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Make a reality check before a loan check

Sunday, May 23rd, 2010

164Our reality check should either reinforce the efficacy of our process or help us understand just where our process has broken down. We can learn to improve our planning in the first step. We can recommit to executing our plan better in the second step. Perhaps we should evaluate more frequently in the third step.What can we improve on? How can we do better? We study the results of our process, draw conclusions, and decide how we will act right now.What’s the best decision we can make at this moment?

Sometimes the action we should take is simply to abandon the activity. Suppose we discover that we do not play well together. This is the perfect time—before we have too much invested in the partnership—to acknowledge the fact, pick up our toys, and move on. Companies frequently find that their cultures or technologies are not as compatible as they thought they were. Rather than ontinuing down a path to nowhere, it’s best sometimes to acknowledge the fact and look for a new partner. This is a healthy sign of maturity and growth. Like couples dating, you learn something about your partner and, just as important, you learn something about yourself. You have just increased your Partnering Intelligence.

What’s the intrinsic value of a loan

Wednesday, March 10th, 2010

The time to maturity is determined in the option contract. Generally, the longer the time to maturity, the more valuable is the option. The reason for this relation is straightforward for the American-style option: the holder of the option can always exercise the option prior to maturity. In addition, there is the possibility to wait and exercise the option at a later point in time. The longer the time to maturity, the greater is the value of the possibility to wait.

For European-style options, the relation of time to maturity and option price needs further explanation. A start is made by showing that an early exercise does not make much sense. Assume that an investor holds a call option with a strike at US$ 100 and a two-year maturity on a nondividend paying stock. The price of the underlying stock is currently at US$ 90. Obviously, an early exercise makes little sense, since the out-of-the money option would be worth zero immediately. Suppose the stock rises to US$ 110 over the next year. If the investor were to exercise the option now, he or she would need to put down US$ 100 (the strike price) and get the stock worth US$ 110. The difference between the actual stock price and the strike price of US$ 10 would have been gained, called the intrinsic value.