Valuing and hedging fixed rate mortgage commitments

A fixed rate loan commitment that is binding on the lender but not on the loan applicant is equivalent to a put option. This article uses the Black-Scholes option pricing model to establish a value for fixed rate loan commitments and to derive the hedge ratio for the lending institution to hedge the interest rate risk associated with the commitments in the FHLMC forward market for mortgages. The effectiveness of the resulting hedge is tested in a simulation, where it is found that the result is a 71% reduction in the variance of the value of the lender's gain or loss associated with the commitment period.     

Is Beta Dead or Alive?

The debate about whether beta is dead or alive has heated up once again. We believe the empirical work supporting either side of the argument is limited because market frictions are not adequately addressed. This study clarifies the controversy about the issue by creating a new moving-average beta and analyzing two market anomalies: the turn-of-the-year and the Monday effects. What is discovered in this research is (1) that a fundamental source of the problem underlying the two types of market anomalies is the persistence of market frictions that retard the arbitrage process; (2) that beta is seriously ill if the effects of market frictions are ignored; and (3) that beta is alive and well if the effects of market frictions are accommodated. Also, we show, by using an optimal lead/lag structure, the moving-average beta provides significantly higher explanatory power for the turn-of the-year and the Monday effects than betas created from ordinary least squares regression and Scholes-Williams and Fama-French methods because the moving-average beta accommodates the effects of market frictions into the body of beta itself. This new type of beta, a moving-average beta, is demonstrated to be robust.     

The potential impact of abolishing company tax in Ciskei

The purpose of this paper is to examine the likely effect of the abolition of company tax on the Ciskeian economy. After considering the case for and against a corporate tax exemption, the issues involved are analysed on two levels. Using aggregate data, drawn from available census data, we find that most firms seem likely either to prefer the existing package of industrial concessions to the tax holiday, or to be indifferent to either option. Similarly, a recent survey of manufacturing enterprises in Ciskei indicated that the majority would prefer the incentive package. Firms that might be attracted by the tax‐free option are likely to be relatively profitable, subsidiaries of multinational companies, and enjoying a higher turnover per worker than firms opting for the incentive package.     

Were internal capital markets affected by the ‘perfect’ pension storm?

We examine capital expenditures in multi-segment firms before and after the “perfect storm” that affected pension plans between 2000 and 2002, when bond yields and stock prices both fell precipitously. Our sample of firms went from having overfunded to underfunded pension plans as a result of the storm. We examine the segment-level relation between investment, Tobin's q, and cash flow both before and after the event. We find mixed evidence on the change in the relation between investment and q, which may be a result of measurement error in q. We find stronger evidence for the conclusion that after the pension storm, firms with underfunded pension plans directed more investment towards segments that produce higher cash flow.     

Do borrowers know their mortgage terms?

We assess whether borrowers know their mortgage terms by comparing the distributions of these variables in the household-reported Survey of Consumer Finances (SCF) to the distributions in lender-reported data. We also examine the characteristics of SCF respondents who report not knowing these contract terms. Although most borrowers seem to know basic mortgage terms, borrowers with adjustable-rate mortgages appear likely to underestimate or to not know how much their interest rates could change. Borrowers who could experience large payment changes if interest rates rose are more likely to report not knowing these contract terms. Difficulties with gathering and processing information appear to be a factor in borrowers' lack of knowledge.     

Comparative assessment of tourist generating markets for New Zealand

Portfolio analysis has become a widely used strategic planning tool in many industries during the past decade. Strategic decisions in the tourism industry include issues such as which markets are most attractive (e.g. have greatest visitor expenditure potential); in which markets are a specific country's “products” most competitive; how promotional budgets should be allocated for greatest effectiveness; and what the promotional message should convey. Industry Attractiveness Analysis—a flexible variety of portfolio analysis—has been applied to the generating countries which supply tourists to New Zealand in an illustrative case study. Both national level and individual company applications are described and illustrated in 3 × 3 matrix form. These diagrams are, in themselves, a good communication mechanism which encourages rational, strategic thinking about managerial decisions and resources allocations. Past, present, and future situations can be portrayed in a graphically useful manner.     

Repeated games and the ‘reciprocal dumping’ model of trade

A repeated game version of the basic Brander and Krugman (1983) model is analyzed. In the Brander-Krugman model, rivalry among oligopolistic firms gives rise to international trade. It is now shown that no trade, which is welfare-reducing when transportation costs are negligible, is a strong Nash equilibrium of the supergame. The threat strategies that support ‘no trade’, the discount rate, and the crucial role of transportation costs are discussed, extending the BranderKrugman analysis in a natural way.     

Rethinking Hecs: Its Definition and Fiscal Role in Compensating for Non-deductibility of Tuition Fees

This paper develops a two period model of the higher education decision to determine the required return from higher education. It uses the model to calculate the proportion of full tuition costs which should be charged 'up front' under the Australian Higher Education Scheme (HECS), in order to compensate for the fact that such fees are not deductible against income for tax purposes. Because full tuition costs represent less than 11 per cent of the total costs of higher education, the ideal HECS ratio is relatively high, in the region of 0.7. The low relative importance of tuition costs means that fee subsidy schemes cannot possibly compensate for other distortions such as income tax progression which persist over the working life of graduates.     

Posing larger questions: the British miners’ strike of 1984–85

The miners’ strike was the longest and most significant dispute in modern British industrial history. The conflict provided a vivid case study of the rationales and processes of capitalism and liberal democracy in the closing decades of this century. This article is an assessment of the important issues raised by the dispute.