Nivine Richie, Ph.D., CFA is an Associate Professor of Finance at the University of North Carolina Wilmington. She teaches courses in corporate financial management, derivatives, fixed income, and commercial bank management. Her research interests include cost of capital, banking, and derivatives. She has published studies in the Journal of Economics and Finance, Journal of Futures Markets, Review of Futures Markets, and Journal of Trading, among others.
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The more I hear Bitcoin discussed in everyday conversation as I'm standing in line at the store, the more I am convinced we've gotten ourselves stuck in a crazy time machine and have been plunked down onto the streets of Amsterdam in the 17th century.
In the late 1600s, what began as a gentlemanly hobby of trading rare tulip bulbs turned into a full financial market filled with buyers and sellers and speculators driving the prices of tulip bulbs to extraordinary heights. From this historical perspective on "Tulip mania" from BBC, we read:
As people heard stories of acquaintances making unheard-of profits simply by buying and selling tulip bulbs, they decided to get in on the act – and prices skyrocketed. In 1633, a single bulb of Semper Augustus was already worth an astonishing 5,500 guilders. By the first month of 1637, this had almost doubled, to 10,000 guilders. Dash puts this sum in context: “It was enough to feed, clothe and house a whole Dutch family for half a lifetime, or sufficient to purchase one of the grandest homes on the most fashionable canal in Amsterdam for cash, complete with a coach house and an 80-ft (25-m) garden – and this at a time when homes in that city were as expensive as property anywhere in the world.”
Everyone got in on the act. First the gentlemen connoisseurs but later the average Joe. We read on:
Things came to a head during the winter of 1636-37, when tulip mania reached its peak. By then, thousands of people within the United Provinces, including cobblers, carpenters, bricklayers and woodcutters, were indulging in frenzied trading, which often took place in smoky tavern backrooms. (Drink was a significant factor in the generally intoxicated mood.) Some bulbs even changed hands up to 10 times during the course of a single day.
And then, overnight, the tavern trade disappeared. In early February 1637, the market for tulips collapsed. This was because most speculators could no longer afford to purchase even the cheapest bulbs. Demand disappeared, and flowers tumbled to a tenth of their former values. The result was the prospect of financial catastrophe for many. Disputes over debts rumbled on for years.
Today we have Bitcoin. And what started as a very niche market for the financially tech savvy has now blossomed into a household-level investment. Standing behind me in line at the mall I could hear one man explain to his friend how much money someone made in Bitcoin, and that this profit can be repeated if they get in to Bitcoin themselves. Soon.
One Bitcoin is now trading at over $13,000, which is up from about $1,000 a year ago. And while it has backed off from its recent highs, it's still a substantial win for anyone who got in early.
But like the tulip bubble of the 17th century, someone may be left holding the proverbial bag. The financial experts are issuing warnings. Goldman Sachs has described the "crypto-currency boom" as an example of "speculative behavior," and others agree:
Goldman isn’t the only firm to send up a warning flag about cryptocurrencies. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon labeled bitcoin a “fraud.” Fed Chair Janet Yellen has said it is a “highly speculative asset,” and Bank of Japan Governor Haruhiko Kuroda said it’s being used for speculation. (Note that Goldman is also reportedly building a cryptocurrency trading desk.)
(read the full Bloomberg article here)
How are the tulip bubble and bitcoin similar? different?
Would you invest in bitcoin? Why or why not?
The Bitcoin futures contract is traded on the CME and can be traded daily. This video explains the contract specifications of the Bitcoin futures contract.
1. What is one contract worth in US dollars?
2. What causes the value of the contract to rise or fall?
3. What are the benefits of trading Bitcoin using this futures contract?
4. How does this differ from buying Bitcoin outright?
Bitcoin seems to be all the rage at the moment. Is this fake money, or is it a legitimate method of payment? This video from the CME answers the following questions:
1. What is Bitcoin?
2. How is Bitcoin created?
3. How can individuals and institutions own Bitcoin?
What are the risk of owning Bitcoin?
In your opinion, is this an "asset bubble?"
The 2016 Small Business Credit Survey published in 2017 shows:
And in terms of funding
Why do you think that small business owners prefer to avoid debt financing?
The Star Wars has been a tremendous success, not unlike franchises such as the James Bond franchise and others. According to the video below by Professor Aswath Damodaran, what makes Star Wars different is the value of add-ons such as toys and collectibles.
What add-ons have been successful? What percentage of revenues came from the box office?
What add-ons have not been overly successful?
Was the acquisition of Star Wars by Disney from George Lucas profitable?
You will find more statistics at Statista
Technical analysis is the use of price and volume charts to forecast buy and sell signals in financial markets. The Efficient Market Hypothesis (EMH) says that market prices already reflect all we know about a stock--that is, full information--and therefore we cannot use such price information to further forecast what will happen to a stock. In other words, if a stock price pattern were to forecast that a price is going up, then the price would already be up and there would be nothing left to gain.
What I just described above is the EMH in the "Weak Form." The EMH comes in a semi-strong and a strong form as well. The semi-strong form of the EMH states that stock prices reflect not only past price and volume information, but they ALSO reflect all public information about a company that can be gleaned from a firm's annual report, news releases, and current and future potential projects. The strong form of the EMH states that stock prices reflect all the information covered by the semi-strong form AND all private information as well, that is secret deals of mergers and future product launches that other investors do not yet know about.
We generally don't believe that markets are efficient in the strong form. How do we know? Because once in a while, we see news stories about someone who got caught making a killing by trading on material non-public information.
As for the semi-strong and the weak forms of the EMH, well, we don't all agree.
In the semi-strong form, investors who try to select investments based on dividends or earnings are basically saying that they think they can outperform the market by evaluating fundamental data and buying the "right" stocks. In the weak form, investors who follow the trading patterns described in the infographic below, are saying that they can outperform the market by evaluating price and volume trends and buying the "right' stocks.
What do you think? Do you believe you can extract enough information from a candlestick chart to buy and sell at the right time? Why or why not?
This video explains how Goldman Sachs made money back in 2010. Several financial issues are raised here:
1. What is the goal of the firm? What is the goal of an investment banking firm like Goldman Sachs?
2. What does it mean for Goldman Sachs to be a "hedge fund masquerading as a bank?"
3. Are investment banks like Goldman front-running their clients as indicated in this video?
4. Should Goldman trade securities that bet against their clients, or is this trading activity simply risk management?
Option contracts are agreements between a buyer (holder of the option) and a seller (writer of the option). The agreements give the holder the right to buy or sell an underlying asset at a predetermined strike price on or before a future expiration date.
These contracts are effectively insurance contracts, and they are described in the video below.
In your own words, how are options similar to car insurance? How are they different?
Option contracts are "derivative" contracts that give the holder the right to buy or sell an underlying asset on or before a future strike date at a predetermined exercise price. The right to buy is called a "call option" while the right to sell is called a "put option."
These contracts have an entry fee or price that an option holder must pay the option writer, and this price is determined by or derived from the price of the underlying asset as well as some other factors.
As these factors change, the price of the option also changes. The sensitivity of the option price to the changes in these factors are called the "Greeks."
The video below describes each of the Greeks.
What are each of the Greeks and what do they mean for an options trader?
Crowdfunding is a way for startups or new ventures to raise capital from many investors in small amounts. The Securities and Exchange Commission (SEC) has rules in place for crowdfunding, and here is a recent excerpt from an SEC bulletin:
Crowdfunding generally refers to a financing method in which money is raised through soliciting relatively small individual investments or contributions from a large number of people. Over the last few years, crowdfunding websites in the United States have proven a popular way by which to solicit charitable donations and to raise funds for artistic endeavors like films and music recordings.
Under rules adopted by the SEC in 2015, the general public now has the opportunity to participate in the early capital raising activities of start-up and early-stage companies and businesses by way of crowdfunding. Companies can use securities-based crowdfunding to offer and sell securities to the investing public.
Anyone can invest in a securities-based crowdfunding offering. Because of the risks involved with this type of investing, however, you are limited in how much you can invest during any 12-month period in these transactions. The limitation on how much you can invest depends on your net worth and annual income.
The best assets to add to an investment portfolio are those that increase the portfolio expected return while reducing the total volatility. To find such assets, investors seek those whose returns are not perfectly correlated with the returns of the existing portfolio. This is diversification. In other words, although the asset may have returns that are expected to vary wildly from one period to the next, as long that variation is not perfectly in tandem with the variation of the returns on the existing portfolio, then the asset may be a good investment and reduce total portfolio return variation.
Enter commodity markets. Though volatile, these assets may offer diversification benefits to portfolios of stocks and bonds.
This video explains commodity investing and the related diversification benefits.
How can an investor participate in the commodity markets?
What is hedging, and how does an investor hedge risk in commodities?
What drives a stock market? Is it strictly gambling sentiment that tosses stock prices around, or is there something more that underlies stock prices?
According to this article by Euronext:
Simply put, the price of an individual stock is determined by supply and demand. The supply of stock is based on the number of shares a company has issued. The demand is created by people who want to buy those shares from investors who already own them. The more that people desire to own a stock, the more they are willing to pay for it.
But the supply of shares of any stock is limited. Investors only can buy shares of stock that are already owned by someone else. So if one person wants to buy, somebody else has to sell, and vice versa. If a lot of people want to buy at the current price and not a lot of people want to sell, the price goes up until more people are willing to sell. When the price gets so high that buyers no longer want the stock, the price starts to drop.
The article goes on to identify several factors that drive stock prices:
In this video from CNN Money, we see some explanations for why the Dow has had such strong performance in 2017. Using the information in the video and the article above, can you identify which of the factors drove the market to its current level?
The value of an investment can be determined several different ways:
In some markets, one method is more appropriate than another. For example, in real estate, method #1 above is most popular. The downside, of course, is that comparable investments must be easily identified and they must have changed hands recently. Otherwise, there's no way to identify the proper appraisal value. In other markets, building the asset from the ground up is the only way to identify its value.
The video below discusses the market for some valuable works of art.
This infographics shows the value of human capital by explaining how long it takes to earn $1 million by education level. Of course, these numbers are averages. An entrepreneur with a high school diploma can become a multi-millionaire while someone with a graduate degree never manages to earn enough to pay off college debt. Still, college pays off on average because most high paying jobs require high levels of skill and training.
1. How would you determine the value of a college education? What numerical problem can you devise and solve to show the NPV of a college degree?
2. In your opinion, is college worth the investment?
Source: FRB Atlanta
This Financial Times video shows that the US dollar (USD) has been declining significantly this year, but the reason for the decline is not straightforward. The video offers one possible reason for the weak dollar: the Fed's low probability of raising interest rates.
The dollar plumbed its lows of the day after the release of the Fed’s November meeting minutes showed policymakers were concerned about inflation, which has remained subdued.
“Some people in the market obviously took that as a sign of dovishness on some policymakers (behalf),” said Thierry Wizman, global interest rates and currencies strategist at Macquarie Limited.
(read the full article here)
The video also shows that the weak dollar is moving in tandem with the price of gold. Why would that be the case?
A lot of food was consumed in the U.S. yesterday. Turkey, gravy, potatoes, stuffing, green beans. The infographic below shows the sales associated with Thanksgiving meals in the U.S.
The American Farm Bureau Federation has found that the average cost of this year's home-cooked Thanksgiving meal for 10 is $49.12, a 75-cent decrease from last year's average. Adjusting for inflation, the cost of dinner is $20.54, the lowest it has been in five years.
“For the second consecutive year, the overall cost of Thanksgiving dinner has declined,” AFBF Director of Market Intelligence Dr. John Newton said. “Even as America’s family farmers and ranchers continue to face economic challenges, they remain committed to providing a safe, abundant and affordable food supply for consumers at Thanksgiving and throughout the year.”
We've been in a low interest rate environment for so long that we aren't really sure what to expect when rates do finally start to rise. This infographic shows the historical impact of rising rates on stock and bond markets.
1. What do investors typically expect will be the response in stock markets when rates start to rise? What about for bond markets?
2. What does this infographic suggest regarding the response by stock and bond markets?
Richard Thaler is the winner of the 2017 Nobel Prize in Economics.
From the NY Times (Oct 9, 2017):
Richard H. Thaler, whose work has persuaded many economists to pay more attention to human behavior, and many governments to pay more attention to economics, was awarded the Nobel Memorial Prize in Economic Sciences on Monday.
Professor Thaler is the rare economist to win a measure of fame before winning the prize. He is an author of a best-selling book, “Nudge,” about helping people to make better decisions. He also appeared in the 2015 film “The Big Short,” delivering what is surely one of the most widely viewed tutorials in the history of economics, on the causes of the 2008 financial crisis.
How can nudges be used to manage risk and help people save more?
Managing the day to day cash flows can impact a business in significant ways. Take accounts payable, for example. This part of working capital management can be managed more efficiently to save thousands of dollars every year. One area of growth has been the use of artificial intelligence in managing accounts payable.
From TG Daily (17 Nov 2017):
There’s no doubt that automation has had a strong impact on the Accounts Payable process. Regimented approval workflows, Optical Character Recognition (OCR) technology, and automated invoice processing have removed many manual aspects of the job. However, due to the nature of their implementation, they are essentially static solutions. Once implementation is complete, the workflows are in place, and AP staff are trained on the process, the solution has reached its highest potential for improving business operations. And for many companies, that is just not good enough.
Accounts Payable software that incorporates machine learning is capable of learning the structure of your invoices, and the patterns of manual data entry. The beauty of machine learning is that the logic and suggestions improve as you go. This eliminates the lengthy implementation project required by automation solutions.
In what other ways can machine learning help a business?
Source: Infographic archive
What do employers look for? School performance is important, but that is just the minimum hurdle. Employers are looking for more than just grades.
Watch this video to see what Goldman Sachs looks for in job candidates:
This Financial Times video reviews the rules of Adam Smith and what makes markets successful
Rule #1. Markets work best when as many people as possible are involved
Rule #2. Markets are most efficient when prices are transparent to many participants
Rule #3. Managers must have a stake in the business and bear responsibility if something goes wrong
Rule #4. Money is embedded in morality and social relations
How have these rules been violated in modern financial markets?
Why would some of these rules be easier to follow in markets dominated by small business than in markets dominated by large corporations?
How does the complexity of modern financial markets make these four rules difficult to follow?
When investors seek a safe investment, many think of bonds. Fixed coupons and stable prices are attractive to highly risk averse investors.
As an alternatives to bonds, some investors buy so-called "safety" stocks, such as utility stocks and real estate investment trusts (REITs).
1. What is attractive about safety stocks in this environment?
2. Why would rising interest rates make safety stocks LESS attractive?
3. Would you buy utilities and REITs right now?
No one knows when a stock market crash will come, though some investors believe they can time the market. Followers of technical analysis believe that they can use historic trends in prices and volumes to buy and sell and outperform the market. These technical analysts believe that the Efficient Market Hypothesis--the theory that stock prices already capture all information--does not hold. In particular, they believe that the Weak-Form of the Efficient Market Hypothesis does not hold.
Some investment strategies have been shown to outperform markets, and so there is some evidence of violations to the Efficient Market Hypothesis. Examples of such investment strategies include:
Below is an infographic of historic declines in the U.S. stock market. If you had been a contrarian investor at those points of time, would you have been profitable? What if you had been a momentum investor?
Source: Infographics Archive
A futures contract is an agreement between two parties to buy or sell some asset at a pre-specified price on a future settlement date. The video below provides a little more detail about what goes into a futures contract.
1. What is the difference between a futures contract and a forward contract?
2. What is the difference between a futures or forward contract and a spot contract?
3. What does it mean to be LONG or SHORT a futures contract?
4. How do you get out of a futures contract if you no longer want to be long or short?
5. How are futures contracts settled at expiration?