Weekly Nugget: Analyzing financial situations using our online App

Analyzing the Argentina US Swap deal

Using our Swap menu item for subscribers

November 14th, 2025

Introduction

About a month ago, Argentina's Central Bank announced it had signed a $20 billion currency swap deal with the US.

A currency swap means Argentina will deliver ARS to the US in exchange for USD at certain future dates. It is in essence a set of future forwards with progressive maturities. Unfortunately, no specific details on the agreement have been divulged. We don’t know if the swap consists of quarterly or yearly transactions nor how many transactions were scheduled to take place.

We do know that interest rates in Argentina are much larger than those in the US and that would make arbitrage free forward contracts reflect higher future ARS/USD exchange rates. US Treasury Secretary, Mr. Scott Bessent declared that the US profited from the deal), that would mean more favorable exchange rates for the US in the future, implying not so favorable for Argentina.

Swap analysis

A swap for that amount of USD makes sense because in 2024 Argentinian exports to the US totaled 6.5 billion USD, while US exports to Argentina amounted to 9.2 billion USD. Therefore, the swap would basically cover 2 years of Argentine imports from the US or four years of approximately 50% of the value of its US imports.

As details are revealed we could, of course, use Finnugget's Swap menu item, available to subscribers, to find either the per year exchange rates or an equivalent fixed exchange rate for any set of periodic transactions. Assuming, of course, that there are risk free interest rates for both economies available for all the required maturities, something not easily found in the case of Argentina due to its history of defaults and high inflation rates. Nonetheless it is easy to explore prevalent conditions as a hypothetical example.

Hypothetical example

If a swap is set for 4 years with 5 billion USD per transaction and assuming the local risk-free interest rates in table 1, we get the results shown in figure 2.

The Amounts are billions and show ARS corresponding to 5 USD per each of the following four years. Dividing ARS by 5 (billion) we get the expected swap exchange rate for each of the following years: 2,240 ARS per USD in one year, up to 4743.83 for the fourth year (Implying a 163.5% devaluation rate in the four-year period).

Notice that the equivalent fixed exchange rate for the whole four-year period is 15,406.487/5 = 3,081.3 Such a hypothetical agreement would hardly be beneficial for Argentina. They actually need to revert the devaluation trend shown by its currency's exchange rate with respect to the USD over the past twenty years. See figure 3.

Conclusion

Unfortunately for Argentinians, the purchasing power of its local currency in terms of other currencies has been steadily losing value. That means acquiring local assets becomes cheaper for foreigners among many other implications. Hopefully, that negative trend will someday be reversed.

Let us know what you think. Until the next post!

Previous Posts:

• October 31st, 2025: Analyzing the seemingly unstoppable growth of public debt
• October 10th, 2025: Analyzing a firm in distress: Intel's struggles to revert its revenue downfall
• October 1st, 2025: Use company options to glimpse possible future trends
• September 8th, 2025: Hedging a payment in another currency
• August 27th, 2025: Improved valuation through better credit rating
• August 14th, 2025: Analyzing Japan's Kansai Airport
• July 30th, 2025: Reducing debt payments through Swaps
• July 18th, 2025: Investment Portfolio Composition
• July 11th, 2025: Should you contract debt, lease or self-finance?
• June 27th, 2025: Analyzing the relative importance of the products offered in Financial Markets.
• June 19th, 2025: Airbus analysis.
• June 12th, 2025: Hedging against price changes.
• June 5th, 2025: Analyzing Option demand for uncorrelated ETFs.
• May 29th, 2025: Exploring alternative investments in turbulent times.
• May 22nd, 2025: Benchmarking public sector infrastructure projects.
• May 14th, 2025: Analyzing investments in foreign risk free bonds.
• May 7th, 2025: Estimating the loss in intrinsic value as a result of Tesla's revenue slowdown.
• April 22nd, 2025: Using Swaps to reduce the uncertainty of future costs.
• April 11th, 2025: Arbitrage opportunities with Forward contracts on Gold.
• April 2nd, 2025: Trading strategies: Bear Spread with Tesla Options.
• March 26th, 2025: Valuing Options, an example with a share of Apple.
• March 19th, 2025: Investment Analysis in Stock Markets
• March 12th, 2025: Cash Flow Transformations in Debt Management
• March 4th, 2025: Term structures of interest rates in financial planning
• Feb 24,2025: How Good is an investment in government bonds in the US and Mexico today?

Analyzing the seemingly unstoppable growth of public debt

Using our Interest rates menu item

October 31st, 2025

Introduction

All of us care about what we may be able to purchase with the money we may be carrying in our pockets or with a certain amount of money if we are used to just using our credit cards.

The purchasing power of a given bill in a given currency changes over time. As an example, using AI we may ask ChatGPT or any other AI engine to get estimates of what one British pound (GBP) could purchase in the city of London overtime. We asked it to search in decade intervals, in the sixty-year span comprising the period 1920 till 1970 and to find the amount of current pounds equivalent to one pound in that year. The following table shows what it reported:

The sources used by ChatGPT were the UK Office for National Statistics, National Archives and historical retail price reports.

We could have performed the preceding analysis using any currency and we would have obtained similar trends with varying great depression and World War II impacts.

Global Causes of Inflation

But why does purchasing power change, usually in the direction of less purchasing power? Well, you have to ask yourself Who issues money. What institution is in charge of making it available?

The answer is Central Banks acting on behalf of their governments. We even have a name that describes the rate by which every currency loses purchasing power: Inflation. It is a phenomenon that is present in all economies.

It would seem that governments make more money available than the amounts that would keep purchasing power more stable, but why?

If we look at how much money governments spend every year, we may find a clue. But because we are dealing with different currencies, we have to ask the question appropriately. That is, we must ask how much each government spends with respect to a relevant local figure such as Gross Domestic Product, and then we must compare those figures over time.

Government Expenditure and Public Debt

The following table shows the government expenditure budgets as percentage of GDP, in nominal currencies in 1970 and 2024, for a few selected countries (all data was obtained from the International Monetary Fund )

The economies have grown, but government expenditures have grown much more. That is why they represent a larger portion of their GDPs. If governments obtain their income from taxpayers and their income has not grown as much as the government expenditure, clearly, they must either increase taxes or get the difference elsewhere, and here is where increasing public debt makes its appearance.

Why, is this important? From Finnugget's perspective interest rates are affected by each country's credit rating because within each economy, risk free interest rates in the local currency are the local government's issued bonds. The local Central Bank won't let government issued debt in local currency default so it may print more money and generate more inflation. In addition, all other bonds issued in that currency will presumably carry more risk and correspondingly will have to pay a higher interest rate. Therefore, financing projects locally will become more expensive.

Finnugget helps you determine what the real interest rate is for any effective or nominal interest rates and any inflation rate.

But more importantly, we should all ask ourselves where is this continuously increasing sovereign debt leading us? Are citizens in countries benefitting from additional services? Who benefits and why are governments continuously operating on deficits?

Conclusion

Ever increasing public debt has many consequences. Interest and principal must be paid and it will either result in less public expenditures, future tax increases or inflation. For now, we will leave you with these ideas to ponder on them. No matter where you look, you see the same pattern of increasing public debt. Why?

Let us know what you think. Until the next post!

Analyzing a firm in distress: Intel's struggles to revert its revenue downfall

Using our Sand Box menu item

October 10th, 2025

Introduction

Intel pioneered chip manufacturing over 60 years ago, and until 2020 it was synonymous with optimal performance; not anymore. What happened? Did it become overly bureaucratic? Perhaps it suffered from that, but more importantly it failed to recognize the importance of two major events: the advent of smartphones in the first decade of this century, and more recently, the artificial intelligence revolution.

Nvidia, AMD, Arm Holdings and other companies benefitted from Intel's inaction and business as usual mindset. Many factors contributed to Intel's current situation.

Leadership problems began in Intel a while back, when in 2018, then CEO Mr. Brian Krzanich was forced to resign due to a violation of Intel's non-fraternization policy. Mr. Robert Swan, the CFO stepped in but was succeeded two years later by Mr. Pat Gelsinger who failed to regain market share and was forced to retire.

Current Situation

Current CEO Mr. Lip-Bu Tan was just appointed in March 2025, but he is already trying to drive the company towards a much less bureaucratic organization, with faster decision-making, more financially disciplined and at the same time more responsive to customer needs.

Things seem to begin to improve for Intel, just a day ago, it announced its new panther lake platform for PCs and its new server platform. Both products seem to finally offer an interesting response to AI needs.

Revenue Projections

Looking at Intel's financial results back in 2021 the best projected trend would have been a yearly linear growth of 3.18 billion USD. See figure 1.

However, just 4 years later, the best fit becomes a downward parabola. See figure 2. Of course, if that trend were to continue, Intel would soon be filing for chapter 11. But we do not think that trend will continue. Figure 2 also includes our best revenue estimate for 2025 based on Q2 results, and hopefully the decreasing trend will revert to a linear growth. But growing by what amount?

What follows lies basically in the realm of speculation and using Finnugget's Sand Box you are able to speculate to your heart's content.

Speculating on Intel's future

Let us assume that Intel manages to generate a linear growth at half the yearly amount appearing in figure 1, and furthermore that it is able to control its costs and expenses so that they are roughly similar to what they were, as percentage of sales, in that year. Assume also that taxes amount to 4.2% of revenues and that Capital Expenditures are kept at 5 billion USD per year. Finally, using the debt reported in 2024 we are able to predict the free cash flows shown in figure 3.

Assigning the current 'B' level rates to discount those cash flows and using a linear perpetuity with 1 billion USD per year constant growth, we get the value estimate shown in Figure 4. Using the current level of shares, that valuation translates to an intrinsic estimated price of 47.54 USD per share. The market price today was 36.3, consequently it could still grow by about 30% to match that highly speculative valuation. Keep in mind that we used very high uncertainty in the Sand Box model (70%) and therefore the valuation ranges from approximately 10 USD/share to 85 USD/share.

Conclusion

Companies face all sorts of difficulties over time. They must struggle to ward off bureaucratic procedures and stiffness and that begins with a visionary leader. We wish Intel best of luck in its strategies and hopefully we will be able to benefit from its future innovative processing solutions.

Let us know what you think. Until the next post!

Use company options to glimpse possible future trends

Using the Option menu item

October 1st, 2025

Introduction

Company derivative markets often signal important potential movements in stocks with unusual volumes. Option contracts are usually written on 100 shares each, so they do carry some weight when exercised.

Options on Calls signal bullish beliefs while options on Puts signal bearish sentiment and possibly the need to protect -hedge – institutional investments. Accordingly, the ratio of Calls/Puts signals future perceived optimism when the ratio is greater than one, or its opposite when the ratio is considerably below 1. A ratio of 1 means business as usual for the company.

If there is unusual volume, coupled with a Call/Put ratio significantly away from 1, then clearly the market believes something is certainly brewing inside the company.

Volume in itself is an important measure of liquidity. That is, how easy it would be to enter or exit that market.

A particular example: PayPal

The 52-week price range for PYPL has shown quite a bit of volatility 55.85 to 93.66

The price had been somewhat increasing from April till July when it reached 78 but then dipped to between 70 and 65 for the past two months.

Currently on Oct 1st PYPL trades at 66.6 USD and the Call/Put ratio for the Oct 3rd expiration date is over 5.0 and for the Nov21st is over 10.0! Now the high-volume Calls place its price at anywhere between 75 and 80 or greater, so that it will be profitable to exercise such contracts. Will that likely happen? No one really knows, but Finnugget may help you price an option for PYPL with strike prices 75 and 80 expiring on November 21st.

Setting up the analysis and Results

We use Excel's Stockhistory function with the weekly closing prices for the past 1400 days as input for the Option menu. Setting the number of days left to 37 we get the results shown in figure 1 for the strike price of 75 and in figure two for the strike price of 80.

The 75-call option has a price of 1.7075 and the 80-call option has a price of 0.848 per share.

The market prices listed on Yahoo finance were 1.71 and 0.91respectively. See figure 3.

Of course, the parameters used to compute the price of the option vary as we vary the number of weeks used as input. They would also vary if we had used months or days as input data. The market prices change as demand changes, for the 75-Call contract. Yahoo shows the price variations for the day, see figure 4.

Conclusion

Option markets offer a glimpse into what presumably knowledgeable investors think future prices may be. Nothing is really known and there are always risks, but where there's smoke, there's fire.

Let us know what you think. Until the next post!

Hedging a payment in another currency

An example using EUR and JPY

Using the Forward submenu item

September 8th, 2025

Introduction

Risk free interest rates are crucial for carrying out currency hedging strategies.

If there is more than one risk free interest rate for a given currency, we could, for a given maturity, short the instrument paying the smallest interest rate and invest the proceeds in the one paying the largest interest rate. The instrument yielding the highest rate will pay enough to pay off the debt from the short position at maturity and allow us to keep an arbitrage as risk-free profits.

Of course, demand for the bond paying the largest interest rate would cause its price to rise reducing the interest rate it pays until there is only one risk free interest rate left. That is all fine in theory but what happens in the Eurozone? There are 20 sovereign nations issuing debt with different yields for the same maturity. So, what interest rate should we to use if we are considering a forward instrument as a currency hedging position in Euros?

Preparing the analysis

Assume you are a Japanese company entering into a contract to deliver merchandise worth $100 million JPY to a French company in one year. The French company wants to pay in EUR; the Japanese company wants to charge Yens. How could they settle on a price?

Today 100 million JPY are equivalent to 580 thousand EUR. But what could be the FX in a year between these two currencies? Finnugget computes for you the arbitrage free future exchange rate but requires that you provide one risk free interest rate per currency.

The latest one-year T-Bill auctioned in Japan was August 19 and in that date the yield of a one year zero coupon bond was 0.6937%. The ministry of finance publishes daily estimates of sovereign risk free interest rate curves. On September 3rd the one year risk free rate was 0.7%

Now, what do we do with regard to the Euro?

Should we use the French one year zero coupon bond to estimate the one-year risk free rate? Is it risk free? How does it differ from Germany's or Spain's? Member countries of the eurozone have different ratings and all of them have sovereign debt.

Although there is typically very low risk of sovereign debt default, the economic crisis in Greece from 2009 to 2016 included a notable March 2012, 261 billion EUR bond default! So sovereign debt in EUR is not really risk free. Furthermore, the European Central Bank does not issue debt, so we can't obtain a term structure from them. However, we may analyze the sovereign debt for the EU members and choose the one with best credit rating.

Analyzing Sovereign Credit Rating

Germany currently has a AAA rating. France an AA, but with a negative outlook, and Spain an A. Accordingly, their sovereign bonds offer slightly different yields, all of them in EUR. We could go on analyzing the remaining 17 countries, but given the high rating of German bonds we will use the one-year current interest rate from their one year bill: 1.84%

Result

Enter the forward prices sub menu item in finnugget and assuming the contract is being entered by the Japanese company, it wants to know how much in Euro to charge its French customer in a year. So, it provides the Spot price 0.0058 EUR per JPY today, the maturity is 1 year the local interest rate is 0.007 and the foreign is 0.0184. Finnugget computes the one-year FX to be 0.0057 EUR per JPY. See figure 1.

The forward price in EUR, for the Japanese merchandise should be 570 thousand EUR. The Japanese company must enter today a forward contract to deliver that amount of EUR in exchange for 100 million JPY in one year. Of course, the Japanese company could tell the French customer that it would maintain the current 580 thousand EUR price and then it could receive roughly 101.75 million JPY (with a forward contract offering to deliver 580 thousand EUR in one year).

Arbitrage possibilities

What could happen if the FX in a forward contract ending in one year was a different one? Say, the same as today 0.0058 You just have to enter that FX as the forward price. Input 100 in the box if arbitrage times, in order to get a more visible result, as shown in Figure 2. In this case an arbitrage could be set up producing a net profit of 193 units, thousands or million JPY.

The arbitrage is explained in the figure's top box. Any FX different from 0.0057 would also result in an arbitrage opportunity. It is fun trying different exchanges and seeing how the set-up changes accordingly. You are welcome to try it out.

Conclusion

Hedging enables reducing risks. There may be a cost to carrying out a hedging strategy. For example, the financial intermediary's fees also known as transaction costs. But eliminating currency exchange risk permits companies to remain focus on their respective jobs and not having to worry about potential losses due to FX fluctuations.

Let us know what you think. Until the next post!

Improved valuation through better credit rating

Term structure and Sand Box menu items

August 27th, 2025

Introduction

Companies spend considerable efforts trying to reduce costs and expenses as part of their ongoing profitability improvement strategies. Such efforts also have a direct impact on the company's intrinsic value.

Value improvement strategies are crucial in attracting investors or during mergers and acquisitions. It has become more common to see public companies carrying out stock repurchase strategies in order to improve its value. Strangely enough some of these companies also issue additional debt at the same time. The question arises why not use the money spent on stock repurchase to address the issues requiring additional debt? Or, to reduce existing debt and send a clear signal that may result in credit rating improvement.

Managers sometimes disregard the crucial role that credit rating has on a company's intrinsic value. The reasons may be dual, on the one hand they affect credit rating indirectly, it is assigned to them, so they relegate it. Consequently, they tend to focus on short term market appraisal. However companies affect credit ratings through their actions, so it isn't really purely external, and if the intrinsic value deteriorates due to excessive debt, investors will eventually reconsider the validity of the market price.

Preparing the analysis

The value of a company depends on its potential to generate net benefits. The interest rates we use to find the current equivalent of those future potential benefits depends on the credit rating. Better credit rating means lower interest rates and consequently higher value.

Credit ratings are important because they affect the coupon value and the prices they are offered per bond when placing debt in financial markets. The relationship between the price companies obtain in bond auctions for different maturities enables computing the interest rate term structure for a given level of credit rating. We will consider just three broad levels: High, Medium and Speculative. High includes companies with a credit rating of A and above. Medium includes companies with ratings B through BBB and Speculative below B.

Table 1 shows the current rates for High Quality Bonds in the US as reported by the St. Louis Federal Bank. Using that information, we periodically estimate interest rates for bonds with Medium and Speculative ratings.

This table is updated periodically in Finnugget's Term Structure menu. Where you are able to obtain any corresponding future interest rate.

There are three major credit rating companies S&P Global, Moody's and Fitch. Each has its own scale, but it is easy to find equivalences between them.

According to the Motley Fool in the 1980's there were approximately 60 companies in the US with a AAA or equivalent credit rating. Now there are just two: Microsoft and Johnson and Johnson. What has happened? Perhaps rating agencies have probably become stricter since the enormous criticisms they received during the 2008 Financial Crisis (where they did a poor job of identifying potential credit defaults and were accused of not being impartial), but maybe companies have become more prone to indebtedness as a means to achieve growth (see OECD report) , or even just as a tax reduction strategy (see Tax justice net report).

Analyzing Impact of Credit Rating

The question is why would financially healthy corporations with enough resources to fund its own projects seek out financing through debt? Financial Institutions make it their business to promote indebtedness, and they make big profits off of it. Companies that may grow with their own funds should use them for that purpose; it is always less expensive and less risky!

Debt shifts net benefits down by the amount of interest to be paid and marginally reduces tax obligations (up to a certain level). In addition, when principals have to be repaid, net benefits are further shifted down by that amount in that period.

To exemplify the importance of these issues let us look at a hypothetical example: Assume that a company obtained in its most recent fiscal year 100 M in revenue and that it has estimated that a linear forecast with a 4 M yearly increment is very likely to represent future sales. However, it recognizes that year to year uncertainty in revenue may be up to plus minus 20% of the most recent revenue. See figure 1.

Furthermore, its EBITDA (Earnings before interests, taxes, depreciation and amortization) has been approximately 20% of revenues and taxes have been, on average, 3% of revenues while Capital Expenditures have amounted to 1.2 M per year, and the company estimates it will need to continue with that level of investment for the next five years. So far its potential Free Cash Flows are shown in Figure 2.

The company has two debt obligations. The first one matures in 2 years requires yearly interest payments of 4% and the principal is 10 M. The second obligation matures in 4 years; its yearly interest rate is 4.5% and the principal is 12M. Incorporating the effect of debt repayment we get figure 3. Notice the two sharp deductions due to principal repayments in times 2 and 4. It is easy to appreciate how the risk of being able to meet any obligation increased significantly. Something not captured by traditional accounting indicators!

Assume that the company’s credit rating is currently below B, so the valuation with a linear perpetuity with half the current projected level of growth (i.e. 2M) results in an expected 470 M. However, if it had a medium rating its value would be 717 (52% increase!) See figure 4.

If the company had a high credit rating, its value would further jump to 1,071 M (another 49% jump in value!). See figure 5. Can you accomplish such high increases with stock repurchase programs? Not remotely likely.

Conclusion

Improving credit ratings has an enormous impact on a company valuation as we have just shown.

Think about the impact this analysis could have when negotiating a potential acquisition with a company that has a lower or higher credit rating than the one you represent. Until the next post!

Analyzing Japan's Kansai Airport

Equivalent Cash Flows menu item

August 14th, 2025

Introduction

Some of the most amazing human accomplishments come from our civil engineering and architectural prowess. Japan's Kansai airport is amongst those great achievements.

It is built on top of two connected artificial islands totaling 1,055 hectares (2,607 acres or 10.55 square kilometers) in Osaka Bay, about 530km from Tokyo. To make the project more challenging, it was known to be an area where both earthquakes and typhoons could take place.

Construction began in 1987, and the airport opened in 1994. The island sank 50 centimeters per year for the first few years and so additional costs were incurred to reduce the rate of subsidence to the current level of 6 centimeters per year in the first island and 21 centimeters in the second one.

From a financial perspective, Kansai airport has taken a while to become a profitable operation. We carried out a little bit or research to find out the required data to analyze the project's profitability. It is a lot easier to perform an analysis after the fact than to predict future potential outcomes, but if lessons are to be learned it is worthwhile analyzing major projects such as this one.

Preparing the analysis

We obtained financial figures by searching the web and the site of the current management of the operation . For the most recent decade, we used Earnings Before Income Tax Depreciation and Amortization (EBITDA) figures as opposed to profits to avoid penalizing current benefits with previous financial obligations that had already been considered as net losses when they occurred. The data is presented in millions USD because most of the initial figures are available in that currency.

Yearly risk-free interest rates in Japan were obtained from the St Louis Federal Bank . . We added one percentile point to each rate and used them to discount cash flows. Finnugget enables you to input as many cash flows as you wish and using any period length as long as the spot interest rates you use are consistent with that time frame. The yearly USD - JPY exchange rates were obtained from Macrotrends .

Analyzing the Cash Flows

Once the data was uploaded, we may easily obtain any equivalent monetary representation for the project. As a first step, we may compute the Net Present Value without considering a perpetuity. The result was -9,610.54 million USD in 1987 or -14,406.05 million USD by the end of Fiscal 2024.

However, one may clearly see the improvement in financial results in the recent decade and so, a first analysis would be to include a flat amount perpetuity. We then get that the NPV becomes 311.48 million USD in 1987 or 466.9 million USD in 2024.

Nonetheless, net benefit will likely continue to grow. A reasonable amount would be 25 million USD per year. Changing the flat perpetuity analysis to a perpetuity with such a linear growth results in an NPV of 8,001.6 million USD, or equivalently 11,994.15 million USD in 2024.

A more modest NPV of 3,071.2 million USD is obtained with an exponential perpetuity with a 1% yearly growth in net benefits, as shown in figure 2.

Equivalent representations

We may also readily find a 38-year bond equivalent to this last analysis. Shown in figure 3. Such a bond paid a 187.38 million USD yearly coupon with Face Value 7,000 million US. That is an annual coupon of 2.67% Not bad considering that the risk-free interest rate in Japan has remained well below 1% for most of those 38 years!

Conclusion

Kansai airport has endured the Great Hanshin earthquake of 1995 (with an epicenter located at merely 20kms) and a typhoon in 2018. Both events had significant financial impacts but were successfully overcome. The challenges faced by the airport, such as the exceeding costs due to unforeseen excessive sinkage, have served to plan better projects with similar characteristics. Currently, over 30 million passengers use the airport on a yearly basis positioning it as the third busiest in Japan. You may find extensive data on it in Wikipedia.

Human creativity, technology and innovation go hand in hand and financial analysis may assist in determining the necessary monetary energetic input required to make those ideas come to life. We hope you enjoyed this analysis and welcome all your comments. Until the next post!

Reducing debt payments through Swaps

Find Swap submenu

July 30th, 2025

Introduction

Swaps are contracts that establish monetary exchange mechanisms between two parties. They can serve to eliminate financial risk due to changes in currency exchange rates, or to change a floating interest rate payment for a fixed interest rate one and viceversa. In the latter case, Swaps generate savings by finding the optimal flow combination from the available monetary flows to the two parties.

Usually there is a financial intermediary involved, and its role is to ensure that both parties receive what was promised. If both parties fulfill their obligations, then everyone involved gets a portion of the total savings. Although, usually the financial intermediary is the only party with complete knowledge and therefore likely to reap most of the benefit.

Understanding how to set up swaps may help companies, and debtors in general, find adequate partners and perhaps explore dispensing with the financial intermediary. The key to such an arrangement resides in the trustworthiness of the chosen swap partner.

Solution strategy

As a hypothetical example, just to show how to set up a credit swap, consider two companies “A” and “B” with access to slightly different floating and fixed interest rates. If both companies have a long-standing client-supplier relationship, then it is likely that they will fulfill their obligations with each other.

When looking for a credit, companies may ask to be offered both a fixed interest rate and a floating interest rate based on current SOFR plus a number of basis points (100 basis points is 0.01 or 1%). SOFR is the Secured Overnight Financing Rate, one of the reference rates that substituted LIBOR.

Example

Using finnugget's find swap submenu item we can quickly figure out if there is a SWAP possibility. We just input the preceding data and obtain figure 1 as output.

In this particular example, a Swap between these two companies is possible if A is interested in paying a fixed rate and B is interested in paying floating rate.

Since the SWAP will consider same currency, it just needs to be set up for the minimum maturity. That is four years, and for the minimum principal amount, 150 million USD as notional principal amount. It is called notional principal, because only the interest rate payments will be exchanged.

Interpreting the result

Even tough A wants to pay fixed interest rate, it must contract the floating rate, and B has to contract fixed rate. If there is a financial intermediary, then the total benefit of 0.002 or 20 basis points on the 150 million USD or 300 thousand per year, will be split between the three participants exactly as shown in figure 1. If there is no financial intermediary, then the 20 basis points can be split perhaps evenly into the two companies 10 basis points each. In that case, B just adds .001 to what A has to pay as floating rate. That is pay A SOFR + .009. Company A has to just pay B a fixed rate of 0.05. Notice B has a 0.016-0.009 =0.007 savings in floating rate payments but has to add 0.006 to the fixed payments, thus keeps a net savings of 0.001 same as A. In this example, both companies get to save 150 thousand dollars each year.

Identifying viable Swap partners

You may use finnugget to tell you what you need in a potential SWAP partner. Figure 2 shows the conditions you would look for depending on whether you wanted to end up paying a fixed interest rate (Top part of the figure), or a floating rate (bottom part).

However, it is always easier to test each potential partner using the find Swap menu and then the Existing conditions button. It takes a few seconds to analyze any potential partner.

Conclusion

Swaps enable finding optimal borrowing schemes by combining the borrowing power of two companies. Financial intermediaries play a crucial role in finding appropriate partners and in reducing risk, but that comes at a price. Finding trustworthy partners may result in further financial savings. However, you must understand the risks associated to entering directly into a Swap with another party.

Let us know what you think. Until the next post!

Investment Portfolio Composition

Investment models menu

July 18th, 2025

Introduction

If you trust the investment recommendations from companies such as the Motley Fool or Zacks you still face the question:

As an example, we use Zacks recent ratings on some companies worthwhile considering:

But, should you invest in all of the above or in which ones and how much should you invest in each chosen company? More importantly, Why?

Don't worry, let's address those questions.

Solution strategy

Investing in public companies implies uncertain benefits, and those benefits are typically expressed as rates of returns. The rates of return are uncertain because market prices fluctuate and are affected by multiple forces. If you buy a stock today for 100 USD, one month from now it may be worth 102, 97, 106, etc. That would mean a 2%, -3% or 6% rate of return in that period. Uncertainty may be managed by recognizing that there is a certain expected rate of return and that the rate of return may vary. The uncertainty around the expected rate of return is captured by its standard deviation.

We will help you estimate the expected rate of return and its associated standard deviation for each company in a very simple and graphical way. Best of all, it will only take a few minutes of your time, and once you get comfortable using these tools, you will be able to do it in just a few minutes!

Once you have each company properly placed in a mean-standard deviation rate of return plane,finnugget will help you select the most adequate portfolio for your needs by identifying the set of optimal portfolios in what is known as the mean-standard deviation efficient frontier, but first you have to do a little bit of work.

Select up to 10 companies recommended by your preferred analyst and get their tickers. Now we are going to get their stock price history using your preferred worksheet: Excel or Google sheets. Ideally you should use four or more years of weekly or monthly data, but make sure you have data for the same dates for all the companies being analyzed. We need stock price historical information in order to be able to compare performance and to extract any existing statistical relationships. Don't worry, all of the number crunching will be done by finnugget

Just as stocks for single companies have a certain expected rate of return and its associated standard deviation, when we invest in a number of companies, that portfolio itself will also have an expected rate of return and standard deviation, and they turn out to have interesting properties and less uncertainty if chosen wisely.

Show preliminary work

Analyzing Solution Alternatives

In the Investments menu, select load and choose the worksheet in your computer, once the data is loaded you will see the following chart.

To visualize the specific values for any stock, just click on the corresponding red circle. The top three dots on the Expected monthly rate of return are HOOD, NFLX and MSFT.

You may click on the market data button to visualize all the Statistics corresponding to the uploaded companies.

The optimal portfolios will be located in what is known as the efficient frontier. You get those optimal portfolios by selecting the efficient frontier button and then specifying if you want to be able to short sell or not.

Efficient frontiers

The mean variance investment model is centered around the idea that the market prices of the companies will continue to vary in a similar way as in the period used to analyze the data. We would probably want to construct a portfolio of investments with the largest expected rate of return and the lowest uncertainty, measured here by the standard deviation. Finnugget computes that efficient frontier both in case you are willing to risk entering into short positions and without short selling any assets. You may click on any point along the frontier to obtain its composition.

An investment with an expected monthly rate of return of 2.9% and an 11.3% standard deviation is shown in figure 4 (see green point). That portfolio requires you to invest 36% of your planned investment in Robin Hood, 40% in Microsoft and 24% in Netflix. All the portfolios in that efficient frontier do not have short positions.

Figure 4 shows a riskier investment on the efficient frontier with an expected monthly rate of return of 4.5% and a 10.2% standard deviation (see green point). Its composition is shown in that same figure. Notice there are long positions in 6 stocks and 4 with short positions. It is quite an aggressive portfolio requiring you to short 57.8% of your intended investment in DIS,56% in ADBE, 11.7% in SHOP and 10.3% in AMZN. Be very careful when considering entering into short positions as they carry considerable risk!!

Conclusion

Investing in Public Companies may bring considerable benefits in the long term, but always keep in mind that investing in public companies carries risk.

Let us know what you think. Until the next post!

Should you contract debt, lease or self-finance?

Sand Box menu

July 11th, 2025

Introduction

Most companies are privately owned, and they typically need investments in capital to be able to operate and generate revenues. Companies generate free cash flows, and they may use them to make major investments such as a new production facility, a warehouse, new machinery or an office building. Alternatively, they may choose to increase expenses and forego asset ownership by entering into leasing contracts.

Problem Statement

Ownership of assets may be carried out either by using the company's available funds or by contracting debt.

Consider a company with 100 million in revenue in its most recent year and with a 10-year forecast consisting of a yearly constant increment of 10 million. Assume the company needs to make an extraordinary investment of 20 million to keep the preceding operation running. If we consider maximum uncertainty bounds of 50% of the previous year’s revenue, we get the projection shown in figure 1.

The company's current operation requires 40% of its revenue income to cover costs, 30% to cover expenses and income taxes have typically represented 3.5% of revenues. It normally invests 5 million per year in capital expenditures and has no debt outstanding. The preceding results in the Free Cash Flow Projection shown in figure 2.

Notice that it has enough free cash flow at time 0 to cover the required extraordinary 20 million investment.

Analyzing Solution Alternatives

If the company contracts debt in the amount of 20 million at a rate very nearly equal to its current cost of capital, then the debt enables the owners to withdraw the 20 million as dividend payment and obviously reducing the value of the business by the same amount. See figure 3. Where the Previous NPV indicates the no debt scenario and the Current NPV possibilities indicates the contracting debt scenario.

The only problem is the risk it now faces at the time of principal repayment at year five as shown in figure 4.

When the debt is contracted at roughly the same interest rate as the interest rates used to discount the free cash flows to obtain the company's Net Present Value, then the procedure acts as a wealth transfer system to the owners (although they may have to pay taxes on the dividends). If the debt is contracted at a lower rate than the ones used to discount the cash flows, then the value of the company will decrease by a smaller amount than the dividend payoff. If the debt is contracted at a higher rate, then the decrease in the value of the company will be greater than the amount of dividend payoff.

Lease versus Debt

Finally, analyzing leasing the assets, if we assume that the contract will increase expenses so that they will now represent 32% of revenues and that income taxes will decrease to roughly 3.1% of revenues, then we get the results shown in figure 5, where it is clear that under those conditions both the debt, appearing as previous and the lease, appearing as current, schemes result in the same company value and enable wealth transfer in the form of dividend payments to the owners.

Conclusion

As wealth transfers accumulate over time, expenses or debt payments reduce profitability and increase risk of not being able to pay, and that could be a disastrous scenario for the company as it would generate a lower credit rating and thus a more pronounced decrease in value. Use finnugget to understand the possible implications of yout financial decisions.

Let us know what you think. Until the next post!

Analyzing the relative importance of the products offered in Financial Markets

Knowledge of financial markets

June 27th, 2025

Introduction

Financial Exchanges offer a funding, hedging and investment alternative. Their products may also be used with speculative purposes or to explore arbitrage opportunities. The most important products that may be found are Stocks for public companies, Options and Futures. These last two products are known as derivatives, and they may be traded on: Single Stocks, Stock Indices, ETFs, Interest Rates, Currencies and Commodities.

Although public companies constitute a small fraction of the total number of businesses in the world, they are quite prominent as an investment alternative.

The most important stock exchanges in the world, 89 of them, are affiliated to the World Federation of Exchanges. The data that follows was obtained analyzing their statistics for the past 24 months: June 2023 through May 2025.

Stock Market

There are currently about 50 thousand companies listed in those exchanges, their average monthly capitalization value was 115.5 trillion USD. However, approximately 64% of that value is concentrated in just the five largest exchanges (or exchange groups as the Euronext) and they list 24% of all the public companies. See figure 1.

Derivative Markets

Derivative contracts enable implementing hedging strategies but may also be used to speculate and to seek arbitrage opportunities. The average notional monthly value of the derivative contracts being traded is currently 3.8 times the market capitalization value of all the public companies in the world!

Single Stock and Stock Indices

The notional market value, in the case of options on single stocks has been on average 2.615 trillion USD or 2.265% the market value of the public companies. 98% of single stock options trading by notional value is concentrated in the largest five exchanges as shown in figure 2.

However, there are also options on Stock Indices, their average monthly notional value has been 91.46 trillion USD or 79.2% of the total market capitalization value of public companies. 84% of stock index options is traded in a single exchange, the National Stock Exchange of India.

Futures contracts on single stock are also important hedging instruments. The notional value of futures contracts on stock indices is approximately 26% of the equivalent options' contracts. 67% of those future's contracts are traded in CME Group.

ETFs

Trading of Options on ETFs is basically concentrated in Brazil's B3 exchange, but it amounts to 45.56 trillion USD in average notional monthly value. Futures on ETFs is currently nonsignificant.

Interest Rates

Interest constitutes the single most important concept in Finance. It is a price expressed as a rate. Average monthly notional value of options on Interest rates has been 42.6 trillion USD and 99% of those options are being traded in just two exchanges: CME Group (81%) and ICE Futures Europe (18%).

Interestingly enough, the notional value of the average futures contracts on interest rates is 4.6 times the value of the corresponding options. Again, most of these contracts (92%) are traded in CME and ICE Futures Europe.

Currencies

The average monthly notional value of currency options has been 0.23 trillion USD. Average monthly notional value of futures contracts has a much larger value 4.325 trillion USD or 18.8 times the value of the corresponding options contracts. Adding Brazil's B3 to CME and ICE Futures Europe we get 91% of all of the contracts being traded.

Commodities

The final major category is the commodities derivative trading. Average monthly notional value for options and futures are 1.76 trillion USD and 15.31 trillion USD respectively.

Summary

Adding the notional values of all the derivatives we are able to visualize the relative value of the different categories. Interest rates constitute over half of the total notional value of all the current derivatives being traded.

Conclusion

There are many investment, hedging and speculating alternatives available in the current global financial markets. We hope to have given you some food for thought. It is important to familiarize yourself with any alternative that you may be considering and to analyze potential risks and benefits thoroughly before deciding.

Let us know what you think. Until the next post!

Airbus analysis

Sandbox menu item

June 19th, 2025

Introduction

Airbus is an aerospace European public corporation originally established in 1970 to compete with Boeing. It currently operates with three main divisions Commercial Aircraft, Defense and Space, and Helicopters. The focus of Airbus has been innovation as it may be easily verified with its 36 thousand granted patents (over 51% active), but also recently attested by its new Racer Helicopter, its state of the art midair refueling system and its research on new materials. Its most important business is the Commercial Aircraft division, which accounted for 73% of its revenue in 2024, then comes Defense and Space with 17% of its revenue and the remainder from Helicopters.

Airbus, formerly known as the European Aeronautic Defense and Space Company (EADS), has had its share of difficulties, most notably those related to the production and timely delivery of its largest iconic A380 aircraft but finally put behind through the leadership of former CEO Louis Gallois. The current CEO leading the company since 2019, is Guillaume Faury.

Commercial Aircraft

Airbus is the current aircraft manufacturer leader surpassing Boeing in deliveries since 2019. Other competitors are Brazil's Embraer (founded in 1969) and China's state owned Comac (established in 2008).

There are several interesting startup companies striving to enter the commercial aircraft market such as Boom in the US and Heart Aerospace in Sweden, but at least in the next few years, the commercial aircraft market is expected to continue to be served preeminently by the four major corporations.

Commercial Aircraft Delivered
Company	2024	2023	% Change
Airbus	766	735	4.2
Boeing	348	528	-34
Embraer	73	64	14
Comac	73	16	356

Other Divisions

Defense and Aerospace has also been growing year to year in Revenue from 10.2 billion euro in 2021 to 12.1 in 2024. However, in 2024, earnings before income tax did not do well due to adjustments in the Space programs. Military equipment orders grew and are expected to continue to do so.

The Helicopters division also shows continued growth in orders and revenue. Deliveries have grown as shown in figure 1 below.

Potential for Revenue generation

Although Finnugget's Sandbox menu was not specifically designed to evaluate companies, but rather as a Financial Planning tool, we may use it to compute an approximate value for the company.

A long-term trend analysis of the revenues would not reveal the actual trend because of the major way in which the Covid pandemic affected Airbus' operation in 2020 and the supplier lingering consequences. But by analyzing the recent trend we uncover a linear growth with a 5.2 billion EUR constant increment. Applying that growth and considering a 30% uncertainty measured with respect to the preceding year's revenue level, we obtain the 10-year forecast shown in figure 2. That forecast means Airbus would basically double its revenue in a little over twelve years.

Management Efficiency

In the Post pandemic years costs plus expenses have fluctuated between 90.7 and 93.5% of revenues, while income taxes have varied between 7.6 and 4.75% of revenues. In addition, Capital Expenditures have increased from 1.76 to 3.67 billion EUR. Furthermore, Airbus has to pay off existing debt. Considering all of the preceding, we arrive at the Free Cash Flows shown in figure 3. Notice that there is a risk of a 90 million EUR deficit in 2026 which may easily be averted by refinancing debt or slightly reducing expenditures.

Company Value

In order to estimate today's equivalent to all future potential net benefits, we need to specify how to compute a perpetuity representing net benefits after 2034. In order to do that, we use half the yearly growth in free cash flow observed between 2027 and 2034, that is 0.25 billion EUR per year. Finally, using interest rates that slowly increase between 2.43% and 3.21% to discount the free cash flows we obtain the company value of 195.8 billion EUR shown in figure 4, or $247.86 EUR per share.

Figure 5 represents the probabilities associated to different net present values.

At last, as a financial planning tool, finnugget enables an estimate of what income statements could look like for the period being forecasted assuming all of the preceding considerations hold true. Figure 6 shows those estimates.

Conclusion

Currently trading at 161.76 EUR in Paris, Airbus may be an attractive investment; however, keep in mind that there is much uncertainty in the markets and that investing in public companies always entails risk. You should never invest without carefully analyzing your investment alternatives. Invest in company shares at your own risk.

Let us know what you think. Until the next post!

Hedging against price changes

Payoff function submenu item

June 12th, 2025

Introduction

All prices fluctuate over time and being able to guarantee a purchasing or selling price of a commodity, a financial asset or an interest rate, gives options the power to provide insurance against any adverse fluctuation. But as with everything else, there is always a price to be paid.

Buying an option gives you the right to sell, if the option is a Put, or it gives you the right to buy if it is a Call an underlying asset at a certain price. There are two parties involved: the buyer of the option and the seller.

Finnugget helps you determine the fair price of any option and even helps you design the kind of insurance that would make you feel comfortable in the presence of particularly uncertain times.

Situation to be analyzed

As an example, we look at an investment in SPY, an ETF tracking the S&P 500, and analyze how much it would cost to set up a portfolio of options that guarantee a minimum price of 605USD and a proportional increment on the Payoff regardless of whether the market price goes up or down 8 workdays from now. That is, on JUne 20th.

It turns out the cost of such a financial insurance is 11.4USD or 1.884% of the 605 USD we would obtain IF the market price of SPY is 605 at the expiring date: June 20th. See figure 1.

If the price is lower or higher we would be getting a payoff proportional to the absolute difference between the final market price and 605. That is, if SPY's price is 599 or 611, the net cost would be -5.4 not 11.4. If the price ends up being higher than 616.4 or lower than 593.6, then we would make a net profit! See figures 2 and 3.

Strategy

How do we create such a financial product?

Actually, it is quite simple: Buy 1 call and 1 put on SPY with the same strike price of 605 and both expiring on June 20th. Such a Portfolio of options has a special name, it is called a Straddle and both the Payoff and the Profit functions have a characteristic V shape.

Data Required

The inputs required are:

1. Current spot price (601.4),
2. Asset's volatility (13.86%),
3. Expiration time in years (8/250=0.028) and
4. Effective interest rate until expiration (0.1014%)

Duality

Now you can analyze taking the side of the buyer of the Straddle or the seller. For the seller, the profit is shown in figure 4. Of course there is a potential for a significant loss, but the issuer of such instruments may of course hedge himself or herself against any significant loss.

Conclusion

Imagine doing the same analysis and creating similar strategies for oil prices per barrel, currency exchange rates or a one-year treasury bill rate. The possibilities are endless.

Let us know what you think. Until the next post!

Analyzing Option demand for uncorrelated ETFs.

Options menu item

June 5th, 2025

Introduction

Continuing with the type of investments that are worthwhile during turbulent times, this week we take a look at two Options on ETFs. The first one, with trading symbol SPY, tracks the S&P500, the other, with trading symbol GLD, invests in gold.

Situation to be analyzed

The closing price today for SPY was 593.05 USD and for GLD 309.33 USD.

The market for options on these ETFs has been very active, just looking at their available contracts with expiration date June 20th, 11 working days from today, we immediately see that:

• For SPY there are 136 contracts for Call options with strike prices ranging from 130 to 830 USD; while, for Put options there are 132 contracts with prices ranging from 150 to 830 USD. What is truly interesting is that there was volume traded for most contracts, even with such widely ranging strike prices!
• For GLD there are 63 contracts both for Call and Put options with strike prices ranging from 90 to 405. There was less trading in GLD than in SPY but nonetheless it was also quite active.

Most of the Calls on both ETFs showed today a decrease in price while most Put contracts showed an increase in price. That signals an increased interest in being able to sell at certain prices than to buy!

Another interesting feature was that the implied volatility that would justify the last price agreed on a trade varied much more in the case of SPY than in GLD.

Looking at a particular contract in each case, we can analyze the theoretical trading price for one Call of GLD and SPY. We will assume European style options, even though they are American, just to obtain the Black and Scholes valuation on the following figures. American call options have the same price as European ones because it is easy to prove that it is always better to wait rather than exercise them early.

Data Required

In order to compute the arbitrage free value of the options we use Excel's Stock History function going back 365 days, then copy the values in a spreadsheet as shown in figure 1.

Results

Using the Value Put or Call submenu item, assigning 11 days left upon loading the data from the two worksheets, one at a time, and then using today's closing price and setting the strike price to 315 USD, we get the call option value for GLD shown in fig2.

Notice that the lattice approximation gives a price of 2.6582 and the Black Scholes equation a 2.574 USD price. The standard deviation computed by finnugget was 0.1806 and we used a 4.06% risk-free yearly rate.

Figure 3 shows an excerpt taken from Yahoo Finance today with that contract, with strike price 315, shown in the middle. Its last price for the call was 2.73 and it shows an implied probability of 0.1969 Those two values (price and volatility) are not dissimilar to the ones we used. Of course they might have used a different initial price as well. But if we had used the 0.196 volatility, the Black and Scholes price would have been 2.949. Clearly there were more sellers than buyers of calls and that is reflected by the 22% reduction in price shown in red.

Similarly, when valuing a call for SPY, we set the current price at 593.05 and the strike price at 605 USD and obtain the call price shown in fig4. The lattice price is 5.7095 and the Black and Scholes is 5.605

Compare the previous theoretical price to the 2.32 USD shown as last price in figure 5 taken from Yahoo Finance. That is a big difference! Notice also the large volume being traded 14,711 and the implied volatility of merely 13.87% which is much smaller than the 20.3% finnugget computed from the daily data provided. Notwithstanding, if we had used that volatility, the Black and Scholes price would have been 2.797 which is 20.5% larger than the last price shown consistent with the large drop in price shown in red for that contract.

Conclusion

You may be wondering, what is going on? Well, there is still much uncertainty in the markets and investors are nervous. Hedge fund managers may be precisely hedging against adverse market movements, but they are also worried about possible reductions in the price of gold. SPY is kind of proxy for the overall stock market and GLD has basically zero correlation to the market movements and yet both options are showing more interest in being able to sell than to buy! We are still immersed in stormy seas.

Let us know what you think. Until the next post!

Exploring alternative investments in turbulent times.

Investment models menu item

May 29th, 2025

Introduction

The current political turmoil and its economic consequences motivate us to explore alternative investment opportunities. Finnugget may very well help you to explore potential alternative portfolios.

Keep in mind that it is always wise to have a portion of your wealth invested in risk free instruments, but if you have additional wealth and want to explore other alternatives you may currently begin by considering some Exchange Traded Funds (ETFs) and some stocks that do not tend to follow the market movements. Such stocks have a low Beta value, where Beta is a measure of volatility with respect to the market, or the share's tendency to be responsive to overall market movements.

We will explore investing in the US market, but the same strategy could be replicated in any European, African, Asian or Latin American markets.

Situation to be analyzed

Consider three ETFs: one energy related, one that invests in gold and one tracking the S&P500. We chose USO or United States Oil Fund, GLD or SPDR Gold and Schwab S&P 500 Index Fund or SWPPX. In addition, let us consider The Campbells Soup Company or CPB, Hormel Foods Corp or HRL and The Kraft Heinz Co or KHC. The latter three possessing low beta values (0.11, 0.33 and 0.23 respectively).

Data Required

We used the Stock history function in Microsoft's Excel to obtain the monthly closing prices in USD dating back to October 2015. Figures 1 and 2 below show the data in value format as required by our software.

Results

Upon loading the data in the Mean Variance submenu, we get the following chart:

Clicking on any given asset enables you to see its ticker, expected monthly rate of return and the interest rate monthly's standard deviation. Figure 3 shows the Schwabs SWPPX fund with a 0.97% expected monthly interest rate and a corresponding standard deviation of 4.51%. To its left is the GLD ETF. The lowest point represents the KHC stock, the one to the far right is the USO ETF. It should be clear to you that there is quite a bit of risk involved just by looking at the standard deviations.

Fortunately, we may also look at the efficient frontier without shorting positions. Figure 4 shows the considerably smaller 2.9% standard deviation corresponding to a 0.9% expected monthly interest rate for a portfolio with 40% invested in SWPPX, 48% in GLD and 12% in HRL. Figure 5 shows a point on the efficient frontier obtained when short selling is allowed - something possible but that we don't recommend at all - but here you may appreciate a slight improvement in reducing the standard deviation to 2.8% but with a slightly lower expected monthly interest rate.

Of course, you could also choose to invest in just the two ETFs and figure 6 shows precisely the optimal composition for such a case, with 54% invested in SWPPX and 46% in GLD.

Conclusion

Here the investment/hedging strategy that we have explored centers on the idea that if the market does poorly gold will do better and if gold is doing poorly, it is because the market is doing better. As usual nothing is certain and as the political climate improves hopefully investor confidence will be back.

Let us know what you think. Until the next post!

Benchmarking public sector infrastructure projects.

Equivalent Cash Flows menu item

May 22nd, 2025

Introduction

Public sector projects vary in complexity and size, but it is always possible to analyze them from a financial perspective. Even though public sector companies are non for profit, it is important that they are able to operate in a self-sufficient manner. Furthermore, analyzing investments and expenditures in public sector projects serves to discourage harmful corruption practices.

One of the most important services that a government may provide is electric power supply. Electricity cannot be stored, at least not in any significant way, and so control centers must carefully monitor demand to activate and shut down generation plants as needed. According to the International Energy Agency, global demand for electricity is expected to grow at a rate of 3.4% per year over the next three years.

Here, we will analyze the construction and operation of enough hydroelectric plants to meet the demand for additional electrical energy in Mexico. Installed electric energy capacity in Mexico is currently around 71,120 MW and if its demand grows according to the global mean, it will need to increase its installed capacity by approximately 2,400 MW per year.

Situation to be analyzed

Hydroelectric plants require several years of planning to prospect plausible locations where a dam could be built. Dams certainly constitute beautiful civil engineering projects, and although all human made constructions impact the environment, hydroelectric power plants use a renewable energy source and once in operation emit very low greenhouse gases. In addition, they can remain operational, if properly maintained, for well over half a century.

According to Statista, the global average hydropower installation costs per Megawatt were 2.881 million USD in 2022. That means, an average investment of 6.914 billion USD per year using this type of electric power generation.

One thing is the capacity to supply electrical energy and another is its consumption. That is, when we use electricity to do things: light houses, operate appliances at home and operate machinery in factories. That is power: the amount of energy transferred or converted per unit of time. In order to consume the electrical energy, it must be delivered to your home, and so we will assume a 10% additional investment to improve the power grid necessities as new generation plants are incorporated to it.

Total consumption of electricity or electrical power used in 2023 in Mexico was 356,416 Giga Watt hour (GWh), which is equivalent to operating the full installed generation capacity at 100% for 208 days. That means, every Megawatt of continuous supply could result in close to 5-Gigawatt hour per year of energy consumed or electrical power used. So, the 2,400 MW of additional installed capacity would translate into 12,000 GWh consumed per year.

Financial Assumptions

We will assume the following: yearly inflation rate in price of electricity 2%, interest rates will be in USD and set for a “BBB” rating (consistent with Mexico's current international credit rating). Net Benefit as a percentage of revenues will be set at 20%.

We will assume that investments, totaling 7.6 Billion USD will occur according to the following table:

Year	Amount B USD	Year	Amount B USD
1	1.5	2	1
3	1	4	1
5	1	6	0.6
7	0.5

We need to find the price P0 per GWh that would result in a feasible operation.

Starting in year 8 the net benefit will be computed as follows:

After trying several prices, we found that setting P0 equal to 0.00022 billion USD or 0.22 USD per KWh results in a Net Present Value equal to just 60 million USD. See figure 1 for the project's net free cash flows, and figure 2 for its NPV obtained using finnugget's equivalent cash flow menu item.

We used an exponential perpetuity rate of 2% keeping inflation throughout the project set at that level.

Results

The 0.22 USD/KWh in 8 years from now is equivalent to 0.1805 in 2023 According to Statista the most expensive country at that time was Ireland with a price of 0.53 USD/KWh, Belgium 0.43, Germany 0.4, Denmark 0.35, France and Australia 0.28, Uruguay 0.26, Peru 0.19, the US 0.17 and Mexico 0.12

Conclusion

Clearly understanding the problem and establishing all the major relations and assumptions are the key elements in any evaluation. The financial analysis is the easy component. In any public sector project cost inflation is the source of corruption and therefore should be the focus of any analyst's attention. That is why benchmarking investments is important. Finnugget may assist you in determining whether a proposed investment makes sense or if it will turn out to be a future costly endeavor.

Governments don't go bankrupt. They merely increase their debts and that burden will be on us, that is why it is important to monitor their decisions and to participate actively as responsible citizens wherever you may live.

Let us know what you think. Until the next post!

Analyzing investments in foreign risk free bonds.

Upcoming Investment sub menu item

May 14th, 2025

Introduction

Risk free interest rates vary from country to country, but in order to invest in a different country you must first exchange your original currency into the local one and then reverse the process when you decide to recover the investment.

While you will know the interest rate for your investment in a local risk-free bond, the inflation rates and the future currency exchange rates remain uncertain.

You may correctly think that you could use currency futures to reduce the uncertainty. However, future currency exchange rates are set such that it would not matter where you invest, you would obtain the same benefit once you exchanged the local currency at the pre-arranged future exchange rate. Otherwise, there would be arbitrage opportunities. Moreover, preset currency futures seldom match the actual observed currency exchange rates, once the future becomes the present.

Situation to be analyzed

Currency futures depend on both the current currency exchange rate and the ratio of the two risk free interest rates. If the risk-free interest rate of country A is always larger than that of country B, that would imply the currency future would always be increasing in terms of number of monetary units of A per monetary unit of B. That has been typically the case of emerging markets compared to more advanced economies. Despite the ever-increasing currency futures in those cases, in actuality currency exchanges fluctuate depending on a number of existing relative forces between countries: commerce, tourism, investments, repatriation of profits, etc.

Careful analysis and monitoring of currency exchanges may result in interesting return opportunities, but just as is the case with public company investments, you must always keep in mind that there may be adverse movements in exchange rates.

Analysis

We will analyze the results of having invested a certain amount of money, as a citizen of each of the following countries in all of the others during two periods: May 2023 thru May 2024, and May 2024 thru May 2025. The countries are:

Eurozone, United Kingdom, China, Mexico, United States and Canada.

Figure 1 shows the actual one-year interest rates as of May 10th for 2023, 2024, and 2025.

Based on the data depicted on figure 1, Mexico would seem like a very promising investment opportunity every year, but back in May 2024 the Mexican Peso was particularly strong and a year later it had lost some of that strength. In effect there are continuous devaluations/appreciations among the different currencies.

Results

Upon analyzing all possible investments for the citizens of each country, it turned out that for all of them, an investment in MXN in a one-year Cete (a Mexican Zero coupon bond) and then converting back to their original currency, would have resulted in the worst return for the May 2024- May 2025 period. Meanwhile an investment in a T-Bill in GBP reported the best returns for that same year. See figure 2.

However, if the period had been May 2023 to May 2024, for all citizens investing in MXN in Cetes would have been the best investment opportunity while a Chinese government bond in CNY would have reported the worst outcome.

Conclusion

What lessons may we derive from the preceding?

• Devaluations may offset local relative higher earnings.
• Timing investments and withdrawals is of the essence.
• Careful analysis and monitoring of opportunities may report considerable benefits.

A strong currency is akin to a high-priced stock. Similarly, a temporarily weakened currency is akin to a cheap stock. However, you must always dig deeper and monitor the markets where you are considering investing.

Let us know what you think. Until the next post!

Estimating the loss in intrinsic value as a result of Tesla's revenue slowdown.

Using the Full Sand Box sub menu item

May 7th, 2025

Introduction

Finnugget was designed to help you analyze financial situations and develop plans accordingly. In particular, the full Sandbox menu allows for a complete analysis of financial prospects, which can help you evaluate a listed company as an investment option or act in your own business.

Situation to be analyzed

As an example, we may go over how the recent decline in revenues has affected the intrinsic value of Tesla.

The value of any company depends on its potential to attract revenues, and when the potential decreases, so does its intrinsic value.

Revenues and Trends

The trend analysis for Tesla's revenue, using the yearly data from 2010 to 2023, resulted in the violet quadratic trend shown in figure 1. However, the deceleration in revenues observed in 2024 resulted in a new best fit shown in red, and the recent results for Q1 used to estimate the total of 2025, resulted in the lowest blue trend.

The violet and blue trends will be used to estimate the change in intrinsic value. They will both be used to forecast expected revenues for the decade 2025-2034.

Solution

In the Sand Box menu, enter the real revenue for 2024 and choose constant change in amount of growth. That option is the quadratic change. You will then be asked to provide the values for two parameters. The first-year increment is obtained as the difference in the trend forecast for 2025 minus the trend forecast for 2024. The second parameter is the change in yearly increment. This is always equal to two times the value of the first coefficient in the quadratic equation. That value is 1.93 in this case. It is the constant change in yearly increment in billion USD. Because of the high volatility, it is appropriate to choose a 0.4 randomness level (this value varies between 0 and 1). Next, you will be asked for the parameters that enable obtaining the free cash flows. We consider costs and expenses to be the average, as percentage of revenue, of the values observed in the period 2022-2024. That is 79.4% for costs and 9.2% for expenses. Income taxes was set equal to 1.8% of revenues (the most recent value) and Capital Investments was set to 10 billion USD per year.

Next, you have to enter the number of existing debt contracts. The following data was obtained from form 10K for 2024. All of the contracts were assigned an estimated interest rate of 3.74% because no specific interest rates were found.

Contract	Principal	Maturing in
1	2.353	1 year
2	4.116	2 years
3	0.699	3 years
4	0.243	4 years
5	0.095	5 years
6	0.401	after 10

For the required discounting rates, the following were used:

Year	Interest	Year	Interest
1	5.11%	2	5.23%
3	5.42%	4	5.64%
5	5.8%	6	6.07%
7	6.25%	8	6.48%
9	6.65%	10	6.89%

Assigning a linear growth perpetuity of 10 billion per year (25% of the difference between 2034 and 2033) resulted in a 926.48 expected intrinsic value, or 289.64 USD per share. The sand box menu enables comparing those results to another scenario, so repeat the process with the updated revenue projection and keep all percentages, debt and discounting rates the same. This results in a new value of 665.99 billion or 208.32 USD per share. The valuation comparisson is shown in figure 2. The new value per share is basically 72% of the value reported with the original 2023 trend used to forecast revenues. However, notice that because of the uncertainty in the forecast, the price per share in this latter version could go all the way down to 552.18 billions or 172.72 USD per share. The number of shares used was 3.197 billion.

Disclaimer

The data used in this analysis is publicly available. The results reflect our opinion and our approach to valuing a company. Any person using these results is solely responsible for his or her actions. Investments in public companies always entail risk.

Conclusion

Intrinsic values are dynamic in nature and quite sensitive to a company's actions. It may take a long time to build a very good customer relationship, and that is something to be treasured.

The Sand Box menu is a powerful tool for financial planning and analysis.

Let us know what you think. Until the next post.

Using Swaps to reduce the uncertainty of future costs

Using the Swap sub menu item

April 22nd, 2025

Introduction

Swaps are very useful financial instruments that allow transforming one set of future cash flows into a different but equivalent set of future cash flows.

Problem Analysis

Consider an electronics manufacturer located in Mexico requiring 2.5 kgs of gold every quarter. In order to be able to eliminate uncertainty in its production costs the company could enter into four future or forward contracts, but this implies a different cost per gram each quarter. However, if the company also enters into a swap contract, it could set it up to receive the future value of the gold in exchange for paying an equivalent fixed amount over the following four quarters.

Information required

The necessary information is the current price per gram of gold: $2,101 MXN and the four risk-free quarterly interest rates currently available in Mexico. The equivalent of a Treasury Bill in Mexico is called a CETE. We used the data posted by Mexico's central bank, Banxico, to estimate the 4 effective quarterly interest rates that would be needed in the Swap contract.

Quarter	Effective rate
1	2.1575%
2	2.1075%
3	2.125%
4	2.1425%

Solution

With the above data, you may use finnugget's Swap sub-menu to obtain the payment amounts for the four forward contracts and the equivalent fixed amount, which is $5,535,365.82 MXN. See figure 1.

Conclusion

Swaps may be used for a variety of purposes, ranging from reducing financing costs to transforming time-dependent cash flows into constant amounts. The preceding example shows one possible use of this powerful financial instrument.

Let us know what you think. Until the next post.

Arbitrage opportunities with Forward contracts on Gold

Using the Forward price sub menu item

April 11th, 2025

Introduction

Gold is a precious metal with multiple uses ranging from investments to electronics, to jewelry to aerospace. It used to be the underlying medium of exchange until Central Banks stopped using it as a standard. But Central Banks still keep gold as part of their reserves, and places like Fort Knox hold large amounts of it.

It is interesting that during periods of peace and stability, its price doesn't vary by much, but because us human beings are prone to conflict, eventually markets crash and gold price rises.

We may easily observe, from figure 1 below, how the price of gold rose after the financial market crash of 2007-2008 and how current political turmoil has also resulted in a considerable price hike.

Preparing the Analysis

According to https://goldprice.org/ if you had kept an investment in gold over the past 20 years, you would have obtained a 638% benefit.

Pretty impressive as long as you knew when to enter and exit the investment! After the peak in gold price in 2012 there was a considerable drop in its price in the span of a year. But enough of looking backwards. What may happen in the future? and how do we analyze potential investments?

The future is uncertain, but there are Options, Futures and Forward contracts. As of today, April 11th, the price of an ounce of gold ranged from 3,193 to 3,263 USD. Looking at the futures contracts the one expiring in one-year GCJ6 at CME, had an open price of 3,356.0, a daily high of 3,362.7 and a low of 3,339.7 and 118 contracts, each for 100 ounces, were traded. So, the price is expected to increase, but not in keeping with the recent growth trend. Why? Because future's prices should not give opportunity for setting up an arbitrage.

Futures and forwards are similar instruments, but positions in futures' accounts are adjusted daily, margin calls may be made, and positions are often closed prior to the termination date. However, let us look at how we could use forward contracts to arrive at a fair future price of gold.

Forward Contract Arbitrage Opportunities

Assume that the current price you are analyzing is right in the middle of the current price range observed today: 3,228.0. Consider neither storage nor transaction costs and a quick search lets us know that in the US the one-year treasury bill interest rate is currently 4.048%

With the preceding information, go to the Forward prices sub-menu and, after providing the current price, choosing 'asset', 'compute' and providing the interest rate to maturity you get that the arbitrage free price in a year is 3,358.67 per ounce.

What if you could find someone willing to enter into a forward contract with you for a different future price?

The arbitrage free price is very close to the future open price observed today at CME, so let's consider both the higher price and the lowest.

If you enter the 3,362.7 forward price, you get the result shown in figure 2. You could set up an arbitrage by borrowing money at the risk-free rate, use that money to buy gold keep it for one year and then deliver it and obtain the agreed upon forward price per ounce. With that money, you would have enough to pay back the debt and keep an arbitrage. If you use 1 contract (100 ounces) the arbitrage is 403.1 or 0.12% with respect to the amount you borrowed.

On the other hand, if you enter the 3,339.7 forward price, you get the result shown in figure 3, where you would have to play the opposite role and make an arbitrage of 1,897 USD or 0.59% with respect to the amount you shorted.

Conclusion

Yes, the price fluctuations could result, in theory, in potential arbitrage opportunities but the benefits are small given the current daily level of price fluctuations. Future and forward contracts are not used so much to speculate as options may be, and they play a crucial role in guaranteeing input prices or revenue levels. On the other hand, there are currently one year call options being actively traded on gold with strike prices of 3,700 USD.

Let us know what you think. Until the next post.

Trading strategies: Bear Spread with Tesla Options

Using the Payoff function sub menu item

April 2nd, 2025

Introduction

Options can be used to hedge against variations in prices of its underlaying asset, or to speculate on what future prices may be. Among market participants speculators play a very important role by contributing to the liquidity of the various available instruments.

In recent weeks there has been considerable speculation regarding Tesla's shares. Its 52-week high was 488.54 USD and its 52-week low was 138.8 USD, while today's closing price was 282.76 USD

Consider a speculator who believes that the price is going to keep on decreasing, but who also wants to limit her potential losses to 100 USD, in case her intuition turns out to be wrong. Then, she could set up a Bear spread with call options as follows: Buy five call options with strike price 285 and sell five call options with strike price 245.

A Bear spread may be easily computed using finnugget's Payoff function submenu.

Preparing the Analysis

Prior to using the Payoff function submenu, a few values need to be computed. First, use the three-rate menu to estimate the effective interest rate from the current yearly nominal rate of 4.34%. It is readily found to be 0.948% for the period ending on June 20th. Next, use the Value Put or Call submenu and use it to estimate the Standard Deviation of the log of the rate of growth. This is accomplished by loading the historical data for Tesla. The problem here is to determine how far back in time should we go. Using the most recent 3500 days you will obtain one estimate, but if you use 3000 days you'll get another and by using 2500 days yet another. Then, you must decide whether to use the opening price or the daily closing price. The two daily prices will likely generate estimates with small variations. How to solve this problem? In our experience using 3000 days, which is roughly equivalent to 8.2 years, seems about right and easier to remember than the 2922 days needed for 8 years.

Use Stock History in Excel to get the opening prices since January 14, 2017, until April 1st, 2025. Upload that file, to get the standard deviation. The result is 0.64003 Then compute the price of an American Call for TSLA with initial price 282.7 and strike price 245, which is 55.49 USD and if the strike price is 285, the result is 34.07 USD

We can compare the above results with the prices reported by Yahoo Finance for the two corresponding contracts: TSLA250620C00245000 and TSLA250620C00285000 See figures 1 and 2. The standard deviations reported are higher than the one we used, but the price variation throughout the day, in both contracts, was quite significant: from 38.1 to 58.39 for the contract with strike price 245 and from 21.91 to 36.7 for the one with strike price 285. Both of the prices we had computed are contained in those ranges.

The only thing missing is the time in years until expiration. There are 56 trading days (until June 20th because there are two holidays), then divide that number by 252 corresponding to the number of trading days in a year. The result is 0.22222

The Bear Spread

We are now ready to enter all of the data. To setup the Bear spread consider buying 5 Calls with strike price 285 and selling 5 Calls with strike price 245. Enter 282.7 as the current price. The results of the Bear spread are shown in figure 3. Notice that the maximum benefit would be 106.71 USD if the price of Tesla dropped to 245 or lower. The maximum loss occurs at a price of 285 signifying a net loss of 93.28 USD.

Figure 4 shows the price where the net benefit is closest to zero, at a price of 266.3 USD. Any price higher than that value generates a net loss, any lower price, generates a net benefit. No transaction costs were considered in this exercise.

As a final consideration, the Payoff function requires all options to be of type European, but you may use American Calls as well because it may be proved that it is never a good strategy to exercise an American call prior to its expiration date.

Conclusion

Options may help us in setting bounds to potential future prices. It is easy to construct Bull, Bear or Butterfly spreads, or any other spread that may satisfy your particular needs.

Can you think of situations where some spread may provide an interesting solution? Let us know by entering the main menu and sending us an email through the contact form. Until the next post.

Valuing Options, an example with a share of Apple.

Using the Options menu item

March 26th, 2025

Introduction

Options are among the most interesting financial instruments. They are contracts with a buyer and a seller.

The buyer of the option obtains the possibility of guaranteeing either a buying price (Call contracts) or a selling price (Put contracts) of a certain asset, called the underlying asset. The buyer acquires the right to exercise the option, and so a date must be set called the expiration date. If the buyer may exercise the option only on that expiration date the option is called European. If the buyer may exercise the option at any time up to that expiration date, then it is called American.

The seller of the option gets an immediate benefit: the option's price but has to deliver the option and get an agreed upon price for it, in the case of the Call contract, or buy the option at the agreed upon price in the case of the Put contract. The agreed upon price must be set on the contract and it is called the strike price.

Exploring Options

It sounds pretty convoluted, doesn't it? But it gets easier if you just think of options as insurance. The seller of the option is like the insurance company and the buyer is just someone wishing to guarantee a certain selling (Put) or buying price (Call). Puts and calls are the two types of insurances, and they come in two varieties American or European. The thing that you want to be able to buy or sell, known as the underlying asset has to be something that is being traded in a financial market, it could be a commodity, an exchange rate for currencies or a share of a public company.

In the case of a public company, the company itself may be completely unaware that its shares are being used as the underlying asset; however, it is also quite common to find public companies incentivizing key employees by offering them options to buy shares of the European type.

How do you set a price to such a complex instrument? Options have been traded for a long time, but what we could term a fair price has existed only since the last couple of decades of the previous century. The way the price is computed is by ensuring that you could not get a financial arbitrage from a portfolio set up with the option, the underlying asset and a risk free bond. Fortunately, finnugget computes that price for you.

The price you pay for an option will depend on several factors, among the most important ones are: time until the expiration date, the strike price, the current price, the risk-free interest rate and also how much the price of the underlying asset has been changing.

An Example: An Apple Call Option

As an example, let's consider the price of an American Option to buy a share of Apple with expiration date on April 4th. That date is 7 days away from today, the current risk free interest rate in 4.5% per year with daily capitalization, for all other required parameters, we may use the STOCKHISTORY function in Excel and find the daily closing price of Aapl for the last 3000 days (how far back you go is pretty much up to you!). We upload the data into finnugget's Option Value menu and as soon as we input 222 for the current price and 200 as the strike price, we get the results shown in figure 1. The price of an American Call with strike price 220 and current price 222 is today, 5.62 USD.

If you looked for the price of such an option in Yahoo finance, you would get the data shown in figure 2.

In particular you may see that the price of the option has been fluctuating between 5.1 and 7.1 during the day, 1,524 contracts (each representing 100 shares) were bought or sold, and there are 6.66 thousand contracts that have not been settled or closed out. So, that gives you an idea of the importance of the derivatives market. In just one type of contract (AAPL250404C00220000) in one day of trading 77,620 shares of Apple were used as the underlying asset.

Conclusion

Options may help us in setting bounds to potential future prices, they may be very useful in hedging strategies, to create incentives, or as part of a merger and acquisition strategy.

With finnugget you may compute the price of any option for any underlying asset, just prepare the data and input it. We'll take care of the number crunching for you. If you have comments or suggestions, we're looking forward to reading them. Please go to the Contact menu and drop us a line. Until our next posting...

Investment Analysis in Stock Markets

Using the Investment models menu item

March 19th, 2025

Introduction

Public companies have two prices attached to them at all times. The first one is readily available as it is its current market price. The second one is harder to obtain and is known as its intrinsic value. A company's intrinsic value represents its current potential to generate net benefits expressed as net present value and divided by the number of shares outstanding. Public companies have two prices attached to them at all times. The first one is readily available as it is its current market price. The second one is harder to obtain and is known as its intrinsic value. A company's intrinsic value represents its current potential to generate net benefits expressed as net present value and divided by the number of shares outstanding. Clearly computing the second price involves number crunching and it's time consuming.

Anyone with a mild interest in public companies, knows that their prices fluctuate quite a bit. People refer to that fluctuation as volatility and that means there is no certain outcome. Furthermore, you may have heard that every now and then markets crash (1929, 1987, 2007), so there is certainly risk involved in these kinds of investments, but the flip side is that there is also opportunity. A share of Apple in January 2000 was worth 0.94 USD. That share today is worth 212. So, if you had invested 1000 USD in AAPL back then, you would have 212,000 USD on Monday March 18, 2025. That's almost a 24% yearly compound growth! But GE was also considered a solid investment in 2000, and it pretty much ceased to exist as we knew it.

Investing

So, there are at least three lessons here: First you should study the companies that you are planning on investing. Two, diversify. Three: monitor and adjust your investments periodically. Having said that, we can go deeper. Assume you are considering investing in the following five companies: Amazon, Apple, Google, Microsoft and Meta. Because of the recent decrease in their prices, you think it may be a good time to buy some shares, but you don't know how much to invest in each.

Fortunately, you may use Finnugget , but first you have to prepare the input data, using Microsoft Excel's Stockhistory function or a similar one in another spreadsheet software. You could basically obtain, in 15 minutes or less the monthly closing prices and in the bottom row the current stock outstanding (in billions). As shown below in figures 1 and 2.

Middle part of table not shown.

Once you have the data in the format above, you may upload it directly into the Mean Variance menu and you will get the chart shown as figure 3.

Strategy

Clicking on anyone asset you may see its ticker, its monthly estimated expected rate of return and its estimated monthly standard deviation. Figure three shows META. By clicking on the efficient frontier radio button and leaving the is shorting permitted box blank, you get the chart appearing as figure 4.

You may click on any point in the frontier and get the corresponding investments that would generate the estimates for both expected rate of return and standard deviation. In the chart we chose a portfolio with a monthly expected rate of return of 0.023 and a standard deviation of 0.074 Such a portfolio, shown in green, would have the following composition: 8% of the amount you intend to invest should be invested in MSFT, 60% in AAPL, and 32% in META. Of course you could incorporate other companies up to 10 of them. You could just as well analyze companies from other exchanges around the world.

As an example from Indian companies, we analyze a potential portfolio using data for HCL Technologies, Bharti Airtel Ltd, Tata Consultancy Services Ltd, Sun Pharmaceutical Ind. Ltd., Reliance Industries and Infosys Ltd. We obtain the following chart in which we chose the point on the efficient frontier with smallest standard deviation yielding the following portfolio composition: 36% in BHARTIARTL, 40% in SUNPHARMA, 24% in INFY. See figure 5.

Conclusion

Always keep in mind that investments in the stock market carry risk, and that they are meant to be long term investments. They may be sound investments as long as the company is well managed, with outstanding services or products and also that you are able to explain to someone else what is it that the company does and why it appeals to you. If at any point in time you are not comfortable with the way the company is being run, its products or services, or you are no longer able to explain either what it does or why it appeals to you, it may be time to explore other investment alternatives. Hopefully, Finnugget will help you out again.

Cash Flow Transformations in Debt Management

Using the Equivalent Cash Flows menu item

March 12th, 2025

When analyzing a project's attractiveness, it is easier to decide based on a single equivalent cash flow, rather than trying to interpret a set of future cash flows. Such transformations are made possible using the set of appropriate interest rates. The interest rates must span the project's horizon.

The equivalent current cash could very well represent the funding necessary to meet certain future obligations. That would be the present value of the future obligations. In that case, the set of interest rates would be the ones that could be obtained for all future payment dates from the best available instrument, such as a set of riskless or high-quality zero-coupon bonds.

For example, Microsoft reported in June 2024 total debt of almost 45 billion USD. That debt included 4 bonds with the data shown in the table below:

Let's assume yearly coupons are payable in March 15 and that Microsoft considers high quality bonds to offer and acceptable level of risk and of course better interest rates than government securities. The interest rates for high grade bonds and the obligations derived from these bonds until their maturities are shown in the table below:

We may easily input that data, using the required format, into the Equivalent Cash Flows menu item and find that the present value of those obligations currently is 12.48 billion USD. See figure 1.

It is just as easy to transform that cash flow into a currently equivalent one in March 2042, that future value is 32.87 billion USD. See figure 2.

Finally, we could transform those obligations into a set of eleven equal payments of 1.44 billion USD beginning now and ending in ten years, March 2035. See figure 3. Why would it be important to consider different sets of transformations? What do you think are the factors involved? How about getting rid of old bonds paying more sizable coupons? When would that be a relevant issue? What interest rates should a company use in the transformation process if it is not considered a high-quality credit company? Should it use one set of rates for investment and paying purposes and another set of rates for other transformations?

Conclusion

Any set of future cash flows may be easily transformed into an equivalent one through the use of the appropriate interest rates, but What do you think happens as interest rates change? We'll pick up this conversation in a later posting.

Term structures of interest rates in financial planning

Using the Term Structure menu item

March 4th, 2025

Interest rates constitute the most important price, typically expressed as a rate, when considering loans or investments. This price represents the cost of financing or the potential benefit to be derived from investing between any initial and final times, and in financial planning it is used to estimate what those financial costs or benefits could be for future periods.

For example, if you knew today, that you will receive an important amount of money, say 1 million USD in one year, and you do not expect that you will need it for another two years hence, could you today make arrangements that will insure how much you will have at your disposal three years from now? The answer is most definitely Yes!

Background

The Federal Reserve Bank of Saint Louis reports every month, the 'spot' rates for high quality rating bonds in the US. High quality means bonds issued by companies that are currently highly unlikely to default on their obligations. These are companies whose obligations are not entirely risk free, such as are the federal government issued obligations in any given currency. But they are companies for whom paying off their debts should not cause them any difficulty whatsoever.

The high-quality 'spot' rates, for January 2025 are shown in figure 1, along with the corresponding rates for January 2024. A given set of 'spot' rates gives rise to a complete set of future implied interest rates. Here, we will show how to make those future interest rates available to you at the same time as those 'spot' rates. Both the 'spot' and the future interest rates constitute what is known as the term structure of interest rates at any given time for a given level of risk.

Solution

Those future interest rates play a fundamental role when negotiating terms for various transactions to take place in the future. Figure 2 shows the implied future interest rates that the Term Structure menu item computes for you.

To verify that you could set up a contract today that guarantees that you will be receive anyone of the implied future interest rates, take a look at figure 3, which shows how you could guarantee the 4.85% interest rate between years 1 and 3 (i.e. 'future 1,3' from january 2026 till january 2028). You could repeat the exercise with any initial and final times. Of course, we assume that shorting any fractional amount of any bond is possible. Bond A in this example is a zero coupon bond maturing in one year, and bond B is a zero coupon bond maturing in three years. Both bonds with a 100 USD face value.

Investing one million in one year would require you to short 10,000 bonds A sell them today at their price today which is $95.62058 USD each and invest the total of $956,205.8USD buying 10,993.548 bonds B (at 86.9788 USD each). Notice you don't really put any money initially, but you owe 10 thousand bonds A and that means one year from now, in January 2026 you will have to pay $1million. But that is the amount of money you will receive then. Finally, in January 2028 you will get paid $100 for each of the 10,993.548 bonds B you bought. That is $1,099,354.8 USD Meaning the interest you obtained on the $1 million you paid in 2026 is 99,354.8 or 4.85% per year for each of the two years. But that is precisely the future rate in figure 2 between year 1 and 3!

Conclusion

Term structure of interest rates offers the possibility of managing risk by planning what future income or obligations will entail in terms of monetary flows. You can do that as long as there are 'spot' rates available with a horizon encompassing your planning needs.

How Good is an investment in government bonds in the US and Mexico today?

Using the Three rate menu item

February 24, 2025

A key aspect when analyzing investments, is to understand the difference between effective and real interest rates for a given time period. Those two rates are related by the inflation rate. Let's look at the potential benefit of investing in a 'treasury bill' in the US and a 'cete' in Mexico, for one year, in order to look at how those interest rates are related. Both the 'treasury bill' and the 'cete' are zero coupon bonds with a given maturity.

According to the results of the auction reported by the Department of the Treasury of the US, a 182-day Treasury Bill was priced today at 97.8868 USD and will pay 100 on August 28, 2025.
That means that each Bill will pay an effective rate of 2.1588% for one semester (26 weeks out of 52 in a year).

In order to analyze a complete year we need to assume that the bi-annual rates will remain pretty much the same for the next semester. With that assumption, we may use the three rates menu and enter 0.021588 in the effective rate input, and then select the bi-annual radio button in the Choose capitalization frequency table. Enter 2 in the number of periods box, and then using the expected inflation rate of 3% for the next 12 months, from the New York Federal Reserve Bank, we arrive at a Real interest rate of 1.3244%
That is the growth in purchasing power that investing in bi-annual treasury bills over the next twelve months would give you. So, you would have 4.36% more money, but things are expected to be more expensive resulting in just 1.3% of purchasing power improvement. See figure 1.

Of course, you may as well look for a one-year treasury bill, but the most recent auction for 52 weeks maturity bills was held on January 21,2025 and at that time the price from the auction was 95.93028 That meant a 4.24237% yearly effective rate, and with a 3% inflation resulted in a 1.206% real interest rate. See figure 2.

In the case of the Mexican 'cete', the auction of february 20 for a 350 day bond resulted in a price of 9.16999 for 10 MXN to be received in february 5 2026. That means an effective rate of 9.051% for a period two weeks shy of a year. Mexico's Central Bank has estimated the inflation for 2025 at 3.83% If we use that inflation for the next twelve months and take the 50 week Cete as a one year investment, the real interest rate in this case results in 5.47%

However, you must also keep in mind that interest received from investing in either treasury bills or in cetes is taxable. That means a further deduction in your change in purchasing power is applicable.

Conclusion

Investments for a one-year period in US government 'treasury bills' will currently result in an expected improvement of your purchasing power of around 1.2 to 1.3%, probably closer to 1% once IRS deductions have been considered. In the case of Mexico the 5.47% improvement in purchasing power would probably end up being closer to 5% once income tax deductions are taken into account. The higher rate paid by Mexican Cetes also reflects the fact that historically Mexican governments and its financial agent, the Mexican Central Bank have had to incurr in MXN devaluations to be able to meet its obligations. In the US we don't currently see a big incentive for considering investments in treasury bills, and in Mexico it is worth considering as long as the current government manages its public finances responsibly. What do you think?