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How do CDS index tranches work and what risks do equity, mezzanine, and senior tranches carry?
CDS index tranches slice the default loss distribution into layers. Equity tranche absorbs first 3% of losses, mezzanine layers follow, super senior sits at top...
How do I integrate human capital and financial capital in a total-wealth framework?
The integrated total-wealth framework treats human capital as an asset on the investor's balance sheet and optimizes financial-capital holdings.
What's the difference between common factor variance and specific variance?
Variance decomposes into common (systematic) and specific (idiosyncratic) parts. Common variance equals factor exposures times factor covariance. Specific variance diversifies away...
How do I compute effective convexity for a bond with embedded options?
Effective convexity uses finite differences: (P− + P+ − 2×P0) / (P0 × (Δy)²). Requires an option-aware pricing model to revalue at shifted yields.
How does Gibbs sampling work and when is it preferred?
Gibbs sampling is an MCMC method that cycles through parameters, sampling each from its full conditional distribution given all others. When full conditionals have known form...
How do I compute Net Borrowing Cost and use it in spread analysis?
NBC = (Interest Expense - Interest Income) x (1-t) / Average NFO. Calypso's 5.04% vs RNOA 11% yields 5.96% spread, amplifying ROE via leverage. Validate against treasury + credit spread; watch for capitalized interest distortions.
What are Pompian's four behavioral investor types?
Michael Pompian's four Behavioral Investor Types: (1) Passive Preserver — low risk, emotional (loss aversion); (2) Friendly Follower — moderate risk, cognitive (availability, recency); (3) Independent Individualist — moderate-high risk, cognitive (overconfidence); (4) Active Accumulator — high risk, emotional (overconfidence, regret aversion)...
What happens when a hedge relationship is discontinued?
Discontinuation of hedge accounting is common when the derivative expires or is sold...
What qualifies a derivative for hedging designation under ASC 815?
ASC 815 imposes strict designation criteria at hedge inception...
What is the T-forward measure and why is it useful?
The T-forward measure uses the zero-coupon bond P(t,T) as numeraire instead of the money-market account.
How does the Libor Market Model (BGM) differ from HJM?
BGM models discrete forward LIBOR rates L_i(t) — the rates underlying caps, floors, and swaptions — rather than instantaneous forwards.
What is the Heath-Jarrow-Morton framework for forward rates?
HJM models the entire forward rate curve directly. The drift alpha(t,T) is uniquely determined by the volatility structure sigma(t,T).
Auction vs dealer markets — how do they compare on cost and transparency?
Auction markets match buyers and sellers directly via competitive bidding; dealer markets use intermediaries who buy/sell from inventory. Equities favor auctions; bonds, FX, and swaps favor dealers.
How does the availability heuristic distort investor decisions?
Availability inflates the perceived probability of vivid or recent events, driving home bias, post-crash selling, and megacap overweighting. Remedies are quantitative frameworks and decision journals.
What's the difference between general obligation and revenue bonds?
GOs: full taxing power. Revenue bonds: project-specific cash flows only. Cascadia issues both; revenue spread is higher reflecting project risk and rate covenants.
How do I build an active risk budget at the fund level?
Active risk budgeting allocates a total tracking error target across strategies, controlling both total active risk and contribution per sleeve...
What is effective duration and when must I use it instead of modified duration?
Effective duration numerically reprices bonds after parallel curve shifts using an option model — required for callables, putables, and MBS where cash flows depend on rates.
Can fine wine actually work as a serious investment?
Fine wine is a small but established alternative asset class. Returns come from scarcity, quality evolution, critic scores, and fashion cycles.
What disclosures do issuers of municipal bonds provide?
Rule 15c2-12 requires official statement at issuance plus annual financials, operating data, and 10-day material event notices filed to EMMA.
How do I calculate the liquidity constraint in an IPS?
Liquidity = ongoing distributions (typically 1 year) plus one-time near-term outflows plus emergency reserve. Separate ongoing from one-time when writing the IPS.
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