Fixed for Four is No More? What? You mean that the Georgia education system has found another way to make education more expensive? After coming across GaYoung's post regarding "Fixed for Four" tuition, I am in shock that tuition would continue to creep up as it has done during the past few years. I entered Georgia State in 2005, when tuition was $1819/semester. Now, as I graduate this May 2009, the tuition has increased to $2167/semester. To comment from GaYoung stated, I totally agree that the increase in tuition was not worth the additional facilities we see. For example, GSU improved our existing library, which was OK. However, the old library was fine. It supplied research material, facilities, and technology.
From the article "Regents suspend fixed tuition program," the board has said that tuition will increase for students who take over 12 credit hours (excluding GA Tech and UGA). In the old system, students were able to take more than 12 hours without an additional charge; however, with the new changes, students will be charged. This means for Georgia State students, they are looking at approximately $203/credit hour since our school is a research university. So if we were to assume that students were to only take 12 hours (in order to avoid the additional charge), you're looking at students remaining in school longer. This is turns means paying tuition longer. Which alternative outweighs the other?
Stephen F. Austin students will also feel an increase in tuition. Because the school built new facilities, the students can expect an $75 increase a semester for the average 15 credit hours. Compared to $203/credit hour, they have it good. I do understand that bills have to be paid and education does not come free. However, these decisions are being made by people who don't attend the school and aren't directly affected my their decisions. How do they know whether building a new library or recreational center is worth my extra $1000? For Georgia State students, not only did out tuition increase, but during this past year, we had a hefty increase of student fees for a football team that is still nonexistent. A lot of students can't afford high tuition and high student fees! And the numbers from above were for IN-STATE TUITION, without room and board! For Georgia residents who qualify for HOPE, tuition is not a big factor. But they have to remember that HOPE is continuing on its path of decreasing the credit hours they will supply for. It use to be 130 credit hours, but as I entered school, it dropped to 127.
So as I exit GSU and receive all these surveys asking me "What do you plan to do after graduation, work or further education," it seems to me that trying to afford school and utilize it at the same time is work. So, I always check "work," since I've already have 4 year experience!
Sources:
1. http://glee1102.blogspot.com/2009/04/fixed-for-four-is-no-more.html
2. http://www.ajc.com/metro/content/metro/stories/2009/04/14/georgia_college_tuition.html
3. http://www.onlineathens.com/stories/041609/uga_429685988.shtml
4. http://www.dailysentinel.com/news/content/news/stories/2009/04/21/sfa_regents_II.html
Tuesday, April 21, 2009
Tuesday, April 14, 2009
Dividends: How Beneficial Are They?
If you've ever taken a finance or risk management class, you've probably heard someone say that the purpose of the execs is to maximize shareholders' wealth AND minimize the cost of risk. Well focusing on the first part, maximizing shareholders' wealth could definitely include activities such as dividend payments. Dividend payments are small payments (although some are not so small) given to shareholders from additional funds the company has acquired. For most shareholders, a dividend payment is good and makes them feel secure in the well being of the company. In fact, Michael Brush agrees and states that firms who pay dividends are usually in a stable market. In addition, those firms tend to pay out dividends during good and bad times; who wouldn't want to be a part of that.
But how important are dividends? Is it worth still holding on to stock? Yes, dividends could be very advantageous, especially for those who participate in dividend investing. In one article, it listed 7 benefits from participating in dividend investing (holding on to dividend stocks). They are:
1. In a troubled market, dividends provide investment stability - I agree and this coincides with Michael Brush's belief.
2. Unlike earnings, dividends can't be manipulated or faked - This is true because with dividends, you either get them or you don't. Just holding regular stock, even if the price of the stock is increasing, the company could still be in financial trouble and the stock market hasn't reflected it yet.
3. Dividends provide continuous feedback - Again, another point that reiterates the aforementioned benefits. Shareholders receiving dividends, especially on a continuous basis, know the position of that firm.
4. Reinvested dividends provided a significant portion of the historical equity returns.
5. Good dividend companies grow their dividends - As a shareholder, you don't just want the same amount of dividends. Instead, you want the dividend amount to increase, showing true progress of the company.
6. Spending dividends in retirement, does not harm your principle investment
7. A dividend portfolio is relatively low maintenance.
When firms' board of directors declare a $.45 or $.55 dividend payment, I am sure that most people see this as a small payout compared to the cost of the stock. Well, those dividend payments mean more than you think. Just take a look at a person who receives dividends. Assuming dividends are a reflection of the company's progress, the stock price will rise. So not only does the shareholder receive a dividend payment, but they will earn on their stock. My position on dividends is a positive one and I value them as well. Dividends are worth the price (i.e. stock price) to you pay in order to become a shareholder. Hoping that execs are looking out for your best interest, those dividends will pay off in the long run.
Sources:
1. http://articles.moneycentral.msn.com/learn-how-to-invest/whats-a-pe-and-9-other-dumb-questions.aspx
2. http://dividendsvalue.com/1289/seven-important-reasons-for-dividend-investing/
3. http://articles.moneycentral.msn.com/learn-how-to-invest/stocks-that-pay-you-to-own-them.aspx
But how important are dividends? Is it worth still holding on to stock? Yes, dividends could be very advantageous, especially for those who participate in dividend investing. In one article, it listed 7 benefits from participating in dividend investing (holding on to dividend stocks). They are:
1. In a troubled market, dividends provide investment stability - I agree and this coincides with Michael Brush's belief.
2. Unlike earnings, dividends can't be manipulated or faked - This is true because with dividends, you either get them or you don't. Just holding regular stock, even if the price of the stock is increasing, the company could still be in financial trouble and the stock market hasn't reflected it yet.
3. Dividends provide continuous feedback - Again, another point that reiterates the aforementioned benefits. Shareholders receiving dividends, especially on a continuous basis, know the position of that firm.
4. Reinvested dividends provided a significant portion of the historical equity returns.
5. Good dividend companies grow their dividends - As a shareholder, you don't just want the same amount of dividends. Instead, you want the dividend amount to increase, showing true progress of the company.
6. Spending dividends in retirement, does not harm your principle investment
7. A dividend portfolio is relatively low maintenance.
When firms' board of directors declare a $.45 or $.55 dividend payment, I am sure that most people see this as a small payout compared to the cost of the stock. Well, those dividend payments mean more than you think. Just take a look at a person who receives dividends. Assuming dividends are a reflection of the company's progress, the stock price will rise. So not only does the shareholder receive a dividend payment, but they will earn on their stock. My position on dividends is a positive one and I value them as well. Dividends are worth the price (i.e. stock price) to you pay in order to become a shareholder. Hoping that execs are looking out for your best interest, those dividends will pay off in the long run.
Sources:
1. http://articles.moneycentral.msn.com/learn-how-to-invest/whats-a-pe-and-9-other-dumb-questions.aspx
2. http://dividendsvalue.com/1289/seven-important-reasons-for-dividend-investing/
3. http://articles.moneycentral.msn.com/learn-how-to-invest/stocks-that-pay-you-to-own-them.aspx
Response: Bernanke Easing Mortgage Rates for Consumer Rebound
A topic that has been major lately is the housing market. In Jessica Lewis's posting, she mentions an article where Bernanke (a guy who's no longer a stranger to my blogs) discusses decreasing mortgage rates. Both Bernanke and Jessica believe that decreasing mortgage rates will help homeowners by returning money into their pockets, thereby improving the economy. I agree with both parties; by lowering the mortgage rates, people are now able to afford their monthly payments with a little bit to spare. In addition, the housing market has been in a little bind lately, so plenty of people are seizing he opportunity of getting a home. However, people shouldn't be waiting so long because who knows how mortgage rates will move.
For example, although mortgage rates have been at record lows, they have become stagnant lately. During the week ending on April 5, rates remained basically the same with only a .01% decrease. Pennsylvania had a .8% decrease and Georgia remained the state with the lowest mortgage rates at 4.96%. Yes, these rates seem favorable, so it is only right for people to take advantage of these circumstances right now. Waiting for mortgage rates to go down even further could place you in an awkward position. Carl Walls, Florida Citizens Bank president, says "Don't wait for mortgage rates to keep dropping. Get the best you can and don't look back." I agree. In another article I read, it was noticed that the mortgage applications are increasing. This means that more people are getting bank loans to purchase a home than refinance.
Right now is a great time to use the opportunity of home buying. We have people in high places (i.e. Bernanke), financial professionals (i.e. Carl Walls), and even citizens (i.e. Jessica Lewis) who all agree that the mortgage rate decreases are creating the perfect time for home buying. I also agree with and support them all.
Sources:
1. http://jlewis45rmiblog.blogspot.com/2009/04/bernanke-easing-mortgage-rates-for.html
2. http://www.bizjournals.com/pittsburgh/stories/2009/04/06/daily20.html
3. http://www.reuters.com/article/economicNews/idUSNYS00498520090408
4. http://www.ocala.com/article/20090413/ARTICLES/904131006/0/news02
For example, although mortgage rates have been at record lows, they have become stagnant lately. During the week ending on April 5, rates remained basically the same with only a .01% decrease. Pennsylvania had a .8% decrease and Georgia remained the state with the lowest mortgage rates at 4.96%. Yes, these rates seem favorable, so it is only right for people to take advantage of these circumstances right now. Waiting for mortgage rates to go down even further could place you in an awkward position. Carl Walls, Florida Citizens Bank president, says "Don't wait for mortgage rates to keep dropping. Get the best you can and don't look back." I agree. In another article I read, it was noticed that the mortgage applications are increasing. This means that more people are getting bank loans to purchase a home than refinance.
Right now is a great time to use the opportunity of home buying. We have people in high places (i.e. Bernanke), financial professionals (i.e. Carl Walls), and even citizens (i.e. Jessica Lewis) who all agree that the mortgage rate decreases are creating the perfect time for home buying. I also agree with and support them all.
Sources:
1. http://jlewis45rmiblog.blogspot.com/2009/04/bernanke-easing-mortgage-rates-for.html
2. http://www.bizjournals.com/pittsburgh/stories/2009/04/06/daily20.html
3. http://www.reuters.com/article/economicNews/idUSNYS00498520090408
4. http://www.ocala.com/article/20090413/ARTICLES/904131006/0/news02
Monday, April 6, 2009
Response: Limit Credit Card Rates
I just got done reading GaYoung's post about the Senate's plan of action to limit credit card rates. I couldn't agree more with GaYoung nor the Senate. Credit card rates are inching up every time we look at it and it's about time that a legislative body steps in for the people. Christopher Dodd, Chairman of the Senate Banking Committee, states that the Senate's move was to protect consumers from the lenders. Lenders are increasing rates even on those people who are paying their bills on time.
There used to be a time where on time payments meant something; however, this hasn't been the case recently. Chase MasterCard holder, Mark Alexander, could be considered a perfect example of the perfect borrower. He rarely has a balance on his card and has always paid his bills on time during the past 10 years. Then why is that his interest rate increased by 40%? What does this mean for me, a student who just made her first purchase on her credit card and making a payment before they even sent the bill? What is there for me to look for when lenders are trying to raise the rates more than normal?
That's why the Senate has stepped in and began to find ways of improving the situation. They have made it where lenders can no longer increase the rate of those card holders who pay bills on time and meet all other criteria. The Senate has also made it where banks can no longer imposed penalty rates for payments late by one or two days. Borrowers still have the normal 30 day grace period.
This is what we need. Card holders need some leeway to still be able to use credit cards without having additional money sucked out of us. If I am portraying credit card companies as gougers who steal money from innocent card holders, that's not what I want to display. Because the truth is that there are bad card holders out there. There are many people who default on their obligations. But for those of us who continue to do as the lenders have asked, it's only fair that we get treated with some respect.
Sources:
1. http://glee1102.blogspot.com/2009/03/limiting-credit-card-rates.html
2. Gelles, Jeff. "Changes to credit card rules on the way." Philadelphia Business Today. 5 April 2009. 6 April 2009 <http://www.philly.com/philly/business/homepage/20090405_Changes_to_credit_card_rules_on_the_way.html?text=med&c=y>.
3. Bloomberg. "Senate panel approves bill limiting credit card rates." Gulfnews.com. 1 April 2009. 6 April 2009 <http://www.gulfnews.com/business/Banking_and_Finance/10300419.html>.
4. Associated Press. "Credit card interest rates rise marginally." Businessweek. 6 April 2009. 6 April 2009 <http://www.businessweek.com/ap/financialnews/D97D4B880.htm>.
There used to be a time where on time payments meant something; however, this hasn't been the case recently. Chase MasterCard holder, Mark Alexander, could be considered a perfect example of the perfect borrower. He rarely has a balance on his card and has always paid his bills on time during the past 10 years. Then why is that his interest rate increased by 40%? What does this mean for me, a student who just made her first purchase on her credit card and making a payment before they even sent the bill? What is there for me to look for when lenders are trying to raise the rates more than normal?
That's why the Senate has stepped in and began to find ways of improving the situation. They have made it where lenders can no longer increase the rate of those card holders who pay bills on time and meet all other criteria. The Senate has also made it where banks can no longer imposed penalty rates for payments late by one or two days. Borrowers still have the normal 30 day grace period.
This is what we need. Card holders need some leeway to still be able to use credit cards without having additional money sucked out of us. If I am portraying credit card companies as gougers who steal money from innocent card holders, that's not what I want to display. Because the truth is that there are bad card holders out there. There are many people who default on their obligations. But for those of us who continue to do as the lenders have asked, it's only fair that we get treated with some respect.
Sources:
1. http://glee1102.blogspot.com/2009/03/limiting-credit-card-rates.html
2. Gelles, Jeff. "Changes to credit card rules on the way." Philadelphia Business Today. 5 April 2009. 6 April 2009 <http://www.philly.com/philly/business/homepage/20090405_Changes_to_credit_card_rules_on_the_way.html?text=med&c=y>.
3. Bloomberg. "Senate panel approves bill limiting credit card rates." Gulfnews.com. 1 April 2009. 6 April 2009 <http://www.gulfnews.com/business/Banking_and_Finance/10300419.html>.
4. Associated Press. "Credit card interest rates rise marginally." Businessweek. 6 April 2009. 6 April 2009 <http://www.businessweek.com/ap/financialnews/D97D4B880.htm>.
Stocks vs. Mutual Funds
During these times, many Americans are afraid of the stock market. Will it go up today? Or will it go down? Since we've entered into this recession, many financial institutions have fallen, including Wachovia, Merrill Lynch, and Washington Mutual. If our money isn't safe in the banks, how about taking our money to the stock market? That's where this question arises, "Should I invest in sole stocks or mutual funds?"
Some believe that a definite answer does not exist. Instead, the answer is different for each person and is dependent on that person's answers to these four questions: 1.How much money do you have? 2. How much time do you have? 3. How much skill do you have? 4. How much desire do you have? Michael Brush, a writer for MSN money, believes this notion, especially in the line of question number 2. He states that if an investor goes with stocks, they will have to research each and every company they purchase stock in, which can be time consuming. "Well, why don't I just purchase stock in one company to prevent me wasting my time doing research?" That would be okay if you weren't lacking one thing; diversity.
Brush, among other supporters, agree that in order to achieve diversity, an investor will have to purchase stock in multiple companies. Well, that's basically the definition of a mutual fund. "A mutual fund is a diverse holding of stocks that are managed on behalf of the investors that buy into the fund. A mutual fund allows an investor to take advantage of a diversified portfolio without having to invest a large sum of money." (http://www.stock-trading-explained.com/stocks-vs-mutual-funds.html). For me, if I'm going to tie my money to an aspect of the stock market, I would prefer to have a diverse portfolio; that way, a decline in one company's stock will not be the end of me. Plus, a mutual fund is monitored by an investment professional who have done research on the companies included in the mutual fund. It doesn't guarantee that I will be without risk, but it does give me a better sense of security seeming the answer to the number 3 question for me is "none."
Mutual funds show to have more advantages than individual stocks. Besides the well known fact of diversification, mutual funds offer benefits like a cushion in case of stock market volatility and the splitting of transaction fees (a typical disadvantage of participating in mutual funds). As stated before, mutual funds do not come without risk nor cost. However, a key topic taught in risk management is that diversification reduces the amount of risk faced.
During my internship, I heard many of my coworkers discuss the recent and dramatic decline in their 401Ks. As most of us know, that is a retirement fund that is heavily tied to the stock market. And yes, participants know the risks of this retirement option before the opt to get in; however, I'm sure that none of us were expecting the drop that occurred. So if I had to choose, in this time and day, whether to invest in stocks individually or a mutual fund...., my pick is definitely a mutual fund.
Sources:
1. http://en.wikipedia.org/wiki/Mutual_funds#Mutual_funds_vs._other_investments
2. http://useconomy.about.com/od/mutualfundsfaq/f/funds_vs_stocks.htm
3. http://www.stock-trading-explained.com/stocks-vs-mutual-funds.html
4. http://www.401khelpcenter.com/press_2009/pr_crain_012609.html
5. http://www.fivecentnickel.com/2006/01/12/stocks-and-bonds-vs-mutual-funds/
6. Brush, Michael. "What's a P/E? (And 9 other 'dumb' questions)." MSN Money. 5 March 2009. 31 March 2009 <http://articles.moneycentral.msn.com/learn-how-to-invest/whats-a-pe-and-9-other-dumb-questions.aspx?page=1>.
Some believe that a definite answer does not exist. Instead, the answer is different for each person and is dependent on that person's answers to these four questions: 1.How much money do you have? 2. How much time do you have? 3. How much skill do you have? 4. How much desire do you have? Michael Brush, a writer for MSN money, believes this notion, especially in the line of question number 2. He states that if an investor goes with stocks, they will have to research each and every company they purchase stock in, which can be time consuming. "Well, why don't I just purchase stock in one company to prevent me wasting my time doing research?" That would be okay if you weren't lacking one thing; diversity.
Brush, among other supporters, agree that in order to achieve diversity, an investor will have to purchase stock in multiple companies. Well, that's basically the definition of a mutual fund. "A mutual fund is a diverse holding of stocks that are managed on behalf of the investors that buy into the fund. A mutual fund allows an investor to take advantage of a diversified portfolio without having to invest a large sum of money." (http://www.stock-trading-explained.com/stocks-vs-mutual-funds.html). For me, if I'm going to tie my money to an aspect of the stock market, I would prefer to have a diverse portfolio; that way, a decline in one company's stock will not be the end of me. Plus, a mutual fund is monitored by an investment professional who have done research on the companies included in the mutual fund. It doesn't guarantee that I will be without risk, but it does give me a better sense of security seeming the answer to the number 3 question for me is "none."
Mutual funds show to have more advantages than individual stocks. Besides the well known fact of diversification, mutual funds offer benefits like a cushion in case of stock market volatility and the splitting of transaction fees (a typical disadvantage of participating in mutual funds). As stated before, mutual funds do not come without risk nor cost. However, a key topic taught in risk management is that diversification reduces the amount of risk faced.
During my internship, I heard many of my coworkers discuss the recent and dramatic decline in their 401Ks. As most of us know, that is a retirement fund that is heavily tied to the stock market. And yes, participants know the risks of this retirement option before the opt to get in; however, I'm sure that none of us were expecting the drop that occurred. So if I had to choose, in this time and day, whether to invest in stocks individually or a mutual fund...., my pick is definitely a mutual fund.
Sources:
1. http://en.wikipedia.org/wiki/Mutual_funds#Mutual_funds_vs._other_investments
2. http://useconomy.about.com/od/mutualfundsfaq/f/funds_vs_stocks.htm
3. http://www.stock-trading-explained.com/stocks-vs-mutual-funds.html
4. http://www.401khelpcenter.com/press_2009/pr_crain_012609.html
5. http://www.fivecentnickel.com/2006/01/12/stocks-and-bonds-vs-mutual-funds/
6. Brush, Michael. "What's a P/E? (And 9 other 'dumb' questions)." MSN Money. 5 March 2009. 31 March 2009 <http://articles.moneycentral.msn.com/learn-how-to-invest/whats-a-pe-and-9-other-dumb-questions.aspx?page=1>.
Tuesday, March 31, 2009
Obama says "No More"
During these past few years, many companies have gotten financial bailouts from the government. AIG, Goldman Sachs, and Merrill Lynch are just a few of the firms who have gotten handouts from the federal government. Although there are many reasons for the assistance, one key reason is because these companies are having hard times financially and difficulty sustaining normal operations. Unfortunately, their industries are not the only ones. The auto industry has been declining for some time now. Now, President Obama has drawn the line and said that no more handouts will be given, and the auto industry will have to work for themselves.
I couldn't agree more with the President. GM, Ford, and Chrysler all have received funds before during some initial bailouts. Those funds were supposed to help them get out of the financial distress they were already in. Under the Bush administration, these firms were given a specific amount of time to improve their situation. Today, these firms are still suffering; however, President Obama has said that no more money will be given. I mean, why would we give them more money? They have already proven once that a financial aid is not going to help them any. If the first bailout couldn't remove them from their operational dysfunctions, than why would the government hand out yet another bailout? As a taxpaying citizen, I do not think I can stand by and watch one of these companies get some more of my money, especially when I see that the auto industry itself is already suffering. Personally, I think President Obama has made a good decision. He's seeing that the public has had enough and took a stand for us all.
Sources:
1. Espo, David. "Obama assets gov't control over the auto industry." Kentucky.com: Lexington Herald-Leader. 30 March 2009. 31 March 2009 <http://www.kentucky.com/103/story/743627-p2.html>.
I couldn't agree more with the President. GM, Ford, and Chrysler all have received funds before during some initial bailouts. Those funds were supposed to help them get out of the financial distress they were already in. Under the Bush administration, these firms were given a specific amount of time to improve their situation. Today, these firms are still suffering; however, President Obama has said that no more money will be given. I mean, why would we give them more money? They have already proven once that a financial aid is not going to help them any. If the first bailout couldn't remove them from their operational dysfunctions, than why would the government hand out yet another bailout? As a taxpaying citizen, I do not think I can stand by and watch one of these companies get some more of my money, especially when I see that the auto industry itself is already suffering. Personally, I think President Obama has made a good decision. He's seeing that the public has had enough and took a stand for us all.
Sources:
1. Espo, David. "Obama assets gov't control over the auto industry." Kentucky.com: Lexington Herald-Leader. 30 March 2009. 31 March 2009 <http://www.kentucky.com/103/story/743627-p2.html>.
Monday, March 30, 2009
Comment on Yu's "Insurance" blog
Yu's posting "Will insurance companies be able to compete with our government? Maybe not but should government even come in the market?" was very intriguing and mentioned key areas affecting our economy today. He argues in favor of the government backing out of the insurance industry, leaving the market to those firms that specialize in providing insurance. However, I choose to disagree. Our government is a body composed of various units that are designed to specialize in multiple areas. Its composition of those units makes it a stronger player in this health insurance "arena" in my opinion.
Yu gives great examples on why the cost of health care continues to increase. Yes, defensive medicine is one top reason, but there is another major contributor; it is the uninsured. In 2006 alone, the uninsured totaled up to 49 million people. Amongst those without insurance were elderly people, those with illnesses, people who are in between job and no longer under employment security, and those between the ages of 18 and 24. Yes, the last group is us, college students. Each of these categories in their own way explain why the government is necessary to help fix this health care situation. Let us examine each individually.
1. Elderly- The article that Yu referenced, "http://www.nytimes.com/2009/03/30/opinion/l30health.html", is composed of various letters with varying opinions about whether government programs, such as Medicare, should be in existence. As a granddaughter, I take notice to the benefits of Medicare firsthand as I assist my grandmother in improving her health. With Medicare, she is able to have routine check ups and purchase medicine, all under coverage and at a reasonable price. In the event that Medicare did not exist, for my grandmother to attain such a coverage would be extremely expensive. An 80 year old woman coming to purchase insurance....anyone can see that she wouldn't be able to afford it.
2. The Ill- Following in the same routine as the previous example, where an 80 year old woman would have to pay an expensive premium due to her age, an ill person would have to pay an expensive premium due to their health condition. Under both circumstances, insurance companies look at insurability and the probability of the insured being a high cost. People with illnesses have more doctor visits, more medication, and higher bills. Insurance companies would have a field day with a person in this condition. The government is proposing a national health care system. This would provide adequate health coverage at an affordable price. Yes, it may have some problems, but I think those with illnesses would rather have the government protect them than private insurance companies seeking a profit.
3. People in between jobs- During this economic time, many workers have been laid off. Not only does this mean no more income, but it also means that benefits are suspended, health care included. With the stimulus package under President Obama, those who have been laid off would receive assistance (up to a certain percentage) for a specified period of time. This is to keep those former employed persons from having to go without coverage for them and their families. If we do not want government programs like this to exist, then we're implying that we'd rather have thousands of laid off workers go without health care OR run to insurance companies, who will take advantage of the unfortunate situation and vulnerable people.
4. People between ages 18 and 24 - In doing a paper last Spring, I came into some statistics about the uninsured. From the 49 million uninsured reported in 2006, 29.3% of those were people who fell in this age range. After doing some research, a large population of that age group were students, people like you and me. High cost and no longer being accepted under parents' coverage were the two top reasons this demographic went uninsured. As an upcoming graduate living in this economy, jobs are like gold. Once you find it, you keep it and cherish it. Unfortunately, not every graduate will have that opportunity as quickly. The government having programs offering health care at an affordable price is what this category needs. We're not asking for handouts, just some help.
Medicare and the government programs in that likeness are not "gimme" programs. They are constructed to pull this country out of old and unresolved situations. Health care has been an ongoing issue for many years, even decades now. If the government pulled back now, we're leaving the entire market to be handle and rectified by insurance companies. Yes, they specialize in offering security, but if the government does not provide monitoring in the form of competition, who will?
Sources:
1. http://yu-rmi4350weekly.blogspot.com/2009/03/will-insurance-companies-be-able-to.html
2. http://blogs.usatoday.com/oped/2008/04/wasted-medical.html
3. http://www.nytimes.com/2009/03/30/opinion/l30health.html?_r=1
4. U.S. Census Bureau. Income, Poverty, and Health Insurance Coverage in the United States: 2006. Aug. 2007. 24 Jan. 2008. <http://www.census.gov/prod/2007pubs/p60-233.pdf>
Yu gives great examples on why the cost of health care continues to increase. Yes, defensive medicine is one top reason, but there is another major contributor; it is the uninsured. In 2006 alone, the uninsured totaled up to 49 million people. Amongst those without insurance were elderly people, those with illnesses, people who are in between job and no longer under employment security, and those between the ages of 18 and 24. Yes, the last group is us, college students. Each of these categories in their own way explain why the government is necessary to help fix this health care situation. Let us examine each individually.
1. Elderly- The article that Yu referenced, "http://www.nytimes.com/2009/03/30/opinion/l30health.html", is composed of various letters with varying opinions about whether government programs, such as Medicare, should be in existence. As a granddaughter, I take notice to the benefits of Medicare firsthand as I assist my grandmother in improving her health. With Medicare, she is able to have routine check ups and purchase medicine, all under coverage and at a reasonable price. In the event that Medicare did not exist, for my grandmother to attain such a coverage would be extremely expensive. An 80 year old woman coming to purchase insurance....anyone can see that she wouldn't be able to afford it.
2. The Ill- Following in the same routine as the previous example, where an 80 year old woman would have to pay an expensive premium due to her age, an ill person would have to pay an expensive premium due to their health condition. Under both circumstances, insurance companies look at insurability and the probability of the insured being a high cost. People with illnesses have more doctor visits, more medication, and higher bills. Insurance companies would have a field day with a person in this condition. The government is proposing a national health care system. This would provide adequate health coverage at an affordable price. Yes, it may have some problems, but I think those with illnesses would rather have the government protect them than private insurance companies seeking a profit.
3. People in between jobs- During this economic time, many workers have been laid off. Not only does this mean no more income, but it also means that benefits are suspended, health care included. With the stimulus package under President Obama, those who have been laid off would receive assistance (up to a certain percentage) for a specified period of time. This is to keep those former employed persons from having to go without coverage for them and their families. If we do not want government programs like this to exist, then we're implying that we'd rather have thousands of laid off workers go without health care OR run to insurance companies, who will take advantage of the unfortunate situation and vulnerable people.
4. People between ages 18 and 24 - In doing a paper last Spring, I came into some statistics about the uninsured. From the 49 million uninsured reported in 2006, 29.3% of those were people who fell in this age range. After doing some research, a large population of that age group were students, people like you and me. High cost and no longer being accepted under parents' coverage were the two top reasons this demographic went uninsured. As an upcoming graduate living in this economy, jobs are like gold. Once you find it, you keep it and cherish it. Unfortunately, not every graduate will have that opportunity as quickly. The government having programs offering health care at an affordable price is what this category needs. We're not asking for handouts, just some help.
Medicare and the government programs in that likeness are not "gimme" programs. They are constructed to pull this country out of old and unresolved situations. Health care has been an ongoing issue for many years, even decades now. If the government pulled back now, we're leaving the entire market to be handle and rectified by insurance companies. Yes, they specialize in offering security, but if the government does not provide monitoring in the form of competition, who will?
Sources:
1. http://yu-rmi4350weekly.blogspot.com/2009/03/will-insurance-companies-be-able-to.html
2. http://blogs.usatoday.com/oped/2008/04/wasted-medical.html
3. http://www.nytimes.com/2009/03/30/opinion/l30health.html?_r=1
4. U.S. Census Bureau. Income, Poverty, and Health Insurance Coverage in the United States: 2006. Aug. 2007. 24 Jan. 2008. <http://www.census.gov/prod/2007pubs/p60-233.pdf>
Tuesday, March 24, 2009
Example III HW problem-new conditions
New exp. revenue = $106M
New cost of capital = 5%
New CaR of 99%, zc = 2.326
106/1.05 - 100 = .95238095
25*25 + 20*20 + 2(20)(25)(.25) = 1275
sqrt(1275) = 35.70
CaR (existing) = 2.326*25 = 58.15
CaR (new + existing) = 2.326*35.70 = 83.05
.95238095 - .11(93.05-58.15) = -$1.78714844
New cost of capital = 5%
New CaR of 99%, zc = 2.326
106/1.05 - 100 = .95238095
25*25 + 20*20 + 2(20)(25)(.25) = 1275
sqrt(1275) = 35.70
CaR (existing) = 2.326*25 = 58.15
CaR (new + existing) = 2.326*35.70 = 83.05
.95238095 - .11(93.05-58.15) = -$1.78714844
Salary Freeze: Actually Might Help
I happened to scroll across Brian Yoo's blog where there he made reference to freezing salaries not being a good way to manage a firm. This idea was from an original post made by Jon F. Both students make a good argument for their perspective; however, it seems that they might be arguing about two different points. Brian's blog gives suggestions that firms should implement to help pull themselves out of the economic pit. On the other hand, Jon is arguing about how upper level execs would prefer to take their bonuses, even when their company has had to lay off lower level workers. From that, he implies that freezing wages could assist firms in managing their company through this tough time. I agree with Jon, but not just in the company sense. If firms, counties, unions, legislation, and more would be willing to freeze their wages, each entity would be able to save more money.
I found an article on the Boston Globe informing us how two more Boston unions have agreed to freeze their wages. Unions, who fight to make their work rights heard and job conditions better for its workers, are willing to sacrifice their raises in order to protect other workers' jobs. This goes in line with Jon's post, where corporate execs would still take a larger check instead of helping people keep their jobs. Now, not everyone is willing to freeze their salary. Out of the 44 unions in the area, only 20 have agreed to the wage freeze. Others refuse to participate until they see the financial details and benefits from this offer, which is perfectly understandable. A union among those who have not yet agreed are the Teachers Union. For this particular union, I have a skewed opinion. Although I believe that freezing wages could improve the financial position of the county, if the Teachers Union agrees, they will have to let off a good number of teachers and teachers' aids. By doing this, you can save money, but you take a chance of hurting your education system. We would have to determine whether the cost savings will be equal in value to the education backslide.
Those last few comments could be seen as speculation and/or a slippery slope. True, but with the way our economy has been sliding down the recession roller coaster, I wouldn't put that option past us at the moment. In general, a freezing of the wages is another option to helping the current financial situation. Brian is correct in the fact that there are other ways for the aforementioned entities to save and manage themselves during this time. However, Jon's post puts the upper level execs on "front street" and makes us aware that there are some people who, even during this time of turmoil, still don't have their priorities in order.
Sources:
1. F, Jon. "Salary Freezes." Goldman, David. "25% of companies plan salary freeze." CNN Money. 9 February 2009. 23 March 2009 <http://enterpriserisk-jonf.blogspot.com/2009/02/salary-freezes.html> <http://money.cnn.com/2009/02/09/news/economy/salary_freeze/index.htm?postversion=2009020914>.
2. Yoo, Brian. "Freezing salary is not the good way to manage a firm or business." 20 March 2009. Online Business Advisor. "Promote An Employee Only When They Are Qualified." Online Business Advisor. 26 July 1999. Dhanil. "How to Overcome Economic Crisis."31 October 2008. 23 March 2009 <http://rmi4350brian.blogspot.com/2009/03/freezing-salary-is-not-good-way-to.html>.
<http://www.onlinebusadv.com/?PAGE=176>. <http://dhanil.blogspot.com/2008/10/how-to-overcome-economic-crisis.html>.
3. Globe Staff. "2 more Boston unions agree to wage freeze." The Boston Globe. 23 March 2009. 23 March 2009 <http://www.boston.com/news/local/breaking_news/2009/03/2_more_boston_u.html?p1=Well_MostPop_Emailed6>.
I found an article on the Boston Globe informing us how two more Boston unions have agreed to freeze their wages. Unions, who fight to make their work rights heard and job conditions better for its workers, are willing to sacrifice their raises in order to protect other workers' jobs. This goes in line with Jon's post, where corporate execs would still take a larger check instead of helping people keep their jobs. Now, not everyone is willing to freeze their salary. Out of the 44 unions in the area, only 20 have agreed to the wage freeze. Others refuse to participate until they see the financial details and benefits from this offer, which is perfectly understandable. A union among those who have not yet agreed are the Teachers Union. For this particular union, I have a skewed opinion. Although I believe that freezing wages could improve the financial position of the county, if the Teachers Union agrees, they will have to let off a good number of teachers and teachers' aids. By doing this, you can save money, but you take a chance of hurting your education system. We would have to determine whether the cost savings will be equal in value to the education backslide.
Those last few comments could be seen as speculation and/or a slippery slope. True, but with the way our economy has been sliding down the recession roller coaster, I wouldn't put that option past us at the moment. In general, a freezing of the wages is another option to helping the current financial situation. Brian is correct in the fact that there are other ways for the aforementioned entities to save and manage themselves during this time. However, Jon's post puts the upper level execs on "front street" and makes us aware that there are some people who, even during this time of turmoil, still don't have their priorities in order.
Sources:
1. F, Jon. "Salary Freezes." Goldman, David. "25% of companies plan salary freeze." CNN Money. 9 February 2009. 23 March 2009 <http://enterpriserisk-jonf.blogspot.com/2009/02/salary-freezes.html> <http://money.cnn.com/2009/02/09/news/economy/salary_freeze/index.htm?postversion=2009020914>.
2. Yoo, Brian. "Freezing salary is not the good way to manage a firm or business." 20 March 2009. Online Business Advisor. "Promote An Employee Only When They Are Qualified." Online Business Advisor. 26 July 1999. Dhanil. "How to Overcome Economic Crisis."31 October 2008. 23 March 2009 <http://rmi4350brian.blogspot.com/2009/03/freezing-salary-is-not-good-way-to.html>.
<http://www.onlinebusadv.com/?PAGE=176>. <http://dhanil.blogspot.com/2008/10/how-to-overcome-economic-crisis.html>.
3. Globe Staff. "2 more Boston unions agree to wage freeze." The Boston Globe. 23 March 2009. 23 March 2009 <http://www.boston.com/news/local/breaking_news/2009/03/2_more_boston_u.html?p1=Well_MostPop_Emailed6>.
Monday, March 23, 2009
Does the Improving Stock Market Mean Improving Economy?
Some market followers and investors believe that the stock market is improving and the US's worst days are behind them. But is it safe to rely on an "ever-so-changing" stock market as the determinant of the economy's well being? As much as we'd like to believe that a turn around in the stock market means a turn around for the country, the economy is weighted on more than our stock exchange. It is true, the market has improved since the beginning of the month. March 6 has been viewed upon as the "low" by some. Since then, the market has been improving. The Standard & Poor's Index increased approximately 14% and just this morning, the market rose 4%. To aid our increasing stock market position, the government is trying to step in and boost the rise. By increasing the spending, the government is hoping to restore some security and balance in our system. Even Ben Bernanke thinks the "recession will end this year."
Ben Bernanke? Isn't this the same guy who, although was upset about the situation, still defended the government's decision to bailout AIG once again? And wasn't it in that following week that AIG declared a $164 million payout of bonuses to its execs? Are we supposed to believe a guy who will defend a company that is hurting our economy with its irresponsibility and poor usage of federal aid? Please believe that I do not want to spoil Bernanke's name nor his reputation. However, I do not want to put my trust in such a strong and life changing declaration. I'd rather stay closer to Doug Peta, stock market strategist, and John Merrill, CIO of Tanglewood Wealth Management. Both agree that the market is doing better, but it is not a clear indication of an uphill ride. One factor they focus on is unemployment, a critical piece of our economy. Unemployment is high and will not disappear as fast as the stock market will increase. And although the stock market is an usual indicator of what the economy will do in the future months, the stock market is known to change very quickly. Remember, how the stock market moves is based on what people perceive. Until people have shown true faith in the status of the economy, we might want to keep our dependence on the stock market to a minimum and just continue to hope for even more better days.
Sources:
1. Steverman, Ben. "Stocks: Is the Worst Over?" Businessweek. 23 March 2009. 23 March 2009 <http://www.businessweek.com/investor/content/mar2009/pi20090320_846632.htm>.
2. Mohoni, Deepak. "Stock Markets Improve Further." The Economic Times. 23 March 2009. 23 March 2009 <http://economictimes.indiatimes.com/Features/Investors-Guide/Stock-markets-improve-further/articleshow/4302869.cms?curpg=1>.
3. Arends, Brett. "The Recession's Early Winners." The Wall Street Journal. 23 March 2009. 23 March 2009 <http://online.wsj.com/article/SB123758303567499201.html>.
Ben Bernanke? Isn't this the same guy who, although was upset about the situation, still defended the government's decision to bailout AIG once again? And wasn't it in that following week that AIG declared a $164 million payout of bonuses to its execs? Are we supposed to believe a guy who will defend a company that is hurting our economy with its irresponsibility and poor usage of federal aid? Please believe that I do not want to spoil Bernanke's name nor his reputation. However, I do not want to put my trust in such a strong and life changing declaration. I'd rather stay closer to Doug Peta, stock market strategist, and John Merrill, CIO of Tanglewood Wealth Management. Both agree that the market is doing better, but it is not a clear indication of an uphill ride. One factor they focus on is unemployment, a critical piece of our economy. Unemployment is high and will not disappear as fast as the stock market will increase. And although the stock market is an usual indicator of what the economy will do in the future months, the stock market is known to change very quickly. Remember, how the stock market moves is based on what people perceive. Until people have shown true faith in the status of the economy, we might want to keep our dependence on the stock market to a minimum and just continue to hope for even more better days.
Sources:
1. Steverman, Ben. "Stocks: Is the Worst Over?" Businessweek. 23 March 2009. 23 March 2009 <http://www.businessweek.com/investor/content/mar2009/pi20090320_846632.htm>.
2. Mohoni, Deepak. "Stock Markets Improve Further." The Economic Times. 23 March 2009. 23 March 2009 <http://economictimes.indiatimes.com/Features/Investors-Guide/Stock-markets-improve-further/articleshow/4302869.cms?curpg=1>.
3. Arends, Brett. "The Recession's Early Winners." The Wall Street Journal. 23 March 2009. 23 March 2009 <http://online.wsj.com/article/SB123758303567499201.html>.
Tuesday, March 17, 2009
Comment on Dr. Grace's opinion about President Barack Obama
Professor Grace has given his opinion about President Obama and a lack of concern for the economy that leads to a downhill stock market. His assertions are stemmed from the article "Barack Obama 'too tired' to give proper welcome to Gordon Brown," which implied that Obama is "doing too much." Later comments stated that the President is placing too much focus on stem cell research, education, and universal health care. From the beginning of Obama's campaign, health care and education have been two key subjects that he wanted to fix. Throughout that campaigning process, Americans followed his journey and raved off of the changes he proposed. Those topics are still things that we want to see come about; however, President Obama's strong focus on these issues is a little unsettling. Although I do not agree that President Obama has a lack of concern for the economy nor is he the sole reason the United States has a declining stock market, Obama's focus on stem cell research, education, and universal health care is unbalanced with other economic issues.
Stem cell research has been a controversial issue for some time now. Under Bush's presidency, a limit was place on the amount of federal funding used for this research. At the beginning of this month, President Obama removed those limits, an action that has started an uproar. With all of the things that are going on with the U.S. economy, starting another controversy is not what the country needs. Many states are already in line to "buck" the lifted ban and hold opposing sides to the President. In the event this takes place, President Obama can look forward to spending time debating against legislators and state governments on his decisions. That time could be spent in another direction, on a different subject, or fixing our current situations. Focusing on an issue that has been a debatable topic for years and far from compromise doesn't seem to be the best option.
Health care is another touchy subject. Some say it's too high, not enough, insufficient, and many other things. No matter the reason, America has incurred multiple problems in dealing with the situation. One of Obama's main campaign pitches was focus on improving health care for all citizens, which he wants to do through universal health care. Again, his suggestions have created rise to debate. Not everyone agrees with the proposal of universal health care nor do they see all the benefits that President Obama describes. Joe Messerli gives a few cons about universal health care, a main one being
The cost of having to implement this plan is what stirs up opposing views on this issue. President Obama is aware that not everyone wants to support this universal health care, especially those who are insured and will have to pay for the uninsured through higher taxes. Another debatable issue that will consume our President's time.
Lastly, there is a concern about Obama's focus on education. Now, most people would wonder why there is a problem about focusing on education. In fact, teachers have been in search of a president that cares about them and the education system. However, it's not the topic that causes problems, but it's President Obama's strong will to defend his budget. Any new plans, bills, laws, or related activities that we do will have a cost. But, the amount of that cost is what will determine whether people go with the plan or against it. Obama and Republicans are having a battle over the President's will to stay true to his $3.6 trillion budget, a budget that included activities to improve both health care and education. Not everyone places education on the top of the country's priority list, especially with the U.S. in its current financial state. President Obama will again have to look forward to opposition and debate on budgetary issues for education. Debates in Congress that will consume portions of his time which are precious and critical in this time and age.
The three topics that were mentioned are all issues that need to be focused on; however, the degree of focus can be adjusted. Our President is doing a lot to improve the country's position and is in need of our support. It's not easy for one person to fix the problems created by men a while ago. If the President wants to gain more support, a compromise could be a possible solution. Recalculating the amount of time he chooses to focus on those issues, picking and choosing his battles accordingly, and prioritizing similar to his current supporters, Obama might be able to see better days and more rest for the next visit of Gordon Brown!
Sources:
1. Reuters. "States Moves to Reject Obama's Stem Cell Reversal." Newsmax. 17 March 2009. 17 March 2009 <http://www.newsmax.com/us/states_stem_cell_ban/2009/03/17/192635.html>.
2. Messerli, Joe. "Should the Government Provide Free Universal Health Care for All Americans?" Balanced Politics. 16 February 2009. 17 March 2009 <http://www.balancedpolitics.org/universal_health_care.htm>.
3. Baker, Brent. "Friendly TV Reception for Obama's Health Care 'Fix'." NewsBusters. 6 March 2009. 17 March 2009 <http://newsbusters.org/blogs/brent-baker/2009/03/06/friendly-tv-reception-obamas-health-care-fix>.
4. Nichols, Han and Roger Runningen. "Obama Defends Health Care, Education Budget Plans (Update 1)." Bloomberg. 17 March 2009. 17 March 2009 <http://www.bloomberg.com/apps/news?pid=20601103&sid=aFxVMApffam8&refer=us>.
5. Shipman, Tim. "Barack Obama 'too tired' to give proper welcome to Gordon Brown." Telegraph.co.uk. 7 March 2009. 17 March 2009 <http://www.telegraph.co.uk/news/worldnews/northamerica/usa/barackobama/4953523/Barack-Obama-too-tired-to-give-proper-welcome-to-Gordon-Brown.html>.
Stem cell research has been a controversial issue for some time now. Under Bush's presidency, a limit was place on the amount of federal funding used for this research. At the beginning of this month, President Obama removed those limits, an action that has started an uproar. With all of the things that are going on with the U.S. economy, starting another controversy is not what the country needs. Many states are already in line to "buck" the lifted ban and hold opposing sides to the President. In the event this takes place, President Obama can look forward to spending time debating against legislators and state governments on his decisions. That time could be spent in another direction, on a different subject, or fixing our current situations. Focusing on an issue that has been a debatable topic for years and far from compromise doesn't seem to be the best option.
Health care is another touchy subject. Some say it's too high, not enough, insufficient, and many other things. No matter the reason, America has incurred multiple problems in dealing with the situation. One of Obama's main campaign pitches was focus on improving health care for all citizens, which he wants to do through universal health care. Again, his suggestions have created rise to debate. Not everyone agrees with the proposal of universal health care nor do they see all the benefits that President Obama describes. Joe Messerli gives a few cons about universal health care, a main one being
"Free" health care isn't really free since we
must pay for it with taxes; expenses for health care would have to be paid for
with higher taxes or spending cuts in other areas such as defense, education,
etc.
The cost of having to implement this plan is what stirs up opposing views on this issue. President Obama is aware that not everyone wants to support this universal health care, especially those who are insured and will have to pay for the uninsured through higher taxes. Another debatable issue that will consume our President's time.
Lastly, there is a concern about Obama's focus on education. Now, most people would wonder why there is a problem about focusing on education. In fact, teachers have been in search of a president that cares about them and the education system. However, it's not the topic that causes problems, but it's President Obama's strong will to defend his budget. Any new plans, bills, laws, or related activities that we do will have a cost. But, the amount of that cost is what will determine whether people go with the plan or against it. Obama and Republicans are having a battle over the President's will to stay true to his $3.6 trillion budget, a budget that included activities to improve both health care and education. Not everyone places education on the top of the country's priority list, especially with the U.S. in its current financial state. President Obama will again have to look forward to opposition and debate on budgetary issues for education. Debates in Congress that will consume portions of his time which are precious and critical in this time and age.
The three topics that were mentioned are all issues that need to be focused on; however, the degree of focus can be adjusted. Our President is doing a lot to improve the country's position and is in need of our support. It's not easy for one person to fix the problems created by men a while ago. If the President wants to gain more support, a compromise could be a possible solution. Recalculating the amount of time he chooses to focus on those issues, picking and choosing his battles accordingly, and prioritizing similar to his current supporters, Obama might be able to see better days and more rest for the next visit of Gordon Brown!
Sources:
1. Reuters. "States Moves to Reject Obama's Stem Cell Reversal." Newsmax. 17 March 2009. 17 March 2009 <http://www.newsmax.com/us/states_stem_cell_ban/2009/03/17/192635.html>.
2. Messerli, Joe. "Should the Government Provide Free Universal Health Care for All Americans?" Balanced Politics. 16 February 2009. 17 March 2009 <http://www.balancedpolitics.org/universal_health_care.htm>.
3. Baker, Brent. "Friendly TV Reception for Obama's Health Care 'Fix'." NewsBusters. 6 March 2009. 17 March 2009 <http://newsbusters.org/blogs/brent-baker/2009/03/06/friendly-tv-reception-obamas-health-care-fix>.
4. Nichols, Han and Roger Runningen. "Obama Defends Health Care, Education Budget Plans (Update 1)." Bloomberg. 17 March 2009. 17 March 2009 <http://www.bloomberg.com/apps/news?pid=20601103&sid=aFxVMApffam8&refer=us>.
5. Shipman, Tim. "Barack Obama 'too tired' to give proper welcome to Gordon Brown." Telegraph.co.uk. 7 March 2009. 17 March 2009 <http://www.telegraph.co.uk/news/worldnews/northamerica/usa/barackobama/4953523/Barack-Obama-too-tired-to-give-proper-welcome-to-Gordon-Brown.html>.
AIG: Problem Child...cont.
It seems like AIG can't stay out of trouble. If soaking up taxpayers' dollars were not enough to outrage the country, they now want to give monetary bonuses to their executives. But what have the executives done that is worth a raise? Should driving particular segments of the company into a financial pit be rewarded? Constantly taking federal aid and dispensing it to other firms who also received federal assistance, is that worthy? Or how about losing an estimated $61.4 billion in the last quarter? None of these things sound like compliments towards upper level management, yet AIG has reported a $165 million payout. For us taxpayers, our foremost thought might be, "Is that where part of the $30 billion is going?" Recall that just last Monday, AIG received another federal bailout of $30 billion on top of the original $150 billion they already received. It appears that money just runs through AIG and nothing has been done about it.
President Obama is standing up to say that, "enough is enough." His view is that it's time to stop this madness, where AIG has been rewarded for irresponsibility. Our President is taking note that many companies in this nation have been working diligently to pull themselves out of their financial hole, without aid from the federal system. They have been overlooked in the past and no one stood up for them. Now the time has come where our Commander in Chief has seen the outcomes of bailing out a company who behaves recklessly, and he is not impressed. But is it too late? Are we speaking up about the situation at a time where the damage has already been done?
Look at the numbers; approximately $180 billion has already been invested into saving this firm. AIG has used that money in various negligent ways, and it's long gone. From the time that AIG received it's first "handout", other businesses in need of that assistance have gone under. The few that remain are struggling. "So what do we do?" Democratic Representative Barney Frank (Ma.) believes that it's time to start firing people. Let them get that bonus, but that will be the last paycheck from that company. A good point made, I will say; however, does unemployment solve the problem? I understand that most of these upper level management employees will have enough to sustain average living, but does the loss of jobs portray that we have taught AIG, the business unit as a whole, its lesson? A compromise of the situation is possible, where some executives (especially those who have been leading AIG in the wrong direction and consuming the federal assistance) should be let go, and the federal government should maintain a tight watch on AIG's action from here on out. Maybe if AIG felt the scrutiny of the people and realizes that it's heavy on our radar, the company might see that it's time to get its act together.
Sources:
1. Raum, Tom. "Obama: AIG can't justify 'outrage' of exec bonuses." Associated Press via Comcast.net. 16 March 2009. 17 March 2009 <http://www.comcast.net/articles/finance/20090315/AIG.Outrage/>.
2. Puzzanghera, Jim. "Why AIG is Still Getting Rescue Funds, According to LA Times." Insurance News Net. LA Times. 9 March 2009. 9 March 2009 <http://www.insurancenewsnet.com/article.asp?a=top_news&id=104037>.
3. Reuters. "US had no choice." Straits Times. 4 March 2009. 9 March 2009 <http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_345649.html>.
4. Scaliger, Charles. "AIG, Bailouts, and the Banks." New American. 9 March 2009. 9 March 2009 <http://www.thenewamerican.com/economy/commentary-mainmenu-43/866-aig-bailouts-and-the-banks>.
President Obama is standing up to say that, "enough is enough." His view is that it's time to stop this madness, where AIG has been rewarded for irresponsibility. Our President is taking note that many companies in this nation have been working diligently to pull themselves out of their financial hole, without aid from the federal system. They have been overlooked in the past and no one stood up for them. Now the time has come where our Commander in Chief has seen the outcomes of bailing out a company who behaves recklessly, and he is not impressed. But is it too late? Are we speaking up about the situation at a time where the damage has already been done?
Look at the numbers; approximately $180 billion has already been invested into saving this firm. AIG has used that money in various negligent ways, and it's long gone. From the time that AIG received it's first "handout", other businesses in need of that assistance have gone under. The few that remain are struggling. "So what do we do?" Democratic Representative Barney Frank (Ma.) believes that it's time to start firing people. Let them get that bonus, but that will be the last paycheck from that company. A good point made, I will say; however, does unemployment solve the problem? I understand that most of these upper level management employees will have enough to sustain average living, but does the loss of jobs portray that we have taught AIG, the business unit as a whole, its lesson? A compromise of the situation is possible, where some executives (especially those who have been leading AIG in the wrong direction and consuming the federal assistance) should be let go, and the federal government should maintain a tight watch on AIG's action from here on out. Maybe if AIG felt the scrutiny of the people and realizes that it's heavy on our radar, the company might see that it's time to get its act together.
Sources:
1. Raum, Tom. "Obama: AIG can't justify 'outrage' of exec bonuses." Associated Press via Comcast.net. 16 March 2009. 17 March 2009 <http://www.comcast.net/articles/finance/20090315/AIG.Outrage/>.
2. Puzzanghera, Jim. "Why AIG is Still Getting Rescue Funds, According to LA Times." Insurance News Net. LA Times. 9 March 2009. 9 March 2009 <http://www.insurancenewsnet.com/article.asp?a=top_news&id=104037>.
3. Reuters. "US had no choice." Straits Times. 4 March 2009. 9 March 2009 <http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_345649.html>.
4. Scaliger, Charles. "AIG, Bailouts, and the Banks." New American. 9 March 2009. 9 March 2009 <http://www.thenewamerican.com/economy/commentary-mainmenu-43/866-aig-bailouts-and-the-banks>.
Tuesday, March 10, 2009
Obama Tax: Is It as Good as "Proposed" to be!
Taxes are an area that affect everyone. From a part-time cashier at McDonalds to a large corporation like Deloitte, what happens with the tax rate and tax spending will impact us all. The new President of the United States, Barack Obama, is stressing a tax increase on the top two tax rates. This will affect those businesses who report more than $200,000 as individuals or $250,000 jointly. Businesses are looking at the President's opinion and aren't too happy with it, especially small businesses. But should they? Since only a low percentage of small businesses actually report that amount, shouldn't the rest of the small business population be OK? If we observe the fact that most small business owners earn a middle-class income, then we'll notice that those owners will actually benefit due to the fact that they will receive tax breaks anyway. Not only that, but it puts large multi-national corporations (MNCs) in their place as well. Most MNCs have locations in multiple countries and contain great knowledge on maneuvering around tax laws. Under the Obama plan, MNCs will no longer be able to receive tax breaks on jobs that are overseas.
If all of that is the case, businesses (particularly small businesses), should be happy with the new plan. But when has a tax rate increase been solely beneficial? All of these things come at a price. Although only a low percentage of small business owners report those income statistics above, the increased tax rate will now make them think about growing. If a small business begins to flourish and have to report numbers greater than those above, then that business is now in the line of fire from the tax increase. This removes the advantage of expansion and can persuade small businesses to stay small. In addition to that, the tax plan will place a limit on itemized deductions, preventing firms to receive full value.
Judging from both perspectives, it's hard to determine whether the tax increase is beneficial or not. I personally don't want an increased tax rate, but I don't make $200,000 either. What does concern me along the lines of the increased tax rate is that our President has now confirmed that more taxpayers money will be spent on human embryonic stem cell research. This is a major subject that has survived many former presidents. However, President Obama will increase the amount of spending, higher than it was under the Bush administration. As a tax payer, it is my duty to know whether my money is being put to good use. According to Dr. Charmaine Yoest of Americans United for Life, spending towards stem cell research is not the way to go. As she states, "Millions of dollars have been spent on embryonic stem cell research and it has failed. To pour more money into it is simply a waste." Is the increase in my tax dollars going towards a failed project? If so, that is where I begin to lean towards the side where tax rates remain the same or decrease. Either way, I do not want hard earned money to go towards a project that will not prove to be a success in my lifetime.
Sources:
1. PR Newswire. "Americans United for Life: Obama Administration Stem Cell Policy an Anti-Life Waste of Tax Dollars." PR Newswire. 9 March 2009. 9 March 2009 <http://sev.prnewswire.com/health-care-hospitals/20090309/DC8065909032009-1.html>.
2. Hoover, Kent. "Business Leery of Obama tax plans." Business Journal. 9 March 2009. 10 March 2009 <http://www.bizjournals.com/birmingham/stories/2009/03/09/daily7.html>.
3. Beach, Jim. "Multinational Companies." Lecture, Fall 2008.
If all of that is the case, businesses (particularly small businesses), should be happy with the new plan. But when has a tax rate increase been solely beneficial? All of these things come at a price. Although only a low percentage of small business owners report those income statistics above, the increased tax rate will now make them think about growing. If a small business begins to flourish and have to report numbers greater than those above, then that business is now in the line of fire from the tax increase. This removes the advantage of expansion and can persuade small businesses to stay small. In addition to that, the tax plan will place a limit on itemized deductions, preventing firms to receive full value.
Judging from both perspectives, it's hard to determine whether the tax increase is beneficial or not. I personally don't want an increased tax rate, but I don't make $200,000 either. What does concern me along the lines of the increased tax rate is that our President has now confirmed that more taxpayers money will be spent on human embryonic stem cell research. This is a major subject that has survived many former presidents. However, President Obama will increase the amount of spending, higher than it was under the Bush administration. As a tax payer, it is my duty to know whether my money is being put to good use. According to Dr. Charmaine Yoest of Americans United for Life, spending towards stem cell research is not the way to go. As she states, "Millions of dollars have been spent on embryonic stem cell research and it has failed. To pour more money into it is simply a waste." Is the increase in my tax dollars going towards a failed project? If so, that is where I begin to lean towards the side where tax rates remain the same or decrease. Either way, I do not want hard earned money to go towards a project that will not prove to be a success in my lifetime.
Sources:
1. PR Newswire. "Americans United for Life: Obama Administration Stem Cell Policy an Anti-Life Waste of Tax Dollars." PR Newswire. 9 March 2009. 9 March 2009 <http://sev.prnewswire.com/health-care-hospitals/20090309/DC8065909032009-1.html>.
2. Hoover, Kent. "Business Leery of Obama tax plans." Business Journal. 9 March 2009. 10 March 2009 <http://www.bizjournals.com/birmingham/stories/2009/03/09/daily7.html>.
3. Beach, Jim. "Multinational Companies." Lecture, Fall 2008.
AIG: The Problem Child
Do you remember when you were younger and had to do chores? If your parents thought you did a good job, you'd usually get an allowance. So began the process of service-payment exchange; you'd conduct the chore and they'd pay you the allowance. However, if you did not complete an assigned chore, you did not receive any payment. Unfortunately in the real world, this is not the case. Insurance giant, American International Group (AIG), has proven to be an exception from the general "service-payment exchange" rule. During this current financial crisis, a series of bailouts have been given to various companies, AIG included. However, it seems that AIG continues to get a stream of bailouts. Why is this so? What are they doing that keeps in them in the need of additional funds? Most importantly, is it fair to keep bailing out a company that has not made any improvements? These are all questions that the general public wants answered.
From the statements above, it can be inferred that I disagree with the AIG bailouts. I must admit, I'm not happy about it. Yet, I do understand why the US continues to do so. Being in various risk management and insurance classes, I've had the chance to discuss AIG's circumstance and what it means for the general public and the future of this financial situation. As mentioned before, AIG is an insurance powerhouse. It is one of the largest insurance corporations in the country and holds a vast amount of the policies thereof. During its positive reign, AIG made an major impact on the insurance industry and the country as a whole. Although it sounds cliche, if AIG were to completely fail, the rest of us would be directly or indirectly affected. The company is very complex and involved with other companies in various ways. It's downfall could create a "domino affect" of failure in the insurance industry and any company that is heavily tied to it. Not only that, but if the US stopped funding AIG, it would lead to the downfall of the healthy sectors inside AIG. What some people fail to realize is that the entire AIG company is not hurting, just a specific area. In fact, AIG's life insurance sector is still prominent and successful. Taking away funds from AIG as a whole would indirectly take away from its flourishing sector.
Although I understand why the bailouts continue to go to AIG, I am not happy about it, nor do I believe it is fair. Fair would be providing minor bailouts for those smaller companies who have acted responsibly. We should help those who have taken necessary steps to aid this financial crisis, place themselves in a better position, but just need a little financial boost. Instead, we are throwing $30 billion on top of the $150 billion to AIG, a company that persists on doing whatever it wants. Senator John McCain supported Bush in the $700 billion bailout, yet he is still shocked at how AIG gave 1/3 of the original $150 billion to companies such as Goldman Sachs and Merrill Lynch. I'm sorry, but isn't Goldman Sachs another company who received a US bailout? Isn't Merrill Lynch a firm that was just acquired by Bank of America? It seems as if AIG is just throwing this money around, when instead, they should be finding ways to create money from its bailout funds. However, the company is still heading down the wrong lane. With a lost of $61.7 billion in the last quarter, another bailout was necessary. McCain isn't the only one upset about the AIG situation. US Federal Reserve Chairman Ben Bernanke is not happy about the circumstance either, but he must still defend the country's decision. Simply put, Bernanke states, "There was no other alternative. We really had no choice" AIG has a strong relationship with banks worldwide, and a failure for the company could lead to a disaster around the globe.
This AIG bailout situation is placing us in a bad position. So many firms and small businesses in need of a financial break, and yet we still provide giants like AIG with billions of dollars. It will be only a matter of time before Americans get tired of paying more tax money to help the irresponsible companies out. It was said by some that AIG was "too big to fail." Well now we all know different. No matter the size of the company, no matter how rich the company, no matter how popular the company, horrible financial choices will lead to disaster. The country is already in a deficit of trillions of dollars; if we continue to bailout out companies like AIG, who knows what this number could grow to.
Sources:
1. Puzzanghera, Jim. "Why AIG is Still Getting Rescue Funds, According to LA Times." Insurance News Net. LA Times. 9 March 2009. 9 March 2009 <http://www.insurancenewsnet.com/article.asp?a=top_news&id=104037>.
2. Reuters. "US had no choice." Straits Times. 4 March 2009. 9 March 2009 <http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_345649.html>.
3. Scaliger, Charles. "AIG, Bailouts, and the Banks." New American. 9 March 2009. 9 March 2009 <http://www.thenewamerican.com/economy/commentary-mainmenu-43/866-aig-bailouts-and-the-banks>.
From the statements above, it can be inferred that I disagree with the AIG bailouts. I must admit, I'm not happy about it. Yet, I do understand why the US continues to do so. Being in various risk management and insurance classes, I've had the chance to discuss AIG's circumstance and what it means for the general public and the future of this financial situation. As mentioned before, AIG is an insurance powerhouse. It is one of the largest insurance corporations in the country and holds a vast amount of the policies thereof. During its positive reign, AIG made an major impact on the insurance industry and the country as a whole. Although it sounds cliche, if AIG were to completely fail, the rest of us would be directly or indirectly affected. The company is very complex and involved with other companies in various ways. It's downfall could create a "domino affect" of failure in the insurance industry and any company that is heavily tied to it. Not only that, but if the US stopped funding AIG, it would lead to the downfall of the healthy sectors inside AIG. What some people fail to realize is that the entire AIG company is not hurting, just a specific area. In fact, AIG's life insurance sector is still prominent and successful. Taking away funds from AIG as a whole would indirectly take away from its flourishing sector.
Although I understand why the bailouts continue to go to AIG, I am not happy about it, nor do I believe it is fair. Fair would be providing minor bailouts for those smaller companies who have acted responsibly. We should help those who have taken necessary steps to aid this financial crisis, place themselves in a better position, but just need a little financial boost. Instead, we are throwing $30 billion on top of the $150 billion to AIG, a company that persists on doing whatever it wants. Senator John McCain supported Bush in the $700 billion bailout, yet he is still shocked at how AIG gave 1/3 of the original $150 billion to companies such as Goldman Sachs and Merrill Lynch. I'm sorry, but isn't Goldman Sachs another company who received a US bailout? Isn't Merrill Lynch a firm that was just acquired by Bank of America? It seems as if AIG is just throwing this money around, when instead, they should be finding ways to create money from its bailout funds. However, the company is still heading down the wrong lane. With a lost of $61.7 billion in the last quarter, another bailout was necessary. McCain isn't the only one upset about the AIG situation. US Federal Reserve Chairman Ben Bernanke is not happy about the circumstance either, but he must still defend the country's decision. Simply put, Bernanke states, "There was no other alternative. We really had no choice" AIG has a strong relationship with banks worldwide, and a failure for the company could lead to a disaster around the globe.
This AIG bailout situation is placing us in a bad position. So many firms and small businesses in need of a financial break, and yet we still provide giants like AIG with billions of dollars. It will be only a matter of time before Americans get tired of paying more tax money to help the irresponsible companies out. It was said by some that AIG was "too big to fail." Well now we all know different. No matter the size of the company, no matter how rich the company, no matter how popular the company, horrible financial choices will lead to disaster. The country is already in a deficit of trillions of dollars; if we continue to bailout out companies like AIG, who knows what this number could grow to.
Sources:
1. Puzzanghera, Jim. "Why AIG is Still Getting Rescue Funds, According to LA Times." Insurance News Net. LA Times. 9 March 2009. 9 March 2009 <http://www.insurancenewsnet.com/article.asp?a=top_news&id=104037>.
2. Reuters. "US had no choice." Straits Times. 4 March 2009. 9 March 2009 <http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_345649.html>.
3. Scaliger, Charles. "AIG, Bailouts, and the Banks." New American. 9 March 2009. 9 March 2009 <http://www.thenewamerican.com/economy/commentary-mainmenu-43/866-aig-bailouts-and-the-banks>.
US On an Economic Rollercoaster
The United States economy has been through a lot during the past few years. For those of us in our younger years, it's hard to believe that an economic crisis such as this could ever occur during our lifetime. From the things we've heard about the Great Depression, it would be our hope that the US wouldn't get close to that again. However, when a nation's financial system is in need of bailouts in the range of trillions of dollars, it's hard not to believe that our recession is only to get worse. Yet the famous billionaire Warren Buffet thinks the opposite. Buffet takes an optimistic view on the situation and believes that "America's best days are still to come." How can this be? How is it possible for the US to regain its powerful position again? Is it just wishful thinking? Buffet states that he realizes the US economy did "fall off a cliff", but still believes that the US has the ability to regain its position and move forward on this economic wave.
As a realist, Buffet has acknowledged some activities that are most likely to occur in the future, such as higher unemployment and an inflation. These things seem more evident has large corporations continue to let go masses of people. Still, through all of the negative events that happen, Buffet remains true to his opinion that we shall see success in the future. Addressing the financial system, he notices that more citizens are improving their spending and saving techniques. Being the owner of over 60 companies including the large car insurance company, GEICO, he noticed that while his jewelry industry suffered a loss, GEICO became more popular as people wanted to save more money. But is that enough? Is switching to another car insurer to save around $500 a year enough to make Americans feel more secure? No. Buffet believes that Americans must have faith in the entire nation's banking system. "Most banks are in good shape. The banking system largely will cure itself," says Buffet. But most banks like who? How are we (as Americans) supposed to feel when banks such as Washington Mutual, Merrill Lynch, and even Wachovia can go under? Can we really have hope that a better economic stance is coming soon?
Keith Fitz-Gerald of NuWire Investor takes the opposing view of Buffet. Instead of a better economic situation to head our way, Gerald believes that the US's recession is worse than Japan's "Lost Decade". (Japan's "Lost Decade" represents the economic turmoil during the 1990s that Japan experienced. This turmoil included a rising unemployment rate, failing financial systems, homelessness, and a Japanese stock market crash). Gerald states that the current US situation is nothing more than a replay of the "Lost Decade", maybe worse. If we take a look at the following similarities between the two eras, it's hard not to believe what he says.
1. Rising unemployment rate
2. Failing financial systems
3. At the beginning of each country's recession, large deficit. (In fact, US had a larger deficit than Japan)
4. Economic problems starting long before results actually appeared
So who do we believe? Do we look at our current situation and follow in Fitz-Gerald's thinking? We can see how our economic and financial instability is a mere future representation of Japan's "Lost Decade". For a long time, we've noticed the downward spiral of the US economy. Having to bailout major corporations and implementing a billion dollar stimulus plan, both of these requiring citizens to cough up more money. Or should we be thinking positively like Mr. Buffet? Start thinking about the future and how the tables can be turned with a little hope and faith? Of course he is speaking as a billionaire who might be able to sustain his financial status during this economic time, but his attitude does remind me of a popular saying; "As low as we are now, there's nowhere else to go but UP!"
Sources:
1. Associated Press. "Warren Buffet says economy fell off a cliff." Contra Costa Times. 9 March 2009. 9 March 2009 <http://www.contracostatimes.com/business/ci_11872501?nclick_check=1>.
2. Fitz-Gerald, Keith. "US Recession Could Be Worse Than Japan's Lost Decade." NuWire Investor. 3 March 2009. 9 March 2009 <http://www.nuwireinvestor.com/articles/us-recession-could-be-worse-than-japans-lost-decade-52647.aspx>.
As a realist, Buffet has acknowledged some activities that are most likely to occur in the future, such as higher unemployment and an inflation. These things seem more evident has large corporations continue to let go masses of people. Still, through all of the negative events that happen, Buffet remains true to his opinion that we shall see success in the future. Addressing the financial system, he notices that more citizens are improving their spending and saving techniques. Being the owner of over 60 companies including the large car insurance company, GEICO, he noticed that while his jewelry industry suffered a loss, GEICO became more popular as people wanted to save more money. But is that enough? Is switching to another car insurer to save around $500 a year enough to make Americans feel more secure? No. Buffet believes that Americans must have faith in the entire nation's banking system. "Most banks are in good shape. The banking system largely will cure itself," says Buffet. But most banks like who? How are we (as Americans) supposed to feel when banks such as Washington Mutual, Merrill Lynch, and even Wachovia can go under? Can we really have hope that a better economic stance is coming soon?
Keith Fitz-Gerald of NuWire Investor takes the opposing view of Buffet. Instead of a better economic situation to head our way, Gerald believes that the US's recession is worse than Japan's "Lost Decade". (Japan's "Lost Decade" represents the economic turmoil during the 1990s that Japan experienced. This turmoil included a rising unemployment rate, failing financial systems, homelessness, and a Japanese stock market crash). Gerald states that the current US situation is nothing more than a replay of the "Lost Decade", maybe worse. If we take a look at the following similarities between the two eras, it's hard not to believe what he says.
1. Rising unemployment rate
2. Failing financial systems
3. At the beginning of each country's recession, large deficit. (In fact, US had a larger deficit than Japan)
4. Economic problems starting long before results actually appeared
So who do we believe? Do we look at our current situation and follow in Fitz-Gerald's thinking? We can see how our economic and financial instability is a mere future representation of Japan's "Lost Decade". For a long time, we've noticed the downward spiral of the US economy. Having to bailout major corporations and implementing a billion dollar stimulus plan, both of these requiring citizens to cough up more money. Or should we be thinking positively like Mr. Buffet? Start thinking about the future and how the tables can be turned with a little hope and faith? Of course he is speaking as a billionaire who might be able to sustain his financial status during this economic time, but his attitude does remind me of a popular saying; "As low as we are now, there's nowhere else to go but UP!"
Sources:
1. Associated Press. "Warren Buffet says economy fell off a cliff." Contra Costa Times. 9 March 2009. 9 March 2009 <http://www.contracostatimes.com/business/ci_11872501?nclick_check=1>.
2. Fitz-Gerald, Keith. "US Recession Could Be Worse Than Japan's Lost Decade." NuWire Investor. 3 March 2009. 9 March 2009 <http://www.nuwireinvestor.com/articles/us-recession-could-be-worse-than-japans-lost-decade-52647.aspx>.
Friday, February 20, 2009
Reserves: What, Why, and How?
The topic of reserves is extremely important. For different types of firms, having a sufficient amount of reserves is critical for future business. In order to see why reserves has a great impact on future endeavors of various companies, we can explore the "what", "why" and "how" of the term.
What are reserves?
The definitions alters a little depending on the type of firm it is. For banks, it is the amount of money that is physically held within each branch of banks. Most banks have to keep a minimum number (reserve requirement) that will enable them to handle the financial transactions throughout the day. For insurance companies, it is similar, but varies on the payout structure. Insurance companies' reserves are the amount of money it holds so that it will be able to pay future policy benefits. The reserves are usually equal to future benefits minus future premiums to be collected. In essence, the generalized definition of reserves is the amount of money a firm keeps on hand so they can handle future business activities.
Why do firms keep reserves?
The purpose of keeping reserves follows the definition, to be able to conduct future activities. Banks use deposits to handle business activities such as investments and loans to other firms. This is a form of them borrowing money from its customers. However, customers will occasionally make withdrawals. That process is the form of customers getting their loan to the banks repaid. The banks must have an amount of money on hand to conduct withdrawals. This same notion applies for insurance companies. Insurance companies issue out various types of policies. They have some that pay in the event of a death and those that pay in the event of survival. In either case, should the policy holder fulfill his or her requirement, a benefit must be paid out. Insurance companies must have an amount that is sufficient enough to handle multiple benefit payments (Remember, insurance companies have MANY policy holders.)
How do reserves diminish risk?
Having a sufficient amount of reserves on hand can keep firms in great standing. For example, banks that issue loans issue them in the thoughts that those loans will not be defaulted on. In our current economic crisis and our housing market, it is evident that this is not the case. Banks that have a large enough amount of reserves can still conduct daily transactions and other business endeavors, even in the event their issued loans are not repaid. If not, those banks will actually have to borrow more money, maybe even from another bank. And one thing we continue to learn is that people are less willing to lend you money when you need. In addition, they are less willing to lend you money when you have a higher default risk. Therefore, having a safety net of reserves helps in decreasing your chances of default risk. Plus, it helps decrease the risk of that firm going bankrupt.
Looking at the three elements above, it is clear that the idea of reserves is critical to firms. It helps businesses better position themselves for future business activities while creating a safety net in the case of financial trouble. And judging from our wave of ups and downs in the economy, it is better to be safe than sorry.
(Information for this posted was gathered from current and previous classes. They include RMi 4350, AS 4350, FI 4000)
What are reserves?
The definitions alters a little depending on the type of firm it is. For banks, it is the amount of money that is physically held within each branch of banks. Most banks have to keep a minimum number (reserve requirement) that will enable them to handle the financial transactions throughout the day. For insurance companies, it is similar, but varies on the payout structure. Insurance companies' reserves are the amount of money it holds so that it will be able to pay future policy benefits. The reserves are usually equal to future benefits minus future premiums to be collected. In essence, the generalized definition of reserves is the amount of money a firm keeps on hand so they can handle future business activities.
Why do firms keep reserves?
The purpose of keeping reserves follows the definition, to be able to conduct future activities. Banks use deposits to handle business activities such as investments and loans to other firms. This is a form of them borrowing money from its customers. However, customers will occasionally make withdrawals. That process is the form of customers getting their loan to the banks repaid. The banks must have an amount of money on hand to conduct withdrawals. This same notion applies for insurance companies. Insurance companies issue out various types of policies. They have some that pay in the event of a death and those that pay in the event of survival. In either case, should the policy holder fulfill his or her requirement, a benefit must be paid out. Insurance companies must have an amount that is sufficient enough to handle multiple benefit payments (Remember, insurance companies have MANY policy holders.)
How do reserves diminish risk?
Having a sufficient amount of reserves on hand can keep firms in great standing. For example, banks that issue loans issue them in the thoughts that those loans will not be defaulted on. In our current economic crisis and our housing market, it is evident that this is not the case. Banks that have a large enough amount of reserves can still conduct daily transactions and other business endeavors, even in the event their issued loans are not repaid. If not, those banks will actually have to borrow more money, maybe even from another bank. And one thing we continue to learn is that people are less willing to lend you money when you need. In addition, they are less willing to lend you money when you have a higher default risk. Therefore, having a safety net of reserves helps in decreasing your chances of default risk. Plus, it helps decrease the risk of that firm going bankrupt.
Looking at the three elements above, it is clear that the idea of reserves is critical to firms. It helps businesses better position themselves for future business activities while creating a safety net in the case of financial trouble. And judging from our wave of ups and downs in the economy, it is better to be safe than sorry.
(Information for this posted was gathered from current and previous classes. They include RMi 4350, AS 4350, FI 4000)
Thursday, February 19, 2009
What is Model Risk?
What is model risk? When discussed in class, Professor Grace stated the summarized definition of "when a firm isn't looking at what's really going on due to them being stuck on a particular model, even if that model is not the correct one." Riccardo Rebonato comprised a definition as well. It simply states that model risk occurs after observing a set of prices for hedging instruments, and receiving a different result after using different yet similar models. Because of the mix-match of results, financial losses are incurred.
There are different types of model risk. 1)Wrong Model- This is when the wrong model is chosen to measure a particular project, returns, or a set of data. 2)Model Implementation- During the process of applying the chosen model, different complications can occur such as using wrong data, estimated values, or other technical errors. 3)Model Usage- This happens when a model is used improperly.
Why is model risk important? What affects does it have on a firm? Looking from its definition, model risk can cause many financial losses. For example, financial institutions rely greatly on models for their investment projects, investment returns, and other data. They use results from created models to determine their moves in the industry. Because most moves require great amount of resources (both money and time), it is critical that they models they used are correct and portray the correct future outcomes. If model risk is high, firms won't only lose financially, but could potentially lose their reputation.
Model risk is very important. Because of all the factors that it affects, firms allocate a lot of money towards model risk management. Once firms are better at choosing the correct models and implementing at the appropriate time, they will decrease their model risk and keep potential monetary and reputable losses low.
(Sources for this post are from "Theory and Practice of Model Risk Management" by Riccardo Rebonato and Wikipedia: "Model Risk".)
There are different types of model risk. 1)Wrong Model- This is when the wrong model is chosen to measure a particular project, returns, or a set of data. 2)Model Implementation- During the process of applying the chosen model, different complications can occur such as using wrong data, estimated values, or other technical errors. 3)Model Usage- This happens when a model is used improperly.
Why is model risk important? What affects does it have on a firm? Looking from its definition, model risk can cause many financial losses. For example, financial institutions rely greatly on models for their investment projects, investment returns, and other data. They use results from created models to determine their moves in the industry. Because most moves require great amount of resources (both money and time), it is critical that they models they used are correct and portray the correct future outcomes. If model risk is high, firms won't only lose financially, but could potentially lose their reputation.
Model risk is very important. Because of all the factors that it affects, firms allocate a lot of money towards model risk management. Once firms are better at choosing the correct models and implementing at the appropriate time, they will decrease their model risk and keep potential monetary and reputable losses low.
(Sources for this post are from "Theory and Practice of Model Risk Management" by Riccardo Rebonato and Wikipedia: "Model Risk".)
Tuesday, February 17, 2009
How will the Stimulus Plan affect me?,...cont.
I recently discussed some aspects of the stimulus bill that has been popular lately. Upon logging online today, I saw that President Obama is planning to go through with the plan is getting ready for the process of signing the bill. Once signed, the Stimulus Plan will be working with a $787 billion package that will spread out among many areas in the nation. Now that a number has been set to the package, we can start seeing how much money will be allocated to particular projects and what these values will mean to us.
1. Taxes- Advantages of tax breaks are provided for families that send a child to college, buy a new car, buy a new home, or make their current home more energy efficient. For individuals, we can expect to see about $13 more in our checks.
2. Health Insurance- With the recent layoffs during the nations reception, a lot of former employees have had problems with health care. Under COBRA, coverage for former employees will continue for the following 18 months. After the implementation of the stimulus package, those who lost their jobs and had to incur the extra cost of expensive health care will now have 65% of their costs handled by the government for the first 9 months.
3. Infrastructure- About $90 billion will be allocated towards repairing roads, repaving highways, and reinforcing bridges. With more construction activities occurring, it is the government's hope that additional job opportunities will be created.
4. Energy- For those who want to be more energy efficient and save money in the long-run, taking on energy focused activities will result in tax breaks. (i.e. energy efficient windows in the home, solar panel roof, other related activities). Also, $300 million will go for rebates to encourage consumers to buy more efficient appliances.
5. Schools- One key goal is to keep teachers employed. To do this, the plan is to allocate $54 billion (where $39 billion will go towards kindergarten to 12 grade) to prevent state budget cuts. Additionally, $25 billion will go to "No Child Left Behind" to help fund teachers' salaries and special education programs.
6. National Debt- Because of this grand total amount, $787 billion, the country will be in more debt. The increase in debt will mean higher taxes and fewer government services that will not only affect our generation, but the next one as well.
7. Environment- $9.2 billion will go towards environmental projects under the EPA (Environmental Projection Agency). The projects they will conduct is expected to produce approximately 200,000 jobs. These projects include national park renovations, road repairs, and improving drinking water systems.
8. Police- $3.7 billion will go towards police programs and hiring new officers. $1 billion is to bring back the program COPS (Community Oriented Policing Systems), a program that was eliminated under the Bush Administration. This program paid police officers' salaries and reduced crime in the 1990s. The bill will also provide an amount to youth mentoring programs, aid victims of crimes, fight Internet crimes against children, and help law enforcement on the Mexican border.
9. Higher Education- Under the plan, the Pell Grant maximum amount will increase to $5,350 from $4,731 starting July 1 and to $5,550 in 2010-2011. An additional 800,000 students will be able to qualify for the grant under the new amount of funds. Also, $32 billion will be allocated towards higher education.
10. The Poor- There are approximately 37 million American who live in poverty. With the stimulus plan in affect, those who get food stamps will now receive more. Those who receive unemployment checks and expect an additional $25/check in addition to a longer check receiving period. People who receive Supplemental Security Income will get a one-time $250.
Although each of these areas are greatly important and might affect all of us differently, as college students, upcoming graduates, and professors, I "bolded" the ones I felt have the most direct affect on us. No matter what, this Stimulus bill is going to impact us heavily in the near future.
(Information for this blog was mainly from "How the stimulus bill affects you" by the Associated Press on February 16, 2009 at 2:40pm. Here is the website for more information. http://articles.moneycentral.msn.com/Investing/Extra/how-the-stimulus-bill-could-affect-you.aspx?page=1>1=33009)
1. Taxes- Advantages of tax breaks are provided for families that send a child to college, buy a new car, buy a new home, or make their current home more energy efficient. For individuals, we can expect to see about $13 more in our checks.
2. Health Insurance- With the recent layoffs during the nations reception, a lot of former employees have had problems with health care. Under COBRA, coverage for former employees will continue for the following 18 months. After the implementation of the stimulus package, those who lost their jobs and had to incur the extra cost of expensive health care will now have 65% of their costs handled by the government for the first 9 months.
3. Infrastructure- About $90 billion will be allocated towards repairing roads, repaving highways, and reinforcing bridges. With more construction activities occurring, it is the government's hope that additional job opportunities will be created.
4. Energy- For those who want to be more energy efficient and save money in the long-run, taking on energy focused activities will result in tax breaks. (i.e. energy efficient windows in the home, solar panel roof, other related activities). Also, $300 million will go for rebates to encourage consumers to buy more efficient appliances.
5. Schools- One key goal is to keep teachers employed. To do this, the plan is to allocate $54 billion (where $39 billion will go towards kindergarten to 12 grade) to prevent state budget cuts. Additionally, $25 billion will go to "No Child Left Behind" to help fund teachers' salaries and special education programs.
6. National Debt- Because of this grand total amount, $787 billion, the country will be in more debt. The increase in debt will mean higher taxes and fewer government services that will not only affect our generation, but the next one as well.
7. Environment- $9.2 billion will go towards environmental projects under the EPA (Environmental Projection Agency). The projects they will conduct is expected to produce approximately 200,000 jobs. These projects include national park renovations, road repairs, and improving drinking water systems.
8. Police- $3.7 billion will go towards police programs and hiring new officers. $1 billion is to bring back the program COPS (Community Oriented Policing Systems), a program that was eliminated under the Bush Administration. This program paid police officers' salaries and reduced crime in the 1990s. The bill will also provide an amount to youth mentoring programs, aid victims of crimes, fight Internet crimes against children, and help law enforcement on the Mexican border.
9. Higher Education- Under the plan, the Pell Grant maximum amount will increase to $5,350 from $4,731 starting July 1 and to $5,550 in 2010-2011. An additional 800,000 students will be able to qualify for the grant under the new amount of funds. Also, $32 billion will be allocated towards higher education.
10. The Poor- There are approximately 37 million American who live in poverty. With the stimulus plan in affect, those who get food stamps will now receive more. Those who receive unemployment checks and expect an additional $25/check in addition to a longer check receiving period. People who receive Supplemental Security Income will get a one-time $250.
Although each of these areas are greatly important and might affect all of us differently, as college students, upcoming graduates, and professors, I "bolded" the ones I felt have the most direct affect on us. No matter what, this Stimulus bill is going to impact us heavily in the near future.
(Information for this blog was mainly from "How the stimulus bill affects you" by the Associated Press on February 16, 2009 at 2:40pm. Here is the website for more information. http://articles.moneycentral.msn.com/Investing/Extra/how-the-stimulus-bill-could-affect-you.aspx?page=1>1=33009)
Sunday, February 15, 2009
What is Credit Risk?
What is the meaning and significance of credit risk? Well, the first answer is that credit risk is "a risk that a counter party will fail to meet a contractual payment obligation." An example would be short selling. I borrow $55 to go and buy stock. My bet is that the stock price will fall, allowing me to make a profit. However, if the price increases, I am still obligated to repay the $55 plus interest back to the lender. The chance that I might not be able to repay the lender means they have a level of credit risk. Credit events (situations where credit risk is evident) would be companies declaring bankruptcy or failure to make bond payments. In reference to bond payments, people can use bond ratings to measure the amount of credit risk and the probability a company will default on a bond. The same holds true for estimating the probability of firms going bankrupt. The ratings transition matrix has a host of numbers that helps firms determine the probability that they will go move from one rating category to the next.
One might think, "Lending and borrowing is done everyday, it's a way of life. Since it's hard to really operate with out the two, how does one protect himself from credit risk?" The answer is yes. Just as their are derivatives to help firms hedge from price risk, there are credit derivatives used to transfer credit risk from a firm. One financial structure is called a CDO, collateralized debt obligation. Using a CDO allows one to take a group of risky bonds and create new claims, where some are less risky than the original bonds. Another derivative is a CDS, credit default swap. As mentioned earlier, a default is when a borrower can not repay its debt to the lender. A CDS makes a payment when a firm experiences a credit event, thereby protecting the purchaser (protection buyer) in the event of a default.
Taking all of these things into account, we see that credit risk is more prevalent than we think. In a simple borrow-and-lend exchange amongst friends, their is a level of credit risk there. And even in that case, smart friends would ask for some collateral or promise of something else in case of default. The same way this informal situation shows protecting actions, this is the same manner firms behave when placed in a credit event.
(The information for this posting was read about in previous classes. However, I received more knowledge from the book "Credit Risk. Derivatives Market." by Robert McDonald.)
One might think, "Lending and borrowing is done everyday, it's a way of life. Since it's hard to really operate with out the two, how does one protect himself from credit risk?" The answer is yes. Just as their are derivatives to help firms hedge from price risk, there are credit derivatives used to transfer credit risk from a firm. One financial structure is called a CDO, collateralized debt obligation. Using a CDO allows one to take a group of risky bonds and create new claims, where some are less risky than the original bonds. Another derivative is a CDS, credit default swap. As mentioned earlier, a default is when a borrower can not repay its debt to the lender. A CDS makes a payment when a firm experiences a credit event, thereby protecting the purchaser (protection buyer) in the event of a default.
Taking all of these things into account, we see that credit risk is more prevalent than we think. In a simple borrow-and-lend exchange amongst friends, their is a level of credit risk there. And even in that case, smart friends would ask for some collateral or promise of something else in case of default. The same way this informal situation shows protecting actions, this is the same manner firms behave when placed in a credit event.
(The information for this posting was read about in previous classes. However, I received more knowledge from the book "Credit Risk. Derivatives Market." by Robert McDonald.)
How Does the Stimulus Affect Me?
For the past year or so, I've been hearing a lot of the "Stimulus Plan". I must say that I did not know much about it. Is it a stimulus check coming to me personally? Or, is it a check that comes to an agency (state or federal government, non-profit government organizations, etc)? In either case, the thinking behind the plan is the same, this "Stimulus Plan" is to "stimulate" the economy. According to Obama's mindset, implementing this plan will issue stimulus checks to various agencies. Those agencies will then use those checks to conduct projects, such as road building, that will not only improve roads and the cities they're in, but create job opportunities. Key objectives of this plan is to decrease unemployment while improving the economy. By having the government borrow money and then spend it on the aforementioned projects, the overall result should be for new money to come into the government.
What does this have to do with me? From speaking with various students, the possibility of individuals receiving stimulus check is not as small as we think. In fact, many are asking questions and giving suggestions on what individuals should do pending they receive a check. One major piece of advice that is going around is to keep the money in the US. What I mean by this is for people to take their checks and spend them in stores where the money will stay in our country. As much as we'd love to, taking our checks to Wal-Mart does not keep the money in the US, but instead, sends it overseas (primarily China). Nothing against Wal-Mart, but most of their products are Chinese imports. What economists are suggesting is for people to spend their checks in "mom-and-pop" stores. Family owned businesses, restaurants, local establishments. This stimulates the local economy as we allow entrepreneurs' (i.e. recent graduates such as myself) establishments to grow. Furthermore, as small businesses begin to increase, more employment opportunities are created, AND that business can give back to the community.
I never knew much about this plan, but as I read and learned more, I see that it affects me in more ways than one. Coming on graduation in a few months and with the current state of the economy, job scarcity is a major concern. Should the bill be passed to implement the "Stimulus Plan", various organizations will received a check and possibly be placed in a better position to offer more jobs. On the other side, universities are in line to receive stimulus checks as well. Even though they cannot use it to on facility reconstruction and related activities, schools can use the monetary advances to increase the level education (by hiring more, expertise educators) and provide additional education resources for students. Either way, I see that this plan has benefits that I'd like to partake of, and I plan to keep watching as the bill moves along in this process.
(Ideas of this post were taken from the article "Heckonomics: The Stimulus: What the heck is it, and how's it supposed to work?" by Timothy P. Carney on January 21, 2009)
What does this have to do with me? From speaking with various students, the possibility of individuals receiving stimulus check is not as small as we think. In fact, many are asking questions and giving suggestions on what individuals should do pending they receive a check. One major piece of advice that is going around is to keep the money in the US. What I mean by this is for people to take their checks and spend them in stores where the money will stay in our country. As much as we'd love to, taking our checks to Wal-Mart does not keep the money in the US, but instead, sends it overseas (primarily China). Nothing against Wal-Mart, but most of their products are Chinese imports. What economists are suggesting is for people to spend their checks in "mom-and-pop" stores. Family owned businesses, restaurants, local establishments. This stimulates the local economy as we allow entrepreneurs' (i.e. recent graduates such as myself) establishments to grow. Furthermore, as small businesses begin to increase, more employment opportunities are created, AND that business can give back to the community.
I never knew much about this plan, but as I read and learned more, I see that it affects me in more ways than one. Coming on graduation in a few months and with the current state of the economy, job scarcity is a major concern. Should the bill be passed to implement the "Stimulus Plan", various organizations will received a check and possibly be placed in a better position to offer more jobs. On the other side, universities are in line to receive stimulus checks as well. Even though they cannot use it to on facility reconstruction and related activities, schools can use the monetary advances to increase the level education (by hiring more, expertise educators) and provide additional education resources for students. Either way, I see that this plan has benefits that I'd like to partake of, and I plan to keep watching as the bill moves along in this process.
(Ideas of this post were taken from the article "Heckonomics: The Stimulus: What the heck is it, and how's it supposed to work?" by Timothy P. Carney on January 21, 2009)
Sunday, February 8, 2009
Recession...leading to Risk Management?
The recession is nothing new to us. In fact, we know that it has been happening for quite some time now. The time now is coming when companies are realizing that this state of economic crisis has a major effect on business and needs to be handled. It's because of this that firms have increased their interest in Enterprise Risk Management. The Association of Insurance and Risk Managers conducted a survey and noticed that 450 of its corporate members increased their focus on ERM during the past 2 years. In addtion to the economy, firms are trying to pick apart which recent investments might have turned out to be a disadvantage rather than the opposite. In finance, we are taught that good investment projects are those with a Net Present Value greater than 0. This is still true; however firms are starting to employ risk management background employees to help determine whether a project should actually be implemented, even if it's NPV >0.
The current economic state has proven that better risk management needs to be in place. From having to bail out various companies, ranging from insurance firms to financial firms, we should see that not everything that glitters for a moment is gold for a lifetime. To better understand and truly discern which investments are beneficial, we have to look at the long run. Professor Grace once said that, "Risk management is not a technique for the short run. Nor is it something that you can look at in the middle and say, 'No, it's not working. Let's change it now.' Instead, it is something that you implement in the beginning for a long term." So I say to those firms who are still doing good and want to stay that way, determine the value that risk management can create for you and let it do just that. Do it before the recession wave catches YOU!
(The article I got this topic and some stats from was titled "Recession forces risk risk management rethink" by Samantha Pearson. It was posted on Feb. 8, 2009 on Financial Times.com.)
The current economic state has proven that better risk management needs to be in place. From having to bail out various companies, ranging from insurance firms to financial firms, we should see that not everything that glitters for a moment is gold for a lifetime. To better understand and truly discern which investments are beneficial, we have to look at the long run. Professor Grace once said that, "Risk management is not a technique for the short run. Nor is it something that you can look at in the middle and say, 'No, it's not working. Let's change it now.' Instead, it is something that you implement in the beginning for a long term." So I say to those firms who are still doing good and want to stay that way, determine the value that risk management can create for you and let it do just that. Do it before the recession wave catches YOU!
(The article I got this topic and some stats from was titled "Recession forces risk risk management rethink" by Samantha Pearson. It was posted on Feb. 8, 2009 on Financial Times.com.)
Saturday, February 7, 2009
Value at Risk or Beta: Which is BetteR?
Professor Grace once asked us a question on which company was riskier: a company with a VaR of $2 bil and a Beta of 1, or a compnay with a VaR of $2 mil and a Beta of 2? Well, which one is it? Answer: It all depends on which view you're looking from AND which measure of risk you're using. Those looking in terms of VaR would say that company #1 is riskier than the second. Those looking at Beta would say the opposite. We'll look at each view and then compare and contrast the two measuring options.
First we look at VaR, which stands for Value at Risk. What is Value at Risk exactly? There are many definitions, but the concept is the same. Computing a firm's Value at Risk allows them to answer the following questions: "What is my exposure for tomorrow, especially if tomorrow is my worst day?" and "What is the worst lost that could occur x% of the time?" In addition, firm's will be able to make the statement, "We are X% certain that we will not lose more than $V in the next N days!" But if we must give some definitions of the term, here are a few: 1) the value of loss to the firm, and 2)an attempt to provide a single number summarizing the total risk in a portfolio. Firms that calculate their VaR are able to find the distribution of their returns and see what their worst possible lost is for a given percentage level so that they can implement the appropriate risk management techniques. For example, banks use VaR to determine how much capital is needed to bear future risks (also known as reserves). One could calulate the VaR using this formula:
VaR (C%) = u +/- sigma * zc . C% represents the percentage (level of confidence) the firm wants to be sure about. With that, zc is the corresponding z-score for the confidence level. u is the mean while sigma is the standard deviation (or volitality). All of these components help companies determine their Value at Risk.
Now, we'll examine Beta. Beta is another way to measure risk. However, it doesn't look at a percentage level; instead, it looks at a relationship between the firm and the market. First, let's determine how to calculate Beta.
Beta = Cov(X,Y)/Var(Y). (Before I go any further, please note that the denominator is the variance of firm Y, not the value at risk of firm Y). Cov(X,Y) represents the covariance between firms X & Y. This basically let's us see how closely related the two firms are, as well as their movement with each other. (This is done by dividing the covariance by the product of both firms' standard deviation; this in turn gives you the correlation). Doing the formula gives you the Beta, the sensitivity changes in X related to the changes in Y. Basically, the sensitivity between X and Y. Another formula would be rs-rf = alpha + Beta(rm-rf); however, this is used in relation with CAPM. From the first formula, we mentioned the word "sensitivity" and how this formula allows you to see the sensitivity between the two variables. This is important because firms can determine their sensitivity in relation to the market. Firms with a Beta>1 are sensitive to the market. This means that whenever the market moves, and in the same direction, that firm will move just the same. For example, Home Depot with a Beta=2 will a movement twice as much as the market. Therefore, if the market's price moves up 10%, Home Depot's will move 20%. For firms that have a Beta=1, they are considered neutral. Meaning, they are in exact alliance with the market. If the market moves up one, they move up one, if the market moves down .17894, that firm moves down exactly .17894. Lastly, if a firm has a Beta<1,>
So, back to the original question, which firm is riskier? With all the information given, some might have changed their answer. However, the answer is still the same. When a firm's VaR is high, they have greater risks. When their Beta increases and gets higher, they have a greater risk. Therefore, the two measuring tools share one common aspect; WHENEVER THEY ARE HIGH, THE COMPANY HAS A LOT OF RISK. So for the question asked, your answer may forever differ from mine because....it all depends on which view we're using!
First we look at VaR, which stands for Value at Risk. What is Value at Risk exactly? There are many definitions, but the concept is the same. Computing a firm's Value at Risk allows them to answer the following questions: "What is my exposure for tomorrow, especially if tomorrow is my worst day?" and "What is the worst lost that could occur x% of the time?" In addition, firm's will be able to make the statement, "We are X% certain that we will not lose more than $V in the next N days!" But if we must give some definitions of the term, here are a few: 1) the value of loss to the firm, and 2)an attempt to provide a single number summarizing the total risk in a portfolio. Firms that calculate their VaR are able to find the distribution of their returns and see what their worst possible lost is for a given percentage level so that they can implement the appropriate risk management techniques. For example, banks use VaR to determine how much capital is needed to bear future risks (also known as reserves). One could calulate the VaR using this formula:
VaR (C%) = u +/- sigma * zc . C% represents the percentage (level of confidence) the firm wants to be sure about. With that, zc is the corresponding z-score for the confidence level. u is the mean while sigma is the standard deviation (or volitality). All of these components help companies determine their Value at Risk.
Now, we'll examine Beta. Beta is another way to measure risk. However, it doesn't look at a percentage level; instead, it looks at a relationship between the firm and the market. First, let's determine how to calculate Beta.
Beta = Cov(X,Y)/Var(Y). (Before I go any further, please note that the denominator is the variance of firm Y, not the value at risk of firm Y). Cov(X,Y) represents the covariance between firms X & Y. This basically let's us see how closely related the two firms are, as well as their movement with each other. (This is done by dividing the covariance by the product of both firms' standard deviation; this in turn gives you the correlation). Doing the formula gives you the Beta, the sensitivity changes in X related to the changes in Y. Basically, the sensitivity between X and Y. Another formula would be rs-rf = alpha + Beta(rm-rf); however, this is used in relation with CAPM. From the first formula, we mentioned the word "sensitivity" and how this formula allows you to see the sensitivity between the two variables. This is important because firms can determine their sensitivity in relation to the market. Firms with a Beta>1 are sensitive to the market. This means that whenever the market moves, and in the same direction, that firm will move just the same. For example, Home Depot with a Beta=2 will a movement twice as much as the market. Therefore, if the market's price moves up 10%, Home Depot's will move 20%. For firms that have a Beta=1, they are considered neutral. Meaning, they are in exact alliance with the market. If the market moves up one, they move up one, if the market moves down .17894, that firm moves down exactly .17894. Lastly, if a firm has a Beta<1,>
So, back to the original question, which firm is riskier? With all the information given, some might have changed their answer. However, the answer is still the same. When a firm's VaR is high, they have greater risks. When their Beta increases and gets higher, they have a greater risk. Therefore, the two measuring tools share one common aspect; WHENEVER THEY ARE HIGH, THE COMPANY HAS A LOT OF RISK. So for the question asked, your answer may forever differ from mine because....it all depends on which view we're using!
Tuesday, February 3, 2009
JQ/Practice Question-Risk Mgnt and Value Equation
For our practice exam, Professor Grace asked us to answer what risk management would do the value of a firm equation. I then noticed that it was also a JQ. So I'm taking it that this is really important. Therefore, I'll break down each component and tell how risk management will affect the equation.
First, let's assume that the appropriate risk management technique has been implemented, and it was performed correctly. So with better risk management, the following will occur:
1. The probability of a firm going bankrupt will decrease. Therefore, the bankruptcy costs will also decrease.
2. As the probability of bankruptcy decreases for a firm, their credibility and reputation begin to look better to lenders. (As Professor Grace said, when you need money the most, that's when people do not want to lend it to you. This is especially true when a company has a higher risk of going bankrupt and losing the money that was lent to them. I believe this is called default risk). Thus, a smaller bankruptcy probability and lower bankruptcy costs will lead to a better interest rates from lenders. This interest rate will be smaller, making the denominator (1+r)^t smaller
The combination of these two factors (low bankruptcy cost and lower interest rate, therefore lower denominator) makes the overall equation and value of the firm increase. One might notice that we didn't mention NCF (Net Cash Flows). This is equal to (Revenues-Costs). With the implementation of risk management techniques, costs will increase. (Paying for insurance, hedging, etc). However, if done correctly and with good financial forecasting, Revenues might also increase, thereby balancing out the numerator of the equation.
Hope this helps.
First, let's assume that the appropriate risk management technique has been implemented, and it was performed correctly. So with better risk management, the following will occur:
1. The probability of a firm going bankrupt will decrease. Therefore, the bankruptcy costs will also decrease.
2. As the probability of bankruptcy decreases for a firm, their credibility and reputation begin to look better to lenders. (As Professor Grace said, when you need money the most, that's when people do not want to lend it to you. This is especially true when a company has a higher risk of going bankrupt and losing the money that was lent to them. I believe this is called default risk). Thus, a smaller bankruptcy probability and lower bankruptcy costs will lead to a better interest rates from lenders. This interest rate will be smaller, making the denominator (1+r)^t smaller
The combination of these two factors (low bankruptcy cost and lower interest rate, therefore lower denominator) makes the overall equation and value of the firm increase. One might notice that we didn't mention NCF (Net Cash Flows). This is equal to (Revenues-Costs). With the implementation of risk management techniques, costs will increase. (Paying for insurance, hedging, etc). However, if done correctly and with good financial forecasting, Revenues might also increase, thereby balancing out the numerator of the equation.
Hope this helps.
Friday, January 30, 2009
Derivatives
Derivatives are financial contracts whose values are derived from another underlying asset (hence the word derivative). They can come in many forms, the most popular being forwards, futures, and options, for which all have different benefits and contractual obligations.
1. Forwards - a contract that requires for a person to either buy or sell a underlying asset. Requires no initial investment. Everything (expiration date and forward price) is agreed upon today and money nor commodity will exchange hands until the expiration date.
2. Options - there are two types: calls and puts. Both are contracts that give the RIGHT to buy or sell an underlying asset. This is different from a forward because you are not required to go through with the transaction; however, you must may a premium for this additional benefit.
3. Futures- forwards that are exchanged through an exchange market. (For example, Chicago Board of Trade or the New York Mercantile Exchange).
There are many reasons why people and firms deal with derivatives; however, most of them fall into two categories: speculation and hedging. Hedging is the use of derivatives to mitigate risks on a commodity (or any underlying asset) that a firm owns or plans to own in the future. On the other end, speculation is the process of using derivatives with no intention on owning the asset, but to gain high profits. For those who use these contracts to hedge, there are multiple benefits. A top one would be for firms that want to protect themselves from the risk of declining prices. A purchase of a forward contract, a put, or the selling of a call would allow them to benefit from falling prices. In reverse, if firms wants to hedge against increasing prices, they could take the opposing side of the aforementioned contracts. Combinations of these contracts can also be formed. Some will allow infinite amounts of profits, some infinite amounts of loss, and others with a limiting amount on both loss and profits, but a great protection area. Examples of these are collars (purchase of a put and selling of a call), spreads (purchase and selling of calls or puts), and straddles (purchase of a put and call).
Just like any financial strategy, there are those who oppose the use of derivatives. These following criticisms are some reasons people do not engage in derivative usage.
1. Possible large losses - if not used correctly (or the wrong derivatives are used), some derivatives can cause companies a great loss. In fact, losses do not only have to be in terms of when companies actually lose money, but can also be when companies have lost the opportunity to gain money. (This is what I was talking about with ARBC).
2. Counter-party risk - each type of derivative has their own degree of risk. And although the use of these contracts is to minimize risk for the company in general, some combinations of derivatives might not offset each other. (This goes back to being able to efficiently combining the correct strategies).
3. Unsuitably high risk for small/inexperienced investors - To tie this with the first point, large losses can occur when inexperienced investors make bad decisions while using derivatives. For those who don't have the expertise in this area, one small, yet wrong move can be fatal to a firm. Now, companies can get outside, more experienced help to guide them in the financial endeavors. However, this help will not come without a price tag. This is when firms must see if the cost of minimizing their risks through derivatives will truly add value to their firm.
Those were just a few of the hardships that can arise from using derivatives. Although they can happen, it is safe to say that the benefits of derivatives outweigh the criticisms. For both hedgers and speculators, it all depends on what you're looking for. In fact, some people spend their time trying to find arbitrage opportunities (when derivative contracts are unfairly priced, either too high or too low, which will give the opportunity to make money off the market. Usually done by speculators). In any case, these financial contracts have proven to be reliable and valuable to many firms in the past. And I'll make a good assumption and say, it will continue to do so in the future!
(Anand V., Professor of Finance at Georgia State University. Spring 2008. Reference slides can be provided if necessary.)
(Wikipedia.com. http://en.wikipedia.org/wiki/Financial_derivatives#Benefits)
(McDonald, Robert. "Introduction to Forwards and Options." Derivatives Market. 2006. Boston: Pearson Education, Inc.)
1. Forwards - a contract that requires for a person to either buy or sell a underlying asset. Requires no initial investment. Everything (expiration date and forward price) is agreed upon today and money nor commodity will exchange hands until the expiration date.
2. Options - there are two types: calls and puts. Both are contracts that give the RIGHT to buy or sell an underlying asset. This is different from a forward because you are not required to go through with the transaction; however, you must may a premium for this additional benefit.
3. Futures- forwards that are exchanged through an exchange market. (For example, Chicago Board of Trade or the New York Mercantile Exchange).
There are many reasons why people and firms deal with derivatives; however, most of them fall into two categories: speculation and hedging. Hedging is the use of derivatives to mitigate risks on a commodity (or any underlying asset) that a firm owns or plans to own in the future. On the other end, speculation is the process of using derivatives with no intention on owning the asset, but to gain high profits. For those who use these contracts to hedge, there are multiple benefits. A top one would be for firms that want to protect themselves from the risk of declining prices. A purchase of a forward contract, a put, or the selling of a call would allow them to benefit from falling prices. In reverse, if firms wants to hedge against increasing prices, they could take the opposing side of the aforementioned contracts. Combinations of these contracts can also be formed. Some will allow infinite amounts of profits, some infinite amounts of loss, and others with a limiting amount on both loss and profits, but a great protection area. Examples of these are collars (purchase of a put and selling of a call), spreads (purchase and selling of calls or puts), and straddles (purchase of a put and call).
Just like any financial strategy, there are those who oppose the use of derivatives. These following criticisms are some reasons people do not engage in derivative usage.
1. Possible large losses - if not used correctly (or the wrong derivatives are used), some derivatives can cause companies a great loss. In fact, losses do not only have to be in terms of when companies actually lose money, but can also be when companies have lost the opportunity to gain money. (This is what I was talking about with ARBC).
2. Counter-party risk - each type of derivative has their own degree of risk. And although the use of these contracts is to minimize risk for the company in general, some combinations of derivatives might not offset each other. (This goes back to being able to efficiently combining the correct strategies).
3. Unsuitably high risk for small/inexperienced investors - To tie this with the first point, large losses can occur when inexperienced investors make bad decisions while using derivatives. For those who don't have the expertise in this area, one small, yet wrong move can be fatal to a firm. Now, companies can get outside, more experienced help to guide them in the financial endeavors. However, this help will not come without a price tag. This is when firms must see if the cost of minimizing their risks through derivatives will truly add value to their firm.
Those were just a few of the hardships that can arise from using derivatives. Although they can happen, it is safe to say that the benefits of derivatives outweigh the criticisms. For both hedgers and speculators, it all depends on what you're looking for. In fact, some people spend their time trying to find arbitrage opportunities (when derivative contracts are unfairly priced, either too high or too low, which will give the opportunity to make money off the market. Usually done by speculators). In any case, these financial contracts have proven to be reliable and valuable to many firms in the past. And I'll make a good assumption and say, it will continue to do so in the future!
(Anand V., Professor of Finance at Georgia State University. Spring 2008. Reference slides can be provided if necessary.)
(Wikipedia.com. http://en.wikipedia.org/wiki/Financial_derivatives#Benefits)
(McDonald, Robert. "Introduction to Forwards and Options." Derivatives Market. 2006. Boston: Pearson Education, Inc.)
Project Cost Risk Analysis
This particular article sparked my interest after the lecture on Value at Risk. It seems as if the concepts are intertwined with each other. This article was written by David Hulett, the founder of Hulett & Associates. He explains how critical it is for companies to take their time and be specific in calculating the cost of various projects. Firms that simply take the estimates per component of that particular project and add those estimates up to get their project costs run the risks of over- or under-estimating their costs. Plain and simple, they are taking the easy way out. Hulett advises to conduct a cost risk analysis. This helps gives a more accurate and realistic estimate of the project costs.
What is a cost risk analysis? According to Mr. Hulett, "A formal risk analysis is putting on the table those problems and fear which heretofore were recognized but intentionally hidden." The core reason for doing this analysis was mentioned above, but we can go a little further. Conducting an analysis can help the project manager with a cost that could be higher than the EAC (estimate at completion) with a high probability. It also help firms find the most likely cost for the entire project, while stating the most risky components of the project. Because of that capability, it allows risk managers to take necessary risk minimizing actions for those particular components.
There are several steps in the project cost risk analysis. It all starts with splitting up the components of the project at hand. Then you would proceed as follows:
1. Collect data on the extreme "pessimistic and optimistic" ranges of cost per component. (This step is the most important, yet most difficult to do. It requires gathering information from all risk advisers).
2. Choose the appropriate probability distribution for each component.
3. Using the ranges and distributions determined (for his particular example, he assumed the Triangular distribution was correct), perform a Monte Carlo Simulation. (A procedure for pricing derivative claims by discounting expected payoffs, where the expected payoff is computed using simulated prices for the underlying asset).
4. From these results, you can discover the percentage contingency needed to accommodate a certain level of cost (non specific, whatever that specific risk manager wants to accommodate).
5. From the results, calculate the correlation between the different components. (This is also important because most of the components risks are correlated. Now you can see the level of that correlation).
6. From the results, you can identify the location of the highest risk. This helps managers prioritize the components and their risk management activities.
All of these steps and the results helps the firm determine whether this project is worth taking on. If so, it assists them on designating the amount of resources they will need for each component. According to Hulett and this information, it's safe to say that conducting a cost risk analysis is a procedure of risk management all in its own!
What is a cost risk analysis? According to Mr. Hulett, "A formal risk analysis is putting on the table those problems and fear which heretofore were recognized but intentionally hidden." The core reason for doing this analysis was mentioned above, but we can go a little further. Conducting an analysis can help the project manager with a cost that could be higher than the EAC (estimate at completion) with a high probability. It also help firms find the most likely cost for the entire project, while stating the most risky components of the project. Because of that capability, it allows risk managers to take necessary risk minimizing actions for those particular components.
There are several steps in the project cost risk analysis. It all starts with splitting up the components of the project at hand. Then you would proceed as follows:
1. Collect data on the extreme "pessimistic and optimistic" ranges of cost per component. (This step is the most important, yet most difficult to do. It requires gathering information from all risk advisers).
2. Choose the appropriate probability distribution for each component.
3. Using the ranges and distributions determined (for his particular example, he assumed the Triangular distribution was correct), perform a Monte Carlo Simulation. (A procedure for pricing derivative claims by discounting expected payoffs, where the expected payoff is computed using simulated prices for the underlying asset).
4. From these results, you can discover the percentage contingency needed to accommodate a certain level of cost (non specific, whatever that specific risk manager wants to accommodate).
5. From the results, calculate the correlation between the different components. (This is also important because most of the components risks are correlated. Now you can see the level of that correlation).
6. From the results, you can identify the location of the highest risk. This helps managers prioritize the components and their risk management activities.
All of these steps and the results helps the firm determine whether this project is worth taking on. If so, it assists them on designating the amount of resources they will need for each component. According to Hulett and this information, it's safe to say that conducting a cost risk analysis is a procedure of risk management all in its own!
Hulett, David. "Project Cost Risk Analysis". http://www.projectrisk.com/. 1999. 28 January 2009 <http://www.projectrisk.com/Welcome/Cost_Risk_Paper/cost_risk_paper.html>.
McDonald, Robert. "Glossary". Derivatives Market. 2006. Boston: Pearson Education, Inc. P.914
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