Money never sleeps

April 4, 2023 by Federico MARTINETTO

Money never sleeps

In this article, Federico MARTINETTO (ESSEC Business School, Exchange Global BBA, 2021) comments on a quote from Gordon Gekko in the famous Wall Street film.

Quote: Money never sleeps

The quote “Money never sleeps” is a famous line from the 1987 film “Wall Street” and has become a popular saying in popular culture. The phrase “money never sleeps” is commonly used in the context of financial markets and reflects the idea that financial activity never truly ceases, even outside of traditional business hours. This reflects the fast-paced nature of the global financial system, where transactions can occur at any time and from any location around the world. This concept is particularly relevant in the field of finance and investment, where the value of stocks, bonds, and other securities can fluctuate rapidly based on changes in market conditions or geopolitical events. As such, traders and investors must remain vigilant and stay informed about market developments, as opportunities and risks can arise at any time.

The idea that “money never sleeps” also highlights the interconnectedness of the global financial system, where events in one part of the world can have significant impacts on financial markets and economic activity in other regions. As a result, the ability to respond quickly and effectively to market changes is critical for success in the world of finance and investment.

Overall, the phrase “money never sleeps” reflects the dynamic and constantly evolving nature of the global economy, where financial activity never truly stops, and opportunities and risks can arise at any time.

Analysis of the quote

The quote “money never sleeps” can be analyzed as a reflection of the constantly changing and dynamic nature of financial markets. The phrase suggests that financial activity is always occurring, even outside of traditional business hours, and that investors and traders must be vigilant and responsive to changes in order to succeed.

One of the key factors that drives the ongoing nature of financial activity is the 24-hour nature of global financial markets. Financial exchanges around the world operate in different time zones, meaning that trading activity can occur at any time. This means that traders and investors must be prepared to respond quickly to market changes, even if they occur outside of normal working hours.

In addition to the 24-hour nature of financial markets, the phrase “money never sleeps” also reflects the rapid pace of financial activity. Financial markets are characterized by their fast-paced nature, with changes in market conditions or geopolitical events leading to rapid fluctuations in the value of securities. This creates both opportunities and risks for traders and investors, who must remain alert and responsive to these changes in order to make informed investment decisions. Furthermore, the interconnectedness of global financial systems is a third factor that contributes to the ongoing nature of financial activity. Events in one part of the world can have significant impacts on financial markets and economic activity in other regions. This means that traders and investors must be aware of global market trends and be prepared to adapt to changing circumstances in order to succeed.

From an academic perspective, the quote “money never sleeps” highlights the importance of remaining vigilant and responsive to changes in financial markets. By doing so, investors and traders can position themselves to take advantage of opportunities and manage risks in order to achieve their investment objectives. Additionally, the ongoing nature of financial activity underscores the importance of financial literacy and education, as individuals must be prepared to make informed decisions in an ever-changing financial landscape.

About the author

Gordon Gekko is a fictional character who appears as the villain in the popular 1987 Oliver Stone movie “Wall Street” and its 2010 sequel “Wall Street: Money Never Sleeps.” The character, a ruthless and wildly wealthy investor and corporate raider, has become a cultural symbol for greed, as epitomized by the famous “Wall Street” quote “Greed is good.”

In “Wall Street,” the protagonist, a young stockbroker named Bud Fox, is desperate to work with Gordon Gekko, who is a legend in the world of finance. Predatory, amoral Gekko is only impressed when Fox is willing to compromise his ethics and provide Gekko with inside information about his father’s company. Gekko makes Fox wealthy, but eventually, Fox regrets what he has done and turns state’s evidence against Gekko, who is sent to prison for securities fraud and insider trading.

For his portrayal of Gordon Gekko in the original film, Michael Douglas won an Academy Award.

Financial concepts related to the quote

The quote “money never sleeps” can be said to refer to three key financial concepts: the 24-hour nature of global financial markets, the rapid pace of financial activity, and the interconnectedness of global financial systems.

The 24-hour nature of global financial markets

One of the key reasons why “money never sleeps” is a relevant concept in finance is the 24-hour nature of global financial markets. Financial exchanges around the world operate in different time zones, meaning that trading activity can occur at any time. For example, the New York Stock Exchange is open from 9:30am to 4:00pm Eastern Time, while the Tokyo Stock Exchange operates from 9:00am to 3:00pm Japan Standard Time. This means that financial transactions can occur at any time, even outside of traditional business hours.

The rapid pace of financial activity

Another reason why “money never sleeps” is an important concept in finance is the rapid pace of financial activity. Financial markets are characterized by their fast-paced nature, with changes in market conditions or geopolitical events leading to rapid fluctuations in the value of securities. This can create both opportunities and risks for traders and investors, who must remain alert and responsive to these changes in order to make informed investment decisions.

The interconnectedness of global financial systems

The interconnectedness of global financial systems is a third reason why “money never sleeps” is a relevant concept in finance. Events in one part of the world can have significant impacts on financial markets and economic activity in other regions. For example, a change in monetary policy by the US Federal Reserve can impact the value of the US dollar and influence economic activity in other countries that trade with the US. This means that financial activity never truly stops, as the effects of market changes and economic events can continue to reverberate around the world.

Overall, the phrase “money never sleeps” reflects the dynamic and constantly evolving nature of the global economy, where financial activity never truly ceases, and opportunities and risks can arise at any time. As a result, traders and investors must remain alert and responsive to changes in financial markets and be prepared to adapt to changing circumstances in order to achieve their investment objectives.

My opinion about this quote

I like so much this quote because it means there are opportunities to make money at any time of the day. One reason why I find the quote appealing is because it suggests a sense of excitement and energy. The phrase implies that financial markets are always active, and that there is always something happening that can impact the value of securities or other financial instruments. For some people, this sense of constant motion and activity can be invigorating and attractive.

Additionally, the quote can be seen as a reminder of the importance of remaining engaged and aware in the pursuit of financial success. By suggesting that “money never sleeps”, the quote underscores the idea that financial markets are always evolving and changing, and that individuals who are not actively engaged in managing their investments may miss out on opportunities or be exposed to unnecessary risks.

Moreover, the quote can also be interpreted as reflective of the importance of hard work and dedication in the pursuit of financial success. The phrase “money never sleeps” suggests that financial success is not achieved through passive investment strategies, but rather through active engagement and a willingness to put in the time and effort required to stay informed and make informed decisions.

For individuals who are interested in finance and investing, the quote can be seen as a motivational reminder of the importance of remaining engaged and committed to achieving one’s financial goals. It encourages individuals to remain vigilant, respond quickly to changes in financial markets, and continually seek out opportunities to maximize their returns.

In conclusion, the quote “money never sleeps” can be appealing for a variety of reasons, including its suggestion of excitement and energy, its reminder of the importance of remaining engaged and aware in the pursuit of financial success, and its emphasis on the importance of hard work and dedication.

Why should I be interested in this post?

The quote “Money never sleeps” relates to the SimTrade certificate in different ways.

Concerning the practice by launching the Efficient market simulation, you will practice how information is incorporated into market prices through the trading of market participants and grasp the concept of market efficiency. By launching the Sending an order simulation, you will practice how financial markets really work and how to act in the market by sending orders.

Regarding the theory for example by taking the Market information course, you will understand how information is incorporated into market prices and the associated concept of market efficiency. By taking the Exchange orders course, you will know more about the different type of orders that you can use to buy and sell assets in financial markets.

Useful resources

SimTrade course Market information

SimTrade course Leverage

SimTrade simulations Efficient market

About the author

The article was written in April 2023 by Federico MARTINETTO (ESSEC Business School, Exchange Global BBA, 2021).

Art as an asset class

January 30, 2024November 2, 2022 by Nakul PANJABI

Art as an asset class

In this article, Nakul PANJABI (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2024) talks about the Art as an asset class.

Before delving into the economics of the art market and art’s significance as an asset class, let us first recollect the definition of an asset and an asset class. An asset broadly refers to a resource from which future economic benefits are expected to flow. An asset class is a group of assets that have similar characteristics and related risk and return behavior. Common examples of asset class would be equities, fixed-income investments, and real estate.

Why have you not invested in art yet?

Although an age-old investment, art as an investment has been available to only a minority of investors most of whom are high-net-worth individuals (HNWI) or even ultra-high-net-worth individuals (UHNWI). The prime reason is that the market faces an inelastic supply. In simple terms, there are very few goods in market to be traded which leads to higher prices of each item and therefore, at equilibrium, only few people with such means could afford the good. This economic explanation of the art market would be enough if there were very few art items available to buy. However, as intuition might suggest, that is not the case. The world is filled with pieces of art and people who own it. Does this fact weaken our previous argument? The answer is simply No. Even though there are lots of art item and anyone with some spare money can buy a piece of art, almost none of those items would be classified as an asset. Art as an Asset class has an extremely limited supply. Only a few pieces of art are purchased as Asset.

Features of the Art Market

Besides limited supply and consequently higher prices, there are few other factors as well that makes art an interesting asset class. Firstly, the investable art items are highly illiquid. Selling a collectible art item is a time-consuming complex process. It requires dealers, auctions and most importantly potential buyers who could afford such an expensive item that provides no economic benefits except capital appreciation. As one might guess, there are only a handful of individuals in the world who own a 50-million-dollar painting.

Secondly, the supply of this asset class is not closely related to the cost of producing it. Most goods’ supply is based on the cost of producing them. For example, it is cheap to produce toothpaste, so it has an elastic supply. If there is a strike at a toothpaste factory, then there would be less people to make the toothpaste. This will increase the wages (cost of production) paid to them. Now fewer toothpastes would be produced at a higher price. This will make the supply of toothpaste relatively inelastic. However, this economic phenomenon seems to be missing in the art market. The supply of this asset class is highly inelastic but the goods that represent investable art are very cheap to produce. The low cost of production does not dictate the supply of collectible art. It is the rarity of these goods that cause such an inelastic supply. A lot of Investable art items are works of deceased artists. Although they probably were very cheap to produce, it is impossible to create more of them. The rarity of such items makes them so valuable.

Art has a very high maintenance cost and most of the art do not provide any recurring cashflows. One source of art cashflows is the income generated from renting art to museums. Because there is a limit to the number of paintings that can be displayed in museums, most of the return from art investments is generated through capital appreciation. However, as we discussed before, it is not so easy to sell a piece of art. Then, why would anyone, let alone the most sophisticated of investors, buy such an asset? Well, there are a lot of reason why one might invest in art.

Reasons to invest in the art market

Low correlation

Art has a low correlation with traditional asset class. Fluctuations in Apple’s stock price would probably have little effect on the price of an authentic Picasso painting. Thanks to this low correlation, a collectible painting can act as a hedge against inflation and market crashes. According to a 2022 Citibank report, art has either a weak positive correlation or zero correlation with other asset classes.

Tax Benefits

Given the fact that the value of investable art does not derive from either its future cashflows or its cost of production, it is relatively easier to manipulate its price than it is for other assets. Manipulating the price of an asset is extremely useful to manipulate income and consequently taxes.

Money laundering

Art Investments have also been used for money laundering. The logic is straightforward. A 50-million-dollar painting can be much easily hidden than cash or gold of similar value.

Status Symbol

Art is a very efficient status symbol. The rarity of the collectible art items makes owning them a source of prestige. If your friend owns one of the only five paintings created by a famous renaissance painter, you don’t need to be an expert in art to judge the economic worth of the painting or of your friend.

What Future looks like for the art market

According to the annual report by Art Basel and UBS Global Art, the worldwide art sales crossed $65.1 billion in 2021. This reflects a 29% increase from the previous year.

Moreover, with increase in the trend of NFT trading, millennials are more interested in (digital) art than ever. According to 2021 study by Art Basel and UBS Global Art, millennials were the highest spenders on fine art in 2020.

Now, with an increase in art investing funds, the barriers for art investing have also been reduced tremendously. People, who could not invest in art because of high capital requirement and lack of expertise, can now do so by investing in an art fund.

Why should I be interested in this post?

As an (wealthy) investor, art represents an asset class which is not highly correlated with traditional assets. It then can be useful for asset allocation in terms of diversification. When you think of your personal portfolio, you may think of art.

About the author

The article was written in November 2022 by Nakul PANJABI (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2024).

Charging Bull on Wall Street

November 2, 2022 by Nakul PANJABI

Charging Bull on Wall Street

In this article, Nakul PANJABI (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2024) talks about the Charging Bull sculpture displayed on Wall Street.

About the Charging Bull sculpture

In mid of December 1989, a bronze sculpture of a bull in its charging position was dropped outside of the New York Stock Exchange. The Bull is a symbol of booming stock prices. Arturo Di Modica, an Italian-American artist, was responsible for this stunt. During the economically depressive period of late 80s, he intended to encourage optimism and hope for a prosperous future among the American Citizens. Anticlimactically, the sculpture was removed just after few hours but was placed just two blocks away from its original place.

Charging Bull sculpture on Wall Street.
Charging Bull sculpture on Wall Street
Source: Arturo Di Modica.

Although the Charging Bull has already become a global symbol for an upward stock price movements and prosperity, understanding the basics of Bull and Bear markets can be useful for Investment Management. Bull market represents the time period where asset and security prices are rising, and it reflects the heightened investor confidence in the financial markets. Conversely, Bear market represents a downward movement in security prices and an increased investor pessimism. The terminology evolves from the behaviour of the animals. Bull market derives its name from the upward attacking technique of a bull and the bear market from the downward attacking technique of a bear.

Price trends

Generally, fundamental investing deals with the fundamental value of the security rather than the movement of its price. However, it does not mean that price movements are completely irrelevant in investment decisions of an individual. It is useful to know whether the market is bullish or bearish. If the security is currently overvalued according to your fundamental analysis, then the ideal action would be to sell the security while it is overvalued. But if the price is expected to rise even higher in the near future, then the rational behaviour would be to sell the Security later at that higher price and to sell it now if the price is expected to dip. Judging the market trends is an important skill to maximise returns on investment.

The price trend approach and market efficiency

Classifying a market as bull or bear derives from studying the trends in prices of assets. The method to identify patterns in price movements and forecasting the direction of price using past market data is known as technical analysis’. Profiting from technical analysis requires the market to be inefficient. It simply means that the current stock price does not reflect all the information represented in the past price points as well as all the public and private information in the market. However, it is widely assumed that developed markets are usually efficient in the semi-strong sense. This means that the prices of the assets reflect all the information from past price points and all the information publicly available. Theoretically, in such a situation an investor cannot benefit (have abnormal returns) by using technical or fundamental analysis.

However, this does not mean that studying price trends is completely useless. In markets which are inefficient, using technical analysis might be even more profitable than fundamental analysis. Generally, the developing economies such as Africa have inefficient markets. In those markets analyzing the past price points might give a reasonable edge to forecast short-term asset prices. Using fundamental analysis can also be tricky in this case. If a stock is undervalued, then the rational behavior would be to buy the stock and wait for its price to increase. However, since the market is inefficient, it is very uncertain when the prices will reflect the public information and, consequently, whether the investor will make a profit or not. In such a case, technical analysis might still work as it relies on market sentiment.

Why should I be interested in this post?

The Charging Bull sculpture on Wall Street is part of the financial culture of every business school student. It is a must see when you visit New York City.

Bull and bear markets are terms that have to be well understood by every investor in financial markets.

Useful resources

Wikipedia Arturo Di Modica.

Antoine Bourdon (22/10/2021) Mort d’Arturo Di Modica, sculpteur du célèbre Charging Bull de Wall Street à New York Connaissances des arts.

About the author

The article was written in November 2022 by Nakul PANJABI (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2024).

Eurobonds

March 7, 2022 by Akshit GUPTA

Eurobonds

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) explains Eurobonds traded in financial markets.

Introduction

In financial markets, bonds are debt securities used by issuers to raise capital from investors. In return investors get an interest payment on the principal invested over the life of the bond. The bonds can be issued by governments, municipalities, financial institutions, and companies. The duration of the bonds can cover different time periods.

Eurobonds are a special kind of bonds issued by companies or governments to raise capital from financial markets. These bonds are denominated in a currency different from the currency of the country where they originated. The Eurobonds help issuers to raise capital in a foreign currency and at a lower cost. Let’s take the example of an American company which would like to issue debt in euros to finance its operations in Europe. If it borrows in European markets, it will get a higher interest rate as it is less well known in the foreign markets that in the domestic market. With Eurobonds, the company can benefit from the same level of interest rates as for its domestic bonds, thereby lowering its cost of capital.

These instruments have a medium to long term maturity and are highly liquid in the market. They are traded over the counter (OTC) and the market for Eurobonds is made up of several financial institutions, issuers, investors, government bodies, and brokers. Many brokerages across the world provide trading platforms facilities to investors and borrowers for trading in different kinds of Eurobonds.

Characteristics of Eurobonds

Eurobonds are unsecured instruments and investors demand high yields on these instruments based on the credit ratings of the issuer. The issuer can issue Eurobonds in a foreign currency and a foreign land based on their capital needs. The name of a Eurobond carries the name of the currency in which they are dominated. For example, a French company willing to do business in the United States, can issue a Eurobond in the UK financial market denominated in US dollars which will be called as euro-dollar bond.

A Eurobond should not be confused with a foreign bond issued by an issuer in the foreign market denominated in the local currency of the investor. A Eurobond can be issued in a foreign country and can be denominated in a currency different from the local currency of the issuer. For example, a French company willing to invest in Japan can issue a Euro-yen bond in the US markets denominated in the local currency of Japan.

These bonds are traded electronically on different platforms and can have maturities ranging from 5 years to 30 years. The bonds can have fixed or floating interest rates with semi-annual or annual payments. These bonds have a relatively small face value making it attractive even to small investors.

Benefits of Eurobonds

Eurobonds can serve different benefits to issuers and investors.

Major advantage of Eurobonds for the issuers

Access to capital at lower rates – Companies can choose countries with lower interest rates to issue Eurobonds, thereby avoiding interest rate risks
Access to different bond maturities – As Eurobonds can have maturities ranging from 5 years to 30 years, companies can have a wide range of maturities to choose from depending on their requirements
Access to international markets – By issuing Eurobonds denominated in a different currency, companies can access different markets with more ease with a wide investor base.

Major advantage of Eurobonds for the investors

Access to international markets – By buying Eurobonds, investors can gain easy access to international markets thereby diversifying their fixed income portfolios.
Access to different bond maturities – As Eurobonds can have maturities ranging from 5 years to 30 years, borrowers can have a wide range of maturities to choose from depending on their investment profile.
High liquidity – As the market size for Eurobonds is very large, investors can enjoy higher liquidity and can exit their positions as per their needs.

Example

The figure below gives an example of Eurobonds issued by the Federal Republic of Nigeria.

Characteristics of the Eurobonds issuance.

Example of Eurobond issuance

Source: FMDQ.

▶ Akshit GUPTA Green bonds

▶ Jayati WALIA Fixed-income products

▶ Jayati WALIA Credit Risk

Useful resources

International Capital Market Association (ICMA) History of Eurobonds

About the author

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

ESSEC Transaction

February 3, 2022 by Louis DETALLE

ESSEC Transaction

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) presents ESSEC Transaction, the first Student Finance Association in France.

What is ESSEC Transaction?

ESSEC Transaction is the leading student finance association in France and the official finance association of ESSEC Business School. Created in 1987, we organize unique, high added-value events for students interested in both corporate finance and market finance. Our student association consists of 45 active members each year, 7 of which lead the association, I personally am the Chief Editor.

Logo of ESSEC Transaction students’ association.

Logo de ESSEC Transaction

Source: ESSEC Transaction.

What are our missions?

The missions of ESSEC Transaction are defined around

Discover: Through the organization of a wide range of events, from workshops to conferences – including contests, networking breaks and visits – we help bridge the gap between theory and real-world experience.
Engage: ESSEC Transaction allows students to sharpen their skills and knowledge thanks to our quality content and events that approach finance from beginner to advance level.
Network: We provide students the opportunity to create and enlarge their network, as “we believe there is no better way to get true insights than through informal discussion with actual professionals” (Louis Villalta, current President).
Create: Because creation entails reflection, we encourage students to decrypt economic and financial news by giving them the opportunity to read, write, register and publish articles and podcasts on our website.

What events do we organize at ESSEC Transaction?

Each year, ESSEC Transaction offers a unique experience to nationwide students from top schools by organizing the largest financial events for students in France. We organize 3 kinds of events:

Flagship events: Perhaps the most famous one being the Paris M&A Summit, but also the Private Equity Summit, the Trade’XTrem, the Finance Discovery Month and the Women In Finance.
Theme-oriented events: The France-China investment conference, the Lawyers vs Bankers: who will shape the finance of tomorrow or the Fintech.
Discovery events: The Rothschild & Co tour or the Jefferies presentation for ESSEC Student, organized also by ESSEC Transaction.

Equipe de l’Association ESSEC Transaction (2021-2022).

Equipe de l’Association ESSEC Transaction

Source: ESSEC Transaction.

In a nutshell, “we aim at empowering students and helping them break into the world of Finance through workshops, competitions, conferences, visits, networking cocktails and a wide range of creative events” (Alrick Babilon, former President of ESSEC Transaction). Our members also enjoy the knowledge of their elder that thrive in the finance sector and can be of excellent help when it comes to preparing oneself for the job interviews.

Why should I be interested in this post?

If you are considering a career in finance, ESSEC Transaction must ring a bell. If you don’t want to miss any opportunities on our events, read this short post and you will have all there is to know about us!

Useful resources

ESSEC Transaction’s website

ESSEC Transaction’s Facebook Account

ESSEC Business School

About the author

The article was written in February 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

Straddle and strangle strategy

January 12, 2022 by Akshit GUPTA

Straddle and Strangle

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the strategies of straddle and strangle based on options.

Introduction

In financial markets, hedging is implemented by investors to minimize the risk exposure and maximize the returns for any investment in securities. While hedging does not necessarily eliminate the entire risk for an investment, it does limit or offset any potential losses that the investor can incur.

Option contracts are commonly used by investors / traders as hedging mechanisms due to their great flexibility (in terms of expiration date, moneyness, liquidity, etc.) and availability. Positions in options are used to offset the risk exposure in the underlying security, another option contract or in any other derivative contract. Option strategies can be directional or non-directional.

Directional strategy is when the investor has a specific viewpoint about the movement of an asset price and aims to earn profit if the viewpoint holds true. For instance, if an investor has a bullish viewpoint about an asset and speculates that its price will rise, she/he can buy a call option on the asset, and this can be referred as a directional trade with a bullish bias. Similarly, if an investor has a bearish viewpoint about an asset and speculates that its price will fall, she/he can buy a put option on the asset, and this can be referred as a directional trade with a bearish bias.

On the other hand, non-directional strategies can be used by investors when they anticipate a major market movement and want to gain profit irrespective of whether the asset price rises or falls, i.e., their payoff is independent of the direction of the price movement of the asset but instead depends on the magnitude of the price movement. There are various popular non-directional strategies that can be implemented through a combination of option contracts to minimize risk and maximize returns. In this post, we are interested in straddle and strangle.

Straddle

In a straddle, the investor buys a European call and a European put option, both at the same expiration date and at the same strike price. This strategy works in a similar manner like a strangle (see below). However, the potential losses are a bit higher than incurred in a strangle if the stock price remains near the central value at expiration date.

A long straddle is when the investor buys the call and put options, whereas a short straddle is when the investor sells the call and put options. Thus, whether a straddle is long or short depends on whether the options are long or short.

Market Scenario

When the price of underlying is expected to move up or down sharply, investors chose to go for a long straddle and the expiration date is chosen such that it occurs after the expected price movement. Scenarios when a long straddle might be used can include budget or company earnings declaration, war announcements, election results, policy changes etc.
Conversely, a short straddle can be implemented when investors do not expect a significant movement in the asset prices.

Example

In Figure 1 below, we represent the profit and loss function of a straddle strategy using a long call and a long put option. K₁ is the strike price of the long call i.e., €98 and K₂ is the strike price of the long put position i.e., €98. The premium of the long call is equal to €5.33, and the premium of the long put is equal to €3.26 computed using the Black-Scholes-Merton model. The time to maturity (T) is of 18 days (i.e., 0.071 years). At the time of valuation, the price of the underlying asset (S₀) is €100, the volatility (σ) of the underlying asset is 40% and the risk-free rate (r) is 1% (market data).

Figure 1. Profit and loss (P&L) function of a straddle position.

Source: computation by the author.

You can download below the Excel file for the computation of the straddle value using the Black-Scholes-Merton model.

Strangle

In a strangle, the investor buys a European call and a European put option, both at the same expiration date but different strike prices. To benefit from this strategy, the price of the underlying asset must move further away from the central value in either direction i.e., increase or decrease. If the stock prices stay at a level closer to the central value, the investor will incur losses.

Like a straddle, a long strangle is when the investor buys the call and put options, whereas a short strangle is when the investor sells (issues) the call and put options. The only difference is the strike price, as in a strangle, the call option has a higher strike price than the price of the underlying asset, while the put option has a lower strike price than the price of the underlying asset.

Strangles are generally cheaper than straddles because investors require relatively less price movement in the asset to ‘break even’.

Market Scenario

The long strangle strategy can be used when the trader expects that the underlying asset is likely to experience significant volatility in the near term. It is a limited risk and unlimited profit strategy because the maximum loss is limited to the net option premiums while the profits depend on the underlying price movements.

Similarly, short strangle can be implemented when the investor holds a neutral market view and expects very little volatility in the underlying asset price in the near term. It is a limited profit and unlimited risk strategy since the payoff is limited to the premiums received for the options, while the risk can amount to a great loss if the underlying price moves significantly.

Example

In Figure 2 below, we represent the profit and loss function of a strangle strategy using a long call and a long put option. K₁ is the strike price of the long call i.e., €98 and K₂ is the strike price of the long put position i.e., €108. The premium of the long call is equal to €5.33, and the premium of the long put is equal to €9.47 computed using the Black-Scholes-Merton model. The time to maturity (T) is of 18 days (i.e., 0.071 years). At the time of valuation, the price of the underlying asset (S₀) is €100, the volatility (σ) of the underlying asset is 40% and the risk-free rate (r) is 1% (market data).

Figure 2. Profit and loss (P&L) function of a strangle position.

Source: computation by the author..

You can download below the Excel file for the computation of the strangle value using the Black-Scholes-Merton model.

▶ All posts about Options

▶ Akshit GUPTA Options

▶ Akshit GUPTA The Black-Scholes-Merton model

▶ Akshit GUPTA Option Spreads

▶ Akshit GUPTA Option Trader – Job description

Useful resources

Academic research articles

Black F. and M. Scholes (1973) “The Pricing of Options and Corporate Liabilities” The Journal of Political Economy, 81, 637-654.

Merton R.C. (1973) “Theory of Rational Option Pricing” Bell Journal of Economics, 4, 141–183.

Books

Hull J.C. (2015) Options, Futures, and Other Derivatives, Ninth Edition, Chapter 10 – Trading strategies involving Options, 276-295.

Wilmott P. (2007) Paul Wilmott Introduces Quantitative Finance, Second Edition, Chapter 8 – The Black Scholes Formula and The Greeks, 182-184.

About the author

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

Option Spreads

January 7, 2022 by Akshit GUPTA

Option Spreads

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the different option spreads used to hedge a position in financial markets.

Introduction

In financial markets, hedging is implemented by investors to minimize the risk exposure for any investment in securities. While hedging does not necessarily eliminate the entire risk for an investment, it does limit or offset any potential losses that the investor can incur.

Option contracts are commonly used by traders and investors as hedging mechanisms due to their great flexibility (in terms of expiration date, moneyness, liquidity, etc.) and availability. Positions in options are used to offset the risk exposure in the underlying security, another option contract or in any other derivative contract. Option strategies can be directional or non-directional.

Spreads are hedging strategies used in trading in which traders buy and sell multiple option contracts on the same underlying asset. In a spread strategy, the option type used to create a spread has to be consistent, either call options or put options. These are used frequently by traders to minimize their risk exposure on the positions in the underlying assets.

Bull Spread

In a bull spread, the investor buys a European call option on the underlying asset with strike price K₁ and sells a call option on the same underlying asset with strike price K₂ (with K₂ higher than K₁) with the same expiration date. The investor expects the price of the underlying asset to go up and is bullish about the stock. Bull spread is a directional strategy where the investor is moderately bullish about the underlying asset, she is investing in.

When an investor buys a call option, there is a limited downside risk (the loss of the premium) and an unlimited upside risk (gains). The bull spread reduces the potential downside risk on buying the call option, but also limits the potential profit by capping the upside. It is used as an effective hedge to limit the losses.

Market Scenario

When the price of underlying asset is expected to moderately move up, investors chose to execute a bull spread and the expiration date is chosen such that it occurs after the expected price movement. If the price decreases significantly by the expiration of the call options, the investor loses money by using a bull spread.

Example

In Figure 1 below, we represent the profit and loss function of a bull spread strategy using a long and a short call option. K₁ is the strike price of the long call i.e., €88 and K₂ is the strike price of the short call position i.e., €110. The premium of the long call is equal to €12.62, and the premium of the short call is equal to €1.16 computed using the Black-Scholes-Merton model. The time to maturity (T) is of 18 days (i.e., 0.071 years). At the time of valuation, the price of the underlying asset (S₀) is €100, the volatility (σ) of the underlying asset is 40% and the risk-free rate (r) is 1% (market data).

Figure 1. Profit and loss (P&L) function of a bull spread.

Profit and loss (P&L) function of a bul spread

Source: computation by the author.

You can download below the Excel file for the computation of the bull spread value using the Black-Scholes-Merton model.

Bear Spread

In a bear spread, the investor expects the price of the underlying asset to moderately decline in the near future. In order to hedge against the downside, the investor buys a put option with strike price K₁ and sells another put option with strike price K₂, with K₁ lower than < K₂. Initially, this initial position leads to a cash outflow since the put option bought (with strike price K₁) has a higher premium than put option sold (with strike price K₂) as K₁ is lower than < K₂.

Market Scenario

When the price of underlying asset is expected to moderately move down, investors chose to execute a bear spread and the expiration date is chosen such that it occurs after the expected price movement. Bear spread is a directional strategy where the investor is moderately bearish about the stock he is investing in. If the price increases significantly by the expiration of the put options, the investor loses money by using a bear spread.

Example

In Figure 2 below, we represent the profit and loss function of a bear spread strategy using a long and a short put option. K₁ is equal to the strike price of the short put i.e., €90 and K₂ is equal to the strike price of the long put i.e., €105. The premium of the short put is equal to €0.86, and the premium long put is equal to €7.26 computed using the Black-Scholes-Merton model.

The time to maturity (T) is of 18 days (i.e., 0.071 years). At the time of valuation, the price of the underlying asset (S₀) is €100, the volatility (σ) of stock is 40% and the risk-free rate (r) is 1% (market data).

Figure 2. Profit and loss (P&L) function of a bear spread.

Profit and loss (P&L) function of a bear spread

Source: computation by the author.

You can download below the Excel file for the computation of the bear spread value using the Black-Scholes-Merton model.

Butterfly Spread

In a butterfly spread, the investor expects the price of the underlying asset to remain close to its current market price in the near future. Just as a bull and bear spread, a butterfly spread can be created using call options. In order to profit from the expected market scenario, the investor buys a call option with strike price K₁ and buys another call option with strike price K₃, where K₁ < K₃, and sells two call options at price K₂, where K₁ < K₂ < K₃. Initially, this initial position leads to a net cash outflow.

Market Scenario

When the price of underlying asset is expected to stay stable, investors chose to execute a butterfly spread and the expiration date is chosen such that the expected price movement occurs before the expiration date. Butterfly spread is a non-directional strategy where the investor expects the price to remain stable and close to the current market price. If the price movement is significant (either downward or upward) by the expiration of the call options, the investor loses money by using a butterfly spread.

Example

In Figure 3 below, we represent the profit and loss function of a butterfly spread strategy using call options. K₁ is equal to the strike price of the long call position i.e., €85 and K₂ is equal the strike price of the two short call positions i.e., €98 and K₃ is equal to the strike price of another long call position i.e., €111. The premium of the long call K₁ is equal to €15.332, the premium of the long call K₃ is equal to €0.993 and the premium of the short call K₂ is equal to €5.334 computed using the Black-Scholes-Merton model. The premium of the butterfly spread is then equal to €5.657 (= 15.332 + 0.993 -2*5.334), which corresponds to an outflow for the investor.

The time to maturity (T) is of 18 days (i.e., 0.071 years). At the time of valuation, the price of the (S₀) is €100, the volatility (σ) of stock is 40% and the risk-free rate (r) is 1% (market data).

Figure 3. Profit and loss (P&L) function of a butterfly spread.

Profit and loss (P&L) function of a butterfly spread

Source: computation by the author.

You can download below the Excel file for the computation of the butterfly spread value using the Black-Scholes-Merton model.

Note that bull, bear, and butterfly spreads can also be created from put options or a combination of call and put options.

▶ All posts about options

▶ Gupta A. Options

▶ Gupta A. The Black-Scholes-Merton model

▶ Gupta A. Option Greeks – Delta

▶ Gupta A. Hedging Strategies – Equities

Useful resources

Hull J.C. (2018) Options, Futures, and Other Derivatives, Tenth Edition, Chapter 12 – Trading strategies involving Options, 282-301.

About the author

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

Equity structured products

December 11, 2021 by Akshit GUPTA

Equity structured products

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) introduces equity structured products, which are complex financial products proposed to investors to benefit from market expectations.

Introduction

Structured products are pre-packaged product offerings which are designed as per the client’s risk-return profile. The returns on the investments in these products are based on the performance of the underlying assets. These underlying assets can include individual assets or indexes in various markets like equities, bonds and commodities, and derivatives on these underlying assets like futures, swaps, and options. The structured products are highly sophisticated products since they are tailor-made as per the client’s requirements and risk/return profile. These products have pre-defined features like maturity date, early – redemption mechanism, coupon payments (fixed or variable coupons), underlying asset, and the degree of capital protection. They can guarantee full or partial capital protection and a flexible degree of leverage as well.

Since these products follow a non-traditional investment strategy and can have different underlying assets, they remain in high demand in different market conditions, either bullish, bearish, stable, volatile, or uncertain. Structured products are normally issued by financial institutions and can either be traded on stock exchanges or over the counter (OTC).

An equity structured products has mainly two components that include:

Fixed-Income product – A fixed-income security like a Treasury bond which fully or partially protects the capital of the investor.
Equity Instrument and Derivatives – An equity instrument (which can be a stock or an index option) which provides the additional pay-off of the product. The payoff of the equity instrument is linked to the performance of the underlying asset.

Underlying assets

The equity structured products can provide the investor an exposure to equity-linked products like an option contract on individual share, index, basket of shares, or indices.
The investor benefits from the performance of the underlying asset and is paid by means of regular coupons at specific observation days or a one-off payment at the end of the product life.

Apart from the traditional equities, the underlying asset for the structured products can also include indices like CAC 40, S&P 500, FTSE or any other. They can also be customized as per the investor’s need to include several different equities or indices.

Example of an equity linked structured product

For example, an investor wants to buy a structured product and invest EUR 1,000 for 3 years. She wants capital protection and at the same time, gain an exposure to the stocks of LVMH trading in the French equity markets.

A structurer can buy a 3-year zero-coupon French OAT (government bond) with a par value of EUR 1,000 at price of EUR 901. At maturity the bond will pay the principal amount of EUR 1,000.

For the remaining EUR 99, the structurer buys a call option on the shares of LVMH
trading at EUR 110. This provides the investor with a participation of 90% (i.e., 99/110) in the performance of the share of LVMH, the underlying asset.

Figure 1. Risk profile of a protective put position.

Source: computation by the author.

img_SimTrade_Options_Protective_Put

Pros and Cons of investing in equity structured products

Pros

Financial planning: Because of their defined maturity dates, structured products can be timed for costs like educational tuition fees and essential purchases and give investors peace of mind.
Risk hedging: Structured products generally offer some form of capital protection as a defensive barrier depending on an investor’s preferences. Thus, structured investments are available to minimize risk exposure.
Market access to diverse assets: Structured products allow investors to gain access to markets and asset classes that are not available through other securities.
Structured products can provide leveraged exposure to markets.

Cons

Market Risk: The return from investment can turn to zero or even negative in adverse market conditions
Liquidity Risk: For structured products, there is only one market maker for the investments and the issuers commit to making a competitive aftersales market in a place that is visible to the investor or their advisory
Counterparty Risk: Like most investments, structured products are subject to counterparty defaults. Issuer’s credit rating assessment and other information like credit default spreads, balance sheet strength etc. are essential

Useful resources

▶ Oesterreichische Nationalbank (2004), Financial Instruments Structured Products Handbook

▶ Akshit GUPTA History of Options markets

▶ Akshit GUPTA Option Trader – Job description

▶ Akshit GUPTA Options

▶ Akshit GUPTA Option Greeks – Delta

▶ Shengyu ZHENG Reverse convertibles

About the author

Article written in December 2021 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

How has the 21st century revolutionized financing methods?

April 27, 2021 by Raphaël ROERO DE CORTANZE

How has the 21st century revolutionized financing methods?

In this article, Raphaël ROERO DE CORTANZE (ESSEC Business School, Master in Management, 2018-2022) explains how the 21st century revolutionized financing methods.

In The Crisis in Keynesian Economics (1974), the British economist John HICKS described how the world economy shifted during the 20th century from the autoeconomy model to the overdrafteconomy model. An autoeconomy is an “equity” economy, dominated by self-financing and capital market financing. An overdrafteconomy is a “debt” economy, where financing is provided through debt by an intermediary (a bank or credit institution).

What were the reasons which led to this shift from autoeconomy to overdrafteconomy? Why do the evolution of markets and investment regulations during the second half of the 20th century question the typology described by John Hicks in 1974?

From the Industrial Revolution to the 1920s: the development of the autoeconomy model

In the beginning of the 19th century as the first wave of industrialization gained momentum across Europe and North America, the relative peace following the end of Napoleonic wars helped cut public spending. This period brought unparalleled increases in revenue, profit and cash flows, allowing both firms and governments to benefit from tremendous surplus and self-investing capacities. For instance, during the 19th century, the UK was able to reduce dramatically its public debt thanks to unprecedented budget surplus.

Meanwhile, financial markets were gradually asserting themselves as key players in financing the economy. Stock exchanges, which were until then mainly open government bonds, started to allow companies to seek additional financing. Companies started to combine more and more self-financing and capital market financing. The passion for the financial markets also affected the general public. In France in 1911, 45% of the inheritance in the bourgeoisie involved securities. In 1914 there were 2.4 million individual security holders (for a population of 42 million).

Until the end of the Roaring Twenties, the stock market was still very attractive. European governments financed the increase of public debt induced by the First World War through capital market financing. Even though the banking system was also developing in parallel, the financing of the economy remained dominated by financial markets and self-financing.

From the Wall Street Crash of 1929 to the 1970s: the shift towards the overdrafteconomy model

On Monday 28 October 1929 (Black Monday), the greatest sell-off of shares in US history was recorded. The Great Crash quickly spread to Europe, and with it a feeling of mistrust towards financial markets settled in. Following the 1929 crash, the first steps of banking regulation contributed to transitioning from the autoeconomy model to the overdrafteconomy model. Indeed, a separation was introduced between retail and investment banks, in order to reduce the impact of a future financial crisis on real economy (the Glass Steagall Act in 1933 in the US). In France, a deposit insurance scheme was introduced in 1934.

On the one hand, the loss of credibility of financial markets, and on the other hand the revival of banking regulation translated into a shift in financing methods. Numerous countries, such as France and Japan, used bank financing to finance the post World War II reconstruction. In most Western countries (except for the US and UK), companies and governments began preferring bank financing to capital markets financing and went into bank debt (hence the “overdraft” economy – where the economy spends more than it produces) to finance their activities.

Since the 1970s: the development of new financing methods

From the 1970s, two phenomena made financial markets appealing again, by making them more liquid and more accessible:

Financial deregulation: end of the stockbrokers’ monopoly, introduction of derivatives, abolition of regulations that hindered the free international movement of capital, etc.
Departitioning between national and international markets and between debt and stock markets.

Furthermore, the separation between retail and investment banks was abolished (in 1979 in the UK), allowing the emergence of banking behemoths (Citi Group in 1998, BNP Paribas in 2000). Banks did not lose out on these developments: they gradually established themselves as the central players in this new globalized finance.

Technical and regulatory innovations in the markets and the banking sector created financial globalization. This evolution was accompanied by a boom in the collective management of savings with the emergence of huge institutional investors. For instance, between 1980 and 2009 the amount of assets managed by pension funds was multiplied by 33.

Finally, the second part of the 20th century saw the development of new forms of financing. In 1958, in the US, new laws allowing the creation of investment firms, paved the way to private equity and venture capital, which financed the development of start-ups in Silicon Valley. The 1980s witnessed the emergence of the first Leverage Buy Out.

At beginning of the 21st century, crowdfunding through crowd equity (funding in exchange of a stake in the company) of crowd lending (funding in exchange of interests) added another new form of financing.

Thus, the 20th century witnessed the development of the forms of financing that we know today. The typology devised by John Hicks in 1974 appears now to be obsolete, as the means of financing abound, without one imposing itself as in the overdraft and autoeconomy models. Nevertheless, it allows us to understand how the events of the last century have built the globalized finance we know today.

Key concepts

Overdraft

An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation, the account is said to be “overdrawn”. If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate. If the negative balance exceeds the agreed terms, then additional fees may be charged and higher interest rates may apply.

Deposit insurance scheme

Deposit insurance or deposit protection is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank’s inability to pay its debts when due. Because banking institution failures have the potential to trigger a broad spectrum of harmful events, including economic recessions, policy makers maintain deposit insurance schemes to protect depositors and to give them comfort that their funds are not at risk. In the European Union, the current coverage limit is €100,000.

Useful resources

John Hicks (1974) The Crisis in Keynesian Economics.

Adeline Daumard (1973) Les fortunes françaises au XIXème siècle.

Pierre-Cyrille Hautcoeur, Paul Lagneau-Ymonet, Angelo Riva (2011) Les marchés financiers français : une perspective historique.

André Strauss (1988) Evolution comparée des systèmes de financement : RFA, Royaume-Uni et Japon.

Henri Bourguinat (1992) Finance internationale.

About the author

Article written in April 2021 by Raphaël ROERO DE CORTANZE (ESSEC Business School, Master in Management, 2019-2022).

Eurozone Crisis 2011

February 27, 2021 by Akshit GUPTA

Eurozone Crisis 2011

This article written by Akshit Gupta (ESSEC Business School, Master in Management, 2019-2022) presents the real life case of the Eurozone Crisis 2011.

Introduction

The Eurozone Crisis, also called the European sovereign debt crisis, took place between 2010 and 2012 when several European countries faced an unmanageable increase in their sovereign debts, fall of their financial institutions and a sharp rise in the government bond yield spreads (difference between the yield of bonds issued by a country and the yield of bonds issued by Germany). The crisis was a result of excessive borrowing done by the Eurozone member states and a lowered refinancing or repayment capacity following the financial crisis of 2008.

Origin of the crisis

The Eurozone, also called the Euro area, was formed in 1999 with the primary aim to promote economic integration and have a stable, growth-oriented Europe by means of a unified primary currency across all member countries. Around 2010, Eurozone was comprised of 17 European countries all of which share a unified primary currency named Euro (€). The monetary policies of the Eurozone member states are governed by a central authority named the European Central Bank (ECB), whereas each country has the power to decide their fiscal and economic policies individually. As a result of a unified monetary framework, countries with weaker economy have access to more debt at a comparatively lower interest rates than before the creation of the Eurozone. Due to the excessive availability of debt, weaker countries increased their spending which resulted in high fiscal deficits. Since, the fiscal policies were controlled by countries individually, no centralized authority could keep a tab on it.
The beginning of the crisis came to light in 2009, when the new Greek government reported irregularities in the accounting system followed by the previous government. The new fiscal deficit showed a sovereign debt amounting to €300 billion which represented more than 110% of the country’s GDP at that time. The chances of default on the government’s debt started building up and the tension started to soar across the European continent.

Source: im-an-economist.blogspot.com

The peak of the crisis

After the Greek government reported the higher levels of sovereign debt, rating agencies started downgrading the country’s debt ratings. The creditors started demanding higher yields on the government bonds, leading to higher borrowing costs for the government and a fall in the prices of these bonds (there is an inverse relationship between the price and yield of bonds). The fall in the prices of these securities sparked an outrage when many large European countries, financial institutions and central banks holding these securities started to lose money due to fall in their prices. By 2010, many other countries including Portugal, Italy, Ireland, and Spain reported similarly high level of sovereign debts.

Causes of the crisis

The Eurozone crisis was a result of many policy failures including high fiscal deficits, lack of unified body to monitor fiscal policies, trade imbalances, and also cultural differences. Some of the primary reasons that triggered the crisis are:

The Eurozone crisis was triggered by the financial crisis of 2008 when access to capital at low interest rates became tough and the countries with high sovereign debt were unable to refinance or repay their debts without the intervention or help of other countries. During the recession that followed the financial crisis of 2008, tax revenues decreased whereas the public spending on unemployment benefits and infrastructure development increased. This resulted in further worsening the fiscal deficit for the weaker economies.
Another cause for the crisis can be attributed to an easy access to cheap capital to the weaker countries during early 2000’s and a lack of centralized fiscal policy framework to put a check on the individual government borrowing and spending.
The trade imbalance resulting from the flow of capital from developed countries like France and Germany to southern nations like Greece, Spain, Italy etc. led to an increase in the wages in these countries which was not matched by the increase in productivity. The increased wages led to an increase in prices of finished goods, thus making these country’s exports less competitive. The increase inflow of capital led to a trade deficit in these countries further aggravating the crisis.

Solutions

All the seventeen member states of the Eurozone voted to create a European Financial Stability Facility (EFSF), which was a temporary measure to provide financial assistance to the countries impacted by the sovereign debt crisis. With the intervention of the International Monetary Fund (IMF), the European Central Bank and the EFSF, a bailout package was provided to the debt-ridden countries amounting to €1 trillion. Several conditions were applied on countries which received bailout funds from the EFSF. The countries were bound to apply severe EU-mandated austerity measures which were formed to reduce government deficits and sovereign debts to acceptable levels. But the measures also faced criticism from the impacted countries as it could have halted the economic recovery for the impacted countries by cutting their spending capacities.

The creation of the EFSF provided remedial measures to the impacted countries by means of financial assistance subject to certain reforms and conditions that the fund – receiving country must undertake. The EFSF functioned by issuing EFSF bonds and other marketable securities to lenders. The bonds and securities were secured and backed by the Eurozone member countries up to the proportion of their share of capital in the ECB.

After effects

In 2012, a European Stability Mechanism (ESM) was instated to replace the EFSF as a permanent financial stability and crisis resolution measure for the Eurozone countries. The ESM is fully backed by the members of the Eurozone. This backing provides a relief to the lenders and assures them of their capital protection. The crisis saw the creation of the Eurobonds, which are used as a new way of financing the bailout funds. The ESM is funded by issuance of Eurobonds worth €700 billion which are backed by the Eurozone countries.

Lessons learnt from the crisis

The Eurozone crisis has affected the world economy at large, posing a threat to the global markets. Although, the decisions taken by the Eurozone countries helped in containing the damage, some policy changes are required to prevent such events to happen in the future. Political consensus among Eurozone member countries is required to ensure efficient decision making. The coordination and monitoring of the fiscal policies along with the monetary policies of the Eurozone countries is also essential to ensure a balanced economy growth. The policy makers should implement centralized fiscal policies to ensure the long-term viability and stability of the European economies.

Relevance to the SimTrade certificate

The concepts about pricing of securities in the secondary market and incorporation of information in market prices can be learnt in the SimTrade Certificate:

About theory

By taking the Exchange orders course, you will know more about the different type of orders that you can use to buy and sell assets in financial markets.
By taking the Market information course, you will understand how information is incorporated into market prices and the associated concept of market efficiency.

About practice

By launching the Sending an Order simulation, you will practice how financial markets really work and how to act in the market by sending orders.
By launching the Efficient market simulation, you will practice how information is incorporated into market prices through the trading of market participants and grasp the concept of market efficiency.

Useful resources

TheBalance – Eurozone Crisis

Solving the Financial and Sovereign Debt Crisis in Europe – by Adrian Blundell-Wignall

European Stability Mechanism

Investopedia Article – European Financial Stability Facility

Article written by Akshit Gupta (ESSEC Business School, Master in Management, 2019-2022).

David Ricardo

January 15, 2021 by Akshit GUPTA

David Ricardo (1772-1823)

This article written by Akshit Gupta (ESSEC Business School, Master in Management, 2022) presents the portrait of David Ricardo, who is a well-known economist.

Introduction

David Ricardo, born in England in 1772, is one of the most well renowned economists of all times. He is famous for his contribution in the field of public finance and is known for his theories of labor value, comparative advantages and rents. He has also written many research papers and books on the policies of the British Central Bank and has made important contributions to the development of monetary policies in Great Britain.

David Ricardo

David Ricardo started his career in the stock markets at the age of 14 when he joined his father who used to work at the London Stock Exchange as a stockbroker. His talents and understanding about the financial markets helped him gain a good reputation in the market. He developed interest in economics in 1799 when he started following the work of Adam Smith, a renowned Scottish economist and philosopher.

Career in the stock market

What is lesser known about David Ricardo is the fact that alongside of being a famous economist, he was also very famous as a quantitative trader. He used to trade in the stock markets using his strong mathematical skills to buy under-priced stocks and short sell the overpriced stocks. He is believed to have made short-term investments in the stock market, investing large amounts of capital with a low-risk appetite, that helped him accumulate a huge wealth.

Two of the Ricardo’s primary rules for trading in the stock market included: a trader should “cut short his losses” and a trader should “let his profits run on”.
In the end, it’s not about making the correct choice always, but correcting the wrong choices at the right time.

Link with the SimTrade Certificate

The two rules by Ricardo by correlate to the learning we derive from the SimTrade Certificate.

The stop loss orders that are taught as part of the different exchange orders are an efficient way that every trader should use to protect their capital and cut short on their losses.

This type of order helps a trader to exit his/her position automatically if the prices of an asset declines by a predefined amount. Such orders are frequently used by traders as an effective risk management strategy to avoid huge losses which may arise if the markets move in the unfavorable direction.

The concepts about different trading strategies and their practical implementation can be learnt in the SimTrade Certificate:

About theory: by taking the Market information course, you will understand how information is incorporated into market prices and the associated concept of market efficiency.
About practice: by launching the market simulations, you will understand how financial markets really work and how to act in the market by sending orders. By executing the stop loss order, a trader will learn the risk management strategy of cutting short their losses.

Article written by Akshit Gupta (ESSEC Business School, Master in Management, 2022).

Film analysis: Too Big To Fail

October 8, 2024November 14, 2020 by Marie POFF

Film analysis: Too Big To Fail

Foreward

A pervasive moral stigma follows the financial sector, which has a dogged reputation for unethical and illegal behaviour. However, the ethical lapses often associated with finance are not always intentional. Instead, a contributing factor is that the teaching of finance and other business disciplines presents the challenge of linking theories and conceptual models to the “real world”. Entertainment media – such as films or books – are useful in this aspect as case studies; they provide students with an organisational frame of reference to better understand both situational contexts, and importantly, the human dimension behind financial numbers.

This article written by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020) analyzes the Too Big To Fail film and explains the related financial concepts.

“Too Big to Fail” is a dramatic retelling of the near collapse of the US banking system during the 2008 financial crisis. No-one saw the financial crisis coming, nor knew how to deal with the disaster when it arrived. This film follows financial leaders US Treasury Secretary Henry Paulson and Ben Bernanke as they try to protect a faltering U.S. economy, and eventually offer a no strings bailout, but leaves Paulson wondering if banks will lend. The issue of moral hazard is explored and begs the question, should banks really be too big to fail?

Film summary

“Too Big to Fail” gives a behind the scenes look at the conversations between major players during the 2008 financial crisis from March to mid-October. In 2008, Lehman Brothers were on the verge of collapse and its CEO Richard S. Fuld Jr. blamed the declining share price on short sellers, refusing to recognize his bank’s weaknesses. Instead, he sought a cash fill from Warren Buffett, and even pursued mergers with Bank of America (BOA) and Barclays. Treasury Secretary Henry Hank Paulson rejected the use of public money to save Lehman, and so in September 2008, Lehman filed for bankruptcy. However, shortly afterwards, Paulson announced AIG’s $85bn bailout, confusing investors with this message. Lehman could fail, but AIG couldn’t? In response to a deteriorating economy, Paulson pushed forward a plan where the US government purchased $500bn worth of toxic assets. After failing to pass congress, he redrafted the plan to assume direct ownership of stocks in banks. The Troubled Asset Relief Program (TARP) was hence created to normalise banks and increase investor confidence, putting the market back on the path to recovery.

The Wolf of Wall Street movie

Financial concepts from the Too Big To Fail film

Too Big to Fail (TBTF)

The name of this film is a financial term referring to institutions which are so large and essential to the functioning of the economy that they cannot be allowed to collapse, no matter the cost to the taxpayer. This was the logic behind the $182 billion bailout the US government provided to AIG, for example, along with the relief funds directed to titans like JPMorgan Chase, Citigroup, and the Big Three automotive companies.

Moral hazard

Moral hazard is a term used to describe how if a party is protected from risk, they will increase their risk tolerance and act less cautiously. In the context of banking, if the leaders of major banks feel confident that they are too big to fail – that is, that the government will bail them out – they will make increasingly risky decisions with the confidence that taxpayer dollars will rescue them if their bets go bust.

Bear Stearns

One of the first banks to fail, Bear Sterns’ hedge funds had accumulated over $20 billion in collateralised debt obligations (CDOs) and exposure to other toxic assets. In March 2008, due to the subprime mortgage crisis, Moody’s downgraded Bear’s MBS to Grades B and C (junk bond levels) and triggered a bank run leaving Bear with only $3.5 billion in cash. As Bear relied on repurchase agreements (short-term loans) – meaning it traded its securities to other banks for cash – Bear imploded when other banks called in their repos and refused to lend more. Bear’s insolvency forced a rescue organised by the Federal Reserve, where JPMorgan Chase bought out the bank for $2 a share (one month prior to this share price was $48). Bear’s demise triggered a panic on Wall Street and caused a banking liquidity crisis, where banks became unwilling to lend to each other. This is often used as a marker for the beginning of the 2008 financial collapse.

Lehman Brothers

On September 15th, 2008, the investment bank Lehman Brothers filed for bankruptcy. It was the biggest filing in U.S. history, with Lehman’s holding $691 billion in assets at the time. By the end of trading that day, $700bn had been wiped off the global stock markets. The Dow Jones had plummeted 500 points, its biggest drop since the terrorist attacks of 9/11. Lehman then sold its IB and capital markets operations to Barclays, kickstarting a global liquidity crisis.

Government Bailout (TARP)

A $700 billion bank bailout bill was signed on October 3, 2008 and was used to establish the Troubled Assets Relief Program (TARP). The fund was used to launch the Capital Purchase Program, which included buying $105 billion in preferred shares in Chase, Wells-Fargo, Goldman and five other leading banks. The insurance giant AIG had also become a major seller of credit default swaps to boost its profit margin, which insured the assets that supported corporate debt and mortgages. If AIG went bankrupt, it would trigger the bankruptcy of many of the financial institutions that had bought these swaps. TARP funds contributed $67.8 billion to the $182 billion AIG bailout, and also used $80.7 billion to bailout the Big Three auto companies.

Homeowner Affordability and Stability Plan

In addition to the TARP, $75 billion was put aside to help homeowners refinance or restructure their mortgages. HOPE NOW required the Treasury Department to both guarantee home loans and assist homeowners in adjusting mortgage terms.

Great Financial Crisis (GFC)

Although TBTF banks were not the sole cause of the recent financial crisis and Great Recession, given the scale of job losses, home foreclosures, lost savings and costs to taxpayers, there is no question that their presence at the centre of the financial system contributed significantly to the magnitude of the crisis and to the extensive damage it inflicted across the economy.

Key insights for investors

Banking reform

Major changes were made to prevent another financial crisis, including introducing stricter capital requirements and ensuring banks are less interconnected or vulnerable to contagion. However, some familiar risks are creeping back, and new ones have emerged as global debt continues to grow – for many countries, the combination of large debts in foreign currencies and weakening local currencies is becoming harder to sustain.

Significance of politics

A key takeaway is the intertwined relationship between politics and finance. Moral hazard asserts that ties between bankers and politicians create dangerous incentives for both parties and indicates the importance of observing not just numbers in our market research, but also non-quantifiable factors which influence expectations.

Learn from the Past

Note that “too big to fail” is a phrase still used today in finance and big business. For example, “Is Facebook too big to fail?” As well, while significant progress has been made to strengthen financial systems internationally, the biggest banks are most likely still too big to fail. It’s useful to be aware of this potential risk to an economy when considering the roles that massive companies and institutions play in our society. Economists will always speculate that we may be “overdue” for another crisis and learning from the past is the best way to prepare for the next crisis.

Relevance to the SimTrade certificate

SimTrade is your introduction to the global financial market; through a combination of theory and simulations, you learn to develop your confidence in your decision making and critical thinking skills. The course teaches you how to analyse the impact of events on expectations and stock prices, eventually teaching you how to build a position and make the market work for you.

Famous quote from the Too Big To Fail film

Paul Giamatti: “I spent my entire academic career studying the Great Depression. The depression may have started because of a stock market crash, but what hit the general economy was a disruption of credit. Average citizens unable to borrow money, to do anything. To buy a home, start a business, stock their shelves.”

Trailer of the Too Big To Fail film

About the author

Article written in November 2020 by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020).

Film analysis: The Wolf of Wall Street

October 8, 2024November 14, 2020 by Marie POFF

Film analysis: The Wolf of Wall Street

Foreward

This article written by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020) analyzes the The Wolf of Wall Street film.

The movie The Wolf of Wall Street is the true story of how rags-to-riches trader Jordan Belfort started with an OTC brokerage firm using pump and dump schemes, but eventually became a main player on Wall Street, where he launched the IPOs of several large companies. This black comedy shows Belfort’s rise to the high-life and excess of Wall Street, followed by a sharp fall involving crime and corruption – all while being seriously entertaining.

Film summary

The movie The Wolf of Wall Street follows one of Wall Street’s most infamous brokers, Jordan Belfort, who makes a fortune by defrauding investors out of millions. Directed by Martin Scorsese, the film starts with Belfort as an entry-level stockbroker at a Wall Street brokerage firm, where he is schooled on their cut-throat selling techniques. After a major market decline, he loses his job and goes to work for a small business selling penny stocks. After discovering the higher commission on penny stocks, he establishes his own firm, Stratton Oakmont, where he sells penny and IPO stocks with speculative returns. Jordan builds a business empire by presenting himself as a polished entrepreneur and training his employees on effective selling techniques. He is soon living the high life and becoming one of the major players on Wall Street, but soon discovers the dark side of success when he blurs ethical boundaries, quickly falling into a world of crime and corruption.

The Wolf of Wall Street movie

Financial concepts from the The Wolf of Wall Street film

Penny stocks

Penny stocks are low-priced stocks that do not trade on major stock exchanges and are issued by companies that typically do not publish financial statements. These trade anywhere from a fraction of a cent to a few dollars, and because the market capitalization, stock price, and the daily volume of these stocks are quite low, they are highly vulnerable to manipulation. For example, a sudden large volume of purchase or sale could cause the price to drop by triple-digits in a single day.

‘Pump and Dump’ schemes

‘Pump and Dump’ penny stock schemes are explained as the manipulation of the market through the accumulation of shares from penny stock or other companies, which are then stored in secret accounts. Investors are then ‘cold called’ to convince them that these companies are potential stocks for investments. The influx of purchasing orders would rapidly inflate the price, assuring investors that the shares are showing bullish behaviour. Belfort’s firm was a type of boiler room, with a team that pressured investors to place their money into highly speculative securities. At its peak, the firm is said to have employed about 1,000 stockbrokers overseeing more than $1 billion worth of investments.

Sales vs financial advisors

While working at L.F. Rothschild in the 1980s, Belfort is quickly taught that a stockbroker’s only goal is to make money for himself. Brokers seemed to focus on selling stocks and generating sales commissions, instead of advising clients on the financial risk of an investment or suitability for their portfolio. Belfort and his team are depicted as sales professionals, not financial ones, who are trained to sell investments at the expense of the client. Today, it’s still debatable whether financial professionals should be held to a fiduciary standard, requiring them to act in the best interest of a client, rather than simply providing a product.

Key insights for investors

Too good to be true: be your own investment expert

As the saying goes; if it sounds too good to be true, it probably is. Especially for beginners to the stock market, it’s important to remain clear-headed about your investment decisions and do your own research. Many of Belfort’s victims trusted him and invested all their life savings in ‘guaranteed’ stocks. Even with an advisor, it’s useful to understand financial markets and strategies, perhaps by at first investing small and diversifying your portfolio.

Legal vs ethical behaviour

Legal standards are the rules which govern the financial sector; but while something can be legal, it may not always be ethical. Belfort’s company was within the law when selling penny stocks, but not fully disclosing the speculative nature of the stocks was completely unethical. While he started by simply blurring this line, Belfort soon crossed the line and was convicted for not following securities regulations. Ethical business practices are the foundation of trust and goodwill; it’s important to take responsibility for your actions.

The road to success

While perhaps not the best role model, Belfort shows that long-term success is not a straight road. He experienced both failures and successes before reaching the height of his career on Wall Street. Losing his job lead to him starting as a stockbroker, and even after going bankrupt and serving time in prison, Belfort finished his sentence and turned his strength in sales and communications into a career as a motivational speaker. Financial mistakes can be rectified and instead become lessons for success. The most important step a person can take, is the next one.

Relevance to the SimTrade certificate

SimTrade allows you to make mistakes in a simulated setting, without suffering the financial consequences of trading with your personal funds. This course teaches you how to analyse the impact of events on stock prices and understand important concepts like market efficiency. As well as theory, you practice building a position, liquidating a position, and how to make the market. SimTrade is the best way for you to take risks, make mistakes, and learn how to make the best decisions for your portfolio.

Famous quote from the The Wolf of Wall Street film

Jordan Belfort: “Sell me this pen.”

Trailer of the The Wolf of Wall Street film

About the author

Article written in November 2020 by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020).

Film analysis: The Big Short

October 8, 2024November 14, 2020 by Marie POFF

Film analysis: The Big Short

Foreward

This article written by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020) analyzes the The Big Short film and explains the related financial concepts.

The film “The Big Short” recounts the subprime housing bubble which lead to the financial crisis in 2008. Through a compelling storyline, the complexities of the financial market – including CDOs, mortgage backed bonds, and the reckless trading of complex derivative instruments – lead to the subsequent financial collapse of the US housing market.

Film summary

“The Big Short” directed by Adam McKay and based on the best-selling book by Michael Lewis, explains how the subprime housing bubble, caused by increasingly risky subprime mortgage bonds, lead to the 2008 financial crisis. The danger was hidden such that only a few players predicted the collapse and used it to “short” the market. Once the bonds failed, the value of billion-dollar securities dropped to nothing, which bankrupted major investment banks and forced a government bailout to prevent economic collapse.

The film is presented as three concurrent stories about the investors who realised the risk of the subprime housing bubble and predicted the 2007 housing market crash. Wall Street investor Michael Burry realised that many subprime home loans packaged in the bonds were in danger of defaulting, and bets against the market with one billion dollars in credit default swaps. We also follow the stories of banker Jared Vennett, hedge-fund specialist Mark Baum, and two younger investors – Charlie Geller and Jamie Shipley – who work with retired banker Ben Rickert. After reading Burry’s findings, they also make a series of successful bets and profit off the downfall of the economy.

The subprime housing bubble caused worldwide chaos as banks entered a liquidity crisis, stock markets crashed, reputable companies collapsed, and millions suffered in the wake of the disaster. The crisis was felt worldwide, irrespective of your position and whether you benefited, survived or lost everything you’d worked towards. This movie helps those who aren’t in the financial sector, understand exactly what happened.

The Big Short film

Financial concepts from the The Big Short film

Financial derivatives

Leverage

Financial leverage can be used to increase (expected) profits but also increases risk by accentuating the gains and losses of a market position. When the largest banks and financial institutions in the world leveraged using derivatives, CDOs and other highly complex securities – the exacerbated losses can lead to collapse.

CDO

A Collateralised Debt Obligation (CDO) is essentially the repackaging “old” products as new, by the securitisation of loans into a product sold to investors on the secondary market. Another example are synthetic CDOs, which essentially bets on the direction the market is going to take and amplifies the monetary gain of a bullish market, but heavily exacerbates the losses from a bearish one.

Subprime Mortgage Backed Securities

Subprime mortgages are a loan to borrowers with a low credit rating, which increases the risk that they will default. Tranches in subprime mortgage-backed bonds are when subprime mortgages are mixed with top-rated mortgages, which effectively hides their risky nature from unsuspecting customers. These top-rated securities could not stand when the subprime mortgages failed, but the danger was looked over even by the banks who sold them.

‘Shorting’ the market

By predicting the danger of mortgage-backed securities and expecting defaults on subprime mortgages, some investors profited from the crisis through credit default swaps. However, this does not mean shorting the market is a good idea. As said by J.M. Keynes; the market can stay irrational much longer than you can stay solvent. Due to unpredictable factors such as politics, going short is a bet that can run out of time – even with a simple options strategy, your options will eventually expire. Sticking with a long term, value-based approach eliminates that problem. Keep short investments on the side to meet short term cash flow needs, but also know that a quality company will generate profits, dividends, and market returns over the long term, without ever expiring.

High Risk vs High Reward

Why did the banks making the loans expose themselves to subprime borrowers at such high levels? Because high-risk borrowers also offered high rewards. Before home prices imploded and the labour market tanked, banks were able to charge sufficiently high interest rates on loans to subprime borrowers which more than overcame the costs of their higher default rates. This combined with the banks’ ability to securitize loans and sell them meant that banks thought their risks were mitigated. Instead they focused on how higher subprime interest rates could boost their margins and profits. However, those default rates eventually grew too high for any interest rate to justify the risk, and the entire system collapsed.

Impartial assessors

Impartial regulators and assessors are critical to the safe functioning of the financial sector. A contributing factor to the crash was years of financial malfeasance and incompetence among the top salesmen and executives among Wall Street’s largest banks. Conflicts of interest and abuse of power by the banks meant credit rating agencies as well as professionals supposedly managing CDOs for the benefit of the customer, were in fact working in the bank’s interest. This fraudulent system meant the credit rating agencies were rating housing debt securities highly, right up until the crash.

Counter-party risk

This simply means the risk of the other party, if their investments are not able to pay out when the time comes. An example is how Baum and Geller bet against the banks, but when the crisis hit the banks eventually went bankrupt – these two investors had to be careful about receiving payment before the banks became insolvent.

Key insights for investors

Trust your instincts

It’s important to do your own homework and trust your instincts. Despite external pressure, the investors shorting the market held their ground, ensuring their investments paid off in the long-term. When the numbers go up and down, it’s important to be patient and study the reasons behind any change. While investment advice is useful, the incentives of others may conflict with yours. It’s your money, and just because an opinion is popular, doesn’t mean its correct.

See the reality

When buying securities, it’s vital to understand the reality of what the numbers represent – real people, real companies. In the film, we see workers paying off loans for three properties at varying rates, and how the incentive system cushioned bank managers’ salaries, helping the mortgage market expand. “No-one can see a bubble; that’s what makes it a bubble” – people lost their ability to see the forest for the trees. They were the weak link in the chain, which once broken, caused the crisis. Your finances are only as strong as their weakest link, so it’s important to diversify your risk.

Mentors

In the film, Geller and Shipley asked their mentor and retired trader Rickert for his support to meet the ISDA threshold. More than that, he taught them that greed is not good, and that their win was at the expense of millions of Americans who would lose their jobs. Have a mentor to guide you both morally and financially.

Opportunity in adversity

A final lesson from this movie, albeit a dark example, is that you can find the good in adversity. By shifting your mindset when facing failures or disasters, you can learn to find opportunity in anything.

Relevance to the SimTrade certificate

Through the SimTrade course, as well as a strong understanding about trading platforms and orders, you are taught about information in financial markets and how to use this to make successful trades. Several case studies teach you how to analyse market information to make valuations, and correctly assess how market activities will affect your own trades. The simulation and contest allow you to compete against others in the course and deepen your understanding of how a market reacts to different players.

Famous quote from the The Big Short film

An investor: “No one can see a bubble. That’s what makes it a bubble.”

Trailer of the The Big Short film

About the author

Article written in November 2020 by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020).

Film analysis: Rogue Trader

October 8, 2024November 14, 2020 by Marie POFF

Film analysis: Rogue Trader

This article written by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020) analyzes the Rogue trader film and explains the related financial concepts.

Based on a true story, ‘Rogue Trader’ details how risky trades made by Nick Leeson, an employee of investment banking firm Barings Bank, lead to its insolvency. This film explores how financial oversight and a lack of risk management from Leeson’s supervisors, lead to irrecoverable losses and the eventual fall of the banking giant.

Film summary

‘Rogue Trader’ recounts the exploits of Nick Leeson and his role in the downfall of Barings Bank, one of the single largest financial disasters of the nineties. Directed by James Dearden, this film encapsulates the economic and social changes of a tumultuous period. Leeson is a young derivatives trader sent to work in Singapore for Barings Bank, a major investment bank at the time. After opening a Future and Options office in Singapore, Leeson is placed in a position of authority where he takes advantage of the thriving Asian market by arbitraging between the Singapore International Monetary Exchange (SIMEX) and the Nikkei in Japan. He begins making unauthorised trades, which initially do make large profits for Barings – however he soon begins using the bank’s money to make bets on the market to recoup his own trading losses. At first, he tries to hide his losses in accounts, but eventually loses over $1 billion of Barings capital as its head of operations on the Singapore Exchange. He eventually flees the country with his wife, but inevitably, he must face how his actions lead to the bankruptcy of Barings Bank.

The Rogue Trader film

Financial concepts from the Rogue Trader film

Financial derivatives

For any new investors, financial derivatives describe a broad class of trading instruments that have no tangible worth of their own, but “derive” their value from a claim to some other financial asset or security. A few examples include futures contracts, forward contracts, put and call options, warrants, and swaps. Derivative trading started from the practice of fixing contracts ahead of time, as a way for market players to insure against fluctuations in the price of agricultural goods. Eventually the practice was extended to cover currencies and other commodities. As exchange rates became increasingly unstable, the derivatives trade facilitated huge profits for those estimating the future relative value of various commodities and currencies, through the buying and selling complex products.

Barings Bank

Founded in 1762, Barings Bank was the second oldest merchant bank in the world before its collapse in 1995. Barings grew from being a conservative merchant bank to becoming heavily reliant on speculation in the global stock markets to accumulate its profits. The derivatives market was somewhere this could be done in a very short space of time. Following the stock market crash of 1987, derivatives became central to the banks’ operations as they sought to offset their declining profits. The volume of their derivative trading soared from less than $2 trillion in 1987, to $12 trillion in 1993. As finance capital became increasingly globalised, Barings branched out to exploit these new markets in Latin America and the Far East.

Tiger Economies

The term “tiger economies” is used to describe the booming Southeast Asian economies of South Korea, Taiwan, Hong Kong, and Singapore. Following export-led growth and especially the development of sophisticated financial and trading hubs, Western interest spiked for these untapped markets in the 1990s.

Arbitrage

Profitable arbitrage opportunities are the result of simultaneously buying and selling in different markets, or by using derivatives, to take advantage of differing prices for the same asset. In the film, Leeson makes a profit by exploiting the small price fluctuations between SIMEX in Singapore and the Nikkei 225 in Japan.

Cash neutral business

A cash neutral business means managing an investment portfolio without adding any capital. For Leeson, any money made or lost on the trades should have belonged to the clients, and only a small proportion of the trades were meant to be proprietary. However, Leeson used Baring Bank’s money to make bets on the market to recoup his trading losses.

Short straddle position

A short straddle is an options strategy which takes advantage of a lack of volatility in an asset’s price, by selling both a call and a put option with the same strike price and expiration date, to create a narrow trading range for the underlying stock. Lesson used this strategy but sold disproportionate amounts of short straddles for each long futures position he took, because he needed to pay the new trades, the initial margin deposits, and meet the mounting margin calls on his existing positions.

Errors account

An errors account is a temporary account used to store and compensate for transactions related to errors in trading activity, such as routing numbers to an incorrect or wrong account. This practice allows for the separation of a transaction so that a claim can be made and resolved quickly. Leeson used this accounting to conceal the losses to Barings Bank which eventually amounted to over £800 million, though the account was supposedly activated to cover-up the loss made by an inexperienced trader working under Leeson’s supervision.

Key insights for investors

Don’t Lose Sight of Reality

An important insight is noticing how Leeson forgot to consider the real-world impact of his trades. He reflects on seeing trading as just artificial numbers flashing across screens, “it was all paid by telegraphic transfer, and since we lived off expense accounts, the numbers in our bank balances just rolled up. The real, real money was the $100 I bet Danny each day about where the market would close, or the cash we spent buying chocolate Kinder eggs to muck around with the plastic toys we found inside them.” Leeson saw the Kobe earthquake as nothing more than an opportunity and conducted more trading in one day than he ever had before as the market was butchered. Investors can avoid Leeson’s mistake by keeping a firm grasp on reality, and remembering the real companies and people represented by the stock exchange.

Destructive Practices

Other employees at Barings Bank most likely relied on internal auditors to discern wrongdoings or mistakes made by others, but as can be seen from Leeson’s case, regulators can be slow to catch on to any wrongdoing – especially when there are large profits involved. The lesson here is that an investor must be aware and proactive in helping to prevent other investors from engaging in destructive trading practices. This is especially true when it comes to newer markets or products, where regulators are unsure what entails best practice.

Tacit Agreement

While Leeson is assumed to be the villain, consider how Barings was able to contravene laws forbidding the transfer of more than 25 percent of the bank’s share capital out of the country for nearly every quarter during 1993 and 1994? Ignorance is not an excuse – tacit agreement is as effective as active engagement. A lesson here is that investors should remain informed on all their business engagements regardless of how much profit it being made.

Relevance to the SimTrade certificate

Famous quote from the Rogue trader film

Nick Lesson: “Despite rumours of secret bank accounts and hidden millions, I did not profit personally from my unlawful trading. To be absolutely honest, sometimes I wish I had.”

Trailer of the Rogue trader film

About the author

Article written in November 2020 by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020).

Film analysis: Other People's Money

October 8, 2024November 14, 2020 by Marie POFF

Film analysis: Other People’s Money

This article written by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020) analyzes the Other People’s Money film.

“Other People’s Money” is a film about a near obsolete publicly traded company, the New England Wire and Cable Company, interwoven with romance and community spirit. Issues arise because the original wire and cable division has become an obsolete parent firm of an otherwise profitable group of subsidiaries, but it employs much of the town’s population. While exploring the world of hostile corporate takeovers and the market for corporate control, this film shows the human impact of shareholder decisions. Good capitalism and greed clash in this fight to keep shareholders satisfied and save the factory from a dying industry.

Film summary

“Other People’s Money” directed by Norman Jewison, delves into the hostile takeover of New England Wire and Cable Company (NEWC) by Garfield Industries, where corporate raider Lawrence “Larry the Liquidator” Garfield is president. New England Wire is a publicly traded, debt-free company founded and managed by the Jorgenson family. Garfield arrives offering a peaceful takeover, explaining that the wire and cable division is in a dying industry, and is harming the profitable subsidiaries by depressing the share price. He believes that liquidating the harmful wire division is necessary to act in the best interest of the shareholders. However, Jorgenson denounces this offer as a death sentence for the employees and their town, arguing that companies should protect their community and have social responsibility. However, the market value of the company’s common stock decreases to equal less than the underlying value of its assets. Garfield then makes a takeover attempt, which culminates at the company’s annual shareholders’ meeting with Garfield succeeding in closing the wire and cable division of NEWC. The film ends with Kate Jorgensen calling with good news from a Japanese automobile company, who are interested in hiring the NEWC to product stainless steel wire cloth instead of wire.

Otehr peoples's money film

Financial concepts from the Other People’s Money film

Other People’s Money

Other people’s money (OPM) is a slang term referring to financial leverage, whereby using borrowed capital it’s possible to increase the potential returns, but also increase the risk, of an investment. In the film, the NEWC had an inefficient capital structure with no debt to leverage the company. Instead the company had a high amount of cash and liquid assets, as well as a fully funded pension plan for its employees, but had a debt-to-equity ratio of zero. There are trade-offs to having a higher debt-to-equity ratio, but in this case, leveraging OPM would have allowed the NEWC to remain in business by transitioning into a more profitable industry.

Corporate restructuring

Corporate restructuring is a process where the structure or operation of a company is significantly modified, usually in periods of significant distress and financial jeopardy. This could involve for example, mergers, takeovers, or divestiture. In this film, Garfield persuades the shareholders to divest of the failing division by selling the division and its remaining assets. Kate Jorgensen offers a better solution – a Japanese automobile company which will hire the NEWC to produce stainless steel wire cloth, allowing the company’s assets to be repurposed instead of liquidated.

Corporate takeovers

A corporate takeover refers to when one company makes a bid to acquire or take control of another, without necessarily obtaining the actual title. A takeover is usually done by purchasing a majority stake in the shares of the target company. In the film the NEWC is debt-free, making it attractive to corporate raiders or ‘takeover artists’, who aim to provide shareholders with a better return for their money.

Market for corporate control

The market for corporate control is the role of equity markets in facilitating corporate takeovers, and mainly refers to the market for acquisitions and mergers where there is competition for control rights. In this film, takeover artist Garfinkle is blocked from purchasing more shares in the NEWC by a judge’s injunction. He fights this as he believes that a free market for corporate control is needed to enable restructuring essential for the company to remain competitive. As a value-focused individual, Garfinkle believes in market dynamism as an effective tool for poor management, where market forces put pressure on managers to perform or risk sale of the company.

Creative destruction

Creative destruction is the union of evolutionary natural selection and economics. Resources are necessarily scarce, so the world advances only when outdated industries are encouraged to die quickly, allowing capital to be reallocated to more efficient and innovative industries. In this film, cable and wire is a dying industry due to the widespread adoption of fibre optics, so Garfield encourages shareholders to sell to him and reallocate their money towards a more productive venture. The underlying assumption is that though a transitioning industry will cause disruption, there is more to gain than lose when capital is put to best use and assets are used in an economically rational manner.

Key insights for investors

Wealth maximisation vs Social responsibility

As investors, the main goal is often to maximise wealth, and the game of making money can make it all too easy to value a business solely on its share price. However, this film shows that behind the numbers are the people who keep the business afloat, and who in turn rely on employment at the NEWC to support themselves. Jorgensen’s focus is on his social responsibility to the employees whose livelihoods depend on the wire plant, while Garfield believes in free enterprise and shareholder wealth maximisation. It’s clear that a balance between the two is required to create ‘good capitalism’, where all parties involved are treated fairly and humanely.

Many sides to every story

A meaningful insight from this film is that both players had valid reasons for their actions. While Garfield is painted as profit-focused at the expense of the employees, he’s also acting in the best interests of the shareholders – he refuses to take a “greenmail” bribe because he believes it would be immoral to sell out and victimise the shareholders whose funds are not being put to best use. Conversely, while Jorgensen is painted as the town’s hero, he is also neglecting his obligation to the shareholders by failing to recognize that his company was in a shrinking market, and would become obsolete if he did not accept innovations in the industry. This dual perspective is an introduction to business ethics, showing how utilitarian thinking can clash with other ideals pushing social responsibility and awareness. As investors, this is a reminder that there are always many perspectives to an issue, and real life is never black and white.

Relevance to the SimTrade certificate

SimTrade is a course designed to teach investors how the market works, including how to make orders and build a market position, while also teaching investors how to interpret and understand what these numbers represent in the real world. A combination of theory and practice helps you to understand the complexities of the stock market – including firm valuations, the impact of events on stock prices, and how to appreciate the degree of market efficiency.

The Other people’s money concept is introduced in Period 3 of the SimTrade certificate:

The Financial leverage course
The series of simulations about market making

Famous quote from the Other people’s money film

About leverage: “I love money. I love money more than the things it can buy. There’s only one thing I love more than money. You know what that is? Other people’s money.”

Watch Garfield making his point about wealth maximisation at the shareholders’ Annual Meeting of their company.

This could be compared to Gordon Gekko explaining “Greed, for the lack of a better word, is good” to the shareholders during the General Meeting of their company (in the Wall Street movie).

Trailer of the Other People’s Money film

About the author

Article written in November 2020 by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020).

Book review: Barbarians at the gate

October 8, 2024November 14, 2020 by Marie POFF

Book review: Barbarians at the gate

This article written by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020) analyzes the Barbarians at the gate book.

“Barbarians at the Gate” is a book title which quickly became a catchphrase in the finance industry. It describes how the once benevolent business practice of leveraged buyouts (LBOs), morphed into something more sinister under the influence of Wall Street in the 1980s. This book describes in detail the LBO and subsequent failure of the RJR Nabisco merger, and dives deeper into a Wall Street culture driven by greed and excess. An exciting read, with valuable lessons which still apply to investors today.

Book summary: Barbarians at the Gate

“Barbarians at the Gate” written by investigative journalists Bryan Burrough and John Helyar, follows Ross F. Johnson as he merges two of America’s biggest brands in the 1980s, RJR and Nabisco, becoming the CEO and president of tobacco and food corporation RJR Nabisco. What follows is the leveraged buyout (LBO) of RJR Nabisco, with a frenetic Wall Street bidding contest between members of the RJR Nabisco management, the investment banking firm Shearson Lehman Hutton, and the LBO firm Kohlberg, Roberts and Co, for the takeover of the company. This takeover was the peak of a wave of LBOs in the 1980s, and after a competitive bidding process, private equity firm Kohlberg Kravis Roberts & Co. (KKR) put in a winning $24.5 billion bid. This netted Johnson over $60 million and put millions more into the hands of executives, lawyers, and bankers involved in the deal.

Barbarians at the Gate Book

Financial concepts from “Barbarians at the Gate”

Leveraged Buyout (LBO)

A leveraged buyout is a financial transaction where a company is purchased using a combination of equity and debt, and where the company’s cash flow is the collateral used to secure and repay the sum borrowed. LBOs started as a work-around by the wealthy to avoid estate taxes; investors would create a shell company and acquire the target company using bank loans and insurance bonds, with only 10% coming from the personal funds of the investors.

Wall Street and LBOs

In the 1980s, the word LBO became synonymous with corporate greed – a representative of the unhinged excess of Wall Street. At the time, the US Internal Revenue Code allowed deductions of interest tax, but not dividends, encouraging companies to go into debt and pay interest, rather than operate at a profit. As well as this, junk bonds – speculative investments with a higher risk of defaulting – then made it possible to raise massive sums of money quickly. This further enabled the transformation of an LBO from a slow financial loophole, to a process used in hostile corporate takeovers.

The Downsides of LBOs

The use of LBOs for hostile takeovers left a heavy debt burden on companies and sparked widespread criticism. Government officials warned that a leveraged takeover one day could mean bankruptcy the next. The original shareholders would thus see their investment value crumble as the company took on enormous debt. The human cost was of course the employees of the targeted companies – many of whom would lose their jobs.

The RJR Nabisco Fiasco

In 1985, Nabisco and RJR merged into RJR Nabisco because of the growth opportunities it would afford both companies. However, the flashy behaviour of the Northern US company, Nabisco, conflicted with the values of its Southern counterpart, RJR. For example, employees at the RJR factory rarely saw limousines, whereas it was the preferred mode of transportation for Nabisco managers. In 1988 there was an LBO takeover for the firm, and the dramatic bidding process put millions into the hands of those involved in the deal, but left the company crippled with a $30 billion debt. Private equity firm KKR agreed to insane terms to win the deal, including giving a huge cut to CEO Johnson, and agreeing to ensure the maintenance of certain departmental budgets and retirement packages. These concessions compromised the austerity measures which enable an LBO, such as downsizing departments to repay the debt. Crippled with debt, RJR Nabisco didn’t survive the long-term effects of the LBO, and in 1999 split back into tobacco and food companies.

Negotiation fees

An overlooked aspect of an LBO are the fees involved; in the case of RJR Nabisco, the upfront fees for advising, moneylending and a ‘success fee’ was upwards of $200 million alone. In all negotiations there are administration and other costs affecting the bottom line of the deal.

Wall Street in the 1980s

It’s worth mentioning the differences between Wall Street in the 1980s and today. The world moved slower without the internet, and newspapers were the most influential (though much slower) medium for financial reporting. A Time cover story condemning the lavishness of Wall Street – “Greed on Wall Street” – was enough to influence the outcome of a deal. Many of the big players on Wall Street wanted above all else to maintain their luxurious lifestyles, often at the expense of others; they truly epitomize the greed and excess of Wall Street in the 1980s.

Key insights for investors

Stay updated

As an investor your primary concern is a return on your investments, so it pays to be aware of any changes to company structure or management, for example changes in the debt/equity structure, which could affect the longevity of the company. By staying aware of mergers, buyouts or other changes involving companies you own, you can better decide if it’s a hold or sell by considering the long-term impact on your investment.

Detrimental effects of greed

Whether it’s the go-go 1980s or the sub-prime wave of the 2000s, greed is a recurring factor when it comes to detrimental financial practices. In the book, KKR was desperate for a piece of the LBO pie, and blinded by the promise of profit, agreed to extremely disadvantageous terms. Johnson also made a bid, but executive Charles Hugel saw how much he aimed to profit at the expense of thousands of Nabisco employees, and appalled by Johnson’s greed, accepted KKR’s lower bid. The lesson here is that numbers should never be the only consideration when making a deal. Taking Forstmann’s “real people, real money” approach, it’s clear that KKR’s bid of “phoney junk bond crap” only lead to fast profits for the dealmakers, and destroyed the long-term health of the company. As investors, it’s important to consider the real-world impact of our investments; by investing into people and ideas, we can help grow the companies of tomorrow, maintain the health of our business sectors, and make reliable long-term profits in the future.

The relevance of the Barbarians at the Gate book for the SimTrade course

An important aspect of finance is learning how the market is directly influenced by the expectations and actions of others. In the SimTrade course, after learning how the market works through the limit order book, prices and transaction volumes, students engage in a simulated market situation where they learn how to send orders, and see first-hand how this directly influences the market. SimTrade also teaches students to understand how a firm is valuated, the impact of events on stock prices, and the real-world effects of your investments. SimTrade is an incredible learning opportunity for those who want to both understand the market, and practice market activities safely in a simulated environment.

About the author

Article written in November 2020 by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020).

The animals of finance

October 30, 2020 by Akshit GUPTA

The animals of finance

This article written by Akshit GUPTA (ESSEC Business School, Master in Management, 2022) analyzes the animals of finance used as metaphors.

Financial markets are a common marketplace where trading of different securities (stocks, bonds, foreign currencies, derivatives, etc.) takes place between prospective buyers and sellers. They play a pivotal role in the functioning and growth of an economy by allocating limited resources and generating liquidity. They consist of several terminologies, associating animals to define key characteristics of different market scenarios and types of investors.

Bulls
A bull is used to define an investor or a market scenario where the traders are optimistic about the markets and expect an upward trend or movement in stock prices. A bullish investor takes a long position in the market and expects to generate a profit by selling the stocks at a higher price. Also, investor confidence is high when the market shows a bullish trend and more capital usually flows into the market increasing market capitalization.
Bears
A bear is used to define an investor or a market scenario where the traders are pessimistic while having negative sentiments about the markets and expect downward trends in the short term. A bearish market shows a lack of investor confidence and comes into existence for a short period followed by a bullish trend. A bearish market is the polar opposite of a bullish market and investors make use of different techniques including short-selling to profit from such trends.
Ostriches
Based on the concept of an ‘Ostrich Effect’, Ostriches represent investors who avoid bad market news and bury their heads inside the sand just like an ostrich to avoid facing such unfavorable situations. Such investors fail to react to negative news at the correct time in anticipation of good times ahead. The strategy employed by them often leads to heavy losses and lower confidence in financial markets.
Stags
Stags are used to define investors who take long positions during the initial public offerings (IPO) of a company and profits by selling the stocks once the shares are listed. These investors aren’t much affected by the bullish or the bearish market trend and place speculative bets on the short term market movements.
Chickens and Pigs
Chicken refers to investors who are risk-averse in nature and have a very conservative approach while dealing in the financial markets. Such investors usually stay away from equity stock investments and prefer safer investments in bonds, fixed deposits, and government securities. The risk appetite for these investors is very low and they look for secured returns.

Pigs are used to define investors who are greedy and resort to taking high risks in anticipation of making huge profits. Their trading style is not based on any fundamental or technical stock analyses but rather on trending stock tips and hearsay. The undisciplined style of investment is what makes these investors most vulnerable to market volatilities and they are the ones to lose most of their investments when the prices move in unfavorable directions.
Wolves
Wolves are used to define investors who are powerful and greedy and resort to unethical and illicit means to generate huge returns in the market. Most of the time, wolves are involved behind the development of high-level scams which disrupts the financial markets and leaves a long term impact on genuine investor’s confidence.

About the author

Article written by Akshit GUPTA (ESSEC Business School, Master in Management, 2022).

Analysis of the Wall Street movie

October 30, 2020 by Akshit GUPTA

Analysis of the Wall Street movie

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) analyzes Wall Street movie.

Analysis of the Wall Street movie

The Wall Street movie released in 1987 is an American drama film based on the life of a junior stockbroker aiming to work with a major Wall Street player in America.

The movie has been regarded as the most iconic film of the 1980s throwing light on the capitalistic trading mentality existing in one of the world’s largest financial markets. It replicated the drastic changes that daring corporate raiders introduced in the financial system. It focuses and enlightens us on concepts of a financial market that we observe in our daily life, which also correlates with some of what we study in the SimTrade course.

Wall Street movie

Key Characters in the movie

Bud fox, a junior stockbroker
Gordon Gekko, A famous Wall Street investor
Lawrence Wildman, a corporate raider
Carl Fox, Bud’s father and a mechanic at Bluestar Airlines

Summary of the Wall Street movie

The movie starts by introducing a character named Bud Fox, who is a junior stockbroker at Jackson Steinem & Co, a New York City-based firm. Aspiring to work with one of the leading Wall Street players named Gordon Gekko, Bud Fox visits Gekko’s office carrying a box of contraband Cuban cigars on his birthday.

In response to Bud’s gesture and courage, Gordon Gekko offers him an opportunity for an interview that Bud has always longed for. Being unable to impress Gekko, Bud takes the extra step and plays his last card. He imparts some inside information about Bluestar Airlines to Gekko which he overheard from his father.

Impressed by the act, Gekko ends up placing an order for Bluestar Airlines’ stocks and becoming one of Fox’s clients. Over the next few months, Fox made several stock deals for Gekko but none showed an increase. Furious Gekko offers a last chance to Bud for him to keep his job. Desperate to continue working with Gekko, Fox agrees to spy on a British CEO and a corporate raider, Lawrence Wildman, and discern his upcoming plans of investments. By following him, Fox learns about an investment Wildman is planning to make in a major steel company named Anacott and take the controlling interest. By leaking the news in the press, Gekko buys the controlling shares before Wildman and sells him the same for a lucrative profit.

The deal leaves Bud significantly rich and provides him with a lot of additional perquisites. He goes on to engage in illicit trading activities and makes a lot of money for Gekko and himself. In the dark, Bud does not realize that he is being put on the hotlist by the SEC.

Bud pitches a plan to Gordon Gekko, which is to expand the Bluestar Airlines after buying it. Bud does all in his power to push the deal through. But in no time he learns about the plan Gordon has, to sell all the assets once the stock peaks, thus leading the company in ashes. Being racked with the guilt of leading all the employees into unemployment, Bud plans to manipulate the stock. He also arranges for a secret meeting with Lawrence Wildman and convinces him to buy a controlling stake in Bluestar Airlines with a significant discount.

On the execution day, Gordon Gekko, realizing that his stocks are plummeting, gets rid of his remaining stake in the company on Bud’s advice, ending up in losses. But soon, Gekko finds out about the plot set up by Bud Fox and Wildman to deceive him.

To teach a lesson to the young broker, Gekko informs the SEC about the insider trading and unethical practices undertaken by Bud Fox to make illicit gains. However, Bud ends up cooperating with the SEC to get a lighter sentence and helping SEC arrest Gordon Gekko.

The relevance of the Wall Street movie for the SimTrade course

The SimTrade course focuses on the concepts of observing the market news and using types of orders to trade and create value at the end of the trading period, which of course goes into detail. The movie correlates with the concept of market efficiency where it shows that the market functions as a semi-strong efficient market at best. Since private inside information is not embedded in the market price of the stock, there is a possibility to make gains higher than the market gains by bringing it into use. It also shows how demand and supply play a fundamental role in any financial market, driving the prices in either direction. Moreover, it establishes the importance of a buyer, a seller and a common trading platform for a transaction to occur.

The ending of the movie is quite relevant portraying how illicit and unethical behavior is dealt with in present-day markets. It also shows how effective measures have been put in place by governments throughout the world to provide traders with a transparent and efficient financial market.

Famous quote from the Wall Street movie: « Greed is good »

Watch Gordon Gekko explaining « Greed, for the lack of a better word, is good » to the shareholders during the General Meeting of their company.

Trailer of the Wall Street movie

About the author

Article written in October 2020 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Analysis of The Hummingbird Project movie

October 30, 2020 by Akshit GUPTA

Analysis of The Hummingbird Project movie

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) analyzes The Hummingbird Project movie.

Analysis of the movie

Also known as The Wall Street Project, the Canadian movie was released in 2018 featuring the evolution of high frequency trading and ultra-low latency direct market access (DMA) in one of the most developed financial markets in the world. The name ‘The Hummingbird Project’ is well suited as it relates to the time a hummingbird’s wing takes to beat. The title of the film impeccably connects with the project the movie is based upon. The movie portrays how the line between success and failure is sometimes very thin. It correlates with the SimTrade course as it teaches us how to make use of technology in markets and stay ahead of others.

Summary of the movie

The The Hummingbird Project movie starts by presenting Mr. Vincent Zaleski, a stockbroker working for Eva Torres, keen on convincing Mr. Bryan Taylor, an investor, on investing in his idea of installing fiber optic cables between the Kansas Stock Exchange and the New York Stock Exchange, at a distance of approximately 1,000 miles, to front-run the orders into the system giving a time benefit of at least 1 millisecond. The high frequency trading operation would have led to an increase in profits by millions of dollars.

Buying into Vincent’s idea, Mr. Bryan shows his faith in him. In order to execute the plan, Vincent convinces his cousin Anton Zaleski, a genius programmer, to resign from their current stockbroking firm, owned by Eva Torres, and work tirelessly to achieve the new feat.

Both the brothers start working on their dream project with Anton handling the technical aspects of the technology of improving his previously coded software and Vincent working on the ground for the installation of the fiber optic cables. Anton has previously coded a software that had the capability to run trades in 17 milliseconds and now, it is required to be brought below 16 milliseconds in order to gain from the system. Since success doesn’t come easy, they encounter many difficulties in attaining their dream.

Meanwhile, Eva becomes aware of their dream project and threatens Anton against using the proprietary software he developed while working for Eva. She also finds a student, at New York University, who wrote a research paper on boosting high-frequency trading using microwave pulses. Seeing a chance to beat Vincent and Anton, Eva immediately hires the student and begins with the building of a series of cell towers to make trades using microwave pulses. As a revenge for deceiving her, Eva gets Anton arrested by the FBI under charges of stock market fraud of utilizing proprietary software owned by Eva’s company.

While Vincent struggles with the digging and the installation of the cables, Eva’s company starts their operations using the microwave impulses, and thus, the front runs the market. Meanwhile, Anton being furious with the arrest unwinds a bug that he has installed in the software, used at Eva’s company, which results in a 20 second slowdown in the high-frequency trades leading to losses of millions of dollars. In order to regain access to her system and save her company, Eva agrees to take back the charges against Anton.

Due to delays and an unforeseen health condition, Vincent fails to roll out his fiber optics project resulting in losses to the investor.

The movie ends with Anton introducing a new idea to his cousin which can bring down the processing time to 9 milliseconds, named neutrino messaging.

Relevance to the SimTrade course

The The Hummingbird Project movie perfectly blends with the structure of present-day financial markets and shows how in just a matter of a few seconds, a person can gain or lose a great fortune. The concepts taught in the movie deals with ‘High-Frequency Trading’ and ‘Direct Market Access’ which are relatively new. These correlate with the courses on exchanging orders and market makers in the SimTrade course. These orders, if executed at ultra-high speed, can help in bringing liquidity to the market and narrow the bid-ask spread. If applied with great precision and knowledge, a trader can earn big fortunes using high-frequency trading which is changing the face of financial markets.

Most famous quotes from the movie

“But the thing is, if all traders use the same system, and have the same information, how do you beat the others? By having the fastest line” – Anton Zaleski

“High speed is not our priority. We don’t believe that making things faster makes things better.” – The Amish guy

“One millisecond faster!” – Anton Zaleski

Trailer of the movie

About the author

Article written in October 2020 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Money never sleeps

Quote: Money never sleeps

Analysis of the quote

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The 24-hour nature of global financial markets

The rapid pace of financial activity

The interconnectedness of global financial systems

My opinion about this quote

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Art as an asset class

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Reasons to invest in the art market

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Charging Bull on Wall Street

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Eurobonds

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ESSEC Transaction

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Straddle and Strangle

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Strangle

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