Ses 7: Fixed-Income Securities IV

MIT 15.401 Finance Theory I, Fall 2008
View the complete course: ocw.mit.edu/15-...
Instructor: Andrew Lo
License: Creative Commons BY-NC-SA
More information at ocw.mit.edu/terms
More courses at ocw.mit.edu

[@Qladstone]

Damn this is better than Netflix. Amazing finance lectures held at a pivotal moment in history. This lecture series is AAA documentary-grade.

[@falinoluiz5962]

Be careful, the rating might change when exam season comes and motivation to watch the lectures becomes more correlated with the motivation to study for the exam.

[@OttoFazzl]

The best intuitive explanation of CDOs that I have seen so far.

[@kushalsaitia971]

Lecture starts at 17:00 , Q&A primarily focuses on the then current financial news of financial institutions consolidating and the bailout package is briefly mentioned.

[@dirmanbw336]

Thank you very much

[@chaganbhaipatel7]

Llllllpllllllll

[@kristinrutherford8779]

every second of Andrew is worth watching imho

[@anonymous.youtuber]

Thank you very much for your excellent explanation of securitization. Btw “tranche” just means “slice”.

[@IamPaste]

The scenario he discussed in "Confessions of a risk manager" sounds a bit like what has been happening in the equities market during 2021.

[@crazyfox7999]

Very good course so far this guy is excellent

[@aenguspatterson4512]

Thank you guys for putting this content out there, I'm a teenager and feel really happy to learn this stuff!

[@Deeb741]

In the samw boat as u, are u planning on majoring in finance?

[@aenguspatterson4512]

@@Deeb741 no, more likely computer science

[@wakingdisaster]

It's probably because the lecturer set it up so well with the coin toss analogy, but it seems so obvious that the default rate would be correlated... "he still doesn't get it" lol

[@un-karnish2967]

1:02:00 The underlying assumption that all the bonds behave according to their rating i.e., ratings are fairly accurate is what went wrong. Not entirely to be blamed but ratings agencies did a very bad job on their part.

[@WanderingExistence]

How do regulators assess the correlation of underlying CDO assets?

[@bluesuedeshoes801]

The student that asked if you could estimate the probabilities yourself got it spot on, it was obscured from investors, but some looked. I'm looking at you, Michael J. Burry!!

[@SphereofTime]

2:48 yield

[@jeffreyanderson5333]

Salute to Central Limit Theorem

[@liamtarr]

I salute you CLT.

[@alexlee557]

20:26 unless country joins some monetary union

[@kylekyle6940]

This 2023 uncertainty is interesting compared to the actions at the time of this course

[@luizfiorentini9522]

lecture starts at 17:00

[@mustavogaia2655]

Tranche can be translate as slice, just as the professor used further on the lecture.

[@wakingdisaster]

Yup. At the bakery you can ask for your pain to be tranché

[@redouaneabegar5490]

Is it possible to get a certification out of that course, it really is gonna be helpfuL

[@vl2091-i4t]

I believe they have a version of this course on Edx where you can get a certification as part of their micro masters in Finance.

[@MrBTie]

1:02:04 "he still doesn't get it" LOL

[@beastmode1647]

I’d say he did though They went long on the senior tranches and short on the junior. Changes in correlation between the underlying bonds led to the juniors having less risk than predicted. So people started buying up the juniors, leading to a short squeeze. And the risk managers who shorted the juniors got rocked That risk manager’s quote shows he understood what happened

[@qiansu2001]

Good explanation, but I have a question. It seems that people were in short positions of junior tranches and long positions in the AAA tranches loses money, which perfectly explained by the model. However, in the movie "Big Short", people actually shorted CDOs and made a heck of money by doing so. Is there a conflict between shorting CDOs and shorting junior tranches of CDOs??

[@qiansu2001]

One possible explanation I come up is, the default rate in the sub-prime crisis also goes up to far more than 10%, say 30%, then the PV of the junior tranches also goes down, hence the entire CDO collapsed...just my conjecture

[@sabatino1977]

Also, it was a movie and not necessarily 100% accurate or in depth enough to explain such a detailed topic. Good question, though. I am trying to find something to answer it for you.

[@funnyclips1334]

I think the point was that they are very correlated. therefore if 1 fails the other one is also failing. however under normal conditions it was said that the senior should be far lower risk and if these initial assumptions were wrong then just based upon arbitrage of the higher priced senior and lower priced junior there would be a 'free lunch' for shorting senior and buying junior. So basically before they both crashed together there was an adjustment in the relative values of the two in theory. ( eg. initial probability 1% and 19%, probability while market is crashing much higher and more equal maybe 50% and 50% so both would decrease in value but the one relative to the other would decrease and increase due to the gap of 1% and 19% closing

[@funnyclips1334]

the fund manager though was saying that the reason for this change in relative values was short sellers cashing in their profitable short trades while the senior was in free fall

[@JustinIm27]

The banks were long on senior tranches and most investors were short the junior tranches. The people in the “Big Short” went against the grain and shorted the “super safe” senior tranches. That’s why the banks were so eager to take their money until they realized their “AAA” rated senior tranches were actually shit.

[@keshavmittal1077]

I think rating agency lied sometime and it's necessary too because in 2008 if they certainly rate less to Lehman brother's company,it already create panic and leads to recession

[@bananajoe700]

I am not getting the same results as his at 18:45 does anyone have any suggestions?

[@RaylinRecords]

What number are you getting?

[@19881224sahan]

Whats this lecturer’s name?

[@mitocw]

He is Andrew Lo. For more information and materials, see the course on MIT OpenCourseWare at: ocw.mit.edu/15-401F08.

[@ruckusrevolution9475]

Yield curve is inverted today 👀👀

[@PeruanoEnTurquia]

thank you so much for sharing this content.

[@arrowb3408]

Hahaha... What a metaphor for the second Junior bond as toxic waste, but the kids at the class are numb-headed...... Hahaha....STF

[@TheYi1985]

Ahaha

[@neelmoradiya1389]

🇮🇳🇮🇳🙏🙏🙏👍👍

[@Antaboga9]

Prescient. Quik koreksi: tranche = slice; tranchée = trench. As in slices of fiat shite...

[@priyadarshisurmya]

Not a stroke of genius, but of cheating. You allocate a value to asset that it doesn't hold and then rating agencies give them a higher rating. All this while the underlying asset is 10 times riskier than the senior tranche