That the return of the underlying instrument follows geometric Brownian motion, implying a lognormal distribution of the return.
a dynamically managed portfolio of the underlying instrument and zero-coupon bonds.
The TED spread is the difference between the interest rates on interbank loans and on short term US government debt (“T-bills”)
TED = 3-month LIBOR minus 3-month T-bill
The TED spread is an indicator of perceived credit risk in the general economy, since T-bills are considered risk-free while LIBOR reflects credit risk of lending to commercial banks.
The LIBOR-OIS spread is the difference between LIBOR and the OIS or overnight index swap rate.
The spread between the two rates is considered to be a measure of health for the banking system.
A higher spread (high LIBOR) indicates a decrease in willingness to lend.
Regulatory capture is a form of government failure that occurs when a regulatory agency, created to act in the public interest instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating.
Occurs because agency becomes staffed with industry vets.
When businesses shop for a country that allows a specific behaviour rather than changing behaviour. Achieved by exploiting loopholes through restructuring transactions, financial engineering and geographic relocation.
IR = annualized residual return / annualized residual risk = α/ɯ
risk aversion of investor = λ
Value Added = α – (λ * ɯ^2)
Maximum Value Added = IR^2 / 4λ
at Optimal Level of Risk = ɯ* = IR/2λ
POST = FV / (1+r)^n
PRE = POST – INV
Required Fraction of Ownership = INV/POST
Investor Shares = Founder Shares (f/(1-f))
Stock Price Per Share = INV / Investor Shares