Reverse Convertibles

August 23, 2022 by Shengyu ZHENG

Reverse Convertibles

In this article, Shengyu ZHENG (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains reverse convertibles, which are a structured product with a fixed-rate coupon and downside risk.

Introduction

The financial market has been ever evolving, witnessing the birth and flourish of novel financial instruments to cater to the diverse needs of market participants. On top of plain vanilla derivative products, there are exotic ones (e.g., barrier options, the simplest and most traded exotic derivative product). Even more complex, there are structured products, which are essentially the combination of vanilla or exotic equity instruments and fixed income instruments.

Amongst the structured products, reverse convertible products are one of the most popular choices for investors. Reverse convertible products are non-principal protected products linked to the performance of an underlying asset, usually an individual stock or an index, or a basket of them. Clients can enter into a position of a reverse convertible with the over-the-counter (OTC) trading desks in major investment banks.

In exchange for an above-market coupon payment, the holder of the product gives up the potential upside exposure to the underlying asset. The exposure to the downside risks still remains. Reserve convertibles are therefore appreciated by the investors who are anticipating a stagnation or a slightly upward market trend.

Construction of a reverse convertible

This product could be decomposed in two parts:

On the one hand, the buyer of the structure receives coupons on the principal invested and this could be considered as a “coupon bond”;
On the other hand, the investor is still exposed to the downside risks of the underlying asset and foregoes the upside gains, and this could be achieved by a short position of a put option (either a vanilla put option or a down-and-in barrier put option).

Positions of the parties of the transaction

A reverse convertible involves two parties in the transaction: a market maker (investment bank) and an investor (client). Table 1 below describes the positions of the two parties at different time of the life cycle of the product.

Table 1. Positions of the parties of a reverse convertible transaction

t	Market Maker (Investment Bank)	Investor (Client)
Beginning	Enters into a long position of a put (either a vanilla put or a down-and-in barrier put) Receives the nominal amount for the “coupon” part Invests in the amount (nominal amount plus the premium of the put) in risk-free instruments	Enters into a short position of a put (either a vanilla put or a down-and-in barrier put) Pays the nominal amount for the “coupon” part
Interim	Pays pre-specified interim coupons in respective interim coupon payment dates (if any) Receives interest payment from risk-free investments	Receives the pre-specified interim coupons in respective interim coupon payment dates (if any)
End	Receives the payoff (if any) of the put option component Pays the pre-specified final coupon in the final coupon payment date	Pays the payoff (if any) of the put option component Receives the pre-specified final coupon in the final coupon payment date

Based on the type of the put option incorporated in the product (either plain vanilla put option or down-and-in barrier put option), reserve convertibles could be categorized as plain or barrier reverse convertibles. Given the difference in terms of the composition of the structured product, the payoff and pricing mechanisms diverge as well.

Here is an example of a plain reverse convertible with following product characteristics and market information.

Product characteristics:

Investment amount: USD 1,000,000.00
Underlying asset: S&P 500 index (Bloomberg Code: SPX Index)
Investment period: from August 12, 2022 to November 12, 2022 (3 months)
Coupon rate: 2.50% (quarterly)
Strike level : 100.00% of the initial level

Market data:

Current risk-free rate: 2.00% (annualized)
Volatility of the S&P 500 index: 13.00% (annualized)

Payoff of a plain reverse convertible

As is presented above, a reverse convertible is essentially a combination of a short position of a put option and a long position of a coupon bond. In case of the plain reverse convertible product with the aforementioned characteristics, we have the blow payoff structure:

in case of a rise of the S&P 500 index during the investment period, the return for the reverse convertible remains at 2.50% (the coupon rate);
in case of a drop of the S&P 500 index during the investment period, the return would be equal to 2.50% minus the percentage drop of the underlying asset and it could be negative if the percentage drop is greater than 2.5%.

Figure 1. The payoff of a plain reverse convertible on the S&P 500 index

Source: Computation by author.

Pricing of a plain reverse convertible

Since a reverse convertible is essentially a structured product composed of a put option and a coupon bond, the pricing of this product could also be decomposed into these two parts. In terms of the pricing a vanilla option, the Black–Scholes–Merton model could do the trick (see Black-Scholes-Merton option pricing model) and in terms of pricing a barrier option, two methods, analytical formula method and Monte-Carlo simulation method, could be of help (see Pricing barrier options with analytical formulas; Pricing barrier options with simulations and sensitivity analysis with Greeks).

With the given parameters, we can calculate, as follows, the margin for the bank with respect to this product. The calculated margin could be considered as the theoretical price of this product.

Table 2. Margin for the bank for the plain reverse convertible

Source: Computation by author.

Download the Excel file to analyze reverse convertibles

You can find below an Excel file to analyze reverse convertibles.

Why should I be interested in this post

As one of the most traded structured products, reverse convertibles have been an important instrument used to secure return amid mildly negative market prospect. It is, therefore, helpful to understand the product elements, such as the construction and the payoff of the product and the targeted clients. This could act as a steppingstone to financial product engineering and risk management.

Resources

Academic references

Broadie, M., Glasserman P., Kou S. (1997) A Continuity Correction for Discrete Barrier Option. Mathematical Finance, 7:325-349.

De Bellefroid, M. (2017) Chapter 13 (Barrier) Reverse Convertibles. The Derivatives Academy. Accessible at https://bookdown.org/maxime_debellefroid/MyBook/barrier-reverse-convertibles.html

Haug, E. (1997) The Complete Guide to Option Pricing. London/New York: McGraw-Hill.

Hull, J. (2006) Options, Futures, and Other Derivatives. Upper Saddle River, N.J: Pearson/Prentice Hall.

Merton, R. (1973). Theory of Rational Option Pricing. The Bell Journal of Economics and Management Science, 4:141-183.

Paixao, T. (2012) A Guide to Structured Products – Reverse Convertible on S&P500

Reiner, E. S. (1991) Breaking down the barriers. Risk Magazine, 4(8), 28–35.

Rich, D.R. (1994) The Mathematical Foundations of Barrier Option-Pricing Theory. Advances in Futures and Options Research: A Research Annual, 7, 267-311.

Business references

Six Structured Products. (2022). Reverse Convertibles et barrier reverse Convertibles

About the author

The article was written in August 2022 by Shengyu ZHENG (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

Macro Funds

August 22, 2022 by Akshit GUPTA

Macro Funds

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) explains marco funds which is a type of hedge fund based on the analysis of macroeconomic or political events.

Introduction

Macro funds, also known as global macro funds, are actively managed alternative investment vehicles (hedge funds) whose strategy profits from the broad market movements caused by macroeconomic (economic, fiscal and monetary) or geopolitical events. These funds typically invest in asset classes including equity, fixed income, currencies, and commodities. They invest in both the spot and derivatives markets. They use a mix of long and short positions in these asset classes to implement their market views to achieve superior returns (higher than a given benchmark).

Some key elements impacting the decisions taken by macro funds include:

Economic factors – Macro funds constantly monitor the economic data across different countries including interest rates, inflation rates, GDP growth, unemployment rates and industrial/retail growth rates to make investment decisions.
Mispricing – Macro funds try to arbitrage markets based on perceived mispricing.
Political situations – The political situations in different countries also play a major role in the investment decisions made by macro funds as unstable political situations can lead to low investor confidence and thus cause a decline in the financial markets.

Benefits of a macro funds

Like other types of hedge funds, macro funds aim at providing their clients (investors) with investments managed in an efficient manner to optimize expected returns and risk. Such funds are especially expected to diversify the clients’ portfolios. So, macro funds are often acknowledged as the alternative funds in the industry.

Other characteristics of macro funds

Other characteristics of macro funds (clients, fee structure, investment constraints) are similar to other types of hedge funds (see the posts Introduction to Hedge Funds and Hedge Funds).

Examples of macro funds strategies

A commonly used asset class in macro fund strategy includes currencies. Their exchange rates are affected by several factors including monetary and fiscal policies, economic factors like GDP growth and inflation and geopolitical situation. Black Wednesday is an example of an infamous event, where we can understand the different factors and use of macro fund strategies.

Black Wednesday

During the 1970s, an European Exchange Rate Mechanism (ERM) was set up to reduce exchange rate variability and stabilize the monetary policies across the continent. Also, a stage was being set to introduce a unified common currency named Euro. The United Kingdom joined ERM in 1990 due to political instability in the country raising fears of higher currency fluctuations.

The pound sterling shadowed the German mark but owing to challenges faced by Britain at that point in time, including lower interest rates, higher inflation rates and an unstable economy, the currency traders weren’t satisfied with the decision.

Seeing the economic situation, George Soros, one of the most famous investors, used the macro fund strategy during 1992 when he took a short position in the pound sterling for $10 billion and made a $1 billion profit from his position.

▶ Akshit GUPTA Asset management firms

▶ Akshit GUPTA Hedge Funds

▶ Youssef LOURAOUI Introduction to Hedge Funds

▶ Akshit GUPTA Portrait of George Soros: A famous investor

Useful resources

Academic resources

Pedersen, L. H., 2015. Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined. Princeton University Press, Chapter 11, Global macro Investing.

Business resources

JP. Morgan Asset Management

DeChesare Brian “Global Macro Hedge Funds: Living in an FX Traders’ Paradise?”

About the author

Article written in August 2022 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Initial and maintenance margins in stocks

August 15, 2022 by Akshit GUPTA

Initial and maintenance margins in stocks

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) explains the mechanisms of initial and maintenance margin used in stocks.

Introduction

In financial markets, margin requirements are present in leveraged positions in stock trading. They refer to a percentage of assets that an investor must put aside with his or her own cash or assets (collateral) as a means of protection against the risk exposure to its potential default for the other counterpart.

Margin requirements serve as a guarantee that the investor providing the margins will fulfill its trade obligations. Many exchanges across the world provide leverage facilities to investors for trading in different assets. For example, an investor can use leverage facilities for trading in equities, bonds, exchange rates, commodities, etc. It usually takes the form of derivatives contracts like futures and options. Whenever an investor buys or sells stocks using leverage, it is called buying or selling on margin.

Margin requirements can be categorized as initial and maintenance margin requirements.

Initial margin

Initial margin (or IM) refers to the initial deposit required when an investor opens a position in an underlying asset and amounts to a percentage of the nominal contract value. The amount for the initial margin requirement is calculated in accordance with approved margin models that are based on the market’s regulatory rules. The determination of the initial margin requirement is essentially based on the volatility of the asset being covered. The more volatile the asset, the higher the initial margin requirement.

You can download below the file to learn about the different initial margin requirements at Euronext Clearing used in stock trading (PDF document).

Maintenance margin

When an investor holds an underlying asset on margin, she is required to maintain a minimum margin amount of that asset position in her portfolio to keep her position open and this is known as the maintenance margin. Maintenance margin requirements aim to protect against excess losses and ensure the broker has enough capital to cover any losses the investor may incur. In case the investor is unable to fulfill the maintenance margin requirements, she receives a margin call initiated from the broker to deposit a further amount in order to keep her position open. If she fails to provide adequate maintenance margins, the broker has the power to close her position.

Mechanism of initial and maintenance margins

Now, we will see how initial and maintenance margins work in the financial markets with the concept of short selling used in equity trading. Since the short sell involves borrowing stock, the investor is required by its broker to post an initial margin at the time the trade is initiated. For instance, this initial margin is set to 50% of the value of the short sale. This money is essentially the collateral on the short sale to protect the lender of the stocks in the future against the default of the borrower (the investor).

Followed by this, a maintenance margin is required at any point of time after the trade is initiated. The maintenance is taken as 30% of the total value of the position. The short seller has to ensure that any time the position falls below this maintenance margin requirement, he will get a margin call and has to increase funds into the margin account.

Example

Here is an example of a typical case of short selling and its margin mechanism:

Margin call on stocks

You can download below the Excel file for the computation of the Intial and Maintenance Margins for the stocks.

Useful resources

Euronext Clearing

Maintenance margin

Initial Margin

Financial Industry Regulatory Authority (FINRA)

▶Akshit GUPTA Initial and Maintenance margin in futures contracts

▶ Youssef LOURAOUI Introduction to Hedge Funds

▶ Akshit GUPTA Analysis of the Big Short movie

▶ Akshit GUPTA Analysis of the Margin call movie

▶ Akshit GUPTA Analysis of the Trading places movie

About the author

Article written in August 2022 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Initial and maintenance margins in futures contracts

August 15, 2022 by Akshit GUPTA

Initial and maintenance margins in futures contracts

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) explains the mechanisms of initial and maintenance margin used in futures contracts.

Introduction

In financial markets, margin requirements are present in leveraged positions in derivative products. They refer to a percentage of assets that an investor must pay for with his or her own cash or assets (collateral) as a means of protection against the risk exposure to its potential default for the other counterpart.

Margin requirements serve as a guarantee that the investor providing the margins will fulfil its trade obligations. Many exchanges across the world provide leverage facilities to investors for trading in different derivative assets. For example, an investor can use leverage facilities for trading in futures contracts across different asset classes like equities, bonds, currencies, interest rates, etc.

Margin requirements can be categorized as initial and maintenance margin requirements.

Initial margin

Initial margin (or IM) refers to the initial deposit required when an investor opens a position in a derivative product and amounts to a percentage of the nominal contract value. The amount for initial margin requirement is calculated in accordance with approved margin models that are based on the market’s regulatory rules. The determination of the initial margin requirement is essentially based on the volatility of the underlying asset of the derivative product being covered. The more volatile the underlying asset, the higher the initial margin requirement.

You can download below the file to learn about the different Euronext Clearing margin requirements used in derivatives trading.

Maintenance margin

When an investor holds an underlying asset on margin, she is required to maintain a minimum margin amount of that asset position in her portfolio to keep her position open and this is known as the maintenance margin. Maintenance margin requirements aim to protect against excess losses and ensures the broker has enough capital to cover any losses the investor may incur. Maintenance margin is generally calculated on a daily mark-to-market basis between the period starting from the trading date to the contract expiration date.

In case the investor is unable to fulfil the maintenance margin requirements, she receives a margin call initiated from the broker to deposit further amount in order to keep her position open. If she fails to provide adequate maintenance margins, the broker has the power to close her positions.

Mechanism of initial and maintenance margins

Now, we will see how initial and maintenance margins work in the financial markets using S&P 500 mini futures contract. Since the investor has bought the futures contract, he/she is required by its broker to post an initial margin at the time the trade is initiated. For instance, this initial margin is set to 40% of the nominal value of the contract. This money is essentially the collateral on the purchase to protect the seller of the contract in the future against the default of the buyer (the investor).

Followed by this, a maintenance margin is required at any point of time after the trade is initiated. The maintenance margin call is triggered when the value of the initial margin falls below the 30% threshold (i.e. 70% of the initial margin). The buyer has to ensure that any time the position falls below this maintenance margin requirements, he will get a margin call and has to increase funds into the margin account.

Example with initial margin

Here is an example of a typical case of buying a futures contract and its margin mechanism:

The characteristics of the contract and market data include:

Margin call on futures

Margin call on long futures

The final value of the investor’s brokerage account is equal to $253,000. At the end of the contract, the investor can get back its initial margin of $158,000 leaving $95,000 on its account. The gain is equal to $10,000 which is the amount left on the account ($95,000) minus the sum of the margin calls ($85,000).

Here is an example of a typical case of selling a futures contract and its margin mechanism using the same characteristics and market data:

Margin call on short futures

The final value of the investor’s brokerage account is equal to $178,000. At the end of the contract, the investor can get back its initial margin of $158,000 leaving $20,000 on its account. The loss is equal to $10,000 which is the amount left on the account ($20,000) minus the sum of the margin calls ($30,000).

You can download below the Excel file for the computation of the Intial and Maintenance Margins for the futures contracts.

Useful resources

Maintenance margin

Initial Margin

Financial Industry Regulatory Authority (FINRA)

Prof. Longin’s website Margin Call mechanism for a futures contract (in French).

About the author

Article written in August 2022 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

My experience as a credit analyst at Amundi Asset Management

August 14, 2022 by Jayati WALIA

My experience as a credit analyst at Amundi Asset Management

In this article, Jayati WALIA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) shares her apprenticeship experience as an assistant credit analyst in Amundi which is a leading European asset management firm.

About Amundi

Amundi is a French asset management firm with currently over €2 trillion asset under management (AUM). It ranks among the top 15 asset managers in the world (see Table 1 below). Amundi is a public company quoted on Euronext with the highest market capitalization in Europe among asset management firms (€10.92 billion as of May 20, 2022). Amundi was founded in 2010 following a merger between Crédit Agricole Asset management and Société Générale Asset management.

Table 1. Rank of asset management firms by asset under management (AUM).
Top asset management firms rankings Source: www.advratings.com

Amundi has over 100 million clients (retail, institutional and corporate) and it offers a range of savings and investment solutions, services, advice, and technology in active and passive management, in both traditional and real assets.

Amundi logo Source: Amundi

My apprenticeship

My team at Amundi, Fixed Income Solutions, works in coordination with all the teams of the firm’s global bond management platform. The team’s work revolves majorly around product development on Amundi’s Fixed Income offerings including technological work, generating new investment ideas, and bringing them to clients both institutional and distributors. My position in the team is Assistant Credit Analyst.

Missions

My work primarily involves setting up tools and procedures linked to various investment solutions and portfolios handled by team. The tools are developed through algorithms in programming languages (mainly Python) and their functionalities range from analysis of market signals for investment, pricing of securities, risk monitoring and reporting. I worked on fixed-income portfolio construction and optimization algorithms implementing modern portfolio theory.

My daily responsibilities include report production related to daily fund activity such as monitoring fund balance and calculation of regulatory financial ratios to check for alignment against specific risk constraints. Additionally, I also participate in market research for new investment ideas through analysis of various fixed-income securities and derivatives.

Required skills and knowledge

The work and missions involved in my role require technical knowledge especially programming skills in Python, quantitative modelling and an understanding of financial markets, products and concepts of valuation, various types of risks and financial data analysis. Other behavioral skills such as project management, autonomy and interpersonal communication are also essential.

Three key financial concepts

The following are three key concepts that are used regularly in my work at Amundi:

Credit ratings

Credit ratings are extensively used in fixed income. They reflect the creditworthiness of a borrower entity such as a company or a government, which has issued financial debt instruments like loans and bonds.

Credit risk assessment for companies and governments is generally performed by rating agencies (such as S&P, Moody’s and Fitch) which analyze the internal and external, qualitative and quantitative attributes that drive the economic future of the entity.
Bonds can be grouped into the following categories based on their credit rating:

Investment grade bonds: These bonds are rated Baa3 (by Moody’s) or BBB- (by S&P and Fitch) or higher and have a low rate of default.
Speculative grade bonds: These bonds are rated Ba1 (by Moody’s) or BB+ (by S&P and Fitch) or lower and have a higher rate of default. They are thus riskier than investment grade bonds and issued at a higher yield. Speculative grade bonds are also referred to “high yield” and “junk bonds”.

Often, some bonds are designated “NR” (“not rated”) or “WR” (“withdrawn rating”) if no rating is available for them due to various reasons, such as lack of credible information.

Credit spreads

Credit spread essentially refers to the difference between the yields of a debt instrument (such as corporate bonds) and a benchmark (government or sovereign bond) with similar maturities but contrasting credit ratings. It is measured in basis points and is indictive of the premium of a risky investment over a risk-free one.

Credit spreads can tighten or widen over time depending on economic and market conditions. For instance, times of financial stress cause an increase in credit risk which leads to spread widening. Similarly, when markets rally, and credit risk is low, spreads tighten. Thus, credit spreads are an indicator of current macro-economic and market conditions.

Credit spreads are used by market participants for investment analysis and bond valuations.

Duration and convexity

Bond prices and interest rates share an inverse relationship, i.e., if interest rates go up, bond prices move down and similarly if interest rates go down, bond prices move up. Duration measures this price sensitivity of bonds with respect to interest rates and helps analyze interest-rate risk for bonds. Bonds with higher duration are more sensitive to interest rate changes and hence more volatile. Duration for a zero-coupon bond is equal to its time to maturity.

While duration is linear measure of bond price-interest rates relationship, in real life, the curve of bond prices against interest rates is convex i.e., the duration of the bonds also changes with change in interest-rates. Convexity measures this duration sensitivity of bonds with respect to interest rates.

Useful resources

Amundi

About the author

The article was written in August 2022 by Jayati WALIA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

The impact of the Russian invasion of Ukraine on Shell

August 10, 2022 by Talia HAMMOUD

The impact of the Russian invasion of Ukraine on Shell

In this article, Talia HAMMOUD (The George Washington University, BBA, 2019-2023) discusses the impact of the Russian invasion on Shell, a large multinational oil company.

What is Shell?

Shell PLC is a British publicly traded multinational oil and gas company headquartered at in London, United Kingdom. It is one of the largest energy and petrochemical companies in the world, supplying all over the world.

What happened?

The relationship between Ukraine and Russia was tense since Ukraine gained its independence from the USSR in 1991. Since then, Russia annexed Crimea claiming it belonged to them as well as massing soldiers on the Ukraine-Russia border in 2021. On the 24th of February 2022, Russia invaded Ukraine, starting a full-blown war in Eastern Europe. In an effort to condemn Russia, many multinational companies announced they would withdraw or completely halt operations in the country.

Shell announced plans to withdraw from Russian oil just as people close to the matter say a plan is in the works by the Biden administration to ban Russian oil imports into the U.S. Due to this withdrawal, Shell announced that it anticipates account charges from $4 billion to $5 billion in its first quarter of 2022. This move caused American depositary shares of Shell to rise by 2.7% Tuesday, 8th March.

Stock market reaction

When it was first revealed that Shell was still buying discounted Russian oil after other oil companies announced their withdrawal on March 4th, Shell’s market shares plummeted by 5.73%. This shows that the market is efficient and was informed of Shell’s decision as many condemned them for still supporting Russia. There was increased market pressure for Shell to cut ties with all Russian oil suppliers. On March 8th, Shell apologized and announce its withdrawal from Russia as well as stopping all oil purchases from there. Thus, the market increased by 1.05% on March 8th.

Evolution of Shell stock market share price

Source: CNBC

Why this is important?

Firstly, it shows how volatile the oil market is as short-term demand for energy responds much faster to changes in growth than to price changes, especially due to the current Russian invasion of Ukraine, and how an act of war can impact millions around the world due to price increases of oil. This inherently impacts a big oil company such as Shell. However, I think that the market stocks rose in support of Shell withdrawing from Russian contracts and territories even though it is very costly as shown by the almost $5 billion in accounting costs for the first quarter. I think that this is an efficient market as stocks began to rise right before the announcement of this withdrawal was revealed showing that people were expecting Shell and other big oil companies to withdraw from Russia due to immense public pressure to condemn the Russian invasion of Ukraine.

Market efficiency

The market is quite efficient as the stock chart reflects all relevant information about Shell and its actions. For example, the announcement of Shells withdrawal in Russia is reflected in the market price of the day it was announced.

Key concepts

American depositary shares (ADS)

American depositary shares (ADS) are shares in foreign companies that are held in American depositary banks and can be traded in the U.S and on major exchanges. Shell Plc has an ADS facility managed by JPMorgan Chase Bank. Each American depositary share is equal to two Shell ordinary shares.

Market efficiency

Market efficiency refers to the degree how which many market prices reflect all relevant information available. If a market is efficient, it means all traders are well-informed and all the information available is reflected in the price of shares.

Volatility

Volatility represents the rate at which the price of a stock increases or decreases over a particular period. Higher stock price volatility often means higher risk and helps an investor to estimate the fluctuations that may happen in the future.

Useful resources

CNBC Shell PLC share price

Wall Street Journal Shell, BP to Withdraw From Russian Oil, Gas

Shell (March 8th, 2022) Shell announces intent to withdraw from Russian oil and gas

About the author

The article was written in August 2022 by Talia HAMMOUD (The George Washington University, BBA, 2019-2023).

My internship experience at Little Friends for Peace

August 10, 2022 by Talia HAMMOUD

My internship experience at Little Friends for Peace

In this article, Talia HAMMOUD (The George Washington University, BBA, 2019-2023) shares her experience as an intern at a non-governmental organization Little Friends for Peace.

Little Friends for Peace

Little Friends for Peace (LFFP) is a small-medium-sized non-profit organization, based in Washington, D.C., that welcomes youth and adults to experience, learn and practice peace through various peace education programs. Started by MJ and Jerry Park in 1981, LFFP believes that all people can create homes, classrooms, teams, and workplaces where everyone gives, everyone gains, and everyone wins. Named for the “little” part we can all play in spreading peace, LFFP seeks to eradicate violence by teaching skills for peace. Some ways they can do this are by hosting ‘peace circles’, summer camps for children, and weekly visits to the McKenna Center, an organization that helps incarcerated men get back on their feet. Furthermore, they have international programming to certain parts of the world such as China, the Middle East, and Latin America.

Logo of Little Friends for Peace

Source: Little Friends for Peace

My Internship Experience

Since my internship experience took place during the unprecedented pandemic, it was not quite the same as other people’s internship experiences. Firstly, we met weekly on zoom as a team for updates, to-dos, and any exciting news about the NGO. Then we had the option to choose what tasks we wanted to be a part of or lead. For example, I chose to lead the Halloween fundraising event as well as lead in-person peace circles for children between the ages of 6-10 every Monday.

Knowledge and skills needed

Some of the skills required for the internship include organization, fundraising skills, and communication via e-mails, meetings, and social media. I had to organize a fundraising event and create an itinerary for the night. I also had to create advertising and marketing materials to spread awareness and attract attention to the event. This proved difficult as it required the use of a lot of social media outlets to stimulate interest.

What I learned

Operating a non-profit organization is very difficult in terms of financing it. Since a lot of the services they provide are pro bono (meaning for free), the non-profit must find other sources of income to keep the program running. Thus, LFFP must make use of donations, host fundraising events, request grants, and other methods of public funding. Despite this, Little Friends for Peace can maintain operating the business successfully.

Financial Concepts

Interdependence: Non-profits are very dependent on governments and donors which requires them to well connect all parts of operations such as planning, programs, evaluations, etc., to ensure that they receive the right amount of funding and to please potential donors.

Another thing to note is that non-profits must have a substantial amount of cash in operating reserves in case of any downturn or opportunities. For example, due to the pandemic, the government had significant delays in handing out grants and donations to NGOs, thus many organizations had to turn to their reserves to keep business operating.

Why should I be interested in this post?

I think it is very important for all students studying business to experience or learn about all different types of businesses, especially non-profit organizations. I feel that the business behind NGOs and the difficulties of running one is not discussed enough. Therefore, I encourage all business students to consider learning more about the behind-the-scenes of a non-profit organization.

Useful resources

Little Friends for Peace

Non-Profit Finance: 12 Golden Rules

About the author

The article was written in August 2022 by Talia Hammoud (The George Washington University, BBA, 2019-2023).

Muhammad Yunus

August 10, 2022 by Louise PIZON

Muhammad Yunus

In this article, Louise PIZON (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2022) presents the portrait of Muhammad Yunus a well-known economist.

Muhammad Yunus or the “banker to the poor” was born in June 1940 in Bangladeshi in the city of Chittagong. He is a social entrepreneur, banker, economist and civil society leader. In 1976, he founded Grameen Bank, a micro finance organization and a community development bank. Microcredit is a delivery system to provide banking services to the rural poor. He is a pioneer of micro funding and microfinance concepts. In 2006, Muhammad Yunus was awarded Nobel Peace prize for these concepts.

Muhammad Yunus
Portrait Yunus
Source: Wikipédia

After his studies in United States, he came back to Bangladesh and worked for three months for the government’s Planning Commission. He quitted to join Chittagong University as head of the Economics department. He started to be involved in poverty reduction in 1974 when famine has struck Bangladesh.

Grameen bank (“village bank”)

It is in 1976, while visiting a poor village of Jobra next to Chittagong University that Muhammad Yunus has the idea of micro funding. He offered the opportunity to women to take a very small loan to create their business. He explains that at the beginning it was complicated to convince women to take loans because they were afraid of not being able to repay the loan. Also, he faced cultural problem; indeed, male didn’t agree to let women manage money.

Grameen Bank consists in constituting groups of solidarity within the villages of people who know each other. The risk of non-refunding is very low because the shame of mismanaging the loan money, naturally prevented borrowers from being dishonest with the Grameen Bank. At the very beginning groups were formed of five people, with one with the role of president and another one of secretary. Women are so proud to be part of these groups and they are meeting every week to check the status of their finance. Grameen bank allowed them to have an easier and more secure access to their money. It never had a shortage of funds for its loans. It was always local money for the poor women in the area. Members were always told that they had to create, operate and develop their branches with their own money.

Six years after the creation of Grameen Bank, the equality gender of the member rose to a 50/50 ratio. The bank observed that the impact on the family was significantly better in families where women were the borrowers compared to families where the borrowers were men. After this the priority for women borrower was set up and it became a common policy for all microcredit programs worldwide.

Link to VICOBA

Grameen Bank has many similarities with Village Community Bank (VICOBA). VICOBA is a savings and loan fund for members who have joined together and formed a group for economic improvement purposes. The system started in Tanzania twenty years ago and has shown great success for its members in being able to lend to each other, helping each other to solve various problems as well set up joint economic projects.

Both forms of micro funding aim at empowering women and lifting families out of poverty by allowing them to borrow a small amount of money to be able to start a business and generate more money. In both cases, the groups are formed in the same way: members come from the same village and in general it is group of close friends or family members. Within the group, a steering committee of five people is elected annually with the roles of chairperson, secretary, treasurer and two accountants. Both village community banks have weekly meetings to manage the accounts and ensure that people repay on time their loans.

However, there are some differences such as the number of members in the groups: five for Grameen bank versus fifteen to thirty members for VICOBA.

The biggest difference between Grameen and VICOBA is that people part of Grameen bank must open a bank account in Grameen bank whereas VICOBA is completely manage by the members of the group and the money is lock in a box by the treasurer of the group. In VICOBA they also have the possibility to follow business trainings to help them to build their businesses.

Why should I be interested in this post?

Do you want to know how an economist won a Nobel Peace Price? Find out the story of Muhammed Yunus or “the banker to the poor” who created the concept of micro funding to help the poor rural to lift out of the poverty and let them a chance to live in better conditions. Besides being a brilliant economist, he is also a humanitarian and a successful businessman whose purpose in life is creating a World without poverty.

Useful resources

Forbes Muhammed Yunus (Prix Nobel) (in French).

About the author

The article was written in August 2022 by Louise PIZON (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2022).

My professional experience as an intern at Caisse des Dépôts

August 10, 2022 by Louise PIZON

My professional experience as an intern at Caisse des Dépôts

In this article, Louise PIZON (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2022) presents her internship experience at Bank of Territories from La Caisse des Dépôts in the Social and Solidarity Economy.

About the company

Caisse des Dépôts et Consignations (CDC), sometimes referred as Caisse des Dépôts, is a French public financial institution created in 1816. Under the direct control of a supervisory commission reporting to Parliament, it carries out general interest activities on behalf of the State and local authorities as well as competitive activities. It employs both civil servants and private-sector personnel under collective agreements.

Launched in 2018, Bank of Territories is a department of CDC. It supports local players in the service of regional development. It offers tailored advisory and financing solutions in loans and investments to meet the needs of local authorities, social housing organizations, local public companies and the legal professions. Bank of Territories also forges strategic partnerships with companies and financial players to carry out projects with a strong territorial impact. It is aimed at all territories, from rural areas to metropolitan areas, with the ambition of fighting against social inequalities and territorial fractures.

It mobilizes 20 billion by year to finance projects for local authorities and social housing actors. It has 35 local offices to ensure greater proximity to its clients. In September 2020, the Bank of Territories and BPI France launched a €40 billion “climate plan” over five years to support French companies in their ecological transition. Priority is given to building renovations and the development of renewable energies, with more than €14 billion budget for each. The rest of the budget should be devoted to innovation (5.6 billion euros), mobility (3.5 billion euros) and industry (1.5 billion euros).

To give an example, in 2013, the Caisse des Dépôts with the help of the State launched the waste recycling and insertion project in Haute Marne. The SCIC (Société Coopérative d’Intérêt Collectif) is called DIB 52 and consists of transforming common industrial waste (CIW), via the creation of platforms allowing the sorting and transformation of CIW into solid recovered fuel (SRF). This project has made it possible to respond to environmental issues thanks to an innovative industrial solution and, in addition, to create jobs.

Logo of La Banque des Territoires
Logo banque des territoires
Source: CDC

What is SSE?

The concept of Social and Solidarity Economy (SSE) designates a set of organizations in the form of cooperatives, mutual insurance, associations or foundations, whose internal functioning and activities are based on a principle of solidarity and social utility.

These enterprises adopt democratic and participatory management methods. The profits made are reinvested. Their financial resources are generally partly public.

Thus, SSE enterprises are concerned with their social or ecological impact. They aim at putting the human being and solidarity at the heart of the economy and respond to the major challenges of society (ageing well, transition to a local, sustainable food system, the circular economy).

My role and personal missions

I was intern in the Social and Solidarity Economy department of Bank of Territories.

I selected innovative start-ups respecting the environment or social utility company and I created their identity card to classify them. Indeed, to be eligible for different type of funding we need to segment them by type of activities. Then some of them will be chose to be financed and we help them for the process of development as an incubator.

The Social and Solidarity Economy department offered them a two-stage support solution for the creation stage and then the development stage. Our mission was to offer them a support as early as possible to be successful during the maturation of the project.

During the creation stage

We help for several tasks :

Create spaces for experimentation in each territory: specific advisors “young people” in an employment support contract, “hosting”/sponsoring of the bearers within a SSE enterprise of the sector (financed).
Help for the rebound in case of failure: assessments of the skills acquired during the creation.
Ensure a flexible and reactive support, adapted to the functioning of these initiatives, based on a mutual relationship between the mentor(s) and the entrepreneur(s)
Offer both technical support (legal, financial, administrative) and support on the substance of the projects’ approach (values, collective management, knowledge of the SSE …).
Immersions in other SSE companies, training on SSE and its values.
To insert the young people as soon as possible in a network as broad and varied as possible (collectives of support to projects). Mutualize the tools and devices of the SSE and the classic economy by the creation of common platforms.

During the development stage

We help them to set up supports for the perpetuation: lines of financing intended for the social innovation of young people (indicators and criteria adapted to the realities of the projects), improve the links between funders to simplify access to funding, make available specific territorial “funds of assistance” for funds for SSE activities of people under 35 years of age.

Raising awareness among local support network’ agents about the characteristics of young SSE projects. Provision of “drawing rights” on all the dimensions that cover support for young people over several years. Offer permanent and informal exchange spaces between holders to simplify the mode of creation of a SCIC. To make a place for young entrepreneurs in the SSE support systems.

Commitment of the Bank of Territories to the development of the SSE and social innovation

The State Secretariat for the SSE and Bank of Territories signed on November 3rd, 2020, an agreement to take an action on the strengthening of the support of SSE companies, the development of their financing and the support to social innovation.

With this objective in mind, Bank of Territories is mobilizing €300 million for the social and solidarity economy (SSE) between 2020 and 2022, as part of a pact to boost the SSE and social innovation.

This pact is based on two main goals:

Strengthening the support of SSE companies: Several actions must be carried out to improve the meeting between SSE companies and private financiers, particularly in the booming field of impact investment.
Financing SSE companies and social innovation

Thus, in addition to its support actions, Bank of Territories is committed to the State to deploy its investment actions over the next three years by:

Massively increasing the use of impact contracts*: These contracts make it possible to finance social innovation based on results and impact measurement. Within this framework, the State will launch calls for expressions of interest to identify projects in which the Bank of Territories will be able to invest in pre-financing.
Reinforcing its direct investments in the sectors of solidarity and medico-social services, food transition, local economic development, education and professional training, and digital inclusion.
Facilitate access to financing.

In addition, indirect investments (impact funds and sharing funds) will allow the Bank of Territories to multiply its support actions to SSE actors, in a complementary way to its direct investments.

General concepts

Impact contract

The impact contract is a partnership between the public and private sectors designed to encourage the emergence of innovative social and environmental projects. These contracts allow for the scaling up of solutions that have been identified in the field and are effective. The private and/or public investor pre-finances the project and takes the risk of failure in exchange for a pre-determined remuneration in case of success. The State only reimburses according to the results obtained and objectively observed by an independent evaluator.

How it works ?

The impact contract renews the financing of innovative projects carried out by actors in the social and solidarity economy. Under this system, social and environmental projects are financed by private and/or public investors, who are reimbursed by the State if the projects achieve the objectives previously set.

Impact contracts are not intended to replace traditional financing of social or environmental activities. They provide a complementary method of financing to facilitate the development of new activities or an innovative program for existing activities.

In concrete terms, the public authorities will launch calls for projects to meet social or environmental needs that are not, or are poorly, covered by the State: the selected structures will then be financed by a third-party investor. Depending on the results observed, based on indicators determined by the stakeholders, the State will remunerate the project leader, who will then be able to reimburse the investor.

Circular economy

The circular economy refers to an economic model whose objective is to produce goods and services in a sustainable manner, by limiting the consumption and waste of resources (raw materials, water, energy) as well as the production of waste. It is about breaking with the linear economy model (extract, manufacture, consume, throw away) for a “circular” economic model.

Intended to generate potential for the creation of activities and jobs, and to respond to the challenges of resource scarcity, circular economy approaches are based on the dynamics of multi-actor cooperation on a territorial scale.

Transition to a local, sustainable food system

The transition to food system refers to the process by which a society profoundly modifies its way of producing and consuming food. The term is used in the context of energy transition, the ecological transition or the demographic transition.

In the 2010s, the term transition to food system is increasingly used in the public debate to designate the expectations or efforts undertaken by the different actors in the chain (producers, processors, distributors, consumers, public authorities) to better respect the environment, improve the nutritional status of food, develop organic and fresh products, and produce under conditions that are more respectful of animal welfare and with greater equity between the actors in the chain.

Useful resources

Banque des territoires

Ellen MacArthur Foundation L’économie circulaire : du consommateur à l’utilisateur Video (in French).

About the author

The article was written in August 2022 by Louise PIZON (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2022).

My professional experience as a business developer at AJISO

August 10, 2022 by Louise PIZON

My professional experience as a business developer at AJISO

In this article, Louise PIZON (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2022) presents her personal internship experience as a business developer at AJISO in the sector of micro funding.

Presentation of the organization

AJISO is a legal aid provision organization that was established in 1998 with the aim of promoting women and children rights and access to justice in society. It empowers women and children through access to justice, organizing public awareness raising meetings about human rights, legal education and Gender-based Violence (GBV). It also trains paralegals, the ward protection committees and child rights clubs to eliminate all forms of violence in society.

After realizing that poverty is a leading cause of GBV, AJISO embarked on empowering women economically by mobilizing them into Village Community Banks (VICOBA) groups where they receive entrepreneurship trainings and other demand driven skills which in turn allows them to engage in economic activities and improve their livelihood hence reducing the risk of being subjected to GBV.

Every year AJISO together with the paralegals serve more than 500 clients and reaches out to more than 93,659 people (43,808 male and 49,851 female) in Kilimanjaro and neighboring regions with legal and GBV education.

Organization structure of AJISO
Ajiso association in Tanzania
Source: Ajiso

Organization structure of AJISO

Source: Ajiso

My role

My role within the organization was to help underprivileged women and disadvantaged minorities in Tanzania to get out of poverty and empower them. I was also in charge of finding new solutions to resolve problems and limits they are facing in their daily life and VICOBA groups.

My personal missions

The main mission was to promote human rights, access to justice and socio-economic empowerment of women and children in Tanzania :

My first mission was to work on VICOBA which is the main solution use by AJISO to help low-income and poor people to get out of the poverty by using micro funding. The solution of VICOBA groups to help people to build their own business. This solution is great and successful but has limits, so I found solution to these limits.

My second mission was to help communities, especially women that wish to join these groups but are unable to afford shares due to their extreme poverty situations. You need 10.000 Shilling to enter in these groups which represent around 3 euros.

My third mission was to work on the problem of wood in households. Indeed, most of the households have a traditional oven which uses a lot of wood. Women spend a lot of time in the wood to find firewood and during this time they are losing customers and money. Because of this they are enabled to buy shares in VICOBA group.

In addition to my missions, I have been working on the preparation of a training guide on VICOBA groups for a better understanding of the system for members and interested people.

Required skills needed

To work for AJISO you need minimum a bachelor’s in economics. The skills and knowledge needed are basics in finance, background in law, social work, gender issues, media or other relevant fields.

The language requirement is English C1.

You need to be flexible and have a strong adaptability to other culture as you will face “different” ways of work, “different” times of work, “different” ways of communication, and different planning and organization. You need also to be altruist to live together. It means a “different” way of managing projects and “different” expectations about the results of the projects. You should be capable to cope with these differences.

You need to send a contribution of 450€ to participate to the program.

Concepts

Village Community Bank (VICOBA)

VICOBA (Village Community Bank) is a savings and loan fund for members who have joined together and formed a group for economic improved purposes. The system started in Tanzania twenty years ago and has shown great success for its members to be able to lend to each other, help each other in various problems as well set up joint economic projects.

The micro funding provided by VICOBA involves banking transactions and group deposits using a share system. Shares are funds that are invested by a group member in the group for the purpose of making profit and becoming the owner of the group. A group member can buy one or more shares. The value of one share will be based on the agreement of the members of the group and it is recommended that the rate take into account the economic potential of its members. So, this feature requires group members to buy shares for each one by loudly stating the number of shares they are buying and the amount of social fund they are investing.

The VICOBA system is like any other financial system that requires a lot of attention in managing its records and assets. The VICOBA system encourages records to be stored in categories (shares and loans) and this is to simplify and be sure when one of the records is read differently or when it causes controversy. In the VICOBA system, records are recorded in the member’s book, group ledger.

With the help of the Economic Empowerment program of AJISO, at least 900 (756 female and 144 male) people including people living with disabilities 34 (18 male and 16 Female) were empowered with knowledge of VICOBA and entrepreneurship which in turn has enabled them to start and expand their businesses to improve their livelihood.

Economic benefits from VICOBA Bank

VICOBA has a lot of economic benefits compare to a normal bank. VICOBA members can benefit from borrowing’ procedures without collateral. The low interest rates are decided by the group members and it is charge between 5 to 10%. At the end of each cycle, shareholders received a return on investment. So, you can win money by simply injecting money into the fund (buying shares).

The poor and low-income household have access to a wide range of financial services such as deposit, loans, payment services, money transfers and insurance products.
All these benefits permit to low-income household to be able to invest in their small businesses and increase their income. VICOBA bank is simple with transparent transactions, It is a safe economic and a good way to secure group members’ market.

Weekly meeting of a VICOBA group
Meeting Vicoba
Source: Vicoba

My takeaway

Working for AJISO was a great experience both on a professional and personal level.

During this internship I understood that the success of an organization is based on the projects that propose long-term solutions to the problems of development and poverty. It was very beneficial to me and made me understand the importance of our involvement in a responsible cooperation generating a human development which will allow the village population that wish develop their business to set up autonomous actions to reach precise objectives. I believe that we can reduce poverty with the implementation of community development, social justice and various forms of emergency interventions.

For the personal aspect, I have acquired a greater sensitivity and knowledge of global inequalities. I understand the importance of helping each other to make things evolve. I learned to be humble because we are so lucky to live in such conditions in France and I am thankful.

Why should I be interested in this post?

If you are interesting to work for a NGO or helping low income people to going out of the poverty through micro funding this post is for you. In this post, I explain my experience as a business developer withing the association AJISO headquarter in Tanzania. And how an almost entirely female association has succeeded in lifted a large part of the population out of poverty.

Useful resources

AJISO

About the author

The article was written in August 2022 by Louise PIZON (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2022).

VICOBA

February 5, 2024August 10, 2022 by Louise PIZON

VICOBA

In this article, Louise PIZON (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2022) explains the concept of Village Community Bank (VICOBA) which is a type of micro funding used in non-governmental organizations (NGOs).

Village Community Bank (VICOBA)

Village Community Bank (VICOBA) is a savings and loan fund for members who have joined together and formed a group for economic improvement purposes. The system started in Tanzania twenty years ago and has shown great success for its members in being able to lend to each other, helping each other to solve various problems as well set up joint economic projects.

What is micro funding? It is the funding of projects that are too small to gain support from mainstream venture capital firms. Through micro funding, such projects can be linked to a group of investors willing to take a chance on the project. Micro funding allows entrepreneur to network with investors and managers to grow your business to the next level.

Purpose of VICOBA group and activities

A VICOBA group is a group of people who have agreed to gather their strengths and resources together to eradicate poverty and bring development in their household. Group members will participate to all group activities as weekly meetings and general meetings, elect a steering committee and establish group rules to guide them.

It is better for groups to meet weekly to increase intimacy and help the loan’ fund to grow faster. Previous experiences have shown that the growth of a group that meet weekly is faster from the growth of a group that meet once a month. Weekly meeting helps people to repay their loans on time and keep the cash flow within the group stable.

All VICOBA group activities are run by the group members themselves through volunteerism. By experience, group members can effectively carry out their activities after receiving leadership training and management teamwork from VICOBA experts, which are AJISO members.

AJISO is a legal aid provision organization in Tanzania who help women to empowered themselves economically, in pushing them to be part of a VICOBA group and giving them some entrepreneurship trainings to allows them to be engage in economic activities and improve their livelihood.

Steps to create a VICOBA group

A VICOBA group is created following the steps:

Persons with the idea of starting a group to meet (not less than fifteen and not more than thirty)
Members collect admission fees usually 10,000 TZS per member. The money is used to buy equipment such as ledgers, passbooks, etc.; Admission fees are also used for group registration costs.
Members start the training supervised by an AJISO trainer.
Members formulate a constitution and rules that will include the level of shares, the social fund, and the date of the meeting.

Details rules of VICOBA

VICOBA groups are made up of 15 to 30 members who are self-selected. These groups come from small groups of five people whose members select and assemble themselves. Members begin to buy shares in the group and after a delay of twelve weeks the share fund begins to be lent to its members.

Membership of VICOBA groups is open to women and men and at least two of the five members of the steering committee must be women. A person who is heavily indebted to other such groups will not be allowed to join the scheme until he has paid off his debts. Religious and government leaders will be allowed to join the program but will not be allowed to lead the group, these leaders are not allowed to be leaders due to their positions and responsibilities they have in society, instead they will be group advisors.

VICOBA groups elect their leaders who are a chairperson, a secretary, a treasurer and two accountants. The members of the steering committee are elected annually and may be removed at any time if 2/3 of the members of the general assembly decide so. VICOBA groups formulate their own rules of governance, and these groups are self-reliant. Each group has its own rules, and these rules give authority to the group leadership to show direction for the conduct of group activities as well as the resolution of group conflicts.

Each participant needs to know all the group rules and to follow them accordingly. VICOBA groups met in a specific order: group members determine the best time to meet. This system emphasizes the group meeting weekly but may consider meeting monthly but will depend on the activities carried out by the members themselves. The group will agree on the date of the meeting, the time of the meeting and the place of meeting. However, the group is important to consider what this program suggests to going further strengthen collaboration and communication to be closer among members. Meeting weekly will allow some members who want to take out loans to make it easier and those who want to take out emergency loans as well.

Fundraising process

The fundraising process involves banking transactions and group deposits using a share system. Shares are funds that are injected by a group member into the group for the purpose of making profit and becoming the owner of the group. Group members contribute financially each week in buying one to five shares. The value of one share will be based on the agreement of the members of the group and it is recommended that the rate take into account the economic potential of its members.

This system requires that each group members buy shares in loudly stating the number of shares that they are buying and the amount of social fund they are investing. The member will submit the money to the accountants and the book is handed over to the treasurer for replenishing the shares and social fund in which the member has invested.

Procedures for repaying loans

Loans given to VICOBA members should be repaid with a small interest which is used to fund the group. This supplement is distributed as a benefit to members based on the number of shares, they have each deposited. Initial loans that are usually smaller than subsequent loans are required to be repaid for a period of 3 to 6 months.

Benefits

VICOBA loans are small loans granted to the poor and low-income households for their microenterprises and small businesses to enable them to raise their income levels and improve their living standards.

This micro lending model has ensured women to be empowered and independent enough through loans taken from VICOBA, using this loan to develop their economic activities. This system promotes the integration of the poor into the process of economic growth, people who do not have access to the formal labor market can often benefit from pooling resources and working in these groups. VICOBA has cultivated the culture of saving, now members have some money to curter their daily expenses and savings. Most of them have changed from poor life to a better life.

Example of success story

Mary CHARLES (37 years old) lives in Usseri division tell her story :

“I am able to provide to my family all the necessities they need, including food, clothing, and medical treatment. I can educate my two children, one is in seventh grade and the other one in third grade, thanks to my dress hair salon business. I obtained the capital to start my business after joining a VICOBA group. I was able to borrow six hundred thousand shillings (600,000 TZS) and so far, I have been able to repay four and half thousand shillings (450,000 TZS) through the profit I get from my business. I aimed to have another salon in the Tara kea Division at the marketplace. Corona’s disease has pushed me back because the business was so volatile, customers were afraid of getting an infection.”

Mary Charles in her shop

Source: Mary Charles

Why should I be interested in this post?

If you are interesting to work for a NGO or helping low income people to going out of the poverty through micro funding this post is for you. In this post, I explain the principle of micro funding named VICOBA using by the association AJISO headquarter in Tanzania to help the population to live in better conditions and more particularly empowered women.
This system can be used in all countries, it only needs a good and devoted team to train future members to be autonomous and teach them some basic business knowledges.

Useful resources

VICOBA Micro funding (ICD)

About the author

The article was written in August 2022 by Louise PIZON (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2022).

My experience as an M&A Analyst Intern at Oaklins Atlas Capital

August 10, 2022 by Basma ISSADIK

My experience as an M&A Analyst Intern at Oaklins Atlas Capital

In this article, Basma ISSADIK (ESSEC Business School, Global Bachelor of Business Administration, 2019-2023) shares her experience as an M&A Analyst intern at Oaklins Atlas Capital.

In May-June 2021, I was able to intern at Oaklins Atlas Capital, which is the Moroccan branch of Oaklins, a leader of M&A advising in mid-market operations. Oaklins group has advisory teams in 45 countries around the world. The Oaklins team provides mergers and acquisitions, growth equity and equity capital markets, debt advisory and corporate finance advisory services.

Oaklins Atlas Capital

Founded in 1999, Atlas Capital is an independent investment bank in Morocco covering all businesses: investment banking, asset management, stock market intermediation and private management. Offering a range of financial services with high added value, it targets a diversified clientele, whether companies and public offices, financial institutions, private companies or individual investors. It then was included in the Oaklins group and network which has presence across the globe through its 45 teams from Stockholm to Shanghai, from New York to São Paulo. The bank benefits from cross-border collaboration which helps the teams find the best suitable deals for its clients with a track record of more than 1900 deals being closed in the past five years.

Logo Oaklins Atlas Capital

Source: Oaklins Atlas Capital.

My internship at Oaklins Atlas Capital

During May-June 2021, I worked as an M&A Analyst intern at Oaklins Atlas Capital. During my time at the bank, my main responsibilities were writing fact sheets about new clients (through communication with the Oaklins Network) and target companies / projects in Morocco. I was also responsible for drafting presentations (teaser, pitch, kick off meetings), for valuations (DCF, transactions) of the target companies once our clients confirmed their interest with it, and for assisting senior management in day-to-day tasks in relation to the transactions.

This experience was my very first in investment banking and it helped me understand the M&A process and how important negotiation and customer relationships were to this field. This internship introduced me to the very basics of Mergers and Acquisitions through a high-level of personal attention and monitoring as I was in a team of five in total including two partners and three interns. I had the opportunity to learn directly from professionals who have been in the field for 20+ years. Moreover, through this internship, I have been exposed to many industries: textile, technology, agriculture, food processing industry, electrical equipment, infrastructure, renewable energy and to clients from all over the world.

Skills needed

Strong interpersonal skills
Financial analysis skills
Customer service (if you are to interact with clients)
To be familiar with finance and be able to analysis financial data
To be familiar with digital tools such as pptx and excel

What I have learnt from the internship

This internship has helped me learn so much about cross-border operations and how to approach potential acquirers with target companies and discuss the acquisition with them. It has also enabled me to have a solid understanding of many industries as I was in charge of sectoral research.

Key concepts related to my work

Mergers and acquisitions

Why do companies merge with and acquire other companies? Mergers and acquisitions are the act of consolidating companies or assets with an eye toward stimulating growth (it can expand a company’s market shares without it having to do significant heavy lifting), gaining competitive advantages (maybe eliminating competition and gaining market share), increasing market share, or influencing supply chains (eliminating a tier of costs).

A merger describes two companies uniting into a single company, where one of the two companies ceases to exist after being absorbed by the other company. The boards of directors of both companies must first secure approval from their respective shareholder bases. In 2006, Disney and Pixar completed a successful merger.

An acquisition occurs when one company (the acquirer) obtains a majority stake in the target firm, which incidentally retains its name and legal structure. For example, after Amazon acquired Whole Foods in 2017, the latter company maintained its name and continued executing its business model, as usual.

Tender Offer

A tender offer is a bid to purchase some or all of shareholders’ stock in a corporation. Tender offers are typically made publicly and invite shareholders to sell their shares for a specified price and within a particular window of time.

The price offered is usually at a premium to the market price and is often contingent upon a minimum or a maximum number of shares sold. To tender is to invite bids for a project or accept a formal offer such as a takeover bid. An exchange offer is a specialized type of tender offer in which securities or other non-cash alternatives are offered in exchange for shares. For example, Elon Musk has recently announced making a tender offer to acquire Twitter.

Proxy fight

A proxy fight refers to the act of a group of shareholders joining forces and attempting to gather enough shareholder proxy votes to win a corporate vote. Sometimes referred to as a “proxy battle,” this action is mainly used in corporate takeovers. For example, Microsoft Corporation made an unsolicited offer to buy Yahoo for $31 per share. The board of directors at Yahoo believed the offer by Microsoft under-valued the company, and, consequently, the board stalled any negotiations between Microsoft and Yahoo executives.

Why should I be interested in this post

This post is interesting for everyone who would like to work in investment banking and who would like to kick start their career by doing a summer internship.

Useful resources

Oaklins Atlas Capital

About the author

The article was written in August 2022 by Basma ISSADIK (ESSEC Business School, Global Bachelor of Business Administration, 2019-2023).

My experience as an M&A/TS intern at Deloitte

August 10, 2022 by Basma ISSADIK

My experience as an M&A/TS intern at Deloitte

In this article, Basma ISSADIK (ESSEC Business School, Global Bachelor of Business Administration, 2019-2023) shares her experience as an M&A/TS (Mergers and Acquisitions / Transaction Services) Intern at Deloitte.

Summer 2021, I was able to intern at Deloitte Casablanca for a couple of months. I was in the Transaction Services team which was in charge of advisory in deal and IPO readiness, target screening, sell-side and buy-side due diligence, transaction accounting and reporting, and business integration or separation. Transaction services typically refers to the services provided when a business transaction takes place. An example of a business transaction would be a merger or acquisition of a company.

Deloitte

Founded in 1845, Deloitte is one of the biggest professional service providers in the world. Being one of the “Big Four” accounting firms, it provides services in audit and assurance, consulting, financial advisory, risk advisory, tax and legal advisory. Deloitte was founded by William Welch Deloitte in London in 1845 and expanded into the United States in 1890. It merged with Haskins & Sells to form Deloitte Haskins & Sells in 1972 and with Touche Ross in the US to form Deloitte & Touche in 1989. As of 2020, Deloitte is the third-largest privately-owned company in the United States, according to Forbes. The firm has sponsored a number of activities and events including the 2012 Summer Olympics.

Logo Deloitte.

Source: Deloitte.

My internship at Deloitte

When I arrived at Deloitte in July 2021, the team was working on a specific project in cooperation with the Minister of the Industry. I was in charge of analyzing the eligibility of our clients to obtain financing from the Minister of the Industry. We already had set criteria for the companies that would later be presented to the Minister of the Industry. Our mission was to select the interesting project in accordance with the “banque de projet” which had already been established and advise the companies to meet the criteria as best as they can. These criteria were of different natures:

In financing for instance, there should be a portion of the project financed by the shareholders / founders.
The forecasted financial figures should be realistic.
The business plan should fit within the criteria and so on…

The junior analysts made sure I was closely supervised and assisted whenever I needed help with anything. I was communicating with them on a daily basis, and they all ensured I had a great experience at Deloitte which is what differentiates the firm from other competitive professional services companies. From the start I was given a lot of responsibilities which I was very happy about. I was able to participate in meetings and had the opportunity to lead one at the end of my internship. It was a really good experience in a way that enabled me to have direct contact with professionals and feel very useful to the team as well.

Skills needed

To have some experience in accounting
To be able to communicate and interact with the team
To possess analytical skills and problem-solving skills
To be familiar with financial reporting
To be familiar with digital tools such as pptx and excel
To have a strong learning ability
Be able to take responsibilities early on

What I have learnt from the internship

This internship has taught me a lot on the importance of meticulousness and how vital it is to be very rigorous with the data we are given and the analysis we do of it. I have also learned lots about the role of an auditing and consulting firm in advising clients to make the best decisions for their companies.

Key concepts related to my internship

Due diligence

Due diligence is an investigation, audit, or review performed to confirm facts or details of a matter under consideration. In the financial world, due diligence requires an examination of financial records before entering a proposed transaction with another party. Due diligence (DD) is an extensive process undertaken by an acquiring firm in order to thoroughly and completely assess the target company’s business, assets, capabilities, and financial performance. There may be as many as 20 or more angles of due diligence analysis.

The main types of due diligence inquiry are as follows:

Administrative DD: Is the aspect of due diligence that involves verifying admin-related items such as facilities, occupancy rate, number of workstations, etc.
Financial DD: Financial DD aims to provide a thorough understanding of all the company’s financials, including, but not restricted to, audited financial statements for the last three years, recent unaudited financial statements with comparable statements of the last year, the company’s projections and the basis of such projections, capital expenditure plan, schedule of inventory, debtors and creditors, etc.
Legal DD
Asset DD
Human Resources DD
Environmental DD
Taxes DD : Due diligence in regard to tax liability includes a review of all taxes the company is required to pay and ensuring their proper calculation with no intention of under-reporting of taxes.
Intellectual Property DD: Almost every company has intellectual property assets that they can use to monetize their business. These intangible assets are something that differentiates their products and services from their competitors.
Customer DD
Strategic Fit: Acquirers are generally also very careful about exercising due diligence in regard to evaluating how well the target company fits in with the overall strategic business plan of the buyer.

Why should I be interested in this post

You should be interested in this post if you are interested in working in finance in general because it might help you understand if you would like to work in the field or not, and maybe help you refine your professional project.

Useful resources

Deloitte

About the author

The article was written in August 2022 by Basma ISSADIK (ESSEC Business School, Global Bachelor in Business Administration, 2019-2023).

Moving averages

August 7, 2022 by Jayati WALIA

Moving averages

In this article, Jayati WALIA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) explains the concept of moving averages and its implementation in financial markets as an indicator in technical analysis of stock price movements.

What is a moving average?

A moving average is a technique to analyze a time-series of data points by taking subsets of data and computing their averages. The subsets of data can explicitly be of a fixed size like simple moving averages or implicitly take into account all past points like exponential moving averages. These averages computed on rolling windows constitute a new time series. The aim of this exercise is essentially to filter noise and smoothen out the data in order to identify an overall trend in the data.

In financial markets, moving averages are one of the most popular indicators used in technical analysis. A moving average is used to interpret the current trend of a stock price (or any asset). It basically shows the price fluctuations in a stock as a single curve and is calculated using previous prices. Hence, a moving average is a lagging indicator.

Moving averages can be computed for different time periods such as 10 days, 20 days or 200 days. The greater the length of the time period (the lag in the trend), the greater the degree of smoothness in the moving average, however, the lower the price sensitivity of the moving average.

To measure the direction and strength of a trend, moving averages involve price averaging to establish a baseline. For instance, if the price moves above the average, the indicated trend is bullish and if it moves below the average, the trend is bearish. Moving average crossovers are also used commonly in trading strategies to identify trends. It then involves two moving averages: one computed on a short-term period and another one computed over a long-term period. When a shorter period moving average crosses above a longer period moving average, the trend is identified as bullish and indicates a buy signal. When a shorter period moving average crosses below a longer period moving average, the trend is identified as bearish and indicates a sell signal.

Moving averages are also used in development of other indicators such as Bollinger’s bands and Moving Average Convergence Divergence (MACD).

Types of moving averages

The moving average indicator can be of many types. Two basic types of moving averages and their interpretation are explained below: simple moving average and exponential-weighted moving average.

Simple moving average

Simple moving average (SMA) is the easiest type of moving average to compute. An n-period SMA is simply calculated by taking the sum of the closing prices of an asset for the past ‘n’ time-periods divided by ‘n’.

The formula to compute the SMA at time t is given by:

Simple moving average formula

Where P_i represents the asset price at time i (i indicating any time between the interval [t-n, t]).

If the current asset price is greater than the SMA value, the viewpoint for trend is established as bullish and similarly, if the current asset price is less than the SMA value, the viewpoint for trend is established as bearish.

Figure 1 below illustrates the 20-day and 50-day SMA for Amazon stock price.

Figure 1. 20-day and 50-day simple moving averages for Amazon stock price.
20-day and 50-day SMA for Amazon stock price Source: Computation by author.

We can observe from the above figure that when the price is going down, the SMA also is going downwards (as expected from the formula). It can also be seen that the movement of the SMA curve lags the change in price movements. The greater is the chosen time-period for SMA, the greater is the lag observed. Thus, while a 50-day SMA maybe smoother compared to a 20-day SMA, the lag observed will also be greater.

Exponential-weighted moving average

Exponential-weighted moving average (EWMA), also known as exponential moving average (EMA) is an improvisation of moving average over the SMA. It assigns weights to moving averages such that the recent data points are assigned greater weight factors than older data points. Thus, EWMA is more sensitive to recent price changes and the line is smoother than that of SMA.

The formula to compute the value of the EWMA at time t is given by:

Exponential-weighted moving average formula

Where P_t represents the stock price at time t, and α is a smoothing (or weighting) factor.

The series is initialized as: EWMA₀ = P₀.

The smoothing factor, α, is a constant value which lies between 0 and 1. The higher the value of α, the greater the weight assigned to the recent data, and the less smooth the EWMA curve.

How to set alpha for an exponential-weighted moving average?

α can be varied by a trader using EWMA based on how heavily he or she wants the recent data to be weighted. If a single EWMA is being considered, an optimal value for alpha can be chosen by minimizing the mean-squared errors (MSE).

A rule of thumb sometimes by traders is specified as:
Alpha for EWMA

For instance, for a short-term EWMA with the lookback period, n = 20, and alpha is equal to 2/21 = 0.095. For a long-term EWMA with n = 50, and alpha is equal to 0.039. Note that n is not related to a meaningful number of days like for the SMA.

When α=2/(n+1), the weights of an SMA and EWMA have the same center of mass.

A more sophisticated method is to relate alpha to the ‘half-life’ concept, meaning how long it takes for the weight to become half of the weight of the most recent data.

If the formula of EWMA is expanded for k days, we get the following:

EWMA formula expanded

For α=2/(n+1), the idea is that for a sufficiently large value of n, the sum of weights assigned to last n days is around 86%.

Figure 2 below illustrates the weights of each day for a EWMA with α equal to 3.92% (corresponding to n equal to 50 with the rule of thumb used by traders). It can be observed that the weights are decreasing in an exponential fashion and lower values are assigned as weights to the least recent days. The sum of the weights assigned to the first 10 days is 35.60 %, the first 50 days 86.47%, and the first 100 days 98.24%.

Figure 2. Weights of each day for an EWMA
EWMA day weights
Source: Computation by author.

Crossovers

EWMA is typically used in crossovers, which is a common strategy used by traders wherein two or more moving averages can help determine a more long-term trend. Basically, if a short-term EWMA crosses above a long-term EWMA, the crossover indicates an uptrend and similarly, if a short-term EWMA crosses below a long-term EWMA, the crossover indicates a downtrend. Traders can utilize it to establish their position in the stock.

Figure 3. below illustrates short-term and long-term EWMA curves for Amazon stock prices.

Figure 3. Short-term and long-term EWMA for Amazon stock price.
img_SimTrade_EWMA_Amazon_stock
Source: Computation by author.

We can observe in the figure above that the short-term EWMA follows the price movements in Amazon stock more closely than the long-term EWMA does. We can also see that a crossover of the two EWMA curves is followed by a change in trend. For instance, in April 2022, the short-term EWMA crosses below the long-term EWMA and there is an evident downtrend observed post the crossover.

You can also download below the Excel file for computation of SMA and EWMA for Amazon stock price and visualize the above graphs.

Useful resources

Hunter, J. S. (1986). The exponentially weighted moving average. Journal of Quality Technology, 18:203–210.

Wikipedia Moving averages

National Institute of Standards and Technology (NIST) US Department of Commerce Single Exponential Smoothing

About the author

The article was written in August 2022 by Jayati WALIA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Reverse Convertibles

Introduction

Construction of a reverse convertible

Positions of the parties of the transaction

Table 1. Positions of the parties of a reverse convertible transaction

Payoff of a plain reverse convertible

Pricing of a plain reverse convertible

Download the Excel file to analyze reverse convertibles

Why should I be interested in this post

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Resources

Academic references

Business references

About the author

Macro Funds

Introduction

Benefits of a macro funds

Other characteristics of macro funds

Examples of macro funds strategies

Black Wednesday

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Initial and maintenance margins in stocks

Introduction

Initial margin

Maintenance margin

Mechanism of initial and maintenance margins

Example

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Initial and maintenance margins in futures contracts

Introduction

Initial margin

Maintenance margin

Mechanism of initial and maintenance margins

Example with initial margin

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My experience as a credit analyst at Amundi Asset Management

About Amundi

My apprenticeship

Missions

Required skills and knowledge

Three key financial concepts

Credit ratings

Credit spreads

Duration and convexity

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The impact of the Russian invasion of Ukraine on Shell

What is Shell?

What happened?

Stock market reaction

Why this is important?

Market efficiency

Key concepts

American depositary shares (ADS)

Market efficiency

Volatility

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My internship experience at Little Friends for Peace

Little Friends for Peace

My Internship Experience

Knowledge and skills needed

What I learned

Financial Concepts

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About the author

Muhammad Yunus

Grameen bank (“village bank”)