Pakistan vs India Semi-Final WC 2011

30th March, 2011 is going to be historic day in the history of Cricket World Cups. Pakistan has so far played 4 matches against India in all the cricket world cup matches and India has won all the matches. The most dazzling match was Quarter final in 1996 which Pakistan lost. In WCC 2011, initially Pakistan was not a favorite team at all due to the bad performance and scandals hovering over the team. However, the team played with faith, determination, and unity and proved their mettle by topping the group winning 5 out of six matches. Not only this Pakistan team got the honor of breaking the 34 matches winning streak of Australian team when they won the group match from Australia. Pakistan played quarter finals with West Indies and knocked the West Indians out to face Indians in semi final in Mohali, India.

Definitely, India has home ground and crowd advantages, yet Pakistan would prove difficult for Indians. With Afridi, Hafeez and Gul’s attacking bowling, form, and focus, with the building up batting form of Muhammad Hafeez, Asad Shafiq, Kamran, Umar, and Misbah, Pakistan has definitely an edge over Indians.

I guess this time Pakistan will break the winning streak of India in worldcups by knocking India out in semi finals with a convincing victory.

It will be great show to watch tomorrow.

Success Pakistan.

Liquidity and Zero Net Supply Assets

In basic asset markets, the marginal investors typically hold a long position in the basic assets due to the positive net supply. For such assets, an agent who is the seller of the asset is no longer concerned about the liquidity of the asset after the transaction, however, it is an agent who is marginal investor or buyer of asset who will be concerned about the liquidity of the asset once he closes the transaction. If the marginal investor expects an illiquidity of asset in the market, he would demand a compensation for the lack of immediacy she faces if she wishes to sell the asset. Therefore, in such markets the investors will demand a liquidity premium on those assets. Hence, cetris peribus, the more illiquid an asset, the higher would be its liquidity premium and its required rate of return, and consequently, the price will be lower. Empirically, evidences from equity and bond market show that stocks and bonds with lower liquidity have lower prices and command higher expected returns. This includes both the theoretical studies of Longstaff (1995a) and Longstaff (2001), various studies in equity markets, in treasury bond market by Amihud and Mendelson (1991), Longstaff (2004), and in Corporate bond market by De Jong and Driessen (2007) and Nashikkar et al. (2008).

Derivative assets are not similar to underlying assets such as stocks and bonds. Liquidity of derivative assets captures the easiness of offsetting the trade by the dealer. The liquidity of derivative therefore has importance for the dealer and bears an effect on its price. Generally, derivatives are in zero net supply, therefore, the marginal investors who are concerned about the liquidity can be either long the derivative assets or short the derivative assets. Suppose the marginal investor concerned about liquidity of the asset is long, she will require a “reduction” in price as a compensation for illiquidity, whereas, when the marginal investor concerned about liquidity of the asset is short, she will ask for an “increase” in price as a compensation. Therefore, for zero net supply assets, both the buyers and sellers would be concerned about the illiquidity and would push the prices in the opposite direction. In such a market, if the marginal investors concerned about liquidity are net long, the buyer-effect will dominate i.e., they will demand lower prices for illiquid assets. Whereas, if the marginal investors concerned about liquidity are net short, the seller-effect will dominate i.e., they will demand higher prices for illiquid assets.

One can conclude that in asset market with positive supply, the marginal investor concerned about liquidity will be buyer of the asset and therefore she will command the liquidity premium. However, in case of assets with zero net supply, it can be either seller or buyer who commands the liquidity premium depending upon whether the net-buyers or the net-sellers of the zero supply assets are concerned with liquidity of the assets.

For Interest Rate Options (Caps and Floors), Deuskar, Gupta and Subrahmanyam (2009) find that the “seller-effect” dominates in that market and therefore, the more the illiquid options, the higher the prices. For CDS market, Bongaerts, De Jong, and Driessen (2010) find the strong evidence for an expected liquidity premium earned by the credit protection seller and a small liquidity risk premium.

I will post more time and again on the topic …

Ramadan – Different than last year?

Ramadan Once Again. Thanks Almighty for giving me another opportunity of earning as much blessings of this holy month of Ramadan, 1430 H.

It is unbelievable that far from family and friends, I am going to spend my third Ramdan, this holy month in Holland, where it doesn’t seem like a holy month. Though there are quite big number of Muslims, Morrocan and Turkish, still it does not feel like a Ramadan. Ramadan in Pakistan where 97% of population is Muslims would be different than in Holland ofcourse. After coming to Holland, I spent my first Ramadan in Amsterdam. I did offer prayers punctually but didnt offer Taraweeh punctually. This is going to be my second Ramadan in Tilburg. Though last year, i hardly offered Taraweeh (maybe 10 days) and hardly recited the Holy Quran, except afew chapters. This time I plan to try to offer all the Salat and Taraweeh and also recite all the chapters of Holy Quran and would try to read translation of as many chapters as I can.

This time Ramadan started from Saturday 22nd August, 2009. The timings on first fast are from 05:00 to 20:53 and which is around 16 hours. This will reduce to 06:00 to 19:50 which is around 14 hours. Though its a long fast, it is not difficult because it is not as warm/hot as in Pakistan like Larkana or Lahore. So it is quite bearable.

Fasting day is a bit different than a usual day here. I atleast don’t cook on Sehri, just eat what is leftover of yesterday evening or eat yoghurt with some fruit, three slices of bread with Shami Kebab, a cup of milk and before the sehri time is over I would prefer to have a cup of Cappuccino coffee. For Iftaar, I do it with some Pakoras (Potatos, Aubergine (Egg Plant), or mix of chopped onions, potatoes, and some green chillies), sometimes Chola Chart, some Salan (either chicken or vegetable) and one Shami Kebab (either Daal or Qeema (minced meat)).

Eid is not a fascinating day here as We all, away from homes, miss our families. To me Eid is a festival to be celebrated with family and friends. Here are friends but the ambience is not Eid like. Here people, esp. Turks, call Eid-ul-Fitr as Sugar Festival. On this day, in the Center or Downtown, you will find some children fun playgames, shops etc., to enjoy. For us, it is to go offer prayers, if somebody invites for some gathering go to his/her place and have a nice gathering and back to work in University. It is completely different experience.

I hope this time we can arrange something very good which makes our Eid better here. I miss all my family very much, I wish I can celebrate the next Ramadan back in Pakistan InshaAllah.

Tilburg, The Netherlands

Tilburg, The Netherlands under the cold wave that struck Europe in early January 2009!

 

One of the view

 

Second View:

Back again :)

Happy reading…

Hi,

I am finally back but this time with the full commitment of writing very regularly. This time I am not talking about studies but something different.

Something has made me to write a small account here. Sometimes things change drastically and sometimes it takes centuries for a change to happen. I am not really talking about Obama, however i liked the word “CHANGE” that everybody’s eyes witnessed during his election campaign and afterwords. I wish him goodluck though.

From the beginning of December 2008, i have been quite busy with the exams and their preparations. I really didn’ t care much about happenings around the globe. Things have changed quite fast in such a short period of time. Specifically, the world has faced a number of crisis: after effects of the financial crisis; the two political crisis, one war in Gaza and the other Mumbai attacks; and the hovering-recession like a witch in some dreadful novel, not only showing symptoms but has actually hit US and is going to hit the globe sooner. I hope the gentlemen of the regulatory parts of the world would tackle it and save the world from the real cruel crisis which might make the poorer nations much poorer as most of the third world countries rely on the business with the first world so their byproduct fate.

The point I am trying to make here by quoting these events and quoting change is that I see alot of change coming as “Change” is calling on people to happen. One the one hand, the blame-game started in the war crisis in Gaza and in Mumbai attacks need a complete U-turn, and on the other hand, the first world countries must change their focus from handling issues by force. This is the right time to choose to live in peace rather than wasting resources on unfruitful things.

Israel has lived on the map for more than 50 years now and it has become reality so why not both Israel and Palestinians come to terms with each other. Similarly, Pakistan and India, both being sovereign countries, have lived more than 60 years on the map, so why to waste resources on fighting and playing a blame-game?  Why to waste resources by building warheads to terrorize each other? Why not this money is spent on the poor of the country who even don’t have clean drinking water to drink, who even don’t have dirty clothes to put on. We must not forget that at the beginning of the new century we made alot of promises and almost a decade is gone and we still stand on the same platform as if no train uses this track any more.

Realizing all the tiny things going through the nerves of our minds, it is time to act rather than delay.

We must we must ACT FOR THE CHANGE TO HAPPEN otherwise THINGS WILL CHANGE DRAMATICALLY this time

…

I am planning to write a “A Page of Finance” regularly. The next post would be “A Page of Finance…”

Options Pricing Framework – Introduction

It has been afew months since I made my account on WordPress.com. The motivation behind starting a blog on wordpress was manifold. The most important was to hone writing skills and share knowledge, experience, thoughts, facts and opinions with friends and colleagues. Moreover, I thought this would prove to be a platform to generating fresh and new ideas through constructive criticim.

Many days passed, but I couldn’t manage to take time out and head on with this long awaited wishlist task. Though I wished to write on number of various general issues, now I think I would start with some serious academic topic as I think this will help me in my understanding and my friends around.

The headline for the discussion I have chosen is Option Pricing Framework. The discussion will be designed in such a fashion that it will first provide a discussion on what options are? How can we price them using risk-neutral valuation and replicating approach. What are the basic numerical procedures of pricing? From Binomial to Black-Scholes World, then we will discuss the draw backs of the Black-Scholes Option Pricing. Final touches will lead to dicuss the alternative models that might address the short-coming of the models. We will try to incorporate within discussion empirical literature, if any.

GET SET GO … !!!

WHAT ARE OPTIONS?

Options are financial securities which derive their value from the underlying assets. Since such securities give the holder the right of excersizing, so the name “Option” is assigned to such securities. Elementary options that one can think of having can be having an exclusive right of either buying or selling some underlying asset. If the holder of the option has the right to buy the underlying asset, it is simply termed as “Call” option, and if the holder of the option has the right to sell the underlying asset, it is called “Put” option. As the names suggest, call sounds like you are asking for something i.e., you are buying some underlying asset whereas, put sounds like you are throwing something to the person on the opposite side which gives you a feeling of selling some underlying asset.

The commentary given above does not suffice the true definition of the option. The missing links of the proper definition arise by the questions like ”what price should option holder be buying the underlying asset when she exercises so called call option?” “who determines these exercise prices and when are they determined?”, and “when can the option holder really exercise the option?” 

By now you yourself would have gotten a feeling of what exercise price is? The exercise price is the price at which the option holder will buy the underlying asset, which is also called strike price at times. This exercise price is determined at the initiation of the contract. Moreover, if the option is traded on exchange, you will find the options written on certain stocks are available with different maturities and strikes.

Since options are the financial contracts, they have certain maturity. There can be two basic possibilities of options either to exercise on maturity or anytime during the life of the contract. If the contract gives you the right of exercising on maturity for a certain strike price, such options are flavored as European Options, whereas if the contract gives you the right of exercing anytime during th elife of the contract, such options are termed as American Options.

The readers must have come up by now with a very simple question, if the option holder has the right to exercise the option, what would the option seller would do? If I put this question to you back, I keep you in the shoes of the option seller (one who has granted such a right of buying/selling underlying asset to option holder), I will definitely expect that you will say such an option seller should honor the exercising right of the option holder. In case of call option, if he exercises the option of buying the underlying asset, the option seller is obliged (or has the obligation) of selling the asset to option holder at the agreed strike price at the initiation of contract and vice versa for put option.

Now we can present a very specific definition of the call and put options.

Call option is the financial derivatives contract in which the call option holder has the right, not the obligation, to buy the underlying asset at the agreed strike price on maturity of the contract whereas the call option seller has the obligation to honor such an exercise. Two parties, an option buyer and option writer are known as option holder and option writer respectively. The one who buys the call option is said to be Long Call and other who sell the call option is said to be Short Call.

The Put option will only differ in a sense that now option buyer (holder) will have the right to sell, in contrast to buying in call option, and option seller (writer) will have the obligation of buying the underlying asset from option buyer, with all other conditions same as mentioned in call option definition.

I will continue this discussion tomorrow Happy reading … !!!

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