Knowledge that Transforms

The basic model of this paper is that of a transactor who is to receive at a specified time t in the future a fixed quantity of domestic funds Ad and a fixed quantity of foreign funds Af. It is further assumed that there exists a forward market in foreign exchange in which one unit of foreign currency can be bought and sold at a given and known forward rate rf, the domestic currency price of one unit of foreign currency. Let X be the net forward purchases of foreign exchange that the transactor undertakes at the market rate rf; a negative value of X indicates net sales of forward exchange. It is assumed that at time t the foreign currency will be convertible for the transactor at a fixed but unknown spot exchange rate and that the transactor can assess or derive a probability distribution on this spot exchange rate f(rt) for rt > 0. Finally, it is assumed that the transactor can express a utility function u on the domestic currency equivalent of his ending currency holdings. This paper considers the problem of determining the optimal level of forward exchange purchases X0.

In this study, an attempt is made to determine whether the profitability of a commercial bank is related to the bank's ownership-control status. Affiliated and unaffiliated commercial banks in the sample are found to be equiprofitable. Affiliation with a mutual savings bank does not generate differences in profits, total current operating revenues, or total current operating expenses between the two groups of commercial banks. Furthermore, the marginal net earnings or returns on the individual deposit types are the same for the two groups of banks.The two groups of banks have extreme differences in their holdings of time and savings deposits and real estate loans. These differences between equiprofitable banks require further analysis. The affiliated commercial banks have significantly larger percentages of their total assets in nonearning assets and lower proportions in loans. The affiliated banks also have larger proportions of their deposits in the less costly demand deposits than do the unaffiliated banks. These results indicate that affiliated banks would have both lower revenues and expenses than do unaffiliated commercial banks, ceteris paribus. However, affiliated banks have larger proportions of their portfolios in the greater income-producing consumer and commercial loans.In conclusion, profitability of the commercial banks in the sample is not affected by the banks' control status. The commercial banks controlled by mutual savings banks are as profitable as banks controlled by management or “independent” owners. However, the control status does effect significant differences in the balance sheet and income statement accounts. While many of these distinctions may result from differences in the banks' deposit structures, these differences themselves are consequences of affiliation.

Professor Wu, in his recent article [8], investigated the trading activities of odd-lotters and their market impact. The purpose of this note is to update the data examined by Wu since recent trends are extremely significant and to question the use and interpretation of some of Wu's original data. In addition, some errors in Wu's article will be discussed.

Professor Stevens has attempted to determine whether or not a consistent financial basis for merger exists as measured by premerger financial characteristics of the acquired firms. He suggests that results of his study are useful in identifying merger motives and in relating such motives to a general framework for analysis of merger movements.

Professors Nielsen and Melicher (N-M) have conducted well an interesting study of merger premiums as related to various measures of synergy connected with those mergers. Their study is another in a growing body of literature concerned with the merger phenomenon which increased substantially during the sixties and has continued into this decade. In order to provide an evaluation of their study, I shall consider their choice of research design and their analysis of research findings.

It has been discovered in the context of various stock valuation models (see [1], [2] and [4]) that the shareholder is indifferent to the proceeds (or subscription) price chosen in a preemptive rights offering of equity capital, provided that the total equity capital raised by the offering is fixed. In this note we generalize this result to any stock valuation model in which arbitrage is present and which values only the total amount of the new investment, that is, places no value on holding more (or fewer) shares with a lower (or higher) market price.

Most large companies develop formal or informal agreements with banks to cover anticipated seasonal or temporary cash needs and/or to provide assurance of the availability of funds against unanticipated cash requirements. We address the problem of determining the optimal limits of available funds a company should maintain under a revolving credit agreement. Typically a company will negotiate a legal commitment with a bank or group of banks for a specified period of time, usually one to three years, in which the bank agrees to extend credit up to a specified maximum amount. During the duration of the commitment, the bank must lend money to the company whenever the company wishes to borrow, provided the amount of money borrowed does not exceed the maximum amount noted in the agreement. The company must not be in default of any of the restrictive covenants of the agreement, such as working capital limits, compensating balances, limits on other indebtedness, etc. Although the agreement itself provides for intermediate-term financing, the agreement often takes the form of short-term (30-60-90 days) renewable notes.

The trading of security options is one of the fastest growing and most dynamic areas of investment concern. When the Chicago Board of Trade's proposal to develop an exchange for trading option contracts is implemented, security option trading will become an even more important aspect of the investment world.

Solving capital budgeting problems with linear and integer programming has been part of the finance literature for some time [21, 22, 23, 7, 14, and 18]. Capital budgeting problems have unique properties that distinguish them from other integer linear problems discussed in the mathematical programming literature. Capital budgeting problems generally have the following characteristics: (1) the matrix tends to be rectangular with more variables than constraints; (2) they are all maximization problems with ≤ constraints and nonnegativity conditions in the general form 0≤xi≤1 in the case of linear programming and xi = 0, 1 in the case of integer problems; and (3) there are often mutually exclusive projects among the variables. The purposes of this note are to illustrate some computational experience using existing integer algorithms to solve a set of capital budgeting problems and to begin to catalog the performance of integer codes on financial problems.

It is likely that warrants will be used increasingly in the future by corporations both as means of sweetening other securities such as preferred stocks and bonds, and as securities in their own right. Many authors have analyzed the characteristics of warrants from the point of view of investors but attempts to develop a procedure for determining the cost to a corporation of issuing warrants have been lacking. We will find it convenient to measure the yield to a corporation of issuing warrants instead of common stock, rather than determining the percentage cost of warrants analogous to the cost of common stock equity, preferred stock, and interest-bearing debt.