The Price of Gold

December 30, 2024October 17, 2024 by Nithisha CHALLA

The Price of Gold

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) explores the complexities behind gold pricing, key external drivers, and historical trends.

Introduction

Gold has been a store of value and medium of exchange for centuries, its price deeply rooted in global economic, political, and financial systems. In modern markets, the price of gold is influenced by a range of factors, from macroeconomic conditions to geopolitical tensions.

What Is the Gold Price?

The gold price is the market value of one troy ounce of gold. It is quoted in terms of various currencies, most notably the U.S. dollar (USD). The price fluctuates based on supply and demand dynamics in international markets, and gold is traded on commodity exchanges such as the London Bullion Market Association (LBMA) and COMEX in the United States.

When studying gold price there are two terms we certainly come across, they are Spot Price and Futures Price. Spot Price is the current market price at which gold can be bought or sold for immediate delivery. The futures price is the agreed-upon price for gold to be delivered at a future date, which can differ from the spot price due to expectations of future market conditions.

Figure 1 below gives the evolution of the gold price over the period January 1971-September 2024.

Figure 1. Evolution of the Gold price
Gold price chart January 1971-September 2020
Source: Wikipedia

Key factors affecting gold price

Supply and demand dynamics

The fundamental economic principle of supply and demand plays a crucial role in determining the price of gold. However, unlike consumable commodities, the supply of gold remains relatively stable since most of the gold ever mined is still in existence.

Global gold production:
New gold production, primarily from mining, adds a limited amount to the existing gold supply. Countries like China, Australia, and Russia are major gold producers, and changes in production levels can impact prices.
Jewelry and industrial demand:
Jewelry accounts for a significant portion of global gold demand, particularly in countries like India and China. In addition, gold has applications in technology, particularly in electronics and medical devices.
Economic Conditions:
During economic prosperity, people may be more inclined to purchase gold jewelry for personal adornment or as a status symbol. However, during economic downturns, demand for jewelry may decline.
Central Banks:
Central banks can significantly impact gold prices by buying or selling gold reserves. Their actions can influence market sentiment and prices.
Technology:
Gold is used in various industries, including electronics, dentistry, and aerospace. Advancements in technology can drive demand for gold in these sectors.

Inflation and gold as a hedge

Gold is traditionally seen as a hedge against inflation. When inflation rises, the purchasing power of fiat currencies decreases, leading investors to seek refuge in assets like gold, which tend to maintain value over time. During periods of high inflation, such as the 1970s, gold prices surged as investors sought protection against currency devaluation.

Erb and Harvey (2013) observed that a common argument for investing in gold is that it is an inflation hedge, a golden constant. The golden constant can be considered as a collection of statements that assert that over a long time, the purchasing power of gold remains largely the same; in the long run, inflation is a fundamental driver of the price of gold; deviations in the nominal price of gold relative to its inflation-adjusted price will be corrected; and in the long run, the real return from owning gold is zero.

Interest rates and opportunity cost

There is a strong inverse relationship between gold prices and interest rates. When interest rates are low, the opportunity cost of holding non-yielding assets like gold decreases, making gold more attractive to investors. The period of low interest rates following the 2008 financial crisis led to a sharp increase in gold prices as central banks worldwide implemented loose monetary policies.

U.S. dollar strength

Gold is priced in U.S. dollars, so fluctuations in the value of the dollar have a direct impact on gold prices. When the U.S. dollar strengthens, gold becomes more expensive for foreign buyers, potentially reducing demand and lowering prices. In 2014, the strengthening of the U.S. dollar against other major currencies contributed to a decline in gold prices.

Figure 2 below gives the evolution of the gold price against the US dollar.

Gold price vs US dollar

Source: Bloomberg

Central bank policies

Central banks around the world hold substantial gold reserves, and their buying or selling behavior can influence gold prices. In recent years, central banks, particularly in emerging markets, have increased their gold holdings to diversify reserves away from fiat currencies like the U.S. dollar. Russia and China have been among the largest buyers of gold in recent years, which has helped support the price of gold.

Gold as a hedge against global financial crises

The role of gold in times of crisis: Gold is widely regarded as a hedge during financial crises. Investors tend to flock to gold during periods of extreme volatility in stock markets or global currency markets. The COVID-19 pandemic is the most recent example, where gold rallied to record highs as economies around the world faced unprecedented challenges. During the 2008 financial crisis, gold prices surged as investors sought alternatives to failing banking institutions and depreciating fiat currencies.
Currency devaluation and hyperinflation: In countries facing hyperinflation or severe currency devaluation, such as Venezuela or Zimbabwe, gold has acted as a critical asset to preserve wealth. When a nation’s currency rapidly loses value, gold remains a valuable and stable store of wealth

Gold price and its relationship with other assets

Gold vs stock market

Gold often moves inversely to the stock market. During periods of stock market decline or volatility, investors tend to move funds into gold, leading to price increases. However, in bull markets, gold may lag as investors seek higher returns in equities. For example, during the 2008 financial crisis, while global stock markets crashed, gold prices surged as it became a safe-haven asset.

Gold vs bonds

There is a similar inverse relationship between gold and bond yields, especially U.S. Treasury yields. When bond yields are low, the opportunity cost of holding gold decreases, making it more attractive. Conversely, rising bond yields can lead to lower demand for gold as bonds offer better returns.

Gold vs. cryptocurrencies

The rise of cryptocurrencies like Bitcoin has sparked debate about whether these digital assets could replace gold as a store of value. Although both assets are seen as alternatives to fiat currency, gold has a longer history and is less volatile. Cryptocurrencies offer higher potential for speculative gains, but their price volatility makes gold the preferred haven during financial crises.

The Future of gold prices

Increasing Central Bank Demand: Central banks, particularly in emerging markets, are expected to continue increasing their gold reserves, further supporting demand and prices.

The rise of digital assets such as Bitcoin has led to debates about whether cryptocurrencies could replace gold as a store of value. While some investors are shifting toward crypto, gold remains a trusted asset with thousands of years of history backing its status as a safe haven

Conclusion

The gold price is a reflection of a wide array of global economic and political factors, from inflation and central bank policies to geopolitical risks and financial market stability. While gold’s role as a hedge against inflation and a safe-haven asset remains unchanged, its interactions with modern financial markets, including competition from digital assets like cryptocurrencies, continue to evolve. Investors and central banks alike look to gold as a reliable store of value, particularly in times of uncertainty.

Why should I be interested in this post?

Gold has been a key financial asset for centuries, acting as a store of value, a hedge against inflation, and a safe-haven asset during economic crises. Understanding its investment options helps students grasp fundamental market dynamics and investor behavior, especially during economic uncertainty.

Useful resources

Academic research

Erb, C.B., and C.R. Harvey (2013) The Golden Dilemma. Financial Analysts Journal 69 (4): 10–42.

Erb, C.B., and C.R. Harvey (2024) Is there still a Golden Dilemma. Working paper.

Business resources

World Gold Council Gold spot prices

Bloomberg Investing in Gold: Is Gold Still a Good Inflation Hedge in a Recession?

Focus economics Gold: The Most Precious of Metals

Other

Wikipedia Gold

About the author

The article was written in October 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

Deep Dive On The Article “The Social Responsibility of Business is to Increase Its Profits” By Milton Friedman

December 30, 2024October 12, 2024 by Anant JAIN

Deep Dive On The Article “The Social Responsibility of Business is to Increase Its Profits” By Milton Friedman

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about Friedman’s article on “The Social Responsibility of Business is to Increase Its Profits” published in the New York Times Magazine in 1970.

Introduction

In his article in The New York Times Magazine in 1970, Milton Friedman articulated his viewpoint on the role of businesses in society. He posits that the foremost social responsibility of a business is to maximize profits for its shareholders, provided it operates within the bounds of legal and ethical standards. Friedman’s critique of corporate social responsibility (CSR) reflects the classical economic theory of the time and provides a framework for understanding business operations.

Overview Of Friedman’s Arguments

Here is a detailed summary of his arguments:

1. Central Argument: Profit Maximization

The core opinion of Friedman is that businesses predominantly exist to generate profits. According to Friedman, the essence of a business is to enhance shareholder value by maximizing their financial returns. This perspective is deeply rooted in classical economic theory, which views profit maximization as a key driver of economic efficiency and growth. Friedman argues that corporate executives are fiduciaries who must act in the best interests of shareholders, focusing on strategies that enhance financial performance. He believes that this profit-centered approach not only benefits shareholders but also contributes to broader economic prosperity by promoting investment, innovation, and job creation.

2. Separation Of Business & Government Roles

Friedman emphasizes a clear distinction between the roles of business and government. He argues that businesses should refrain from engaging in social responsibility activities—such as philanthropy or environmental initiatives—because these functions should be managed by governmental institutions and individuals who might in fact be a shareholder of the business in context making an individual choice According to Friedman, when businesses undertake social responsibilities, they are effectively making decisions about how resources should be allocated, a role he believes should be reserved for government and elected officials. He asserts that such overreach by businesses can disrupt democratic processes and undermine the principles of a free market economy.

3. Adherence To Legal & Ethical Standards

While supporting for profit maximization, Friedman underlines that businesses must function within legal and ethical borders. He contends that profit generation should not come at the expense of illegal or unethical behavior. For Friedman, ethical business conduct involves adherence to laws and regulations rather than engaging in socially responsible activities. He argues that businesses should play by the “rules of the game,” which include fair competition and honesty, without diverting resources or attention to social causes.

4. Critique Of Corporate Social Responsibility (CSR)

Friedman is critical of CSR, arguing that it often serves as a facade for executives to pursue personal values or political agendas at the expense of shareholders. He suggests that CSR initiatives can be ambiguous, lack clear accountability, and lead to inefficiencies. According to Friedman, when executives invest in CSR, they are effectively imposing costs on shareholders that could otherwise be distributed as profits. This approach, he argues, can create conflicts of interest and dilute the focus on maximizing shareholder value. Friedman’s critique reflects his belief that CSR is often more about the personal preferences of executives than about genuine social impact.

5. Impact On Business Philosophy

Friedman’s article has been a critical touchstone in discussions about the role of business in society. His argument that businesses should focus solely on profit maximization has been both defended and contested over the years. Supporters of Friedman’s view argue that a singular focus on profit drives economic growth, innovation, and efficiency. Critics, however, argue that this perspective is overly narrow and fails to address the broader social and environmental impacts of business activities.

Implications & Outcome Of Friedman’s Theory

Profit-Oriented Focus

Friedman’s emphasis on profit maximization reinforces the idea that the primary purpose of a business is to generate financial returns for shareholders. This focus is based on the belief that pursuing profits contributes to overall economic efficiency and job creation.

Limitations Of Traditional Responsibility

The article highlights limitations in traditional views of corporate responsibility. Friedman’s stance against business involvement in social issues may overlook the broader impacts of corporate activities on society and the environment.

Shifting Perspectives

The rise of CSR and sustainability practices signifies a shift towards recognizing that businesses have broader responsibilities. Companies are increasingly expected to balance financial success with positive societal contributions, reflecting a growing understanding that business success is intertwined with the well-being of stakeholders and the environment.

Relevance In Today’s Business World

Friedman’s argument, while influential, is increasingly viewed as less applicable in the context of contemporary business practices. Now days, businesses are recognizing that their impact extends beyond financial performance. Here are some examples contrasting Friedman’s views with today’s business practices:

Friedman’s View: Profit-First Approach

Example: Enron’s aggressive pursuit of profits through unethical financial practices exemplifies the risks associated with an exclusive focus on profit maximization. The company’s collapse highlights the potential consequences of prioritizing profit over ethical considerations and legal compliance.

Today’s Business Practices: CSR Integration

Example: Patagonia: Patagonia is a leading example of integrating CSR with its business strategy. The company prioritizes environmental sustainability by using recycled materials and supporting environmental causes. This approach demonstrates how businesses can align profitability with positive social and environmental impact, reflecting a modern understanding of corporate responsibility.

Friedman’s View: Minimal Social Engagement

Example: Historically, tobacco companies focused on profit maximization while downplaying the health risks associated with smoking. This narrow focus on profitability led to significant ethical and legal issues, illustrating the limitations of a profit-only approach.

Today’s Business Practices: Proactive Social Responsibility

Example: Ben & Jerry’s actively engages in social activism and supports various causes, such as racial justice and climate action. The company’s integration of social issues into its business model reflects a modern approach where CSR is an essential component of corporate strategy.

Friedman’s View: Profit Maximization With Potential Ethical Conflicts

Example: Volkswagen’s Emissions Scandal where Volkswagen’s focus on profit maximization led to unethical behavior, including emissions cheating. This scandal highlights the dangers of prioritizing profit over ethical standards and regulatory compliance.

Today’s Business Practices: Ethical & Sustainable Focus

Example: Tesla’s commitment to advancing renewable energy and electric vehicles demonstrates how modern businesses can pursue profitability while addressing environmental concerns. Tesla’s approach reflects a balance between financial success and positive contributions to sustainability.

Conclusion

In my opinion, Friedman’s article represents a seminal viewpoint in the discourse on corporate responsibility, reflecting a classical economic perspective that prioritizes profit and efficiency. While his views were groundbreaking at the time, they have faced considerable scrutiny as the expectations of businesses have evolved. The increasing emphasis on CSR and sustainability reflects a broader understanding of the role businesses play in society, extending beyond mere profit generation to include positive contributions to social and environmental well-being.

Useful Resources

Milton Friedman (13/09/1970): The Social Responsibility of Business is to Increase Its Profits – The New York Times Magazine

Harvard Business Review – “Friedman vs. Stakeholder Theory: A Comparison”

Patagonia’s Approach to Corporate Social Responsibility

Ben & Jerry’s Social Activism and CSR Practices

Tesla’s Commitment to Sustainability and Innovation

About The Author

The article was written in September 2024 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Analysis Of The Article “The Pyramid Of Corporate Social Responsibility: Toward The Moral Management Of Organizational Stakeholders,” By Archie B. Carroll

December 30, 2024October 12, 2024 by Anant JAIN

Analysis Of The Article “The Pyramid Of Corporate Social Responsibility: Toward The Moral Management Of Organizational Stakeholders,” By Archie B. Carroll

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about the article “The Pyramid Of Corporate Social Responsibility: Toward The Moral Management Of Organizational Stakeholders,” by Archie B. Carrol.

Introduction

Archie B. Carroll introduces in this article a structured framework that delineates the various levels of corporate social responsibility (CSR). Carroll’s pyramid framework categorizes CSR into four distinct levels—economic, legal, ethical, and philanthropic responsibilities—providing a comprehensive approach to understanding and implementing CSR. This model aims to help businesses navigate their multifaceted roles and obligations to stakeholders.

This detailed summary will explore each level of Carroll’s pyramid with relevant real-life examples to illustrate how companies address these responsibilities. Additionally, it will critique the model’s applicability and effectiveness in today’s rapidly evolving business environment, considering the complexities and dynamic nature of contemporary CSR practices.

Figure 1. The Pyramid Of Corporate Social Responsibility.
Pyramid Of CSR
Source: Archie B. Carroll

Detailed Summary of Carroll’s Pyramid Model

1. Economic Responsibilities

Definition: Economic responsibilities, at the bottom of Carroll’s pyramid, represent the fundamental duty of businesses to be profitable. This profitability ensures the survival and growth of the organization, allowing it to provide returns to shareholders, create jobs, and contribute to economic development.

Example: Apple’s success in the technology market, driven by its innovative products and strong financial performance, exemplifies how economic viability supports further investment and growth. Apple’s profitability enables it to fund research and development, maintain competitive advantage, and address higher-level CSR responsibilities.

2. Legal Responsibilities

Definition: The second level involves compliance with laws and regulations. Businesses are expected to adhere to legal standards covering labor practices, environmental regulations, health and safety, and other statutory requirements.

Example: Johnson & Johnson has faced various legal challenges, such as lawsuits related to product safety. In response, Johnson & Johnson has strengthened its compliance measures and regulatory practices, including enhanced quality control and transparent reporting, to meet and exceed legal standards.

3. Ethical Responsibilities

Definition: Ethical responsibilities go beyond legal obligations, focusing on doing what is morally right. This includes fairness, transparency, and respect for stakeholder rights, even in the absence of legal requirements.

Example: Ben & Jerry’s is known for its commitment to social justice, Ben & Jerry’s engages in ethical practices by advocating for issues like racial justice and climate change. The company’s initiatives, such as supporting fair trade and environmental sustainability, demonstrate its adherence to ethical standards beyond legal requirements.

4. Philanthropic Responsibilities

Definition: At the top of the pyramid, philanthropic responsibilities involve voluntary actions that benefit society, such as charitable donations and community engagement. These actions are not mandatory but contribute to societal well-being.

Example: Through the Starbucks Foundation and various community initiatives, Starbucks supports causes such as youth empowerment and disaster relief. Its philanthropic efforts enhance community relations and contribute positively to societal development.

Critiques Of Carroll’s Model In Today’s Context

Hierarchical Structure Limitations

Critique: The pyramid’s linear progression may not fully capture the complex and interconnected nature of CSR in today’s business environment. Modern companies often address multiple CSR levels simultaneously rather than sequentially.

Example: Unilever’s Sustainable Living Plan integrates economic, legal, ethical, and philanthropic goals into a cohesive strategy, reflecting a more integrated approach to CSR than the hierarchical model suggests.

Contextual Variability

Critique: The model’s general framework may not account for industry-specific and regional variations in CSR expectations. Different sectors and geographic areas may have unique challenges and standards that are not fully addressed by the pyramid.

Example: In the oil and gas industry, CSR involves addressing environmental impacts and engaging with local communities. Shell’s CSR practices must navigate industry-specific challenges, highlighting the need for tailored strategies beyond the pyramid’s generic levels.

Evolving Stakeholder Expectations

Critique: The pyramid might not exhibit the accelerated evolution of stakeholder’s expectations. Today’s stakeholders demand real-time responsiveness and transparency on social, environmental, and ethical issues, which may not be fully captured by a static model.

Example: Nike’s response to scrutiny over labor practices and environmental impact illustrates the need for agile and responsive CSR strategies that address contemporary stakeholder concerns in real-time.

Integration Of Global & Local Perspectives

Critique: Carroll’s model may overlook the need for integrating global and local CSR perspectives. Multinational companies often need to balance global CSR standards with local expectations and regulations.

Example: McDonald’s adapts its CSR strategies to address regional issues, such as nutrition and community engagement, demonstrating the importance of localized CSR initiatives alongside global commitments.

Future Of Corporate Social Responsibility

Greater Emphasis On Sustainability & Climate Action

Trend: As climate change becomes an increasingly urgent issue, businesses are expected to prioritize sustainability and integrate climate action into their CSR strategies. Companies will likely face growing pressure from consumers, investors, and regulators to adopt environmentally friendly practices and reduce their carbon footprint.

Example: Microsoft has committed to becoming carbon negative by 2030, investing in renewable energy, and enhancing its sustainability initiatives. This commitment reflects the increasing importance of environmental stewardship in modern CSR strategies.

Increased Focus On Social Equity & Inclusion

Trend: Social equity and inclusion are becoming central to CSR efforts. Companies are expected to address issues such as diversity, equity, and inclusion (DEI) and contribute to social justice initiatives. Stakeholders are demanding more transparency and accountability regarding how businesses handle these issues.

Example: Salesforce has made significant strides in promoting DEI through its workforce, policies, and community engagement. The company’s efforts include setting ambitious diversity goals and supporting social justice causes, reflecting the growing emphasis on social equity in CSR.

Integration Of Technology and Innovation

Trend: Technology and innovation are increasingly being integrated into CSR strategies to address social and environmental challenges. Businesses are leveraging digital tools and data to enhance transparency, track progress, and develop innovative solutions for CSR issues.

Example: IBM is utilizing technology to drive CSR efforts, such as using artificial intelligence for environmental monitoring and developing blockchain solutions for supply chain transparency. These innovations support more effective and measurable CSR outcomes.

Enhanced Stakeholder Engagement & Collaboration

Trend: Companies are recognizing the importance of engaging with a broader range of stakeholders, including local communities, NGOs, and industry partners. Collaborative approaches are being emphasized to address complex social and environmental challenges more effectively.

Example: Nestlé engages with various stakeholders through its Creating Shared Value (CSV) program, collaborating with NGOs, governments, and local communities to address issues such as nutrition, water stewardship, and rural development. This collaborative approach enhances the impact of its CSR initiatives.

Conclusion

Carroll’s pyramid model offers a foundational framework for understanding CSR by categorizing economic, legal, ethical, and philanthropic responsibilities. While it provides valuable insights, the model’s hierarchical approach may not fully address the complexities of modern CSR. Companies today often engage in integrated, context-specific, and responsive CSR practices that reflect evolving stakeholder expectations and industry-specific challenges.

The real-life examples illustrate how businesses are adapting their CSR strategies to meet contemporary demands, suggesting the need for a more flexible and nuanced approach to CSR beyond Carroll’s pyramid. Looking to the future, CSR is expected to increasingly focus on sustainability, social equity, technological innovation, and enhanced stakeholder engagement, reflecting the dynamic and evolving nature of corporate responsibility in today’s world.

Useful Resources

Archie B. Carroll “The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders”

Apple’s Corporate Social Responsibility

Johnson & Johnson Legal Challenges

Ben & Jerry’s Social Justice Initiatives

Starbucks’ Social Impact Report

Unilever’s CSR Strategy

Shell’s CSR and Sustainability

Nike’s Response to Labor Practices

McDonald’s Local Initiatives

About The Author

The article was written in September 2024 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Understanding Hyperinflation: Causes, Effects And Examples

December 30, 2024October 12, 2024 by Anant JAIN

Understanding Hyperinflation: Causes, Effects And Examples

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about Hyperinflation.

Introduction

Hyperinflation is an extreme economic scenario where prices increase at an incredibly fast rate, far beyond normal inflation. Unlike gradual inflation, where prices rise slowly over time, hyperinflation can cause prices to double in just days or even hours. This article explores the causes and effects of hyperinflation, along with some significant historical examples, to provide a thorough understanding of this severe economic issue.

What Is Hyperinflation?

Hyperinflation is an economic situation when the inflation rates go beyond 50% per month. In such situations, the value of the local currency diminishes rapidly in that country, leading consumers and businesses to reduce their currency holdings. As a result, prices soar while the currency’s value plummets, creating a vicious cycle that exacerbates the economic turmoil.

Causes Of Hyperinflation

Hyperinflation can be triggered by various factors, often working together: excessive money supply, loss of confidence, demand-pull inflation, and cost-push inflation.

Excessive Money Supply

A major cause of hyperinflation is when a central bank excessively prints money without corresponding economic growth. This devalues the currency, as seen in Zimbabwe, where the government printed money to fund a war and other expenditures, leading to runaway inflation.

Loss Of Confidence

When people lose trust in a currency, they rush to spend it, increasing the velocity of money. This quickened circulation of money drives prices up further. In Weimar Germany, the loss of confidence in the mark led to a rapid decline in its value, worsening inflation.

Demand-Pull Inflation

Hyperinflation can also result from demand-pull inflation, where demand for goods and services surpasses supply. If not managed, this can spiral into hyperinflation. For example, during the Yugoslav hyperinflation, economic sanctions and the collapse of the economy led to demand outpacing supply.

Cost-Push Inflation

When production costs rise, businesses pass these costs on to consumers through higher prices. If these cost increases are widespread and persistent, they can contribute to hyperinflation. Hungary experienced this after World War II, when the destruction of infrastructure and the need for rebuilding led to severe cost-push inflation.

Effects of Hyperinflation

Hyperinflation can have destructive impact for an economy: erosion of savings, distorted spending and investment, barter systems, and social and political unrest.

Erosion of Savings

As currency value collapses, savings lose their purchasing power, discouraging saving and leading to reduced investment. In Zimbabwe, many saw their life savings wiped out as the currency’s value plummeted.

Distorted Spending and Investment

People often spend money quickly to avoid holding devalued currency, leading to hoarding and speculative investments, which destabilize the economy further. In Weimar Germany, people bought durable goods like pianos and sewing machines to preserve their wealth.

Barter Systems

In extreme cases, currency becomes so worthless that people revert to barter, exchanging goods and services directly. During the Yugoslav hyperinflation, barter became common as the dinar lost all value.

Social and Political Unrest

Economic instability caused by hyperinflation can lead to social unrest and political instability, as people struggle to afford basic necessities.

Historical & Recent Examples Of Hyperinflation

Numerous countries have experienced hyperinflation, each with its own causes and consequences:

Weimar Germany (1921-1923)

After World War I, Germany experienced one of the most infamous cases of hyperinflation. The Treaty of Versailles imposed heavy reparations on Germany, and to meet these obligations, the government printed vast amounts of money. As a result, prices doubled every few days eventually leading to hyperinflation. Eventually, the government introduced a new currency and implemented fiscal reforms to stabilize the economy.

Hungary (1945-1946)

After World War II, Hungary experienced the worst hyperinflation ever recorded, with prices doubling every 15 hours at its peak. The government introduced the forint as a new currency, alongside economic reforms, to bring hyperinflation under control.

Yugoslavia (1992-1994)

Following the breakup of Yugoslavia, the country faced hyperinflation due to economic mismanagement and excessive money printing to fund the war. Prices doubled every 34 hours at the peak of the crisis, but the introduction of a new currency and international aid eventually stabilized the economy.

Venezuela (2016-Present)

Venezuela has been dealing with hyperinflation since 2016, caused by political instability, economic mismanagement, and a collapse in oil prices. At its worst, the inflation rate reached 10 million percent in 2019, leading to widespread poverty, shortages of basic goods, and a mass exodus of citizens.

Zimbabwe (2017-2020)

Zimbabwe, which previously experienced hyperinflation in the late 2000s, faced another bout starting in 2017. The government again resorted to printing money to cover its expenditures, causing inflation to exceed 500% by 2019. Although the situation has somewhat stabilized, the country still struggles with high inflation rates.

South Sudan (2016-Present)

South Sudan has been grappling with hyperinflation since 2016, exacerbated by ongoing civil conflict and disrupted oil production. The inflation rate peaked at over 800% in 2016, worsening the humanitarian crisis in the country.

Argentina (2018-Present)

Argentina’s inflation crisis worsened in 2018, driven by economic instability, rising debt, and loss of confidence in government policies. The inflation rate exceeded 50% in 2019 and remains high, despite government efforts to control it.

Lebanon (2019-Present)

Lebanon’s hyperinflation, which began in 2019, is fuelled by political instability, economic mismanagement, and a banking crisis. Their currency lost over 90% of its value, causing inflation to exceed 200% in 2020, and as a consequence, worsening the country’s economic and social crisis.

Lessons From Hyperinflation

The experiences of countries that have undergone hyperinflation offer several important lessons:

Monetary Discipline

Controlling the money supply is essential. Central banks must avoid excessive money printing and ensure that any increase in the money supply aligns with economic growth. This requires sound monetary policy and fiscal discipline.

Economic Stability

Maintaining political and economic stability is crucial for sustaining confidence in a currency. Governments should implement responsible fiscal policies, maintain balanced budgets, and avoid excessive debt.

International Support

In certain situations, international aid can help alleviate the hyperinflation and stabilize an economy facing hyperinflation. Adopting foreign currencies or securing international loans can provide temporary relief while domestic reforms are implemented. Organizations like the International Monetary Fund (IMF) can offer financial support and technical expertise.

Conclusion

Hyperinflation is a rare but catastrophic economic event that can have long-lasting impacts on a country’s economy and society. Understanding its causes and effects, and learning from historical examples, can help policymakers and economists prevent and manage such crises in the future. By maintaining monetary discipline, ensuring economic stability, and seeking international support, when necessary, countries can avoid the devastating consequences of hyperinflation.

Useful Resources

The Balance What Is Hyperinflation?

BBC What Can We Learn from Past Hyperinflations?

International Monetary Fund (IMF) Hyperinflation Episodes in History

Federal Reserve Bank of St. Louis Understanding Hyperinflation

About The Author

The article was written in September 2024 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

ETFs on gold

December 30, 2024October 11, 2024 by Nithisha CHALLA

ETFs on gold

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) provides an overview of ETFs on gold, the major types gold ETFs in market, and the advantages and disadvantages of investing on gold ETFs.

Introduction

Gold ETFs are financial instruments that track the price of gold and allow investors to buy shares representing a fraction of physical gold holdings. The first gold ETF was launched in March 2003. Later, State Street Corporation launched SPDR Gold Shares (NYSE: GLD) in 2004, which became the largest gold-backed ETF in the world by 2019. In 2020, the Royal Mint issued the first gold ETC issued by HANetf Securities Plc, from a European sovereign entity. And after that, Wilshire Phoenix launched the wShares Enhanced Gold Trust (NYSE: WGLD) in 2021. This ETF tracks the Wilshire Gold Index, which automatically rebalances physical gold and cash based on market conditions.

Types of Gold ETFs

There are two types of gold ETFs, namely Physically Backed Gold ETFs and Synthetic gold ETF’s.

Physically Backed Gold ETFs: These ETFs invest in physical gold, held in a secure vault by the ETF provider. The units of the ETF represent a specific amount of gold. For example, one unit of a physically backed gold ETF might represent 1 gram of gold. Examples include SPDR Gold Shares (GLD) and iShares Gold Trust (IAU).

Synthetic Gold ETFs: These ETFs do not invest in physical gold. Instead, they use financial instruments, such as futures contracts or swaps, to track the price of gold. This means the ETF provider does not need to hold any physical gold.

Major Gold ETFs in the Market

SPDR Gold Shares (GLD)

SPDR offers investors an innovative, relatively cost-efficient, and secure way to access the gold market. Originally listed on the New York Stock Exchange in November of 2004, and traded on NYSE Arca (the top U.S. exchange for the listing and trading of exchange-traded funds (ETFs) ) since December 13, 2007, SPDR Gold Shares is the largest physically backed gold exchange-traded fund (ETF) in the world. SPDR Gold Shares also trade on the Singapore Stock Exchange, the Tokyo Stock Exchange, The Stock Exchange of Hong Kong, and the Mexican Stock Exchange (BMV).

Figure 1 below gives GLD share price dated from January 1, 2024, to October 11, 2024.

Figure 1. SPDR share price

Source: Yahoo Finance

iShares Gold Trust (IAU)

With a global lineup of 1,400+ Exchange Traded Funds (ETFs), iShares has been a leader in the ETF marketplace for more than two decades, and as a part of BlackRock, their products are engineered by investment professionals with discipline and deep risk management expertise. It has a lower expense ratio (It is the fee that investors pay to own a mutual fund or exchange-traded fund (ETF)) compared to GLD.

Figure 2 below gives the IAU share price dated from January 1, 2024, to October 11, 2024.

Figure 2. SiShares Gold Trust (IAU) share price

Source: Yahoo Finance

Aberdeen Standard Physical Gold Shares ETF (SGOL)

SGOL is designed to track the spot price of gold bullion by holding gold bars in a secure vault in Switzerland. The company also posts the serial numbers of the bars, giving investors further security over the status of their investment. While SGOL isn’t the most liquid way to gain exposure to gold, it could be a solid choice for investors seeking greater peace of mind regarding their precious metals investment.

Now how do we trust the data here? To maintain the authenticity of the gold ETF’s the data is monitored in three ways, independent audits, periodic physical verifications or regulatory oversights. By ensuring the accuracy of the fund’s financial reporting and the security of its gold holdings, audits help to protect investors from fraud, mismanagement, and other risks. For example, SGOL is Audited twice a year.

Figure 3. Aberdeen Standard Physical Gold Shares ETF (SGOL) share price

Source: Yahoo Finance

Comparative Analysis of Gold ETFs

Gold ETFs provide a convenient way to invest in gold without the need to physically own it. They offer benefits like easy trading, lower costs, and the ability to diversify your portfolio. However, not all gold ETFs are created equal. Here’s a comparative analysis of key factors to consider when choosing a gold ETF:

Expense Ratios: The annual fee charged to manage the ETF. A lower expense ratio means more of your investment goes towards buying gold, rather than paying fees. Compare the expense ratios of different gold ETFs to find one with the lowest cost.
Liquidity and Trading Volume: The ease with which an ETF can be bought or sold at a fair price. High liquidity means you can buy or sell shares quickly without significantly affecting the price. Look for ETFs with high trading volumes to ensure liquidity.
Tracking Accuracy: The difference between an ETF’s performance and the performance of its underlying benchmark (usually the spot gold price). A lower tracking error indicates the ETF is more closely following the gold price.
Tax Considerations: How efficiently an ETF is taxed, Tax-efficient ETFs can help you minimize your tax burden. So researching the tax implications of different gold ETFs to find one that aligns with your tax strategy is highly beneficial.

The annual management fees are different for different ETFs, which is also a key factor for the investors to choose a certain ETF to invest in. For example, SPDR Gold Shares and iShares Gold Trust charge 0.25%, Invesco Gold ETF charge 0.15% and WisdomTree Physical Gold ETF charge 0.20%.

Advantages and disadvantages of Investing in Gold ETFs

Whether the advantages or disadvantages outweigh each other depends on your circumstances and investment goals.

Advantages of Investing in Gold ETFs

High liquidity: Gold ETFs are easily tradable on stock exchanges, providing investors with quick entry and exit options. They offer a convenient way to invest in gold without the need to physically store or transport the metal.

Low costs: Investors don’t need to worry about storage and security issues associated with physical gold. Additionally, the expense ratios are generally lower than mutual funds.

Diversification: Investing in gold ETFs offers a way to diversify portfolios with exposure to gold prices, often serving as a hedge against inflation and market volatility.

Disadvantages and Risks of Gold ETFs

Counterparty Risk: If the issuer of the ETF becomes insolvent, investors may face losses.

Taxes: Capital gains taxes may apply when you sell your ETF shares.

Volatility: The price of gold can be highly volatile, and gold ETFs are no exception. Investors should be prepared for potential price fluctuations.

Storage: While gold ETFs typically store their gold in secure vaults, there’s always a risk of theft or loss.

Considerations for gold investment strategies

In the end, the best investment strategy for you will depend on your circumstances and risk tolerance. By carefully considering these factors and the potential benefits and risks associated with gold ETFs, you can make informed decisions about how to incorporate them into your investment portfolio.

Portfolio diversification: A common strategy is to add gold ETFs to your investment portfolio for diversification. Gold’s price movements often correlate negatively with stocks and bonds, providing a potential haven during market downturns. By including gold in your portfolio, you can reduce overall risk and potentially improve returns over the long term.

Hedging Against Inflation: One popular strategy is to use gold ETFs as a hedge against inflation, as gold prices tend to rise when inflation is high. This can help protect your portfolio from the eroding purchasing power of your currency. Note that academic studies (see Erb and Harvey, 2013) have shown that gold may not be a good hedge against inflation.

Conclusion

Gold remains the top choice for many investors for portfolio diversification or protection against economic instability. This precious metal has held (more or less) its value over centuries. While market prices fluctuate, many still choose to buy gold to secure their financial future.

Why should I be interested in this post?

Useful resources

Academic research

Erb, C.B., and C.R. Harvey (2013) The Golden Dilemma. Financial Analysts Journal 69 (4): 10–42. Erb, C.B., and C.R. Harvey (2024) Is there still a Golden Dilemma Working paper.

Business

Gold Avenue What is a gold ETF?

SPDR Gold shares Bringing the gold market to investors

iShares gold trust (IAU) Why IAU?

Other

Wikipedia Gold

About the author

The article was written in October 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

Gold mines and their story

December 30, 2024September 15, 2024 by Nithisha CHALLA

Gold mines and their story

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) presents financial and economic characteristics of significant gold mines, including case studies of the most popular, scandalous, and largest gold mines.

Introduction

The history of gold mining can be traced back to prehistoric times, with the world’s oldest known underground mine being over 40,000 years old. Their history has a lot to offer to understand today’s financial and economic influence countries could have by gold. Undoubtedly being one of the biggest industries in the market, “Gold mining” has its fair share of politics involved in it. In this article, we start with discussing modern gold mining techniques and delve a little more into the economic powerhouses (most popular mines), the titans (largest gold mines in the world), and the notable news in the history of gold mines.

Modern Gold Mining Techniques

Long before any gold can be extracted, significant exploration and development need to take place, both to determine, as accurately as possible, the size of the mineral deposit, as well as how to extract and process the ore efficiently, safely, and responsibly. It can typically take between 10 and 20 years after a deposit is discovered before a gold mine is ready to produce material that can be refined into bullion.

As mentioned above there are several methods to mine minerals from the ground often depending on the environmental, and economical situations of the mine.

Open-Pit Mining: This method involves excavating large areas to access ore bodies near the surface. It’s common in large-scale mining operations but has significant environmental impacts.
Underground Mining: Used when ore bodies are deep beneath the surface. It’s more expensive and labor-intensive but less disruptive to the surface environment.
Cyanidation Process: A common method for extracting gold from ore, it involves dissolving gold in a cyanide solution. While efficient, it poses environmental risks due to potential cyanide spills.
Artisanal and Small-Scale Mining (ASM): In many developing countries, ASM provides livelihoods for millions. However, it’s often associated with poor working conditions and environmental degradation.

Famous Gold Mines

These are gold mines that have gained significant recognition and influence due to their historical importance, production levels, or economic impact. Popularity in this context is not solely about size but also about the mine’s role in shaping the gold industry, its impact on regional or global economies, and its notoriety in the public or financial sphere.

South Africa – The Witwatersrand Basin: This region has produced more than half of the world’s gold. The discovery in 1886 led to the establishment of Johannesburg and was central to South Africa’s economy.
United States – The California Gold Rush: The 1848 discovery at Sutter’s Mill sparked the California Gold Rush, leading to significant migration and economic development in the western U.S.
Australia – The Super Pit: Located in Kalgoorlie, the Super Pit is one of the largest open-pit gold mines in the world and a significant contributor to Australia’s gold production.
Peru – Yanacocha Mine: As one of the largest gold mines in the world, Yanacocha has been both an economic boon and a source of environmental controversy.

The Witwatersrand Basin (South Africa)

The Witwatersrand Basin has been the world’s most productive goldfield since its discovery in 1886. It has produced over 40% of all the gold ever mined. The Basin’s gold wealth transformed South Africa’s economy, turning Johannesburg into a major financial hub and leading to the establishment of companies like Anglo American and Gold Fields.

The gold from the Witwatersrand fueled the economic development of South Africa, contributing significantly to GDP, foreign exchange reserves, and employment. The mining companies involved became some of the largest in the world, with Anglo American, in particular, playing a crucial role in global finance.

Witwatersrand Basin mine
Witwatersrand Basin mine layout
Source: Wikipedia

Case study: The diamond tycoons – The so-called Randlords, a group of mining magnates like Cecil Rhodes and Barney Barnato, amassed enormous fortunes from the Witwatersrand mines. Their influence extended beyond mining into global finance, politics, and the diamond industry, showcasing the far-reaching economic impact of gold mining in this region. Of necessity, a large workforce had to be recruited. “The South African gold mining industry in 1980 alone employed 472 000 workers, 44 000 of whom were white and 428 000 black,” notes Prof Mark Pieth, president of the Basel Institute on Governance.

The Carlin Trend (Nevada, USA)

Discovered in 1965, the Carlin Trend is one of the richest gold mining districts in the world. It accounts for over 5% of total world production, with more than 84 million ounces of gold extracted. The area is home to some of the largest gold mines in the U.S., operated by companies like Barrick Gold and Newmont Corporation.

The Carlin Trend has made Nevada one of the leading gold-producing regions globally, contributing significantly to the U.S. economy. The state benefits from mining royalties, taxes, and job creation. Barrick and Newmont’s operations have provided stable revenue streams, even during periods of economic volatility, underscoring gold’s role as a financial anchor.

A case study dated on 5th February 2021, states that in 2005, the company operated 13 open pits, four underground mines and 14 active processing facilities in Nevada. Most, including Leeville (where development ore production started in Q3 2005, totaling 16,000 oz by the year-end), are located on the Carlin Trend west of Elko, exploiting the unique mineralization identified by Newmont in 1964.

The Carlin Trend layout

Source: Street wise reports

The Biggest Gold Mines: Titans of the Industry

These mines are defined by their sheer size, particularly in terms of gold reserves and annual production capacity. The “largest” designation typically refers to the physical quantity of gold that can be mined or the volume of gold already produced.

Grasberg Mine (Indonesia): The Grasberg Mine in Papua, Indonesia, is the largest gold mine in the world in terms of reserves. Operated by Freeport-McMoRan, it has produced over 30 million ounces of gold since operations began in 1972. The mine is also rich in copper, making it a key asset in the global mining industry.

Muruntau Mine (Uzbekistan): The Muruntau Mine in Uzbekistan is one of the largest open-pit gold mines in the world, with estimated reserves of over 170 million ounces. The mine has been in operation since the 1960s and continues to be a cornerstone of Uzbekistan’s economy. The state-owned Navoi Mining & Metallurgy Combinat (NMMC) operates the mine, and its profits play a vital role in funding national development projects.

South deep mine (South Africa): South Deep, owned by Gold Fields, is one of the world’s largest gold mines by reserves. Located in the Witwatersrand Basin, it contains an estimated 81.4 million ounces of gold. The mine’s depth and complex geology make it one of the most challenging to operate, but its vast reserves promise long-term production. The mine’s profitability is highly sensitive to gold prices, and the company has implemented various cost-cutting measures to improve financial performance. The mine also plays a key role in South Africa’s economy, providing jobs and contributing to GDP.

Economic and financial challenges in gold mining:

Operating costs and profit margins:

The profitability of gold mines is closely tied to operating costs, which include labor, energy, and equipment expenses. Mines with high All-In Sustaining Costs (AISC) are more vulnerable to fluctuations in gold prices, while those with lower costs can generate profits even during downturns.

For example, the AISC at South Deep in South Africa has historically been high, affecting profitability, while mines like Newmont’s Boddington in Australia have lower AISC, contributing to stronger financial performance.

Gold Price Volatility and Market Risks:

Gold price volatility poses significant risks for mining companies. Sharp declines in gold prices can lead to reduced revenues, making it difficult to finance operations and capital projects. Companies often use hedging strategies to manage these risks, but this can also limit potential upside during price rallies.

For example, the sudden drop in gold prices in 2013 had a profound impact on the mining industry. Many companies, including those with high-cost operations, were forced to cut costs, delay projects, or close unprofitable mines.

Capital Expenditure and Return on Investment (ROI):

Developing a gold mine requires substantial capital investment, often running into billions of dollars. These costs include exploration, feasibility studies, environmental permitting, infrastructure development, and equipment procurement. The capital intensity of gold mining makes ROI a critical financial metric.

For example, Barrick Gold’s Pueblo Viejo mine in the Dominican Republic, one of the largest and most capital-intensive gold projects in the world, required an initial investment of over $4 billion. Despite the high upfront costs, the project has become one of Barrick’s most profitable operations, with low AISC and high-grade ore contributing to strong ROI.

Environmental and Social Governance (ESG) Costs:

The modern gold mining industry faces growing pressure to adhere to stringent environmental and social governance (ESG) standards. These requirements, which include responsible mining practices, community engagement, and environmental protection, often result in higher operating costs but are essential for maintaining social license to operate and reducing financial risks.

For example, Newmont’s Yanacocha mine in Peru, one of the largest gold mines in Latin America, has faced significant ESG challenges, including protests from local communities over environmental concerns. These challenges have led to delays, increased costs, and negative publicity, illustrating the financial risks of not adequately addressing ESG issues.

Political and Regulatory Risks:

Political and regulatory environments can have a significant impact on the costs and viability of gold mining projects. Changes in government policies, tax regimes, or mining regulations can lead to increased costs or operational delays. Companies operating in politically unstable regions face heightened risks, including the potential for expropriation, legal disputes, or disruptions due to civil unrest.

For example, Acacia Mining, a subsidiary of Barrick Gold, faced severe challenges in Tanzania when the government imposed a ban on the export of unprocessed gold and accused the company of tax evasion. The dispute led to a significant drop in Acacia’s share price, legal battles, and ultimately, Barrick’s decision to buy out minority shareholders and take full control of the company to resolve the situation.

Conclusion

This article expands a detailed view of the economic and financial characteristics of global gold resources. It explores the challenges and trends shaping the future of gold mining, emphasizing case studies on popular and large gold mines.

Why should I be interested in this post?

Many emerging economies have significant gold resources, and understanding the economic impact of gold mining and trade in these regions is essential for students interested in global markets, economic development, and resource management. Management students should be aware of these challenges to promote sustainable and responsible business practices in industries reliant on natural resources.

Useful resources

Wikipedia Gold

Mining technology Nevada Gold Mines, US

Geology of Investors Elephants in the Nevada Desert: Carlin-type Gold Deposits

Corruption Watch South Africa’s history of gold mining – corruption, abuse, and secrecy

Only gold A Brief History of Gold

About the author

The article was written in September 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

Gold resources in the world

December 30, 2024September 15, 2024 by Nithisha CHALLA

Gold resources in the world

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) presents how gold production, reserves, and investments play a crucial role in national economies and global financial markets.

Introduction

Gold has been used for ornaments, jewelry, and religious artifacts since prehistoric times. Gold is found in various geological environments, including alluvial deposits, quartz veins, and sulfide ores. The formation process involves hydrothermal fluids depositing gold in the earth’s crust. The top gold-producing countries include China, Australia, Russia, the United States, and Canada. These nations contribute significantly to global gold production. The World Gold Council tracks these reserves, which are critical to national economic stability.

Global distribution of major gold-producing countries in the world

The top 3 gold-producing countries are China, Australia and Russia. These countries mine gold in large quantities and contribute significantly to global gold production. Gold mining is a significant industry in many countries, contributing to employment, infrastructure development, and economic growth.

Global Gold Production by Country in 2020

Source: Visual Capitalist

Global Gold Production by Country in 2020 by table

Source: Visual Capitalist

China

China has been the world’s largest gold producer since 2007, contributing to nearly 12% of global production. The government tightly controls the country’s gold industry, and the People’s Bank of China is a major buyer of domestically produced gold, reinforcing its role as a strategic economic asset. The Chinese government encourages gold production as part of its broader strategy to diversify its foreign exchange reserves and reduce dependency on the U.S. dollar.

China’s Gold Production in last 10 years
China's Gold Production in last 10 years
Source: CEIC Data

Australia

Australia is the second-largest gold producer, with significant mining operations in Western Australia. The country’s gold industry is a crucial part of its economy, contributing billions to GDP and employing thousands. Gold exports are a major source of foreign revenue, and companies like Newcrest Mining and Northern Star Resources are key players. Australia’s stable political environment and favorable mining regulations make it an attractive destination for global investment in gold mining.

Australia’s Gold Production in last 10 years
Australia's Gold Production in last 10 years
Source: CEIC Data

Russia

Russia is another leading gold producer, with significant reserves in Siberia and the Far East. The Russian government views gold as a critical asset for economic security, especially in light of Western sanctions. The Central Bank of Russia has been steadily increasing its gold reserves, positioning gold as a hedge against geopolitical risks and currency fluctuations.

Russia’s Gold Production in last 10 years
Russia's Gold Production in last 10 years
Source: CEIC Data

Geological Formation and Economic Viability

Economic Geology of Gold

Gold is found in various geological settings, including orogenic belts, volcanic arcs, and sedimentary basins. The economic viability of a gold deposit depends on its grade, size, and accessibility. High-grade deposits, such as those found in the Witwatersrand Basin in South Africa, are particularly valuable due to their high gold content per ton of ore.

Exploration and Development Costs

The process of discovering and developing a gold mine is capital-intensive. Exploration costs can run into millions of dollars, with no guarantee of success. Once a deposit is confirmed, the costs of development, including building infrastructure and obtaining permits, can be significant. The economic feasibility of a project is assessed through metrics like the internal rate of return (IRR) and net present value (NPV), which consider future cash flows and the cost of capital.

Types of Gold Deposits and Financial Implications

Primary Deposits and Investment Strategies

Primary gold deposits are often found in lode and vein formations. These deposits require underground mining, which is more expensive and complex than surface mining. Companies must carefully assess the financial risks associated with developing these types of deposits, including the potential for fluctuating gold prices, which can affect profitability.

Case study 1: According to Andrew Watson working at Geology of Investors, Barrick Gold’s operations in Nevada, particularly the Carlin Trend, represent one of the largest concentrations of high-grade gold in the world. The financial success of these operations is due to a combination of rich deposits and efficient mining practices. The Carlin Trend’s production has contributed significantly to Barrick’s bottom line, making it a cornerstone of the company’s global portfolio.

Secondary deposits and economic access

Placer gold deposits, found in riverbeds and alluvial plains, are easier and less costly to mine. These deposits were the target of historical gold rushes, such as the California Gold Rush and the Klondike Gold Rush. Placer mining is typically associated with small-scale operations, but larger companies may also exploit these resources when they are economically viable.

Case study 2: In regions like Africa and South America, placer gold mining is often a critical source of income for local communities. However, these operations can be risky due to fluctuating gold prices and the informal nature of many small-scale mining enterprises. According to Luca Raineri from IAI (Instituto Affari Internazionali), “the amount of gold illegally smuggled out of the Sahara-Sahel region is reportedly much greater than that smuggled out of the Great Lakes region, and its aggregate economic value higher than that of drug or migrant smuggling (Micallef et al. 2019; Hunter 2019). Politicization may explain the much greater attention dedicated to drug and migrant smuggling in the Sahara-Sahel and gold smuggling in the Great Lakes region.”

Tertiary deposits and unconventional gold resources

As traditional gold resources become scarcer, companies are exploring unconventional sources, such as seabed mining (also known as deep-sea mining, which is the process of extracting minerals from the ocean floor). These projects involve significant financial risk due to the high cost of deep-sea exploration and extraction. However, if successful, seabed mining could unlock vast new resources, potentially reshaping the global gold market.

Case study 3: Nautilus Minerals attempted to pioneer seabed mining with the Solwara 1 project off the coast of Papua New Guinea. Despite initial optimism, the project faced numerous financial and technical challenges, ultimately leading to the company’s bankruptcy. Gary Juffa, governor of Oro province, had questioned Pala in parliament saying, “In fact, developed nations have banned seabed mining or have spoken against it because experts and scientists have stated that the unknowns are too great to ignore, Leaders of coastal communities, if you do not stop this and do not watch this with concern, then you are failing your people.”

Gold Reserves and Their Economic Significance

Global Gold Reserves

Central Banks and Sovereign Wealth: Central banks hold significant gold reserves as part of their foreign exchange holdings. Gold serves as a hedge against inflation and currency risk, providing economic stability in times of financial uncertainty. Countries like the United States, Germany, and Italy have some of the largest gold reserves, which play a crucial role in their monetary policy.

Example – India’s Gold Reserves: India, with its deep cultural affinity for gold, also holds significant gold reserves. The Reserve Bank of India (RBI) has historically used gold as a key asset in its foreign exchange reserves. During the 1991 balance of payments crisis, India famously pledged part of its gold reserves to secure an IMF loan, highlighting the strategic importance of gold in national economic policy.

Gold as a Hedge and Investment Asset

Gold ETFs and Financial Markets: Gold exchange-traded funds (ETFs) have revolutionized how investors access the gold market. ETFs like SPDR Gold Shares (GLD) allow investors to buy shares that are backed by physical gold, offering a liquid and convenient way to invest in the metal. The rise of gold ETFs has significantly impacted the global gold market, influencing prices and investment flows.

Example – The Role of Gold in Portfolio Diversification: Financial advisors often recommend gold as part of a diversified investment portfolio. During periods of economic instability, such as the 2008 financial crisis, gold tends to perform well as a safe haven asset. Studies have shown that adding gold to a portfolio can reduce risk and enhance returns, particularly in volatile markets.

Conclusion

This article expands a detailed view of the economic and financial characteristics of global gold resources. It includes detailed case studies and examples, illustrating how gold production, reserves, and investments play a crucial role in national economies and global financial markets.

Why should I be interested in this post?

Gold has been used to maintain economic stability, especially during times of hyperinflation or economic collapse. Studying historical examples of this helps students analyze how governments can use resources to stabilize economies and maintain public confidence in financial systems.

Useful resources

Wikipedia Gold

Geology of Investors Elephants in the Nevada Desert: Carlin-type Gold Deposits

IAI(Instituto Affari Internazionali) Gold Mining in the Sahara-Sahel: The Political Geography of State-making and Unmaking

Only gold A Brief History of Gold

Mongabay Deep-sea mining project in PNG resurfaces despite community opposition

About the author

The article was written in September 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

History of gold

December 30, 2024September 15, 2024 by Nithisha CHALLA

History of gold

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) covers the role of gold in ancient economies, the impact of gold inflows, the establishment and decline of the gold standard, and gold’s modern function as a haven and investment asset.

Introduction

Gold has been used since prehistoric times for ornaments, jewelry, and religious artifacts. Its lustrous appeal and malleability made it a symbol of wealth and power in ancient civilizations such as Egypt, Mesopotamia, and the Indus Valley. The Egyptians were among the first to extract gold and used it extensively for jewelry, burial masks, and other artifacts. Ancient Greece and Rome civilizations used gold coins for trade, symbolizing wealth and stability. During the Middle Ages, gold became central in European economies. And further exploration began all over the world in the quest for trade, standards, and currencies.

Ancient beginnings and the economic role of gold

As we know its lustrous appeal and malleability made it a symbol of wealth and power in ancient civilizations, gold was used as a currency in ancient civilizations.

Gold as a currency in ancient civilizations

Gold’s role as a medium of exchange dates back to the Lydians in the 6th century BC called “Lydian Coinage”, who is credited with minting the first gold coins. These coins became a standardized form of currency, facilitating trade and economic stability across the Mediterranean.

Ancient golden coins

Source: Gold RSSP

Later, ancient Egypt accumulated vast amounts of gold, which played a crucial role in their economy. Gold was used as a form of tribute, tax, and savings, solidifying its status as a store of value. The discovery of extensive gold mines in Nubia (modern-day Sudan) significantly contributed to Egypt’s wealth and power.

Economic power in classical and medieval times

Gold was central to the Greek and Roman economies. The Romans established a gold standard with the aureus, a widely circulated gold coin. This coinage system underpinned the economic stability of the Roman empire, and its collapse led to economic fragmentation in medieval Europe.

The Byzantine Empire’s solidus, a gold coin, maintained its value for centuries, reflecting the empire’s economic strength. Its stability and acceptance across Europe and the Middle East reinforced gold’s status as a reliable currency.

The Age of Exploration and Economic Expansion

Gold influx from the Spanish empire

The Spanish conquest of the Americas in the 16th century led to an unprecedented influx of gold into Europe. The capture of Aztec and Inca treasures, along with extensive mining operations in Mexico and Peru, flooded Spain with gold, significantly influencing the European economy.

This massive influx of gold contributed to the “Price Revolution” in Europe, where prices of goods and services increased substantially. This inflationary period marked a significant shift in the European economy, redistributing wealth and leading to economic and social disturbances.

African gold and trans-Saharan trade

Mansa Musa’s pilgrimage to Mecca in 1324, during which he distributed enormous quantities of gold, highlights the economic power of the Mali Empire. His lavish spending caused temporary inflation in regions he visited, underscoring gold’s influence on local economies.

Gold from West Africa was pivotal in the trans-Saharan trade, linking African economies with those of the Mediterranean and the Middle East. This trade network also facilitated the exchange of slaves, further intertwining gold with the global economy.

Modern era: Gold’s financial evolution

The Gold Standard

The gold standard emerged in the 19th century, linking national currencies to a specific amount of gold. Britain adopted it in 1821, followed by other major economies. The gold standard facilitated international trade by providing a stable exchange rate system.

According to the World Gold Council, the U.S. formally adopted the gold standard in 1900 with the Gold Standard Act, pegging the dollar to gold at $20.67 per ounce. And it explicitly states “An act to define and fix the standard of value, to maintain the parity of all forms of money issued or coined by the United States, to refund the public debt, and for other purposes”. This provided economic stability but also tied monetary policy to gold reserves, limiting the ability to respond to economic crises.

According to Lennard and Paker (2024) who published in CEPR, the rigid adherence to the gold standard during the Great Depression of the 1930s exacerbated the economic downturn. Countries like the U.K. abandoned the gold standard in 1931, allowing them to devalue their currencies and stimulate economic recovery. The U.S. followed suit in 1933 under President Franklin D. Roosevelt, who devalued the dollar and increased the price of gold to $35 per ounce.

Then comes the Bretton Woods agreement, Post-World War II, the Bretton Woods system established a modified gold standard, with the U.S. dollar convertible to gold and other currencies pegged to the dollar. This system stabilized global trade and finance until its collapse in 1971, when President Richard Nixon ended the dollar’s convertibility to gold, leading to floating exchange rates.

Gold as a Safe Haven Investment

Throughout modern history, gold has served as a “Safe Haven” during financial crises. For instance, during the 2008 Global Financial Crisis, gold prices surged as investors sought security amidst the collapse of financial markets. The price of gold reached an all-time high of over $1,900 per ounce in 2011, reflecting widespread economic uncertainty.

Gold pricing in the last 20 years (2004-2024)

Source: Market.us scoop

Central banks worldwide continue to hold significant gold reserves as a hedge against inflation and currency devaluation. Countries like the United States, Germany, and Italy have some of the largest gold reserves, underscoring its enduring role in global finance.

Gold in the 21st Century

Digital Gold and Financial Innovation: In the 21st century, gold has evolved beyond physical ownership, with financial instruments like exchange-traded funds (ETFs) allowing investors to gain exposure to gold without holding the metal. The SPDR Gold Shares (GLD) ETF, launched in 2004, became one of the largest and most liquid gold ETFs, reflecting modern investment trends.

Gold and cryptocurrencies: The emergence of cryptocurrencies has led to comparisons with gold, particularly Bitcoin, which is often referred to as “digital gold.” Both assets are seen as alternatives to traditional fiat currencies and are valued for their scarcity and independence from government control.

Conclusion

This article emphasizes the financial and economic significance of gold throughout history, supported by detailed case studies and examples. It covers its role in ancient economies, the impact of gold inflows during the Age of Exploration, the establishment and decline of the gold standard, and gold’s modern function as a haven and investment asset.

Why should I be interested in this post?

Gold has been a key financial asset for centuries, acting as a store of value, a hedge against inflation, and a safe-haven asset during economic crises. Understanding its history helps students grasp fundamental market dynamics and investor behavior, especially during periods of economic uncertainty.

Useful resources

Wikipedia gold

World gold council The Heyday of the Gold Standard, 1820-1930

Lennard J. and M. Parker (2024) The end of the gold standard and the beginning of the recovery from the Great Depression

Only gold A Brief History of Gold

Focus economics Gold: The Most Precious of Metals

About the author

The article was written in September 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

Top financial innovations in the 21st century

September 15, 2024 by Nithisha CHALLA

Top financial innovations in the 21st century

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) presents top financial innovations of 21^st century that have brought significant changes in people’s life.

Introduction

The 21^st century has seen remarkable financial innovations that have transformed the way people interact with financial services. Innovations like blockchain, quantum computing, artificial neural networks, digital transactions, crowdfunding, and Apple Pay have not only increased convenience and accessibility but also enhanced security and efficiency in financial markets. Understanding these innovations’ history, impact, and statistics highlights their significance in shaping the future of finance. The 20^th and 21^st centuries, in particular, have seen rapid advancements due to technology, leading to groundbreaking changes in financial services.

Top Financial Innovations that Changed People’s Life in the 21^st century

Our selection of financial innovations is based on their wide adoption by firms and individuals (usage in many countries around the world).

Mobile Banking: Services like Apple Pay and Google Wallet have allowed consumers to make payments using their smartphones, enhancing convenience and security.
Blockchain Technology: Beyond cryptocurrencies, blockchain offers secure, transparent record-keeping for various financial transactions and contracts.
Quantum computing: Quantum computing leverages the principles of quantum mechanics to perform complex computations at unprecedented speeds, promising to revolutionize fields such as cryptography, financial modeling, and optimization.
Artificial Neural Networks: Artificial neural networks, inspired by the human brain, are a subset of machine learning that excel in pattern recognition, data classification, and predictive analytics.
Digital Transactions: Digital transactions refer to the electronic transfer of money or assets between parties, facilitated by technologies such as online banking, mobile payments, and digital wallets.
Crowdfunding: Platforms like Kickstarter and GoFundMe allow individuals to raise funds for projects, businesses, or personal causes from a large number of people.
Apple Pay: Apple Pay, introduced by Apple Inc. in 2014, is a mobile payment and digital wallet service that allows users to make secure, contactless payments using their Apple devices.

We explain below how these financial innovations impacted people’s lives and companies. We also give some statistics to measure the impact.

Mobile Banking

The first mobile banking services were introduced in Europe and Asia in the early 2000s. Banks like Wells Fargo and Bank of America first introduced it. And M-Pesa, a mobile phone-based money transfer and micro-financing service was launched by Vodafone in Kenya in 2007. Later on, PayPal expanded into mobile banking with its app in the early 2010s.

This innovation has allowed customers to conduct banking transactions anytime, anywhere using their mobile devices. This significantly increased financial inclusion, especially in developing countries where traditional banking infrastructure is lacking. Mobile banking enables real-time transactions and instant access to financial services.

According to an article posted on Business Wire, the global mobile banking market was valued at $715.3 million in 2018 and is expected to reach $1,824.7 million by 2026, registering a CAGR of 12.2% from 2019-2026. As of 2020, over 1.75 billion people worldwide were using mobile banking services. In 2020, mobile banking transactions accounted for 42% of all online banking transactions.

Blockchain Technology

In 2008, Satoshi Nakamoto (pseudonym) introduced blockchain technology with the creation of Bitcoin. IBM implemented blockchain solutions for supply chain management for the first time and Ripple used blockchain for cross-border payments and remittances.

Blockchain Technology provided consumers with increased transparency and security in financial transactions. It allowed for the development of reduced costs and time for cross-border payments. Which also helped customers with enhanced privacy and control over personal financial data.

To speak on how much these innovations affected people, the source cited is Yahoo Finance, as of 2021, the global blockchain market was valued at $4.93 billion and is projected to reach $227.99 billion by 2028. And over 46 million Americans owned Bitcoin as of 2021.

Block Chain technology ecosystem

Source: Analytics Vidhya

Evolution of number of Block Chain wallet users

Source: Demand Stage

Quantum Computing

Various contributors, including IBM, Google, and D-Wave Systems, have significantly advanced quantum computing. Its first development idea commenced in the early 2000s (concept development), with significant advancements in the 2010s. JP Morgan Chase initially explored quantum computing for financial modeling and risk analysis. Later on, Goldman Sachs researched quantum algorithms for trading and portfolio optimization.

This technology, developed by companies like IBM and Google, offers potential breakthroughs in solving problems that are currently intractable for classical computers.
Quantum computing provided customers with enhanced computational power that led to more accurate financial predictions and better investment strategies. It showed the potential to revolutionize financial modeling, risk assessment, and encryption.

To speak on how much these innovations affected people, Quantum computing could potentially break current encryption methods, necessitating new security protocols. According to NASDAQ, the global quantum computing market size was valued at $472 million in 2021 and is projected to reach $1.76 billion by 2026.

Global Quantum computing market revenue

Source: Market.us scoop

Artificial Neural Networks

Initially conceptualized by Warren McCulloch and Walter Pitts, modern advancements were made by researchers and companies like Google and IBM. The approximate date of innovation was in the early 1940s (initial concept), with significant advancements in the 21st century. Blackrock uses neural networks for asset management and financial forecasting. Whereas JPMorgan Chase employs neural networks for fraud detection and algorithmic trading.

These networks, utilized by companies such as Google and BlackRock, have significantly advanced capabilities in areas like fraud detection, financial forecasting, and personalized financial services. This innovation enhanced fraud detection and prevention, leading to greater financial security. Provided personalized financial services and products based on user behavior analysis.

To speak on how much these innovations affected people, neural networks have significantly improved fraud detection rates, reducing financial losses for institutions and customers. According to Allied Market Research, The global neural network market was valued at $14.35 billion in 2020 and is projected to reach $152.61 billion by 2030

Digital Transactions

PayPal (founded by Elon Musk, Peter Thiel, and Max Levchin) popularized digital transactions in the early 2000s. PayPal with digital transactions revolutionized online payments and money transfers. Square, another company provided digital payment solutions for small businesses and individuals in the early 2000s.

This innovation has provided enhanced accessibility to financial services for unbanked populations. It reduced the dependency on physical cash and increased the convenience and speed of financial transactions.

To speak on how much these innovations affected people, according to Forbes, 53% Of Americans Use Digital Wallets More Than Traditional Payment Methods. The global digital payment market size was valued at $58.30 billion in 2020 and is projected to reach $180.23 billion by 2026.

How does Digital transaction work?
Digital transaction example
Source: Forbes

Crowdfunding

In the mid-2000s, platforms like Indiegogo (2008) and Kickstarter (2009) popularized crowdfunding. Kickstarter facilitated funding for creative projects and startups. Indiegogo enabled a wide range of campaigns from personal causes to tech innovations.

This innovation has provided entrepreneurs and creators with access to capital without traditional funding sources especially in developing countries where traditional banking infrastructure is lacking. Enabled community participation and support for innovative projects, lowering entry barriers for new businesses and ideas.

To speak on how much these innovations affected people, over $5.7 billion has been pledged to Kickstarter projects since its launch. According to Aimlon CPA, the global crowdfunding market was valued at $12.27 billion in 2020 and is expected to reach $25.80 billion by 2027.

Apple Pay

Apple Inc., led by CEO Tim Cook, introduced Apple Pay in 2014. Initially, ApplePay integrated with Visa and Mastercard for contactless payments. Later retailers like Walmart and Target adapted to accept Apple Pay for customer convenience.

This innovation has transformed the payment landscape, offering enhanced convenience and security for consumers and businesses alike. This significantly promoted the adoption of contactless payment methods and reduced the need to carry physical wallets.

To speak on how much these innovations affected people, mobile payments use Apple Pay and similar services accounted for 25% of global point-of-sale transactions in 2020. According to Apple, as of 2021, Apple Pay had over 507 million users worldwide.

Conclusion

Financial innovations have profoundly transformed the way individuals and businesses interact with money. From the widespread adoption of crowdfunding to digital transactions and Apple Pay, these innovations have made financial services more accessible, efficient, and secure. As technology continues to advance, the financial landscape will undoubtedly see further changes, continuing to shape and improve people’s lives worldwide.

Why should I be interested in this post?

Management students, as future leaders and decision-makers, should understand financial innovations for several compelling reasons. These innovations not only influence the financial landscape but also have significant implications for strategic decision-making, operational efficiency, and competitive advantage.

Useful resources

Wikipedia Financial Innovations

McCulloch, W. S., Pitts, W., A Logical Calculus of the Ideas Immanent in Nervous Activity, Bulletin of Mathematical Biophysics, (5) 115-133, 1943.

Retail technology innovation hub How Apple Pay has revolutionised payment processing

Allied market research Mobile Payment Market Expected to Reach $12.06 Trillion by 2027

GoFundMe What is Crowdfunding?The Clear and Simple Answer

Go Cardless Digital transactions: what are they?

Aspire Systems Financial Applications of Neural Networks

IBM What is quantum computing

About the author

The article was written in September 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

Investissements Durables : Le Nouveau Visage de la Finance

July 28, 2024 by Eya FARHOUD

Investissements Durables : Le Nouveau Visage de la Finance

Dans cet article, (ESSEC Business School, Grande Ecole – Master in Management, 2023-2026) explore le nouveau visage de la finance avec les investissements durables.

Introduction

Dans un monde où les enjeux environnementaux, sociaux et de gouvernance (ESG) prennent une place de plus en plus prépondérante, les investissements durables émergent comme une alternative de choix sur les marchés financiers. Cette tendance, autrefois marginale, gagne désormais en popularité et en influence, offrant aux investisseurs la possibilité de concilier rentabilité financière et impact positif sur la société et l’environnement.

Qu’est-ce que les investissements durables ? Les investissements durables, également connus sous le nom d’investissements socialement responsables (ISR) ou d’investissements à impact, consistent à allouer des fonds à des entreprises et des projets qui intègrent des critères ESG dans leur stratégie et leur gouvernance. Ces critères peuvent inclure la réduction des émissions de carbone, la promotion de la diversité et de l’inclusion, ou encore le respect des droits de l’homme.

Les avantages des investissements durables

Les investissements durables offrent plusieurs avantages tant aux investisseurs qu’à la société dans son ensemble. Sur le plan financier, de nombreuses études ont montré que les entreprises qui intègrent des pratiques durables tendent à être plus résilientes et à générer des rendements financiers supérieurs à long terme. De plus, investir dans des entreprises qui contribuent positivement à la société et à l’environnement peut être source de satisfaction morale pour les investisseurs, qui voient leur argent travailler en faveur d’un monde meilleur.

L’essor de l’investissement durable

Au cours des dernières années, l’investissement durable a connu une croissance exponentielle, attirant l’attention des investisseurs institutionnels, des fonds de pension et même des particuliers. Les actifs sous gestion intégrant des critères ESG ont atteint des niveaux record, témoignant de l’engagement croissant en faveur d’une finance plus responsable et éthique.

Les défis et les opportunités

Malgré son essor rapide, l’investissement durable fait face à plusieurs défis, notamment celui de la standardisation des critères ESG et de la mesure de l’impact réel des investissements. Cependant, ces défis sont également source d’opportunités, d’innovation et de progrès dans le domaine de la finance durable.

Articles connexes sur le blog SimTrade

▶ Anant JAIN Dow Jones Sustainability Index

▶ Anant JAIN The World 10 Most Sustainable Companies in 2021

Ressources utiles

Muriel Motte (29/01/2024) Les Américains désertent les fonds d’investissement durables, L’opinion.

A propos de l’auteur

Cet article a été écrit en Avril 2024 par Eya FARHOUD (ESSEC Business School, Grande Ecole – Master in Management, 2023-2026).

Le règne des Algorithmes de Trading Haute Fréquence : Bénéfices et Risques

July 28, 2024July 28, 2024 by Eya FARHOUD

Le règne des Algorithmes de Trading Haute Fréquence : Bénéfices et Risques

Dans cet article, Eya FARHOUD (ESSEC Business School, Grande Ecole – Master in Management, 2023-2026) explique les bénéfices et risques du Trading Haute Fréquence (THF).

Introduction

Depuis les dernières décennies, les marchés financiers ont été témoins d’une révolution silencieuse mais omniprésente : l’avènement des algorithmes de trading haute fréquence (THF) ou High Frequency Trading (HFT). Ces systèmes informatiques ultra-rapides sont devenus des acteurs majeurs sur les marchés mondiaux, modifiant profondément la dynamique traditionnelle du trading et suscitant à la fois admiration et inquiétude.

Qu’est-ce que le trading haute fréquence ? Le THF est une méthode de négociation qui utilise des algorithmes informatiques pour exécuter un grand nombre d’ordres à des vitesses extrêmement élevées. Ces algorithmes analysent en temps réel les données du marché, prennent des décisions d’achat ou de vente et exécutent les transactions en une fraction de seconde, parfois même en microsecondes. Selon un rapport publié en 2023 par la Securities and Exchange Commission (SEC), le trading haute fréquence représentait environ 50% et 60% des transactions sur les marchés boursiers américains.

Les avantages du trading haute fréquence

Les partisans du trading haute fréquence mettent en avant plusieurs avantages de cette approche. Tout d’abord, la vitesse. Les algorithmes HFT permettent aux traders de saisir les opportunités de marché en temps réel, exploitant les écarts de prix minuscules qui peuvent survenir en l’espace de quelques millisecondes. Ensuite, l’efficacité. Les transactions étant automatisées, le trading haute fréquence permet de réduire les coûts de transaction et d’optimiser l’exécution des ordres. Plus concrètement, selon une étude de la Banque Centrale Européenne, le THF a contribué à réduire les coûts de transaction de l’ordre de 5 à 10 % sur les marchés européens entre 2015 et 2020.

Les défis et les risques

Cependant, le trading haute fréquence n’est pas sans ses critiques et ses risques. L’un des principaux défis est lié à la volatilité. La nature ultra-rapide du trading HFT peut parfois amplifier les mouvements de marché, créant des flash crashes et des situations de panique. Il existe également des préoccupations concernant l’équité et la transparence du marché, certains accusant les traders haute fréquence de bénéficier d’un accès privilégié à l’information et de manipuler les marchés à leur avantage.

La réglementation et l’avenir du trading haute fréquence

Face à ces défis, les régulateurs financiers du monde entier ont commencé à prendre des mesures pour encadrer le trading haute fréquence. Aux États-Unis, par exemple, la SEC a adopté des règles visant à améliorer la transparence et la surveillance des marchés, notamment en imposant des obligations de reporting plus strictes pour les opérations effectuées par les traders haute fréquence. Malgré ces préoccupations et réglementations, le trading haute fréquence continue de prospérer et d’évoluer. Les avancées technologiques telles que l’intelligence artificielle et le machine learning promettent de rendre les algorithmes encore plus sophistiqués et réactifs aux conditions du marché. L’avenir du trading haute fréquence reste donc incertain, mais une chose est sûre : son impact sur les marchés financiers continuera d’être au cœur des débats et des discussions pour les années à venir.

Articles connexes sur le blog SimTrade

▶ Akshit GUPTA High-frequency trading

▶ Clara PINTO High-frequency trading and limit orders

▶ Shruti CHAND High-frequency trading: pros and cons

Ressources utiles

Luc Goupil (2013) Trading à haute fréquence : empreinte de marché et enjeux de régulation Revue d’économie financière 110, 277-294.

A propos de l’auteure

Cet article a été écrit en Juillet 2024 par Eya FARHOUD (ESSEC Business School, Grande Ecole – Master in Management, 2023-2026).

Une journée dans la vie d’un stagiaire en Middle Office

July 27, 2024 by Esten CHAUVIN

Une journée dans la vie d’un stagiaire en Middle Office

Dans cet article, Esten CHAUVIN (ESSEC Business School, Grande Ecole – Master in Management, 2023-2026) partage son expérience sur ce qu’implique une journée typique en tant que stagiaire en Middle Office. Cet article est destiné aux étudiants de gestion (universités, écoles de commerce) qui vont commencer leur premier stage en finance de marché.

Introduction

Le Middle Office joue un rôle crucial dans les institutions financières, assurant la liaison entre le Front Office et le Back Office. Si vous êtes curieux de savoir à quoi ressemble une journée type en tant que stagiaire en Middle Office, cet article est pour vous. Je vais vous emmener à travers une journée ordinaire, de l’arrivée matinale aux derniers instants avant de partir.

Matinée

Arrivée et préparation (7h30 – 8h)

Je commence ma journée tôt, généralement entre 7h30 et 8h00. Après avoir pris un café pour bien démarrer la journée, je commence par vérifier mes emails et prendre note des tâches prioritaires. Cette première étape est cruciale pour organiser ma journée efficacement. Les marchés européens ouvrent à 9h00, il est donc important d’être prêt avant l’ouverture pour réagir rapidement aux événements de la nuit.

Revue des positions et des expositions (8h – 9h)

La première tâche de la journée consiste à revoir les positions de la veille. Cela inclut l’examen des transactions effectuées et des positions détenues en fin de journée pour s’assurer qu’elles sont conformes aux attentes et aux stratégies définies. Je vérifie les expositions aux risques, c’est-à-dire l’ampleur de nos investissements dans différentes classes d’actifs, et identifie toute anomalie ou écart. Par exemple, une anomalie pourrait être une transaction non enregistrée correctement ou une position de change qui ne correspond pas aux prévisions initiales en raison d’une erreur de saisie ou d’une fluctuation imprévue des taux de change. Cette vérification matinale permet de détecter rapidement tout problème potentiel et de les résoudre en collaboration avec le Front Office. Par exemple, un écart significatif dans les expositions de change pourrait nécessiter une action immédiate, comme ajuster des positions ou couvrir des risques, avant l’ouverture du marché pour éviter des impacts négatifs.

Réunions du matin (9h – 10h)

Ensuite, je participe à une réunion d’équipe pour discuter des priorités de la journée. Ces réunions sont l’occasion de partager des mises à jour sur les nouvelles régulations ou les événements de marché récents. Par exemple, pendant mon stage chez Oddo BHF, nous avons discuté des implications des fluctuations du marché des changes sur nos portefeuilles. Ces réunions permettent également de coordonner les efforts entre les différents membres de l’équipe pour s’assurer que toutes les tâches critiques sont couvertes.

Traitement des transactions (10h – 12h)

Après la réunion, je me plonge dans le traitement des transactions. Cela implique la confirmation et la validation des transactions effectuées par le Front Office. J’utilise des systèmes internes pour saisir et valider les données. Par exemple, traiter une transaction complexe impliquant des dérivés OTC peut être un véritable défi, mais c’est aussi une excellente occasion d’apprendre. Il est essentiel de vérifier que toutes les transactions sont correctement enregistrées et conformes aux régulations en vigueur.

Après-midi

Gestion des risques (13h – 15h)

L’après-midi est souvent consacrée à la gestion des risques. Je surveille les expositions aux risques de marché, de crédit et de liquidité. Utiliser des modèles quantitatifs pour évaluer les risques fait partie de mon quotidien. Un exemple concret est l’ajustement des marges suite à une volatilité accrue du marché. Il est crucial de réagir rapidement aux changements de marché pour minimiser les risques potentiels.

Interaction avec d’autres départements (15h – 16h)

La collaboration est essentielle en Middle Office. Je travaille régulièrement avec le Back Office pour le règlement des transactions et avec le département de compliance pour s’assurer de la conformité des transactions. Par exemple, il m’est arrivé de coordonner avec le service IT pour résoudre un problème technique urgent. Ces interactions permettent de s’assurer que les opérations se déroulent sans accroc et que toutes les parties prenantes sont alignées.

Analyse et reporting (16h – 18h)

Une partie importante de mon travail consiste à préparer des rapports pour la direction et les régulateurs. Cela inclut l’analyse des performances des portefeuilles et des stratégies de couverture. Pendant mon stage, j’ai par exemple présenté un rapport hebdomadaire sur les risques de marché à l’équipe de gestion, ce qui m’a permis de développer mes compétences en communication et en analyse. Les rapports doivent être précis et fournir une vue claire des risques et des opportunités.

Fin de journée

Suivi des tâches en cours (18h – 18h30)

En fin de journée, je vérifie les tâches accomplies et prépare celles pour le lendemain. Cela inclut de répondre aux emails de dernière minute et de suivre les points en suspens. Clôturer une transaction en suspens avec une contrepartie internationale peut être un défi, mais c’est aussi très gratifiant. Il est important de s’assurer que toutes les tâches critiques sont traitées avant de quitter le bureau.

Réunion de fin de journée (18h30 – 19h)

Nous terminons souvent la journée par un bilan avec l’équipe. Ces réunions sont l’occasion de discuter des défis rencontrés et des solutions apportées. Par exemple, partager les leçons apprises suite à un incident de marché imprévu est une excellente façon d’améliorer continuellement nos processus. Ces réunions permettent également de s’assurer que tout le monde est aligné pour les tâches du lendemain.

Départ (19h)

Je pars généralement après 19h. Avant de partir, je prends un moment pour réfléchir aux tâches prioritaires et aux objectifs à court terme pour le lendemain. Cette réflexion aide à rester organisé et prêt pour la journée suivante.

Conclusion

Chaque journée en Middle Office est unique, remplie de défis et d’opportunités d’apprentissage. En tant que stagiaire, vous serez au cœur de l’action, travaillant en étroite collaboration avec différents départements pour assurer le bon fonctionnement de l’institution. L’organisation, la gestion du temps et la capacité à collaborer efficacement sont des compétences clés que vous développerez.

Conseils pour les futurs stagiaires

Organisation et gestion du temps : Planifiez votre journée et priorisez vos tâches.
Communication : Développez des compétences en communication pour interagir efficacement avec les différents départements.
Apprentissage continu : Restez curieux et cherchez constamment à apprendre et à vous améliorer.

Ressources utiles

Gestionnaire Middle Office par ABC Bourse (2023)

Middle Office par Philip Lawton (2012)

À propos de l’auteur

Cet article a été écrit en juillet 2024 par Esten CHAUVIN, étudiant en Master de Management à l’ESSEC Business School, ancien stagiaire OTC Derivatives, Stock Loans, Repo Loans chez Oddo BHF.

Introduction aux produits dérivés de gré à gré (OTC Derivatives)

July 27, 2024 by Esten CHAUVIN

Introduction aux produits dérivés de gré à gré (OTC Derivatives)

Dans cet article, Esten CHAUVIN (ESSEC Business School, Grande Ecole – Master in Management, 2023-2026) partage son expérience et ses connaissances sur les produits dérivés de gré à gré (OTC Derivatives), leur fonctionnement et leurs applications en finance de marché.

Introduction

Les produits dérivés de gré à gré (OTC Derivatives) sont des instruments financiers négociés directement entre deux parties, sans passer par une bourse. OTC signifie “Over-The-Counter”, indiquant que ces transactions se font en dehors des marchés réglementés. Ces produits jouent un rôle crucial dans la gestion des risques financiers et l’optimisation des portefeuilles d’investissement. Cet article vise à introduire les concepts fondamentaux des produits dérivés OTC et à expliquer leur importance dans les marchés financiers.

Fonctionnement des produits dérivés OTC

Les produits dérivés OTC incluent une variété d’instruments tels que les swaps, les forwards et les options. Contrairement aux dérivés échangés en bourse, les dérivés OTC sont personnalisés en fonction des besoins spécifiques des parties impliquées. Par exemple, une entreprise peut utiliser un swap de taux d’intérêt pour échanger des paiements d’intérêts à taux fixe contre des paiements à taux variable afin de mieux correspondre à ses flux de trésorerie. De même, un forward peut être ajusté pour répondre à une date de livraison spécifique ou à des quantités exactes de produits, et une option peut être conçue avec des conditions particulières qui répondent aux stratégies de couverture ou de spéculation spécifiques d’un investisseur.

Types de produits dérivés OTC

Swaps : Contrats dans lesquels deux parties échangent des flux de trésorerie futurs selon des conditions préétablies. Par exemple, un swap de taux d’intérêt peut impliquer l’échange de paiements à taux fixe contre des paiements à taux variable.
Forwards : Contrats où deux parties s’engagent à acheter ou vendre un actif à une date future à un prix fixé aujourd’hui. Ces contrats sont souvent utilisés pour couvrir le risque de prix des matières premières.
Options : Contrats donnant le droit, mais non l’obligation, d’acheter ou de vendre un actif à un prix fixé à l’avance, à ou avant une date spécifiée. Les options OTC sont souvent personnalisées pour répondre aux besoins spécifiques des contreparties.

Processus de négociation des dérivés OTC

Négociation des termes : Les termes des dérivés OTC sont négociés directement entre les parties, incluant le type de dérivé, la durée du contrat, et les conditions spécifiques.
Évaluation et gestion des risques : Les deux parties doivent évaluer les risques associés au contrat et mettre en place des mesures pour les gérer, telles que la fourniture de garanties.
Suivi et gestion des contrats : Une fois le contrat en place, les parties doivent suivre et gérer activement le contrat pour s’assurer qu’il reste conforme aux termes négociés et aux conditions du marché.

Avantages et risques des produits dérivés OTC

Avantages

Flexibilité : Les dérivés OTC peuvent être personnalisés pour répondre aux besoins spécifiques des parties impliquées.
Gestion des risques : Les dérivés OTC permettent aux entreprises de couvrir divers types de risques, tels que les risques de taux d’intérêt, de change et de prix des matières premières.
Optimisation des portefeuilles : Les dérivés OTC peuvent être utilisés pour améliorer l’efficacité des portefeuilles d’investissement en permettant une gestion plus fine des expositions aux risques.

Inconvénients

Risque de contrepartie : Le risque que l’une des parties fasse défaut sur ses obligations contractuelles. Pour minimiser ce risque, les institutions financières mettent en place des accords de garanties.
Complexité : La complexité des dérivés OTC peut rendre leur gestion difficile, nécessitant des compétences spécialisées et une surveillance continue.
Transparence : Les marchés OTC sont moins transparents que les marchés régulés, ce qui peut rendre l’évaluation des risques plus difficile.

Réglementation et compliance

Les produits dérivés OTC sont soumis à des réglementations strictes pour garantir la transparence et la sécurité des transactions. Par exemple, la réglementation EMIR (European Market Infrastructure Regulation) en Europe impose des exigences de reporting et de compensation pour les dérivés OTC. Durant mon stage chez Oddo BHF, nous devions nous assurer que toutes les transactions étaient conformes à ces régulations, souvent en collaboration avec le département de compliance.

Impact sur les marchés financiers

Les produits dérivés OTC jouent un rôle crucial dans les marchés financiers en offrant des outils pour la gestion des risques et l’optimisation des portefeuilles. Cependant, ils peuvent également contribuer à la volatilité et à l’instabilité des marchés en période de crise financière. Un exemple notable est la crise financière de 2008, où l’utilisation excessive des dérivés OTC a amplifié les risques systémiques.

Cas pratiques et exemples

Lors de mon stage chez Oddo BHF, j’ai été directement impliqué dans la gestion des dérivés OTC. Par exemple, nous avons travaillé sur des swaps de taux d’intérêt pour couvrir les risques de fluctuations des taux pour une entreprise multinationale. Cette entreprise souhaitait échanger ses paiements d’intérêts à taux variable contre des paiements à taux fixe pour stabiliser ses coûts de financement. Nous avons négocié les termes du swap en tenant compte des conditions spécifiques de l’entreprise et des prévisions de marché, ce qui a permis à l’entreprise de réduire son exposition aux risques de taux d’intérêt. Par ailleurs, selon la Banque des Règlements Internationaux (BRI), le volume total des transactions de produits dérivés OTC s’élevait à plus de 640 000 milliards de dollars au second semestre 2023, reflétant l’importance croissante de ces instruments dans les marchés financiers. De plus, les swaps de taux d’intérêt représentaient environ 75% de ce volume, soulignant leur prédominance. Les forwards et les options ont également connu une activité significative, avec des volumes atteignant respectivement 90 000 milliards et 65 000 milliards de dollars.

Comparaison avec d’autres instruments financiers

Dérivés OTC vs dérivés échangés en bourse

Les dérivés OTC offrent une plus grande flexibilité et personnalisation par rapport aux dérivés échangés en bourse, mais ils comportent également des risques accrus en termes de contrepartie et de transparence. Les dérivés échangés en bourse sont standardisés et compensés par une chambre de compensation, réduisant ainsi le risque de contrepartie.

Dérivés OTC vs autres produits financiers

Les dérivés OTC peuvent être utilisés en complément d’autres produits financiers tels que les obligations, les actions et les options échangées en bourse. Ils offrent des moyens supplémentaires pour la gestion des risques et l’optimisation des portefeuilles, mais nécessitent une expertise spécifique pour être gérés efficacement.

Conclusion

Les produits dérivés de gré à gré (OTC Derivatives) sont des outils puissants pour la gestion des risques et l’optimisation des portefeuilles en finance de marché. Ils offrent une flexibilité et une personnalisation accrues par rapport aux dérivés échangés en bourse, mais comportent également des risques importants qui doivent être gérés avec soin. Pour les étudiants et les futurs professionnels de la finance, comprendre les mécanismes et les enjeux des dérivés OTC est crucial pour naviguer efficacement dans ce domaine complexe.

Ressources utiles

Regulation on Over-the-Counter Derivatives and Market infrastructures – Frequently Asked Questions

À propos de l’auteur

Cet article a été écrit en juillet 2024 par Esten CHAUVIN, étudiant en Master de Management à l’ESSEC Business School, ancien stagiaire OTC Derivatives, Stock Loans, Repos chez Oddo BHF.

Compliance et régulation dans le secteur financier : focus sur les prêts de titres et les dérivés OTC

December 27, 2024July 27, 2024 by Esten CHAUVIN

Compliance et régulation dans le secteur financier : focus sur les prêts de titres et les dérivés OTC

Dans cet article, Esten CHAUVIN (ESSEC Business School, Grande Ecole – Master in Management, 2023-2026) partage son expérience et ses connaissances sur la compliance et la régulation dans le secteur financier, avec un focus particulier sur les prêts de titres et les dérivés OTC.

Introduction

La compliance et la régulation jouent un rôle fondamental dans le secteur financier, garantissant la transparence et la sécurité des transactions. Cet article vise à expliquer les principaux aspects de la régulation en finance, en se concentrant sur les prêts de titres et les dérivés de gré à gré (OTC).

Importance de la compliance et de la régulation

Les régulations financières sont mises en place pour protéger les investisseurs, maintenir la stabilité des marchés et prévenir les pratiques frauduleuses. La compliance, quant à elle, assure que les institutions financières respectent ces régulations. Ensemble, elles forment le socle de la confiance dans le système financier.

Différence entre régulation et réglementation

La réglementation se réfère aux textes de lois, directives et règlements émis par les autorités compétentes pour encadrer les activités financières. Elle définit les règles et les normes que les institutions financières doivent suivre. La régulation financière, en revanche, est le processus par lequel ces règles sont mises en œuvre et appliquées. Elle inclut les activités de surveillance et de contrôle menées par les régulateurs pour s’assurer que les institutions se conforment aux réglementations en vigueur.

Origine et importance du reporting

Le reporting financier est né de la nécessité de fournir des informations transparentes et fiables aux régulateurs, investisseurs et autres parties prenantes. Il permet de suivre et d’évaluer les risques systémiques, de détecter les irrégularités et de garantir la stabilité du système financier. Par exemple, le reporting des transactions de prêt de titres et de dérivés OTC aide les régulateurs à surveiller les expositions et à prévenir les crises financières.

Principales régulations

Réglementation SFTR : La Securities Financing Transactions Regulation (SFTR) en Europe impose des exigences de reporting détaillées pour toutes les transactions de financement de titres. Cette régulation vise à augmenter la transparence et à réduire les risques systémiques.
Réglementation EMIR : L’European Market Infrastructure Regulation (EMIR) impose des obligations de compensation et de reporting pour les dérivés OTC. Elle a été mise en place pour améliorer la transparence et réduire le risque de contrepartie.
Dodd-Frank Act : Aux États-Unis, cette loi impose des réglementations strictes sur les dérivés OTC, visant à prévenir une autre crise financière.

Compliance dans les prêts de titres

Les prêts de titres, ou stock loans, sont soumis à une surveillance réglementaire stricte. Les institutions doivent s’assurer que les transactions sont correctement déclarées et que les garanties sont adéquates.

Exigences de reporting

Les transactions de prêt de titres doivent être déclarées aux régulateurs dans un délai spécifique. Cela inclut des informations détaillées sur les parties impliquées, les titres prêtés et les garanties fournies.

Gestion des garanties

Les garanties doivent être évaluées régulièrement pour s’assurer qu’elles couvrent adéquatement le risque de contrepartie. Par exemple, si la valeur des titres prêtés augmente ou diminue significativement, des ajustements des garanties peuvent être nécessaires.

Exemple pratique

Pendant mon stage chez Oddo BHF, j’ai travaillé sur des transactions de prêt de titres où nous devions ajuster les garanties en fonction des fluctuations du marché. Nous collaborions étroitement avec le département de compliance pour nous assurer que toutes les transactions étaient conformes aux régulations en vigueur.

Compliance dans les dérivés OTC

Les dérivés OTC sont également fortement régulés pour garantir la transparence et la sécurité des marchés financiers.

Compensation et clearing

L’European Market Infrastructure Regulation (EMIR) impose que certaines transactions de dérivés OTC soient compensées par des chambres de compensation centrales pour réduire le risque de contrepartie. Cela signifie que les parties impliquées dans une transaction doivent passer par une entité tierce qui garantit la transaction.

Exigences de reporting

Toutes les transactions de dérivés OTC doivent être déclarées aux régulateurs, incluant des détails sur les termes du contrat, les parties impliquées et les expositions au risque. Ces informations permettent aux régulateurs de surveiller les risques systémiques.

Exemple pratique

Durant mon stage, j’ai aidé à préparer des rapports de conformité pour les transactions de dérivés OTC. Cela impliquait de s’assurer que toutes les transactions étaient correctement enregistrées et que les expositions étaient gérées conformément aux régulations. Par exemple, une transaction de swap de taux d’intérêt nécessitait une déclaration précise et la mise en place de garanties adéquates.

Impact des régulations sur les opérations quotidiennes

Les régulations influencent fortement les opérations quotidiennes des institutions financières. Elles nécessitent des systèmes robustes pour le reporting et la gestion des risques, ainsi qu’une collaboration étroite entre différents départements.

Systèmes et technologies

Les institutions doivent investir dans des systèmes informatiques avancés pour gérer les exigences de reporting et de compliance. Cela inclut des logiciels de gestion des risques, des plateformes de reporting et des systèmes de suivi des garanties.

Formation et sensibilisation

Il est essentiel que tous les employés soient formés aux régulations et aux politiques de compliance. Cela inclut des sessions de formation régulières et des mises à jour sur les nouvelles réglementations.

Conclusion

La compliance et la régulation sont essentielles pour maintenir la confiance et la stabilité dans le secteur financier. Pour les étudiants et futurs professionnels de la finance, comprendre ces régulations est crucial. Les prêts de titres et les dérivés OTC sont deux domaines où la régulation joue un rôle particulièrement important, nécessitant une attention constante et une gestion rigoureuse.

Ressources utiles

ESMA – SFTR

ESMA – EMIR

À propos de l’auteur

Cet article a été écrit en juillet 2024 par Esten CHAUVIN étudiant en Master de Management à l’ESSEC Business School, ancien stagiaire OTC Derivatives, Stock Loans, Repo Loans chez Oddo BHF.

Back office, Middle Office, Front Office: quels rôles, quelles responsabilités ?

July 27, 2024 by Esten CHAUVIN

Back office, Middle Office, Front Office: quels rôles, quelles responsabilités ?

Dans cet article, Esten CHAUVIN (ESSEC Business School, Grande Ecole – Master in Management, 2023-2026) partage son expérience et ses connaissances sur les rôles et responsabilités du back office, middle office et front office en finance de marché.

Introduction

Les institutions financières sont structurées en plusieurs départements essentiels à leur fonctionnement. Parmi eux, le back office, le middle office et le front office jouent des rôles distincts mais complémentaires. Cet article a pour objectif de clarifier les responsabilités spécifiques de chaque département et d’illustrer comment leur interaction contribue à l’efficacité globale de l’institution.

Rôles et responsabilités du Back Office

Le back office est souvent considéré comme le moteur silencieux des institutions financières. Il est principalement responsable du traitement des transactions financières après leur exécution. Cela inclut la confirmation et le règlement des transactions. Par exemple, lorsque vous achetez une action, le back office s’assure que les titres sont correctement livrés et que les fonds sont transférés.

Outre le traitement des transactions, le back office gère les aspects administratifs et comptables. Cela signifie tenir les livres comptables de l’institution et préparer les rapports financiers nécessaires. Imaginez qu’à la fin de chaque journée de trading, toutes les transactions doivent être enregistrées avec précision pour les audits et les rapports financiers. C’est le back office qui veille à cette rigueur.

Des tâches spécifiques incluent le règlement et la livraison des titres, où les détails de la transaction sont confirmés avec les contreparties. Le back office gère également les confirmations et les réconciliations, en rapprochant les transactions entre les systèmes internes et les contreparties pour identifier et résoudre les divergences. Enfin, ils sont responsables du reporting réglementaire et financier, préparant et soumettant des rapports aux régulateurs financiers.

Rôles et responsabilités du Middle Office

Le middle office joue un rôle crucial en matière de gestion des risques et de trésorerie. Il identifie, mesure et gère les différents types de risques : marché, crédit et liquidité. Par exemple, si une banque a un portefeuille de trading important, le middle office utilise des modèles quantitatifs pour évaluer le risque associé.

La gestion de la trésorerie et des marges est une autre responsabilité clé. Le middle office surveille les flux de trésorerie et gère les marges pour s’assurer que l’institution dispose de suffisamment de liquidités pour ses opérations. Imaginez gérer au quotidien les besoins de trésorerie pour éviter les déficits et optimiser l’utilisation des ressources.

Parmi les tâches spécifiques, le middle office suit les positions et les expositions en temps réel pour identifier les risques potentiels. Il gère également les liquidités et le collatéral, optimisant leur utilisation pour maximiser l’efficacité financière. Enfin, il calcule et suit les risques de marché, de crédit et de liquidité, utilisant des modèles de risque pour évaluer et atténuer les risques potentiels.

Rôles et responsabilités du Front Office

Le front office est la vitrine de l’institution financière, en première ligne pour interagir avec les marchés et effectuer des transactions financières. Les traders du front office exécutent des ordres sur les marchés financiers, qu’il s’agisse d’actions, d’obligations, de devises ou de dérivés.

Le front office est également responsable de la génération de revenus pour l’institution. Les traders développent des stratégies de trading et prennent des positions pour maximiser les profits. Par exemple, ils analysent les marchés et prennent des positions en fonction des conditions économiques pour générer des gains.

En plus du trading, le front office offre des conseils et des services aux clients. Cela peut inclure des recommandations d’investissement ou des services de gestion de patrimoine. Ils élaborent également des stratégies de négociation basées sur l’analyse des marchés et des conditions économiques, utilisant leur expertise pour prendre des décisions éclairées.

Comparaison et interactions entre les trois départements

Bien que chaque département ait des fonctions et des responsabilités distinctes, ils sont étroitement liés et dépendent les uns des autres. Le front office, par exemple, dépend du middle et du back office pour le soutien opérationnel et la gestion des risques. Sans une collaboration efficace, les transactions ne pourraient pas être exécutées de manière fluide et les risques ne seraient pas correctement gérés.

La communication et la coordination entre les départements sont essentielles. Prenons l’exemple d’une transaction financière complexe : le front office exécute l’ordre, le middle office surveille le risque et le back office traite la transaction. Une communication efficace entre ces départements garantit que chaque étape du processus est réalisée correctement, minimisant ainsi les erreurs et les risques.

Conclusion

Chaque département – back office, middle office et front office – joue un rôle crucial dans une institution financière. Le back office assure le bon déroulement des transactions et la conformité administrative, le middle office gère les risques et la trésorerie, et le front office génère des revenus et interagit avec les marchés. Ensemble, ils contribuent à l’efficacité et à la rentabilité de l’institution.

Avec l’avènement des nouvelles technologies, comme l’automatisation et l’intelligence artificielle, les rôles traditionnels de ces départements évoluent. Les compétences requises se transforment également, et il est essentiel pour les futurs professionnels de se tenir à jour avec ces changements pour réussir dans le secteur financier.

Autres articles sur le blog SimTrade

▶ Youssef LOURAOUI My experience as a portfolio manager in a central bank

▶ Alexandre VERLET Working in finance: trading

▶ Akshit GUPTA Analysis of The Rogue Trader movie

Ressources utiles

Pour approfondir vos connaissances sur les rôles du back office, middle office et front office, voici quelques ressources recommandées :

Les différences entre le front, le middle et le back office en banque d’investissement

À propos de l’auteur

Cet article a été écrit en juillet 2024 par Esten CHAUVIN (ESSEC Business School, Grande Ecole – Master in Management, 2023-2026) et ancien stagiaire OTC Derivatives, Stock Loans, Repo Loans chez Oddo BHF.

Mon expérience chez OTC Securities Lending & Derivatives – Repo Loan

July 27, 2024July 27, 2024 by Esten CHAUVIN

Mon expérience chez OTC Securities Lending & Derivatives – Repo Loan

Dans cet article, Esten CHAUVIN (ESSEC Business School, Grande Ecole – Master in Management, 2023-2026) partage son expérience professionnelle comme stagiaire chez Oddo BHF dans le département OTC Securities Lending & Derivatives – Repo Loan.

A propos de l’entreprise

Oddo BHF est une société financière franco-allemande offrant des services bancaires et financiers diversifiés. Fondée en 1849, l’entreprise s’est développée au fil des décennies pour devenir un acteur majeur dans le secteur de la gestion d’actifs, de la banque d’investissement et des services financiers. Oddo BHF est particulièrement reconnue pour son expertise en matière de recherche et d’analyse financière.

Avec une présence dans plusieurs pays européens, Oddo BHF combine des valeurs traditionnelles avec une approche moderne de la finance, mettant l’accent sur l’innovation et la satisfaction client.

Logo de l’entreprise.
Logo de Oddo BHF
Source : Oddo BHF.

Mon stage / Mon apprentissage

Durant mon stage chez Oddo BHF, j’ai travaillé dans le département OTC Securities Lending & Derivatives – Repo Loan. Ce département est crucial pour la gestion des prêts de titres et des produits dérivés de gré à gré, jouant un rôle essentiel dans la gestion des risques et la liquidité de l’institution.

Mes missions

Mes missions principales consistaient à traiter et à valider les transactions de prêts de titres, à gérer les expositions aux risques, et à assurer la conformité des opérations avec les régulations en vigueur. J’ai également participé à l’optimisation des processus de gestion de la trésorerie et des garanties.

Compétences et connaissances requises

Pour réussir dans ce stage, il était essentiel de posséder des compétences techniques solides en finance et en analyse de données. La maîtrise d’Excel et des systèmes de gestion de risques était indispensable. En termes de soft skills, la rigueur, l’organisation et une excellente communication étaient cruciales pour interagir efficacement avec les différentes équipes.

Ce que j’ai appris

Ce stage m’a permis d’acquérir une compréhension approfondie des mécanismes des prêts de titres et des produits dérivés. J’ai également développé des compétences en gestion des risques et appris à naviguer dans un environnement réglementaire complexe. Ce fut une expérience enrichissante qui a renforcé mon intérêt pour la finance de marché.

Concepts financiers liés à mon stage

Prêts de titres

Les prêts de titres permettent aux investisseurs de prêter leurs titres en échange d’une garantie et de frais, optimisant ainsi l’utilisation de leurs actifs.

Repos Loans

Les repos loans sont des accords où un vendeur vend des titres avec l’engagement de les racheter à une date ultérieure, fournissant ainsi une source de liquidités à court terme.

Gestion des risques

La gestion des risques implique l’identification, l’évaluation et la mitigation des risques financiers, notamment en utilisant des modèles quantitatifs et des stratégies de couverture.

Pourquoi pourrais-je être intéressé par cet article ?

Si vous êtes un étudiant de l’ESSEC intéressé par une carrière en finance de marché, cet article vous donne un aperçu précieux des responsabilités et des compétences nécessaires pour réussir dans ce domaine. Mon expérience chez Oddo BHF vous aidera à mieux comprendre les défis et les opportunités de ce secteur.

Autres articles sur le blog SimTrade

▶ All posts about Professional experiences

▶ Alexandre VERLET Classic brain teasers from real-life interviews

▶ David-Alexandre BLUM My professional experience as an Institutional Sales Assistant with Lazard Frères Gestion

▶ Chloé ANIFRANI My experience as an Asset Management Sales Assistant for Amplegest

▶ Tanguy TONEL My experience as an Investment Specialist at Amundi Asset Management

Ressources utiles

Voici quelques ressources utiles pour en savoir plus sur Oddo BHF et le secteur financier :

Site officiel d’Oddo BHF

A propos de l’auteur

Cet article a été écrit en juillet 2024 par Esten CHAUVIN (ESSEC Business School, Grande Ecole – Master in Management, 2023-2026).

Exploring the SARR Fund: A New Approach to Innovative Corporate Financing

July 9, 2024 by Gilles de MALBOSC

Exploring the SARR Fund: A New Approach to Innovative Corporate Financing

In this article, Gilles de MALBOSC (Manager of the SARR fund and CIO at Harmony Family Office) explores a new approach to innovative corporate financing : the Stable and Recurring Revenue (SARR) Fund.

Exploring the SARR Fund: A New Approach to Innovative Financing

In the ever-evolving landscape of financial investments, the SARR Fund stands out as a pioneering solution for growing enterprises. This fund is designed to provide innovative financing options that cater to companies with stable and recurring revenue models. Here’s a closer look at what makes SARR Fund a unique investment opportunity.

Introduction to SARR Fund

SARR stands for Stable and Recurring Revenue. The SARR Fund is a private fund that aims to invest a minimum of 95% of its total assets in private subscription investments. Unlike traditional investment vehicles, SARR focuses on purchasing future revenues from companies, offering them a financing method that doesn’t rely on real estate or personal guarantees. This approach allows companies to secure funding quickly, without diluting ownership or adversely affecting their debt ratios.

Why SARR Fund?

SARR both finances real-life growing companies in an entrepreneur friendly fashion, and it leverages technology like no other fund :

Innovative Financing Solutions

SARR helps entrepreneurs.

Quick Financing: Companies can receive financing within 48 hours, which is crucial for businesses needing rapid capital to seize growth opportunities.
Non-Dilutive Capital: By selling future revenues instead of equity, companies retain full control over their operations. For entrepreneurs, it’s like being granted some debt, in 48 hours, and without impacting their debt-ratio
Data-Driven Decisions: Financing decisions are based purely on data, ensuring fairness and transparency regardless of the entrepreneur’s background. Because SARR relies on “clean” data since it’s provided by trusted third parties

Timing and Technology

The fund leverages two modern concepts to provide its innovative solutions:

Open Banking: This technology gives investors comprehensive insights into companies’ financial health, enhancing the accuracy of risk assessments. This allows them to make decisions based on data that comes directly from 3 trusted third parties: the bank, the accountant and the subscription manager
XaaS Model: Companies operating on a subscription-based model offer predictable and stable revenue streams, making them ideal candidates for the fund.

How Does SARR Fund Work?

A typical transaction involves a company, such as a growing CRM software provider, seeking additional funding to expand its product offerings. The step-by-step process is described below:

Marketplace Registration: The company registers on a fintech marketplace, which evaluates their financial data to determine a trading limit and risk profile.
Funding Request: The company submits a funding request based on their trading limit.
Revenue Sale: SARR Fund purchases a portion of the company’s future recurring revenue at a discount, providing the necessary capital upfront.
Revenue Collection: The fund collects the full value of the purchased revenue in monthly installments over the next 12 months.

Process of a transaction.

Source: The company.

Benefits for Investors

Investing in the SARR fund presents the following Benefits for Investors: Low Risk and High Stability, Performance and Security.

Low Risk and High Stability

Senior Repayment Position: SARR Fund is positioned ahead of most senior lenders, reducing the risk of default.
Diversification: The fund invests in more than 100 companies, ensuring that no single investment exceeds 2% of the total Asset under Management (AUM).
Monthly Liquidity: Investors have access to 7.5% of the fund’s total AUM each month, providing a level of liquidity uncommon in similar investment vehicles.

Performance and Security

Collateral: Investments are secured by collateral from the outset, and covenants are in place to protect the principal.
Consistent Returns: The fund aims for positive performance each month, leveraging the stability of recurring revenue models.

Target Audience

The SARR Fund is suitable for a wide range of investors, including company treasurers, family offices, business angels, financial advisors, and high net worth individuals. Its structure and risk management strategies make it appealing even to conservative investors seeking stable returns with low volatility.

Conclusion

The SARR Fund represents a significant innovation in the field of private equity and venture financing. By focusing on stable and recurring revenue streams, it offers a low-risk, high-stability investment option that benefits both investors and growing enterprises. This unique approach not only provides quick and non-dilutive financing but also ensures robust returns for investors through meticulous data-driven decision-making and strategic partnerships with leading fintech platforms.

For more detailed information on the SARR Fund, prospective investors are encouraged to review the fund’s prospectus and consult with financial advisors to understand the full scope of benefits and risks associated with this innovative investment vehicle.

Useful resources

The Future of Data-Driven Finance and RegTech: Lessons from EU Big Bang II European Banking Institute Working Paper Series 2019/35

From FinTech to TechFin: The Regulatory Challenges of Data-Driven Finance

New York University Journal of Law and Business, Forthcoming European Banking Institute Working Paper Series 2017 – No. 6

Risk-based Investment Management in Practice (Global Financial Markets), by Frances Cowell

Banks and the real economy: An assessment of the research, Allen N. Berger, Phil Molyneux, John O.S. Wilson

About the author

The article was written in July 2024 by Gilles de MALBOSC (Manager of the SARR fund and CIO at Harmony Family Office).

Top 5 Private Equity firms in Germany

July 9, 2024 by Margaux DEVERGNE

Top 5 Private Equity firms in Germany

In this article, Margaux DEVERGNE (ESSEC Business School, Global BBA, 2020-2024) presents the top 5 Private Equity Firms in Germany.

Introduction

Germany is home to some of the largest and most influential private equity firms in Europe. These firms manage billions of euros in assets and invest in high-growth potential companies through buyouts, growth financing, and turnarounds. Key players in the German private equity landscape include international heavyweights such as Permira, Cinven, and EQT, alongside German-origin firms like Triton and Advent International. With strategically located offices in cities such as Frankfurt, Munich, and Berlin, these firms are well-positioned to identify and finance premier investment opportunities in one of Europe’s most dynamic and innovative markets.

Methodology

To define the top five private equity firms in Germany, several criteria and financial metrics are typically considered: Assets Under Management, Transaction Volume. Investment Profitability, Geographical Presence, Investment Sectors, Tenure and Reputation, and Recent Fundraising

Assets Under Management (AUM)

One of the primary criteria for evaluating the significance of a private equity firm is the size of its assets under management. AUM represents the total capital managed by the firm across its various investment funds. Higher AUM indicates greater capacity for making substantial investments.

Transaction Volume

The total volume of acquisition deals conducted by a private equity firm over a given period (typically the past 3-5 years) is a good indicator of its activity and market presence in Germany. Large-scale transactions, or mega-deals, are particularly scrutinized.

Investment Profitability

The financial performance of the funds managed by the firm is analyzed, focusing on internal rates of return (IRR) and multiples of invested capital. Firms demonstrating high IRRs on past investments are more highly valued.

Geographical Presence

A strong local presence in Germany, with offices in major cities such as Frankfurt, Munich, or Berlin, is advantageous for capitalizing on domestic investment opportunities.

Investment Sectors

Private equity firms specializing in key sectors of the German economy, such as industry, financial services, healthcare, or technology, receive higher ratings.

Tenure and Reputation

The experience, longevity, and established reputation of a private equity firm in the German market play a significant role in its ranking.

Recent Fundraising

The amount of recent funds raised by the firm, reflecting the confidence of institutional investors, is also considered.

By cross-referencing these quantitative and qualitative metrics, analysts and specialized media compile rankings of the leading private equity firms active in Germany. Although subjective, these rankings provide a comprehensive overview of the landscape and major players in the sector.

How did I get these ranking results?

To establish a ranking of the top 5 private equity firms in Germany (Permira, Cinven, EQT, Triton and Advent International), the most important criteria used were as follows:

Assets under management (AUM): EQT appears to have a dry powder of €25.28 billion, which puts it in the lead for this criterion.

Transaction volume: Triton is listed in the top 3 most active companies in Germany according to Private Equity Monitor, which suggests that its transaction volume is high.

Investment sectors: EQT stands out as having strong expertise in technology sectors, which may be an advantage given the importance of the TMT sector in Germany.

From this we obtained the 5 firms to rank:

Permira
Cinven
EQT
Triton
Advent International

To compile the ranking, we will analyze each firm using the metrics mentioned above.

Permira

Assets Under Management: Approximately €32 billion
Notable Recent Transactions: Acquisition of Siemens Logistics in 2020 (€1.1 billion), buyout of Camfil in 2022 (€4.8 billion)
Profitability: Net IRR of 22.5% on mature funds
Presence: Offices in Frankfurt, Munich, and other German cities
Key Sectors: Technology, services, consumer goods
Established: 1985

Logo of the company.
Logo of Permira
Source: The company.

Cinven

Assets Under Management: Over €30 billion
Transactions: Acquisition of Compressors Systems in 2022 (€3.9 billion)
Profitability: Gross IRR of 27% on European funds
Presence: Offices in Frankfurt and Munich
Sectors: Business services, healthcare, technology
Established: 1977

Logo of the company.
Logo of Cinven
Source: The company.

EQT

Assets Under Management: €84 billion
Transactions: Buyout of Freenet in 2022 (€1.3 billion)
Profitability: Net IRR of 24% on private equity funds
Presence: Offices in Munich, Frankfurt, and other cities
Sectors: Technology, healthcare, services, industry
Established: 1994

Logo of the company.
Logo of EQT
Source: The company.

Triton

Assets Under Management: €18.5 billion
Transactions: Acquisition of Flender in 2021 (€1.9 billion)
Profitability: Gross IRR of 32% on mature funds
Presence: Headquarters in Frankfurt, offices in Munich
Sectors: Industrial, services, consumer, healthcare
Established: 1997

Logo of the company.
Logo of Triton
Source: The company.

Advent International

Assets Under Management: $88 billion (approximately €80 billion)
Transactions: Buyout of Obier in 2022 (€1.1 billion)
Profitability: Net IRR of 22% on mature funds
Presence: Offices in Frankfurt and Munich
Sectors: Financial services, healthcare, industry, retail
Established: 1984

Logo of the company.
Logo of Advent International
Source: The company.

Conclusion

The private equity landscape in Germany is dominated by a few major players, comprising both leading international firms and well-established German companies. At the forefront of this ranking is Permira, with approximately €32 billion in assets under management, closely followed by Cinven, managing over €30 billion. The Swedish giant EQT ranks third with an impressive portfolio of €84 billion in assets.

German firm Triton, with €18.5 billion under management, and the American firm Advent International, boasting $88 billion (approximately €80 billion) in assets, round out the top five. These substantial figures underscore the financial strength of these firms, enabling them to execute significant transactions, such as EQT’s recent acquisition of Freenet for €1.3 billion.

Beyond the size of the assets managed, these private equity firms also demonstrate remarkable performance, with net internal rates of return (IRR) ranging from 22% to 32% on their mature funds. This high profitability ensures the confidence of institutional investors, allowing these firms to continue raising substantial funds and maintaining their status as key players in the German market for acquisitions and growth financing.

Why should I be interested in this post?

As a French-German ESSEC student enrolled in the SimTrade course, exploring the realm of private equity could be highly beneficial. This post offers an insightful examination of the key players in the German industry, providing valuable insights into their distinctive characteristics. It presents an opportunity to deepen your understanding of the sector and potentially identify your future employer among these influential firms.

Useful resources

Permira Company

Cinven Company

EQT Group Company

Triton Partners Company

Advent International Company

About the author

The article was written in July 2024 by Margaux DEVERGNE (ESSEC Business School, Global BBA, 2020-2024).

Activists in financial markets and the corporate world

July 10, 2024June 23, 2024 by Nithisha CHALLA

Activists in financial markets and the corporate world

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) presents information how individuals and groups (financial activists) use their influence as shareholders to drive strategic, operational, and governance changes within companies to improve performance, enhance shareholder value, and promote ethical practices.

Introduction

Activism in financial markets and the corporate world refers to the efforts of individuals or institutions (like hedge funds) to influence a company’s behavior. Their objectives can include changes in management, strategy, financial structure, or operational practices. Activists aim to improve company performance, enhance shareholder value, or promote social, environmental, or governance (ESG) objectives.

History

The concept of shareholder activism dates back to the early 20th century, but it gained significant momentum in the 1980s. During this period, activist investors began buying substantial shares in underperforming companies to gain control and enforce changes. For example, Paul Singer and AT&T, where Paul Singer’s Elliott Management took a $3.2 billion stake in AT&T in 2019. Over the decades, activism has evolved, with various methods and strategies being adopted to exert influence on corporate boards and top management.

Types of Activism

There are different types of activism: shareholder activism, Environmental, Social, and Governance (ESG) activism, operational activism, and proxy fights.

Shareholder Activism

Shareholder activism focuses on improving company performance and shareholder returns through changes in governance, strategy, or financial practices.

For example, in the case of Apple in 2015, Carl Icahn’s activism led to increased share buybacks and dividend payments, enhancing shareholder returns.

Environmental, Social, and Governance (ESG) Activism

Environmental, Social, and Governance (ESG) activism aims to promote sustainable and ethical practices within companies, addressing issues like climate change, labor practices, and board diversity.

The most common ESG-related litigation is based on alleged false disclosures in securities filings. Statements in proxy materials about companies’ commitment to diversity could be false and misleading because there is a lack of diversity and/or the companies fail to follow through on promises to increase diversity.

For example, the SEC reached a US$35 million settlement with a gaming company in February 2023 after the company failed to maintain disclosure controls related to workplace misconduct. This settlement came after a wave of shareholders advocated for leadership changes within the company and its board.

Operational Activism

Operational activism involves pushing for changes in the company’s operations, such as cost-cutting measures, divestitures, or restructuring.

For example, in the case of Procter & Gamble (P&G) in 2017, Nelson Peltz’s Trian Partners waged a successful campaign for board representation, leading to significant cost-cutting and strategic refocus.

Proxy Fights

Proxy fights occur when activists seek to gain seats on the company’s board to directly influence decisions.

For example, in the case of Yahoo in 2017, activist pressures from several hedge funds, including Third Point led by Dan Loeb, resulted in major leadership changes and a shift in strategic direction.

Methods and Strategies

To achieve their goals, activists have different methods and strategies: engagement and dialogue with companies, public campaigns, proxy battles, litigation, and shareholder proposals.

Engagement and Dialogue with Companies

Activists may initiate discussions with the top management and the board of companies to induce changes.

Public Campaigns

Activists may use media and public statements to rally support from other shareholders and put pressure on the company.

Proxy Battles

Through proxy battles, activists may gain enough shareholder votes during general meetings to win board seats and implement changes directly.

Litigation

Activists may take legal action to force companies to comply with certain demands.

Shareholder Proposals

Activists may submit proposals to be voted on at the companies’ annual meetings.

Short Selling

Activists may sell borrowed shares of a company with the expectation that the stock price will decline. Activists may release reports highlighting issues such as accounting irregularities or poor governance to justify their short positions.

Notable Activists

Carl Icahn: Known for his aggressive tactics, Icahn has targeted companies like Apple, eBay, and Xerox, pushing for strategic changes to enhance shareholder value.
Bill Ackman: Founder of Pershing Square Capital Management, Ackman has influenced companies like Target and Valeant Pharmaceuticals through high-profile campaigns.
Elliott Management: Led by Paul Singer, Elliott Management has been involved in numerous activism campaigns, including those at AT&T, Twitter, and SAP.
Jim Chanos: Famous for short selling, Chanos is known for his early identification of problems at companies like Enron. His approach often involves detailed research and public reports that bring issues to light.

Impact on Companies

Activist interventions can have significant impact on companies, both positive and negative.

Positive Impact

Activism can lead to improved governance, better financial performance, and enhanced shareholder value.

For instance, the activist campaign by Trian Partners at Procter & Gamble resulted in cost-cutting measures and strategic shifts that boosted profitability.

Negative Impact

On the downside, activism can create instability, distract management, and lead to short-termism.

For example, the intense activist pressure on Yahoo! led to management upheavals and strategic uncertainty.

Impact of Short Selling

Short selling activism can expose weaknesses and unethical practices within companies, leading to regulatory investigations and changes in management. However, it can also lead to significant volatility and negative sentiment in the stock market.

For instance, Jim Chanos’s short selling and public exposure of Enron’s accounting fraud played a crucial role in revealing one of the largest corporate scandals in history

Conclusion

Activists in financial markets and the corporate world play a crucial role in shaping the future of companies. While their methods can be controversial, the influence of activists has led to significant changes in corporate governance and performance. By pushing for accountability, transparency, and strategic improvements, activists continue to be a powerful force in the corporate landscape.

Why should I be interested in this post?

This article provides a comprehensive overview of activism in the corporate world, with clear examples and explanations of key concepts. For management students, understanding and analyzing the corporate world is equally important as being a part of it and making changes in it.

Useful resources

The hedgefund journal Shareholder Activism

Hogan lovells Recent developments in ESG shareholder activism around the world and suggestions for risk mitigation

Fordham law school Yahoo! and Hedge Fund Activism

Harvard Business Review Types of Activist Investors and How to Spot Them

Wikipedia Shareholder activism

About the author

The article was written in June 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).

Analysis of Visa’s Business Model and Market Prospects

June 24, 2024June 22, 2024 by Liner SHI

Analysis of Visa’s Business Model and Market Prospects

In this article, Liner SHI (ESSEC Business School, Global Bachelor of Business Administration (GBBA) – Exchange Student, 2024-2025) shares her analysis about Visa’s business model, industry conditions, and future trends.

What is Visa

Visa is a specialized bank card clearing institution that resolves authorization and transaction issues between banks.

Logo of VISA.

Source: Visa.

How visa was built : In 1950s, under the trend of installment payments, Bank of America became a leading credit card company. However, due to US banking laws, expansion outside California faced challenges. To overcome this, Bank of America started a franchise model. To deal with initial complications arising from complex authorization and currency exchange between banks, National BankAmericard Inc. was established. In 1973, transaction settlement costs was significantly reduced due to automation of the authorization process and then NBI was renamed to Visa.

In essence, Visa operates as a professional payment technology company under a four-party clearing model: banks, merchants, consumers, and clearing institutions. In 2023,Visa boasts 4.3 billion users, collaborates with 14,000 financial institutions, and records a payment volume of $12.3 trillion.Visa gained net revenue of $32.7 billion in 2023, representing a 11% increase compared to the previous year.

Visa’s Business Model

A typical Visa payment transaction

Visa payment process.

Source: VISA.
Source: Annual Report 2023

In a Visa C2B payment, the consumer uses a Visa card to buy from a merchant. The merchant sends the transaction to an acquirer, who sends it to VisaNet. VisaNet then checks with the issuer for authorization. Once authorized, the issuer pays the acquirer, minus fees. The acquirer pays the merchant, minus their fee. Visa earns by facilitating global money movement among consumers, merchants, and banks through innovative tech.

How Visa Makes Money—Visa’s Fee Structure

Visa earns revenue through various methods: transaction amount-based revenue and transaction count-based revenue.

Transaction Amount-based Revenue

Service Revenue ($14.8B in 2023): This includes income from Visa’s payment processing services and technological solutions like transaction processing, clearing, settlement, risk management, and security services.
International Transaction Revenue ($11.6B in 2023): Generated from cross-border transaction processing and currency conversion activities. Visa charges fees for these transactions due to their complexity, involving currency conversion and higher fraud risks.Nominal payment volume serves as a hedge against inflation, making it a primary revenue driver. If commodity costs rise, Visa’s revenue automatically increases.

Transaction Count-based Revenue

C.Data Processing Revenue ($16.0B in 2023): Visa earns revenue by processing transaction data and offering analytical services to partners. These services assist in customer behavior analysis, risk management, and marketing, thereby adding more value. In recent years, international transaction revenue has steadily increased while data processing revenue has slightly decreased, possibly influenced by inflationary growth.

Business Model Evaluation

Profitability

From 2017 to 2022, Visa’s average Return on Invested Capital (ROIC) stood impressively at 87%. This remarkable performance is primarily driven by a consistently high profit margin. Since 2011, Visa’s net profit margin has shown a steady increase, surpassing 50% after 2018. This growth is largely fueled by economies of scale. While Visa requires significant upfront capital investment, its operational costs per unit are comparatively low, almost negligible when compared to traditional banking institutions. Consequently, as Visa processes more transactions through its network, its profitability naturally expands. In the four-party model of bank card clearing, Visa avoids bearing customer acquisition costs and credit risks, thus enjoying the highest profit margins.

Business moat

Technology: Visa provides users with a network technology known for its high real-time performance and security. Notably, Visa excels in managing fraud by utilizing extensive labeled transaction data and advanced algorithms like neural networks, Bayesian, and SVM. This enables Visa to construct effective risk control models, preemptively intercepting risky transactions.
Brand and Switching Costs: In the payment industry, brand reputation significantly influences consumer choices. Visa’s strong brand power consistently attracts new customers. Moreover, existing customers are deterred from switching their bank cards to other clearing institutions due to substantial switching costs.
Economies of Scale: As transaction volume expands, the clearing industry benefits from economies of scale, leading to an oligopolistic competitive structure. Similar to logistics systems such as gas pipelines and highways, once convenient and cost-effective clearing networks are established in the market, new entrants find little to no space for market penetration.

Visa’s Future Assessment

Market Trends

Overview

The payments industry revenue pool expanded by 8.3% from 2017 to 2022 to reach $1.6 trillion. However, according to BCG, slower growth is on the way. Their estimates suggest that overall revenue growth will decline from today’s levels to a CAGR of 6.2% from now through 2027, increasing the global revenue pool to $2.2 trillion at the end of that period.

Global payment revenue trend.

Source: McKinsey.

Specific Analysis

Positive Factor 1: Personal consumption expenditure is the main driver behind the growth in payment transaction volumes. Over time, as living standards improve and inflation rises, personal consumption expenditure tends to increase. Technological advancements, such as the rise of contactless cards (NFC) and electronic wallets, make payment methods more convenient, leading to higher transaction frequencies for credit cards. Visa’s data shows that contactless bank cards have an average transaction frequency about 20% higher than regular bank cards, expanding the industry scale for clearing institutions. Moreover, following the COVID-19 pandemic, the surge in e-commerce adoption has shifted more people from cash to credit card payments, boosting the penetration rate of non-cash payments and driving payment amounts and volumes.
Positive Factor 2: At the same time, the global small-value payment systems’ total transaction volume stands at approximately $235 trillion, with B2B transactions accounting for about $125 trillion (53%), C2B transactions at $50 trillion (21%), and B2C transactions at $30 trillion (13%). Both the B2B and B2C payment markets still hold significant growth potential, offering opportunities for further scale expansion for clearing institutions like Visa.
Risk: Firstly, in the post-pandemic era, economic slowdown could lead to a decrease in transaction volume growth or even a decline. This presents challenges for clearing institutions on multiple fronts. They may face reduced revenue due to fewer transactions while also needing to navigate more stringent risk management and regulatory requirements. Secondly, according to the latest estimates from BCG, the emergence of new payment networks and the increasing popularity of electronic currencies may result in an overall reduction in scale. Market Trends

Competitive Analysis

Overview

Among existing competitors, Visa demonstrates robust performance, but concurrently, it may face threats from digital wallets and encrypted cryptocurrencies.

Specific Analysis

Existing competitors: Visa maintains a competitive edge over its rivals in market share, revenue performance, organizational efficiency, and technological prowess. Contrasting Visa with its primary competitor, Mastercard, between 2018 and 2022, Visa boasted an average Return on Invested Capital (ROIC) of 88% and a net profit margin of 48.5%, surpassing Mastercard’s 54% ROIC and 41.3% net profit margin. This superiority stems from Visa’s early market entry advantage, higher market penetration, and lower customer acquisition costs. Moreover, Visa exhibits greater efficiency in internal organizational management, particularly focusing on clearing operations, while Mastercard’s management expense ratio tends to be approximately 10 percentage points higher. In terms of technology, Visa’s transaction processing capability outshines Mastercard’s, with Visa processing 65,000 transactions per second compared to Mastercard’s 5,000 transactions per second.
Substitute competitors: Visa’s primary threat comes from other payment networks and digital wallets such as Apple Pay, Google Pay, and PayPal. These services are increasingly popular among consumers and may eventually erode Visa’s market share. Additionally, the rise of cryptocurrencies may lead to reduced demand for traditional payment networks like Visa.

Conclusion

Visa possesses a strong advantage in the current payment industry market development and competitive landscape. However, it is likely to be impacted in the short term by macro-market fluctuations and in the long term by the development of emerging payment technologies

Why should I be interested in this post?

This article will give you a better understanding of Visa as a company, while also providing you with more knowledge and information about similar clearing institutions and the payment industry. This will help you prepare for job interviews by equipping you with valuable insights into the workings of Visa and its counterparts, enabling you to demonstrate a deeper understanding of the industry during the interview process.

Useful resources

BCG Global Payments Report 2023

Visa Annual Report 2023

McKinsey The-2023-mckinsey-global-payments-report

Goldmansachs 2008-entire-annual-report

About the author

The article was written in June 2024 by Liner SHI (ESSEC Business School, Global Bachelor of Business Administration (GBBA) – Exchange Student, 2024-2025).

The Price of Gold

Introduction

What Is the Gold Price?

Key factors affecting gold price

Supply and demand dynamics

Inflation and gold as a hedge

Interest rates and opportunity cost

U.S. dollar strength

Central bank policies

Gold as a hedge against global financial crises

Gold price and its relationship with other assets

Gold vs stock market

Gold vs bonds

Gold vs. cryptocurrencies

The Future of gold prices

Conclusion

Why should I be interested in this post?

Related posts on the SimTrade blog

Useful resources

Academic research

Business resources

Other

About the author

Deep Dive On The Article “The Social Responsibility of Business is to Increase Its Profits” By Milton Friedman

Introduction

Overview Of Friedman’s Arguments

1. Central Argument: Profit Maximization

2. Separation Of Business & Government Roles

3. Adherence To Legal & Ethical Standards

4. Critique Of Corporate Social Responsibility (CSR)

5. Impact On Business Philosophy

Implications & Outcome Of Friedman’s Theory

Profit-Oriented Focus

Limitations Of Traditional Responsibility

Shifting Perspectives

Relevance In Today’s Business World

Friedman’s View: Profit-First Approach

Today’s Business Practices: CSR Integration

Friedman’s View: Minimal Social Engagement

Today’s Business Practices: Proactive Social Responsibility

Friedman’s View: Profit Maximization With Potential Ethical Conflicts

Today’s Business Practices: Ethical & Sustainable Focus

Conclusion

Related Posts On The SimTrade Blog

Useful Resources

About The Author

Analysis Of The Article “The Pyramid Of Corporate Social Responsibility: Toward The Moral Management Of Organizational Stakeholders,” By Archie B. Carroll

Introduction

Detailed Summary of Carroll’s Pyramid Model

1. Economic Responsibilities

2. Legal Responsibilities

3. Ethical Responsibilities

4. Philanthropic Responsibilities

Critiques Of Carroll’s Model In Today’s Context

Hierarchical Structure Limitations

Contextual Variability

Evolving Stakeholder Expectations

Integration Of Global & Local Perspectives

Future Of Corporate Social Responsibility

Greater Emphasis On Sustainability & Climate Action

Increased Focus On Social Equity & Inclusion

Integration Of Technology and Innovation

Enhanced Stakeholder Engagement & Collaboration

Conclusion

Related Posts On The SimTrade Blog

Useful Resources

About The Author

Understanding Hyperinflation: Causes, Effects And Examples

Introduction

What Is Hyperinflation?

Causes Of Hyperinflation

Excessive Money Supply

Loss Of Confidence

Demand-Pull Inflation

Cost-Push Inflation

Effects of Hyperinflation

Erosion of Savings

Distorted Spending and Investment

Barter Systems

Social and Political Unrest