ludwig Von
    Dr Joe's picture

    Ludwig Von:
    Dr Joe:
    I am sorry but a company that allows a person who doesn't pick up on this enter into contracts is not being fair to its shareholders. This is pretty darn obvious, and as bankbank mentioned, if you fall for this its your own damn fault.

    The fool is always at fault for his own victimization but do you really think that removes the guilt of his victimizer?

    Not always, no. But in this situation, a company enters a contract with a bank that undoubtedly mentions the settlement method to be used. It is the company's responsibility to know what they are signing.

    I suppose you could make the argument that this is just an additional fee that is charged, and by efficient markets, it is deducted from other fees charged on the transaction. So if you were to do away with this "implied fee" then the stated fee would increase. If this were not the case there would be an opportunity for someone else to come in at a lower price.

  • In reply to Dr Joe
    Ludwig Von's picture

    Dr Joe:

    Not always, no. But in this situation, a company enters a contract with a bank that undoubtedly mentions the settlement method to be used.

    Great point. If it's in the contract, which it probably is, then that's all there is to it and the banks aren't at fault.

    "Alas, how many have been persecuted for the wrong of having been right?"
    -Jean-Baptiste Say

  • In reply to Ludwig Von
    Omer Rosen's picture

    Ludwig Von:
    Who in the business usually does the calculations for the yield settlement? Are these the 700 GMAT whiz-kids or just client account stewards?

    What were the boss responses to anyone who tried to use a method that didn't rip people off?

    What did co-workers usually think about practices like these? Were people openly accepting that fraud was used, was it rationalized, was it loved or hated? Did anyone quit or get fired because of it?

    Thanks. It's a shame that the only respectable position in the business world is to do the wrong thing for years and years (as long as it's profitable and prestigious) and then confess, rather than doing the right thing immediately when the first instance of fraud is noticed. What employer would hire the man who quit the first day on principle, or supposedly passed up offers from companies purely because he knows they do wrong?

    The same people that transact the product do the calculations. In this context, what I think you are referring to by account stewards, would be the people who send out the payment or book the trade in the system or send out trade confirmations - but all of that is a flow-through based on instructions

    I never heard much questioning about how things were done, though I obviously cannot speak to people's internal monologues. Sometimes there were some jokes but otherwise it was kind of just pretty normal, day-to-day type stuff. I can remember one time a coworker telling me he felt dirty (though he never refused to do anything), and one time someone from another group told me that he couldn't believe the type of stuff we did "up there" (we were on a higher floor).

    I don't know anyone who left explicitly because of their discomfort with all this, but you never really know all the factors behind someone's departure. As for getting fired, I can't imagine why someone would have been fired for doing what they were taught and encouraged to do...I guess I can sum up this type of behavior by saying that, like many things in life, it just is and shouldn't be.

  • 2133's picture

    If banks are not at fault, why is it that if I were a banker (and I had done this) I would not like my clients to read this post...

  • GoodBread's picture

    I guess I'm shocked clients don't figure this out. I'm sure most treasury departments have an idea of what duration and convexity are, the math on this isn't all that different.

  • TheKing's picture

    I always get a laugh at the caveat emptor defense in this sort of case. Could you imagine what would happen if a client complained about this practice and the bank said "well, caveat emptor, you should've done your homework to make sure we aren't cheating you out of money!" Yeah, good luck with that shit.

    It is assumed that the bank is acting in the best interest of its client. This is generally true when buying a legitimate service. Unless something is egregious, you should feel comfortable that you are not being lied to or misled. It's one thing when you're dealing with a shady chop shop advertising on Craigslist, it's another when the service is being provided by fucking Citigroup.

    Furthermore, where the fuck is the integrity? Some of you people are disgusting.

    On a side note, if this were a story about the federal government doing something similar with tax returns and somehow fraudulently keeping more of our tax dollars, people would be going ABSOLUTELY APE SHIT, and there's zero chance anyone would say "caveat emptor!" like some shit eating, bank shilling, fucking retard.

  • APAE's picture

    Along with King's post, remember that banking is a service based on relationship, reputation, and trust. Lose that subjective position and you lose business. Simple as that. Putting a shit-eating grin on your face and saying "caveat emptor" is easy to do across the Internet. Even considering that in a real-world situation like this gets you fired and pariahed.

    Most people do things to add days to their life. I do things to add life to my days.

    Browse my blog as a WSO contributing author

  • In reply to TheKing
    bankbank's picture

    TheKing:
    I always get a laugh at the caveat emptor defense in this sort of case. Could you imagine what would happen if a client complained about this practice and the bank said "well, caveat emptor, you should've done your homework to make sure we aren't cheating you out of money!" Yeah, good luck with that shit.

    that's what i originally asked in my post before i said "caveat emptor..." i imagine some clients would somehow notice this and mention it and i was wondering what happened in that instance. does the bank just position it as a transaction fee for doing the trade, or are they forced to switch to a different methodology for settlement, or what?

    i wasn't trying to comment on right or wrong. when i do my business, i make sure i understand what i'm agreeing to, and it's my opinion that other people should do likewise.

    for example, when we're drafting shareholder agreements and a seemingly straightforward ownership adjustment or dilution mechanism is proposed and drafted, we still run the math and run scenarios to make sure it actually plays out the way we thought it would. granted, this is a more important part of our business so we afford it more attention/time/money than i assume these corporate finance guys do for the rate locks, but that doesn't excuse them from understanding what they are signing up for.

  • Midas Mulligan Magoo's picture

    @ Eddie,

    Great job, bro. Unfortunately, I think that the average monkey's head is so far up his ass digging for buried treasure that the realities of the industry are not something he wants to face.

    @ The King,

    Why not consider writing a post about how actually working in the industry and running the track has shaped your opinions and views? Your caveat emptor comments here are a good example. Many of the younger guys would benefit and it might add to debate substance in the future.

  • In reply to bankbank
    TheKing's picture

    bankbank:
    TheKing:
    I always get a laugh at the caveat emptor defense in this sort of case. Could you imagine what would happen if a client complained about this practice and the bank said "well, caveat emptor, you should've done your homework to make sure we aren't cheating you out of money!" Yeah, good luck with that shit.

    that's what i originally asked in my post before i said "caveat emptor..." i imagine some clients would somehow notice this and mention it and i was wondering what happened in that instance. does the bank just position it as a transaction fee for doing the trade, or are they forced to switch to a different methodology for settlement, or what?

    i wasn't trying to comment on right or wrong. when i do my business, i make sure i understand what i'm agreeing to, and it's my opinion that other people should do likewise.

    for example, when we're drafting shareholder agreements and a seemingly straightforward ownership adjustment or dilution mechanism is proposed and drafted, we still run the math and run scenarios to make sure it actually plays out the way we thought it would. granted, this is a more important part of our business so we afford it more attention/time/money than i assume these corporate finance guys do for the rate locks, but that doesn't excuse them from understanding what they are signing up for.

    Right, I understand what you are saying, but the fact is that you shouldn't have to check for something misleading and fraudulent when paying for a service like this. I don't think your purchase agreement is analogous to the topic at all. If one had to double check and think twice about the validity of every service they paid for, the world wouldn't function. You shouldn't have to be extra cautious about this sort of thing.

    Plus, I presume the client has other shit to do (namely, running their own business) instead of worrying about whether or not their banker is defrauding them.

  • TheKing's picture

    @Midas, Agreed. I try and contribute as much as I can, but it'd probably be beneficial to outline what shaped my views at some point.

  • In reply to TheKing
    bankbank's picture

    TheKing:
    I always get a laugh at the caveat emptor defense in this sort of case. Could you imagine what would happen if a client complained about this practice and the bank said "well, caveat emptor, you should've done your homework to make sure we aren't cheating you out of money!" Yeah, good luck with that shit.

    It is assumed that the bank is acting in the best interest of its client. This is generally true when buying a legitimate service. Unless something is egregious, you should feel comfortable that you are not being lied to or misled. It's one thing when you're dealing with a shady chop shop advertising on Craigslist, it's another when the service is being provided by fucking Citigroup.

    Furthermore, where the fuck is the integrity? Some of you people are disgusting.

    On a side note, if this were a story about the federal government doing something similar with tax returns and somehow fraudulently keeping more of our tax dollars, people would be going ABSOLUTELY APE SHIT, and there's zero chance anyone would say "caveat emptor!" like some shit eating, bank shilling, fucking retard.

    "Assuming makes an 'ass' out of 'you' and 'me.'" Why is it assumed that a bank is acting in the best interest of its clients? I don't assume that. I think it would be nice to live in a world in which that were true, but I think it's pretty naive to assume we live in that world. It might be good, profitable business for a bank to act in that way and i think it usually is, but that doesn't mean it's the only profitable way for a bank to behave or that it's the most profitable way for a bank to behave.

    Yes I think the world could be better for everyone if everyone were more trustworthy and less self-interested, but I don't think that's the world we live in.

    As for the side note on the taxes. I do think the government should be held to a higher standard. It's not a corporation. "by the people, for the people" and all that. corporation is supposed to be by the shareholders, for the shareholders. and also, if the formula for calculating your taxes were laid out in the tax documents you were provided and then according to the formula you ended up paying more tax than you assumed or thought you should have paid, i still think that's your fault for not doing the math.

  • In reply to bankbank
    TheKing's picture

    bankbank:
    TheKing:
    I always get a laugh at the caveat emptor defense in this sort of case. Could you imagine what would happen if a client complained about this practice and the bank said "well, caveat emptor, you should've done your homework to make sure we aren't cheating you out of money!" Yeah, good luck with that shit.

    It is assumed that the bank is acting in the best interest of its client. This is generally true when buying a legitimate service. Unless something is egregious, you should feel comfortable that you are not being lied to or misled. It's one thing when you're dealing with a shady chop shop advertising on Craigslist, it's another when the service is being provided by fucking Citigroup.

    Furthermore, where the fuck is the integrity? Some of you people are disgusting.

    On a side note, if this were a story about the federal government doing something similar with tax returns and somehow fraudulently keeping more of our tax dollars, people would be going ABSOLUTELY APE SHIT, and there's zero chance anyone would say "caveat emptor!" like some shit eating, bank shilling, fucking retard.

    "Assuming makes an 'ass' out of 'you' and 'me.'" Why is it assumed that a bank is acting in the best interest of its clients? I don't assume that. I think it would be nice to live in a world in which that were true, but I think it's pretty naive to assume we live in that world. It might be good, profitable business for a bank to act in that way and i think it usually is, but that doesn't mean it's the only profitable way for a bank to behave or that it's the most profitable way for a bank to behave.

    Yes I think the world could be better for everyone if everyone were more trustworthy and less self-interested, but I don't think that's the world we live in.

    As for the side note on the taxes. I do think the government should be held to a higher standard. It's not a corporation. "by the people, for the people" and all that. corporation is supposed to be by the shareholders, for the shareholders. and also, if the formula for calculating your taxes were laid out in the tax documents you were provided and then according to the formula you ended up paying more tax than you assumed or thought you should have paid, i still think that's your fault for not doing the math.

    If assuming the bank isn't defrauding me makes me an ass, then I'm at a loss for words. I agree that the banks are businesses and their goal is to make money, but again, knowing that, you should still be able to assume that they are not defrauding you. This is not crazy.

    Again, where is the integrity?

  • Dr Joe's picture

    @TheKing
    Am I correct in interpreting your comments as the existence of an expectation in the business that, as the client, you should be informed of all sources of revenue to the bank arising from your transaction? Seems a bit excessive... similar to, when buying shares, asking the bank "well how much did YOU buy them for? how much are YOU making from this?". One might argue this line of questioning is irrelevant, and the point is that you are getting the product at a market rate - the same rate you would get elsewhere, and the same rate I could sell to someone else for.
    What am I missing?

  • In reply to Dr Joe
    TheKing's picture

    Dr Joe:
    @TheKing
    Am I correct in interpreting your comments as the existence of an expectation in the business that, as the client, you should be informed of all sources of revenue to the bank arising from your transaction? Seems a bit excessive... similar to, when buying shares, asking the bank "well how much did YOU buy them for? how much are YOU making from this?". One might argue this line of questioning is irrelevant, and the point is that you are getting the product at a market rate - the same rate you would get elsewhere, and the same rate I could sell to someone else for.
    What am I missing?

    Wait, what? I'm not sure how me saying "you should not have to worry about the bank doing fraudulent shit to screw you over" = what you are saying here. Again, I am arguing against fraud and saying that it's fucked up that clients should have to constantly worry about whether or not they are being defrauded.

  • In reply to TheKing
    bankbank's picture

    TheKing:
    bankbank:
    TheKing:
    I always get a laugh at the caveat emptor defense in this sort of case. Could you imagine what would happen if a client complained about this practice and the bank said "well, caveat emptor, you should've done your homework to make sure we aren't cheating you out of money!" Yeah, good luck with that shit.

    It is assumed that the bank is acting in the best interest of its client. This is generally true when buying a legitimate service. Unless something is egregious, you should feel comfortable that you are not being lied to or misled. It's one thing when you're dealing with a shady chop shop advertising on Craigslist, it's another when the service is being provided by fucking Citigroup.

    Furthermore, where the fuck is the integrity? Some of you people are disgusting.

    On a side note, if this were a story about the federal government doing something similar with tax returns and somehow fraudulently keeping more of our tax dollars, people would be going ABSOLUTELY APE SHIT, and there's zero chance anyone would say "caveat emptor!" like some shit eating, bank shilling, fucking retard.

    "Assuming makes an 'ass' out of 'you' and 'me.'" Why is it assumed that a bank is acting in the best interest of its clients? I don't assume that. I think it would be nice to live in a world in which that were true, but I think it's pretty naive to assume we live in that world. It might be good, profitable business for a bank to act in that way and i think it usually is, but that doesn't mean it's the only profitable way for a bank to behave or that it's the most profitable way for a bank to behave.

    Yes I think the world could be better for everyone if everyone were more trustworthy and less self-interested, but I don't think that's the world we live in.

    As for the side note on the taxes. I do think the government should be held to a higher standard. It's not a corporation. "by the people, for the people" and all that. corporation is supposed to be by the shareholders, for the shareholders. and also, if the formula for calculating your taxes were laid out in the tax documents you were provided and then according to the formula you ended up paying more tax than you assumed or thought you should have paid, i still think that's your fault for not doing the math.

    If assuming the bank isn't defrauding me makes me an ass, then I'm at a loss for words. I agree that the banks are businesses and their goal is to make money, but again, knowing that, you should still be able to assume that they are not defrauding you. This is not crazy.

    Again, where is the integrity?

    i think our biggest point of contention is that i do not think this actually constitutes fraud. i do think it's shady, but not fraud. this is sort of similar to fabulous Fab and GS.

    and i understand that these people have businesses to run and hopefully they don't have to spend time double-checking their bank services, but it's not like this is a merchant going to his local credit union teller to withdraw money from his checking account. these are corporate finance people from big corporations entering into derivative contracts with a big, profit hungry banks. if i were in their shoes, i would be watching my back. maybe that's because i work in the industry and understand that it's a bunch of greedy, think-they're-too-smart people that are just collecting fees for shuffling around other people's money. but, i also think that's just business in general. in most cases, people aren't in business to serve the community.

  • In reply to bankbank
    TheKing's picture

    bankbank:
    TheKing:
    bankbank:
    TheKing:
    I always get a laugh at the caveat emptor defense in this sort of case. Could you imagine what would happen if a client complained about this practice and the bank said "well, caveat emptor, you should've done your homework to make sure we aren't cheating you out of money!" Yeah, good luck with that shit.

    It is assumed that the bank is acting in the best interest of its client. This is generally true when buying a legitimate service. Unless something is egregious, you should feel comfortable that you are not being lied to or misled. It's one thing when you're dealing with a shady chop shop advertising on Craigslist, it's another when the service is being provided by fucking Citigroup.

    Furthermore, where the fuck is the integrity? Some of you people are disgusting.

    On a side note, if this were a story about the federal government doing something similar with tax returns and somehow fraudulently keeping more of our tax dollars, people would be going ABSOLUTELY APE SHIT, and there's zero chance anyone would say "caveat emptor!" like some shit eating, bank shilling, fucking retard.

    "Assuming makes an 'ass' out of 'you' and 'me.'" Why is it assumed that a bank is acting in the best interest of its clients? I don't assume that. I think it would be nice to live in a world in which that were true, but I think it's pretty naive to assume we live in that world. It might be good, profitable business for a bank to act in that way and i think it usually is, but that doesn't mean it's the only profitable way for a bank to behave or that it's the most profitable way for a bank to behave.

    Yes I think the world could be better for everyone if everyone were more trustworthy and less self-interested, but I don't think that's the world we live in.

    As for the side note on the taxes. I do think the government should be held to a higher standard. It's not a corporation. "by the people, for the people" and all that. corporation is supposed to be by the shareholders, for the shareholders. and also, if the formula for calculating your taxes were laid out in the tax documents you were provided and then according to the formula you ended up paying more tax than you assumed or thought you should have paid, i still think that's your fault for not doing the math.

    If assuming the bank isn't defrauding me makes me an ass, then I'm at a loss for words. I agree that the banks are businesses and their goal is to make money, but again, knowing that, you should still be able to assume that they are not defrauding you. This is not crazy.

    Again, where is the integrity?

    i think our biggest point of contention is that i do not think this actually constitutes fraud. i do think it's shady, but not fraud. this is sort of similar to fabulous Fab and GS.

    and i understand that these people have businesses to run and hopefully they don't have to spend time double-checking their bank services, but it's not like this is a merchant going to his local credit union teller to withdraw money from his checking account. these are corporate finance people from big corporations entering into derivative contracts with a big, profit hungry banks. if i were in their shoes, i would be watching my back. maybe that's because i work in the industry and understand that it's a bunch of greedy, think-they're-too-smart people that are just collecting fees for shuffling around other people's money. but, i also think that's just business in general. in most cases, people aren't in business to serve the community.

    I think you are right about our point of contention. This is the sort of stuff that just really pisses me off because I realize that most people are not like you or me, and that most people don't realize that this kind of shady shit goes down. If it's not fraud, it's at least shady as fuck.

  • In reply to TheKing
    UFOinsider's picture

    TheKing:
    Plus, I presume the client has other shit to do (namely, running their own business) instead of worrying about whether or not their banker is defrauding them.

    Agreed.

    "Legal but unethical" is just bad business, and every time one of us fucks someone over, we strengthen the gov'ts case for more regulation. Do the right fucking thing already. I'm in favor of much harsher penalties for financial crime, as it will clear out my path to the top.

    Get busy living

  • George87's picture

    Thanks for the post, great read!

  • In reply to GoodBread
    Omer Rosen's picture

    GoodBread:
    I guess I'm shocked clients don't figure this out. I'm sure most treasury departments have an idea of what duration and convexity are, the math on this isn't all that different.

    Just some thoughts off the top of my head:

    a) It is easy to figure this out when you are told that you don't know it...but if you don't know that you don't know it...different altogether...just never occurs to them to think about this...they are probably just happy they even understand the concepts they are learning. Also, they have an entire job to do that is unrelated to Treasury-rate lock settlement mechanics...if they don't instantly see a problem they aren't going to take it home with them and study it for no reason.

    b) confrontation isn't easy for most people, especially if they are afraid of looking dumb for not understanding something or of incorrectly insinuating that they are being lied to.

    c) It is one thing to know what convexity and duration are, but quite another to apply the logic of them to new and unfamiliar situations.

    d) Bank is in the position of teacher on this one...as long as you talk confidently you aren't likely to be questioned. Plus, with the way it is phrased, even if a client might recognize that the DVO1 changes with yield they still might conclude that they are somehow being given an average DVO1 for their deal.

    e) Maybe a client notices and, rather than confronting the bank, just never calls them for business again.

    f) One guy at a different bank told me that he always used to speak of it as an approximation and that that way he was never technically lying (he never mentioned how large the approximation might become or that it always worked out in the banks favor). I've never personally seen someone use this tactic...most people want exact numbers in my experience.

    g) Forget, clients...I am quite confident most investment bankers (i.e. people away from the fixed income trading floor world) and even some capital markets people would easily fall for this.

  • GoodBread's picture

    Makes sense. I was obviously looking for the catch while reading your article and I'm not sure I would have cried foul the moment I saw DVO1 under different circumstances.

  • In reply to Dr Joe
    Omer Rosen's picture

    Dr Joe:
    @TheKing
    Am I correct in interpreting your comments as the existence of an expectation in the business that, as the client, you should be informed of all sources of revenue to the bank arising from your transaction? Seems a bit excessive... similar to, when buying shares, asking the bank "well how much did YOU buy them for? how much are YOU making from this?". One might argue this line of questioning is irrelevant, and the point is that you are getting the product at a market rate - the same rate you would get elsewhere, and the same rate I could sell to someone else for.
    What am I missing?

    A few thoughts, again, off the top of my head:

    1) While I'm not for trickery of any sort, I do think it makes a difference (and is worse) when certain math is explicitly represented and taught as being correct when it is not.

    2) With a hedging product, price is part of the product. It's not like an ice cream which you can enjoy the taste of even when you overpay for it (ignoring emotional cheapskate type thoughts). If a hedge is mispriced or not properly structured it is, to a certain degree, a less effective hedge or it throws off analysis you might be doing (eg if you're deciding on whether or not you should swap debt from fixed to floating).

    3) I honestly don't remember much about the series 7 and series 63 licensing exams, but we were required to take them (even though most of the financial subject matter was irrelevant to our line of business) because we talked to clients (or so I was told). I seem to remember that there was a good amount in at least one of those exams about ethics and the like and I don't think any of these games would have passed muster by those standards but who knows.

    4) A lot of this comes down to what your relationship is with the other party and can't easily be discussed in theoretical debates. Some readers have said that these companies weren't our clients but our counterparties. Well we referred to them and treated them as clients. But what does that actually mean anyway? Forget labels, what was our actual interaction with these companies on a day-to-day basis? I don't think anyone should be scamming anyone, but, especially when I think about how these interactions between us actually transpired and what kind of relationship those interactions implied us having with these companies, I definitely do not think the behavior was appropriate.

  • In reply to GoodBread
    Omer Rosen's picture

    GoodBread:
    Makes sense. I was obviously looking for the catch while reading your article and I'm not sure I would have cried foul the moment I saw DVO1 under different circumstances.

    Yeah in my original drafts of this article I structured it in a manner that would not give a warning and without explaining price settlement first (ie I structured it with the purpose of tricking the reader, as if they were a client, and only explaining what was wrong later).

    I realized that structure would be a problem when friends asked me to explain what "cash flows" meant. Having price settlement first and having all the warnings and explanations and analogies hopefully makes it an easier (relatively speaking) read on the off-chance that non-finance people pick it up...so if I don't get to enjoy the cruel satisfaction of tricking the maximum amount of people, I will just have to learn to live with that :)

  • In reply to Ludwig Von
    Omer Rosen's picture

    Ludwig Von:
    Dr Joe:

    Not always, no. But in this situation, a company enters a contract with a bank that undoubtedly mentions the settlement method to be used.

    Great point. If it's in the contract, which it probably is, then that's all there is to it and the banks aren't at fault.

    I can't tell if you're being sarcastic or serious here but I'll assume the latter and just stand corrected later if I am wrong. I consider it being in the contracts as being important for entirely different reasons - it represents proof. Anyway, I am not a contract lawyer but I don't think having it in a contract necessarily makes anything okay (whatever okay means to you...legally, ethically, morally, etc.).

  • GoodBread's picture

    Major props for this Omer (and Eddie). The general public distrusts Wall Street largely because of compensation when they really should be focusing on how banks squeeze the buyside (people's retirements) and corporates (at which most people are employed).

  • alexpasch's picture

    The clients didn't understand this? Like this is simple convexity, not complicated at all...

    Maybe these fees are priced in? As in, if they did it by price settlement instead of yield-settlement, the fees charged would be higher? My guess is that maybe everything was previously done by price settlement, and then some smart banker came in and thought, "well, I'll offer yield settlement, and pocket the difference that creates, but this will allow me to charge lower stated fees and steal market share from my competitors". Maybe the clients are not losing as much as we think? Just food for thought...

    Consultant to a Fortune 50 Company

  • In reply to alexpasch
    Edmundo Braverman's picture

    alexpasch:
    Maybe these fees are priced in? As in, if they did it by price settlement instead of yield-settlement, the fees charged would be higher? My guess is that maybe everything was previously done by price settlement, and then some smart banker came in and thought, "well, I'll offer yield settlement, and pocket the difference that creates, but this will allow me to charge lower stated fees and steal market share from my competitors". Maybe the clients are not losing as much as we think? Just food for thought...

    LMAO.

    Yeah, cause shit works out in the client's favor all the time.

  • In reply to GoodBread
    UFOinsider's picture

    GoodBread:
    Major props for this Omer (and Eddie). The general public distrusts Wall Street largely because of compensation when they really should be focusing on how banks squeeze the buyside (people's retirements) and corporates (at which most people are employed).

    AbsoFuckingLutely. To be fair, and I'm open about my bias, most other industries are shady as well....I'm a former restaurant guy and most people have no clue how far even a really good bar goes in raking its customers over the coals [google "alcohol profit margins"]. It's just human nature, and right now Wall Street is the whipping boy.

    It would be nice if it's over soon and people on our end STOP FUCKING UP, but we're tough, we can take it

    Get busy living

  • In reply to alexpasch
    Omer Rosen's picture

    alexpasch:
    The clients didn't understand this? Like this is simple convexity, not complicated at all...

    Maybe these fees are priced in? As in, if they did it by price settlement instead of yield-settlement, the fees charged would be higher? My guess is that maybe everything was previously done by price settlement, and then some smart banker came in and thought, "well, I'll offer yield settlement, and pocket the difference that creates, but this will allow me to charge lower stated fees and steal market share from my competitors". Maybe the clients are not losing as much as we think? Just food for thought...

    I personally have not seen or head of a client getting credit for convexity when settling via yield settlement. Nor have I ever heard of someone explaining to a client that yield settlement is wrong but that they are getting some credit for it. I was specifically taught yield settlement, quite early on in my time at the bank, as a way to make extra profit...not as a way to give a lower rate.

    The value of the convexity was not calculated ahead of time - as would have been necessary to give the client credit for it via a lower rate. It was calculated once the rate lock was settled and it was quite a simple calculation: subtract the true settlement amount found using price settlement from the incorrect settlement amount found using yield settlement. And this value was booked as profit. It was a separate calculation from whatever other profit had already been made on the rate lock through whatever other methods were used.

    Also, if I remember this next part correctly, as giving the client credit for convexity via a lower rate would mean having to assign a value ahead of time to the convexity, the traders would have then had to hedge the convexity over the life of the rate lock. This simply wasn't ever done in the context of treasury rate locks, no more matter how competitive the deal, as far as I can remember.

  • Inept Speculator's picture

    Omer insightful topic. Thanks.
    Would be nice if you touched a little of FX especially forward contracts. Are you familiar with NARC? Much appreciated.

  • In reply to UFOinsider
    bfin's picture

    UFOinsider:
    GoodBread:
    Major props for this Omer (and Eddie). The general public distrusts Wall Street largely because of compensation when they really should be focusing on how banks squeeze the buyside (people's retirements) and corporates (at which most people are employed).

    AbsoFuckingLutely. To be fair, and I'm open about my bias, most other industries are shady as well....I'm a former restaurant guy and most people have no clue how far even a really good bar goes in raking its customers over the coals [google "alcohol profit margins"]. It's just human nature, and right now Wall Street is the whipping boy.

    It would be nice if it's over soon and people on our end STOP FUCKING UP, but we're tough, we can take it

    Holy fuck I didn't realize bar's are making 70+% on alcohol.....hmmmm

    The answer to your question is 1) network 2) get involved 3) beef up your resume 4) repeat -happypantsmcgee

    WSO is not your personal search function.

  • In reply to bfin
    Omer Rosen's picture

    blackfinancier:
    UFOinsider:
    GoodBread:
    Major props for this Omer (and Eddie). The general public distrusts Wall Street largely because of compensation when they really should be focusing on how banks squeeze the buyside (people's retirements) and corporates (at which most people are employed).

    AbsoFuckingLutely. To be fair, and I'm open about my bias, most other industries are shady as well....I'm a former restaurant guy and most people have no clue how far even a really good bar goes in raking its customers over the coals [google "alcohol profit margins"]. It's just human nature, and right now Wall Street is the whipping boy.

    It would be nice if it's over soon and people on our end STOP FUCKING UP, but we're tough, we can take it

    Holy fuck I didn't realize bar's are making 70+% on alcohol.....hmmmm

    Haha I like to tell myself I'm paying for the "experience"

  • The.RealDeal's picture

    This is quite a refreshing post. Thank you Eddie for posting this and Omar for taking the time to share this with the WSO community.

    " A recession is when other people lose their job, a depression is when you lose your job. "

  • Going Concern's picture

    So this is basically saying that a bond usually experiences duration drift since its price-yield curve has convexity and isn't simply linear, so you can't assume DV01 stays constant as yields change. Surprised people can get away with implying otherwise, but this is basic fixed income to anyone that is familiar.

    “The new day brings new hope. The lives we’ve led, the lives we’ve yet to lead. A new day. New ideas. A new you.”

  • In reply to The.RealDeal
    oreos's picture

    The.RealDeal:
    This is quite a refreshing post. Thank you Eddie for posting this and Omar for taking the time to share this with the WSO community.

    I'd like to echo these sentiments. Cheers for taking the time to write this and if you have any more stories along a similar vein they'll be greatly appreciated.

    "After you work on Wall Street it's a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side." - David Tepper

  • Derivs's picture

    Just saw this thread. It's quite interesting to know what actually goes on in practice. So thank you for the post!

    But looks like someone forgot their Fabozzi 101. Isn't this simple under/overestimation from using DV01to calculate prices based on relatively large change in yields and not adjusting for convexity, which in this case kills the investor in up and down movements?

Pages