What is a solvency cone?
A concept often used in financial mathematics that models financial trades. This model pays particular consideration to the impact of transaction costs while trading financial assets. Specifically, it is a set of positions that can be exchanged into a non-negative portfolio at a certain time after taking bid-ask prices into consideration.
Where have you heard about solvency cones?
Many experienced traders and investors will be aware of the solvency cone model, particularly if they are knowledgeable about the world of financial mathematics. The process of using solvency cones – modelling a financial market – is sometimes known as a market process.
What you need to know about solvency cones.
Traditional financial models do not usually take transaction costs into account. This can negatively affect their efficiency when applied to real world scenarios, as transaction costs are a significant factor in trading decisions. By taking these costs into account, the solvency cone model eliminates this drawback, making it very useful when used in markets such as foreign exchange. It is important to note that the spread between bid and ask prices is an important part of transaction costs. While bid-ask spreads can be narrow in the foreign exchange market, the larger position sizes in some segments of the forex market can increase transaction costs.
Find out more about solvency cones.
To better understand solvency cones, it is useful to read about transaction costs.