Penguins in Bondage?

After having published the Vanilla building post, I saw the march-of-the-penguins photo. And I thought, are those two trying to change direction?

However, most change initiatives fail.

For the penguins in the cold it might be difficult to move, they stay in the herd. But the two might instinctively want to move into a zone with a better micro climate?

There has been a lot of criticism on models and the complexity of instruments and its interplay. And yes, some deal types are intrinsically toxic.

You might explore this when checking them across model-scenarios (like complex interest rate derivatives across various short rate models and the Libor market model). If you are sure that your model representation is accurate and robust enough and you have done the calibration and its related parameter identification right and you observe significant differences in prices and risk factors, stay away from that instrument, unless you can explain, why this is so.

But how many do? If everybody uses Libor market models for everything, what can be wrong? OK, it became a bit cold now but ...

We at UnRisk, might be the two ... but we are not naive: change will take time.