Commercial Paper Small Business

Can a business ever be too small to issue commercial paper?

A:
There are effective – though not legal – restrictions on the size of commercial paper issuers. Any company can issue commercial paper. As of 2015, commercial paper with less than 270 days’ maturity doesn’t have to be registered with the Securities and Exchange Commission.

Without any legal restrictions on commercial paper issues, the market itself dictates when a business is too small or not creditworthy enough to issue acceptable paper. Issues aren’t worth anything if there aren’t any buyers.
Normal Issuers of Commercial Paper
The majority of commercial paper issues are made by large companies with top credit ratings. In fact, only top-rated (AA or higher) paper even receives a listed rating in markets in the United States. Lower-rated paper is sometimes sold, but at rates far above the standard rate.

Financial institutions dominate the commercial paper market. As of 2002, financial institutions issued nearly 90% of rated commercial paper outstanding.

Commercial Paper and Company Size
As a general rule, small businesses have less access to credit than large businesses. This is particularly true with unsecured credit, since creditors want to make sure they borrow from reputable companies with large revenue streams. Larger businesses have better relationships with banks and other financial institutions. All of these factors create de facto limits on the average size of commercial paper issuers.

Even though small businesses can legally issue commercial paper, they may not want to expose themselves to risk. The standard increments of paper issues are $100,000, which wouldn’t look very good on a small company’s balance sheet.

Unsecured and Unregulated Risks
When investors and creditors are unprotected by regulations (through the SEC) or bankruptcy proceedings, they are forced to be more careful when lending money. This is the main reason that large, highly rated companies rule the commercial paper market.

Even if a small company offered a higher interest rate, most commercial paper buyers would side with less-risky large firms. The lack of an effective backstop pushes buyers toward larger, known commodities.

 

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CPFP

DEFINITION of ‘Commercial Paper Funding Program – CPFP’
A program instituted in October of 2008 that created the Commercial Paper Funding Facility (CPFF). The Commercial Paper Funding Program (CPFP) was designed to increase the liquidity of the commercial paper market by providing funding to issuers. The program specifically provided a backup measure of liquidity for commercial paper issuers via a Special Purpose Vehicle (SPV).

‘Commercial Paper Funding Program – CPFP’
The SPVs were financed directly by the Federal Reserve Bank of New York and were used to purchase three-month commercial paper, both secured and unsecured. This financing was then to be secured by the assets placed into the SPVs and also by the fees paid by issuers of unsecured paper. The Treasury department felt that the program was required in order to prevent further substantial disruption of the financial markets.

 

Forex Trading The Martingale Way

Forex Trading The Martingale Way
Would you be interested in a trading strategy that is practically 100% profitable? Most traders will probably reply with a resounding, “Yes!” Amazingly, such a strategy does exist and dates all the way back to the 18th century. This strategy is based on probability theory, and if your pockets are deep enough, it has a near-100% success rate.

Known in the trading world as the martingale, this strategy was most commonly practiced in the gambling halls of Las Vegas casinos. It is the main reason why casinos now have betting minimums and maximums, and why the roulette wheel has two green markers (0 and 00) in addition to the odd or even bets. The problem with this strategy is that to achieve 100% profitability, you need to have very deep pockets; in some cases, they must be infinitely deep.
No one has infinite wealth, but with a theory that relies on mean reversion, one missed trade can bankrupt an entire account. Also, the amount risked on the trade is far greater than the potential gain. Despite these drawbacks, there are ways to improve the martingale strategy. In this article, we’ll explore the ways you can improve your chances of succeeding at this very high-risk and difficult strategy.

What is the Martingale Strategy?
Popularized in the 18th century, the martingale was introduced by the French mathematician Paul Pierre Levy. The martingale was originally a type of betting style based on the premise of “doubling down.” A lot of the work done on the martingale was done by an American mathematician named Joseph Leo Doob, who sought to disprove the possibility of a 100% profitable betting strategy.

The system’s mechanics involve an initial bet; however, each time the bet becomes a loser, the wager is doubled such that, given enough time, one winning trade will make up all of the previous losses. The 0 and 00 on the roulette wheel were introduced to break the martingale’s mechanics by giving the game more than two possible outcomes other than the odd versus even, or red versus black. This made the long-run profit expectancy of using the martingale in roulette negative, and thus destroyed any incentive for using it.

To understand the basics behind the martingale strategy, let’s look at a simple example. Suppose we had a coin and engaged in a betting game of either heads or tails with a starting wager of $1. There is an equal probability that the coin will land on heads or tails, and each flip is independent, meaning that the previous flip does not impact the outcome of the next flip. As long as you stick with the same directional view each time, you would eventually, given an infinite amount of money, see the coin land on heads and regain all of your losses, plus $1. The strategy is based on the premise that only one trade is needed to turn your account around.

Examples

Your Bet Wager Flip Results Profit/Loss Account Equity
Heads $ 1 Heads $ 1 $11
Heads $ 1 Tails $ (1) $10
Heads $ 2 Tails $ (2) $8
Heads $ 4 Heads $ 4 $12
Assume that you have $10 to wager, starting with a first wager of $1. You bet on heads, the coin flips that way and you win $1, bringing your equity up to $11. Each time you are successful, you continue to bet the same $1 until you lose. The next flip is a loser, and you bring your account equity back to $10. On the next bet, you wager $2 hoping that if the coin lands on heads, you will recoup your previous losses and bring your net profit and loss to zero. Unfortunately, it lands on tails again and you lose another $2, bringing your total equity down to $8. So, according to martingale strategy, on the next bet you wager double the prior amount to $4. Thankfully, you hit a winner and gain $4, bringing your total equity back up to $12. As you can see, all you needed was one winner to get back all of your previous losses.

However, let’s consider what happens when you hit a losing streak:

Your Bet Wager Flip Results Profit/Loss Account Equity
Heads $1 Tails $ (1) $9
Heads $2 Tails $ (2) $7
Heads $4 Tails $ (4) $3
Heads $3 Tails $ (3) ZERO
Once again, you have $10 to wager, with a starting bet of $1. In this scenario, you immediately lose on the first bet and bring your balance down to $9. You double your bet on the next wager, lose again and end up with $7. On the third bet, your wager is up to $4 and your losing streak continues, bringing you down to $3. You do not have enough money to double down, and the best you can do is bet it all. If you lose, you are down to zero and even if you win, you are still far from your initial $10 starting capital.

Trading Application
You may think that the long string of losses, such as in the above example, would represent unusually bad luck. But when you trade currencies, they tend to trend, and trends can last a very long time. The key with martingale, when applied to trading, is that by “doubling down” you essentially lower your average entry price. In the example below, at two lots, you need the EUR/USD to rally from 1.263 to 1.264 to break even. As the price moves lower and you add four lots, you only need it to rally to 1.2625 instead of 1.264 to break even. The more lots you add, the lower your average entry price. Even though you may lose 100 pips on the first lot of the EUR/USD if the price hits 1.255, you only need the currency pair to rally to 1.2569 to break even on your entire holdings.

This is also a clear example of why deep pockets are needed. If you only have $5,000 to trade, you would be bankrupt before you were even able to see the EUR/USD reach 1.255. The currency may eventually turn, but with the martingale strategy, there are many cases when you may not have enough money to keep you in the market long enough to see that end.

EUR/USD Lots Average or Break-Even Price Accumulated Loss Break-Even Move
1.2650 1 1.265 $0 0 pips
1.2630 2 1.264 -$200 +10 pips
1.2610 4 1.2625 -$600 +15 pips
1.2590 8 1.2605 -$1,400 +17 pips
1.2570 16 1.2588 -$3,000 +18 pips
1.2550 32 1.2569 -$6,200 +19 pips
Why Martingale Works Better with FX
One of the reasons the martingale strategy is so popular in the currency market is because, unlike stocks, currencies rarely drop to zero. Although companies easily can go bankrupt, countries cannot. There will be times when a currency is devalued, but even in cases of a sharp slide, the currency’s value never reaches zero. It’s not impossible, but what it would take for this to happen is too scary to even consider.

The FX market also offers one unique advantage that makes it more attractive for traders who have the capital to follow the martingale strategy: The ability to earn interest allows traders to offset a portion of their losses with interest income. This means that an astute martingale trader may want to only trade the strategy on currency pairs in the direction of positive carry. In other words, he or she would buy a currency with a high interest rate and earn that interest while, at the same time, selling a currency with a low interest rate. With a large number of lots, interest income can be very substantial and could work to reduce your average entry price.

The Bottom Line
As attractive as the martingale strategy may sound to some traders, we emphasize that grave caution is needed for those who attempt to practice this trading style. The main problem with this strategy is that often, seemingly sure-fire trades may blow up your account before you can turn a profit or even recoup your losses. In the end, traders must question whether they are willing to lose most of their account equity on a single trade. Given that they must do this to average much smaller profits, many feel that the martingale trading strategy is entirely too risky for their tastes.

High risk, high reward✔️

Hamptons Effect

Hamptons Effect

What is the ‘Hamptons Effect’
The Hamptons Effect refers to a dip in trading prior to the Labor Day weekend followed by increased trading volume as traders and investors return from the long weekend. The term implies that many of the large scale traders on Wall Street spend the last days of summer in Hamptons, a traditional summer destination for the wealthy of New York City. The increased volume of the Hamptons Effect can be positive in the form of a rally as portfolio managers place trades to firm up overall returns going into the end of the year or it can be on the negative side if those same portfolio managers decide to take profits rather than opening or adding to positions. The Hamptons Effect is a calendar effect based on a combination of statistical analysis and anecdotal evidence.

BREAKING DOWN ‘Hamptons Effect’
The statistical case for the Hamptons Effect is stronger for some sectors compared to others. On a market-wide measure like the S&P 500, the Hamptons Effect is characterized by slightly higher volatility with a small positive effect depending on the time period used. That said, it is possible to drill down to the sector level and create the case for a certain stock profile being favored following the long weekend. For example, the case can be made that defensive stocks that are consistent performers like food and utilities are favored going into the end of the year, and thus benefit from the Hamptons Effect.

Trading Opportunities
As with any market effect, finding a pattern and reliably profiting from it are two different things. Analyzing a huge set of data will almost always reveal interesting trends and patterns as you shift the parameters. The Hamptons Effect can certainly be mined out of market data when you play with the time period and the types of stocks. The question is whether the effect is large enough to create a true performance advantage after fees, taxes, spreads, and so on. For an individual investor, the answer is often no when it comes to these market anomalies. The Hamptons Effect and other similar anomalies that can be mined in data are interesting tidbits, but their value as an investment strategy is very small for your average investor. Even if a market effect appears consistent, it can quickly break down as traders and institutional investors implement strategies to take advantage of the arbitrage opportunity.

 

Endowment

Endowment

What is an ‘Endowment’
An endowment is a financial asset, in the form of a donation made to a non-profit group, institution or individual consisting of investment funds or other property that may or may not have a stated purpose at the bequest of the donor. Most endowments are designed to keep the principal amount intact while using the investment income from dividends for charitable efforts.
Endowments provide ongoing benefits for those that receive them by earning a market rate of interest while keeping the core endowment principal intact to fund future years of scholarships or whatever efforts the donor seeks to fund. In some cases, a certain percentage of the assets are allowed to be used each year, so the amount pulled out of the endowment could be a combination of interest income and principal. The ratio of principal to income would change year to year based on prevailing market rates. Endowments can be set up for purposes ranging from higher education to the wellbeing of pets, and can include terms like swimming tests and ice-cream made available at all times.

Types of Endowments
There are four different types of endowments; unrestricted, term, quasi, and restricted.

Term endowments usually stipulate that only after a period of time or a certain event can the principal be expended.
Unrestricted endowments assets that can be spent, saved, invested, and distributed at the discretion of the institution receiving the gift.
A quasi-endowment is a donation by an individual or institution who give the gift with the intent of having that fund serve a specific purpose. The principal is typically retained while the earnings are expended or distributed per specifications of the donor. These endowments are usually started by the institutions that benefit from them via internal transfers or by using unrestricted endowments already given to the intuition.
Restricted Endowments have their principal held in perpetuity, while the earnings from the earnings from the invested assets are expended per the donor’s specification.
Except in a few circumstances, the terms of these endowments cannot be violated. If an institution is near bankruptcy or has declared it, but it still has assets in endowments, a court can issue a doctrine of cy-près so the institution can use those assets to move them to better financial health while using the endowment in a way that reflects the wishes of the donor as closely as possible.

Use of Endowments in Universities and Colleges
Endowments are such an integral part of Western academic institutions that a fair measure of a college or university’s wellbeing can be the size of their endowment. They provide colleges and universities with the ability to fund their operating costs with sources other than tuition, and ensure a level of stability by using them as a potential ‘rainy-day-fund’.

Endowments set up by these institutions or given as gifts by donors have multiple uses. They can ensure the financial health of specific departments, they can establish professorships, and they be awarded to students in the form of scholarships or fellowships as awards for merit or as assistance to students from a background of economic hardship.

‘Chair positions’, or ‘endowed professorships’ are paid with the revenue of an endowment, and free up capital with which institutions can use to hire more faculty, increasing professor to student ratios. These chair positions are considered prestigious and are reserved for senior faculty.Endowments can also be established for specific disciplines, departments, or programs within universities. Smith College, for instance, has an endowment specifically for their botanical gardens, and Harvard has upwards of 10,000 separate endowments.

Management of Endowments
The goal of any group given the task of managing a university’s endowments is to sustainably grow the funds by reinvestment of the endowment’s earnings while also contributing to the operating cost of the institution and it’s goals. Older educational institutions like the Ivy League schools in the United States have been successful in building extremely robust funds in party because of continued donation from wealthy graduates and well managed funds. Harvard, Yale, Princeton, Stanford, and MIT have, respectively, $32 Billion, $20 billion, $18.7 billion, $18.6 billion, and $10 billion in their endowments.

Management of an endowment is a discipline unto itself. An outline of considerations made by a management team include; setting objectives, developing a payout policy, building an asset allocation policy, selecting managers, managing risks systematically, cutting costs, and defining responsibilities.

Criticism and Student Activism
Harvard and other elite higher educational institutions have come under criticism for the size of their endowment. Critics have questioned the utility of large, multi-billion dollar endowments, likening it to hoarding, especially as tuition costs began rising at the end of the 20th century. Large endowments had been though of as rainy day funds for educational institutions, but during the 2008 recession endowments did the opposite, instead many of them cut the payouts on endowments. A study published in the American Economic Review looked closely at the incentives behind this behavior, found that there has been a trend of overemphasis on the health of an endowment instead of that of the institution as a whole by endowment managers.

It’s not unusual for student activists to look with a critical eye at where their colleges and universities invest their endowment. In 1977 Hampshire College divested from South Africa in protest to apartheid, a move that a large number of educational institutions in the United States followed soon after. Advocating for divestment from industries and countries students find morally compromised is still a common tactic used by student activists.

Private Non-Operating Foundations and Federally Required Payout
Managers of endowments have to deal with the push and pull of interests to make use of assets to forward their causes, or to sustainably grow their respective foundation, institution, or university. Philanthropies, or more specifically private non-operating foundations, a category that includes the majority of grant-making foundations, are required by federal law to pay out 5% of their investment assets on their endowment every year for charitable purposes.

Private operating foundations must pay substantially all (85% or more) of it’s investment income, while community foundations have no requirement.

History
The oldest endowments still active today were established by both Henry the VIII and his relatives. His grandmother, Countess of Richmond established endowed chairs in divinity at both Oxford and Cambridge, while King Henry the VIII established professorships in a variety of disciplines at both Oxford and Cambridge.

Marcus Aurelius established the first recorded endowment for the major schools of philosophy in Athens circa 176 AD.