Capital Markets & Risk

Taxonomy v2.1 — June 2026·4 subdomains

Risk and derivative questions punish framework substitution and convention drift. A greater-of payoff modeled as a sum, a square-root time-scaling dropped, a forward quoted additively rather than as a rate ratio, none of these are exotic, and all of them produce a confident number that misstates the hedge, the claim, or the risk by a structural margin.

CMR·01

Convertible & preferred securities

Treats convertible-preferred liquidation preference and conversion value as additive rather than greater-of

MechanismA non-participating preferred pays the greater of its preference or its as-converted value, not the sum of the two.

ConsequenceOverstates the preferred holder's claim and distorts the entire equity waterfall.

StructuralCritical
Ignores participation and cap features when modeling the preferred payoff

MechanismParticipating preferred takes its preference and then shares as-converted, often subject to a cap; the payoff is piecewise.

ConsequenceMisstates common proceeds across exit values.

StructuralMaterial
CMR·02

Options & derivatives

Applies put-call parity without adjusting for dividends or carry

MechanismParity holds on forward terms; dividends and financing carry shift the relationship.

ConsequenceProduces a mispriced synthetic and a false arbitrage signal.

ArithmeticMaterial
Confuses an option's delta with the probability of finishing in the money

MechanismDelta approximates but is not the risk-neutral exercise probability, which is N(d2) rather than N(d1).

ConsequenceMisstates hedge ratios and expected payoff.

StructuralMinor
CMR·03

Risk measures (VaR, duration, Greeks)

Scales daily VaR to an annual horizon by 252 rather than the square root of 252

MechanismUnder an i.i.d. assumption volatility scales with the square root of time, not time itself.

ConsequenceOverstates annualized VaR by roughly sixteen times.

ArithmeticCritical
Uses modified duration for a large rate move without the convexity adjustment

MechanismDuration is a first-order approximation; large moves require the second-order convexity term.

ConsequenceUnderstates price gains and overstates losses on big moves.

ArithmeticMaterial
CMR·04

Hedging & FX

Quotes a forward FX rate by adding a spread rather than applying the interest-rate-differential ratio

MechanismCovered interest parity sets the forward as spot times the ratio of gross interest rates, not spot plus a spread.

ConsequenceProduces a mispriced forward and a false carry signal.

ArithmeticMaterial
Inverts the direction of a cross-rate triangulation

MechanismTriangulating through a common currency requires consistent base and quote conventions.

ConsequenceReciprocates the cross rate and inverts the trade.

ArithmeticMinor

The full bank contains additional items not published here. The taxonomy is a living artifact, derived from practice — versioned, dated, and never claimed to be exhaustive.