Solvency Cone


DEFINITION of 'Solvency Cone'

A model that considers the impact of transaction costs while trading financial assets. The solvency cone at a certain time ("t") is the set of those positions that can be exchanged into a non-negative portfolio at time t after taking bid-ask prices into consideration. The spread between bid and ask prices is a very significant component of transaction costs.

BREAKING DOWN 'Solvency Cone'

Classical financial models generally do not take transaction costs into account, which hampers their application in the real world, since these costs are a significant factor in trading decisions. The solvency cone eliminates this drawback by taking transaction costs into account in its model. The concept finds a great deal of application in markets such as foreign exchange. While bid-ask spreads can be quite narrow in the foreign exchange market, the large position sizes in the interbank and institutional segments of the forex market can result in significant transaction costs.

  1. Model Risk

    A type of risk that occurs when a financial model used to measure ...
  2. Ask

    The price a seller is willing to accept for a security, also ...
  3. Transaction Costs

    Expenses incurred when buying or selling securities. Transaction ...
  4. Bid

    1. An offer made by an investor, a trader or a dealer to buy ...
  5. Bid-Ask Spread

    The amount by which the ask price exceeds the bid. This is essentially ...
  6. Black Box Model

    A computer program into which users enter information and the ...
Related Articles
  1. Investing Basics

    Calculating Beta: Portfolio Math For The Average Investor

    Beta is a useful tool for calculating risk, but the formulas provided online aren't specific to you. Learn how to make your own.
  2. Professionals

    Quants: The Rocket Scientists Of Wall Street

    Blend math, finance and computer skills to command a high - and well deserved - salary.
  3. Forex Education

    How To Calculate Required Rate Of Return

    The required rate of return is used by investors and corporations to evaluate investments. Find out how to calculate it.
  4. Fundamental Analysis

    Do-It-Yourself Analyst Predictions

    Regular investors can build their own financial models using the mosaic theory.
  5. Personal Finance

    Financial Physics: "Natural" Market Laws

    Physics uses math to define the laws of the universe; here, we look at what laws explain the financial universe.
  6. Professionals

    Style Matters In Financial Modeling

    If you're looking to get a job as an analyst, you'll need to know how to work it.
  7. Investing

    In Search of the Rate-Proof Portfolio

    After October’s better-than-expected employment report, a December Federal Reserve (Fed) liftoff is looking more likely than it was earlier this fall.
  8. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  9. Investing

    Where the Price is Right for Dividends

    There are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
  10. Professionals

    Top 3 Misconceptions About Financial Analysts

    Learn misconceptions about financial analysts, such as they exclusively study the stock market, they are the same as financial advisors and they are all rich.
  1. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  2. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  3. How does the stock market react to changes in the Federal Funds Rate?

    The stock market reacts to changes in the federal funds rate in various ways depending on where it is in the business cycle. ... Read Full Answer >>
  4. How do I place an order to buy or sell shares?

    It is easy to get started buying and selling stocks, especially with the advancements in online trading since the turn of ... Read Full Answer >>
  5. Is there a difference between financial spread betting and arbitrage?

    Financial spread betting is a type of speculation that involves a highly leveraged derivative product, whereas arbitrage ... Read Full Answer >>
  6. What are the requirements for being a Public Limited Company?

    The requirements for an entity to be considered a public limited company (PLC) include registration requirements, establishing ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  2. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  4. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  5. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  6. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
Trading Center