Islamic Finance – Executive 3 Day Program

Today, I presented remotely from London at the Islamic Finance Program, hosted at Rotman for the Executive Program in partnership with Bennett Jones. This was the final component of our Islamic Finance ICP. The team lead by Walid included myself, Arash, Shahzad, Khaled, Kashif and Noureen and we presented our materials to the executive program participants.

With the rise of Islamic finance, I’ve had some interesting conversations with people I’ve met while on exchange at LBS regarding Sharia compliant financial structures such as the various types of sukuks we’ve been analyzing.

Our spread analysis drove quite a bit of interest for people who were interested in what a Sharia compliant structure would yield and the market conditions for doing such an issuance. Even before our presentation, I had the opportunity to answer some basic questions regarding the pricing spread between Islamic instruments versus conventional.

Senatus Populus Que Romanus

Quando sei a Roma vai dove vanno i romani
"When in Rome do as the Romans do"

One of the benefits of doing exchange, particularly in Europe, is the ability to travel to new places, see new things and meet new people. This weekend I visited Rome flying on EasyJet from Gatwick. Thankfully, my teammate for Private Equity / Venture Capital was a good sport, agreeing to meet well in advance of an assignment due for next week to finish it as I would be incommunicado for the weekend.

I visited the Colosseum and the Roman forums where ancient ruins stretched across parks. Even the city itself was sprinkled with fountains, statues and monuments. It was impossible to travel for even a few meters without encountering a plethora of fountains, making it surprisingly difficult to navigate the entangled narrow streets using landmarks.

Like many travellers collecting stamps on our passports, I was hoping to get a stamp from the Vatican (afterall it is technically its own country, the smallest country in the world). However, despite the tall walls surrounding the city, there was no security or passport control. The Sistine chapel and St. Peter's Basillica were very serine and it was nice to just enjoy the solemnity and gravity of the place.

The trip itself was actually punctuated more with food and wine then tourism to be honest. It was nice to just relax somewhere enjoy copious amounts of "vino della casa", putting down several "brave soldiers", and generous portions of fresh pasta and risotto.

My only regret is pushing my return so late, arriving "home" to London on Tuesday afternoon with just enough time to shower and rush to class, a mistake I will not repeat on my next excursion.

Veni, vidi, vici

Intuitive Explanation of Bayes’ Rule

One of my favourite math identities is Bayes’ rule. It also occurs quite frequently in Behavioural Econ / Finance as well as integrative thinking because it is such a good (mathematically provable) example of flawed thinking and model construction.

But like any formula, if not understood at an intuitive level (aka memorizing the formula vs rebuilding it from scratch), applying the formula incorrectly will yield meaningless (and potentially misleading) results.

Bayes’ rule states:

P(A\B) = P(B\A) x P(A) / P(B)

On the surface, this formula seems to make no sense: “The probability of A given B is the probability of B given A multiplied by probability of A divided by probability of B.”

However, walking through step by step we first understand that:

P(A\B) = P(A Λ B) / P(B)

This makes sense. The probability of A happening given that B has happened is the area encompassed by A and B (gray) divided by the total universe of probabilities, B (red and gray), because we are told that B “has happened”.

So from here we can also understand that:

P(B\A) = P(A Λ B) / P(A)

Which is simply the same rationale as the one above. However, using algebra, we can see that:

P(A Λ B) = P(B\A) x P(A)

And combining the two formulas, we get the original:

P(A\B) = P(B\A) x P(A) / P(B)

Example provided in class:
Of patients entering a chest clinic:
Event A – Person has cancer
Event B – Person is a smoker

80% of people with cancer are smokers: P(A\B) = 80%

10% of patients have cancer: P(A) = 10%
50% of patients smoke: P(B) = 50%

If you knew someone was a smoker, what is the probability they have cancer?

Solution:

Most people would over estimate the number, due to various incongruities in the probabilities, namely because such a high percentage of patients with cancer are smokers at 80%.

However, the math shows us that P(B\A), the probability of finding cancer given that you know someone is a smoker is (80% x 10%)/50% or 16%. Although it is higher than the average of 10%, is still relatively unlikely that they have cancer relative to what most guesses anticipated.

You'll notice that the answer is heavily affected by the rarity (and relative elasticity) of event A, or the chance that someone has cancer to begin with.

Behavioural Finance and Bounded Rationality

Whether fortunately or unfortunately, human beings do not behave in perfectly economically rational ways which makes them very difficult to predict. Even with our most complex models accounting for a variety of different factors, there is a high degree of volatility not explained by our multifactor regressions and the models they produce.

Behavioural finance (along with it's fraternal twin, behavioural economics) aims to better understand how humans make decisions that are non-optimal in the strict finance / economics definition and don't comply with what academics would have us anticipate as expected behaviour.

While this course is particularly interesting, what did strike me as noteworthy was that a lot of the foundation material for this course is based on the same principals as integrative thinking taught in our FIT class. In fact, it seems as if we've been doing a review of FIT, focusing on how humans make errors in judgment and build sub-optimal mental models based on well documented shortcomings in how we think.

In fact, some of the examples used in the class are lifted from the exact same material presented to us in Q1 of our first year highlighting anchoring effects, neglecting regression to the mean, availability heuristic, rational probabilty assessments, hot hand and gamblers fallacy etc.

A Framework for Measuring PE Deal Success

The Analyst Exchange and Marquee group showed us how to build LBO models and the basic framework for showing how LBOs generate returns to private equity holders through 3 mechanisms:

1. Leverage arbitrage – Increasing leverage and paying down through cash sweeps
2. Operational arbitrage – Improving operations to generate higher earnings / EBITDA
3. Multiple arbitrage – Selling the company for a higher exit multiple

Of the three, the most meaningful method of generating returns is the second, operational arbitrage. Leverage arbitrage can generate returns, but is not a strategic differentiator when it comes to a bidding process (unless you have some unusual advantage in raising capital) and multiple arbitrage is simply based on market conditions. However, operational arbitrage is directly related to value creation and is the reason why a strategic buyer can afford to pay more than a financial one.

While this is useful notionally, how can we use this to build a framework to understand how each dimension performs in a deal? In my Private Equity and Venture Capital class, they proposed the following framework and example:

So the total gain in equity value is 78.9 (112.9 – 34.0)

1. Return from leverage arbitrage is actually negative because debt increased rather than decreased at -9.2 or (4 - 13.2) and contributes to the equity gain by -12% (-9.2 / 78.9).
2. Return from multiple expansion is 27.3 or (13 x (9.7 - 7.6)) and contributes 35% (28.6 / 78.9)
3. Return from operational improvement is 60.8 or (7.6 x (13 – 5)) and contributes 77%

Using this information, you can benchmark the deal against different performance metrics and determine if the deal generates equity gain simply because of leverage or multiple expansion versus creating value by improving operations.

[Rotman] 5 Great Speakers at Rotman

[Rotman Series: 1, 2, 3, 4, 5]

Jaime is a part-time student in the MBA program at Rotman. He has worked in the sports media industry since 2002 and is currently Manager, Digital Media for the Canadian Football League. He and I went to the Latin America study tour in May last year. He was gracious enough to do a write up for me on his favourite guest speakers which follows:

By Jaime Stein

One of the first things you notice when you obtain an e-mail account at the Rotman School of Management is the sheer volume of e-mails from a guy named Steve. At first it can be overwhelming, but if utilized wisely, it can be your ticket to an exclusive roster of speakers. Steve and his team are the masterminds behind the A-list speakers that regularly visit the Rotman School.

The hardest choice I have to make each week is which speakers I will NOT listen to. This is a good problem to have because choice is always welcome when working full time and attending school part time. I simply don’t have the time to listen to every speaker that passes through Rotman. However, in almost three years, I have been privileged to listen to close to 100 guest speakers.

Most of the speakers that I have seen have delivered outstanding talks, but for the purpose of this blog I present five of the best speakers I have listened to during my time at the Rotman School:

1. Paul Martin – Former Prime Minister of Canada

Imagine you are in your second semester of a three-year MBA degree and you are studying Macroeconomics. A large focus of the course stems around Canada’s macroeconomic policies during the 1980s and 1990s; specifically the country’s battle with debt and inflation. One day you find out that the man behind the plan to battle inflation will be speaking at your school. That would be like a young basketball player having the opportunity to shoot hoops with Michael Jordan and ask him for tips.

Fortunately for our macro class, Mr. Martin came to speak at the Rotman School one morning and for about an hour took us through his plan that brought Canada back from the brink in the mid-‘90s. Following his talk he took time to speak to each of us and share some more personal insights and war stories from his time as both Finance Minister and Prime Minister. This was one of the great days at school that left me wanting to explore a subject further.

2. Isadore Sharp – Founder, Chairman and CEO of Four Seasons Hotels and Resorts

One of the main selling points of the Rotman School is its focus on Integrative Thinking – the theory coined by the current Dean, Roger Martin. In one of his books on Integrative Thinking (The Opposable Mind), Martin focuses on the story of Isadore Sharp and his path to building the greatest luxury brand of hotels in the world. In many of our classes we study the Four Seasons Model for customer service and other best-in-class management techniques. We were fortunate to have Mr. Sharp visit the Rotman School and explain firsthand how he went from one Four Seasons hotel in 1961 in Toronto to operating a chain of approximately 100 properties worldwide.

For anyone with an ounce of entrepreneurial spirit this was a motivating discussion. You could see the passion, courage and drive that Mr. Sharp possessed to launch his vision and stay true to it along the way. Any successful company will create a competitive advantage – however, these are eventually replicated by the competition over time. When people are your competitive advantage, it becomes truly sustainable as Mr. Sharp has proven. While other hotels provide outstanding service, none of been able to match the formula created by the Four Seasons.

3. Rahaf Harfoush – Digital Strategist and Author

It was November 27, 2008 when Ms. Harfoush spoke (for the first time, I believe) at the Rotman School. There was lots of hype surrounding her talk that day because Barak Obama had recently been elected President of the United States and Ms. Harfoush was a part of his wildly successful digital media campaign. I also remember this talk vividly, because it was one day later on November 28, 2008 that I joined Twitter. A lot in my personal and professional life has changed since that defining moment – all for the better.

The topic of conversation at Rotman that day was, “Applying Barack Obama’s Social Media Strategy to Your Brand’s Communications Needs” and it was Ms. Harfoush’s talk that became the inspiration for a lot of what we have done at the Canadian Football League over the past two seasons in the social media realm. To me, this is what an MBA program is about – an exchange of ideas to help stoke peoples’ imagination and potential. I’m glad I made time to attend her talk that day.

4. Michael Lee-Chin – Founder and Chairman of Portland Holdings Inc.

In October, 2009 I attended the Rotman School MBA Leadership Conference in downtown Toronto. It was a star-studded event with speakers like George Butterfield, Co-President of Butterfield & Robinson, Beth Comstock the CMO for GE, Don Morrison, COO of Research in Motion, Robert Deluce the CEO of Porter Airlines and Michael Lee-Chin, the Founder and Chairman of Portland Holdings.

Mr. Lee-Chin is one of the most engaging speakers I have had the pleasure to listen to in person. Mr. Lee-Chin spoke for about an hour on a variety of subjects including how to create wealth. He focused on a small number of blue chip businesses with long-term growth potential. But he was adamant that you know and understand where you are investing your money. One quote from Mr. Lee-Chin that sticks with me is, “If you don’t understand what you own, are you investing or speculating?” This is important advice that too many people continue to ignore this day and age.

5. Jay Hennick – Founder and CEO of FirstService

Mr. Hennick spoke to our class recently at the Rotman School. He runs FirstService, a company that provides services in commercial real estate, residential property management and property services and generates about US $2 billion in annualized revenue. Mr. Hennick told us his amazing story of how he achieved his current standing atop a multi-national company. He got his start with a company he ran as a tenth grader that brought in an income of $200,000. Yes, you read that correctly – he was in grade 10.

His key message was focused on people management; what he believed was the differentiating factor for the success of his current company. His “Partnership Philosophy” states that impact players must have more than a salary and bonus invested in the business; they must have an equity stake. His company focuses on aligning employees’ interest with shareholders in building long-term value. This was both fascinating and eye opening for most students who believe this is hard to do in a company of 18,000+. Yet FirstService continues to succeed. Listening to Mr. Hennick and his passion for success was rewarding.

As you can see, there are some overarching themes from these speakers such as focusing on people and establishing long-term strategies. But ultimately, each of these speakers is among the leaders in their field and that is why I feel fortunate to have spent the past three years at the Rotman School. The access to these great minds alone was worth the price of admission – well almost!

Arrived in Britannia!

I've arrived and moved in to my flat which is right across the street from London Business School which is convenient. Apparently, we happen to be very close to some famous addresses on "Baker street":

We've met our exchange classmates from around the world and are slowly going around meeting the 400 students in each of the 2011 and 2012 classes. There are some impressive resumes and experiences of the small sample of people we've met so far.

[Rotman] Ghana, another perspective

[Rotman Series: 1, 2, 3, 4, 5]

Darshan is an another good friend of mine from Rotman. He holds Bachelor of Technology, Applied Electronics and Instru, University of Kerala and also spent this last summer in Ghana.

Darshan has graciously written me a summary of his experiences which were from a different perspective than Harman’s (Darshan's had a bit more of a engineering / technology flavour). It follows:

Snapshots from Ghana – An Emerging Nation in West-Africa
Looking back, my 3-month Ghanaian summer experience provided a fairly deep understanding of the opportunities and challenges present in this sub-Saharan African country – one that is at the cusp of a developmental inflection point. Along with a fellow Rotman MBA student and four other Canadians, I was working for a non-profit organization located in Kumasi. The organization (SMIDO) dealt with supporting close to 80,000 people - a community of artisans, auto mechanics and metal workers in Suame Magazine (sector of densely populated metal workshops) – to gain market access and facilitate an ecosystem required for businesses to compete with the formal sector.

I arrived in Kumasi with a hazy idea in my mind about the place – drawing pictures and parallels with my home state Kerala, located in southern India. Those ideas were redrawn in the first few hours after I reached there. More than anything else, my first impression of Kumasi was that of a highly dense, busy, loud urban community trying to make ends meet. Beyond that first impression, however, the environment has a noisy vibrancy colored with great optimism about a better future.

Here are a few highlights from my visit there:

Industry and Client Site Visits: My tryst with Ghanaian business began with an introduction to Ghana's gold mining sector. After meetings with gold miner Central African Gold, who was once our client, I got a chance to tour their gold mine pits and extraction plants to see their operations first hand – this was quite an interesting piece of the visit. In another meeting with Red Back Mining, a Canadian gold miner, what was memorable was hearing the head of the firm’s social responsibility group talk at length about Red Back Mining's efforts to establish lasting relationships with the mine’s displaced community. Red Back has invested considerable resources in helping the local community in which it operates and asked our expertise in partnering with them to design skill development and training programs for apprentices from those displaced communities.

Economic Growth Prospects: Apart from mining, another key growth prospect in Ghana is information communication technology (ICT). Most high school children in urban centers have a Facebook account and there is an increasing trend toward being connected to the world - through mobile phones or the internet. Along with the addition of the focus on energy resulting from the recent discovery of sizeable oil reserves off the coast of Ghana, the country also has a Green Revolution going on where local farmers are getting more yields and income from their crops.

Talks with Ministers and Entrepreneurs: Some of the chats with Ghana’s politicians such as the Minister of State for Environment revealed a message of prudence concerning the potential perils of newfound natural resources and a desire to expand unions with other West African countries. A chance conversation with social entrepreneurs like Ashley Murray (Waste Enterprises) gave me a sense of profound optimism of the future of the private sector. The fact that Ghana enjoys a reverse brain-drain, wherein internationally educated Ghanaians and foreign nationals are increasingly returning home from North America and Europe to begin careers that will design enterprise development seems to support this growing optimism.

Despite the different rendezvous with entrepreneurs, business people and ministers, the time spent with the people within the non-profit was perhaps the best part of my summer. The long bus rides and trips were memorable as they included time to talk about our cultural experiences. Created by the common bond of intense cultural experiences – with visits to the beaches of Cape Coast, Elmina Castle slave trading post, Kakum and Mole National Parks and the countless soccer games we watched together - the personal connections forged during the trip will no doubt be more valuable to me and a true measure of my impact.

I departed Ghana very impressed by the hospitality of the Ghanaian people, the immense potential of the country and the depth of the challenges that will present themselves along this nation's path to growth.

[Rotman Series: 1, 2, 3, 4, 5]

Flying out for Exchange, London Business School

I think it's finally hit me. I'm flying to London. I'm sitting in Pearson airport taking advantage of the free wifi, wrapping up a few things and my excitement level is steadily increasing. Geoff Wylde, the other Rotman student going on exchange to LBS has been busy, having left last week. I've been getting emails from the international exchange students who are already there and their social plans for their time in the UK.

I'm really looking forward to being at a new school and meeting new people. As with Rotman, it will be another opportunity to meet likeminded individuals and participate in various events (I would be severely disappointed if my participation in events like case competitions dips even a little bit).

MBA Games was fun, with Rotman winning the Spirit Q&A awards. The Rotman organizing team did a phenomenal job planning our participation this year, only our second year participating. It occurs to me that this is the largest student event I’ve ever been to; even CFES Congress and CEC were only about 220 students, whereas the MBA games were 662 from 20 MBA schools across Canada. I also met some old friends from the FEI case comp, RIM and even junior high! Small world.

The winning team was University of Alberta, so it seems that next year’s team will have an interesting trek to the next games assuming they can get funding support. The host of the games is the previous year’s winner, unlike the CEC which uses a bidding system.

[Rotman] India, US, Canada, and Africa

[Rotman Series: 1, 2, 3, 4, 5]

Harmanpreet is an international student from India and holds a Bachelor of Computer Science and Engineering degree from the National Institute of Technology in Jalandhar, India and will be joining Deloitte’s technology consulting practice once he is finished his MBA at Rotman.

Harman had the interesting experience this past summer of working in Ghana, Africa and I’ve asked him to provide a short reflection of the experience which follows:

Before joining Rotman School of Management I was working as a technology consultant in one of the leading investment banks in New York.

To fast pace my career I decided to pursue MBA and because of some personal reasons chose Canada as place for that. I chose Rotman because of its excellent faculty and its location proximity to finance and consulting industry. I must say it has been an eye opening experience. The people I met, their vast experience, the work they have been doing in past amazes me.

I decided to take a bit different route to enrich my MBA experience. While working full-time in professional world it is very difficult to get an option of doing something completely different.

During summer break, I went to Ghana to work for Suame Magazine Industrial Development Organization (SMIDO). It is an industrial development organization of the biggest industrial cluster in sub Saharan Africa. SMIDO is an umbrella organization of various businesses in Suame Magazine area and is committed to ensuring the development of Suame Magazine into a technologically advanced industrial estate and representing the various economic groups that operate within the area.

Working in a under developed economy is a real challenge. But the satisfaction that I got from work that changes someone’s life is incomparable and this feeling kept pushing me to put more and more efforts into whatever I was trying to achieve.

My most important contribution while there was to approach a gold mining company with a proposal to sponsor apprenticeships for people displaced by their mining operations. It was ecstatic when the mining company accepted the proposal.

After summer experience my whole approach to business has changed. I used to think that business means making more money for you and for your shareholders. Now I believe that purpose of business should be to benefit human society rather than to accumulate wealth to satisfy egos.

It was an experience that I will cherish for rest of my life.
-Harman Singh

[Rotman Series: 1, 2, 3, 4, 5]

[Rotman] What country starts with "A", but doesn't end with "A"?

[Rotman Series: 1, 2, 3, 4, 5]

Arash is a old friend of mine back from my McMaster Engineering days. After pursuing his Masters of Engineering, he decided to come to Rotman to do his MBA and will be joining Booz & Co in the Middle East when he is finished here. We also went on the Latin America Study tour together in May of last year.

During my visit on the Middle East study tour, we visited the Aga Khan foundation. The Aga Khan Development Network (AKDN) is a group of development agencies with mandates that include the environment, health, education, architecture, culture, microfinance, rural development, disaster reduction, the promotion of private-sector enterprise and the revitalisation of historic cities. AKDN agencies conduct their programmes without regard to faith, origin or gender.

One of their impressive projects was their work with Roshan, a unique telephone company that performed to the same standards of private enterprise with regards to profit generation, but also imposed high standards to their relationships with governments regarding transparancy. Arash had the opportunity to work with Roshan this recent summer and he's written a post about the experience which follows:

Little did I know what adventures awaited me upon starting my MBA at Rotman. Of course it would open new doors and new opportunities, but where exactly was still to be determined. However, I knew that I would have preferred an international experience, as a result of which I also signed up for the Latin America study tour for which we visited Brazil and Argentina. When summer recruiting came around, I applied to both domestic and international opportunities. Of the postings that came up, the one that stood out the most was the one by Roshan Telecom in Afghanistan. Having been born in Afghanistan, I jumped at this opportunity to go to back and work there. I was very young when I left Afghanistan so I never actually got to see the country, so this opportunity was ideal – international work experience in an extremely challenging work environment and the ability to see the country and my extended family.

Naturally, working there was not easy, and definitely not for the faint-hearted. The challenges were numerous – adapting to the local work culture, working with expats colleagues from 20+ countries, and learning about the telecom sector as well as the market in Afghanistan. Imagine doing business in a country where there is little to no rule of law, very little regulations and a largely illiterate population. In addition to this, security restrictions were extremely tight and violations were swiftly dealt with (one intern was sent home for breaking curfew rules). However, these restrictions were definitely necessary – while I was working there, there were numerous incidents in Kabul, including a suicide bombing, roadside bombing, rocket attack on the airport, riots and street fighting. The challenge was to try to reduce the possibility of being at the wrong place at the wrong time, and really, the wrong place could be anywhere, and the wrong time could be any time. Despite this, I did managed to connect with relatives there (they had seen me when I was born but I never met them), and made visits to a couple historic sites in Kabul as well as Herat. It was definitely interesting to see some of the places that my parents saw when they grew up, although things now were radically different. Over the last 30 years of war, the population of Kabul swelled from 400,000 to over 4 million and you could definitely feel it.

My project at the company was as interesting as it was challenging. I had no background in the telecom sector. More specifically, I was looking into a type of fraud that occurs in the sector, which made matters even more complex. My project was to analyze internal detection and treatment mechanisms as well as to come up with potential strategies for preventing this fraud from taking place. After spending days learning about this problem and gathering data, I spent the following weeks working on analyzing the information to develop actionable strategies that could be used to reduce the impact this fraud had on the company. I found it extremely interesting, and I found several areas of improvement that could positively impact the company by improving their fraud strategy.

After work we were shuttled back from the office in downtown Kabul to our guesthouse just on the outskirts of the city. Life was actually less complicated there than it is here – we had room service that cleaned our room every day, we had laundry service and buffet style breakfast, lunch and dinner. I absolutely loved the fruits there – the best grapes and cantaloupes I have ever had in my entire life. After dinner people hung out in their rooms or relaxed out in the courtyard, watched the Indians/Pakistanis play cricket, worked out, played basketball or played pool. All in all, not a bad life, if it weren’t for the volatility of the country.

Overall, it was a fantastic opportunity to work in a challenging environment and with an interesting company. I never thought that coming to Rotman would have enabled me to work in Afghanistan, but it did, and I am definitely grateful for that. In addition to this, the study tour was definitely very interesting and also helped solidify my interest in working abroad. Moving forward, I will be working full-time for a top tier management consulting firm in the middle-east, an opportunity which also came about through Rotman. Not only did my MBA at Rotman open new doors for me, but it opened up the entire world to me – the world truly is my oyster.

[Rotman Series: 1, 2, 3, 4, 5]

[Rotman] Why is an MBA taking a Geology class?

[Rotman Series: 1, 2, 3, 4, 5]

As I’m preparing to go to go to LBS, I’m dedicating this week to Rotman: What makes us different? Over the next 5 days, I’ll be putting up posts about what differentiates Rotman the school and the students, not just locally, but also within a global context.

The first post is about Shree, a brilliant friend and colleague at Rotman who I respect very much. He also had a very unique experience; an opportunity which I think is often over looked and should be highlighted. Specifically, that Rotman is part of the University of Toronto, but more than just having access to U of T’s libraries, sports facilities and resources, as U of T students, we also have access to elective courses outside the business faculty.

Shree had the idea of taking an engineering geology course because he has a natural interest in commodities and wanted to have the insight and gain a higher level of understanding of mining.

I’ve asked Shree to write a honest review of the course (GLG 1442) and I’ve included it below:

Do you have a specific career in mind that demands you know things other than the 4Ps of marketing or the time value of money? If so, you might want to look into picking up a course outside of Rotman in that area.

My job involves looking at investments, and since Canada is often referred to as the “mining capital of the world”, I felt that a geology course would add value to my education. With this in mind, I took the GLG 1442 course, which is offered through the Earth Sciences department at UofT. My review in a nutshell:

Learning accomplished: 9/10
Relevance of the course to everyday business: 6/10
Organization of the course: 3/10
Degree of difficulty: 8.5/10

Lets break down the components above into more detail –

Learning accomplished: If there was one objective in my mind for taking this course, it was to learn more about geology. The course was highly education towards this objective. I was able to learn about different types of deposits, how they are formed, what the typical characteristics of such deposits are and where a certain type of deposit can be found. I doubt I would have been able to achieve all this learning outside of the classroom within a four month time frame. As a result, I give a very high grade for the learning accomplished.

Relevance of the course to everyday business: Let’s face it. Many of you will never have to deal with a mining company in your career. This reduces the relevance of the course right away. However, for those who want to become involved in equity research or investment banking that could benefit from having some knowledge of geology, this course should provide a decent level of groundwork. Relevant topics include different types of deposits for specific metals as well as the grade, tonnage characteristics of these deposits. There is very little coverage regarding the costs related to mining these types of deposits, which makes this course somewhat less relevant than it could be. Secondly, there isn’t much coverage regarding the economics of mining either, which further erodes the relevance.

Organization of the course: If you are expecting a course which is organized in a manner similar to Rotman, you are in for a huge shock. A combination of handwritten overheads, no powerpoints and old school slide projectors makes the organization of this course difficult to follow. Additionally, there are in class handouts which are meant to supplement the handwritten notes, which further make it difficult to keep track of what might be going on in the course. The structure of the course is fairly loose since materials covered tend to skip many parts of the notes and does not strongly tie into the textbook. In fact, I never had to even use the textbook.

Degree of difficulty: The major fact of this course is that this is a graduate level geology course. The majority of the students taking this course are mining engineers or geologists. You will be expected to be on the same level as these guys pretty much from day one. Given the lack of a foundations course, this puts a student at a huge disadvantage. Therefore, if you are taking this course with the expectation of getting a good mark, you may be better off sticking with a Rotman course. If you are expecting to take this course as an elective, you are definitely better off taking a Rotman course. Compared to a typical Rotman course which is 2 hours of lectures per week, you will find that this course demands 5 hours of class time (2 hours of lectures + 3 hours of lab time). There is also a lab exam in this course which is unrelated to the materials covered in the exam, which means you are really taking an equivalent of two courses. The takeaway here is, be prepared for a difficult course and have some prior knowledge of the materials before hand. This will be the difference between struggling through this course and potentially failing this course.

Conclusion: For the people who have a genuine interest in mining, this course is highly useful. This course would be much more useful if it were better organized and had a better tie-in with business concepts such as IRR, project financing etc.

[Rotman Series: 1, 2, 3, 4, 5]

Game On!

We just arrived at the Westin Harbour Castle in Toronto for the MBA Games hosted by Schulich. The Rotman team has arrived and we are just getting sorted in our rooms before finding a quick bite to eat and attending the opening ceremonies later tonight.

The hotel lobby is filled with students from other schools and already we are piled up with great deals of swag: Rotman branded sweaters, t-shirts and track suits from our sponsors, snacks from General Mills, KD from Kraft, water bottles from RBC, etc.

Already, I've had a chat with someone I met at FEI competition from the Ryerson team. There is a lot of energy in the air as everyone is excited to meet with other students from different schools over the weekend.

I'll be in one of the academic competitions, the Case Competition, where only hint is that the topic will be "Organizational Management". We'll be spending all of Saturday (starting early) on the case competition. Sunday has many of the sporting events so we will be cheering our team mates as they compete in various sporting events.

Modeling a Down Payment as a Call Option

There was an interesting idea that came up in our discussion of Islamic Finance that got me thinking. While not directly related to what we were doing, someone mentioned the idea that a down payment was modeled like a call option which I thought was quite clever.

Consider this, you can:

• put down a payment for the right to purchase the asset
• elect to walk away from this right, forfeiting the down payment, or
• pay the *remaining amount* and purchase the asset at the appropriate time

This is very similar to a call option, with only one exception:

Note that in a down payment, you are paying the remaining amount, not the full amount of the asset. So if you were to use a call option to model down payment, you would have to adjust the strike price down by the premium (down payment) because the down payment is applied to the purchase price of the asset.

So imagine that the value of your asset changes after you’ve paid the down payment. If it goes up, you can continue your purchase (and possibly even sell your asset for a profit, assuming its liquid enough) or you can elect not to buy it if you’ve taken a huge bath (maybe even the market value dropped by more than the down payment amount).

Back from the Holiday

Well after a well deserved break, all the students are back.

First years are in their Negotiations class which odd for me as I didn’t do this last year due to the Middle East study tour, but now I see what it was like with the Atrium constantly being flooded by ambitious MBA students trying to get better deals in their exercises. There have also been requests for help with preparing for recruitment week which is coming up next week and some postings already up.

Even second years are at school, many having the clever idea of taking an intensive or two to lighten their final term course load.

Yesterday, we did a presentation for our ICP in Islamic Finance. Arash and I did a presentation on two comparable securities, one conventional and one Islamic and we showed they were strategically and operationally comparable (same industry, business model, enterprise value, capital structure, debt ladder, similar maturity, seniority and economic conditions, but different country and terms) and we analyzed the yield, adjusting for country risk and broke down the spread accounting for liquidity risk, minor maturity differences and increased cost of capital related to Sharia compliant terms.

This material will be used as part of Rotman’s new Executive MBA program class on Islamic Finance. While we aren’t quite finished with our work, the next step being to propose a term sheet for what the conventional financing would look like if it were Sharia compliant, I’m very happy with our progress and the insight we were able to bring into this new product class.