Options are a device that allows an investor to hedge potential losses for a cost. A call option gives the purchaser the right, but not the obligation, to buy a stock at a given price. A put option gives the purchaser the right, but not the obligation, to sell a stock at a given price. The counter party to the agreement has the obligation to either sell or buy (call and put) at the agreed price if the option is exercised. The exercise date is always in the future, and the further an option is in the future, the more it will cost. How much more depends on the exercise price, interest rates and the volatility of the stock. To give you an idea, here’s some data from Microsoft and Google showing the call option prices going four months into the future. I obtained this data from Yahoo! Finance for Microsoft and Google. To make monthly analysis more relevant, I’ve included only the call options that have been traded for a given strike price in each of the four months analyzed. I also collapsed recent trade prices for options with the same strike price in some cases. Call Option Pricing Microsoft The stock price at the time these options values were captured was $34.54. July, 2013 August, 2013 September, 2013 October, 2013 Strike Last Last Last Last stdev (annual) $29.00 $5.69 $4.50 $5.35 $5.77 1.743 $30.00 $4.81 $4.75 $4.80 $4.85 0.123 $31.00 $3.66 $3.85 $3.80 $4.09 0.537 $32.00 $2.77 $2.88 $2.97 $3.22 0.575 $33.00 $1.88 $2.20 $2.32 $2.55 0.837 $34.00 $0.77 $1.41 $1.66 $1.85 1.413 $35.00 $0.16 $0.86 $1.13 $1.33 1.533 $36.00 $0.25 $0.50 $0.70 $0.99 0.939 $37.00 $0.09 $0.24 $0.43 $0.63 0.702 $38.00 $0.03 $0.12 $0.28 $0.43 0.530 $39.00 $0.01 $0.03 $0.15 $0.27 0.361 $40.00 $0.02 $0.04 $0.08 $0.16 0.186 $41.00 $0.01 $0.02 $0.05 $0.11 0.135 Google The stock price at the time these options values were captured was $880.37. July, 2013 August, 2013 September, 2013 October, 2013 Strike Last Last Last Last stdev (annual) $700.00 $180.87 $179.00 $216.00 $186.00 51.831 $750.00 $135.10 $144.67 $127.40 $151.80 32.104 $770.00 $103.50 $113.90 $104.20 $126.00 31.591 $780.00 $102.73 $105.50 $122.00 $108.20 25.675 $800.00 $73.12 $87.90 $91.80 $94.40 28.519 $805.00 $81.22 $81.20 $114.04...

The last lecture in my Management Law course was lively and interesting. It centered on the UCC and gave particular emphasis on the merchant to merchant dealings. There was particular emphasis on Sale and Lease sections and some discussion around the original vs. the revised, which addresses contemporary issues related to e-commerce and electronic communication. What was interesting is that the formality and rigidity which is characteristic of law in so many other contexts cedes to predictability and flexibility. In other words, the UCC wants to make business easy and remove as many inhibitors. As a result, many of the questions that arise in merchant to merchant cases center around past dealings and industry averages. This may result in cases where there was no contract, but there can still be a definitive ruling. Another aspect of the UCC for merchants is that it favors resolution outside of court. With the less rigid structure of the guidelines governing merchants, it’s not as easy to clearly identify breach. If breach isn’t absolutely clear, the cost of litigation is a risky bet. So it seems there is opportunity for broad interpretation of the UCC when it comes to merchants. Bottom line? Take the time to choose vendors, suppliers, contractors and other partners that you trust and establish a good track record. If you keep the lines of communication open and have well established policies, you may not even need to review the UCC....

It’s often useful to understand how a company makes financing decisions, and where funds for investment originate. While financing decisions may not be a good indicator of likely growth or profit, they may be an effective indicator of company health. One way to segment this analysis is Internal funds Net equity issues Net borrowing Gather the data The data for this type of analysis is available on http://finance.yahoo.com. After searching for your desired company, click “Cash Flow” under “Financials”. Using that I found the cash flow details for Google and Microsoft. Net borrowing is listed directly. Net equity issues are listed as “Sale Purchase of Stock”. In order to get the amount of investment that came from internal funds (plowback), I take the “Total Cash Flows From Investing Activities” and subtract away Dividends, Sale Purchase of Stock and Net Borrowings. I can then get the proportions by dividing each of these by the total investing amount. I used the standard three years shown on the cash flow statement for this analysis. Microsoft funding sources Period Ending 29-Jun-10 29-Jun-11 29-Jun-12 Internal funds -18% 43% 62% Net equity issues 79% 62% 13% Net borrowing -2% -41% 0% Google funding sources Period Ending 30-Dec-10 30-Dec-11 30-Dec-12 Internal funds 125% 104% 110% Net equity issues 8% 0% 0% Net borrowing -32% -4% -10%   Review Based on the last three years it is observed that Microsoft much more frequently resorts to issuing stock and borrowing than Google. Also, the majority of the investment made by Google is from internal funds, even to the extent of investing savings from previous periods. They even purchased back some stock in one period to achieve a net positive equity issue. Here’s the original spreadsheet if you want to see how I arrived at the numbers above: Sources of funds for Google and...

The MBA program director and many of the professors  at NNU prefer papers to be submitted in APA style, 6th edition format. There are many tutorials and guides about how to follow the APA style. I perfer to use LaTeX. TeX and LaTeX are typesetting systems that allow the author to focus on content in plain text and leave the formatting alone. When the content is complete, simply use LaTeX to compile or render your document. I typically use pdfLaTeX and render straight to PDF for delivery or printing. There are other formats, including DVI, that can also be used. Getting LaTeX One disadvantage to LaTeX is the high learning curve. Another is complexity in installing new styles. Compared to Word, it can take quite a bit of setup to get it going. However, once it’s going, changes are easy to make and the entire document can be recompiled. References, figures, and any other dynamic elements simply update themselves in the new view. TeX live I suggest starting with TeX live. I download the .ISO file and use slysoft virtual clone drive to mount it. At that point I have what looks like a drive on my system and can install TeX live. Getting APA6 Next, I download the apa6 package from CTAN. unzip these files into a temporary directory. I opened up a console window (click start and type ‘cmd’) and changed into the directory where I had just unzipped the package. Once there I created two directories: config pseudoTeX I then ran the command “latex apa6.dtx”. That created a bunch of files, include the .CLS file. Install I then created a local directory for this new class definition here C:\texlive\texmf-local\tex\latex\local\apa6 I copied most of the files into this local directory, including the config folder, that were compiled above when I ran ‘latex’ on the ‘apa6.dtx’ file. I then ran ‘texhash.exe’ to update the tex database with information about the new apa6 class. LaTeX editor On Windows I use the WinShell editor for LaTeX. It includes some shortcuts and other helpers, including one click compile and view in acrobat. This is not a WYSIWYG editor, but it does provide helpers for much of what you want to do....

Previously I calculated the beta (ß) and r-squared (R2) for Google and Microsoft relative to the market (DJIA). There are cases where it’s more useful to know how a company does relative to its peers or as part of a portfolio. Using the monthly values from that previous work, I compiled and ‘industry’ or ‘portfolio’ average of returns. That provided me with a ß and R2 for the industry.   As shown above, the software industry (my sample of GOOG and MSFT) has a ß=0.9847 and an R2=0.5163 relative to the market (DJIA). While that’s interesting, it’s also worth observing the ß and R2 of each company relative to the industry.   This table summarizes the observations in the plots shown above Company Beta-market Beta-industry R2-market R2-industry MSFT 1.0168 0.8919 0.4891 0.7066 GOOG 0.9526 1.1081 0.3101 0.7881 Some observations are less useful due to the small sample of only two companies. For example,  the ß values are proportionally distant from the industry. This is because the industry is made up of a sample of those two companies only. The R2 for the industry are very similar and both show better fit to data than the industry comparison. CAPM Recall that the cost of equity, re, can be obtained using the Capital Asset Pricing Model as follows: Using this and the data above, we can calculate the average cost of equity for the industry as represented by Google and Microsoft. We’ll use rf=0.1 and rm=6.2. That gives us: With the current economic state, the risk free rate has little impact on the equity rate. The beta for the industry relative to the market is also very tight, which reduces risk with respect to the...