Thursday, September 29, 2005

Coffee Arbitrage at RaceTrac Gas Stations

The purpose of this post is to compare retail coffee to bond coupons. Bond coupons are the cash flows from regular interest payments on a certificate of debt.

As you know, I like buying my weak American coffee at Atlanta-area RaceTrac gas stations. Refills of RaceTrac brand coffee inside of my Starbucks mug cost $.52, and I purchase one to two refills per day.

I recently discovered a unique bargain: With the purchase of a $2.60 RaceTrac coffee mug, the owner is entitled to five free refills.

The math thus far is simple: $.52 per refill x quantity 5 refills = $2.60. We are getting the cheap RaceTrac mug for free (estimated value: somewhere between nothing and $.30).

I measured the volume differential and was pleased to note that the RaceTrac coffee mug contains approximately four (4) additional ounces of coffee. This additional gross of coffee is, if I understand correctly, my bond coupon. Four additional ounces of coffee = $.13, based on $.52 for a 16-ounce mug.

The actual bond (my investment in the $2.60 RaceTrac coffee mug) has a five-refill coupon term, because I cease to receive free refills after five uses.

But today the mugs were on sale for $2.02. So, to the claim that "This coupon has no cash value," -- I call bullshit.

$.52 per refill * 5 refills
=
$2.60 - $2.02 cost of mug
=
$.58 immediate card value*

*Based on current sale price and assumption of daily refill purchases.

Financially-minded friends, is my analogy correct? Can I arbitrage the heck out of this?

Coffee Card
Bond Coupon
Time period
Refills
Annual or monthly
Expiration
Five uses
Bond maturity, fixed future date
Return, variable
Extra coffee
Regular interest payments
Return, fixed
Coffee mug
Principal repayment of debt

An investment in a RaceTrac coffee mug actually provides infinite coupon returns ($.13 each) in the form of four additional ounces of coffee per refill, but I don't know of a financial instrument that divests coupons over an infinite period of time.

 
Comments:
I lov ethe analogy and it is correct logic. This is most certainly an arb opportunity.
 

nick -
this is fabulous. at one point i held hopes of creating a book that was based around everyday arbitrage. the book was actually based around an oceanliner and it's passengers at the turn of the 19th century. however, one of the passengers was a sociologist and he was employing the concept of arbitrage to examine the exchange of favors in communities. anyhow, after reading your entry here, i am both reminded of that dormant ambition and tickled by your analysis.
ps
i have encountered and enjoyed your site a number of times after running across some of your photos on flickr. so... thanks for the entertainment.
 

Great analysis! Cheers
 

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