Deriving Options

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

Project Titan(ic)

In 2014, Apple was rumored to have approved Project Titan, Apple's development of an electric car. In 2015, Apple formally introduced the new project. At its height in 2018, Project Titan employed 5,000 people. Now, nearly a decade later after it started, Apple announced that it is shutting down Project Titan, thereby exercising the option to abandon. With shrinking demand for electric cars, Apple must have believed that spending more money on the new car isn't worth the payoff, even though Apple had reportedly already spent more than $10 billion on the project. We will likely see a write off announcement in the next several months detailing the total spent on the project. Apple has utilized another option as it also announced that many of the Project Titan employees would begin working on AI technology. Fortunately for Apple, it doesn't appear the money spent on this project will sink the company.

NYCB Dividend Cut

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

The Shortest Treasury Bills

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

Accounting Fiction?

A recent article in the Wall Street Journal notes that as of May 26, 77 percent of the 485 companies in the S&P 500 that had reported earnings beat earnings, compared to the historical rate of 66 percent. What is even more surprising is that the earnings beats are 6.9 percent above expectations, compared to a 4.1 percent historical average. But accounting choices, which have been labeled as potential earnings manipulation, may be the cause. For example, Google extended the life of its server infrastructure from four years to six years. The extension added 6 cents per share to earnings due to lower depreciation. The company also shifted employee stock awards from January to March, which also increased reported earnings. And Carvana, which was expected to lose $2.03 per share only lost $1.51 per share. The company had taken charges in the previous quarter when used car prices had plummeted and expected to sell cars for less. When used car prices increases, the company unwound those loses, increasing earnings per share by $.48, almost all of the earnings beat. 

A Green NPV

European low cost carrier Ryanair announced a new project that will install Split Scimitar winglets on each of the company's Boeing 737-800s. The installation is expected to reduce fuel consumption by 1.5 percent and reduce CO2 emissions by 165,000 tons per year. So, the project is green for the environment, but is it green for stock holders? A quick calculation shows that it is. Based on the numbers, Ryanair spent €1.14 billion on fuel in a recent quarter, which amounts to €4.56 billion per year. A 1.5 percent savings in fuel costs is €68.4 million per year. This savings results in a payback period of 2.92 years. Assuming a 10 percent discount rate and 20 years of operation, the NPV is about €382 million. Sounds like a green, green project to us.   

Your Song (Is For Sale)

Any stream of cash flows can potentially be sold for the present value of its cash flows. And one of the biggest cash flows being sold recently is an artist's song catalog. The owner of a song catalog receives the cash flows from the royalty paid whenever a song is played. It was announced yesterday that Justin Bieber's song catalog was sold for a reported $200 million. And although we agree that this is a tidy sum, it is still smaller than the $500 million that Bruce Springsteen or $300 million that Bob Dylan received last year for similar sales. The price isn't cheap as song catalogs are reportedly being sold for 30 times annual royalties.