Tuesday, March 30, 2010


I still think that the US Treasury might make a profit on assets it bought during the crisis:

Friday, March 19, 2010

Martin Wolf @ IESE

Today we had Martin Wolf giving a special lecture at IESE on  "Development and Globalization after the Crisis". His daily column on the Financial Times is very good and interesting, I recommend it to everyone. It was nice to meet him in person, but it is a shame that I don't have the slides of his presentation to show. It was also very good.

In summary, he is still very worried with the recovery of developed economies in the future. The fiscal outlook looks bleak for US/Europe and that the recovery can only be sustained if the private sector can replace public spending.

Saturday, March 6, 2010

Hedging World Cup Risk

Today I was walking around Barcelona and saw this interesting time-deposit offer from Banesto (a local bank). They promise you 3%/year, but IF Spain wins the World Cup, the investor gets 4%.

Around the World Cup we see all kinds of offers like this (in Spain, the UK, and Brazil at least): buy a flat-screen TV and if Brazil wins you get another one, etc.

An interesting question is how much money does the bank expects to spend with this offer? How should  this be hedged?  Of course, based on historical probabilities they won't lose a dime, but with Spain being one the favourites, what to do to at least find an estimate? 

Supose that the bank's reinvestment rate is 4%. If Spain does not win the World Cup, they make a 1% profit. If Spain does win, they make zero. The expected return is the 1%*(Prob Win), which looks good on their side given previous history.

I wonder if they could hedge this against a portfolio of online bets held by betting houses. 

Any ideas? This might turn into a nice exam question or topic for the derivatives course.