< The Finance Professionals' Post: March 2013

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8 posts from March 2013


Forget the European Union’s Bonus Cap. Worse May Be to Come


Like a busy cephalopod, the European Union’s bonus capping law makers are putting their tentacles into places previously considered out of bounds. Asset management firms are the latest to be touched. Hedge fund managers could be next.

Sven Giegold, a German Green Member of the European Parliament (MEP) , has proposed that fund managers working at UCITS funds should have their bonuses capped as a proportion of salaries in much the same way as bankers. As reported yesterday, this implies a maximum cap on bonuses of 250% of salaries, with shareholder approval. The cap would be a step, “towards ending the gambler mentality in the investment fund sector,” said Giegold in support of its introduction.

Continue reading "Forget the European Union’s Bonus Cap. Worse May Be to Come" »


Don’t Miss the Easiest 15 Points on the Exam!

CFA Exam Prep

Want to know the easiest way to lose 15 points on the exam? According to Michael Maestas, CFA, CPA, it is showing up with only a beginner’s understanding of how to use the HP12C or TI BA-II calculator. He says the difference between being a novice and a power user can easily be worth that much.

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Recent Research: Highlights from March 2013

"Derivatives in Islamic Finance: There is No Right Way to Do the Wrong Thing – Opportunities for Investors"
The Journal of Investing (Spring 2013)
Andreas A. Jobst

Derivatives are few and far between in countries where the compatibility of financial transactions with Islamic law requires the development of shari’ah-compliant structures. However, as Islamic finance continues to develop rapidly, the rising opportunity cost of limited shari’ah-compliant risk transfer mechanisms has raised questions about the scope of religious restrictions on the use of derivatives, and the scope for efficient risk management techniques for investors. Islamic finance is governed by the shari’ah, which bans speculation and gambling, and stipulates that income must be derived as profits from the shared generation of goods and services between counterparties rather than interest or a guaranteed return. The article explains the fundamental legal principles underpinning Islamic derivatives by reviewing accepted contracts and the scholastic debate surrounding existing financial innovation in this area, in order to generate an axiomatic perspective on a principle-based permissibility of derivatives under Islamic law. An overview of recent standardization efforts also is provided.

"Pricing American Options in the Heston Model: A Close Look at Incorporating Correlation"
The Journal of Derivatives (Spring 2013)
Peter Ruckdeschel, Tilman Sayer, and Alexanger Szimayer

The Binomial model and similar lattice methods are workhorses of practical derivatives valuation. But returns processes more realistic than lognormal diffusions with constant parameters easily create difficulties for them. One of the most important extensions of the Black-Scholes paradigm is to allow stochastic volatility, but even nonstochastic timevarying volatility destroys the important property that the tree recombines, which limits the growth in the number of nodes as time advances. Stochastic volatility introduces a second random variable, which then requires adding another dimension to the tree, under the constraint that the return and volatility changes must maintain the same degree of correlation as in the data. The Heston model features correlation in return and volatility shocks, but building it into a lattice is tricky. In this article, Ruckdeschel, Sayer, and Szimayer develop a lattice method that begins with a binomial tree for the volatility and a trinomial tree for stock price, and then connects them in such a way that the empirical degree of correlation between return and volatility is maintained. Efficiency relative to existing methods is increased, and in some cases it is possible to improve performance further by matching higher moments as well.

"Key Drivers of Private Equity Firm Certification at Initial Public Offering"
The Journal of Private Equity (Spring 2013)
Mike Hopkins and Donald G. Ross

Private equity firms have been shown to add considerable value to investee companies. This article examines buy-side financial analyst perceptions of the determinants of private equity firm value added. The findings reveal significant relationships between the attractiveness of private equity firms’ IPOs and 1) their reputations, 2) their level of retained ownership, 3) the duration of their involvement prior to the IPO, and 4) the interaction between duration and intensity of involvement. The research reveals certification effects are best explained by theories of resource exchange and reduced informational asymmetries with reduced agency risk being a much lesser influence.

"An Investor’s Low Volatility Strategy"
The Journal of Index Investing (Spring 2013)
Li-Lan Kuo and Feifei Li

Investors are displaying a fast-rising appetite for low volatility strategies, given growing academic and empirical evidence of consistent outperformance over the markets from which they are drawn. However, many existing low volatile strategies are optimized, creating biases toward smaller cap stocks and over-concentration in a small number of sectors and/or countries. Instead, we develop a heuristic-based design that leads to a practical portfolio with a superior Sharpe ratio as well as more investor-friendly attributes, including a lower turnover rate, higher investment capacity, relative transparency, and broader market representativeness.

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Are Interest Rate Fixings Fixed? An Analysis of Libor and Euribor

The London Interbank Offered Rate (Libor) and the Euro Interbank Offered Rate (Euribor) are two key market benchmark interest rates used in a plethora of financial contracts with notional amounts running into the hundreds of trillions of dollars. The integrity of the rate-setting process for these benchmarks has been under intense scrutiny ever since the first reports of attempts to manipulate these rates surfaced in 2007. In this paper, we analyze Libor and Euribor rate submissions by the individual panel banks and shed light on the underlying manipulation incentives by quantifying their potential effects on the final rate set (the “fixing”).


Furthermore, we explicitly take into account the possibility of collusion between several market participants. Our setup allows us to quantify such effects for the actual rate-setting process that is in place at present, and compare it to several alternative rate-setting procedures. We find that such alternative rate fixings, and larger sample sizes, could significantly reduce the effect of manipulation. Furthermore, we discuss the role of the particular questions asked of the panel banks, which are different for Libor and Euribor, and examine the need for a transaction database to validate individual submissions.

–Alexander Eisl, Rainer Jankowitschy, WU (Vienna University of Economics and Business); Marti G. Subrahmanyamz, New York University, Stern School of Business

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The Keys to Writing: Investment Research Reports That Stick

If you want to enhance your reputation as an analyst, your aim is to write reports that stick, that is, reports that your clients will remember.

Face it: Today's multi-tasking readers are busy, sleep deprived, distracted, and—most likely—reading your report on a mobile device while rushing to the next meeting.

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How Your Work and Education Background Correlates to Your CFA Exam Performance

If you don't have a finance-related background, are you disadvantaged when it comes to the CFA exams?

In the December 2012 exams, we set out to find some clues to shed some light on just that. In our Analyze Results tool, we now include a question where candidates can input their work and education background, indicating whether their backgrounds were finance-related or not.

Given enough of a sample size, we could then compare the various background profiles with pass rates, and see how pass rates varied across candidates that had different backgrounds in work and education.

The results were quite surprising.

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This Emerging Market Investment Bank Increased Headcount by 20% and Is Still Hiring


Arqaam Capital, an emerging markets focused investment bank based in Dubai, has increased staff by 20% since January 2012 and is continuing to expand. Senior employees in shrinking bulge bracket banks have taken note.

While international banks have cut headcount in the Middle East, Arqaam has hired 18 people to take its total headcount to 110 across all of its offices – an increase of 20%. This week, it named former Credit Suisse banker Wafic Nsouli as its new head of institutional equity sales.

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Why I Marched Against the XL Pipeline

My daughter and I joined an estimated 50,000 demonstrators in Washington, D.C. marching against the XL Pipeline that would connect the Canadian Tar Sands to American refineries.  After a half century on this planet, I took to the streets.  Here’s why.

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