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

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!

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.