Volume 38 CONTENTS Fall/Winter 2012
Salary Inversion in Business Schools: Does a Rising Tide Lift All Boats?
Tom Arnold, Raymond P. H. Fishe and Adam Schwartz
The paper analyzes AACSB salary survey information from 1979 to 2008. The question addressed in this analysis is whether salary inversion is wide-spread across the three business disciplines of accounting, economics, and finance. We find limited evidence of mean level inversions, which is concentrated in recent years. Stochastic dominance methods confirm these results. We also develop a measure of salary dominance based on comparing the distribution of reported salaries. This statistic shows a significant trend towards salary inversion in finance and accounting.
Global Alphabet Soup: Internationally Recognized Professional Designations in Finance
Ernest N. Biktimirov
The globalization of the world economy has increased interest in internationally recognized finance designations, which serve as external validation of expertise and are routinely used in hiring and promotion decisions. To help students, finance professors, career advisors, and practitioners make informed decisions or provide knowledgeable advice about global financial designations, this paper discusses the main characteristics of six designations and two certificates that are directly transferable from one country to another. Suggestions for choosing among designations are offered.
A Life Cycle View of Enterprise Risk Management: The Case of Southwest Airlines Jet Fuel Hedging
The objective of this paper is to illustrate the life cycle of enterprise risk management using jet fuel price risk management within Southwest Airlines, Inc. Enterprise risk management within a corporation appears to follow distinct life cycle periods as a firm moves from creation through a fully mature company. We use the history of SWA to suggest the main life cycle periods.
Dynamic and Interactive Teaching with Technology
Peter J. Phillips and Birgit I. Loch
This paper reports the results of an investigation into the efficacy of tablet PC technology in teaching introductory level corporate finance to a large cohort of 400 students, of which three quarters were enrolled for distance study. Tablet technology consolidates elements of traditional white-board-based teaching and PowerPoint presentation in a manner that can generate a far more dynamic and interactive classroom experience without a dramatic departure from traditional instructional approaches. In addition, it provides a straightforward option to capture classroom action for instructors who wish to deliver elements of the classroom experience to distance students. The student experience, which was assessed by an analysis of solicited (survey) and unsolicited student comments as well as quantitative retention and performance data confirms the utility of the technology for both face-to-face and distance delivery. Some striking improvements in motivation (higher retention rates) and performance (final examination performance) were found.
Understanding Levered LTF Returns: An Exercise
Jeff Donaldson and Donald Flagg
Levered exchange traded funds (ETFs) are relatively new and often misunderstood by investors. The returns of levered ETFs are designed to deliver some multiple of the underlying index, such as two or three times the daily index return. The issue relating to these funds is that the levered ETFs do not reproduce the corresponding multiple of the related index over time periods greater than one day. This exercise examines the levered fundís returns in trending markets, mean reverting markets, changes in volatility, and multiple annual simulations. We find that when students follow the exercises in this paper they come away with a significantly greater understanding of the nature of levered ETF returns and, more importantly, an understanding of their appropriate (and inappropriate) applications for investing.
Describing REIT Prices and the Real Estate Bubble Using the Dividend Growth Model
Joseph Farinella and Edward Graham
During financial bubbles, investors often disregard fundamentals and buy assets at any price. This occurred in the real estate market in the early 2000ís as real estate prices soared. The rationale was that real estate would continue to appreciate, enabling investors to sell for ever-higher prices. However, the bubble did what all bubbles eventually do Ė it burst. In cases such as this, the dividend growth model (DGM) can help students (and investors) examine this bubble and re-focus on the fundamentals. Using it, students can examine the price of real estate without dealing with the inefficiencies associated with the real estate market. One of the most attractive features for finance students is a clear link between the classroom and the real world. This is accomplished through an assignment we design where students use the dividend growth model to value real estate investment trusts (REITs) before and after the real estate bubble.
A Suggested Exercise for Teaching Arbitrage
Jeffrey C. Hobbs
Traditionally, finance textbooks have taught the concept of arbitrage through a number of disparate examples often presented in different sections or chapters. This paper proposes a method for the finance instructor to tie together three types of arbitrage, by emphasizing their risk-free nature in relation to the concepts of the law of one price and market efficiency, in four simple steps. It also provides a series of classroom exercises that show how to recognize arbitrage opportunities and how those opportunities disappear with repeated use. This proposed method of teaching should take the instructor roughly one hour of class time to accomplish, and can easily be expanded to include other forms of arbitrage not included here.
Triangular Arbitrage Deconstructed
The objective of this paper is to present a new methodology of instruction for triangular arbitrage. This methodology covers the features of this type of transaction in a simplified manner, emphasizing currency conversion and appropriate use of bid and asks quotes. This method also stresses the use of a triangle to help students visualize the transactions they must do to generate triangular arbitrage. Three quarters of the students who used this methodology were able to successfully determine when triangular arbitrage is feasible and conduct the appropriate profit-generating strategy.
Teaching Market Efficiency and Arbitrage Opportunity Using the Financial Crisis of 2007-09
Investment courses teach that the more active portfolio managers we have the more efficient markets become, and arbitrage opportunities are extremely scarce. The financial crisis of 2007-09 provides a rare but valuable case to teach this theory using a real world example. Citigroupís offer to convert preferred stock to common stock in February 2009 lead to a condition that violates put-call parity and an arbitrage profit could be generated using short sales. The market inefficiency was observed because active portfolio managers such as hedge funds did not have enough funding liquidity to take positions during the financial crisis. This case is presented using Excel spreadsheet exercises and a reading assignment on two articles in the Wall Street Journal (WSJ).
Case Study: An IPO In an Emerging Market: The Case of ASUR Mexico
Carlos Omar Trejo-Pech, Magdy Noguera and Susan White
"I finally finished the last page," John Staley, analyst at Evermore LLC, sighed. He was analyzing information concerning the initial public offering of Aeropuertos del Sureste Mexico (ASUR). "It was ten inches high, no exaggeration!" ASUR had announced that the IPO would take place in September 2000. ASUR was a government-owned Mexican company with a 50-year concession to operate, maintain and develop nine airports in the southeast of the country, including the fast growing Cancun airport. ASURís IPO would be the first major equity offering of a Mexican company in more than three years. According to ASURís executives the company was planning to issue about $400 USD million in stock simultaneously on the Mexican Stock Exchange and on the New York Stock Exchange (NYSE). ASUR and Mexican officials believed that the deal could serve as a model for other regional privatizations.