Climateer Trouble Of The Day: Convexity Edition

From the Convexity Maven via ZeroHedge:

...Wall Street loves to brand convexity audio complex (I suppose it’s thus they tin accuse higher fees?). We verbalize Greek (calling it “gamma”), employ physics as a metaphor (analogizing to it “acceleration”), in addition to purpose mathematical definitions (since it is the minute derivative of the asset’s cost change).

Pish, posh. An investment is convex if the reward is unbalanced for every bit reverse outcomes. So if there’s the potential to earn a lucre of ii on a bet versus a maximum loss of one, the bet is positively convex. If you lot tin lose 3 versus making two, it is negatively convex. That’s it. The rocket scientists are called upon to aid (fairly) cost the cost (value) of such possible outcomes. This is why the expansion of derivative trading inwards the 1990’s resulted inwards a hiring spree of physics PhD’s....

"Pish. Posh." is a technical term alone used past times marketplace professionals for those situations where 1 has decided to become total Alinsky dominion #5:

#5 Ridicule is man’s almost rigid weapon. It’s difficult to counterattack ridicule, in addition to it infuriates the opposition, which in addition to thus reacts to your advantage...

The Convexity Maven is zippo if non a professional. Here is business office of his mini-bio at MacroVoices:

Harley S. Bassman
Harley Bassman created, marketed in addition to traded a broad multifariousness of derivative in addition to structured products during his twenty-six-year career at Merrill Lynch.  In 1985 he created the OPOSSMS mortgage options production that facilitated run a jeopardy transmission betwixt MBS originators in addition to fiscal institutions.  In 1988, he assumed responsibleness for trading in addition to marketing IO/PO in addition to other levered prepayment securities.  Soon later this, he started purchasing RTC auctioned MBS Servicing rights in addition to repackaged them for the securities marketplace as BIGS - Beneficial Interests inwards GNMA Servicing.  Later, he started a GNMA servicing conduit becoming 1 of the Top 20 originators inwards 1992.  As managing in addition to hedging prepayment run a jeopardy became a priority focus for the fiscal markets, Mr. Bassman created PRESERV, Merrill's trademarked Prepayment Cap product. Merrill was a leader inwards this production category writing protection that covered the run a jeopardy on tens of billions of notional mortgage servicing rights.  Later, Mr. Bassman managed Merrill's initial venture into off-balance canvass mortgage trading.

In 1994, Mr. Bassman assumed responsibleness for OTC bond options.

Within a year, Merrill was the leader inwards this production sector.  H5N1 broad multifariousness of products were offered including vanilla in addition to complex options on MBS spreads in addition to the Treasury yield curve.

To aid clients to a greater extent than fully appreciate Volatility as a principal run a jeopardy vector, he created the MOVE Index.  Similar inwards shape to the VIX Index, it is instantly the recognized touchstone mensurate of Interest Rate Volatility.

From 1995 to 2000 he focused on creating hedge strategies for MBS servicers in addition to portfolio optimization techniques for Total Return in addition to Index investors.

Mr. Bassman became the managing director of North American MBS in addition to Structured Finance trading inwards 2001.  During his tenure, he created SURF, (Specialty Underwriting in addition to Residential Finance), a self-contained Sub-Prime mortgage conduit.  He supervised the issuance of Merrill’s get-go Sub-Prime securities. He also transitioned the structuring draw concern to a novel technology platform.

In 2006 he built the RateLab, a total spectrum USA Rates Trading Desk Strategy Group.  Here he worked alongside investors to suggest in addition to optimize their run a jeopardy exposure.  As a primal fellow member of the customer trading business, he facilitated action past times providing liquidity to both the firm’s clients in addition to marketplace makers.

After a (too) brief sabbatical, inwards 2011 Mr. Bassman joined Credit Suisse's Global Rates draw concern where he identified in addition to integrated investment in addition to hedging opportunities for sophisticated investors.

Most recently, Mr. Bassman was an Executive Vice President in addition to Portfolio Manager at PIMCO - a leading global investment administration firm.  Here he managed investments for the Liquid Alternative products grouping as good as advised on portfolio strategy across property classes for the firm's franchise businesses.

Mr. Bassman splits his fourth dimension betwixt Laguna Beach, California in addition to New York City. He has a B.A. inwards administration scientific discipline from the University of California, San Diego in addition to an MBA inwards finance in addition to marketing from the University of Chicago....

The entire ZeroHedge piece is worth a read if you lot bring the time.