Clearly there was something wrong with this...

From Brad DeLong's blog he quotes this article:

From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

I'm a true believer of the contribution to society by financial instutions, but when they are generating more profits than other industries, there is clearly something wrong going on....

Terminator and Real Options

The FT today has an article about the auction of rights to the Terminator movie franchise (a few weeks ago they had also auctioned the rights to the The Teenage Mutant Ninja Turtles for $60mi). The owner will be able to launch new movies, TV series and anything related to the last Terminator movie.

This story reminded me of the Arundel Partners case. The case asks students to apply option pricing theory to value the option to produce sequels to Hollywood blockbusters. They have to estimate the volatility, consider potential moral hazard problems and decide which movies to use when estimating parameters.

This term for the first time  I'll use it in the Corporate Finance course to talk about Real Options. I hope it goes  down well with students. Everyone gets scared the first time they see the Black-Scholes formula on the board...

GFC and bonuses

This is a really interesting post by Emanuel Derman. I think he is spot on that one of the main problems with the current system is not high profits per se, but actually that these profits are earned largely because of the implied backing given to banks (and the overall market) by the government.

Next week I'll discuss options in class. I think I will use this as an example to talk about puts.

PS - The first time I read GFC I thought it was something like the "Global Fighting Championship" rather than "Global Financial Crisis"...

Why is it so difficult for foreign firms to suceed in China?

The Economist this week is full of interesting articles as usual. One that caught my attention is a piece on why foreign firms face so many difficulties in the country. Language and political regime (a capitalist dictatorship) do not explain as many other countries have the same characteristics.

The article says that firms "... they complain about subsidized competition, restricted access, conflicting regulations, a lack of protection for intellectual property and opaque and arbitrary bureaucracy."

I wonder whether China will ever open their domestic market enough to enable serious competition by foreign firms.