Financial Engineering of Climate Uncertainty

The climatic condition influences and determines the various sectors in the economy. The emergence of weather derivatives in the financial market is the most palpable reflection of this reality. Derivative contracts climate use climate measures, analogous to the target asset for the pricing.

An institution that wishes to eliminate the risk of a given weather event, such as a period with little/excessive rain or temperature can purchase weather derivatives contracts, adjusting the unfavorable weather conditions to the estimated lost value and the return of the contracts.

The high speed dark side.

The segment of High Frequency Trading is currently designated as the ultimate technology in systems investments, because of the ability to manage orders directly to book on a high speed.

There is much controversy regarding this technology, either for lack of structure and procedures of software development, causing risk of failure, or the misuse of some participants due to the price manipulation caused by these systems.

FCA, British authority, fined by the 1st time a case of market abuse caused by the misuse of high-frequency systems, due to an abusive practice that uses high speed to send and cancel a high volume of orders in the book, pressing prices artificially.

Investment systems: a pragmatic text.

Investment / Trading systems are computer programs that send orders in the capital market. It's technology architecture is designed to support a decision system that sends signals to enter and exit on asset positions (buy and / or sell).

What ensures investment efficiency is the ability of these systems on making profit in the long run with the maximum possible security. The big question when we consider these systems is the ability to evaluate the performance and rank it as sufficient to ensure efficient management.

That is, put another way, how to separate systems that lack credibility on signals generating of which represent a significant result.

4 selected articles from “The Journal of Finance” – February 2013

The last edition of The Journal of Finance [link] came with good articles, related to financial engineering and capital markets that I would appreciate to list.

The Journal of Finance, one of the most prestigious finance journals, was established on 1946. Is one of the most cited journals with distinguished articles like “Portfolio Selection” [link] – Henry Markowitz.

The selected articles are:

Controlling Complexity in Trading Systems.

The development of trading systems can achieve high degrees of complexity. The process of simulating a particular strategy, termed backtesting can be triggered in several stages of optimization, and monitored at various levels of automation.

Developers always seek out new strategies or logical combinations. A system composed of a set of modules, which are interconnected, could trigger many situations.

The algorithmic complexity that can arise from this process is very high and if not taken care of organizing the evolution of codes, it is possible that errors can be observed as recorded in Knight Capital.

Modules that, being in great quantity and interconnected, go through changes at different times, and, may generate imbalances in the flow of information.

It's not it, but we say it is, to see, how it would be, if it was!

I heard this definition of simulation when I was an undergraduate student. Because it was funny and intuitive, I found it very interesting to use this term to define simulation.

The great utility and insight behind this definition is the ability to simulate what I wish.

That is, the author of the phrase is not worried about obeying any rules or fixed protocols. Rather, he is concerned to investigate and be flexible.

Managing Trading Systems: An Automation and Control Point of View.

Capital Market Investments are known as being risky process, requiring an adequate Risk Management (see Financial Risk Management , Volatility vs. Risk, HFT Risk ). Trading Systems are not out of this group, but trading systems have a particular element: It´s a systematic approach. Systematic doesn´t means profitable, however means tractable (see Financial Automation and Control: a new age).

When I say tractable, I’m referring to the mathematical model, where all the variables and parameters are disposal, ensure tracking.

On the tracking list could be included: