Consider the Ontario Lottery Corporation’s game “Cash for Life”. It’s the scratch and win game card where you hope to match up three identical “Cash for Life” symbols. If you do, you’ll receive $1000 every week for 20 years. Sounds good to me!

That adds up to a whopping total sum ($1000×52*20) $1,040,000 bucks over 20 years.

$1000 a week over time can buy you some fancy clothes or watches. Over some more time perhaps a decent used car. Or maybe you wait the long haul and save up for a child’s education. OR maybe you wait even looooonger and save up for a new home purchase. In that case lets say you want to buy a $250,000 home. That’s going to take (($250,000/$1,000)/52) 4.81 years to save up for.

So, what if we could determine how much the future sums of the cash flow is worth today and convince the lottery to pay that amount out to us in one lump sum of cash to do what ever we want with?

Here’s the numbers;

First, we’ll have to reference the trade-off between the sum of cash flows over the 20 years to the present sum of cash by the interest rate at which we will assume is constant. The Bank of Canada posts it’s 20 year government bond rate to be approx. 3.45% annually. I’ll choose 4% and imply that it would be more probable in a more stable less volatile interest rate environment. It’s an arguable assumption but that’s what were going to use. Don’t like it, tough! (There are several more robust ways to compute an interest rate assumption, but this is supposed to be quick and fun, not long and arduous)

Also, I have to set out the compounding frequency and number of periods. Given that we have 52 weeks in a year and the cash flows go on for 20 years, we have 1,040 compounding periods. Since were using weekly figures for the compounding period, we must do the same to the interest rate which will be used at 0.0769%.

So to make a long story short; the calculation’s using the inputs of 1040 cash flow periods (52*20), a weekly interest rate (4%/52) of 0.0769% and a cash flow amount of $1000.

Using my handy present value function on my calculator we find an answer that suggests that, given the inputs, a person is likely to accept $715,692.70 in lieu of $1000 a week for 20 years. In essence, the calculation says that based on a persons total risk aversion and opportunity cost of %4, one would accept $715,692.70 today in exchange for $1,040,000 over time.

Now maybe not all of you are agreeing; I’m not a surprised. Some people would prefer to live modestly and would be quite happy with $1,000 a week for 20 years. Some people may rather live dangerously and take that lump sum and invest it in high risk ventures or off track horse racing hoping to turn the $700,000 into much more. It’s all based on the person.

Since the chances of being one of the 4 people to win the jackpot each time OLG runs this game is 0.0000581% we won’t actually have to worry about having this problem. Interestingly enough, the OLG does give the winners the option of choosing a lump sum over a weekly payout. But it comes not without its penalties such as a cap on how long a term one can use to calculate the present value or the risk of the OLG using a discount rate below standard Bank of Canada rates. Not to mention, there are legal fees that have to be dealt with.

It’s an interesting thought though…

What would you do?

Needless to say, I enjoyed these games like none other.

Firstly, I have to say that before the Olympics started this year I had already been one of the Winter Olympics’ biggest fans. I love the spirit of competition and determination. I admire the preparation and tenacity of the athletes. I bathe in a country coming together with unabashed national pride. And with these games being in our own backyard (Vancouver) the anticipation before the games could be greater.

The games certainly started off on a bad note. The death of Georgian luger Nodar Kumaritashvili definitely casted a dark cloud over Vancouver very quickly as he had died shortly after exiting the track on the last corner and striking a girder that supported the track’s overhang, in a training run. My sympathies go out toward the family of Nodar as this is obviously a tragedy that all will regret. My sympathies also follow the Georgian athletes who bravely showed their respects and determination by marching into the stadium at the opening ceremonies with their heads high as all that attended stood with an ovation of respect.

This brings me to what I thought of the Opening Ceremonies. As I watched with friends we noticed and joked about the Native Canadian theme that awaited all the athletes as they entered the stadium. Yes, I agree that those watching internationally will now think that we all wear head dresses and dance around for hours BUT I think it certainly casted a jovial nuance throughout the stadium in preparation for the excitement of the games. I tell you; those dancing were athletes in their own as they uninterruptedly danced for what felt like two hours! The performances showcased Canadian musical talent properly and were all properly themed to say the least. Not to mention that the return of Ashley McIssac interesting and entertaining at the same time! It was a great start to the games.

Time passed as Canada waited for that illusive first medal and it came with a story that personifies what the Olympics can be about. Alexander Bilodeau won Canada’s first goal medal in Men’s Freestyle Skiing with a flawless run and I went insane! Before the event CTV profiled Alex’s brother Frederic who lives life day-to-day with cerebral palsy. Frederic is Alex’s role model and biggest fan. The size of the smile and excitement that Frederic displayed as the judges delivered their scores was bigger than life. What a beautiful moment that was.

The events showcased the personalities of many Canadian athletes. One of which that stood out in the minds of many people was skeleton slider, Jon Montgomery. Born in Manitoba where he works as a used car sales man and an auctioneer, his famous moment was winning the gold in his event with an enthusiasm seldom seen. The picture I won’t forget is of him walking through Whistler that night chugging a pitcher of beer as the police escort him around. You have to love that!

Another athlete that stood out in my mind as being one of the bravest I’ve ever seen was Joanne Rochette. Her ability to perform her short program figure skating routine one day after she was told that her mother had died just after arriving to Vancouver to proudly watch her daughter compete. I remember fighting back my own tears when she began to weep at the completion of her program. What an incredibly joyful and sombre moment that was. I don’t think there was one person in that rink who didn’t want to share the pain Joanne was feeling.  To eventually win a bronze medal, considering all things, is an unimaginable accomplishment to be proud of.

The games went with out their follies though. The malfunctioning cauldron arm that prevented Catriona Lemay Doan from parting in the torch lighting was embarrassing. The lack of snow at Cypress that caused the postponement of some skiing events was unfortunate. People became increasingly upset by the lack of intimacy with the outdoor cauldron caused VANOC to act quickly seemed amateur. And insertion of poor, unimaginative, humour ended a wonderful week in an anti-climatic fashion.

One topic that really had me thinking revolved around what role protesters have at the Olympic Games; summer and winter alike. On a superficial level, in my opinion, they are unnecessary. To me, they interrupt the message of accomplishment, fair competition, athletic dreams and goals, joy, and national pride the Olympics provide.  I get why they protest. For one, VANOC really did try to limit the free speech of Olympic proponents which I am not in agreement with. Secondly, the money spent on the Olympics in general can sometimes mirror the annual GDP of developing countries. This being said; I am not for the abolition of the Olympics in anyways. There are negative externalities that come about as the Olympics progress however, who is anyone to tell me I can’t enjoy them? On an unselfish note, who is anyone to tell anyone not to enjoy them? Athletes train all their lives at the chance in an attempt to realize one hell of a goal. People with a passion for sport either work or volunteer tirelessly towards a cause that they believe in; people around the world watch in amazement and awe as they see their country’s men and woman compete and why should any individual or group have the opportunity to take that away. The violent protests were not at all necessary. I’ll never support that medium of activity.

*Note; I do also realize that this topic is much more complicated that what I’ve mentioned. But that’s another story all together.

Back to what I personally believe was one of the greatest moments of these Olympics: the goad medal hockey game. This was the greatest hockey event that I have ever been fortunate to be a part of. There isn’t an author alive that could have written a script as gripping as that. I watched the game, like many households in Canada, with many of the people who share the same passion for sports as I do and as Sidney Crosby took a feed from Jerome Iginla from the corner and slid the puck through USA goaltender, Ryan Miller, everything went crazy. I immediately had a friend jump on me and give me a hug as if this was the greatest thing he’d ever seen. Friends who don’t entirely enjoy the game of hockey were on their feet throwing fists that could have punched through windows. It was amazing. It was the greatest sporting moment I had ever experienced.

Now the games are over and I sit here on CTVolympics.ca watching videos from the last two weeks, even though I’ve seen them all a million times. I could watch montage videos until the next winter Olympics begin. I have reunited with sports in an intimate way. The events in Vancouver brought many of us joy, laugher, excitement, disappointment, anger, sadness, tears and grief. One thing I know is that one day I’ll give back to the Winter Olympics. Someway, somehow.

Thank you Vancouver. Thank you athletes. Thank you Olympics. I’ll tell the story of the Vancouver Olympics for many years to come.

http://www.ctvolympics.ca/video/index.html

The underlying strategy for merger arbitrage is to go long on the targets share after the annoucement is made hoping that the merger is consumated. An investor could also short the acquierer since historically speaking, the acquirer’s stock deflates in the event of a tender offer. There are also variations of this strategy that indicate at what weights an investor should engage each position long or short. Also, there is a method of indication on which company an investor should long or short in all stock mergers (out of the scope of this post).

Either way, I’ve done some work to validate these findings and low and behold, it works! Mind you I’ve only taken ten samples from the past six months to show this (although, doing i in the last six months may show that the results are immune to systematic events). But either way its interesting. All of the return papers I’ve read this week all suggest that there is an excess monthtly return to be made.

The question is then, why doesn’t everyone do it? My answer is, I don’t know! Obviously this is not a riskless arbitrage as it can be argued that there is no such thing; this may scare some people into diving in. I also don’t think that many investment students have had the opportunity to study mergers in depth.

Here’s a video from Bloomberg TV that gives a good example of this strategy

Also, there’s a site on Reuter’s that show’s arbitrage spreads. This is the difference between a target company’s stock price after annoncement and the deal price. It is said the the larger the spread, the lower the probability that the merger will take place however, the greater reward an arbitrager will reap if the merger is completed. Risk and return right!?

http://www.reuters.com/finance/deals/arbitrageSpreads

Anyways, I don’t think merger arbitrage is too goo to be true at all! Its a strategy that seems legitimate. Just remember that it may be a good idea to read up on merger completion probabilities before you think about trying this. A better understanding of that, the better chance that you’ll be able to profit overall!

Now, of course I have a feeling of betrayal in me knowing that the executives of companies are being compensated immensely for failure, however there is one sub topic that I think is absurd.

During the congressional hearing today, a congressman by the name of Barney Frank suggested that the names of the executives should be given up. He mentioned that if Liddy was uncooperative to his request, Frank would submit a request to congress for a subpoena to force AIG to reveal the people who have received the bonuses.

http://www.bnn.ca/news/7946.html

I have a problem with that. The executives of AIG have occasionally received death threats on their own lives, threats to hurt their families and even as far as vandalizing their personal property. If this is already happening to the public members of AIG, what do you think will happen when the people who received bonuses are revealed? They’ll most certainly take the heat on their personal lives on top of their professional lives. I know that it is in bad taste for these managers to accept this compensation but the fact of the matter is that it isn’t an illegal move, it is also up to the firm itself to allow bonuses of this effect to happen. It is not fair to the people whose lives are threatened because of their professional lives.

Ya know, if these executives just threw me a little of their bonuses, maybe I’d even support what they’ve been given! Not likely.

Anyways, the financial economy seems like a circus these days and I consider this story like a sideshow.

Here’s a video of Rep Barney Frank talking about the AIG bonuses on the Today Show

A lot of market strength comes from investor confidence. I personally think that there will be a delay between when the economy will return to being in good shape intrinsically and the reflection of this in stock prices. I say this because it’s going to take some time for the timid investors to show faith in the market not tanking again. Regardless of what’s being reported in firms’ financial reports.

Anyways, what do you think?

It will be interesting to see if what the poll says the majority vote is and compare that to when the economy has been deemed ‘safe’. My hypothesis is that it will be very similar. Being that this is my second day with this blog, I doubt we’ll find anything substantial.

Check it out, you could learn a thing or two. Not to mention, the name of the site is pretty cleaver

http://thegreenhowseeffect.wordpress.com/

This is my first go at this world we call blogging. So I figured I’d leave an open forum to this one. Comment and let me know what your thoughts these days on the current financial world. Let me know what you think about Madoff’s ascent to corporate crime’s history books. Or how about the recession? What about the fact that if you were to have correctly timed the financial stocks this week, you’d have made a solid profit (assuming you didn’t invest 8 months to a year in them as well).

 I’m a student of finance in Canada, I’m a sports fan (hockey being the most prominent interest), and I’m a fan of on-line collaboration.

Here’s a decent video of Letterman doing a Bernie Madoff Top Ten List (Fast forward to about the 3:30 mark)

 Send me a few messages. Lets get this blog going!

Sean