The Arbitrageur

Shedding Light on the Black Box

A new magazine from the publishers of The Financier

Please consider contributing questions and/or solutions to problems related to corporate finance, securities markets, risk management, and regulatory and accounting compliance.  The Arbitrageur will be an educational resource for practitioners and students of finance, accounting, and securities law. Professionals who are responsible for raising, protecting and allocating capital will receive The Arbitrageur four times per year.  An electronic version of The Arbitrageur will also be published.

The following questions are intended to give you an idea of the type and tone of material that we believe will be of interest to The Arbitrageur's audience. A good source of problems will be text books for which you have respect, exam problems you have given to your MBA students, and problems you have solved for clients. Solutions to some of the more interesting problems that often appear in the best texts but are often not done justice in class would add an interesting dimension to The Arbitrageur.  

The following questions are intended to motivate not constrain your creativity:

• What information is needed to correctly value a 10 year government bond? Explain how this information is incorporated into a bond valuation model. What additional information is required to value a AAA rated 10 year callable corporate bond? How do traders determine which bond is over valued and which is under valued?

• What is the motivation for a company to issue Premium Equity Participating Securities (PEPS)? How should PEPS be valued?

• What are the contract terms of NYMEX futures contract on electricity? Outline a hedging strategy for a utility that relies on OTC derivatives and one that uses electricity futures. Which one is more efficient?

• Do NYSE trading curbs impose costs on option and futures traders? If so, can these risks be hedged? Are trading curbs: costly, neutral, or beneficial?

• What are the causes and mechanics of a currency devaluation a  la Mexico, 1994. What are the long term and short term costs of a currency devaluation?

• What is the correct method of valuing a BOT concession?

• Where is the dividing line between debt and equity for tax purposes?

• When should a firm use interest rate swaps?  When should a firm simply take the risk?

• Will the transition to the EURO be smooth for Treasury Departments?

• Should companies attempt to neutralize fluctuations in the strength of the dollar?  What are some of the financial and operational tactics that firms can use to minimize the costs of currency fluctuations?

• Can large segments of the Japanese banking system simply fail without any repercussion in overseas financial markets?  To what extent should the Japanese government support insolvent institutions?

• Are asset backed commercial paper conduits less capital intensive than revolving credit facilities supplied by banks?

• Illustrate how a balanced budget amendment might accentuate business cycles.

• How long can France sustain 13% unemployment rates before there is severe social upheaval?

• How can portfolio a manger utilize measurements of contributions to shareholder value into their investment strategies?

• How should an IPO be priced, timed, and negotiated.

• How are corporations in Europe required to report their derivative exposures?  Has FASB 119 made derivative risks assumed by corporations more transparent?

• When a CEO receives a hostile tender offer, what are the appropriate and legal responses.  How can a CEO justify rejecting an offer that is 83% higher than the current market price the company's shares?

• How do large pension funds manage their equity investments?

• Are venture capital firm's embedded in the large Technology companies such as Intel, Microsoft, Motorola, and IBM.  How should the venture capital portion of their assets be valued?

• Discuss the prospects and implications of allowing the Social Security Fund to allocate capital to the stock market. 

• What elements must be considered when structuring a privatization transaction.

• Are hedge funds hedged?

• How did the U.S. manage to manage inflation so badly for so long if it can be managed so easily a la Greenspan & Co.? 

• What events and factors caused the CMO bubble to burst?  Was it a bubble?  While we are at it, what is a bubble?

• Should there be a strong correlation between the yields on FNMA mortgage backed securities and FNMA debentures?

• Can a synthetic S&L be constructed from derivative instruments?  Would this synthetic vehicle have a regulatory and market advantage over the real S&L?

• What is an option to buy a Boeing 747 worth?

• How does the balance of the U.S. trade account affect the rate at which GDP grows?

• Are there any risks associated with a single European currency?

• What are the causes and consequences of a strong dollar?  Is the strong dollar an objective or consequence of sound economic policy?

• Is owning a portfolio of shares in U.S. companies which do business in Asia a substitute for owning shares in Asian companies?

• How can municipalities derive value from securitizing tax liens?

• How can the duration of a security with an uncertain maturity be calculated?

• What is the relationship between spot and forward prices?  How does this relationship determine the equilibrium price of futures and forward contracts?

• How is the value of a swap contract determined for purposes of marking it to market?

• What is the difference between hedging and dynamic hedging?

• How are measures of sovereign risk incorporated in bond valuation models?

• what has been the relative performance of subordinate MBS?

• How should a CFO evaluate the leasing versus purchase decision?  

• What is the proper way for outside shareholders to evaluate a company's stock option plan?  How can shareholders detect a plan which is incorrectly guaged to output and performance?

• How does CALPERS measure and value market risk?

• Is P-1 rated ABCP issued by a partially supported multiseller conduit equivalent in value and liquidity to P-1 rated ABCP issued by a fully supported vehicle?  Is P-1 rated CP equivalent to P-1 rated ABCP?

• What is rating arbitrage?

• What is the difference between a REMIC and a FASIT?

• What distinguishes a true sale for bankruptcy purposes from a secured borrowing?

• Is it possible that a transfer of assets would be considered a true sale for accounting purposes but a secured borrowing under bankruptcy law and the tax code?

• How has the structure and pace of privatization in China differed from the transfer of assets from the state to private ownership in Russia?

• Of all the possible liabilities Microsoft could have issued, how and why did they settle on, "2 3/4% Convertible Exchangeable Principal-Protected Preferred Shares, Series A"?

• Elaborate on the tax arbitrage scheme that Fidelity Investments has captured in its issuance of "Employee Stock" (WSJ, 2/11/97)?  Have other firms used this tactic to in their compensation packages?

• What are Belgian coordination centers?  What is the value of establishing a coordination center?  Can a company use its coordination center as a securitization vehicle?

• How are program trades designed and executed?

• Is asset securitization neutral with respect to the supply of high powered money?

• Do corporations have an incentive to write clauses into their loan agreements which prevent banks from securitization their loans?

• How should investors value corporate venture capital portfolios?  Will Adobe's flotation of shares in its venture capital portfolio (WSJ, 3/19/97) increase the value of  its common stock? 

• What causes a speculative attack on a currency.? How can the speculators beat a central bank?  How should the central bank defend its currency? When is a currency ripe for attack? 

• Why was there a rush to issue century bonds in 1997?

• Why should there be a contagion effect across emerging market currency and stock markets?

• What is the connection between a country's current account and the relative value of its currency?

• What advantages accrue to special purpose corporations that establish themselves in the Cayman Islands?

• Is there any information that can be exploited in a put/call ratio?

• How fast and how far can a stock market fall?  Can the NASDAQ fall faster than the NYSE?

• Do efficient markets assume that investors comprehend information at the same rate they incorporate it into their decisions?

• When should a FASIT be used to refinance a pool of assets rather than a REMIC?

• Should companies doing business in emerging markets hedge against devaluation?

• Is convexity in fixed income securities valuable?

• What is a true sale for GAAP and for RAP how do they differ? 

• What are the elements that cause and mechanics characterize a stock market crash?

• How is convertible preferred stock valued?

• How does a liquidating trust function?

• Can a master trust issue multiple series backed by separate  and segregated pools of  assets?

• What are the practical limits on the number of countries that can form a single currency market?

• How will the fiscal policies of European countries change once the Euro is introduced?

• How can one determine if a company's stock option plan lowers the value of  its common stock to outsiders?

• If the IMF would announce that it was going to abstain from acting as the lender of last resort what would happen to emerging market currency values and subsequently world trade patterns and the development of transitional economies.

• What is the correct timing, magnitude and scope of IMF intervention?

• Are there any substantial macro or micro economic risks associated with the introduction of the Euro?

• Will the introduction of the Euro have a fundamental change on the international flow of funds?

• What implications does the introduction of the Euro have for European Bourses?

• What determines which bourses on which a firm should list its shares?

• Does the NASDAQ have an incentive to develop a partnership with a European bourse?

• Will an integrated over the counter equity market develop in Europe?

• Can the Japanese banking system securitize its way out of distress?

• What is the value to shareholders of the merger between CCA and the REIT PZN?

• What is causing the kink in the yield curve (9/22/98) and what opportunities to traders does this unique shape offer?

• What advantages does the Cayman Islands offer for securitization transactions?

• What is the future of the Russian financial system?  Has the flow of capital been completely cut off?  What are the implications of the Russian default on the cost of hedging financial risk in other transitional economies?

• If Great Britain is considering giving up its monetary sovereignty by joining adopting the Euro should they weigh this against adopting the U.S. dollar?

• If misguided, misinformed, investors increase their participation in the equity markets through online trading will this have implications for overall market efficiency?
  

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The Arbitrageur
Come into the Brainstorm

The Arbitrageur
Learn how experts solve capital budgeting and risk management problems

The Arbitrageur
Study how portfolio managers allocate capital

The Arbitrageur
Read rigorous commentary and analysis by respected financial economists

The Arbitrageur
Listen to great minds debate important issues, discuss financial strategies, and describe market tactics.

The Arbitrageur
A fluid source of deep thought regarding how capital can be raised,
allocated and traded more efficiently

The Arbitrageur
Bringing the supply and demand sides of the capital markets together

The Arbitrageur
The back of the envelope

The Arbitrageur
A new magazine from the publisher of The Financier.
Volume # 1, Issue # 1
Autumn, 1997