Saturday, December 27, 2008

Cycling City: Lyon

In Lyon the city council with collaboration with an advertising agency has started a public cycling program called velib, which tries to solve the problem of traffic congestions, environment and public health. The scheme is funded by JC Decaux in exchange of exclusive access to public billboards. It all started with 2,000 bikes and 200 bike stations where the users can hire the bikes for a annual rental fee of few Euros. After using the bikes they have to park them back to any of the nearby stations.

Success of this system has lead to plans of introducing a similar system in other cities. Using a prepaid card, residents can rent city bikes for free for the first half hour. And for the next half hour there is charge of 1 Euro giving incentive for people to use these bikes for short duration and return them back.

The program which started in 2005 with few thousand bikes has now grown to 20,000 bikes and 1,450 rental stations! This means that you will find one rental station within 300 meters of any point in the city.

The addvertising company which funded the project believes that the revenue they generate from addvertising space whould be higher than the costs involved in running the trasport system. The users of the rental program are happy because it offers cheap and healthy transportaion. The city addministration is happy becasue it offers an alternative to existing crowded transport system and roads and provides good pitch for election campains. This is what i would call win win situation for all parties involves.

Click to play a video on Velib

Tuesday, December 16, 2008

Focus: Fed Funds Rate

Everyone in the market is expecting a cut in the target fed funds rate by Federal Reserve. This is the rate that Federal Reserve will try to achieve in the inter-bank borrowing market in US.

The futures on the t-bills can provide indicative market sentiment and expectations towards changes in future rates. The option contract on t-bills futures on C-bot (Chicago board of trade) can even provide the probability how much the market is pricing in a rate cut. Assuming there is a close relationship between fed funds rate and t bills rates.

If federal reserve cuts rates below to below 50bps then that will be the lowest rate since world war 2. Already market expectation of 75 bps cut was showing a probability of close to 90% week back, but one day before the cut has come down to 50-60%. What is more shocking that there is a 20% probability that the federal reserve will cut the Fed funds rate down to 0%. The effective federal funds rate on the futures market has fallen near zero as well -- as low as 0.0625 percent -- despite the Fed target of 1.0 percent.

Rate cuts do boost the economy, but there are times when rate cut do not really lead to economic growth, this is due to deflation (-ve inflation). During times of deflation even though the interest rates might be close to zero but real interest rates which is the difference between interest rates and inflation could end up being really high, making borrowing less attractive. At the same time there is a decline in the investments due to negative time value to money; money in future is more valuable that money now, so by just keeping money idle under the bed would generate a return!

The rate cut I believe is just a cosmetic measure to be taken by Federal Reserve even though it is occupying lot of media space. What I believe is more important are the measures to be taken by the government to boost spending and economic growth. That would be the true solution to the worst global economic period since great depression!

Tuesday, December 09, 2008

Historic Volatility Calculation

Dynamic replication of option price requires a key ingredient, volatility. Often we get into arguments about using Implied market volatility, Expected volatility (could be forecast/ prediction) or just historic volatility.

I was just trying to calculate historic volatility of major currency pairs and the Indian and World indexes. At first I thought using daily closing prices would be the most logical method. But later wanted to see if there is significant difference between calculations done on closing prices vs. opening and day high and day close.



I was expecting more or less same volatility figures for different data. But to my surprise the volatility figures based on Day high were significantly less volatile across markets and benchmarks.



The effect is more pronounced in stock Indexes like NSE Nifty, BSE Sensex and foreign indexes like Nikkei 225 and the Dow Jones. This is something very counter intuitive because in the last year all indexes have gone down but still the market highs from one day to other are less volatile compared to Open and High data.

The volatility was calculated by using daily log returns for past 256 data points (roughly 1 yr with 5 market days and 5 holidays)

The Currrencies are Pound, Euro, Yen and Swedis Krona all against USD.

Thursday, November 20, 2008

Rupee Depreciating!


In the latter half of the year Rupee has weakened against the Dollar significantly. Black line in the graph is USD/INR which has appreciated from close to 40 Rs for a Dollar in April to about 50 Rs.

At the same time it is argued by some that USD has strengthened across all currencies. Implying that INR has not weakened much its just USD showing lot of strengthening. The red like shows USD index which is trade weighted index of USD against major currency pairs. This like shows performance of USD against other major currencies like Euro, Pound and Yen etc.

There is a close association in the upward movement of Dollar against Rupee and against all other major currencies (in other words the black and red lines)

Wednesday, May 28, 2008

US economy benefitting from increasing crude oil prices!

With the crude oil touching $130 per barrel all of a sudden the US looking more profitable. Take the steel industry for example; the US steel industry was hit very hard by the low cost competition from China. Year over year the steel factories were shut down resulting to huge job losses. But recent import and production figures show something different. The latest one year production figures for steel in US shows a 10% increase compared to 20% decline for the steel imported form China. These numbers show how the US steel is fast replacing the Chinese steel, possibly closing down the cost arbitrage that existed between US and China.

So how is Crude oil responsible for this! Analysts believe that the Chinese competitiveness has gone down because of the increasing cost of transportation for the bulky Chinese products. The Chinese Steel manufactures have to import raw materials like the coking coal and iron ore from Brazil and Australia. The shipping rates have gone up considerably for these products. For one barrel of oil the Chinese have to spend close to $10 on shipping. And with increasing crude oil prices the transportation cost will only go up, thus the cost arbitrage will become smaller.

There are analysts who predict that a similar trend will be seen in other bulky manufactured products, like air conditioners, washing machines etc. But we have to remember that many production facilities in US have shut down due to the rise in imports. It will take some time for businesses to put up new production facilities to take advantage of this new opportunity. It is clear that rising crude oil prices will make the domestic producers in US more competitive. At the same time declining dollar is helping the US exports to gain new grounds in Europe and Asia. Could this be a revival for the US economy which has only faced trouble so far in the new millennium? Well only time can tell, anyways they have more than 990 years to change things.