What do olive presses, Las Vegas, and random walks have in common? The Black-Scholes Option Pricing model! A really interesting Veritasium video walks through a brief history of options and the mathematics behind the Black-Scholes model. And while the video does a good job of explaining option basics, it also discusses some of the beauty behind the math ..read more

Banks stocks are generally affected by interest rates and New York Community Bancorp (NYCB) is no different. NYCB has a large amount of loans tied to New York City apartments and commercial real estate. With high interest rates, New York City rent control policies, and changing demand for commercial real estate in New York City, investors are concerned about the bank's future performance. On January 31, 2024, the company announced that it would slash its quarterly dividend from 4.17 to $.05, a 70 percent cut. Investors were none too pleased as the stock dropped from $10.38 to $6.47, a 37 perce ..read more

As we mentioned in the textbook, generally the shortest Treasury bills issued are 13 week maturity. However, given the recent debt ceiling problems, the Treasury issued cash management bills (CMBs), with a one day maturity. On Friday, June 2, the Treasury sold $15 billion in one day CMBs, to be issued on June 5 that mature on June 6. Over the past 25 years, the Treasury has held six CMBs auctions with a maturity of one day. And on June 1, the Treasury auctioned $25 billion in three-day bills ..read more

A recent article in the Wall Street Journal notes that as of May 26, 77 percent of the 485 companies in the S&P 500 that had reported earnings beat earnings, compared to the historical rate of 66 percent. What is even more surprising is that the earnings beats are 6.9 percent above expectations, compared to a 4.1 percent historical average. But accounting choices, which have been labeled as potential earnings manipulation, may be the cause. For example, Google extended the life of its server infrastructure from four years to six years. The extension added 6 cents per share to earnings due ..read more

European low cost carrier Ryanair announced a new project that will install Split Scimitar winglets on each of the company's Boeing 737-800s. The installation is expected to reduce fuel consumption by 1.5 percent and reduce CO2 emissions by 165,000 tons per year. So, the project is green for the environment, but is it green for stock holders? A quick calculation shows that it is. Based on the numbers, Ryanair spent €1.14 billion on fuel in a recent quarter, which amounts to €4.56 billion per year. A 1.5 percent savings in fuel costs is €68.4 million per year. This savings results in a payback ..read more

Any stream of cash flows can potentially be sold for the present value of its cash flows. And one of the biggest cash flows being sold recently is an artist's song catalog. The owner of a song catalog receives the cash flows from the royalty paid whenever a song is played. It was announced yesterday that Justin Bieber's song catalog was sold for a reported $200 million. And although we agree that this is a tidy sum, it is still smaller than the $500 million that Bruce Springsteen or $300 million that Bob Dylan received last year for similar sales. The price isn't cheap as song catalogs are rep ..read more

As Mark Twain once said,  "Prediction is difficult - especially about the future." And while investors would wish otherwise, predictions about the stock market are especially difficult. Many investors will use historical returns as an estimate of future returns. However, the job of an analyst is to make stock market predictions based off additional evidence. Recently, Vanguard, one of the largest mutual fund companies in the world, released its 10-year annualized forecast for financial markets. Vanguard is estimating only a 4.7% to 6.7% annual return for large-cap U.S. stocks and a 5.0% t ..read more

Although many people may not consider sports gambling as a hedge, and it a straight bet, it is not a hedge, a Houston furniture store owner successfully used sports betting as a hedge. Jim McIngvale offered purchasers of more than $3,000 in furniture their money back if the Houston Astros win the World Series. When the Astros won the World Series Saturday, McIngvale was obligated to pay these customers back. To hedge his risk, his first bet on the Astros was a $3 million bet in May at 10-to-1 odds. He added more bets over the summer totaling about $10 million at average odds of +750. Because t ..read more

While you now know that, in general, an annuity is an equal payment with a finite number of payments, how do annuities work in the "real world"? To give you an idea, check out Charles Schwab's annuity calculator. Notice, the website shows three different payment options. The first option, "For my lifetime (single life)", offers the highest payout per period. Using a mortality table for annuities, the insurance company estimates the number of payments on the expected life of the annuitant. If the annuitant outlives their expected life, payments are still made until their demise. However, if som ..read more

Amid high inflation, rising interest rates, and a faltering stock market, one bright spot has been the performance of the U.S dollar. Since the beginning of the year, the dollar has risen 17 percent against the British pound, 25 percent against the Swedish krona and Japanese yen, and an astounding 40 percent against the Argentinean peso. Two currencies that have strengthened compared to the dollar are the Mexican peso and Brazilian real ..read more