Table of Contents

The Complexities of the Financial Turmoil of 2007 and 2008

Gregory A. Krohn, Bucknell University - Department of Economics
William R. Gruver, Bucknell University - Department of Management

British Land

Lucy White, Harvard Business School - Finance Unit, Swiss Finance Institute, Centre for Economic Policy Research (CEPR)

2006 Hurricane Risk

Erik Stafford, Harvard Business School
André Perold, Harvard Business School

Return to Fundamentals: Perpetuities, Common Wisdom and the Use of the Gordon Constant Growth Model

Ignacio Velez-Pareja, Universidad Tecnologica de Bolivar - Department of Finance and International Business


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"The Complexities of the Financial Turmoil of 2007 and 2008" Free Download

GREGORY A. KROHN, Bucknell University - Department of Economics
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WILLIAM R. GRUVER, Bucknell University - Department of Management
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Sparked by rising defaults on subprime mortgages, the financial turmoil of 2007 and 2008 threatened the stability of the worldwide financial system and led to unprecedented interventions in financial markets by central banks and other governmental institutions. This essay describes and explains the complexities of the financial turmoil of 2007 and 2008 for students of the financial system so that they might understand better how problems in the mortgage market led to the possibility of collapse of the financial system and the controversial actions taken by the Federal Reserve and other governmental entities. We draw several lessons about the behavior of financial markets and financial regulation from this historic episode.

"British Land" 
HBS Case No.: 208-064

LUCY WHITE, Harvard Business School - Finance Unit, Swiss Finance Institute, Centre for Economic Policy Research (CEPR)
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SUBJECT AREAS: Activism, Conflicts of interest, Corporate governance, Hedge funds, Real estate, Valuation.

British Land's shares traded below NAV. Laxey investments tried to force British Land into share buybacks and criticized its corporate governance. Laxey voted borrowed shares at the AGM.

"2006 Hurricane Risk" 
HBS Case No.: 207-075

ERIK STAFFORD, Harvard Business School
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ANDRÉ PEROLD, Harvard Business School
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SUBJECT AREAS: Insurance, Investment management, Personal finance, Risk, Risk management.

In May 2006, a resident of Key West, FL had to decide whether to renew his policy to insure against hurricane damage. The policy would cost $13,000 for one year, $5,000 more than what he paid in 2005. At the same time, a wealthy California resident was contemplating an opportunity to buy a "cat note" that offered a high yield, but with a chance of losing the full investment if severe hurricanes struck the coastline of the United States.

"Return to Fundamentals: Perpetuities, Common Wisdom and the Use of the Gordon Constant Growth Model" Free Download

IGNACIO VELEZ-PAREJA, Universidad Tecnologica de Bolivar - Department of Finance and International Business
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In this work we explain the proper use of perpetuities and the value of them. We consider two cases: calculating the value on period zero when the perpetuity starts with a given cash flow in period 1 and when it starts from a cash flow in period zero and it grows in period 1 at a given rate (as when we calculate a terminal or continuing value). We derive the proper expressions for the two cases.

In particular we focus the analysis when there is no real growth and expected inflation is positive.

We conclude that depending on which is the case we can use or not the Constant Growth Model (Gordon Model).

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