Valuing Partial Interests in Trusts
By: Geng Deng, Tim Husson, and Craig McCann
The financial interests of a trust's beneficiaries are often diametrically opposed and conflict among trust beneficiaries is common. Although applicable law requires that trustees adhere to lofty standards of 'good faith' and 'fair dealing' they must make tangible, specific decisions, and sometimes under circumstances in which the settlor's expectations regarding investments and distributions as set forth in the trust document are unclear. Traditional methods for valuing partial interests in...
Rethinking the Comparable Companies Valuation Method
By: Paul Godek, Craig McCann, Dan Simundza, and Carmen Taveras
This paper studies a commonly used method of valuing companies, the comparable companies method, also known as the method of multiples. We use an intuitive graphical presentation to show why the comparable companies method is arbitrary and imprecise. We then show how valuations can be significantly improved using regression analysis. Regression analysis is superior to the comparable companies method because, by using more of the available data and imposing fewer unreasonable assumptions, it...
The Properties of Short Term Investing in Leveraged ETFs
By: Geng Deng and Craig McCann
The daily returns on leveraged and inverse-leveraged exchange-traded funds (LETFs) are a multiple of the daily returns of a reference index. Because LETFs rebalance their leverage daily, their holding period returns can deviate substantially from the returns of a leveraged investment. While about half of LETF investors hold their investments for less than a month, the standard analysis of these investments uses a continuous time framework that is not appropriate for analyzing short holding...
The VXX ETN and Volatility Exposure
By: Tim Husson and Craig McCann
Exposure to the CBOE Volatility Index (VIX) has been available since 2004 in the form of futures and since 2006 in the form of options, but recently new exchange-traded products have offered retail investors an easier way to gain exposure to this popular measure of market sentiment. The most successful of these products so far has been Barclays's VXX ETN, which has grown to a market cap of just under $1.5 billion. However, the VXX ETN has lost more than 90% of its value since its...
Modeling Autocallable Structured Products
By: Geng Deng, Joshua Mallett, and Craig McCann
Since first introduced in 2003, the number of autocallable structured products in the U.S. has increased exponentially. The autocall feature immediately converts the product if the reference asset's value rises above a pre-specified call price. Because an autocallable structured product matures immediately if it is called, the autocall feature reduces the product's duration and expected maturity.
In this paper, we present a flexible Partial Differential Equation (PDE) framework to model...
Futures-Based Commodities ETFs
By: Ilan Guedj, Guohua Li, and Craig McCann
Commodities Exchange Traded Funds (ETFs) have become popular investments since first introduced in 2004. These funds offer investors a simple way to gain exposure to commodities, which are thought of as an asset class suitable for diversification in investment portfolios and as a hedge against economic downturns. However, returns of futures-based commodities ETFs have deviated significantly from the changes in the prices of their underlying commodities. The pervasive underperformance of...
