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May years ago, I was in aircraft structured finance, one night, when waiting for some documents during a closing, a bunch of us (structurer and lawyers) were sitting around in NY law firm conference room. Out of boredom a junior associate started doing the maths for a termination payment in the Japanese leveraged lease structure we were closing (ok we were very bored), within 20 minutes he became very quiet, took me aside and told me he though there was an error in this (very simple -- but long) equation, since the payment amount was rising the wrong way (as maturity neared payment amount should fall). Once alerted, I took aside the senior partner (big NY law firm) and I told him that we should revise the equation so that its right (Despite the fact that the documents had already been negotiated), the words didn't match the equation... His first comment was, your guy made a mistake, when we showed him our spreadsheet, he started yelling at one of his junior for being a dumb-ass at copying the equation. The junior came back and said, its exactly the same equation that we used in a previous week's closing -- it came form the law firm's document database. We got everyone in the room and told them, immediately the law firm pulled documents for the last 3 years -- and the wrong equation was used in every single transaction. Errors creep up easily, eventually more than 90 transaction had to be revised -- don't know if they were (not my problem).
1. Canadian British 2. Derivatives desk 3. MSc Economics
Toggle Commented Jun 22, 2009 on Reader Survey at Worthwhile Canadian Initiative
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Stephen: Your analysis is interesting, but one issue that really bugs me is the use of a normal distribution in your analysis. My gut feeling is that using a normal distribution is inappropriate since the probability of of the next outcome is not independent from the previous occurrence. By the way, I have no solution to that problem.
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