Shop till you drop

What is “affordable”?

admin — Wed, 27 May 2009 15:11:36 +0000

Doing direct comparisons of price levels in any country is really an exercise of little value. Consumer goods in Cuba are expensive to Cubans, but the same items in Japan (at a higher price in any currency) are cheap to the Japanese. How can this be? What we can afford to pay for goods is a function of what we earn. What we can spend is after tax has been deducted and other essential needs have been paid for. In a country like the UK you don’t spend as much money on healthcare and safety as in other countries. Those items are already included in the taxes paid. Taxes are surprisingly low in the UK, but that is slowly changing.
So how do we make a meaningful comparison? The only item everyone worldwide has the same amount of, is time. Consider “time” to be a universal currency. Thus a good measure of affordability is how long it will take you to earn the same item. (The fact that items vary in quality and need replacing more often in some countries will be ignored for now). Calculations for your doing the same job in the UK is obviously necessary to conduct a meaningful review, so see the chapter on employment.
In the meantime we will use average earnings to explain affordability further. The UK has amongst the world’s most even distribution of wealth. The “average” person exists in tens of millions in the UK. The average working person in the UK earns £23,000 a year. The tax take on this is about 25%. Worked out on an hourly basis (52 weeks and 35 hours a week) this equates to netting just over £9 an hour.
Going down to your local hamburger outlet in London and having a meal comes to, for simplicity sake, £4. That is less than half an hour’s net income. For someone from Madagascar, that meal is almost the equivalent of a week of working. The Briton will tell you the meal is affordable (or even cheap) whilst the person from Madagascar couldn’t disagree more. The same meal in Madagascar costs the equivalent of £1, but the Madagascan person never buys it because…it’s unaffordable. Get it? Affordability is about how long it takes you to earn after tax what you want (or need) in the area that you spend it.
It is why tourists from around the world find Western Europe an expensive place to visit, because they don’t earn their income there. As an outsider looking in, another economy’s price levels will always look disjointed. It is only when you’re earning your keep in that economy that it will make more sense to you. Keep this measure of affordability in mind when evaluating prices. If you’re able to calculate your own earning power doing a comparable job in the UK, then great. Words of warning though, just don’t count on earning that kind of money from day one in the UK.

Laminate flooring at Carpet One

admin — Tue, 19 May 2009 19:39:25 +0000

Nowadays, flooring choices might be overwhelming with often hundreds of options to choose from. I decided to change my hardwood floor, which became worn out over time, to something different. I didn’t want the thick 3/4in boards but something lighter and brighter and, most of all, cheaper. I discovered Carpet One, whose advisors pointed me to an excellent deal on laminate flooring. I chose ta Platinum labeled floor, which is one of the most durable in the industry and carries the highest level warranty.
Thank you carpet One. I’m pleased with my choice.

THE ROLE OF FUTURES MARKETS AND EXCHANGES

admin — Tue, 12 May 2009 10:49:38 +0000

Virtually all participants in the financial markets have heard of futures markets, but many do not understand the role that futures markets play. Some participants do not understand how futures markets function in global financial systems and often look at futures with suspicion, if not disdain.
In earlier posts, we discussed the purposes of derivative markets. We found that derivative markets provide price discovery and risk management, make the markets for the underlying assets more efficient, and permit trading at low transaction costs. These characteristics are also associated with futures markets. In fact, price discovery is often cited by others as the primary advantage of futures markets. Yet, all derivative markets provide these benefits. What characteristics do futures markets have that are not provided by comparable markets as forward markets?
First recall that a major distinction between futures and forwards is that futures are standardized instruments. By having an agreed-upon set of homogeneous contracts, futures markets can provide an orderly, liquid market in which traders can open and close positions without having to worry about holding these positions to expiration. Although not all futures contracts have a high degree of liquidity, an open position can nonetheless be closed on the exchange where the contract was initiated.51 More importantly, however, futures contracts are guaranteed against credit losses. If a counterparty defaults, the clearinghouse pays and, as we have emphasized, no clearinghouse has ever defaulted. In this manner, a party can engage in a transaction to lock in a future price or rate without having to worry about the credit quality of the counterparty. Forward contracts are subject to default risk, but of course they offer the advantage of customization, the tailoring of a contract’s terms to meet the needs of the parties involved.
With an open, standardized, and regulated market for futures contracts, their prices can be disseminated to other investors and the general public. Futures prices are closely watched by a vast number of market participants, many trying to discern an indication of the direction of future spot prices and some simply trying to determine what price they could lock in for future purchase or sale of the underlying asset. Although forward prices provide similar information, forward contracts are private transactions and their prices are not publicly reported. Futures markets thus provide transparency to the financial markets. They reveal the prices at which parties contract for future transactions.
Therefore, futures prices contribute an important element to the body of information on which investors make decisions. In addition, they provide opportunities to transact for future purchase or sale of an underlying asset without having to worry about the credit quality of the counterparty.
In earlier posts we studied forward and futures contracts and showed that they have a lot in common. Both are commitments to buy or sell an asset at a future date at a price agreed on today. No money changes hands at the start of either transaction. We learned how to determine appropriate prices and values for these contracts. In future posts, we shall look at a variety of strategies and applications using forward and futures contracts. For now, however, we take a totally different approach and look at contracts that provide not the obligation but rather the right to buy or sell an asset at a later date at a price agreed on today. To obtain such a right, in contrast to agreeing to an obligation, one must pay money at the start.

Pricing futures contracts

admin — Sat, 09 May 2009 10:49:15 +0000

Now let us proceed to the pricing of futures contracts. As we did with forward contracts, we consider the case of a generic underlying asset priced at $100. A futures contract calls for delivery of the underlying asset in one year at a price of $108. Let us see if $108 is the appropriate price for this futures contract.
Suppose we buy the asset for $100 and sell the futures contract. We hold the position until expiration. For right now, we assume no costs are involved in holding the asset. We do, however, lose interest on the $100 tied up in the asset for one year. We assume that this opportunity cost is at the risk-free interest rate of 5 percent.
Recall that no money changes hands at the start of a futures contract. Moreover, we can reasonably ignore the rather small margin deposit that would be required. In addition, margin deposits can generally be met by putting up interest-earning securities, so there is really no opportunity cost. As discussed in the previous posts, we also will assume away the daily settlement procedure; in other words, the value of the futures contract paid out at expiration is the final futures price minus the original futures price. Because the final futures price converges to the spot price, the final payout is the spot price minus the original futures price.
So at the contract expiration, we are short the futures and must deliver the asset, which we own. We do so and receive the original futures price for it. So we receive $108 for an asset purchased a year ago at $100. At a 5 percent interest rate, we lose only $5 in interest, so our return in excess of the opportunity cost is 3 percent risk free. This risk-free return in excess of the risk-free rate is clearly attractive and would induce traders to buy the asset and sell the futures. This arbitrage activity would drive the futures price down until it reaches $105.
If the futures price falls below $105, say to $102, the opposite arbitrage would occur. The arbitrageur would buy the futures, but either we would need to be able to borrow the asset and sell it short, or investors who own the asset would have to be willing to sell it and buy the futures. They would receive the asset price of $100 and invest it at 5 percent interest. Then at expiration, those investors would get the asset back upon taking delivery, paying $102. This transaction would net a clear and risk-free profit of $3, consisting of interest of $5 minus a $2 loss from selling the asset at $100 and buying it back at $102. Again, through the buying of the futures and shorting of the asset, the forces of arbitrage would cause prices to realign to $105.
Some difficulties occur with selling short certain assets. Although the financial markets make short selling relatively easy, some commodities are not easy to sell short. In such a case, it is still possible for arbitrage to occur. If investors who already own the asset sell it and buy the futures, they can reap similar gains at no risk. Because our interest is in financial instruments, we shall ignore these commodity market issues and assume that short selling can be easily executed.
If the market price is not equal to the price given by the model, it is important to note that regardless of the asset price at expiration, the above arbitrage guarantees a risk-free profit. That profit is known at the time the parties enter the transaction.
The transactions we have described are identical to those using forward contracts. We did note with forward contracts, however, that one can enter into an off-market forward contract, having one party pay cash to another to settle any difference resulting from the contract not trading at its arbitrage-free value up front. In the futures market, this type of arrangement is not permitted; all contracts are entered into without any cash payments up front.

Bornhuetter-Ferguson reported claim count method

admin — Sun, 29 Mar 2009 13:08:35 +0000

Bornhuetter-Ferguson reported claim count method. This method projects ultimate claim counts in two parts, expected open claims that will close with indemnity payment plus actual reported claims through year-end. Open claims that will close with payment are estimated to be the expected percentage open times initial expected ultimate claim counts. The expected percentage open is based on the selected reported claim count development factors to ultimate. Initial expected ultimate claim count is the same as for the closed claim count Bornhuetter-Ferguson method. This method is best when claim count reporting patterns tend to be unstable.

Bornhuetter-Ferguson closed claim count method

admin — Sun, 29 Mar 2009 13:06:32 +0000

Bornhuetter-Ferguson closed claim count method. This method projects ultimate claim counts in two parts, expected open claims that will close with indemnity payment plus actual closed claims . Open claims that will close with indemnity payment are estimated to be the expected percentage open times initial expected ultimate claim count. The expected percentage unpaid is based on the selected closed claim count development factors to ultimate. Initial expected ultimate claim counts are based upon ultimate indicated claim counts from the reported claim count development method, except that a linear curve is fit to the ultimate claim frequency . This method is best when claim closing patterns tend to be unstable.

Reported claim count development method

admin — Sun, 29 Mar 2009 13:04:17 +0000

Reported claim count development method. Reported claim counts are projected to ultimate values based on historical development patterns. Historical development factors are reviewed and forecasted factors are selected. The selected factors are used to project ultimate claim counts. This method is most reliable when development patterns are stable over time, which is generally true for the experience under consideration.

Creative Financing

admin — Sat, 28 Mar 2009 13:46:48 +0000

Another advantage that the prospective buyer should toss into the negotiating picture is the possibility of creative financing. For example, the seller may be willing to hold a second mortgage; this can reduce or eliminate the need for a down payment. The seller also may more readily agree to take responsibility for closing costs. For a typical $100,000 purchase, closing costs can range from $900 to $5,000, depending on the financing and purchase situation. The FSBO purchase transaction may also provide the buyer with an opportunity to exercise an assumption option, which has many little-known benefits for the buyer, including savings of thousands of dollars in interest payments and possible reduced down payments.

Closed claim count

admin — Tue, 24 Mar 2009 13:02:26 +0000

Closed claim count development method. Closed claim counts are projected to ultimate values based on historical development patterns. Historical count development factors are reviewed and forecasted factors are selected. The selected factors are used to project ultimate claim counts. This method is most reliable when claims closing patterns are stable over time. The closed claim count development patterns for medical malpractice are not generally very stable, particularly for early levels of development.

Allocated Loss Adjustment Expenses (ALAE)

admin — Mon, 16 Mar 2009 12:59:06 +0000

Loss adjustment expenses are a significant part of medical malpractice rates. Direct claim defense costs (attorneys, expert witness and court costs) are called Allocated Loss Adjustment Expenses (ALAE) and exclude insurance company home office claims administration expenses. Because ALAE is not usually subject to policy limits, they are not capped in this analysis. The following chart shows historical Missouri Physicians and Surgeons Medical Malpractice Insurance ALAE per exposure, or ALAE pure premium.