Category Archives: General

General blog posts that inform users of recent developments.

Kickstarter Detour

I’m currently reading “the Lean Startup” by Eric Ries and have decided I may have done a common faux-pas: I’ve created something without knowing whether the public at-large even cares. The quickest way to test my hypothesis (i.e. that this isn’t a complete waste of time) is to put the project up on Kickstarter – the crowd-funding site.

In some ways, this is publicity stunt. I can gauge interest in the project solely by the number of people who pony up a few dollars to help out.

In other ways, this is the perfect test. The people on crowd-funding sites like Kickstarter are what I call “Consumer Investors” (somewhat different than “Retail Investors”) and its those people I expect to use my site.

Consumer Investors fund projects that are cool, or push boundaries beyond what’s offered today. They’re less focused on profit than on creating something new. Retail investors still believe the stock market isn’t fixed and it’s still possible to profit from it over time. Consumer investors have decided they don’t care – they’d rather use their money in small increments for something they can personally get behind before it becomes corporatized and overrun by greedy financiers.

So here’s Massive Rainfall. Let the testing begin.

The Purpose of Micro-Derivatives

Derivatives, in the past, have served a simple purpose: to divide up the risk of some commodity’s “price” that businesses rely on, and to pass that risk onto others who are more able to manage that risk.

Equities or shares of a company are a type of derivative by their very nature. Equities derive their value from the underlying company’s assets and its expected profits.

Bonds or loans are derivatives of a contract with their value derived from the PAR value at maturity, the likelihood of repayment and the duration when that repayment is due, among other things.

Could we not come up with derivatives outside of of the Equity, Bond or Commodity markets? Once started, it’s difficult to stop:

  • Baseball player’s salaries
  • Traffic at 6:30pm on a Friday on the I-95 highway within Detroit’s boundaries
  • Goals per game by the Toronto Maple Leafs
  • Number of babies born each month in New York
  • Temperature at Mid-Day on a specific date
  • Life expectancy of certain celebrities
  • The costs associated with a tornado destroying your home

The distinction of whether this is “gambling” or “hedging” seems to lie in whether there is a business need to quantify a given risk. Insurance is a derivative only by another name. Insurance fills an emotional need of the person avoiding risk. Derivative is a speculative investment prone to destroying our financial markets and sending us head-long into a recession.

Derivatives need a better PR manager.

Intermittent Profit & Loss: Mark to Market

So you’ve bought a Weather Future yesterday, specifically for rainfall next Tuesday. You entered into the agreement with the expectation that there might be 2mm of rain that day. If there’s no rain at all, you’re on the hook to pay out $20 (10 * -2). But if there’s lots of rain, its your pay day (5mm pays you (5-2) * 10 or $30).

But what is that future worth today?

At Massive Rainfall, we use a “Mark to Market” to basically follow the forecasts and “lock” money in either your account or the account of your counter-party. Let’s say the forecast as of today expects 5mm of rain. Although nothing is paid to you or them, the $30 in their account is locked and cannot be spent. Tomorrow, if the forecast changes to 3mm, the lock is adjusted downward to $10 = (3mm-2mm) * 10. Now if the final actual weather is 1mm of rain then the payout is in fact against you (1mm – 2mm) * 10 or negative $10.

It doesn’t matter that previous forecasts would have paid out to you – unless you clear your position by entering into an offsetting transaction. If you decided to lock in your 5mm of rain today, you would sell a future at 5mm. On the actual day, your buy would pay -$10, but your sell would pay $40 netting you $30 in profit. Cash in your account will be locked for each day (selling the 5mm will give you $20 when the forecast drops to 3mm [(3mm-5mm) * 10] and $10 (3mm-2mm)*10=$10 and then finally (5mm-1mm)*10 = $40 for the sell future, -$10 for the buy future – still netting you $30. A table would probably make this clearer.

This leads to the “take the money and run” syndrome. When a weather future is in the money prior to the forecast, there is no guarantee that it will be the final forecast. Volatility can be your friend but be forewarned – it can be a bit of a jerk too.

But what if you took that money today, and watched the forecast change to a Massive Rainfall that paid out $180, how could you swallow that?

Micro-derivatives: For a new kind of investing

Considering all the recent havoc that the financial markets have wreaked on the world’s economy, I haven’t seen a lot of innovation coming from that industry. Mortgage Backed Securities have been around since the last depression and can hardly be considered new.

The most recent creative financial instruments that I’ve seen are weather derivatives (1990’s) or the most recent – Peer-to-Peer lending (2005). Even then, P2P Lending was invented before the first iPhone.

So I’ve noticed the financial industry needs a shake-up. Banks and Investment dealers are not inclined to shake up themselves. Their business is very, very old and they take a ridiculous amount of foot-dragging to change. But they can, if forced. Fees on various exchanges are now much lower than in years past. The industry can change.

The moats are large, as they say. Government regulation surrounds them, protecting them from the ravages of competition and change. Year after year, new regulations are added, new taxes defined, and every year a new reason to stay away from creating something new.

I’m creating something new. Something different. Watch this space.