Journal of
Financial Education

Volume 31                                               CONTENTS                                      Spring 2005

SPECIAL TOPICS

#1 - Developing an Advisory Board to Enhance Collegiate Finance Programs

Stephen M. Avila, John C. Bratton and Michael N. Baur

This paper focuses on the development of an advisory board that can be used to increase funding for faculty and student development, improve relationships with industry personnel and alumni, examine curriculum issues, and increase prestige for collegiate finance programs. Specifically, advisory boards can help in enhancing collegiate finance programs by providing academic and professional insight to the curriculum while building relationships with organizations to provide the necessary resources and financial support.

Pages 1-13

EDUCATIONAL RESEARCH

#2 - Can Students Teach Finance? Factors that Attain University Objectives
in a Multicultural Classroom

Henk von Eije

Corporate finance is considered a technical subject that requires professors to teach. The literature on learning, however, questions the top-down approach. The teaching method becomes even more relevant if it is the aim of the university to teach students to apply the content. We report on an experiment in which the top-down approach is replaced by an approach involving students who frequently teach each other. A binomial analysis of the impact of factors derived from a questionnaire suggests that the experimental method may help students to increase knowledge, to apply the knowledge and to attain the objectives of the university.

Pages 14-29

#3 Using the Essays of Warren Buffet: Lessons for Corporate American in the Classroom

Leo Chan, Kam C. Chan and Edward R. Wolfe

This paper provides a guide to the use of Warren Buffett’s Essays in the introductory corporate finance course. Mr. Buffett’s thoughts and positions on corporate finance issues have been conveniently organized by Lawrence A. Cunningham, a lawyer who has written extensively in the finance area. In this format the essays make for timely and enlightening reading for finance students, and we have provided suggested questions and responses that an instructor could use in the classroom. In general, we have found that students are very positive in their response to this book.

Pages 30-41

FINANCE PEDAGOGY

#4 - Method for Closing in on the Marginal Cost of Convertible Debt Capital

Wm R. McDaniel

Financial managers can use an estimate of the marginal cost of convertible debt capital as part of the process of establishing the corporation's weighted average cost of capital and/or as a benchmark to aid in setting the terms of a new convertible bond issuance. The fact that they cannot know the conversion date a priori causes a lack of precision in the estimate, but the method for analyzing the cost of convertible capital presented here allows managers to close in on a value.

Pages 42-53

#5 - Trading GPA Futures Contracts as a Teaching Tool: A Classroom Exercise

Thomas Root and Donald Lien

Students often struggle to fully understand the dynamics of futures markets. This paper presents a classroom exercise designed to increase understanding of future market dynamics. The exercise allows students to trade a futures contract based upon the average grade received by the class. This provides the student with an opportunity to interact in a market with a direct bearing on their grade. This paper presents an overview of the contract specifications, a description of the learning points that can be taught via the trading, and a description of the results of actual student trading.

Pages 54-67

#6 - Building Lattices: From Cox, Ross and Rubinstein to Heath, Jarrow and Morton

Dwight Grant and Gautam Vora

This paper presents an integrated description of the modeling of stock prices and interest rates as lattices. We begin with the presentation of the standard construction of a stock-price lattice. Then we introduce an alternative based on binomial probabilities of ˝ that are standard in interest rate modeling. We describe the standard numerical implementation of the Ho and Lee model. This implementation highlights a pattern that suggests the feasibility of an analytical implementation. We extend that analytical result to the more general Heath-Jarrow-Morton Model of the evolution of spot and forward interest rates. Both the stock-price lattices and interest-rate lattices are enhanced with the valuation of a put option.

Pages 68-85

#7 - An Excel Application for Valuing European Options with Monte Carlo Analysis

Tom Arnold and Stephen C. Henry

By developing the basic intuition of how Monte Carlo simulation works within an Excel spreadsheet framework, this paper allows the undergraduate student to use Monte Carlo simulation techniques to price European style options without additional sophisticated software. Further, the skills and intuition developed provide the basis for much more complex simulation techniques.

Pages 86-97

#8 - A Simple Exact Lookback Option Binomial Algorithm

Joseph K. Winsen

Lookback options whose payoffs depend on the maximum or minimum value that the underlying security may have during the life of the option have been valued by both analytical and numeric methods. The presentation of these methods is generally beyond the level of understanding of undergraduate and even MBA students. This paper presents a simple algorithm which under-graduate students can create using a spreadsheet to value lookbacks and thus gain some insight into how these options are valued.

Pages 98-107

FINANCE CASES

#9 - Case Study: Wine World Estates

Armand Gilinsky, Jr. and Raymond H. Lopez

Walt Klenz, president of the wine operations of Nestle, shared these thoughts with his division’s top managers in the summer of 1995. He had been producing excellent operating results for the parent company and found it hard to believe they might sell this growing and profitable business. Over the last three fiscal years, sales grew by over 14 percent annually and net income more than doubled. The division had established itself as one of the largest sellers of premium wine products in the United States. Plans had been formulated to continue to expand in this market segment through internal development of brands as well as the purchase of premium brand wineries in the California region.

Pages 108-133