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Author: Bill Campbell
Leases: General
A lease is a contract that lets one party use an asset owned by another party, in exchange for periodic payments. The owner of the asset is the lessor; the user of the asset is the lessee. For the purposes of financial reporting, leases are divided into two categories, based on the economic substance of…
Dollar Duration and Dollar Beta
Dollar duration (or money duration) is a phrase that should be familiar to you by now: instead of measuring the percentage change in the value of a fixed income portfolio for a 1% change in yield to maturity (as modified or effective duration do), dollar duration measures the change in dollar (or other currency) value…
Getting from Here to There
Many applications of derivatives – forwards and futures in particular – in risk management boil down to getting from here to there: temporarily changing (adjusting) the: Value of an equity portfolio Beta of an equity portfolio Value of a fixed income portfolio Duration of a fixed income portfolio Allocation of an equity/fixed income portfolio There are formulae…
Grinold-Kroner Model
The Grinold-Kroner model is an equation to estimate the return on a stock; although the components of the model are reasonable (once you think of them), they will require a bit of memorization at first, until you’ve worked with the model a bit and it’s become habitual. Here it is: \[\hat R_i\ =\ \frac{D_1}{P_0}\ +\…
Cobb-Douglas Production Function
The Cobb-Douglas production function is: \[Y\ =\ AK^{\alpha}L^{\beta}\] where: \(Y\): total real economic output (GDP) \(A\): total factor productivity (TFP), a measure of the level of technology \(K\): capital \(L\): labor \(\alpha\): the share of total output attributable to capital, known as the output elasticity of capital; note that \(0\ <\ \alpha\ <\ 1\) \(\beta\):…
Endogenous Growth Theory
There are four articles on economic growth theories: Synopsis Classical growth theory Neoclassical growth theory Endogenous growth theory (you are here) Endogenous Growth Unlike the exogenous growth theories (classical growth and neoclassical growth), endogenous growth theory views technological advancement as a result of investment in physical capital and human capital (as opposed to an external…
Neoclassical Growth Theory
There are four articles on economic growth theories: Synopsis Classical growth theory Neoclassical growth theory (you are here) Endogenous growth theory Neoclassical Growth Neoclassical growth theory is more complicated than classical growth theory, but it’s not too bad. (OK, maybe it is; I’m just trying to encourage you to keep reading.) It does require a…
Classical Growth Theory
There are four articles on economic growth theories: Synopsis Classical growth theory (you are here) Neoclassical growth theory Endogenous growth theory Classical Growth Theory Classical growth theory is pretty easy (and a bit depressing); the basic idea, in a nutshell, is that when wages rise above the subsistence level (the minimum amount people need to…
Economic Growth Theories (Synopsis)
There are a number of theories that attempt to explain the growth of an economy; they fit broadly into two categories: Exogenous: economic growth is caused by factors that are external to the economy itself (the prefix exo- meaning outside) Endogenous: economic growth is caused by factors that are internal to the economy itself (the…
Triangular Arbitrage
Triangular arbitrage is nothing more than determining whether an arbitrage opportunity exists amongst three currencies with three exchange rates; the complicating factor is that the exchange rates each have a bid rate and an ask rate. (Note: the arbitrage could, in fact, involve more than three currencies. As the principles are the same, only three…