Thursday, July 29, 2010

The author of the Gordon Growth Formula to price stocks died recently

eHatched at MIT in 1959, the Gordon Equation soon grew into an important tool for investors - The Globe and Mail:
The author of the Gordon Growth Formula (P = d(1)/(R-g)) died recently. I did not know him but he sounds like a great guy!

From the Globe and Mail

"Myron Jules Gordon, economist, financial theorist and consumer activist, died on July 5 in Summit, N.J., at the age of 89 after several years of ill health and a series of strokes."

Wednesday, July 28, 2010

Adobe to Launch $240 Million Tender Offer for Day Software -

Adobe to Launch $240 Million Tender Offer for Day Software -
"Adobe Systems Inc. said Wednesday it has signed a definitive agreement to launch a public tender offer to acquire all of Day Software Holding AG's shares for about $240 million, a move that highlights the expansion of its portfolio of Web content-management offerings.

Adobe will acquire the shares at 139 Swiss francs (approximately US$131.44) each in cash, said Rob Tarkoff, who runs Adobe's Digital Enterprise Solutions group, in an interview from Day Software's headquarters in Basel, Switzerland. The deal is subject to a minimum acceptance threshold and is expected to close sometime in Adobe's fiscal fourth quarter, which ends on Nov. 30."

Monday, July 12, 2010

Markets trapped between euphoria and despair | Analysis & Opinion |

Daniel KahnemanImage via Wikipedia
Markets trapped between euphoria and despair | Analysis & Opinion |:
"In a famous 1981 paper on “The framing of decisions and the psychology of choice”, Nobel Prize-winner Daniel Kahneman and Amos Tversky, founders of behavioural economics, showed they assign too much weight to high-consequence outcomes that have a low probability of occurring (a flu pandemic or economic depression), while simultaneously underweighting middling outcomes with a much higher chance of being realised.

There are indications this may be happening at the moment as investors and policymakers assign too much weight to extreme outcomes (high inflation or outright deflation) at the expense of more moderate ones (steady rates of fairly low price increases).
and later:
"Investors need to take tail risks into account (as some investment banks and hedge funds obviously failed to do in 1997 and again in 2007-2009). But it makes little sense to promote tail risks to the status of “central scenario”."

I would suggest the people on the TV news and weather need to think about the same thing!
Enhanced by Zemanta

Sunday, July 11, 2010

Economic View - The Trilemma of International Finance -

Good article (especially for an International Finance class or Money and Banking) in todays NY Times by Harvard's N. Gregory Mankiw

Economic View - The Trilemma of International Finance -
"What is the trilemma in international finance? It stems from the fact that, in most nations, economic policy makers would like to achieve these three goals:

• Make the country’s economy open to international flows of capital....

•Use monetary policy as a tool to help stabilize the economy. The central bank can then increase the money supply and reduce interest rates when the economy is depressed, and reduce money growth and raise interest rates when it is overheated.

•Maintain stability in the currency exchange rate...."

The article goes on to discuss the tenet that you can only have two of the three.

( I would be tempted to discuss Financial Derivatives as Hedging tools that can largely reduce the need for the third goal, but.....)

- Sent using Google Toolbar"

Dallas Cowboys and Stadium debt: great class example

So you know all the ratios and projections we use in class? Well here they are in practice with the case of the Dallas Cowboys and Cowboys Stadium. A definite example for class!

Tax income to pay Cowboys Stadium debt is beating projections | News for Dallas, Texas | Dallas Morning News | Latest News:
"Vrooman said Arlington residents should feel 'relatively safe' about the financial health of the bonds, although he's not a fan of many stadium deals. Although the cost split between the city and Cowboys is better than many stadium financing deals, he said that 'does not serve to justify the use of public money for private Dallas Cowboys gain.'

Kenneth Daniels, a finance professor at Virginia Commonwealth University in Richmond who researches municipal bonds, wrote in an e-mail that the flat revenue projections from the city were 'atypical' and probably unusually conservative because the debt required voter approval.

He also said the debt-to-revenue ratio is a little thin between 2018 and 2027, but the size of the reserve fund 'seems reasonable.'

'A lot of deals would probably be more aggressive and would project revenues growing over the time,' Yelverton said.

- Sent using Google Toolbar"

Thursday, July 08, 2010

SSRN-Coarse Thinking, Implied Volatility, and the Price of Call and Put Options by Hammad Siddiqi

SSRN-Coarse Thinking, Implied Volatility, and the Price of Call and Put Options by Hammad Siddiqi:
"We derive a new option pricing formula based on the notion that the market consists of coarse thinkers as well as rational investors. The new formula, called the behavioral option pricing formula is a generalization of the Black-Scholes formula. The new formula not only provides explanations for the implied volatility skew and term structure puzzles in equity index options but is also consistent with the observed negative relationship between contemporaneous equity price shocks and implied volatility."

In their words:

" Given undeniable evidence of the role of coarse thinking in almost everything we do, what are the implications for options pricing if some investors are coarse thinkers? Intuitively, an in-the-money call option is similar to its underlying stock. So rather than investing in the underlying outright, some investors prefer to buy an in-the- money call option, as an in-the-money call offers the same dollar-for-dollar increase or decrease in payoff as the underlying while requiring only a fraction of investment. However, this advantage comes at a cost. An in-the-money call is riskier than the underlying...."


Cite: Siddiqi, Hammad, Coarse Thinking, Implied Volatility, and the Price of Call and Put Options (January 8, 2010). Available at SSRN:

The pursuit of happiness

I know an awful lot of miserable rich people. So while money can buy you some aspects of happiness, I would be very interested to see the exact relationship!

Personal Finance: The pursuit of happiness:
"'Yes, money makes you happy -- we see the effect of income on life satisfaction is very strong and virtually ubiquitous and universal around the world,' said Ed Diener, a professor emeritus of psychology at the University of Illinois who led the study. 'But it makes you more satisfied than it makes you feel good. Positive feelings are less affected by money and more affected by the things people are doing day to day.''
Enhanced by Zemanta

Cash-strapped Barcelona forced to take out £125m loan to pay superstar players | Mail Online

Yaya Toure protegiendo el balonImage via Wikipedia
Loans and asset sales are standard procedure for an firm in financial difficulty. But for a soccer team? And Barcelona no less.

Cash-strapped Barcelona forced to take out £125m loan to pay superstar players | Mail Online: "
New Barcelona president Sandro Rosell last night revealed the club will need a loan to pay their players at the end of the month."

and from the BleacherReporter:

"Barcelona recently sold defender Dmitro Chygrynskiy to Shakhtar Donetsk for around £12.5 million. This was to help raise much-needed funds, even though they were keen to keep him at the club.
They also sold Yaya Toure to Manchester City for about £20 million.
Rosell tried to reassure the fans by saying the club's money was under control. "The banks know that we have a business plan that will allow them to recover."
Enhanced by Zemanta

Tuesday, July 06, 2010

Will we get brain scans of fund managers in the future>

A Neuroscientist Uncovers A Dark Secret : NPR:
"... but Fallon says the orbital cortex puts a brake on another part of the brain called the amygdala, which is involved with aggression and appetites. But in some people, there's an imbalance — the orbital cortex isn't doing its job — perhaps because the person had a brain injury or was born that way.

'What's left? What takes over?' he asks. 'The area of the brain that drives your id-type behaviors, which is rage, violence, eating, sex, drinking.'"
Which would likely be tied to overconfidence and excessive trading etc. So, can you see the future where you get a brain scan of your portfolio manager?

- Sent using Google Toolbar"
Enhanced by Zemanta

Thursday, July 01, 2010

How a broker spent $520m in a drunken stupor and moved the global oil price - Telegraph

This happened last year but details are just being made known now.

How a broker spent $520m in a drunken stupor and moved the global oil price - Telegraph: "The 34-year old broker at first claimed he had spent the night trading alongside a client. But the story began to fall apart when he refused to put the customer in touch with his desk for official approval of the trades.

By 10am it emerged that Mr Perkins had single-handedly moved the global price of oil to an eight-month high during a 'drunken blackout'. Prices leapt by more than $1.50 a barrel in under half an hour at around 2am....Ten times the usual volume of futures contracts changed hands in just one hour.
By the time PVM realised the trades were not authorised and swiftly began to unwind the positions, losses of exactly $9,763,252 had stacked up.

The amount was almost equal to PVM Oil Futures' entire annual revenue of $12m"
H/T to BionicTurtle.