Speculative Capital: The Nature of Risk in Capital Markets - Hardcover

Saber, Nasser

Hardcover

ISBN 10: 027364422X ISBN 13: 9780273644224

Publisher: Financial Times Management, 1999

Synopsis

Details the characteristics of derivatives, which act as the functional form of speculative capital in financial markets.

About this title

About the Author

Nasser Saber is the general partner of Saber Partnership (saberpartnership) in New York. He holds a masters degree in engineering from Case Western Reserve University and an MBA in quantitative analysis and finance from NYU.

Nasser spent ten years with Standard and Poor and the New York branch of Credit Lyonnais where he led projects in the design of trading and risk management systems. He lectures on Derivatives Risks at NYU's Institute of Finance and Banking.

From the Back Cover

Saber shows that valuation of derivatives presupposes speculative capital; the Black-Scholes option valuation model outside its financial context has no meaning.

What is more, options are not what they seem to be: rights to buy or sell. They are rights to default in a forward. The implications of that discovery for options valuation, risk management, portfolio insurance, hedging and credit risk quantification cannot be over-emphasized.

Next is the uncertainty in the law of securities and derivatives which has bedeviled the practitioners and scholars of law in the US for over half a century, and whose theoretical difficulties are put to rest thanks to Saber's logical development of the meaning of securities and his explanation of how they differ from derivatives.

Finally, there is the question of systems and operations risk, where confusion and arbitrary interpretation have managed to obfuscate the true source of the risk: the attempts of insiders to circumvent the control mechanism of the institutions.

Speculative Capital & derivatives is the continuation of the journey that began in Vol. 1, with the aim of discovering the consequences of the operation of speculative capital. No other book in contemporary finance an economics takes its readers farther from their starting point or presents them with more insightful discoveries. What emerges at the end of this journey is an understanding of the true nature of risk in capital markets that was never known before.

Excerpt. © Reprinted by permission. All rights reserved.

Foreword

Derivatives are the functional form that speculative capital assumes in the market. This form is fundamentally a bet. But like the bodies of the damned in the Inferno whose deformity corresponds to the sort of sin they have committed, the particular composition of each derivative corresponds to the sort of arbitrage opportunity that speculative capital intends to exploit. Arbitrage opportunities are many and varied; hence the confusing array of derivatives and the tortuous legal documentation that must accompany each.

As the embodiment of speculative capital, all derivatives comprise basis risk. Basis risk is inherent to speculative capital and cannot be "diversified away." Additionally, the specific structure of derivatives gives rise to three other risks. One arises from the failure of finance to understand them. Theoretical failure, because the value of derivatives is calculated through theory, translates to market risk, which, unbeknown to the theorist, is also the counterparty risk. Another risk arises from the failure of the law to understand them. A baffled law creates legal uncertainty, hence the legal risk of derivatives. The third is due to the operational complexity of derivatives which makes calculation of their profit and loss susceptible to manipulation. That is the systems and operations risk.

With the exception of systems and operational risk, some of whose aspects are understood by some practitioners, the subject of the risks of derivatives is virgin territory. That is not due to a dearth of attempts to explore it. Quite the contrary; the mountain of material on the subject has few rivals in any discipline. But the territory of concern to us is in the realm of theory and thought, into which unthinking material cannot penetrate—no matter what its size. The scholars of law provide a case in point. They have dried up seas of ink writing about the meaning of a security and whether this derivative or that note is a security. In the end, the question of what a security is has remained as puzzling as ever. In fact, the uncertainty has increased with each writing because arbitrary interpretations have become, by virtue of being written, reference points for even more muddled ideas.

The market and counterparty risk of derivatives is an even sorrier story. While the scholars and practitioners of law at least know what they do not know, no one in finance suspects that the concept of an option, as universally understood, is all wrong. Here, too, the published material on the subject has only served to create a fluffy theoretical environment in which legions of "theorists" enjoy happy sustenance like ticks on a sheep.

Derivatives are the embodiment of speculative capital. It is impossible to understand them without knowing what speculative capital is. Having studied this potent and paradoxical force of finance in Vol. 1, we now turn our attention to derivatives and their risks.

Edition details

• Publisher: Financial Times Management
• Publication date: 1999
• Language: English
• ISBN 10: 027364422X
• ISBN 13: 9780273644224
• Binding: Hardcover
• Number of pages: 284