What Really Is Radio Frequency?

I'm sure sure everybody has heard of the term 'radio frequency'. Commonly, it is used for radio but did you know radio frequency has many other uses as well? Today's topic takes a diversion from finance as I'm tired of it for now but I will get back to it soon! So, what is radio frequency? It is a rate of oscillation in the range of about 3 kHz to 300 GHz, which corresponds to the frequency of radio waves and the alternating currents which carry radio signals. Confused? I know...I was too....

A radio wave is an electromagnetic wave propagated by an antenna. Radio waves have different frequencies and by tuning a radio receiver to a specific frequency, you can pick up a specific signal. For example, if you are listening to 99.9 FM Virgin Radio, you are listening to a radio station broadcasting an FM radio signal at a frequency of 99.9 megahertz. Megahertz simply means 'millions of cycles per second', so 99.9 megahertz means that the transmitter at the radio station is oscillating at a frequency of 99, 900, 000 cycles per second. The ban of radio spectrum of frequencies for FM radio is between 88 megahertz and 108 megahertz.

Besides radio, there are several other devices that use radio frequency, some of which are television, garage door openers, alarm systems, cordless phones, baby monitors, cellphones and GPS. Let's look into more detail about the application of radio frequency on a commonly used device - Bluetooth. 

Bluetooth is wireless technology standard for exchanging data over short distances from fixed and mobile devices with high levels of security. Bluetooth networking transmits data via low-power radio waves. It communicates on a frequency of 2.24 gigahertz. Other devices with this same frequency band are baby monitors, garage door openers and cordless phones, thus  ensuring Bluetooth and these devices don't interfere with each other has been a crucial part of the design process. One way the Bluetooth achieves this is by sending out very weak signals of about 1 milliwatt. The low power limits the range of a Bluetooth device to about 10 metres.  It can connect up to 8 devices simultaneously. 

When Bluetooth devices come into range with each other, an electronic conversation takes place to determine if they have data to share or if one needs to control another. This happens automatically, the user doesn't have to do anything.  Once the conversation has taken place, the devices create a personal network area (PAN ) and hop frequencies in unison so that they stay in touch with each other. Bluetooth is an amazing device that has the ability to utilize radio frequency at such high levels with several security modes.

10 Points to Retire and Live Life!

The word 'retirement' may seem like a synonym for 'dread' or 'bore', like the end of life or a wait for the day of departure from this world. That's not true! Retirement means getting your life back to live it the way you want to and do things you have always wanted to but never got around to doing them due to responsibilities! It is FREEDOM, finally:). It is imperative that planning for retirement is begun early or one has to undergo pains to survive this last leg of opportunity. Today's blog is dedicated to how to retire well and live your life.

1. Saving is the topmost priority when it comes to retirement planning. Any articles or books on this topic will mention this first. There are several ways to save for retirement. One way is to consider 401(k) benefits when applying for jobs. Though most people focus on the salary, its important to consider a potential employer's 401(k) benefit policy. Some firms don't offer 401(k) while some provide 5% or higher matches. This could greatly contribute to your retirement security. Another way is to convert retirement money into tax-free money by doing a Roth IRA conversion which is a special type of retirement plan under US law that is generally not taxed. Contributions to Roth IRA are not tax-deductible but withdrawals are generally tax-free.

2. Invest in yourself. Take care of your health by eating healthy and well, exercising and keeping in shape, as this will save you thousands of dollars from health care costs. Age takes its toll on us by weakening our body, introducing diseases and causing lethargy which will inevitably lead to greater health care costs. By being mindful of the fact that we might not be as healthy or active as we are now in the future, and taking good care of ourselves, we will indeed contribute greatly to our retirement savings. According to Fidelity Investments, the average 65-year old couple will spend about $400 000 out-of-pocket throughout retirement until age 92, not including long-term-care costs.

3. Don't be extravagant. One of the quickest way to become rich is to live a frugal lifestyle. Live below your means, for example, buy a used car instead of a new one, or buy a 2-bedroom house instead of a 5-bedroom one. After all how much of difference does it make? Besides, if you make these small changes in your lifestyle, you can multiply your savings rapidly which can provide an early and fulfilling retirement.

4. Plan ahead. Start making plans early on so that when its time to retire, you wouldn't feel lost or bored and lonely. May it be to learn something new, or travelling or spending time with family, planning a schedule is always useful to keep one on the go.

5. Diversify in a retirement portfolio.  Diversifying means to have different sources of income investments, rather than just one. For example, owning some properties and deriving income from the lease, investing in safe bonds or equities, and having certificate of deposit are some ways of diversifying a portfolio.

6. Life and Disability Insurance plans are a must. Anything can happen at anytime and while its important to have these insurance at all times, its becomes imperative towards retirement. Health expenses can quickly drain financial resources and thus it is necessary to have coverage to protect us during such crisis. It also prevents dependence on others for financial aid.

7. Keep inflation in mind while planning. Prices are always rising, what may cost $10 now may cost double in 10 years time. Likewise, in today's world, someone may be able to live comfortably with a certain retirement budget which may not be enough to live the same lifestyle in 20 years time. So that has to be considered when planning retirement budget.

8. Don't get caught up in materialism. If you have planned and saved well for your retirement, you may feel you have more than you require and have the urge to splurge. When you make a large purchase, it is necessary to consider if it is really required. Some basic things that must be kept in mind before retirement are paying off your home, ensuring that vehicles are paid for in full and are in good condition, and that all large debts are paid off.

9. Retire at 65 or later.  Retiring at 62 is not realistic for many Americans especially during these hard times. Furthermore, if you delay retirement, the benefits are greater. For example, the longer you wait to retire, the greater the monthly check from Social Security. Also, you would have deferred eating into your retirement savings for more years.

10. It's not just about the money. Though financial preparation for retirement is very important, investing in human capital is also essential for a happy retirement. Being socially active by having a good network of friends, communities and families contributes to the emotional and mental well being of retirees and leads to a successful retirement.

What You Should Know about Buying a Home

As we are on planning on buying a home soon, I thought I should do some reading up and also write about it. Buying a home is a huge decision and commitment that requires utmost attention to detail and care to make an informed decision. Let's look at what processes there are in buying a home and other tips that would help assist this major decision.

Finance check
Credit score has to be in form when you are buying a home, to apply for a mortgage. The higher the credit score, the higher the chances for getting a low interest rate on your loan. If you are not prompt with payments and you have a low credit score, it would hurt your chance of getting the best interest rate or getting any financing at all.

Budget
How much can you afford to buy your desired home? You can ask to be pre-approved by a lender, who will consider your income, debt and credit to determine the kind of loan that's available to you. A general way of coming up with the cost of the home is that it has to be 2 1/2 times your gross annual salary. Another way of calculating would be to ensure that the monthly payment for the home does not exceed 36% of your gross monthly salary.

Cash for Downpayment
Generally, 20% of a home's price has to be paid as downpayment and if you do so, lenders would approve a larger loan. There are private and public agencies such as Fannie Mae and Freddie Mac and the Federal Housing Administration that remove this barrier and make possible lower downpayment mortgages. Besides the downpayment, you need to have enough to cover the costs of appraisal fee, loan fees, attorney's fees, inspection fees and the cost of a title search which could amount to more than $10, 000 and often run to 5% of the mortgage amount.

Real Estate Agent
Though it may not really be necessary to buy a home through a real estate agent, given all the information and tools available these days to assist you, its not usually recommended. The housing market is localised and each state, city and neighborhood has its local laws and customs that only risk professionals can help you with.


House Hunt
Finally its time to get down to the real business and look for that house! What city or neighborhood do you want to live in? Some signs of economic vibrancy in a community include a mixture of young families and older couples, low unemployment, and good incomes. Districts with good schools are desirable even if you don't have any children as it would be helpful when it is time to sell. Choose a price range of 10% percent above and 10% below your true range so that your search criteria isn't too restrictive. Note: Don't reject a house just because it doesn't measure up to your expectations in price or features. You can add a patio or upgrade the kitchen. The asking price is just the start of negotiation and so you can make offers and counteroffers till an acceptable price is reached.

Closing the Deal
Once you have found the house you like, you would have to make your bid. You can make an offer about 8-10% below the asking price which would give you room to negotiate. However if you really want the house then don't test the seller too much or you might lose it to another buyer or the seller may just give up on you. Be creative in your negotiation skills, for example, you can ask if the seller would throw in the kitchen and laundry appliances if you met his price or take them away in exchange for a lower price.

Once a mutually acceptable price has been reached, the seller's agent will draw up an offer to purchase, including an estimated closing date which is usually 45-60 days from acceptance of the offer. Have an attorney review done where the lawyer would make sure the deal is contingent upon your obtaining a mortgage, a home inspection that shows no major defects, and a guarantee that you may conduct a walk-through inspection 24 hours before closing. You need a make a good-faith deposit which is usually 1-10% of the purchase price that should be deposited into an escrow account. The seller will receive this money after the deal has closed. You will get the money back only if the home failed any of the contingency clauses. Now, you should call your lender and agree on the terms, if you have not already done so.

Conduct a home inspection which could cost between $300 to $1000. If there are any major problems, ask your lawyer or agent to discuss it with the seller. Either the seller has to fix the problem before you move in or deduct the cost of the repair from the final price. If the seller doesnt agree to either, you may decide to walk away from the deal, which you can do without penalty if you have that contingency written into the contract. 

Foundations of Risk Management:Topics 1-4

Hey everyone! Hope everybody had awesome Christmas and New Year holidays! I have not posted in a while due to laziness and focus on other responsibilities....Hubby had to nudge me to write an entry..lol! I guess you must be wondering about my title for today's blog entry. 'Foundations of Risk Management? Is she starting risk management classes on her blog?' Nope. In fact, I need the world's best financial risk management instructor to conduct 100s of classes for me to pass level 1. Despite the farfetched hope, I am making an attempt on the FRM exam and hubby suggested that I include in my blog a summary of what I have covered at each stage. So that's what today's article is about. You might find it dry and boring but I'll make a sincere attempt at putting it down in simple terms.



For the level 1 exam, there are 4 main areas in the syllabus which are Foundations of Risk Management, Quantitative Analysis, Valuation and Risk Models and Financial Markets and Products. I am now in Foundations and there are 12 chapters. I have only covered 4 chapters...the content is heavy and me being an amateur, am taking lots of time to understand the material. Ok let's get started!



Chapter 1

What is Risk?

Risk according to Schweser, is the unexpected variability of asset prices or earnings. There are 2 types of risks: business & financial.

Business risk: Risks arising from daily operations, including risks that result from business decisions & environment

Financial Risk: Risks resulting from a firm's financial market activities.



Financial risk is what our focus is on.

2 major factors that have increased sensitivity to financial factors are - Deregulation & Globalization

Deregulation has led to increases in interest rate sensitivity in banks. Deregulation is when government reduces its role and allows industry greater freedom in how it operates.

Globalization refers to firms doing business outside borders, leading to more exposure to currency changes.

What is a derivative contract?

A derivative contract is a contract that derives it value from an underlying security. It has a finite, predefined life, predefined reference rate and predefined notional amount. Eg. forward contract

FRM is the process of detecting, assessing, and managing financial risks. The use of tools to measure and manage these risks is hence very important. A major tool that is used for many risks is Value-At-Risk (VAR) measure.

VAR is defined as the maximum loss over a defined period of time at a stated level of confidence, given normal market conditions. Other risk management tools are stop-loss limit, notional limit, and exposure limit.

There are mainly 4 types of risks - Market risk, Liquidity risk, Credit risk and Operational risk

Market risk - Risk that declining prices or volatility of prices will result in a loss

Liquidity risk - sustaining significant losses due to inability to liquidate a position at a fair price

Credit risk - possibility of a default on payment by a counterparty

Operational risk - Risk of loss due to inadequate monitoring systems, management failure, defective controls, fraud and human errors



Chapter 2

Investors and Risk Management

Mean and variance of a distribution shows the probability distribution of normally distributed security returns.

Diversifiable risk - Part of the volatility of a security's return that is not related to the volatility of the market portfolio

Systematic risk - Part of a security's risk that arises because of the positive covariance of the security's return with overall market returns

Market portfolio - a bundle of investments that includes every type of asset available in the world financial market

Positive covariance - a measure of the degree to which returns on 2 risky assets move in tandem. For eg if return on security A goes up, then the return on security B goes up too.

Negative covariance - Same meaning as positive covariance but if return on security A goes up, the return on security B goes down.

Risk of portfolio decreases as correlation of returns between 2 securities goes down which goes to show that lower correlation results in greater diversification benefits.

Risk of a portfolio of Risky Assets depends on

1. Volatility of the risky asset returns

2. Proportion of portfolio invested in each asset

3. Covariance of each asset with all other assets in the portfolio

CAPM equation - Expected return on any security or portfolio is determined by its systematic risk (beta)

Reducing a firm's diversifiable risk will reduce the firm's value

Reducing a firm's systematic risk will not increase firm value

Low cost operating strategies to reduce beta of a firm's equity might increase a firm's value



Chapter 3

Creating Value with Risk Management

Bankruptcy and financial distress are costly and reducing risk can increase the value of a firm.

Reducing volatility of taxable income can reduce a firm's tax liability and increase firm value.

Optimal amount of debt in the firm's target capital structure can be increased by risk reduction strategies, leading to lower funding costs and increased firm value.

Large shareholder increases firm value due to his greater incentive to monitor management and influence management decisions. This prevents managers from taking decisions that will benefit management but do not increase firm value.

Risk management clarifies relation between managerial decisions and firm value leading to more efficient management incentive compensation schemes.

Debt overhang refers to the situation where amount of debt prevents equityholders from investing in positive net present value projects because the benefit to debtholders reduces the value created for equityholders.

Risk management can increase firm value by reducing the potential for conflicts between the interests of debtholders and the interests of equityholders and managers. It also increases firm value by reducing the problem of asymmetric information, thereby reducing the firm's cost of capital.



Chapter 4

Delineating Efficient Portfolios

Perfect positive correlation (p=1): The portfolio standard deviation reduces to this simple weighted average of the individual standard deviations. The portfolio possibilities curve for 2 perfectly correlated assets is a straight line, indicating that there are no benefits from diversifying from a 1-asset to a 2-asset portfolio is the assets are perfectly correlated.

Perfect negative correlation (p= -1): Greatest diversification is achieved when 2 assets are negatively correlated. The portfolio possibilities curve is 2 lines segments and it is possible to construct a portfolio with zero standard deviation.


Zero correlation: When the correlation between 2 assets is zero, the covariance term in the portfolio standard deviation expression is eliminated. The portfolio possibilities curve is non-linear in this case.

Moderate correlation: Most equities are positively correlated (i.e. 0<p<1). The portfolio possibilities curve is non-linear in this case.

The portfolio possibilities curve is concave above the minimum variance portfolio and convex below the minimum variance portfolio.

The minimum variance portfolio is the portfolio with the smallest variance among all the possible portfolios on a portfolio possibilities curve.

The efficient frontier is a plot of the expected return and risk combinations of all efficient portfolios on the portfolios combinations curve. An efficient portfolio has the highest return for all portfolios with equal volatility and the lowest volatility for all portfolios with equal return.

When short sale are allowed, the efficient frontier expands up and to the right (i.e. higher return and higher volatility portfolio combinations become feasible).

When risk free lending and borrowing are available, the efficient frontier becomes a straight line. A risk free asset is the security that has a return known ahead of time, so the variance of the return is zero.

Warren Buffett - An Ideal Billionaire

Today's blog entry is about a man from the finance industry, well known by the world and whom I truly admire - Warren Buffett, the chairman and CEO of Berkshire Hathaway. He is an investor, a business magnate and a philanthropist. 'Several billionaires are philanthropists, what's the big deal?', you may ask. He could the only billionaire in this world who has pledged 99% of his 50 billion dollars wealth for philanthropic causes. His benevolence is not only extended to those in need of basic necessities but he also strives for equality for the general populace.


Buffett has pointed out to the congress to raise the taxes for the rich Americans. Some years back, he noticed that he was paying only 19% of his income for taxes while his employees were paying 33% of theirs' despite earning much less money. He then proposed a 'Buffett Tax' to 'ensure that no millionaire would pay less in taxes than a middle-class family'. Hearing this, Obama has gotten down to work out a deficit reduction plan, which includes a measure to increase the minimum tax rate for taxpayers in the highest income group. We only have Mr Buffett to thank for taking this initiative to raise awareness to the public of what the federal government has known for years: America's tax system is not progressive (higher tax rates for those with higher income) as thought.


In August 2011, when Bank of America was struggling with a budget deficit, Buffett contributed $5 billion to help. In 2008 when Goldman Sachs and General Electric were in a similar situation, he made huge investments in them which helped to firms get back up on their feet. While it is true that Buffett made these deals at a return which paid him back well (naturally, being a businessman), Buffett has to be thanked for immediate relief from imminent bankruptcy of Goldman Sachs and General Electric and for a boost to the overall market.


Despite his immense wealth and power (3rd richest man in the world as of 2011), Buffett till today is living in a 5-bedroom house which he purchased for $31,500 in 1957. What I truly admire about Buffett is that money has not corrupted him. He seeks to earn money, being a businessman and investor, but not to squander it wastefully as many rich do.We have seen so often in the news about corruption of the common people by the rich and powerful, but seeing people like Buffett who divert their wealth towards those in need gain my admiration and respect. Buffett-"The way I see it is that my money represents an enormous number of claim checks on society. It's like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GDP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don't do that though. I don't use very many of those claim checks. There's nothing material I want very much. And I'm going to give virtually all of those claim checks to charity when my wife and I die."

Money Laundering - How? Why? Oh my!

Recently, I did a short online tutorial on money laundering and found it really interesting, so I decided this topic has to go down in my blog. What is money laundering? It is a way by which illegal sources of money are disguised to make them look like they are from legal sources.

Illegal sources of money could refer to funds from drug trafficking and smuggling, fraud, extortion, corruption or prostitution rings. Significant profits are made through such criminal activities and fraudsters have to find a way to enjoy this money without attracting any attention to the activity or people involved. Money laundering happens in almost every country in the world but it is difficult  to give an exact figure of how much money is being laundered every year. In 1996 though, IMF estimated that 2-5% of the world's GDP, which ranges between USD 590 billion and USD 1.5 trillion is being laundered every year.

So the next question will be, 'How is money laundered'? Money laundering occurs in 3 steps, which by order are, 'Placement', 'Layering' and 'Integration'. In the placement stage, the launderer introduces the illegal money into the financial system by probably breaking up a huge sum of money into smaller amounts and depositing them into bank accounts.

Next is the layering stage in which the money is converted into financial instruments or wired through various accounts from banks all over the world. In this phase, complex financial transactions are made to disguise the illegal source of the money.

Once these two stages are successfully completed, the money launderer then proceeds to the integration stage where money re-enters the legitimate economy. This is where the launderer uses the money for actual intentions such as investing in luxury assets or business ventures.

Banking and financial services industry take money laundering very seriously and are taking several concrete steps to uncover and eradicate money laundering as it is a matter of integrity, which is the most important value for a financial institution. If a financial institution is found to have links or complicity with criminals and their activites, the impacts are disastrous such as loss of reputation, faith of other financial intermeidiaries, regulatory authorities and customers, and huge fines. For example, Wachovia was found to have been involved in the handling of illicit funds of $378.4 billion dollars between 2004-2007 for Mexican-currency exchange houses.

There are several organizations such as the United Nations, the World Bank and International Monetary Fund or divisions in organizations trying to get an edge over the problem of money laundering. However, given the scale on which it happens and the multi layers of complex activites that take place in the process, several criminals get away with successful money. An international organization, The Financial Action Task Force(FATF) has been set up to combat money laundering and terrorist financing. As of 2011, FATF has 34 member states and 2 regional organizations who are encouraged not to deal with 'uncooperative countries' on financial matters. FATF's uncooperative list has gone from 15 countries in 2000 to none in 2009. This is significant progress in the attempt to control money laundering. Only global awareness and cooperation will contribute to the abolition of money laundering.

Smartphones: Apple & Google Vs Blackberry

This seems to be going a bit off track from finance to technology sector but I guess its alright since they do overlap several times:). I am planning to talk about Apple's and Research in Motion's shares and earnings as well so there you go! Yesterday, I was reading a finance news page and saw an interesting article on the comparison between Apple and Blackberry smartphones. Research in Motion, which I'm sure many of you know, is the maker of Blackberry smartphones. The third quarter results for RIM is out and utterly disappointing with a whooping 71% fall in earnings to $265 million which is way, way lower than last year's $911 million. However, much of that drop was due to a $485 million pretax charge on the large number of unsold Playbook tablets. This has forced RIM to offer huge discounts on the tablets, which are not as loved as Apple's ipad.

The severity of RIM's situation is reflected in its share price which was a low of $13.12 on Friday(12.17.2011) after trading as high as $144 in 2008 and $70 as recently as Feb this year. At peak, the company that was worth $80 billion is now valued at just $7 billion. Just a few years ago, Blackberry was considered a status symbol and owned by 'very important and busy' people such as Wall Streeters, corporate lawyers and Capitol Hill staffers. Once a premier smartphone, it is now greatly overshadowed by Apple's iphone and Google's Android devices. The reason for this: RIM had unidimensional focus on user experience and the mobile market whereas Apple and Google focused on the consumer market. They went ahead to create dynamic, as well as consumer-friendly devices to send emails and browse the web. Another key point for their dramatic success: creating a platform on top of which developers could create applications. There are thousands of applications available for iPhone and Android devices.

Let's now look at the statistics of Apple's and Google's market share and share price. Today, Apple and Google jointly account for 71% of the U.S. Smartphone market and 83% among users who have downloaded 'apps' over the last 30 days. The average share price range for Apple in 2011 is $310.50-$426.7 and Google's is $473.02-$642.96. Given the tragic, sudden fall of RIM, there is a call for a new 'transformational leader' to replace CEOs Mike Lazaridis and Jim Balsillie. If there is a change in management, hopefully, the new leader uses strategic focus to help steer RIM in the right direction.