Articles:
‘I'm Not Rich Yet, But...'
Saving Lives, Saving Jobs
‘I'm Not Rich Yet, But...'
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Alumnus Vergil Daughtery found a hole in the real-world application of a world-famous financial algorithm and is poised to drive a Brink's truck through it.
Daughtery, Mgt 90, MS Econ 95, has licensed his product, the Expirationless American Option, or XPO, to NexTrade Futures Exchange, which is applying for permission to open as a futures exchange by mid-June 2004.
Daughtery never could let go of his "huh?" reaction to a portion of the Black-Scholes option pricing algorithm presented years earlier in a Georgia Tech classroom. He puzzled over it almost every night for 17 years.
His "aha!" moment led him in 2001 — after forming a business partnership with former Securities and Exchange Commissioner Steven Wallman — to become the first person in the United States to patent a financial product traded on exchanges or over the counter. Daughtery will get a fraction of the value of each trade that uses his product between the time. NexTrade Futures Exchange, based in Clearwater, Fla., opens and July 2014.
No one is willing to speculate on how much money could be made from XPOs, but it could be enormous.
"We have the first patents in a market estimated at greater than $1 quadrillion ($1,000,000,000,000, 000) annually," Daughtery said. "I am not rich yet, but I think it's a reasonable certainty that I will be able to retire in comfort at some point in time."
Daughtery lives with his wife and two teen-age children in North Carolina, where he is the president of a nonprofit group that builds houses for people with disabilities.
Frank Bachinsky, director of exchange development for the NexTrade Futures Exchange, said, "The overall feedback from market participants has been outstanding. The general consensus sees this product as the next big thing in the derivative marketplace."
Basically, Daughtery has eliminated the last of the three gambles that is part of each options decision — whether the price of something will rise, whether it will fall, and how much time will pass before it happens. It's a product he designed after never being able to figure out why there needed to be a time element in real-world applications of the Black-Scholes option-pricing algorithm, developed in part by one of two economists who won the 1998 Nobel Prize for their work in options pricing.
One of the basic assumptions in that algorithm, Daughtery decided, would never work in reality. The assumption gave a value to an expirationless European option. European options can only be exercised on the last day of an option, as opposed to American options, which can be exercised at any time within a specified period. But how could something that is expirationless have a "last day?" Daughtery wondered as he studied the European model on which the Black-Scholes algorithm is based.
Daughtery's XPO could become a key component in new exchanges like NexTrade Futures Exchange that are forming to challenge the heavyweights Chicago Mercantile Exchange and Chicago Board of Trade in the futures market.
NexTrade is now developing ways to sell expirationless options, Bachinsky said.
"They have structural benefits. We have the ability to apply them to any market we so choose."
Daughtery said XPOs have a wide range of uses.
"XPOs will be used to help manage risk between different asset classes — futures, equities, swaps and options — to create a new way to invest, speculate and hedge," he said. "This will increase value for all investors and should lead to higher stock and other asset prices — more value — as risk is reduced across markets, time zones and geographic
boundaries."
Saving Lives, Saving Jobs
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David Rice knows something about survival.
His manufacturing business took a hit, but Rice, IM 72, made sure it wasn't a fatal blow.
Now 80 percent of the bulletproof vests worn by U.S. military personnel are manufactured at Rice's plants in south Georgia.
Rice is proud that the company he and his brother founded in Vidalia, Ga., has evolved to save lives and jobs.
"In 1980 my brother and I started manufacturing sports bags. In 1982 we started manufacturing luggage. We got hooked up with a company called Tumi, which makes very high-end luggage. We were the principal manufacturer of Tumi luggage for 20 years," Rice said. "We had 360 people manufacturing Tumi luggage in two plants in Vidalia and one in Swainsboro.
"We became the top contract luggage manufacturing house in America," he said. "Last year Tumi pulled out and took it all to China."
Savannah Luggage Works laid off more than half of its work force. David and Allenn Rice searched for a way to save the business. The luggage the company had manufactured was made of ballistic nylon, the same material used in protective body armor That helped land the contract to make Interceptor vests for Point Blank Body Armor, based in Fort Lauderdale, Fla., and restore Savannah Luggage Works' employee count to 350.
Each tactical vest, with pockets for radios, ammunition and supplies, sells to the government for $1,583.
Rice said the body armor Savannah Luggage Works manufactures is also worn by officers in the Los Angeles and New York police departments, the FBI, CIA, IRS, Office of Diplomatic Security and U.S. State Department.
Rice's company also has won a contract to manufacture 15,000 pop-up tents for the Army and is bidding to make the military's MOLLE — modular lightweight load-carrying equipment. Georgia Tech is helping Savannah Luggage Works secure the contract.
"We're using the Georgia Tech Economic Development Institute to help us bid. Tech has a program called the Procurement Assistance Center. They're helping us bid on government contracts."
©2003 Georgia Tech Alumni Association