Fischer Black and Me

The video explores Fisher Black's 1970 financial model, focusing on risk tolerance and the role of banks. It contrasts this with the modern shadow banking system, where asset managers invest in residential mortgage-backed securities. The video explains how risk is managed through derivatives like interest rate swaps and credit default swaps, highlighting the roles of global funding banks and derivative dealers.

What was Fisher Black's view on the role of banks in the financial system?

• Banks were only for risk-tolerant individuals.

• Banks were unnecessary in a world without money.

• Banks were essential for channeling risk-free loans.

• Banks were primarily for issuing equity.

In the shadow banking system, who primarily holds the net worth?

• Risk-tolerant individuals

• Professional asset managers

• Individual investors

• Risk-intolerant individuals

What is the primary role of residential mortgage-backed securities in the shadow banking system?

• To provide risk-free loans

• To serve as collateral for borrowing

• To eliminate the need for banks

• To be held by individual investors

How do capital funding banks manage risk in residential mortgage-backed securities?

• By issuing equity

• By using interest rate swaps and credit default swaps

• By selling them to individual investors

• By holding them as long-term investments

What are the two key intermediaries in the shadow banking system?

• Risk-tolerant and risk-intolerant individuals

• Individual investors and asset managers

• Global funding banks and derivative dealers

• Central banks and commercial banks