The “Professional experiences” category contains posts about the professional experience of contributors (apprenticeship, internship, consulting mission, first job, etc.).
This article written by Subhasish CHATTERJEE (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2021) discusses the financial impact of the Covid-19 crisis on the healthcare sector in India and especially for hospitals.
Impact of the Covid-19 crisis on hospital operations
For any organization, a positive operating margin is essential for long-term Financial stability. Few organizations can maintain themselves for a long period when total operating expenses are greater than total operating revenues. A positive operating margin allows the organisation to develop its business by financing new projects with internal financial resources along with external financial resources such as debt and equity.
For hospitals, a positive operating margin allows them to invest in new treatment services for enhancing patient satisfaction, building of new facilities, and researching on new drugs.
Before Covid-19
Compared with other sectors, healthcare margins typically have been very low. Even before the appearance of Covid-19, a number of Indian hospitals struggled with poor or even negative margins—in other words, they were losing money on their operations. In fact, the median hospital margin was around 4.7 percent. This situation has been perilous to the future viability of many of Indian hospitals.
My experience during my internship
When the Covid-19 pandemic emerged, hospitals had to renounce the non-Covid treatment. The result was a drastic slowdown in volume of patients and in revenue, but the expenses remained high. To date, nobody can assure when and to what degree these non-Covid patients will return in the hospital. The result has been an uncertain future about the ability of hospitals to serve their communities and remain financially viable. My experience was in India but if you follow the statistics, the hospitals are suffering from same consequences anywhere in the world.
As indicated in Figure 1, during the year 2020, because of the Covid-19 crisis, 39.4% of hospitals lost more than 50% of their revenue compared to last year. Hospital Systems are Data from Hospital Centre Compiled Together.
As indicated in Figure 2, during the year 2020, because of the Covid-19 crisis, 47.6% of independent medical groups lost more than 50% revenue as clinics couldn’t treat and provide bed to patients on a larger scale like hospitals. Independent Medical group are the private clinics run by physicians.
Figure 2. Covid-19’s impact on independent medical group finances
Source: AMGA surveys.
The possible long-term impact of Covid-19 in hospitals
To date, the financial impact of Covid-19 has been significant, even with Government funding, the financial damage is likely to continue. Adding to this is the unpredictable nature of Covid-19. Now more than ever, hospitals will need support from governments, and will need to rethink their strategic–financial plans for what is likely to be a highly challenging environment even as Covid-19 cases diminish.
Key concepts
I present below key concepts to understand the financial situation of a business.
My experience as a sell-side equity research analyst
In this article, Tanmay DAGA (ESSEC Business School, Global Bachelor of Business Administration, 2017-2021) introduces equity research, shares his internship experience at a top sell-side equity research company named Kotak Securities and gives his opinions on what the future holds for the industry.
About Kotak Securities
Kotak Securities was founded in 1994 as a subsidiary of Kotak Mahindra Bank and is headquartered in Mumbai, India. It is headed by Mr. Jaideep Hansraj who is a leading figure and has over 20 years of experience in the equity research industry. The company has over 1.7 million customer accounts and handles over 800,000 trades every single day making it one of the biggest brokerage houses in the country. The company handles operations in over 394 cities in India and is well poised for further expansion helping it expand its customer base. Kotak Securities offers stock broker services, portfolio management services, depository services, research expertise, dynamic market data and international reach for clients looking for investment opportunities overseas.
What is equity research?
It is a mainstream finance position which entails fundamental analysis and subsequent recommendation of public securities. Fundamental analysis is a method of evaluating the intrinsic value of an asset (future cash flows discounted to the present) and analyzing the factors that could influence its price in the future. Hence, equity research is an investigation based upon the core business drivers of a particular business which are reflected in its financial statements. Hence, equity researchers use financial statements combined with other industry and macroeconomic reports to form their opinion about a certain company or a universe of companies (also called coverage list). Investors such as money/managers use this information to better investigate their potential or existing investment decisions. To conclude, the main purpose of equity research is to provide investors with detailed financial analysis and recommendations on whether to buy, hold, or sell a particular stock. The professionals working in brokerage firms which sell analysis reports to investors are called sell-side analysts. Professionals working for mutual funds or hedge funds and who make direct investment decisions are called buy-side analysts.
Read an interesting interview with an industry expert who shares his experience of working in the industry.
Me and Finance
I had gotten enrolled in ESSEC’s GBBA in 2017 owing to my curiosity in finance and the university’s premier status, especially in finance. At the end of the first year, I had the opportunity to apply my mind and practically learn a few things along with it. It had always been my mission to work in finance, particularly in valuation. My fascination with valuation is simple – you are allowed to deem the situation as you see fit provided you have a logical reasoning behind it. Nothing can narrow the scope of your thoughts as long as they are realistic and reasonable. It is a great way for individuals to look at things from a broader perspective and develop an analytical mindset to help comprehend several moving parts simultaneously. It does take time getting used to the idea of having to dig into minute details but it’s worth it! Valuation is not purely science per se. It is a blend between sound analytical reasoning that helps you come up with a story (forecast as experts call it) and simple objective mathematics to help validate your story’s credibility. The fact that valuation today in investment banking and other fields looks so complicated is partly to mask the simplicity involved in the process so big banks can continue to charge hefty fees for what they do. Moreover, it is not a skill that will ever go in vain. The mindset a sound valuer develops helps him/her analyze the pros and cons any situation better than a counterpart. It is a skill that I recommend everyone to acquire.
My internship in Kotak Securities
In 2018, at the end of my first year of my GBBA at ESSEC Business School, I did an internship at Kotak Securities equity research division in Mumbai, India. I was 18 years old and comparatively new to equity research. Resulting, I witnessed a steep learning curve requiring me to learn and apply several concepts in a short span of time. My main responsibility was to help the fundamental research team carry out due diligence (financial analysis to analyse the true or intrinsic value of an asset and all other factors affecting this value) for the companies under our coverage universe. This was done by performing rigorous research for the company’s business, its supply chain, its value drivers and all other factors that affect its value and ultimately its stock price. The conclusions were to be presented to the senior management and the sales team along with a thorough explanation behind the rationale of selecting a particular stock for client recommendation. Based on the findings, recommendations were to be published in a bi-monthly analysis report which also included other important topics like the economic analysis of the current situation and trends in the currencies traded in foreign exchange (FX) market. As the organization was agile and flexible with what responsibilities members could take, I had the opportunity of working with several other departments aside from fundamental research. Some of the other projects I worked on were developing a proprietary algorithm based on analysis of trading patterns for index companies alongside the technical analysis team (which is the motivation for me in selecting the SimTrade course) and a model project on sentiment analysis – how news and company perception (especially on Twitter) affect the stock price in the short run. I learnt several hard skills such as modelling in Excel, literacy in reading company’s financial statements and intermediate level of coding in Python. Overall, it was a great work experience for me.
Key takeaways from my internship
During my time at Kotak, I have come across some important financial concepts that I believe every individual, irrespective of their affiliation with the finance industry, must truly understand. They will help you better understand financial issues and make sound investment decisions.
Inflation
Inflation refers to the sustained increase in the price of goods and services in an economy. This increase in price is hard to pinpoint at any one factor but more often than not, it is a combination of various factors. This could range from increase in labor prices to jump in raw material costs. As prices rise due to inflation, you’ll be able to afford less and less over a given period of time. That’s why it is imperative to understand that long-term savings must be invested in a manner by which the returns surpass the inflation rate. That’s the only way one can continue to afford to buy more in a definite time period in the future. In many countries, the only reliable way to beat inflation is investing in stocks/equities. As Bonds or Bank savings do not offer any positive real interest realization.
Diversification
Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio. A diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt at limiting exposure to any single asset or risk. The rationale behind this technique is that a portfolio constructed of different kinds of assets will, on average, yield higher long-term returns and lower the risk of any individual holding or security. This is a widely approved method for protecting capital against unexpected events in the global markets. By using the primary study of correlation, investors can diversify certain risk away. However, data on correlation is historical and thus, backwards looking, and might not always hold true in the future. For instance, during the shutdown of the global economy in March 2020, multiple assets like stocks, commodities and bitcoin (which have not been positively correlated in the past) collapsed together. All have had a positive recovery together since (again implying positive correlation as opposed to results from previous studies).
Time Value of Money
The time value of money (TVM) is the concept that money you have now is worth more than the identical sum in the future due to its potential earning capacity. This core principle of finance holds that provided money can earn interest, any amount of money is worth more the sooner it is received. For instance, assume a sum of $10,000 is invested for one year at 10% interest. The future value (FV) of that money is: FV = $10,000 x (1 + 10%) = $11,000. The formula can also be rearranged (reversed) to find the value of the future sum in present day dollars. For example, the present value (PV) of $5,000 one year from today, compounded at 7% interest, is: PV = $5,000 / (1 + 7% ) = $4,673.
TVM is also sometimes referred to as present discounted value. This is a fundamental pillar on which company valuation is based. The true value of a company is the future free cash flows the company generates, discounted to the present time using an appropriate discount factor.
Future of equity research: my personal view
Equity research is an important role that has come into prominence since the bull market in the 1950s. Thousands of fund managers handling trillions of dollars in assets under management often use sell-side research to get an outsider’s opinion before making investment decisions. Certainly, the size of the industry has shrunk significantly since buy-side and IB analysts are being better compensated, causing a shift in the workforce. However, things are not bad. Companies are now letting analysts focus more on analysis than on sales. This is certainly going to attract new talents who want to focus purely on analysis.
Read this interesting counter-view on the future of the industry.
Relevance to SimTrade
This course helps in understanding the other side of the same coin – technical analysis (using price movements and other factors to predict the future of a security). Participants of this course can expect to gain practical knowledge about stock trading by using a real-world like simulator where multiple strategies can be applied and tested. Other benefits include gaining a broad understanding of the financial markets and concepts.
Private banking: evolving in a challenging environment
This article written by Hélène Vaguet-Aubert (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2021) discusses the challenging environment in private banking based on her experience at the Banque Internationale à Luxembourg (BIL).
Banque Internationale à Luxembourg (BIL)
Banque Internationale à Luxembourg (BIL) was founded in 1856 and is now steered by Marcel Leyers, appointed as director and chairman of BIL’s executive committee in 2019 (BIL, 2021). Being a top bank for over 160 years and being owned to a 10% extent by the Luxembourgish government, BIL supports Luxembourg’s economy at all levels. BIL has also established itself as top international player thanks to its international subsidiaries. BIL’s international scope, 2,000 top-skilled employees worldwide, strong financial results and growth confirms its systemic importance.
Headquarters of Banque Internationale à Luxembourg (BIL)Source: BIL
BIL brings together all its banking business lines under a common umbrella in order to propose top-of-the-range solutions tailored to the requirements of a very diverse client base. Indeed, the bank has all the financial products and expertise necessary to fulfill all of its clients’ needs: private banking, retail banking, corporate banking and financial markets. As of H1 2019, the bank had a €45 million profit and €41.9 million of assets under management.
As BIL’s “create, collaborate, care” mission statement clearly indicates, BIL’s marketing strategy is client oriented. BIL’s objectives are to focus on core competencies to boost its revenues. To do so, BIL’s short term strategy is to strengthen its activities in mature markets such as Luxembourg and Switzerland. On the long term, BIL’s objective is to leverage the potential of Legend Holdings and the Chinese private banking market.
My internship at BIL
Passionate by strategy and sales, and willing to acquire international experience in the financial sector, I carried out a six-month internship in the Sales Management Department of Banque Internationale à Luxembourg (BIL). In this department, I worked with a team of five international people whose role was to design strategy, sales and marketing solutions to be the direct support of BIL front office and the private banking clients’ indirect support. During this internship, the responsibilities that I had where divided in two parts: on the one hand, sales and marketing, and on the other hand, strategy.
First, regarding the sales and marketing part, my role was to analyze the performance of the bonds and equity financial markets and mutual funds as well to develop weekly sell/buy/hold recommendations regarding BIL products. Once these sales recommendations were made, my role was to analyze the performance of wealth managers from BIL Europe, Asia and Middle East. Finally, once BIL products and wealth managers’ performances were analyzed, I had the opportunity to design relevant marketing content (pitch book containing the details of the financial products) for BIL 20,000 private banking clients.
Second, regarding the more strategic parts, I contributed to the management of two projects at the group level: digitalization of the commercial process on a selection of 2,500 products and repositioning of the private banking service offering targeting 2,000 customers.
Private banking
The financial concept that was the most linked to my experience at BIL is the concept of private banking. Private banking is the main subset of wealth management, it offers investment, banking and other financial services to high-net-worth individuals (HNWI) on different markets. The adjective “private” emphasizes a more consumer-centered approach than what is offered by retail banks since each client is usually assigned to dedicated relationship managers and benefits from tailor-made products. Historically, HNWI from different markets or private banks’ target, were individuals with liquidity over $2 million. However, now, it is possible to open a private banking account with cash and/or financial assets of $250,000. Hence, HNWIs segments that wealth management institutions such as private banks target can be divided into four categories based on their income:
Affluent: between $250,000 and $1 million
Lower HNWI: between $1 million and $20 million
Upper HNWI: between $ 20 million and $100 million
Ultra-High Net Worth individuals or UHNWI: over $100 million
Under one roof, private banks’ offering encompasses wealth management, tax and insurance services.
Pricing model
For these services, private banks can use three types of pricing models (Goyal et al., 2019):
“Standard” model: the client pays custody fees, transaction fees and management fees
“All-in fee” model: the client only pays management fees
“Performance fee” model: the client pays performance fees and custody fees
Challenges
Today, the private banking industry is facing many threats such as: digitalization, enhanced regulations, rising clients expectations but I would say one of the most important one I noticed in the wake of my internship is: negative interest rates, which is the second financial concept I will introduce here. Indeed, in the wake of the 2008 financial crisis, central banks such as the European Central Bank (ECB) in 2014 had to charge negative interest rates to fight the deflationary spiral. These negative interest rates (-0.5% since September 2019) are a big trouble for European banks such as the ones in Luxembourg: banks must now pay interests on their reserves to the ECB. The excess in bank reserves has exploded since the “Quantitative Easing” program of the ECB in 2015. Therefore, banks have paid €25 billion of negative deposit rate to the ECB since 2014 which had a had a considerable impact on banks’ profitability, equating to a 4% decline in profits for European banks in 2018 for instance (Honoré-Rougé, 2019).
To compensate these profits cuts, some European banks have started charging their clients on their cash deposits or take the risk to grant more risky loans to maintain a decent level of profitability (Arnold, Morris & Storbeck, 2019). However, despite these negative economic trends, Luxembourg is still the leading asset management center in the Eurozone. In Luxembourg, AUM increased to $4.9 trillion in 2020 (+5.4% from 2019).
Related posts on the SimTrade blog
Looking for an internship? Looking for a job? You may find useful information by reading other posts where students share their professional experience:
Arnold, M., Morris, S., & Storbeck, O. (2019). European banks fear no escape from negative rates. The Financial Times, 1-3. Retrieved from https://www.ft.com/content/93015730-d960-11e9-8f9b-77216ebe1f17
BIL. (2021). BIL, a key player in the Luxembourgish financial market. Retrieved 27 December 2021, from https://www.bil.com/en/bil group/the-bank/Pages/discover-BIL.aspx
Goyal, D., Zakrzewski, A., Mende, M., Alm, E., Kowalczyk, L., & Wachters, I. (2019). Solving the Pricing Puzzle in Wealth Management. Retrieved 28 December 2019, from https://www.bcg.com/publications/2019/solving-the-pricing-puzzle-in-wealth-management.aspx
Honoré-Rougé, C. (2019). Les taux négatifs et leurs conséquences sur les banques de la zone euro. Retrieved 25 February 2021, from http://www.bsi-economics.org/1039-taux-negatifs-consequences-banques-zone-euro-chr
Relevance to the SimTrade Certificate
It relates to the SimTrade Certificate in the following ways:
About theory
By taking the Discover SimTrade course (Period 1), you will discover the SimTrade platform that allows investors (or their financial advisors or private bankers) to invest in the financial markets.
By taking the Market information course (Period 2), you will know more about how information is incorporated in the stock market price.
About practice
By launching the Sending an Order simulation, you will practice how financial markets really work and how to act in the market by sending orders.
By launching the Market order simulation and the Limit order simulation, you will practice market orders and limit orders that are the two main orders used by investors to build and liquidate positions in financial markets.
More about SimTrade
About the author
Article written by Hélène Vaguet-Aubert (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2021).
This article written by Ghali El Kouhene (ESSEC Business School, Global BBA, 2019-2022) discusses the valuation methods in the real estate sector.
Definition of a real estate
Real estate is a property, land, buildings, air rights above the land (with certain limitations) and underground rights below the land. The term “real estate” means real, or physical, property. It is the land and its attached constructions that represent a capital good that produces a flow of services over time. Therefore, land includes earth’s surface, lateral support and subjacent support. But it also includes materials under the surface such as substances, minerals oil and gas.
There are four types of real estate assets. First, we find residential real estate. It is a type of leased property, containing either a single family or multifamily structure that is available for occupation for non-business purposes. This includes both new construction and resale homes. Secondly, there is commercial real estate. They are property used exclusively for business purposes or to provide a workspace rather than a living space. All of them are owned to produce income. Thirdly, we can mention industrial real estate. There are generally two uses for industrial properties: companies make things, or they store things. These includes manufacturing buildings and property, as well as warehouses.
Finally, land is real estate or property, minus buildings and equipment that is designated by fixed spatial boundaries. Land ownership may offer the titleholder the right to natural resources on the land. Traditionally it is defined as a factor of production, along with capital and labor.
Importance of the real estate sector in the economy
According to the European Real Estate Forum, the real estate sector has a higher economic importance than several other sectors. Indeed, it makes a major contribution to GDP in the European Union and provides prosperity and jobs. The real estate sector contributed approximately 7% to the USA economy and 12% to the European economy.
Real estate represents the majority of the existing real capital and is particularly relevant too because of its additional function as provision for old age and protection against inflation.
The value of the world’s real estate reached US$281 trillion, the highest figure we’ve ever recorded. Residential real estate accounted for the largest share ($US220.2 trillion) of that huge figure.
Real estate is by far the most significant store of wealth, representing more than 3.5 times the total global GDP. For comparison, financial instruments like equities represent US$83,3 million, which is three times less than commercial real estate.
Source: Savills World Research
Why does the need for property valuation arise?
The need for property valuation arises in many decisions in real estate project like investing, managing, disinvesting and financing. Thereby, valuation is present throughout the life of real estate investment. It is not a unique need for real estate but common to any investment such as stock investment.
There are fundamental characteristics to be evaluated in the valuation process. Characteristics like the use of the asset (commercial, residential, etc.), the location, the antiquity (1st hand, 2nd hand), construction costs and surfaces.
What are the different types of value for a real estate asset?
According to the Royal Institution Of Chartered Surveyors standards (RICS) which offers qualifications and standards recognized in the real estate sector, a value is an estimated amount for which an asset or an obligation should be exchanged at the valuation date between a buyer willing to buy and a seller willing to sell, in a free transaction, after appropriate marketing, in which the parties have acted with sufficient information, prudence and without coercion. This specific definition is declined in several others values like equitable value, fair value or market value. For each value, different methods of valuation are used.
Which methods are used to appraise an asset?
The great diversity of real estate assets must be approached from different approaches in order to determine their value. The existence of comparable assets in the market, the type of use made of them, the cash flows that they may eventually generate, replacement costs or the state of development of the same opens up a wide range of valuation methodologies. In this way we can identify at least six different types of valuation methodologies applicable to the different types of real estate assets that we will classify into at least 14 large groups. The main axes of the valuation methodologies are: comparison, residual, capitalization and cash flows. It is important to know that each type of real estate asset has its preferred method of valuation. For example, the comparison method is mainly utilized for assets for own use (dwellings and premises mainly) and for rustic land. The concept for this method consists in comparing a property of known price and characteristics with the one we want to value. Regarding the discounted cash flow methodology, it consists in determining the market value of a property by estimating the cash flows generated by the property (mainly rents) during a determined period of time and the resale of the investment.
Reading the real estate market requires the development of an information tool. The study of the traditional approach has shown that the reliability of real estate valuation methods is intimately linked to the information available. Information is essential when it comes to asset valuation for each of the different methods (list of rents, the price per square meter etc.). The difficulty in the valuation process does not come from the methodology but from the availability of relevant information. To complete his/her analysis of the real estate deal, the expert can also consider the future instead of the past contained in historical data.
For example, the value of the real estate can be obtained by estimating the growth rate of future rents. Today, artificial intelligence (AI) can be used to develop new valuation models are based on machine learning (ML) algorithm.
How to invest in the real estate sector?
Real estate investment consists of acquiring a property not for the purpose of living in it, but as a savings investment to earn an income from it. It is considered as one of the most stable and profitable investments in the long term. For this reason, investing in real estate is not a trivial gesture: you must know enough about the state of the market and the different investment possibilities not to put your money in risky options.
Several reasons can push you to proceed to a real estate investment. First, it is a great way to build up a tangible and lasting estate. Secondly, investing in real estate enables to finance a property with the aim of making it your main residence later on, by means of rental investment. And lastly, it improves your purchasing power by collecting additional income.
There are several possibilities when it comes to investing in real estate. Among them, there is direct investment which means creating a property portfolio. Indeed, any private individual can firstly invest and acquire a property as a primary residence and later on acquire other properties for the purpose of making a rental investment in order to collect the rents. In the other hand, other types of investment such as indirect investment. The concept of indirect investment consists in buying shares of property company or Real Estate Investment Trust’s (REITS) which aims at the constitution, management and exploitation of a real estate portfolio. Therefore, this company manages real estate assets on behalf of its shareholders. Lastly, a real estate investment company (SCPI) is a collective investment vehicle which is very similar to REITS. Except that in return for this investment, investors receive social shares. Unlike company shares, these units are not listed on the stock exchange. These savings vehicles offer a very good market return in return for a moderate risk.
My experience as a portfolio manager in a central bank
During my studies at ESSEC Business School, I had the chance to attend the SimTrade course. This course helped me to secure an internship as a risk manager at Bank Al-Maghrib (the central bank of Morocco) as I was asked during my interviews technical questions about financial markets that were covered during the course.
In this article, Youssef LOURAOUI (ESSEC Business School, Global Bachelor of Business Administration, 2020) shares his experience as an intern in the risk management department (middle office) at the Central Bank of Morocco (Bank Al-Maghrib) in 2020.
Bank Al-Maghrib
The central bank of Morocco was founded in 1959 after Morocco proclaimed its independence. It is a 100% state-owned bank that regulates the markets and the economy by implementing monetary and economic policies to ensure the welfare in terms of the parity of prices and the control of inflation. Inflation is a major economic indicator that possesses strategic importance and is part of the major focus for the central bank.
I describe below my experience at Bank Al-Maghrib.
My internship at Bank Al-Maghrib
I was affected at the middle office department, which is in charge of measuring risk exposures and profits and losses on the positions taken by the bank on an investment portfolio of 27,4 billion euros of foreign reserve. One of the key risk exposure metrics is volatility measured by the standard deviation statistically defined as the dispersion of a random variable (asset prices or returns in my case) from its expected value. The standard deviation indicates how much the current return is deviating from its expected historical returns. It is one of the most widely used metrics for investors when analyzing the risk of an investment. Among other key exposures metric, there is what it is called the VaR (Value at Risk) at 99% and a 95% confidence level for 1-day and 30-day positions. In other words, the VaR is a metric used to compute how much loss can the portfolio incur at a % degree of confidence for a given time horizon.
Every day, the Head of the Middle Office organizes a general meeting where he talks about global debriefing of the main financial news that happened overnight and debriefing the middle office desk for the “watch out” assets that could have a potential investment opportunity. Accordingly, the team has also the task of staying in line with the investment decision that characterizes the organization, as it does not operate as an investment banking corporation nor a hedge fund in the risk and leverage used. As the central bank has the special task of keeping safe the national reserve and searching for a good mix to invest in a low risk asset (AAA bonds from European countries coupled with American treasury bonds).
My task aimed to get a hand on the investment mechanism in the middle office of the bank. The investment mechanism consists of the division of the overall portfolio into three main tranches where each one has its characteristics. The first tranche (called also the security tranche) is calculated by analyzing the national need for a currency that needs to be kept safe to establish welfare on the exchange market (based mainly on short term position in low-risk profile asset (Liquid and high rated bonds). The second tranche is based on buy and hold and a market strategy. The first one consists of taking a long position on more risky assets than the first tranche till maturity, there is no selling during the lifetime of the asset (riskier bonds and gold). The second strategy is based on buying and selling liquid assets for an expectation of yielding higher returns.
During my time at the middle office desk, I’ve managed to develop a tool to represent the investment mechanism used for asset allocation. The tool, developed in an Excel spreadsheet, is an intuitive and simplified model that enables the understanding of the investment mechanism. Indeed, it is capable of continuously refreshing the data by importing the most recent quotations (from data providers like Bloomberg or Reuters as the two main financial data providers) to allow for an update of the different exposures and thus allow to respect the proportions of portfolio allocations. It has also a dynamic risk management tool to effectively compute draw-downs (a peak-to-trough decline during a specific period for an investment) and stressed conditions, as I experienced how the markets reacted to the novel Covid-19 pandemic with one of the most historic market movements in a long time.
Some of the key learning outcomes:
The introduction to data analysis by manipulating large datasets
Portfolio optimization based on the Markowitz efficient frontier
Dynamic portfolio allocation based on the fundamentals of the modern portfolio theory
The theory of efficient markets to understand how the markets evolve and move in a different direction as a reaction to events.
Front office, middle office and back office
My internship was also a good opportunity to discover the different departments of the bank: the front office, the middle office, and the back office:
The front office directly deals with the individual or corporate clients of the bank. Salespeople propose adequate products and solutions to the clients (they are in front of them!). Traders intervene in the financial markets on behalf of the clients or for the bank itself (proprietary trading). To answer the demand of clients, financial engineers and quants also develop new products and the associated mathematical models to price them. One of the main trends that are emerging in the front office is the automatization with the help of AI and algorithmic trading that is taken some room in the trading desks. At this time the bank didn’t implement any technology based on high-frequency trading, but it is taking the financial industry by surprise and it goes a long way back, nearly decades ago since the first usage of algorithmic trading.
The middle office situated between the front office and the back office (somewhere in the middle!) deals with the risk management of the bank. Risk managers control the traders’ positions (respect of constraints such as value-at-risk limits and stress tests) and compute the profits and losses (P&L) on traders’ positions daily.
The back-office deals with the conformity and the security check of every trade to ensure a proper settlement.
Note that the frontiers between the front, middle, and back-office may change from one bank to another. And last but not the least, the IT people are also supporting all three departments to make the whole system work. In other words, they are in charge of the maintenance of the technical infrastructure that the bank uses daily to operate fluently, as all the departments are dependent on internal software to intermediate and operate in the market or to communicate between each department of the bank or with another organization. The IT desk has great importance in offering a flawless experience for the employees when using the internal electronic infrastructure. There is the backbone of the bank skeleton.
All in all, the SimTrade module served me well as I managed to gain quickly the necessary knowledge and bridge the gap that I had to be in the best position to achieve the missions I’ve been affected. I especially used the content of Period 2 of the SimTrade certificate, which deals with market information. The concepts of trading and investing were also obviously useful for the development of my portfolio management tools.
Source: BIL 
