Posts Tagged ‘ Concepts ’

Life Settlements – Ethical or Not?

A recent article in the Wall Street Journal talks about how a lawyer in Rhode Island is advertising and giving out $2000 in cash to policy holders who are terminally ill. In return, he is asking to be the beneficiary on their life insurance policies.

There have been many arguments for and against the investment. Some believe that it is a viable investment and is ethical while there are people who argue the believers. For those of you who would like to know what a life settlements investment is in a nutshell, please see my earlier post by clicking here. (Please note that I am in no way arguing for or against the investment; it is something I researched on as part of my internship at Quantum Financial Advisors in Washington, DC.)

Joseph A. Caramadre, the lawyer mentioned in the article, is known in the state of Rhode Island for his philanthropic endeavors. According to his lawyer and the article, Caramadre has given out $2000 anyway to people who have refused his offer of taking over their life insurance policies.

Relatives of the insured in question have looked down upon and filed lawsuits against life settlements investors. Insurance companies have filed lawsuits against the legality of these investments (please see the article in WSJ for more) making the rules surrounding these investments stricter. But, it really comes down to individual perception on the ethical aspect of these investments.

What are your thoughts?

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Why Should We Hire You?

There are many questions an interviewer can ask such as:

1. List your strengths and weaknesses
2. Tell us about yourself

There are other questions as well but which question is the one that is most dreaded? Or may be considered the most crucial one?

Yup, you guessed it. It is “Why Should We Hire You?” I’m not saying other questions aren’t as important or difficult but this particular question is like Brett Favre’s interception pass last night against the Saints – A GAME CHANGER. The answer to this question can change the game in your favor just like it did for the Saints or against you just like it did for Favre and the Vikings. Now, it doesn’t mean that Favre isn’t a good player or that Vikings aren’t a better team, it just means that one mistake cost Favre the game. Similarly, the way we answer this question can make or break the deal for you. You may without a doubt be a better candidate skills wise, but the competitor might be a better self-marketer.

I have been asked the above mentioned question at almost every interview I’ve ever been to and I am certain that anyone who has ever interviewed has come across it too. So what really is the right answer? Now, I am in no way a professional or an expert at answering that question but speaking from personal experience and upon seeking advice from people with more experience, I can definitely conclude that there is no particular right answer to this question. It all comes down to HOW YOU MARKET YOURSELF.

I am sure that everyone will agree with me that to land a job in the current economic situation we need to market ourselves better than we usually would. There are more people applying for the same job and everyone has some unique skill that they can bring to the table. But, who really gets hired? The one who sells himself better than the other.

I wrote this article to learn myself on how to answer the question. I invite people from all backgrounds and experiences to give their input on the topic. share their experience and knowledge on the subject with college graduates and job seekers like myself to better market themselves. It would be great if you could mention who you are and what you do in the comments. You don’t have to completely reveal your identity but your position and number of years of work experience would be great.

Before opening this Blog post for a discussion I have a link to share. I believe it is very insightful:

http://bit.ly/6pEucwWhy Should We Hire You” by Carole Martin at JobBank USA – I think she has some good tips in here.

There are various links on YouTube. Just type “Why should I hire you?” or “Why Should We Hire You”

Thanks and can’t wait to read your inputs!

Regulatory Reform Plan 2009

With the new Regulatory Reform Plan put in place by Obama administration, it seems like the Federal Reserve, a quasi-public and quasi private entity, will have complete control over the United States banking system. The Federal Reserve has been given all rights to regulate any activities carried out in the US banking system and can take over any company they’d like.

Even though the Obama administration claims to have a special team that will work with and advise the Fed Reserve on how to carry out their operations, the reserve is unaccountable to the US Congress, in fact, they are not accountable to anyone and hence have the right to decline any suggestions made to them.

It is clear that the Obama administration took this action based on the current economic situation and to ensure complete prevention of a similar future event. They are trying to avoid mishaps such as subprime mortgages. But, “Is giving full control to the Fed Reserve really the answer? ”

In my personal opinion, President Obama should have a separate team that performs the regulatory tasks and is accountable to the US Congress on every major action they take, this allows for fairness in the system.

Even if President Obama reads this and “takes my suggestion” (no pun intended 🙂 ), the banks have to now be super careful in every action they take.

Even after TARP, credit is hard to come by

TARP or the Troubled Asset Relief Program that the government put in place to buy out equity and assets from financial institutions to strengthen the financial sector does not seem to be motivating enough for banks to lend more to the consumers.

David Ellis in his article “Big Banks Still Not Lending” touches base on the lending market. He mentions how the lending has gone down 7% since March. Some of the market regulators believe the reason for the decline could be a lower demand by the industrial sector. This makes me believe that banks have more faith in the industrial sector than the consumer market even though it is the taxpayers’ funds that constitute the TARP.

Banks stress on the fact that they are lending more but the consumers believe that it is still very hard to get credit.

In a different article “Economy in ‘early stages of repair’, Colin Barr mentions that Tim Geithner thinks the economy has started to recover and there is a noted improvement in the stock market, but there still maybe tough times to face in the near future. Could this fear of facing tougher times in the near future be the reason why banks are not lending as much? Who knows? I just can’t wait till Wednesday to see what the new ‘regulatory reform plan’ put in place by the Obama administration would do to make the financial sector more stable.

Will come back with more on the Regulatory Reform Plan soon,until then please feel free to leave comments.

Investment Opportunities – Life Settlements

For my internship at QFA, I am researching on life settlements. Life settlements market is still in development.

What is life settlement? Life settlement is sale or transfer of an insurance policy in lieu of cash. The beneficiary then is the life settlement company – the new owner of the policy. The money paid to the original policy holder is usually higher than the surrender value of the insurance policy.

I have performed an intense research on the topic and will continue to do so as a part of my internship with other learnings but following are some of the basic points about life settlements that I’d like to share here today:

  • Proceeds are Taxable – Should always consult a tax advisor prior to selling the policy
  • Almost any type of life insurance policy is acceptable – Universal, whole, term, Keynes, Survivorship, etc
  • The process can be anywhere between 2 to 6 weeks long
  • Eligibility : Anyone 65 or over, a policy with a face amount of $50,000 or more and an assignable policy or a policy outside of the contestable period.

Don’t viatical firms do the same? The big difference between a viatical firm and a life settlement company is that viatical firms target people with life threatening conditions.

This market is yet to be at a fully developed stage.

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Rise In Gold Prices and Talks About Inflation

There have been talks about gold and gold prices recently in the commodities market.  An increase in the price of gold maybe the reason for these talks. Some reasons that possibly led to an increase in the price of gold are:

  • Weak Dollar
  • A Not So Great Financial System

With the dollar weakening and the financial system being in trouble right now, it seems that it is highly unlikely that jewelers have a high demand for gold. The fact that so much money is being pumped into the economy, there is a rise in commodity prices.

Could this lead to inflation? Possibly yes. Even though this may not be what the economists or Ben Bernanke are heavily talking about today, but I’m sure at some level this is their priority in order to prevent high inflation rates.

Hedge Fund, Hedging and Position Delta

Upon having a conversation with my brother, Varun, about hedging, I thought it might be a great idea to share what exactly is hedging and a hedge fund. He does not have a background in finance and I thought it would be interesting to talk about it here so that anyone, finance background or not, can learn about hedging and maybe give me some tips, suggestions and comments on my knowledge of hedging.

A hedge fund works in a similar manner as a mutual fund where there is a fund manager who invests money he receives from the investors. However, there is a difference between a hedge fund and a mutual fund, a big difference. A hedge fund is not limited to just stocks like its counterpart mutual funds. A hedge can invest in almost anything but it is mostly derivatives. Even though a hedge fund maybe a good portfolio diversifying activity, it is VERY risky. A lot of research prior to investment is a must.

AND, Hedging is when you have a position in an asset and you take a position in a derivative  to offset the exposure.

But, what exactly is that position to offset the exposure? What exactly is a position delta?

Delta is a measure of risk in the options trading market. It basically tells us how many contracts should be in place to  hedge  a long or a short position of an underlying asset.

Before I give an example, here is some vital information:

Values of delta: In the Money (when the strike price is below market price for a call option and vice-versa for a put): 0.8

Out of the Money (when the strike is higher than market price for a call option and vice-versa for a put): 0.3

At the Money  ( when the strike price equals market price for the underlying asset)                                  : 0.5

Note: The above values were provided to me by my Professor, Professor Joseph Rinaldi, who also happens to be my boss, and these values may vary depending on the source such as an out of the money delta could be 0.25 instead of 0.3. I have seen that happen but I am going to go with what my professor told me).

Also, another vital piece of information:

Long Call: Delta Positive

Long Put: Delta Negative

Short Call: Delta Negative

Short Put: Delta Positive

Now, an example to explain the above concepts. Let’s say the strike price of the underlying asset is 45 and there are 10 short put contracts with an out of the money delta of 0.3, what could be some strategies to offset the exposure?

One of the strategies could be to short 300 shares (10 contracts = 1000 shares and 1000*-0.3 = 300 shares). Some other strategies could include holding a long position in an out of the money put or short out of the money calls.

Since, there is a slim chance of an out of the money option to go in the money (Delta of 0.3 = 30% probability to go in the money), what happens if it does go in the money? Well then to obtain an in the money position to offset the exposure the following could be done:

  • Sell 500 more shares (10 contracts = 1000 shares and 1000*-0.8 = 800 shares, but we already sold 300 shares, so now we take the difference so that we do not over expose ourselves)
  • Short In the money call
  • Long in the money put

I hope the above information helped explaining the concept of hedging a little bit. Comments are highly appreciated.