During the break between exams, Cobb Douglas was hitting on some Covered-Call-girls in the lobby. At first, they weren’t all that interested in his weak-form downward sloping demand curve and liquidity preference. Out of nowhere, through open market operations, Mr. Douglas received a shot from his buddy, Fed, and was able to support a strong-form upward sloping supply curve. The covered-call girls didn’t want to jump in his market, and needed to perform their due diligence. They began by administering a Chi-square test to check on the variance of his supported supply curve, it was determined to be suitable for them. They followed up with an F-test to check on the variance of his supply curve and the variance of their efficient frontiers. This test was successful and they began to show him their naked puts. They advised Cobb that, when together, they prefer the normal backwardation position in their z-spread in hopes of receiving some positive roll-yield. With all the excitement, Cobb had covered his short position and paid an early liquidity premium for his short duration. The covered-call girls began laughing histerically, looked at eachother and said “Type-2 error” and realized they failed to check on his safety-first criterion which would’ve pointed out his excessive short-fall risk. Without hesitation, Cobb looked at the covered-call girls and said, “I didn’t want to give you your normal backwardation and positive roll yield, y’all got some stinky OAS-spreads with an over-allocation of STDs, short-term debt that is, which is susceptible to diminishing marginal returns. You aren’t worthy of this debt service coverage ratio!” He then tucked away his flat yield curve and went on his way.
