Blog Posts

Modern portfolio theory revolves around creating an optimal portfolio that maximizes the expected return for a given level of risk. Yet, traditional portfolio optimization methods often consider only the first two moments of the return distribution: mean and variance. Mean is basically returns – i.e., how much has this asset generated per year or how […]

The First-Hitting-Time Model (FHTM) is a mathematical concept that originates from the field of stochastic processes, which we’ve covered in our article on probability theory in trading. It’s more recently gained prominence in finance, particularly in trading and portfolio management. The model is used to predict the time it takes for a random process to […]

In finance, replicating portfolios have emerged as a popular tool for managing risk and enhancing returns. By creating a portfolio that replicates the cash flows of a specific financial instrument, investors can achieve a level of security and predictability. This article will look at the concepts of static and dynamic replication, as well as static […]

There are several assets that can be considered stores of value that hold their value over time and are less dependent on infusions of liquidity and good economic conditions. Including some level of “anti-growth” assets in a portfolio can help to mitigate risk and provide a store of value for a more balanced portfolio or […]

The duration gap is an important financial and accounting term commonly used by banks, pension funds, and other financial institutions to assess their risk due to fluctuations in interest rates. This article looks at the concept of duration gap, discussing its significance and how it helps institutions manage asset-liability mismatches.   Key Takeaways – Duration […]

In recent decades, the 401(k) retirement savings plan has surged in popularity, gradually overshadowing traditional pension plans, also known as defined benefit plans. This shift has been driven by several factors, including: the changing nature of the labor market the preferences of employers and employees, and regulatory changes This article looks at the reasons behind […]

Cash flow matching, also known as “dedication” or “immunization,” is a strategy used by investors to align future cash inflows with anticipated cash outflows. This is often used to manage liquidity and interest rate risk, especially in managing pension funds, insurance companies, and other financial institutions, and minimize risks associated with asset-liability mismatches. This method […]

Option pinning is a phenomenon in the options market where the price of an underlying asset tends to gravitate toward the strike price of a large, near-the-money option with a short time to expiration. This process occurs due to the dynamic hedging activities of market participants, particularly market makers. In this article, we’ll look at […]

Asset-liability mismatches (ALMs) occur when the financial characteristics of an entity’s assets do not align with those of its liabilities. These mismatches can lead to substantial financial risks, including liquidity crises, currency risks, and interest rate risks. It can pose a problem for traders as well. Often, market participants and businesses are not aware of […]

When it comes to investing, few names carry as much weight as Warren Buffett, the chairman and CEO of Berkshire Hathaway and one of the world’s most successful investors. Over the decades, Buffett has developed a highly effective investment approach that has made him one of the world’s most successful people by conventional measures. What […]