Discovering Private Equity: Behind the Scenes of Fund Strategies

Posted on February 10, 2024 by Lilian BALLOIS

Discovering Private Equity: Behind the Scenes of Fund Strategies

In this article, Lilian BALLOIS (ESSEC Business School, Bachelor in Business Administration (BBA), 2019-2023) explains about Private Equity fund strategies.

Reminder: What is Private Equity?

Private Equity entails investors directing capital into privately held enterprises that are not publicly traded on stock exchanges. Private Equity firms manage investors’ funds, which are utilized to secure ownership stakes in these companies, fostering their growth, innovation, or resolution of financial challenges. In exchange, investors anticipate yielding profits upon exiting the investment, typically within a span of 5 to 8 years.

Private equity thus offers a way for companies to receive strategic financing and for investors to earn returns on their investments, in an alternative way to traditional investments.

But how do you know which funds to invest in?

Decoding Success: How to choose the perfect Private Equity Investment Strategy

Aligning Investments with the Company Lifecycle

Private equity investments are aligned with various stages of a company’s lifecycle (Cf. chart below). In the early stages, venture capital provides funding for startups to assist in innovation and growth. As companies mature, growth equity offers expansion capital to fuel further development and market penetration. In the maturity stage, private equity often engages in leveraged buyouts (LBOs) to acquire established companies, implementing operational enhancements and strategic changes to boost efficiency and profitability. Finally, distressed capital may be deployed to support struggling businesses, offering resources and expertise to facilitate turnaround efforts.

Company life cycle.

Source: The author

Venture Capital: at the Introduction Phase

Venture Capital is a private equity and financing approach focused on supporting early-stage startups and high-potential businesses. Investors, including affluent individuals, investment banks, and angel investors, contribute funds to fuel the growth of these companies. Apart from monetary contributions, investors may also offer technical or managerial expertise. An illustrative example of Venture Capital at work is Uber, which in 2010 received its initial major funding of $1.3 million led by First Round Capital. Shortly after, in early 2011, it raised $11 million in a Series A funding round led by Benchmark. With these funds, Uber expanded its operations to various cities in the United States and abroad, including Paris, where the concept originated. By December of 2011, Uber secured $37 million in Series B financing from Menlo Ventures, Jeff Bezos, and Goldman Sachs, further fuelling its global expansion and technological advancements.

Growth Equity: at the Growth Phase

Growth equity is a less speculative form of financing, aids companies in their expansion phase. Unlike venture capital, growth equity is directed at already profitable and mature businesses with minimal debt. This type of funding, commonly involving minority ownership through preferred shares, facilitates strategic business growth, such as entering new markets or acquiring other companies, with a balanced risk-return profile. Adyen, a prime example, initially self-funded, but experienced exponential growth after securing $250M in Series B funding led by General Atlantic in 2014. This injection of capital significantly accelerated Adyen’s trajectory, leading to its successful IPO on Euronext in June 2018, with a market capitalization of €7.1B. Adyen’s subsequent revenue surge to €721.7 million in 2022 further underscores the potency of growth equity in fuelling sustained business growth.

Leveraged Buyouts & Management Buyouts: during the Maturity Phase

Leveraged Buyouts

Leveraged Buyouts (LBOs) funds combine investment funds with borrowed capital to acquire companies, aiming to enhance profitability. By leveraging creditors’ and investors’ money, the fund manager has more capital to purchase larger companies, either outright or by securing a majority stake for strategic control. The term “leveraged buyout” reflects the use of borrowed funds to afford larger acquisitions, potentially resulting in substantial returns if the strategies pay off. An instance of an LBO is Elon Musk’s acquisition of Twitter, Inc. Despite initial resistance from Twitter’s board, who employed a “poison pill” strategy to deter hostile takeovers, Musk’s persistent pursuit led to the acceptance of his buyout offer of $44 billion on April 25.

Management Buyouts

Management Buyouts (MBOs) are transactions in which the existing management team of a company acquires a significant ownership stake or complete ownership of a business. In a MBO, the current managers collaborate with a private equity firm to purchase the business from its existing owners. This transaction is common when a company’s management team believes they can run the business more effectively or exploit growth opportunities better than the current ownership structure allows. The MBO of Dell Inc. in 2013 stands out as one of the largest and most significant in history. With a valuation reaching approximately $24.9 billion. The company’s founder, Michael Dell, partnered with Silver Lake Partners to reclaim control of the company he had founded. The move allowed Dell to implement long-term strategies and make pivotal decisions without the immediate pressures of quarterly earnings reports, facilitating a more nimble and adaptable approach to the rapidly evolving tech landscape.

Distressed Capital: at the Decline Phase

Distressed capital consists in lending to companies facing financial crises and to take control of businesses during bankruptcy or restructuring processes. The strategy involves purchasing distressed companies at a lower price, turn them around, and eventually sell them. Distressed capital carries inherent risk due to investing in financially challenged companies. For example, in May 2020, Hertz Global Holdings, filed for Chapter 11 bankruptcy due to the impact of the COVID-19 pandemic on its business, which saw a significant decline in travel demand. During its bankruptcy proceedings, Hertz secured funding from distressed debt investors to support their operations and restructuring efforts. This financing came from a consortium of lenders and institutional investors, providing Hertz with the liquidity needed to continue operations, pay essential expenses, and navigate the bankruptcy process.

Timeless Investing: Optimizing Portfolios through Vintage Year Diversity

What are “Vintage Years”?

“Vintage years” refer to specific time periods during which a fund was raised or initiated. Each vintage year represents a cohort of funds that were raised and deployed within a similar timeframe. These vintage years are often used by investors and analysts to track the performance of funds over time, as funds raised in the same vintage year may encounter similar market conditions and economic environments, which can affect their overall performance and returns.

Mitigating market cycles

Private equity has demonstrated superior performance compared to public equity throughout market cycles. However, returns are subject to fluctuations based on the phase of the business cycle. For instance, if a fund initiates investments during a downturn, it is likely to encounter a broader array of distressed and undervalued assets, with the potential for profitable exits when the market peaks. Conversely, a fund entering the market at its highpoint may face challenges as assets are likely to be expensive and may risk undervaluation upon entering public markets during the exit phase.

Given the unpredictability of market timing, diversification across vintages serves as a strategic approach to dampen this cyclical risk. This approach aims to create a more stable return profile that mirrors the overall characteristics of the asset class.

Establishing a self-sustaining portfolio

Company life cycle.
Self-funding Portfolio
Source: The author

As written above, funds can diversify through various vintages. This strategy allows to generate returns from an earlier vintage, which are reinvested as commitments for a subsequent vintage. In doing so, a self-funding portfolio is cultivated, steadily appreciating in value over time.

Exploring Sectors of Private Equity Investments

In 2023, technology continued to lead private equity investments, capturing a significant 31% share of total investments. Cloud-related ventures, especially enterprise Software as a Service (SaaS), remained appealing, fueled by expectations of sustained growth. Additionally, the rapid adoption of machine learning, driven by global enterprises integrating generative Artificial Intelligence (GenAI) into operations, signaled a broader trend towards innovation.

Consumer-focused investments, accounting for 14% of total investments, saw a focus on low-risk ventures in the food and agribusiness sector. Sustainable farming, combined agriculture, and timber ventures stood out, driven by increasing emphasis on environmental sustainability and responsible resource management.

In addition, financial services (11%) and health sectors (9%) saw significant private equity activity. In finance, investments spanned various subsectors, reflecting a pursuit of diverse opportunities. Meanwhile, health sector niches like enterprise imaging solutions and voice-based diagnostics attracted attention, driven by innovation in medical technology platforms, highlighting the sector’s transformative potential.

Company life cycle.
Sectoral Share in Private Equity Deal Values
Source: Moonfare

The private equity landscape in 2023 featured a diverse range of investment opportunities, with technology dominating while consumer, financial services, and health sectors also drew significant interest, providing distinct pathways for growth and value generation.

Why should I be interested in this post?

This post offers a comprehensive overview of private equity investing. It defines private equity and explores various investment strategies such as venture capital, growth equity, leveraged buyouts, management buyouts, and distressed capital, providing practical insights into their roles at different stages of a company’s lifecycle. Additionally, the post discusses the concept of vintage years and their significance in tracking fund performance over time, highlighting the importance of portfolio diversification and risk management.

Useful resources

Academic References

Martin, J. and R. Manac (2022) Varieties of funds and performance: the case of private equity, The European Journal of Finance, 28(18) 1819–1866.

EVCA (2007) Guide on Private Equity and Venture Capital for Entrepreneurs

Caselli, S. and M. Zava (2022) Private Equity and Venture Capital Markets in Europe

Specialized Press

Investment Strategies in private equity

Barber F. and M. Goold (2023) The strategic secret of private equity Harvard Business Review

Private Equity Pulse: key takeaways from Q4 2023

Financial Times Private Equity

Wall Street Journal Private Equity

About the author

The article was written in February 2024 by Lilian BALLOIS (ESSEC Business School, Bachelor in Business Administration (BBA), 2019-2023).

Posted in Contributors, Financial techniques | Tagged Private equity | 1 Comment

My professional experience as a property manager assistant at Urban Premium

Posted on February 10, 2024 by Lilian BALLOIS

My professional experience as a property manager assistant at Urban Premium

In this article, Lilian BALLOIS (ESSEC Business School, Bachelor in Business Administration Program, 2019-2023) shares his professional experience as a property manager assistant at Urban Premium.

About the company

Founded in 2010, Urban Premium specializes in the structuring and management of real estate investment trusts (REITs). The company specializes in the management of residential and commercial SCPIs (Société Civile de Placement Immobilier). A SCPI is a collective investment undertaking in the form of a company that is not listed on the stock exchange. SCPIs collect money from many investors with the sole aim of acquiring and managing a property portfolio for rental. Urban Premium specializes in inner-city real estate investment, incorporating attractive tax incentives like “Pinel/Denormandie”, “Malraux” and “Déficit Foncier”.

The Pinel and Denormandie instruments offer tax reductions for the construction or renovation of real estate in specific areas of France, based on the duration of the lease.

The Malraux Law promotes investment in high-quality real estate, often in city centres and protected areas, offering an income tax reduction.

The Déficit Foncier allows for reducing tax pressure by generating a deficit through investments in properties requiring renovations, deductible from rental income.

Logo of Urban Premium.

Source: Urban Premium

As a property manager assistant, I was able to work alongside the front office managers. It was the central unit within the company, and it was responsible for implementing the investment strategy in line with tax incentives (Pinel/Denormandie, Malraux, and Déficit foncier). The front office was made up of one Managing Director, 5 managers and me.

In addition to these responsibilities, our department played a crucial role in managing funds and making strategic decisions. This involved overseeing the allocation of resources across various investment channels, ensuring optimal utilization of available funds while adhering to risk management protocols. Furthermore, our team engaged in market research and trend analysis to identify opportunities.

My internship

I had a 6-month internship at Urban Premium as an assistant property manager.

My missions

During my 6-month internship from September 2022 to February 2023, I engaged with multiple investment opportunities and projects. I took on the responsibility of analysing and crafting pitch-books for weekly meetings with managers when investment opportunity booklets were received. In addition to this, I had to monitor the accounting sheets of the real estate funds, analyzing, and providing insightful comments on their performance. While also overseeing fundraising to a lesser extent, my internship enabled me to understand the complexities of regulatory compliance concerning tax incentives for real estate finance and portfolio management within my company.

Required skills and knowledge

To be able to work in a real estate investment fund, it is necessary to have certain key skills:

Financial analysis to assess the profitability and viability of real estate investments.
A certain degree in accounting knowledge to understand and manage financial sheets. Particularly, you need a good knowledge of property valuation and lease accounting.
The ability to implement and analyse benchmarks to evaluate investment performance relative to the market.
Some background knowledge of the mechanisms of real estate markets and investment strategies.
Excellent communication skills to collaborate effectively with team members, partners, and investors.
Mastery of IT Tools, notably Excel.
Especially for the fund in which I was employed, knowing the principles of the different tax systems (Pinel, Malraux and Déficit Foncier).

What I learned

During my internship at Urban Premium, I learned new concepts and solidified the knowledge I already had. The hands-on experience provided through my internship gave me understanding of the management of real estate investment portfolios. Other important aspects of my internship were analyzing and contributing to the assessment of investment opportunities, navigating the complexities of project financing, and honing my skills in financial analysis.

Financial concepts related my internship

(Real estate) Financial analysis

Real estate financial analysis is the process of evaluating the financial aspects of property investments. It involves a comprehensive examination of various financial metrics and considerations to determine the profitability and feasibility of a real estate venture. This analysis encompasses factors such as property values, rental income, operating expenses, financing costs, and potential returns on investment.

Investment opportunity evaluation

Evaluation of an investment opportunity is the process of assessing the viability and potential returns of a specific investment. It involves an analysis of financial data, market trends, risks, and potential rewards. This evaluation aims to provide decision-makers with an understanding of the investment’s feasibility and align it with the overall goals and strategies of the investor or organization.

Portfolio Management

Portfolio management is the strategic and systematic process of overseeing and optimizing a collection of financial assets (real estate in this case), known as a portfolio, to achieve specific investment goals.

Why should I be interested in this post?

This post provides insights into the professional experience of working as a property manager assistant at a real estate investment trust (REITs) and managing residential and commercial SCPIs. It delves into real estate finance, including French tax incentives such as “Pinel/Denormandie”, “Malraux”, and “Déficit Foncier”. Additionally, the post outlines the responsibilities and skills required for working REITs, making it a must-read for anyone interested in pursuing a career in this field or seeking to enhance their knowledge.

Useful resources

Urban Premium

About the author

The article was written in February 2024 by Lilian BALLOIS (ESSEC Business School, Bachelor in Business Administration Program, 2019-2023).

Posted in Contributors, Professional experiences | Tagged Internship, Real estate, Urban Premium | Leave a comment

Extreme correlation

Posted on January 31, 2024 by Shengyu ZHENG

Extreme correlation

In this article, Shengyu ZHENG (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2024) explains the concept of extreme correlation.

Background

In financial risk management, there is a concept that is often overlooked, the extreme correlation also known as tail dependence. Tail dependence reveals how extreme events in two variables are linked. The oversight could leave portfolios exposed to amplified risks during market turbulence. In this post, we will get to see the definition and implications of this concept.

Linear correlation and copula

As presented in the post on copula, using linear correlation to model the dependence structure between random variables poses many limitations, and copula is a more generalized tool that allows to capture a fuller picture of the dependence structure.

Let’s recall the definition of copula. A copula, denoted typically as C∶[0,1]^d→[0,1] , is a multivariate distribution function whose marginals are uniformly distributed on the unit interval. The parameter d is the number of variables. For a set of random variables U₁, …, U_d with cumulative distribution functions F₁, …, F_d, the copula function C satisfies:

C(F₁(u₁),…,F_d(u_d)) = ℙ(U₁≤u₁,…,U_d≤u_d)

Here we introduce Student t-copula as an example, which will also be used as an illustration in the part of extreme correlation.

Tail dependence coefficient

The tail dependence coefficient captures the dependence level of a bivariate distribution at its tails. Let’s denote X and Y as two continuous random variables with continuous distribution F and G respectively. The (upper) tail dependence coefficient between X and Y is defined as:

with the limit of λ_U∈[0,1]

We can conclude that the tail dependence coefficient between two continuous random variables is a copula property, and it remains invariant with strict increasing transformations of the two random variables.

If λ_U∈(0,1], X and Y are considered asymptotically dependent in their (upper) tail. If λ_U=0, X and Y are considered asymptotically independent in their (upper) tail.

It is important to note that the independent of X and Y implies that λ_U=0, but the converse is not necessarily true. λ_U describes only the dependence level at the tails.

Examples of extreme correlation

Longin and Solnik (2001) and Gkillas and Longin (2019) employ the logistic model for the dependence function of the Gumbel copula (also called the Gumbel-Hougaard copula) for Fréchet margins, as follows:

This model contains the special cases of asymptotic independence and total dependence. It is parsimonious, as we only need one parameter to model the bivariate dependence structure of exceedances, i.e., the dependence parameter α with 0<α≤1. The correlation of exceedances ρ (also called extreme correlation) can be computed from the dependence parameter α of the logistic model as follows: ρ= 1-α^2. The special cases where α is equal to 1 and α converges towards 0 correspond to asymptotic independence, in which ρ is equal to 0, and total dependence, in which ρ is equal to 1, respectively (Tiago de Oliveira, 1973).

Useful resources

Academic resources

Gkillas K. and F. Longin (2018) Is Bitcoin the new digital Gold?, Working paper, ESSEC Business School.

Longin F. (2016) Extreme events in finance: a handbook of extreme value theory and its applications Wiley Editions.

Longin F. and B. Solnik (2001) Extreme Correlation of International Equity Markets, The Journal of Finance, 56, 649-676.

Zeevi A. and R. Mashal (2002) Beyond Correlation: Extreme Co-Movements between Financial Assets. Available at SSRN: https://ssrn.com/abstract=317122

Other resources

Extreme Events in Finance

Rieder H. E. (2014) Extreme Value Theory: A primer (slides).

About the author

The article was written in January 2024 by Shengyu ZHENG (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2024).

Posted in Contributors, Financial techniques | Tagged Copula, Extreme correlation, Tail dependence | Leave a comment

Optimal threshold selection for the peak-over-threshold approach of extreme value theory

Posted on January 27, 2024 by Shengyu ZHENG

Optimal threshold selection for the peak-over-threshold approach of extreme value theory

In this article, Shengyu ZHENG (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2024) explains the different methods used to select the threshold for the tails for the peak-over-threshold (POT) approach of extreme value theory (EVT).

The Peak-over-Threshold threshold approach

As we have seen in the previous post, Extreme Value Theory: the Block-Maxima approach and the Peak-Over-Threshold approach, there are two main paradigms to model the extreme behavior of a random variable (say asset returns in finance).

Amongst the two, the POT approach makes use of all data entries above a designated high threshold u. The threshold exceedances could be fitted into a generalized Pareto distribution (GPD):

Illustration of the POT approach

Threshold selection

Along with the POT approach arises the issue of threshold selection to define when the tail of the distribution starts. Estimating parameters for extreme value distributions becomes more stable when based on exceedances beyond an appropriate threshold. In the tail, the distribution may behave more consistently, leading to more reliable parameter estimates. This stability is crucial for making accurate predictions about extreme events.

An efficient method for the computation of an optimal threshold optimizes the trade-off between bias and inefficiency (Jansen and de Vries, 1991). As explained by Gkillas, Katsiampa, and Longin (2021): “on the one hand, a low threshold value induces an estimation bias, due to observations not belonging to the distribution tails considered as exceedances. On the other hand, a high threshold value leads to inefficient estimates with high standard errors, due to the reduced size of the estimation sample”.

Methods of optimal threshold selection

There are several methods to this issue. We explain in detail the methods based on the plot analysis and Monte Carlo simulations. We also briefly discuss other methods: bootstrapping techniques, bias reduction, etc.

Plot analysis

The most known plot for deriving the optimal threshold is the Hill plot.

The Hill estimator is commonly used to estimate the tail index of a generalised Pareto distribution and to estimate the optimal threshold. The tail index is a measure of the heaviness of the tails of a distribution. According to the statistical order X_(1:n), the Hill estimator for the tail index α=1/ξ is given by

with k being the highest statistical order.

The Hill plot is a graphical representation of the Hill estimators. In a Hill plot, the sample data is sorted in descending order, and the plot shows the logarithm of the sample quantiles against their corresponding order statistics. The slope of the line in the plot provides information about the tail behaviour of the distribution. What we are looking for here is the point from where the plot starts to stabilise.

Here we have an example of a Hill Plot of the logarithmic losses of the S&P 500 index.

There exist alternative plots based on the standard Hill plot, such as Alternative Hill plot, smoothed Hill plot. These two alternatives are available in the evmix R package.

Monte Carlo simulations

Jansen and de Vries (1991) proposed a Monte Carlo simulation method as follows. Imagine we would like to study the behaviour of a random variable at its extreme. First a family of specific models for this random variable is assumed (say the family of Student-t distributions). Based on the assumption of a specific distribution, Monte Carlo simulations are launched. For each simulation, the optimal number of return exceedances is computed, and this corresponds to the optimal threshold. The mean squared error (MSE) of simulated optimal numbers of return exceedances is then calculated. With this result, we can derive the optimal threshold for the observed series. As Theil (1971) explains, the MSE criterion takes into account of a double effect of bias and inefficiency. The MSE of S simulated observations of the estimator of a parameter X could be represented as:

Where X̄ represents the mean of S simulated observations. The first part on the right of the equation represents the bias, and the second part represents the inefficiency.

Other methods

There are many other methods based on various mechanisms, such as bootstrap and bias reduction. The tea package in R has in place multiple methods for estimating optimal thresholds from a series of scholars. In the R file that can be downloaded below, we can find various examples. For instance, the “danielsson” function from the package is based on a double bootstrap procedure for choosing the optimal sample fraction. (Danielsson et al., 2001). The “DK” function is a Bias-based procedure for choosing the optimal threshold. (Drees & Kaufmann, 1998)

Download R file to model extreme behavior of the index

You can find below an R file to calculate optimal threshold for the POT approach.

Useful resources

Academic resources

Danielsson, J. and Haan, L. and Peng, L. and Vries, C.G. (2001). Using a bootstrap method to choose the sample fraction in tail index estimation. Journal of Multivariate analysis, 2, 226-248.

Drees H. and E. Kaufmann (1998) Selecting the optimal sample fraction in univariate extreme value estimation. Stochastic Processes and their Applications, 75(2), 149–172.

Embrechts P., C. Klüppelberg and T. Mikosch (1997) Modelling Extremal Events for Insurance and Finance.

Embrechts P., R. Frey and A.J. McNeil (2022) Quantitative Risk Management, Princeton University Press.

Gumbel, E. J. (1958) Statistics of extremes New York: Columbia University Press.

Jansen D. and C. de Vries (1991) On the Frequency of Large Stock Returns: Putting Booms and Busts into Perspective, The Review of Economics and Statistics, 73, 18-24.

Longin F. (2016) Extreme events in finance: a handbook of extreme value theory and its applications Wiley Editions.

Longin F. and B. Solnik (2001) Extreme Correlation of International Equity Markets, The Journal of Finance, 56, 649-676.

Other resources

Extreme Events in Finance

Rieder H. E. (2014) Extreme Value Theory: A primer (slides).

About the author

The article was written in December 2023 by Shengyu ZHENG (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2024).

Posted in Contributors | 2 Comments

Securities and Exchange Board of India (SEBI)

Posted on January 26, 2024 by Nithisha CHALLA

Securities and Exchange Board of India (SEBI)

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole – Master in Management (MiM), 2021-2024) presents the Securities and Exchange Board of India (SEBI) which is empowering markets and ensuring integrity.

Introduction to SEBI

The Securities and Exchange Board of India (SEBI) serves as a regulator over the country’s financial markets and has a significant impact on how the economy of the country is shaped. Established in 1988, SEBI’s regulatory authority is responsible for a broad range of activities, including promoting open and honest market processes and protecting investors’ rights and interests. Protecting investors’ rights and interests is SEBI’s main goal. Market manipulation, insider trading, and other fraudulent activities are also in the scope of the regulatory authority. Investors receive reliable and timely information to help them make informed decisions thanks to SEBI’s strict standards and requirements for listed companies on Indian exchanges. This emphasis on openness and disclosure encourages investor trust, which increases market activity.

Logo of Securities and Exchange Board of India.
Source: SEBI.

Market development and innovation

The purpose of SEBI goes beyond simple regulation; it also actively promotes market expansion and innovation. SEBI has broadened the investment options available to both institutional and individual investors by introducing mutual funds, derivatives, and alternative investment vehicles. These cutting-edge financial products have expanded the investment landscape and drawn institutional investors from abroad, helping India integrate into the world financial markets.

A barrier to malpractices is SEBI’s effective market surveillance systems. To identify and stop market manipulation, SEBI uses an integrated surveillance system to track trade patterns, price changes, and unusual activity. Its ability to punish offenders shows how committed it is to upholding market integrity.

Global Integration and Investor Confidence

Market-friendly policies and international acclaim have been won by SEBI’s regulatory initiatives. Increased foreign direct investment, portfolio investment, and institutional investor activity in Indian markets are the results of this. India’s reputation as a desirable investment location is greatly influenced by SEBI’s role in establishing a favorable investment climate.

While SEBI’s achievements are noteworthy, it faces challenges such as the rapid pace of technological advancements, ensuring effective implementation of regulations, and maintaining a balance between innovation and investor protection. Moreover, as the financial markets evolve, SEBI’s role in regulating emerging areas like cryptocurrencies and digital assets becomes increasingly critical.

Conclusion

The distinctiveness of SEBI rests not only in its ability to regulate, but also in its innovative projects that go beyond conventional regulatory functions. The SEBI stands as a testament to India’s regulatory foresight, from empowering investors through cutting-edge processes to stimulating innovation while safeguarding investor protection. Its dedication to sustainability, education, and technology-driven surveillance distinguishes it as a regulatory pathfinder that keeps up with changes in the financial world.

Why should I be interested in this post?

For a Master in Management student like me, delving into SEBI’s operations provides a real-world context to the theories we study. Understanding SEBI’s unique initiatives, such as the Regulatory Sandbox (a framework that allows businesses, especially in the financial technology sector, to test innovative products, services, business models in a controlled environment) and its emphasis on sustainability, offers insights into modern regulatory challenges and innovative solutions. Exploring SEBI’s role in investor protection and market integrity enhances my grasp of ethical governance and responsible business practices. SEBI’s dynamic approach aligns with the multidisciplinary nature of my studies, allowing me to connect theoretical knowledge with practical implications in the financial world.

Useful resources

SEBI What’s new in SEBI?

About the author

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

Posted in Contributors, Financial techniques | 1 Comment

My professional experience as a credit analyst at Targobank

Posted on January 20, 2024 by Matthieu MENAGER

My professional experience as a credit analyst at Targobank

In this article, Matthieu MENAGER (ESSEC Business School, Bachelor in Business Administration (BBA), 2017-2021) shares his professional experience as credit analyst at Targobank (a subsidiary of the Crédit Mutuel group).

The Company

Targobank, a subsidiary of the Crédit Mutuel group, is a German bank operating mainly in the retail and corporate customer segments. Founded in 1926, it is one of the major players in Germany. With €2.6 billion in equity (8.6% of its total liabilities), Targobank AG generated €1.2 billion in income and interest in 2021.

Targobank has 7,000 employees in 2022.

The Crédit Mutuel Alliance Fédérale group is one of the largest and financially strongest banks in Europe (18 billion euros in interest and similar income in 2022), with a very good credit rating (S&P: A). It combines the advantages of a cooperative bank with strong local roots with those of an international bank, Crédit Industriel et Commercial.

Logo of the company.
Logo of Targobank
Source: Targobank.

What is really a credit analyst?

Credit analyst is an important position in the organization of a bank. It generally belongs to the back office (in my case I was in the front office). This department determines a company’s ability to repay one or more different types of loan (syndicated loan, current account overdraft, club deal, etc.) and the degree of risk for the bank. It carries out a financial, macroeconomic, microeconomic, CSR (Corporate Social Responsibility) and overall analysis of all the criteria that can have an impact on repayment capacity.

In addition to carrying out a complete analysis on established customers and prospects (potential new customers), the credit analyst must also ensure that the systems are properly maintained (internal rating commitments, updating the group’s status, etc.). This is a task that should not be neglected, as it allows all the other divisions to be informed about the situation of each agency.

What were my missions in the VIE ?

I arrived in June 2022 as a VIE (Volontariat International en Entreprise in French) for a period of 1 year and 6 months (I’ve extended by 4 months until April 2024). My objective at Targobank was initially, to look after the 42 existing customer files at our Frankfurt branch by carrying out each year either a simple annual review (simple review of our borrower’s group without any major decisions), a renewal (complete review and renewal of one or more lines that are due to expire at the time of the administrative deadline for the file), or a new application (complete review and new application(s) in addition to the review or renewal of other existing lines).

We offer companies every possible type of loan (traditional loans, facilities, leasing, factoring, SDM, or even guarantees). I also analyze certain prospects to determine whether they could become our customers. This analysis can have several objectives: either the customer is solid and profitable or belongs to a group with which we would like to have a future commercial relationship.

Finally, it is also my task to keep the various files on our internal systems up to date. I’m in constant contact with the Back Office to obtain the various documents needed to carry out internal tasks. These tasks may include filling in financial data, listing the various commitments, updating the company’s status, etc.

Required skills and knowledge

To be a credit analyst, you need several hard skills. You need to know how to use Excel and all the internal programs (we have a few days to familiarize ourselves with the systems), you need to be able to produce complete and concise analyses (financial, risk, data, etc.), you need to have a good grasp of accounting and be able to draw up financial forecasts. In my personal case (I work in Germany), I also need to be able to speak several languages (German, English and French).

Soft skills are just as important as hard skills. As a credit analyst, you have to turn in reports on time. You have to be meticulous about every detail so as not to mislead those who are going to validate the reports (commitments can amount to €20 million). Another skill is knowing how to collaborate and communicate with your team in order to provide the best file based on the various documents obtained. Finally, it is important to manage time and stress so as not to make mistakes when sending the report to the committee.

What I have learnt

During my almost two years in banking, I was able to broaden my knowledge of the world of finance. I worked in many different sectors and was able to get familiar with several other finance-related jobs (leasing, back office, etc.). My analysis of different financial situations has only improved and I’m now very comfortable with technical terms and their repercussions on a company. I can quickly form an initial impression of a group by carrying out a simple financial and market analysis. I’m also increasingly careful in my research to avoid being misled by a group’s appearance (some groups may claim to be doing well but are actually in decline).

My communication (email exchanges, Skype, Meeting Calls) has also improved. I try to give clear, concise answers so that I don’t get bogged down in a flood of emails and so that my interlocutor and I waste as little time as possible.

I’ve also acquired knowledge of the different markets (trends, clients, best manufacturers, etc.) in which I’ve worked (construction, pharmaceuticals, automotive, etc.). This is a quality that could be very useful to me in any field in which I might later wish to work.

Financial concepts related my internship

Group Annual Report

A group’s annual report is essential to its analysis. It must or may be published depending on a number of conditions and the surrounding standards (IFRS or HGB in Germany). The annual report provides a detailed picture of the group’s profitability (income statement), financial strength (balance sheet) and liquidity (cash flow statement). Annual reports also include a market analysis and financial forecasts (PLAN and FORECAST).

Environmental Social Governance (ESG)

Environmental Social Governance (ESG) is playing an increasingly important role in finance. For some time now, I have had to carry out an internal analysis of these 3 non-financial factors for each group and assign a rating, which can have an impact on the increase or decrease in financial interest on each commitment. The group must pay attention to its carbon footprint, diversity within the group, and the health and well-being of its employees.

Covenant

A covenant is a clause in a contract that allows the loan to be repaid if targets are not met. Covenants often relate to financial aspects and require the Group to send a Compliance Certificate, which verifies whether or not the objectives have been met and which is to be delivered on the date specified in the contract. Examples of covenants I have dealt with are: leverage >3.0x; Maintain equity >= 30%; or Gearing <100%.

Why should I be interested in this post?

If you’re interested in the world of finance, the position of credit analyst will undoubtedly be very popular. You’ll be exposed to several areas of finance, you’ll acquire a lot of knowledge and skills, and you’ll be responsible for monitoring several files. It’s a job that requires a lot of qualities and rigor, but also a lot of experience and knowledge. You’ll be doing financial analysis, macroeconomic analysis, microeconomic analysis, ratings, reports, simplified excel sheets and lots of other tasks.

I’d highly recommend the job and I’d advise starting out in a banking institution. It will be easier to get into the swing of things in a bank because you have less risk-averse credits. You could then consider joining an investment fund, where the decisions taken will have greater importance.

Useful resources

Targobank

Crédit Mutuel

About the author

The article was written in January 2024 by Matthieu MENAGER (ESSEC Business School, Bachelor in Business Administration (BBA), 2017-2021).

Posted in Contributors, Professional experiences | Leave a comment

Trading strategies based on market profiles and volume profiles

Posted on December 27, 2023 by Michel VERHASSELT

Trading strategies based on market profiles and volume profiles

In this third article on a series on market profiles, Michel Henry VERHASSELT (ESSEC Business School – Master in Finance, 2023-2025) explains trading strategies based on market profiles and volume profiles.

Introduction

We have defined and seen illustrations of all the key concepts related to both market profiles and volume profiles. Let us now look at their practical applications and trading strategies that may be applied.

These techniques apply to both market profiles and volume profiles.

Mean reversion

A mean reversion strategy is a trading approach based on the idea that prices tend to revert to their historical average or mean over time. Traders employing this strategy look for opportunities to enter trades when prices deviate significantly from their historical average, anticipating a return to the mean.

Market profiles naturally fit this kind of strategy, as their whole point is to show where participants have deemed the price to be fair. For example, a trader could consider that when the price is trading below a high-volume area, that area will act as a magnet to pull the price up. The prices in that region were indeed considered fairer, and the current low price would be an anomaly to be corrected by market participants. Therefore, the trader would buy at the current price and sell around the POC or at least within the value area.

Resistance and support

Conversely, a different interpretation within the same framework involves viewing these highly-traded areas as potential resistance or support zones. Support is a crucial level preventing an asset from further decline, often due to an upsurge in buying interest. In contrast, resistance is a pivotal level inhibiting an asset from rising higher, typically caused by intensified selling activity.

For a trader emphasizing resistance and support concepts, consider a rising price nearing a heavily traded zone encountering resistance, similar to reaching a ceiling. The outcome may lead to either a breakout to new highs or a reversal downward. In this context, the value area is not seen as a magnetic force drawing prices toward fair value; instead, it functions as a testing ground. The result hinges on whether the attempt to breach resistance is rejected, leading to a lower price, or successful, resulting in an upward move past this pivotal point. This dynamic interaction adds layers of complexity to mean reversion and support/resistance strategies within the realm of market profiles.

Entries and exits

More generally, traders employ various tools to make well-informed decisions about when to enter or exit market positions. One such powerful tool is the market profile. Even if a trader’s primary strategy relies on other triggers to look at a trade, say for example macro events, they can still leverage market profiles. These profiles help determine optimal entry or exit points, considering factors like obtaining liquidity with minimal market impact and identifying levels for stop losses and target profits based on perceived resistance and support.

Breakouts

As mentioned above, breakout trading is a strategy employed in financial markets where traders capitalize on significant price movements beyond established levels of support or resistance. In a breakout, the price surpasses a predefined range or pattern, triggering potential buying or selling signals. Traders often interpret breakouts as indicators of strong momentum, with the expectation that the price will continue moving in the breakout direction. The aim of breakout trading is to enter positions early in a new trend and ride the momentum for profitable gains.

Market profile can help identify breakout opportunities. For example, when a market exhibits confined trading within a narrow range and the profile reveals an accumulation of TPOs (Time Price Opportunities) near the boundaries of this range, a breakout surpassing these levels could indicate a potential trading opportunity.

False breakout strategy

The false breakout trading strategy relies on discerning instances where the price briefly moves beyond a trading range but subsequently retraces, indicating potential weaknesses in the current trend. In a false bullish breakout, signaling buyers’ weakness, traders might opt for short positions. Conversely, in retraced bearish breakouts, suggesting sellers’ uncertainty, opportunities for long positions may emerge. The effectiveness of this strategy lies in recognizing imbalances in supply and demand, a task facilitated by market profiles.

Market profiles offer a nuanced visual representation of price movements over time, highlighting areas of significant trading activity and the distribution of volume at different price levels. This information aids traders in identifying potential entry and exit points more precisely. By integrating market profiles into the false breakout strategy, traders gain insights into the dynamics of supply and demand within specific price ranges. This, in turn, enhances their ability to navigate market sentiment shifts and make informed decisions, contributing to the overall effectiveness of the false breakout trading strategy.

Single prints

The Market Profile Single Print strategy is a dynamic approach leveraging the unique concept of single prints within the Market Profile chart to identify potential breakout opportunities.

The strategy’s foundation lies in identifying single prints—instances where a price level remains untouched throughout the trading session, creating a gap in the Market Profile chart. Price can often revisit these areas to test these inefficiencies. These single prints therefore act as crucial markers, indicating potential areas of support or resistance. The significance of this lies in the ability to pinpoint breakout levels: a break above a single print suggests a bullish breakout, while a break below indicates a bearish breakout.

Crucially, market profiles assist in managing risk effectively by providing a visual representation of potential areas of support or resistance. Continual monitoring of the trade is emphasized, with adjustments made based on evolving market conditions. Trailing stop-loss orders are recommended to protect profits as the trade progresses favorably.

Useful resources

Steidlmayer P.J. and S.B. Hawkins (2003) Steidlmayer on Markets: Trading with Market Profile, John Wiley & Sons, Second Edition;

Steidlmayer P.J. and K. Koy (1986) Markets and Market Logic: Trading and Investing with a Sound Understanding and Approach, Porcupine Press.

About the author

The article was written in December 2023 by Michel Henry VERHASSELT (ESSEC Business School – Master in Finance, 2023-2025).

Posted in Contributors, Financial techniques | Tagged Trading | 2 Comments

Difference between market profiles and volume profiles

Posted on December 27, 2023 by Michel VERHASSELT

Difference between market profiles and volume profiles

In this second article on a series on market profiles, Michel Henry VERHASSELT (ESSEC Business School – Master in Finance, 2023-2025) explains the difference between market profiles and volume profiles.

Comparison

Both Market Profiles and Volume Profiles follow the auction theory of markets. According to this theory, price, time and volume are the three processes through which trading takes place.

More exactly:

Price advertises all opportunities. It lets the participants know that they can buy or sell an asset at a given price; it tells them what their opportunities are.
Time regulates all opportunities. Indeed, the opportunities given by price are limited in time; they are ephemeral and depend on the liquidity and volatility of an asset, in other words, how much time it takes for the price to change and the opportunity to vanish.
Volume measures the success or failure of advertised opportunities. Volume reflects the degree of market participation and validates the relevance of the opportunities presented. If an opportunity is advertised and becomes successful that means many participants agree on the fairness of this opportunity and a relatively significant amount of trading activity (volume) takes place at this price. A price that is not accepted over time is, in fact, rejected: the advertisement has failed.

All traders feel the pressure of time ticking away during a trade. When a trade stalls and doesn’t go as expected, it can create doubts, especially the longer it remains stagnant. The constant tick of the clock forces traders to ponder what might be going wrong. For instance, the late liquidation or short-covering rally in the pit session may be due to day traders running out of time rather than a lack of trading volume. In that sense, volume must take place within a given time range to validate the price advertisement.

Now when it comes to Volume Profiles, the chart shows the distribution of volume at different price levels, kind of like a visual map of where the action is happening. It uses a vertical histogram to make it easy for traders to see where the most trading activity is concentrated. This charting tool is all about giving traders a closer look at how much trading is going on at different price points over time.

Comparing Volume Profile to Market Profile, we find three key areas of differences: analytical focus, representation of data, and time and price dynamics.

Analytical Focus

Volume Profile: As the name suggests, Volume Profile places a paramount emphasis on volume, aiming to dissect the distribution of trading activity at different price levels over a designated timeframe.

Market Profile: In contrast, Market Profile combines time and price to create a graphical representation of market behavior. It divides price movements into designated time segments, typically 30-minute intervals, offering a nuanced perspective on the interplay between time and price.

Representation of Data

Volume Profile: The chart generated by Volume Profile provides a clear visualization of how volume is distributed across various price levels, offering insights into where significant buying or selling activity is concentrated.

Market Profile: While also representing volume, Market Profile charts use letters (TPOs) to signify the time spent at specific price levels, creating a distinctive visual pattern resembling a probability distribution.

Time and Price Dynamics

Volume Profile: Its primary concern is the interrelation of volume and price, with a focus on understanding the significance of different price levels based on the amount of trading activity.

Market Profile: Integrates time as a crucial factor, providing traders with a holistic view of market behavior over specific time intervals. This temporal dimension aids in identifying periods of heightened activity and potential areas of interest.

Let’s now look at Market and Volume profiles graphs.

Illustration

The figure below is taken from Steidlmayer’s main work: “Steidlmayer on Markets, Trading with Market Profile”. Each letter (A, B, C, D, etc.) corresponds to a single timeframe of 30 minutes. The condensed triangle-shaped figure shows where price has moved throughout the entire time period according to the trading activity.

Market profile.

Source: Steidlmayer’s book “Steidlmayer on Markets, Trading with Market Profile”.

If we rotate the figure, we get a bell-shaped pattern that looks like a normal distribution.

Market profile (reversed presentation).

Source: Steidlmayer’s book “Steidlmayer on Markets, Trading with Market Profile”.

The price distribution in a Market Profile tends to exhibit a bell-shaped pattern due to the nature of market dynamics and participant behavior. In a well-functioning and liquid market, prices are subject to constant fluctuations driven by the interplay of buying and selling activities and the bell-shaped distribution is simply a reflection of the statistical tendency of prices to cluster around a central point. The majority of trading activity should in theory occur around a fair or equilibrium price. As you move away from this central point, the occurrences of extreme price levels decrease, forming the characteristic bell curve. It is a visual representation of the market’s natural inclination to spend more time around prices that are deemed fair.

The figure below represents the volume profiles of the BTC/USDT pair on Binance’s futures market from December 8 until December 15, 2023.

Volume profile.

Source: exocharts.com.

We see the point of control (POC) that corresponds to the most traded price as a red line extending through the volume profile of each day. The value area is marked both by a whiter grey and dotted lines. The current price is a green line on the far left. On the far right, we find the volume profile for the whole timeframe displayed on the screen, with its own value area and point of control.

While the two profiles are very similar, however instead of looking at price and time as in a market profile, the volume profile focuses on volume. First, the volume profile is indifferent to when exactly a given trade took place within the same timeframe, here a day. Second, the volume profile uses true volume data rather than simply whether or not a trade took place. The length of each bar within a volume profile is directly proportionate to the volume of the trades at that price. In contrast, the market profile does not show the size of the trades but simply shows whether or not a price was traded during a 30-minute period, and then aggregates (or “collapses”) the data to form one profile, as we saw in the bell-shaped curve above.

Why should I be interested in this post?

Students of finance interested in financial markets and trading would be the target audience of this post. I believe this technique to be relatively obscure despite its long history. We rarely see asset charts displayed as histograms as an effort to understand market behavior and participant psychology. I believe it is fundamental to consider that the market is made up of human actors, that these actors have their biases on price and value, and in turn that these biases’ success is represented as a function of volume. Even if a student does not subscribe to this understanding of markets, it would broaden his/her perspective and allow him/her to understand trading more generally.

Useful resources

Steidlmayer P.J. and S.B. Hawkins (2003) Steidlmayer on Markets: Trading with Market Profile, John Wiley & Sons, Second Edition;

Steidlmayer P.J. and K. Koy (1986) Markets and Market Logic: Trading and Investing with a Sound Understanding and Approach, Porcupine Press.

TPO versus Volume Profiles

Trader Dale Volume Profile vs. Market Profile – What Is The Difference? YouTube video

About the author

The article was written in December 2023 by Michel Henry VERHASSELT (ESSEC Business School – Master in Finance, 2023-2025).

Posted in Contributors, Financial techniques | Tagged Trading | 2 Comments

Market profiles

Posted on December 27, 2023 by Michel VERHASSELT

Market profiles

In this first article on a series on market profiles, Michel Henry VERHASSELT (ESSEC Business School – Master in Finance, 2023-2025) explains the history behind this concept and defines its central themes.

Introduction

The concept of Market Profiles emerged as a response to the dynamic nature of financial markets, where prices are in constant flux due to the continuous flow of information. Peter Steidlmayer, a trader at the Chicago Board of Trade during the 1960s and 1970s, sought to develop a charting method that could capture the interplay between price and volume, reflecting the idea that, despite the constant price changes, there should be a fair value around which prices revolve at any given time.

In traditional charting methods like bar charts and candle charts, the emphasis is typically on plotting price against time. Steidlmayer, however, wanted to make volume immediately apparent on the chart. This emphasis on volume is crucial because it provides insights into the level of participation and conviction among market participants.

The development of Market Profile was influenced by various theories and disciplines. In particular, it drew inspiration from the concept of value investing articulated by Benjamin Graham and David Dodd, the statistical bell curve, and John Schultz’s work on minimum trend. By combining these influences, Steidlmayer aimed to create a charting technique that would not only reveal price movements but also offer a visual representation of the market’s perception of value.

Market Profile, as a charting technique, differs significantly from traditional methods. Instead of using standard bar charts with prices plotted against time, Market Profile organizes data in a way that reflects the distribution of prices at different levels. Each time period is represented by a separate column, with prices displayed in ascending order on the vertical axis. This organization provides a visual representation of how much time the market spent at different price levels, creating a histogram-like structure.

The resulting chart, with letters (A, B, C, D, etc.) representing Time Price Opportunities (TPO), helps traders identify key areas such as the Value Area (where the majority of trading activity occurred), the Point of Control (the most traded price level), and Single Prints (indicating areas of price discovery). These elements collectively contribute to a comprehensive understanding of market dynamics and help traders make more informed decisions.

Definitions

We define below the key terms to understand Market Profile: Volume, Value Area, and Point of Control.

Volume

Volume in the context of financial markets refers to the number of contracts or shares traded at during a specific time period. Volume is a crucial component in Market Profile analysis because it provides insights into the level of participation and conviction among market participants. High volume at a particular price level suggests a significant level of interest or agreement on the value of the asset at that point.

Volume helps us shape the Time Price Opportunities. A TPO represents a unit of time and price on a Market Profile chart. Each 30-minute period (or another specified time frame) is represented by a letter, forming a vertical histogram on the price axis. TPOs help visualize the distribution of trading activity at different price levels over time. By organizing price data into these time brackets, traders can identify patterns, trends, and areas of importance, contributing to a better understanding of market behavior.

Value Area

The Value Area represents the range of price levels that contain a specific percentage of the total traded volume (usually 70% of the day’s trading activity). Traders also use the Upper Value Area (where 15% of the volume is located above) and the Lower Value Area (where 15% of the volume is below), with the area in between considered the “fair value” zone. It helps traders identify the price levels that are deemed fair by the market. It provides insights into where the majority of trading activity occurred, offering potential support and resistance zones for future price movements.

Point of Control

Within the value area, we find the Point of Control. The Point of Control is the price level at which the most TPOs occurred during a specific time period. It is considered a point of balance and represents the price where the market found the most acceptance. It indicates the price level that had the most trading activity, suggesting a level of equilibrium where buyers and sellers found agreement. Traders often monitor the POC for potential shifts in market sentiment.

By understanding the interplay between these elements, traders can gain valuable insights into market dynamics, identify key support and resistance zones, and make more informed decisions in their trading strategies.

With this background and definitions, we can look further into the practice of market profiles and its closely related concept, volume profiles.

Why should I be interested in this post?

Useful resources

Steidlmayer P.J. and S.B. Hawkins (2003) Steidlmayer on Markets: Trading with Market Profile, John Wiley & Sons, Second Edition;

Steidlmayer P.J. and K. Koy (1986) Markets and Market Logic: Trading and Investing with a Sound Understanding and Approach, Porcupine Press.

Letian Wang (2020) Using Python for Market Profiles

About the author

The article was written in December 2023 by Michel Henry VERHASSELT (ESSEC Business School – Master in Finance, 2023-2025).

Posted in Contributors, Financial techniques | Tagged Trading | 2 Comments

Impact du contrôle de gestion sur l’entreprise

Posted on December 26, 2023 by Medine ACAR

Impact du contrôle de gestion sur l’entreprise

Dans cet article, Medine ACAR (ESSEC Business School, Programme Bachelor in Business Administration (BBA), 2020-2024) analyse l’impact du contrôle de gestion dans l’entreprise.

Introduction

Le contrôle de gestion est une fonction clé en entreprise, axée sur la performance et l’efficacité. Il implique la planification, la mesure et l’analyse des activités pour aligner les performances avec les objectifs stratégiques de l’entreprise. Ce processus inclut la budgétisation, la prévision financière, et l’analyse des écarts entre les résultats réels et les prévisions. Le contrôle de gestion aide également à identifier les opportunités d’amélioration et à mettre en œuvre des stratégies correctives pour optimiser les opérations et les coûts. Entre autres, le contrôle de gestion assure la santé et la viabilité des entreprises. Allons plus loin.

Amélioration de la Performance et de la Prise de Décision

Le contrôle de gestion, au cœur des stratégies d’entreprise, joue un rôle déterminant dans l’analyse et l’amélioration des performances financières. Il offre une perspective claire sur les forces et faiblesses de l’organisation, permettant ainsi une prise de décision plus stratégique et éclairée. Des études de cas dans divers secteurs, telles que celles menées sur des entreprises comme IBM ou General Electric, illustrent comment l’application rigoureuse du contrôle de gestion peut entraîner une transformation significative dans la performance et la gestion des ressources. Par exemple, l’implémentation par GE des pratiques « Six Sigma » et de gestion Lean sous la direction de Jack Welch a conduit à des améliorations substantielles de l’efficacité opérationnelle et de la réduction des coûts. (Etude de cas: General Electric’s Two-Decade Transformation Under the Leadership of Jack Welch).

Gestion des Risques et Assise de la Durabilité

Au-delà de la simple surveillance financière, le contrôle de gestion est essentiel pour la gestion des risques et la durabilité à long terme de l’entreprise. Il permet d’identifier les risques potentiels, tant financiers qu’opérationnels, et de mettre en place des stratégies pour les atténuer. Des recherches menées dans le domaine bancaire, par exemple, mettent en lumière l’importance de cette fonction pour prévenir les crises financières et assurer une stabilité continue.

L’étude “Management controls and crisis: evidence from the banking sector” menée par Pall Rikhardsson, Carsten Rohde, Leif Christensen, Catherine E. Batt en 2021, sur l’utilisation des contrôles de gestion lors de la crise financière de 2008 dans six banques a révélé que l’emploi à la fois de contrôles de gestion organiques et mécanistes était essentiel pour gérer le changement.

Ces contrôles jouent trois rôles principaux :

Guider et contrôler le comportement
Changer les perceptions internes et externes
Assurer la responsabilité.

Résumé

Le contrôle de gestion n’est pas seulement un outil de surveillance financière ; c’est un levier stratégique qui influence profondément la performance, la prise de décision, la gestion des risques et, en fin de compte, la durabilité de l’entreprise. Les études dans ce domaine confirment son rôle inestimable dans le succès et la pérennité des entreprises à travers le monde.

Autres articles sur le blog

▶ Jessica BAOUNON Enjeux de la pratique de la pleine conscience et de l’intelligence émotionnelle dans la fonction de contrôle de gestion

▶ Chloé POUZOL Contrôle de gestion chez Edgar suites

▶ Emma LAFARGUE Contrôle de gestion chez Chanel

Ressources utiles

Robert Obert et Marie-Pierre Mairesse (2008) “Le Contrôle de Gestion: Organisation et Mise en Œuvre”, Dunod.

Case Study: General Electric’s Two-Decade Transformation Under the Leadership of Jack Welch

6 sigma (2017) General Electric (GE) et Six Sigma

Henderson, K.M. and Evans, J.R. (2000) “Successful implementation of Six Sigma: benchmarking General Electric Company”, Benchmarking: An International Journal, 7(4): 260-282.

Karim Saïd and Soufiane Kherrazi (2021) Du contrôle de gestion à l’innovation dans le contrôle HBR France

Rikhardsson, P., Rohde, C., Christensen, L. et Batt, C.E. (2021) “Management controls and crisis: evidence from the banking sector” Accounting, Auditing & Accountability Journal, 34(4): 757-785.

A propos de l’auteure

L’article a été rédigé en décembre 2023 par Medine ACAR (ESSEC Business School, Programme Bachelor in Business Administration (BBA), 2020-2024).

Posted in Contributors, Financial techniques | Leave a comment

Volume-Weighted Average Price (VWAP)

Posted on December 26, 2023 by Raphael TRAEN

Volume-Weighted Average Price (VWAP)

In this article , Raphael TRAEN (ESSEC Business School, Global BBA, 2023-2024) explains about the Volume-Weighted Average Price (abbreviated as VWAP), a statistic used by traders to determine the average trading taking into account transaction volume.

Definition

The volume-weighted average price (VWAP) is a measurement that shows the average price of a security, adjusted for its volume. It is calculated during a specific trading session by taking the total dollar value of trading in the security (sum of the products of the price by the quantity of each trade during the trading session) and dividing it by the total volume of trades (sum of the quantities of each trade during the trading session). The formula for calculating VWAP is given by

Formula VWAP

Where N is the number of transactions during the trading session (trading day).

VWAP can also be computed for consecutive time intervals during the trading sessions.

Sometimes, the price is replaced by a “typical price” computed as the average of the minimal price, maximal price, and closing price observe over a time interval.

Typical price

Interpreting the VWAP indicator / Key takeaways

Volume-weighted average price (VWAP) is a popular technical indicator used by traders and investors to identify trends, support and resistance levels, and potential entry and exit points. It can also be used for example to assess the liquidity and market depth of a security. If the VWAP is closely clustered around the current price, it suggests that there is a lot of liquidity and that the market is well-balanced. If the VWAP is spread out over a wide range of prices, it suggests that the market is less liquid and that there is a higher risk of wide price swings.

Breakout above the VWAP line suggests a bullish trend

A breakout above VWAP suggests that the price has momentum and is moving upwards. This could be due to increased buying pressure from investors, indicating a shift in sentiment towards the security. Once the price breaks above VWAP, it can act as a support level, making it more difficult for the price to fall below that level.

This could be an opportunity to enter a long position, anticipating the price to continue rising.

Breakdown below the VWAP line suggests a bearish trend

If the price of a security breaks below the VWAP line, it may signal a potential bearish trend. This could be an opportunity to enter a short position, anticipating the price to continue falling.

VWAP line can act as support or resistance level

The VWAP line can also function as a support or resistance level, representing a price range where the price of the security may tend to bounce off.

VWAP to identify trends

If the VWAP line is trending upwards, it suggests an overall upward trend in the price of the security. This could indicate favorable conditions for long-term investments. Conversely, if the VWAP line is trending downwards, it suggests an overall downward trend in the price of the security. This could indicate caution for long-term investments.

Conclusion

It is important to note that VWAP is just one indicator, and it should not be used in isolation. It is always a good idea to consider other technical indicators, such as the moving average convergence divergence (MACD) and the relative strength index (RSI), before making any trading decisions.

Often, multiple interpretations are possible and because of this, it is important to use the VWAP in combination with other indicators.

As I said, a breakdown below the VWAP may suggest a bearish trend. But it can also be interpreted as the following: Stocks with prices below the VWAP are considered as undervalued and those with prices above it, overvalued.

So while some institutions may prefer to buy when the price of the security is below the VWAP or sell when it is above, VWAP is not the only factor to consider. In strong uptrends, the price may continue to move higher for many days without dropping below the VWAP at all. Therefore, waiting for the price to fall below the VWAP could mean a missed opportunity if prices are rising quickly.

Why should I be interested in this post?

This article will provide students interested in business and finance a comprehensive overview of VWAP and how it is used by traders and investors. By understanding this fundamental concept in technical analysis, students will gain a valuable tool for making informed investment decisions.

Useful resources

Academic articles

Menkhoff, L. (2010) The use of technical analysis by fund managers: International evidence, Journal of Banking & Finance 34(11): 2573-2586.

Kirkpatrick II, C. D., and J.R. Dahlquist (2010) Technical Analysis: The Complete Resource for Financial Market Technicians. FT press.

Videos

Humbled Trader VWAP Trading Strategy Crash Course (YouTube video)

MHFIN VWAP Explained For Beginners In Under 5 Minutes (YouTube video)

About the author

The article was written in December 2023 by Raphael TRAEN (ESSEC Business School, Global BBA, 2023-2024).

Posted in Contributors, Financial techniques | Tagged Trading | Leave a comment

Understanding Correlation in the Financial Landscape: How It Drives Portfolio Diversification

Posted on December 26, 2023 by Raphael TRAEN

Understanding Correlation in the Financial Landscape: How It Drives Portfolio Diversification

In this article, Raphael TRAEN (ESSEC Business School, Global BBA, 2023-2024) delves into the fascinating world of correlation and its profound impact on diversification strategies in the financial realm. Understanding correlation is crucial for crafting well-diversified investment portfolios that can effectively mitigate risk and enhance overall performance (the famous trade-off between risk and expected return).

Statistical correlation

Definition

Statistical correlation is a quantitative measure of the strength and direction of the linear relationship between two variables. It describes how two variables are related to each other and how one variable changes in response to the other (but remember that correlation is not causality!).

Mathematically (or more precisely statistically), correlation is defined by the following formula:

Correlation formula

where ρ_1,2 is the correlation coefficient between the two random variables (say X₁ and X₂), 𝜎_1,2 the covariance between the two random variables, and 𝜎₁ and 𝜎₂ are the standard deviation of each random variable.

Correlation is measured on a scale from -1 to +1, with -1 representing a perfect negative correlation, +1 representing a perfect positive correlation, and 0 representing no correlation.

Correlation vs Independence

Correlation and independence are two statistical measures that describe the relationship between two variables. As already mentioned, correlation quantifies the strength and direction of the relationship, ranging from perfect negative (one variable decreases as the other increases) to perfect positive (both variables increase or decrease together). Independence on the other hand indicates the absence of any consistent relationship between the variables.

If two random variables are independent, their correlation is equal to zero. But if the correlation between two random variables is equal to zero, it does not necessarily mean that they are independent. This can be illustrated with an example. Let us consider two random variables, X and Y, defined as follows: X is a random variable that takes discrete values from the set {-1, 0, 1} with equal probability (1/3) and Y is defined as Y = X².

E(X) = 0, as the expected value of X is (1 + 0 + (-1))/3 = 0
E(Y) = E(X²) = (1² + 0² + (-1)²)/3 = 2/3
E(XY) = (-1 * 1 + 0 * 0 + 1 * 1)/3 = 0

Cov(X, Y) = E(XY) – E(X)E(Y) = 0 – 0 * (2/3) = 0

As Corr(X, Y) is equal to Cov(X, Y) / (sqrt(Var(X)) * sqrt(Var(Y))), we find that Corr(X, Y) = 0.

Application in finance

We now consider a financial application : the construction of portfolios. We show that correlation is a key input when building portfolios.

If the concept of portfolios is completely new to you, I recommend first reading through the article by Youssef LOURAOUI about Portfolio.

Portfolio with two assets

In the world of investments, understanding the expected return and variance of a portfolio is crucial for informed decision-making. These two statistical measures provide valuable insights into the potential performance and risk of a collection of assets held together. In what follows, we first focus on a portfolio consisting of two assets.

Return and expected return of a portfolio

The return of a two-asset portfolio P is computed as

Return two assets

where w₁ and w₂ are the weights of the two assets in the portfolio and R₁ and R₂ are the returns of the two assets.

The expected return of the two-asset portfolio P is computed as

Expected return two assets

where w₁ and w₂ are the weights of the two assets in the portfolio and μ₁ and μ₂ are the expected returns of the two assets.

Risk of a portfolio

The standard deviation (squared root of the variance) of a two-asset portfolio is computed as

Standard deviation of the return of a two-asset portfolio

where w₁ and w₂ are the weights of the two assets in the portfolio, 𝜎₁ and 𝜎₂ are the standard deviations of the returns of the two assets, and 𝜎_1,2 and ρ_1,2 are the covariance and correlation coefficient between the two assets returns.

The first expression uses the covariance 𝜎_1,2 and the second expression the correlation ρ_1,2.

Impact of correlation on diversification (the case of two assets)

From the above formulas follows a very interesting theorem called the “Diversification effect” which says the following: with two assets, suppose the weights of both securities are positive. As long as the correlation coefficient is less than 1, the standard deviation of a portfolio of two securities is less than the weighted average of the standard deviation deviations of the individual securities. Investors can obtain the same level of expected return with lower risk.

The figures below illustrate the impact of the correlation between the two assets on portfolio diversification and the efficient portfolio frontier. For a given level of portfolio risk, the lower the correlation, the higher the expected return of the portfolio.

Impact of the correlation on portfolio diversification

You can download below an Excel file (from Prof. Longin’s course) that illustrates the impact of correlation on portfolio diversification.

Diversification effect (extension to several assets)

With many assets, suppose the weights of all securities are positive. As long as the correlations between pairs of securities are less than 1, the standard deviation of a portfolio of many assets is less than the weighted average of the standard deviations of the individual securities.

Why should I be interested in this post?

Understanding correlation is an essential skill for any investor seeking to build a well-diversified portfolio that can withstand market volatility and achieve long-term growth. By carefully analyzing correlation dynamics and incorporating correlation analysis into their investment strategies, investors can effectively manage risk exposure and build resilient portfolios that can weather market storms and emerge stronger on the other side.

Useful resources

Prof. Longin’s ESSEC Master in Management “Fundamentals of finance” course.

William Pouder’s ESSEC BBA “Finance” course.

About the author

The article was written in December 2023 by Raphael TRAEN (ESSEC Business School, Global BBA, 2023-2024).

Posted in Contributors, Financial techniques | Tagged Correlation | Leave a comment

Analysis of “The Madoff Affair” documentary

Posted on December 26, 2023 by Raphael TRAEN

Analysis of “The Madoff Affair” documentary

In this article, Raphael TRAEN (ESSEC Business School, Global BBA, 2023-2024) analyzes “The Madoff Affair” documentary and explains the key financial concepts related to this documentary.

Key characters in the documentary

Bernard Madoff: key person, the admitted mastermind of the Ponzi scheme
Avellino: partner in Avellino and Bienes, advising its clients to invest with Madoff
Bienes: accountant for Madoff’s father-in-law, later partner in Avellino and Bienes, advising its clients to invest with Madoff

Summary of the documentary

Bernard Lawrence Madoff (“Bernie”) was an American stockbroker, market maker and an unofficial investment advisor (because he did not have the necessary license to do so) who operated what has been considered the largest Ponzi scheme in history. He defrauded investors out of billions over a long period.

The Madoff Affair

How did the scheme work?

Madoff’s Ponzi scheme was a classic example of a “pyramid scheme,” in which money from new investors is used to pay returns to earlier investors, creating the illusion of strong returns. Madoff claimed to be investing in a “secret” arbitrage strategy that generated consistent returns, even during periods of market downturn.

In reality, Madoff was simply lying to investors and using the money to pay returns to existing investors and to enrich himself. He kept his scheme going by attracting new investors, who were lured by the promise of high returns and the reputation of Madoff, who was a well-respected figure on Wall Street.

Bernard Madoff was able to maintain his Ponzi scheme for so long in part because he had help from two of his closest associates: Avellino and Bienes. Avellino and Bienes were investment advisors who were responsible for soliciting investments from Madoff’s funds. They were also responsible for creating false account statements that showed investors were making consistently high returns.

Avellino and Bienes first met Madoff and were impressed by his reputation and his consistent track record of high returns. They even approached Madoff about managing their own investments. Madoff agreed, and Avellino and Bienes began to introduce Madoff to their own clients.

Avellino and Bienes were instrumental in helping Madoff build his Ponzi scheme. They were able to attract new investors to Madoff’s funds by touting his track record and his reputation for integrity.

Technical details about the Madoff investment strategy

Bernie Madoff told his investors he was using a legitimate investing strategy called split-strike conversion. This strategy involves buying a stock index and simultaneously purchasing put options to limit the downside potential and selling call options to generate additional income.

Evolution of the Fairfield Sentry fund of Madoff Source: Madoff

Statistical measures of the Fairfield Sentry fund of Madoff Source: Bernard and Boyle (2009)

Should you be more interested in this strategy I definitely recommend watching the following video explaining the strategy with an example:

Bernie Madoff’s infamous split-strike conversion strategy

Theoretically, this strategy aims to provide a steady stream of income while protecting against significant losses. However, Madoff’s claims about his split-strike conversion strategy were entirely fabricated. He was not actually making these trades or generating the reported returns. Instead, he was using money from new investors to pay off existing investors, replicating a classic Ponzi scheme. This is also further confirmed by the picture I added above comparing the different strategies. The Fairfield Sentry fund was one controlled by Madoff. You can immediately see that the return is higher than what it would be according to the strategy and also that the standard deviation is much lower.

The downfall of the scheme

The Madoff Ponzi scheme began to unravel in the fall of 2008, as the global financial crisis took hold. As investors grew increasingly nervous about their investments, they began to withdraw their money from Madoff’s funds. Madoff was unable to meet these withdrawals, and the scheme collapsed.

In December 2008, Madoff’s sons, Mark and Andrew, confronted him about the scheme. Madoff confessed to his sons, and they immediately contacted the FBI.

One important person we should certainly not forget to mention is Markopolos, an American investor who accused Bernard Madoff of running a Ponzi scheme. He warned the SEC multiple times about Madoff’s suspicious investment returns and opaque investment strategy, but the SEC did not take action until after the collapse of Madoff’s Ponzi scheme in 2008. Markopolos was subsequently hailed as a hero for his efforts to expose the fraud.

Markopolos also believed that Madoff was using his position as a market maker to front-run his clients’ trades. This means that Madoff was using his knowledge of his clients’ impending trades to make profitable trades for himself before his clients’ trades were executed. This would allow Madoff to profit from the difference in price between the time his clients’ trades were executed and the time he made his trades.

Financial concepts related to the documentary

Investment returns

Madoff’s scheme relied on the promise of consistent, high returns even during periods of market downturn. This was a red flag for many investors, as it is unrealistic for any investment strategy to guarantee such consistent performance.

Greed

Madoff’s scheme was fueled by the greed of both investors and Madoff himself. Investors were willing to overlook red flags because they were attracted to the promise of high returns. Madoff was motivated by his own insatiable desire for wealth and power.

Regulatory oversight

The Securities and Exchange Commission (SEC) failed to detect Madoff’s scheme for many years. This failure allowed Madoff to operate his scheme for many years and highlights the need for stronger enforcement of financial regulations.

What lessons can be learned?

Beware of “too good to be true” opportunities

If an investment opportunity sounds too good to be true, it probably is. Investors should be wary of any investment that promises consistently high returns no matter which market conditions, especially if there is no clear explanation of how those returns are being generated.

Do your own research

Before investing in any fund or product, investors should thoroughly research the company or individual running the investment and understand the risks involved. The Madoff Ponzi scheme is a reminder that even seemingly respectable individuals can commit fraud on a massive scale. It is important for investors to be vigilant and to do their homework before investing their hard-earned money.

Madoff’s cynicism

« In an era of faceless organization owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: the owner’s name is on the door. Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing and high ethical standards that has always been the firm’s hallmark. »

Why should I be interested in this post?

As a student pursuing a business or finance degree at ESSEC, I think you will be very fascinated by the Madoff Ponzi scheme for its multifaceted lessons in ethics, financial practices, and regulatory oversight. The scale of the fraud, its longevity, and the involvement of high-profile individuals make it a very interesting case study in the financial world. It is one of the largest financial frauds ever. There are many lessons to be learned.

Useful resources

Academic articles

Bernard C. and P.P. Boyle (2009) “Mr. Madoff’s Amazing Returns: An Analysis of the Split-Strike Conversion Strategy” The Journal of Derivatives, 17(1): 62-76.

Monroe H., A. Carvajal and C. Pattillo (2010) “Perils of Ponzis” Finance & development, 47(1).

Videos

FRONTLINE PBS The Madoff Affair (full documentary on YouTube)

TPM TV Roundtable Discussion With Bernard Madoff (YouTube video about regulation by Madoff)

Associated Press Executive: SEC Ignored Warnings About Madoff (YouTube video about the testimony of Harry Markopolos)

TPM TV Roundtable Discussion With Bernard Madoff (YouTube video about the testimony of Harry Markopolos)

About the author

The article was written in December 2023 by Raphael TRAEN (ESSEC Business School, Global BBA, 2023-2024).

Posted in Contributors, Movies and documentaries | Tagged Madoff, Options | 1 Comment

Le marché boursier est conçu pour transférer de l'argent des actifs aux patients.

Posted on December 17, 2023 by Medine ACAR

Le marché boursier est conçu pour transférer de l’argent des actifs aux patients.

Dans cet article Medine ACAR (ESSEC Business School, Programme Bachelor in Business Administration (BBA) – 2020-2024) commente une citation de Warren Buffett sur l’investissement à long terme.

« Le marché boursier est conçu pour transférer de l’argent des actifs aux patients. »

Warren Buffett suggère que le marché boursier favorise ceux qui adoptent une approche patiente et à long terme plutôt que ceux qui sont constamment actifs et réactifs. Cette perspective souligne l’importance de stratégies d’investissement basées sur une analyse approfondie et une vision à long terme, par opposition à des réactions rapides aux fluctuations du marché. Elle met en évidence l’idée que l’accumulation de richesse à travers le marché boursier est plus le résultat de décisions réfléchies et stables, plutôt que de transactions spéculatives fréquentes.

Qui est Warren Buffett ?

Warren Buffett, né en 1930, est l’un des investisseurs et figures financières les plus renommés du 20e et 21e siècles. Il est le président-directeur général de Berkshire Hathaway, une société de portefeuille multinationale.

Buffett est souvent surnommé “l’Oracle d’Omaha” pour son exceptionnelle compétence en investissement. Sa philosophie d’investissement met l’accent sur l’investissement de valeur à long terme, et il est connu pour son approche patiente du marché boursier.

Les lettres annuelles de Buffett aux actionnaires de Berkshire Hathaway et ses citations perspicaces sur l’investissement en font une source d’inspiration pour les investisseurs du monde entier. Il figure régulièrement parmi les personnes les plus riches du monde.

Concepts financiers liés à la citation

Investissement à Long Terme

La citation souligne l’importance d’un horizon d’investissement à long terme. Les investisseurs à long terme se concentrent sur la détention d’actifs pendant une période prolongée pour bénéficier de l’effet de composition et minimiser l’impact des fluctuations du marché à court terme.

Patience face à la Volatilité du Marché

Elle met en lumière l’importance de la patience pendant la volatilité du marché. Les investisseurs patients sont moins susceptibles de paniquer et de prendre des décisions impulsives pendant les turbulences du marché, ce qui peut conduire à de meilleurs résultats.

Investissement de Valeur

La philosophie d’investissement de Buffett est ancrée dans l’investissement de valeur, qui implique d’identifier des actions sous-évaluées avec de solides fondamentaux et de les conserver sur le long terme. Ce concept met l’accent sur l’importance d’analyser la valeur intrinsèque d’une entreprise plutôt que les mouvements de prix à court terme.

J’ai choisi cette citation car elle transmet succinctement l’essence d’une prise de décision financière prudente. Warren Buffett, l’un des investisseurs les plus prospères de tous les temps, a bâti sa fortune sur le principe de la réflexion à long terme et de la patience disciplinée. Dans un monde où beaucoup cherchent des gains rapides, cette citation sert de rappel que l’accumulation de richesse en finance nécessite souvent une main ferme et une volonté de supporter la volatilité à court terme pour des récompenses à long terme. C’est une leçon intemporelle qui peut profiter à la fois aux investisseurs chevronnés et aux nouveaux venus dans le monde de la finance.

Cette citation est importante car elle transmet la sagesse de Warren Buffett, un investisseur légendaire connu pour son approche d’investissement axée sur la valeur et le long terme. Pour quiconque s’intéresse à la finance, elle fournit des perspectives pratiques et des stratégies pour une construction durable de richesse, s’inspirant de l’expérience de l’un des investisseurs les plus réussis de l’histoire.

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▶ All posts about Quotes

▶ Michel VERHASSELT Risk comes from not knowing what you are doing

▶ Federico DE ROSSI The Power of Patience: Warren Buffett’s Advice on Investing in the Stock Market

▶ Rayan AKKAWI Warren Buffet and his basket of eggs

▶ Youssef LOURAOUI Long-short equity strategy

▶ Akshit GUPTA Value investment strategy

▶ Henri VANDECASTEELE Approaches to investment

Ressources

Berkshire Hathaway’s 2022 Shareholder Letter

The Essays of Warren Buffett: Lessons for Corporate America

A propos de l’auteure

L’article a été rédigé en décembre 2023 par Medine ACAR (ESSEC Business School, Programme Bachelor in business administration (BBA) – 2020-2024).

Posted in Contributors, Quotes | Tagged Warren Buffet | Leave a comment

Mon expérience professionnelle en tant que contrôleuse de gestion chez Carfuel

Posted on December 17, 2023 by Medine ACAR

Mon expérience professionnelle en tant que contrôleuse de gestion chez Carfuel

Dans cet articleMedine ACAR (ESSEC Business School, Programme Bachelor in business administration (BBA) – 2020-2024) partage son experience professionnelle en tant que contrôleuse de gestion chez Carfuel.

Présentation de l’entreprise

Carfuel, une filiale du groupe Carrefour, est un acteur notable dans le secteur pétrolier français depuis sa création en 1976. Elle se positionne comme le 3ème opérateur pétrolier du pays. La société, avec un capital social de 17,5 millions d’euros, a généré un chiffre d’affaires impressionnant de 4,78 milliards d’euros en 2021.

Elle possède et opère plus de 1 300 stations-service à travers la France.

Le produit phare de Carfuel est la carte carburant Carrefour pour les professionnels, offrant des avantages tels que l’accès à des stations-service à prix compétitifs, une gestion simplifiée des dépenses en carburant, et des fonctionnalités pratiques pour le suivi des dépenses et la récupération de la TVA.

Logo de l’entreprise.
Logo de Carrefour
Source : l’entreprise.

Le département

Le département de contrôle de gestion de Carfuel se concentre sur l’analyse et la surveillance financière de l’entreprise. Il gère les budgets, contrôle les coûts, et évalue les performances financières.

Les responsabilités de ce département incluent la préparation des rapports financiers, la conduite d’analyses de variance, et la collaboration avec d’autres départements pour optimiser les dépenses et améliorer l’efficacité. Ce département joue un rôle clé dans le soutien des décisions stratégiques et opérationnelles de Carfuel, assurant ainsi une gestion financière efficace.

Mon stage

Dans mon rôle d’Apprentie en Contrôle de Gestion au sein du Département de Contrôle de Gestion, j’ai activement contribué à la récupération efficace des créances, atteignant un montant significatif de plus de 1 million d’euros. Cette tâche nécessitait une gestion méticuleuse des litiges et des impayés, tout en assurant un reporting analytique précis et informatif pour nos équipes. De plus, j’ai habilement dirigé une équipe de sous-traitants, établissant des relations de travail solides et directes avec la direction.

En outre, j’étais responsable de la préparation de rapports et de tableaux de bord, ce qui impliquait une analyse détaillée des coûts et la validation des données financières. J’étais impliquée dans la communication des performances actuelles par rapport aux résultats précédents, fournissant ainsi des informations clés aux équipes pour soutenir la prise de décision et la planification stratégique.

Compétences et connaissances requises

Dans mon rôle chez Carfuel, la compétence en recouvrement de créances était primordiale pour assurer la santé financière de l’entreprise, en récupérant les fonds dus de manière efficace et en minimisant les pertes.

La maîtrise d’Excel était essentielle pour analyser avec précision les données financières et d’élaborer des rapports détaillés, permettant ainsi une meilleure prise de décision. De plus, le leadership et la gestion d’équipe étaient cruciaux pour coordonner et motiver une équipe de sous-traitants, garantissant l’efficacité et le respect des délais. Enfin, une bonne compréhension du secteur pétrolier et la capacité à établir des relations avec différentes directions étaient nécessaires pour contextualiser mon travail et optimiser les processus financiers.

Quelles ont été les bénéfices de cette expérience

Pendant mon apprenstissage chez Carfuel, j’ai eu l’opportunité d’enrichir mes compétences en gestion financière, me concentrant spécialement sur la gestion du crédit et la récupération des dettes. C’était une expérience immersive où j’ai pu développer mes talents d’analyse, notamment en exploitant intensément Excel pour analyser les données et élaborer des rapports pertinents.

Diriger et gérer une équipe de sous-traitants a été un véritable challenge, mais aussi une occasion incroyable de croissance personnelle dans les domaines du leadership et de la gestion d’équipe.

De plus, j’ai acquis une compréhension plus approfondie du secteur pétrolier et développé ma capacité à communiquer et à collaborer efficacement avec divers départements, améliorant ma vision globale des affaires et mon expertise financière.

Les concepts financiers en lien avec mon expérience

Recouvrement de créances

Mon rôle dans la récupération des créances est directement lié à ce concept. Un recouvrement de créances efficace est crucial pour maintenir la trésorerie de l’entreprise et sa stabilité financière.

Rapport financier et analyse

L’utilisation d’Excel pour une analyse financière détaillée et la création de rapports était une partie clé de mon travail, s’alignant sur ce concept. Un rapport précis aide à la prise de décision stratégique et à l’évaluation de la performance financière.

Gestion des coûts

Diriger une équipe de sous-traitants et optimiser les processus financiers touche à la gestion des coûts. Cela implique de contrôler et de réduire les dépenses pour améliorer la rentabilité de l’entreprise.

Un intérêt pour vous ?

Si vous êtes intéressé par une carrière dans la finance, cet article donne un aperçu concret et précieux de ce que signifie travailler dans la gestion financière au sein d’une grande entreprise. En partageant mon expérience de stage chez Carfuel, je vous donne un avant-goût de la réalité de la finance d’entreprise, en mettant l’accent sur des aspects pratiques tels que la gestion du crédit, le recouvrement de dettes, et l’analyse financière.

Vous découvrirez comment les compétences théoriques apprises se traduisent dans un environnement professionnel dynamique. Mon expérience illustre également l’importance des soft skills essentiels pour toute carrière dans la finance ?

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Ressources

Groupe Carrefour

A propos de l’auteure

L’article a été rédigé en décembre 2023 par Medine ACAR (ESSEC Business School, Programme Bachelor in business administration (BBA) – 2020-2024).

Posted in Contributors, Professional experiences | Tagged Carfuel | Leave a comment

My experience as Digital Business Developer for Capture Europe

Posted on December 17, 2023 by Michel VERHASSELT

My experience as Digital Business Developer for Capture Europe

In this article, Michel Henry VERHASSELT (ESSEC Business School, Master in Finance, 2023-2025) shares his professional experience as Digital Business Developper at Capture Europe.

About the company

Capture Europe provides software solutions and IT services to businesses on an international scale, with a focus on European businesses. Partners of Broadcom and ServiceNow, their areas of expertise are mainly in Project Portfolio Management and Automation. Past clients include major banks, telecommunication companies, etc.

Logo of the company.
Logo of Capture Europe
Source: the company.

My role at Capture Europe

My missions

In my role as a Digital Business Developer at Capture Europe, my primary mission was to coordinate our sales and marketing teams. This multifaceted role demanded a diverse skill set and included various responsibilities. On the sales front, I screened prospects, transforming them into valuable sales-qualified leads. This process involved market and industry research, cold-calling, and reaching out to other potential clients, such as webinar attendees and conference participants.

Once the leads met our predefined criteria and expressed a genuine interest in partnering with Capture Europe, I connected them with the relevant business divisions within our company. This transition from prospect to sales-ready lead was pivotal in driving sales, and it was perhaps what I enjoyed most about the job. I had to learn to be comfortable talking to people in different positions of the corporate hierarchy, to change my style accordingly and make sure they were interested in what I had to say. I also had to learn to deal with rejection and sometimes rudeness. In the end, you get used to it, and you focus on achieving your goals.
On the marketing front, I played a role in bolstering our company’s online presence. This involved curating content for our social media platforms and leading marketing campaigns in collaboration with the rest of the team. I was responsible for developing compelling marketing materials, creating engaging presentations and webinars, and maintaining our extensive CRM database, which housed information on 2,000-3,000 customers.

As part of my administrative duties, I maintained regular communication with our executives, providing them with insightful updates on the performance of both the sales and marketing teams in relation to key performance indicators and our organization’s overarching goals. This holistic experience provided me with insights into the inner workings of our business and, I believe, helped my professional growth in general.

Throughout my tenure at Capture Europe, I consistently exceeded KPI sales targets, driving over €600,000 in revenue through strategic software sales. This experience not only enhanced my sales and marketing skills but also equipped me with a comprehensive understanding of how an enterprise operates.

Required skills and knowledge

A diverse skill set is needed to succeed as Digital Business Developer. Approximately half of my responsibilities revolved around leveraging analytical skills, while the other half emphasized interpersonal and communication abilities.

On the analytical side, a substantial portion of my time was dedicated to database analysis and market research. These tasks demanded a thorough understanding of research tools and data analysis techniques, allowing me to derive meaningful insights from large datasets. Familiarity with Customer Relationship Management (CRM) software was also indispensable, enabling the efficient management of customer data and facilitating data-driven decision-making.

Once I had identified promising prospects, my role transitioned to a more people-centric focus. Building and nurturing business relationships became pivotal. Effective interpersonal skills, coupled with the ability to initiate conversations and guide them towards a successful conclusion, played a vital role in securing sales. These skills were also essential for facilitating smooth collaboration and alignment between the marketing and sales teams, despite differing goals and expectations. It was not uncommon for conflicts to arise, with the teams’ managers occasionally holding conflicting opinions. In such scenarios, I often found myself in a diplomatic role, navigating the fine line between my role as an employee of the Head of Marketing and the imperative to ensure effective cooperation. My background in languages and translation proved invaluable in these situations, as it equipped me with the ability to employ nuanced language to reconcile differences and lead the teams to collectively achieve overarching project success.

What I learned

My tenure as a Digital Business Developer at Capture Europe provided me with insights into the workings of a business, from its microscale operations to the macroscopic strategic planning. Throughout my role, I gained a comprehensive understanding of various facets, including how different branches within the corporate structure collaborate and communicate to achieve common objectives.

On a microscale, I learned the intricacies of identifying potential sales opportunities and managing short-term projects efficiently. These experiences equipped me with practical insights into the day-to-day operations of a business, highlighting the importance of timely execution and attention to detail.

On a macroscale, I had the privilege of observing how executives manage and coordinate teams to achieve long-term organizational goals. This perspective allowed me to comprehend the complexities of aligning individual efforts with the overarching mission of the company.

In terms of interpersonal skills, my role exposed me to the nuances of effective communication, diplomacy, and conflict resolution within a professional setting. I encountered challenging scenarios, learned how to navigate workplace conflicts, and honed my ability to maintain productive relationships, even when dealing with difficult customers. This aspect of my experience underscored the importance of empathy, patience, and adaptability when addressing customer concerns and achieving favourable outcomes.

Lastly, I acquired a range of hard skills, most notably advanced proficiency in Excel. The practical utilization of Excel tools and functions in data analysis and reporting became a crucial component of my daily responsibilities. This experience enhanced my analytical capabilities and has proven to be an asset in various professional contexts.

In essence, my time at Capture Europe provided me with a holistic view of business operations, from the smallest details of day-to-day tasks to the grand strategies of executives. It also honed my people skills and hard skills. These experiences have collectively contributed to my personal and professional growth.

Financial concepts related my internship

Return on Investment

As a Digital Business Developer, understanding ROI is essential. Your role involves identifying sales opportunities, conducting market research, and implementing marketing campaigns. These efforts all incur costs, and it’s crucial to measure the return on these investments. We would continually be measuring our efforts against the overall marketing budget, and gauging how cost-effective our campaigns were. For example, some menial tasks involve a lot of man-hours, like screening thousands of prospects’ backgrounds – would it be smarter for the organization to automate this work ? It is not at all obvious without thorough analysis of the specific costs of both options. It was my suggestion to management, but it was ultimately rejected as too costly.

You need to analyze the effectiveness of marketing campaigns, sales efforts, and the overall impact on the company’s bottom line. Knowledge of ROI enables you to assess whether your strategies are generating profitable outcomes or if adjustments are required.

Customer Lifetime Value

This concept, akin to ROI but with a more personalized focus, comes into play when dealing with numerous potential clients daily. In such a dynamic environment, you must make choices and prioritize certain relationships over others. It’s important to recognize that the most promising business relationships might not yield immediate success. Patience is key, as nurturing long-term client relations can be more valuable. While a single, small to medium-sized contract may not suffice to meet your KPIs or drive significant company growth, establishing trust with a long-term partner can be more advantageous. These enduring partnerships offer the potential for recurring contracts and cross-selling opportunities once clients appreciate the value you bring to their business, making them exceptionally valuable.

Cash-flow analysis

Cash-flow analysis serves as the linchpin that connects both ROI and CLV. To ascertain ROI, you must meticulously track the flow of financial resources. It involves assessing the inflow and outflow of cash within the business, to ensure liquidity and overall financial stability. Similarly, when considering CLV, understanding the organization’s cash flow is vital. It enables you to determine the feasibility of nurturing long-term client relationships, as you can evaluate the available funds to support these efforts over an extended period.

Why should I be interested in this job?

Imagine your finance studies as the “what” of the financial world – understanding numbers, investments, and markets. But a successful finance professional needs the “how” and “why” too. That’s where my experience as a Digital Business Developer comes into play.

You’ll need to grasp how different parts of a company connect and impact each other. My role helped me understand this interconnected web of business operations. You’ll appreciate this holistic perspective when you’re making financial decisions that affect the entire organization.

Moreover, I often needed to take the role of a team leader. Leadership and teamwork are more than buzzwords. Your finance journey won’t be a solo ride; you’ll work in teams with different goals. My time as a coordinator taught me how to lead, resolve conflicts, and unite people towards a common objective. This is the reality of working within a larger structure: managing projects, working with diverse teams, and making things happen together.

Externally, building relationships and securing deals were crucial in my role. These soft skills are a finance must-have too. Whether you’re advising clients in private banking or large institutions and businesses in corporate and commercial banking, it’s all about understanding others’ needs and offering tailored solutions. Your people skills will play a significant role in your future success.

Finally, in terms of hard skills, Digital Business Developers need to wield a variety of tools to garner meaningful business insight and drive sales. In finance, you’ll likewise need to use models and analysis tools for similar goals: to assess the feasibility of your projects, study potential risks, and compare them to the rewards.

In a nutshell, my journey as a Digital Business Developer gives you a sneak peek into the “real world” of a business. It’s like having a backstage pass to understand how businesses run, the art of teamwork, and the tools to navigate the corporate maze. So, when you blend this with your finance studies at ESSEC, you’re not just learning about finance – you’re becoming the kind of finance professional who can thrive in any role in the industry.

Useful resources

Capture Europe

What is Digital Business Development

Marketing Strategies for Financial Services

About the author

The article was written in December 2023 by Michel Henry VERHASSELT (ESSEC Business School – Master in Finance, 2023-2025).

Posted in Contributors, Professional experiences | Tagged Capture Europe | Leave a comment

Risk comes from not knowing what you are doing

Posted on December 17, 2023 by Michel VERHASSELT

Risk comes from not knowing what you are doing

In this article, Michel Henry VERHASSELT (ESSEC Business School – Master in Finance, 2023-2025) comments on a quote by Warren Buffet about risk.

“Risk comes from not knowing what you are doing”

Analysis of the quote

Warren Buffett’s quote, “Risk comes from not knowing what you are doing,” encapsulates a fundamental principle of investing and decision-making. It underscores the significance of knowledge, research, and informed decision-making in managing risk.

One key aspect of this quote is the idea that risk is not solely a result of the inherent uncertainty in investments or ventures. Rather, risk is often the consequence of making decisions without a comprehensive understanding of the situation. In the world of finance and investing, not knowing the intricacies of an investment or the market can lead to hasty, ill-informed choices that carry a higher level of risk.

Moreover, this quote stresses the importance of education and continuous learning in risk management. To minimize risk, individuals need to invest time and effort in gaining knowledge and expertise within their chosen domain. For investors, this means understanding the companies or assets they invest in, analysing financial statements, and staying informed about market trends.

In a broader context, this quote is not limited to finance; it applies to various aspects of life. In personal life just as in business, forgoing the careful analysis of the potential consequences of one’s actions can lead to very negative outcomes. Decisions made in haste, out of anger, excitement, disappointment, and other strong emotions generally tend to be mistakes. Patience and forethought tend to be rewarded.

In essence, Warren Buffett’s quote reminds us that risk is not an abstract force beyond our control. It is, to a significant extent, a product of our knowledge and decisions. By equipping ourselves with information, staying well-informed, and making deliberate choices, we can effectively manage and mitigate risk in both our financial and personal pursuits.

About the author

Warren Buffett is a renowned American investor and CEO of Berkshire Hathaway, known for his value investing approach and philanthropic efforts. His net worth consistently places him among the world’s wealthiest individuals. However, he is equally renowned for his commitment to philanthropy, pledging the majority of his fortune to charitable causes, primarily through the Bill & Melinda Gates Foundation. Buffett’s influence extends far beyond the financial world, making him a respected figure in both business and philanthropy. His life and career continue to inspire countless investors and entrepreneurs worldwide.

Financial concepts related to the quote

Risk management

Of course, the concept most directly related to the quote is risk management. That is perhaps the most fundamental concept of finance. We are dealing with unknowns, probabilities, and expectations. We must make sure that, through careful analysis, we eliminate as much downside potential as possible: that is the only way to guarantee long-term survival (and a fortiori, long-term success). This goal can only be achieved once a thorough understanding is reached of the assets and markets we invest in, and the people we invest or transact with. Without such an understanding, we create unnecessary risk and that will almost assuredly lead to financial losses sooner or later.

Due diligence

The quote underscores the significance of “knowing what you are doing”. In finance, we call this conducting due diligence. It involves comprehensive research and analysis before making any financial commitment. This includes examining a company’s financials, understanding market dynamics, and evaluating potential investments. Without proper due diligence, individuals may enter financial ventures blindly, exposing themselves to significant risks.

Portfolio diversification

One of the ways in which we mitigate risk is portfolio diversification. When we add assets to our portfolio, we want to reduce or eliminate the risk that comes with exposure to one specific investment, while keeping as much of the return as possible. The concept of beta directly stems from the idea of portfolio diversification. By sticking to a single asset, you are entirely and solely exposed to its volatility; by wholly diversifying your portfolio, you are theoretically reproducing the entire market, making your beta equal to 1, or in other words turning your risk exposure into the market risk. In conclusion, portfolio diversification is a fundamental strategy for risk mitigation in investment, and closely aligns with the quote’s meaning.

My opinion about this quote

In my opinion, Warren Buffett was talking about investing and not trading. However, as my experience and interests are closer to trading than investing, I see it as a useful quote within that context.

Firstly, let’s talk about stop-losses. They’re your safety net. You set them at a certain point where, if the trade goes sour, you bail out. But if you don’t know why you’re placing a stop-loss at a particular level, it’s like playing darts blindfolded. You might hit the target, but it’s mostly luck. Understanding the underlying reasons for your stop-losses is crucial. It’s not just a random number; it’s based on your analysis.

Managing position size is another important element to consider. If you don’t know what you’re doing, you might risk your entire account on a single, promising, trade, much like going all-in on a hand of poker simply because you were dealt a pair of aces. Position sizing is about controlling risk. You need to understand how much you can afford to lose and then adjust your position size accordingly. If you don’t, you’re setting yourself up for potential disaster. It’s important to remember you never know the market, you simply might sometimes guess better than others. Outside of arbitrage or insider trading, certainty does not exist in trading; hence, position size should always be managed intelligently.

Hedging is also related to this quote. A hedge is a plan B. If you are long on a stock, and you are not certain which direction the market will take, you can reduce your risk by creating another position with options or other derivatives. But, if you don’t know how these instruments work or why you’re using them, it’s like having a spare tire but not knowing how to change it. You might end up with two flat tires instead of one.

Lastly, getting an edge on the market. Ultimately this is what every trader claims to be able to do. It boils down, almost entirely, to risk management. You must know your strategy inside out, and you must know exactly what you plan to do if you don’t get this expected edge out of your trade. In this way, over the long run, you can have either a majority of winning trades of equal sizes, or winning trades that outweigh the losing ones in terms of net gain. To have an edge, you need to understand why your approach works, when it might not, and continuously adapt.

In short, in trading and more generally in finance, ignorance isn’t bliss; it’s a one-way ticket to risk.

Why should I be interested in this post?

A finance student should be interested in this post because risk is the single most important concept to understand both in finance and in business. In this post, I believe I have made this concept compelling for students by going beyond theory. My post is also practical. It talks about real-world applications like setting stop-losses, managing position size, and hedging with financial products. These are the tools used daily by finance professionals in capital markets.

Furthermore, finance is all about making sound decisions, and you can’t do that effectively without understanding how to control and mitigate risk. What’s even more interesting is that it clarifies a common misconception. It tells you that gaining an edge in the financial market isn’t about having secret knowledge. It’s understanding your approach and the markets you’re dealing with. Being aware of the importance of risk management is therefore crucial for a wide range of careers and that is why a finance student should take an interest in it.

Useful resources

Are Stop-Losses Necessary?

Diversifying your portfolio with a lower net worth

Sharpe’s classic 1964 article on CAPM

About the author

The article was written in December 2023 by Michel Henry VERHASSELT (ESSEC Business School – Master in Finance, 2023-2025).

Posted in Contributors, Quotes | Tagged Risk, Warren Buffet | 1 Comment

Ethereum – Unleashing Blockchain Innovation

Posted on December 13, 2023 by Snehasish CHINARA

Ethereum – Unleashing Blockchain Innovation

In this article, Snehasish CHINARA (ESSEC Business School, Grande Ecole Program – Master in Management, 2022-2024) explains Bitcoin which is considered as the mother of all cryptocurrencies.

Historical context and background

Ethereum is a groundbreaking blockchain platform that emerged in the wake of Bitcoin’s success in 2015. It was conceived by a young Canadian programmer, Vitalik Buterin, who saw limitations in Bitcoin’s functionality and envisioned a decentralized platform capable of executing smart contracts. Buterin’s idea gained traction in the cryptocurrency community, and he, along with a team of developers, published the Ethereum whitepaper in late 2013. The platform’s official development began in 2014, with a crowdfunding campaign that raised over $18 million in Bitcoin, making it one of the most successful initial coin offerings (ICOs) of its time. Ethereum’s genesis block was mined on July 30, 2015, marking the official launch of the network.

Ethereum’s innovative concept of smart contracts and decentralized applications (DApps) quickly garnered attention within the blockchain and cryptocurrency space. The platform introduced a Turing-complete programming language, enabling developers to create a wide array of decentralized applications. Ethereum’s native cryptocurrency, Ether (ETH), serves as both a digital currency and a utility token within the ecosystem. Over the years, Ethereum has undergone several network upgrades to improve scalability and security, most notably the transition from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism with the Ethereum 2.0 upgrade. This transition aims to address the network’s scalability issues and reduce its energy consumption, positioning Ethereum as a sustainable and versatile blockchain platform for the future. Today, Ethereum continues to play a pivotal role in the blockchain and decentralized finance (DeFi) space, powering a vast array of projects, including NFT platforms, decentralized exchanges, and decentralized applications that have reshaped the way we think about finance and technology.

Ethereum Logo

Source: Yahoo! Finance .

Figure 1. Key Dates in Ethereum History

Source: Yahoo! Finance .

Key Features of Ethereum

Smart Contracts

Ethereum is renowned for its pioneering smart contract functionality. Smart contracts are self-executing agreements with predefined rules and conditions, enabling automated and trustless transactions. This feature has broad applications in various industries, including finance, supply chain management, and legal services.

Decentralization

Ethereum operates on a decentralized network of nodes, making it resistant to censorship and single points of failure. This decentralization ensures the security and integrity of the blockchain, with no single entity having control over the network.

Ether (ETH)

Ethereum’s native cryptocurrency, Ether, serves as both a digital currency and a utility token. It’s used to pay for transaction fees, secure the network through staking in Ethereum 2.0, and as a medium of exchange within the ecosystem.

Interoperability

Ethereum is designed to interact with other blockchains and networks, fostering compatibility and collaboration across the blockchain ecosystem. Projects like Polkadot and Cosmos aim to enhance this interoperability.

EVM (Ethereum Virtual Machine)

The Ethereum Virtual Machine is a runtime environment for executing smart contracts. It’s a critical component that ensures the same execution of smart contracts across all Ethereum nodes, making Ethereum’s ecosystem reliable and consistent.

EIPs (Ethereum Improvement Proposals)

Ethereum has a robust governance model for protocol upgrades and improvements, with EIPs serving as the mechanism for proposing and implementing changes. This allows for community-driven innovation and adaptation.

Use Cases of Ethereum

Decentralized Finance (DeFi)

Ethereum is at the heart of the DeFi movement, offering lending, borrowing, trading, and yield farming services through DApps like Compound, Aave, and Uniswap. DeFi has disrupted traditional finance, providing open and inclusive access to financial services.

Non-Fungible Tokens (NFTs)

Ethereum’s ERC-721 and ERC-1155 token standards have fueled the NFT boom. NFTs enable the ownership and trade of unique digital assets, from art and music to virtual real estate and collectibles, all recorded on the blockchain.

Supply Chain Management

Ethereum’s transparent and tamper-proof ledger is used to track and verify the authenticity and provenance of products. This enhances supply chain efficiency and trust, reducing fraud and counterfeiting.

Gaming and Virtual Worlds

Ethereum is the platform of choice for blockchain-based gaming and virtual reality experiences. DApps like Decentraland and Axie Infinity allow users to trade in-game assets and participate in virtual economies.

Tokenization of Assets

Real-world assets, such as real estate, stocks, and commodities, can be tokenized on the Ethereum blockchain, making them more accessible for investment and trading.

Identity Verification

Ethereum can be used to secure and manage digital identities, enhancing privacy and reducing the risk of identity theft.

Social Impact

Ethereum is leveraged for social impact projects, including humanitarian aid distribution, voting systems, and tracking philanthropic donations, ensuring transparency and accountability.

Content Distribution

Ethereum-based projects are exploring decentralized content platforms, enabling creators to have more control over their intellectual property and revenue.

Ethereum’s versatility and ongoing development make it a crucial platform for a wide range of applications, from financial innovation to social change and beyond, driving the evolution of the blockchain and cryptocurrency space.

Technology and underlying blockchain

Ethereum’s underlying technology is rooted in blockchain, a distributed ledger system known for its security, transparency, and decentralization. Ethereum, like Bitcoin, employs a blockchain to record and verify transactions, but it offers a distinct set of features and capabilities that set it apart. At the core of Ethereum’s technology is the Ethereum Virtual Machine (EVM), a decentralized computing environment that executes smart contracts. Smart contracts are self-executing agreements with predefined rules and conditions that automate processes without the need for intermediaries.

Ethereum uses a consensus mechanism known as Proof of Stake (PoS), which is a significant departure from Bitcoin’s Proof of Work (PoW). PoS allows network participants, known as validators, to create new blocks and secure the network by locking up a certain amount of Ether as collateral. This approach is more energy-efficient and scalable compared to PoW, addressing some of the limitations that Bitcoin faces. Ethereum’s blockchain is a public and permissionless network, meaning that anyone can participate, transact, and develop decentralized applications (DApps) on the platform without needing approval.

The Ethereum ecosystem also employs a variety of token standards, with ERC-20 and ERC-721 being the most well-known. ERC-20 tokens are fungible and often used for cryptocurrencies, while ERC-721 tokens are non-fungible and have powered the explosion of NFTs (Non-Fungible Tokens). These standards have facilitated the creation and interoperability of a vast array of digital assets and DApps on the platform. Ethereum’s robust governance model, through Ethereum Improvement Proposals (EIPs), allows the community to suggest and implement changes, ensuring that the platform remains adaptable and responsive to evolving needs and challenges. Ethereum’s groundbreaking technology and active development community have positioned it as a leader in the blockchain space, with far-reaching implications for industries beyond just cryptocurrencies.

Supply of coins

Ethereum initially used a proof-of-work (PoW) consensus algorithm for coin mining, similar to Bitcoin. The process involved miners solving complex mathematical puzzles to validate transactions and add new blocks to the blockchain. Miners competed to solve these puzzles, and the first one to succeed was rewarded with newly minted Ethereum coins (ETH). This process was resource-intensive and required significant computational power.

However, Ethereum has been undergoing a transition to a proof-of-stake (PoS) consensus mechanism as part of its Ethereum 2.0 upgrade. The PoS model doesn’t rely on miners solving computational puzzles but instead relies on validators who lock up a certain amount of cryptocurrency as collateral to propose and validate new blocks. Validators are chosen to create new blocks based on the amount of cryptocurrency they hold and are willing to “stake” as collateral.

This transition to PoS is occurring in multiple phases. The Beacon Chain, which is the PoS blockchain that runs parallel to the existing PoW chain, was launched in December 2020. The full transition to Ethereum 2.0, including the complete shift to PoS, is expected to occur in multiple subsequent phases.

As of Q1 2023, there are approximately 121,826,163.06 Ethereum (ETH) coins in circulation, a key distinction from Bitcoin, which has a capped supply of 21 million. Ethereum, created by Vitalik Buterin, was designed without a specific supply limit, allowing for an unlimited number of coins if mining continues. Despite this, there is a cap of 18 million ETH coins that can be mined annually, equating to around 2 ETH per block. Ethereum Classic (ETC), a separate blockchain resulting from a community dispute, also exists with 135.3 billion coins. The Ethereum blockchain’s size was 175 GB in 2021, considerably smaller than Bitcoin’s 412 GB. Approximately 5750 Ethereum blocks are mined daily, with mining difficulty increasing and around 2,151 active nodes globally, primarily in the USA. Ethereum’s potential to become deflationary is acknowledged, contingent on mining costs exceeding rewards, as stated in a GitHub disclaimer.

Figure 2. Number of Ethereum Transaction per Day
Number of bitcoins in circulation
Source: BitInfoCharts (Ethereum Transactions historical chart).

Historical data for Ethereum

How to get the data?

The Ethereum is the most popular cryptocurrency on the market, and historical data for the Ethereum such as prices and volume traded can be easily downloaded from the internet sources such as Yahoo! Finance, Blockchain.com & CoinMarketCap. For example, you can download data for Ethereum on Yahoo! Finance (the Yahoo! code for Ethereum is ETH-USD).

Figure 4. Ethereum data

Source: Yahoo! Finance.

Historical data for the Ethereum market prices

Historical data on the price of Ethereum holds paramount significance in understanding the cryptocurrency’s market trends, investor behavior, and overall performance over time. Analyzing historical price data allows investors, analysts, and researchers to identify patterns, cycles, and potential indicators that may influence future price movements. It provides valuable insights into market sentiment, periods of volatility, and the impact of significant events or developments within the Ethereum ecosystem. Traders use historical data to formulate strategies, assess risk, and make informed decisions. Furthermore, the data aids in evaluating the success of protocol upgrades, regulatory changes, and shifts in broader economic conditions, offering a comprehensive view of Ethereum’s evolution. The historical price data of Ethereum serves as a crucial tool for market participants seeking to navigate the dynamic and sometimes unpredictable nature of the cryptocurrency market.

With the number of coins in circulation, the information on the price of coins for a given currency is also important to compute Ethereum’s market capitalization.

Figure 5 below represents the evolution of the price of Ethereum in US dollar over the period Nov 2017 – Dec 2023. The price corresponds to the “closing” price (observed at 10:00 PM CET at the end of the month).

Figure 5. Evolution of the Ethereum price

Source: Yahoo! Finance.

R program

The R program below written by Shengyu ZHENG allows you to download the data from Yahoo! Finance website and to compute summary statistics and risk measures about the Ethereum.

Data file

The R program that you can download above allows you to download the data for the Ethereum from the Yahoo! Finance website. The database starts on December, 2017.

Table 3 below represents the top of the data file for the Ethereum downloaded from the Yahoo! Finance website with the R program.

Table 3. Top of the data file for the Ethereum.
Top of the file for the Ethereum data
Source: computation by the author (data: Yahoo! Finance website).

Python code

You can download the Python code used to download the data from Yahoo! Finance.

Python script to download Ethereum historical data and save it to an Excel sheet::

import yfinance as yf
import pandas as pd

# Define the ticker symbol for Ethereum
eth_ticker = “ETH-USD”

# Define the date range for historical data
start_date = “2020-01-01”
end_date = “2022-01-01”

# Download historical data using yfinance
eth_data = yf.download(eth_ticker, start=start_date, end=end_date)

# Create a Pandas DataFrame from the downloaded data
eth_df = pd.DataFrame(eth_data)

# Define the Excel file path
excel_file_path = “ethereum_historical_data.xlsx”

# Save the data to an Excel sheet
eth_df.to_excel(excel_file_path, sheet_name=”ETH Historical Data”)

print(f”Data saved to {excel_file_path}”)

# Make sure you have the required libraries installed and adjust the “start_date” and “end_date” variables to the desired date range for the historical data you want to download.

Evolution of the Ethereum

Figure 6 below gives the evolution of the Ethereum on a daily basis.

Source: computation by the author (data: Yahoo! Finance website).

Figure 6. Evolution of the Ethereum.

Source: computation by the author (data: Yahoo! Finance website).

Figure 2 below gives the evolution of the Ethereum returns from November 09, 2017 to December 31, 2022 on a daily basis.

Figure 7. Evolution of the Ethereum returns.

Source: computation by the author (data: Yahoo! Finance website).

Summary statistics for the Ethereum

The R program that you can download above also allows you to compute summary statistics about the returns of the Ethereum.

Table 4 below presents the following summary statistics estimated for the Ethereum:

The mean
The standard deviation (the squared root of the variance)
The skewness
The kurtosis.

The mean, the standard deviation / variance, the skewness, and the kurtosis refer to the first, second, third and fourth moments of statistical distribution of returns respectively.

Table 4. Summary statistics for the Ethereum.

Source: computation by the author (data: Yahoo! Finance website).

Statistical distribution of the Ethereum returns

Historical distribution

Figure 8 represents the historical distribution of the Ethereum daily returns for the period from November 09, 2017 to December 31, 2022.

Figure 8. Historical Ethereum distribution of the returns.

Source: computation by the author (data: Yahoo! Finance website).

Gaussian distribution

The Gaussian distribution (also called the normal distribution) is a parametric distribution with two parameters: the mean and the standard deviation of returns. We estimated these two parameters over the period from November 09, 2017 to December 31, 2022. The annualized mean of daily returns is equal to 30.81% and the annualized standard deviation of daily returns is equal to 62.33%.

Figure 9 below represents the Gaussian distribution of the Ethereum daily returns with parameters estimated over the period from November 09, 2017 to December 31, 2022.

Figure 9. Gaussian distribution of the Ethereum returns.

Source: computation by the author (data: Yahoo! Finance website).

Risk measures of the Ethereum returns

The R program that you can download above also allows you to compute risk measures about the returns of the Ethereum.

Table 5 below presents the following risk measures estimated for the Ethereum:

The long-term volatility (the unconditional standard deviation estimated over the entire period)
The short-term volatility (the standard deviation estimated over the last three months)
The Value at Risk (VaR) for the left tail (the 5% quantile of the historical distribution)
The Value at Risk (VaR) for the right tail (the 95% quantile of the historical distribution)
The Expected Shortfall (ES) for the left tail (the average loss over the 5% quantile of the historical distribution)
The Expected Shortfall (ES) for the right tail (the average loss over the 95% quantile of the historical distribution)
The Stress Value (SV) for the left tail (the 1% quantile of the tail distribution estimated with a Generalized Pareto distribution)
The Stress Value (SV) for the right tail (the 99% quantile of the tail distribution estimated with a Generalized Pareto distribution)

Table 5. Risk measures for the Ethereum.

Source: computation by the author (data: Yahoo! Finance website).

The volatility is a global measure of risk as it considers all the returns. The Value at Risk (VaR), Expected Shortfall (ES) and Stress Value (SV) are local measures of risk as they focus on the tails of the distribution. The study of the left tail is relevant for an investor holding a long position in the Ethereum while the study of the right tail is relevant for an investor holding a short position in the Ethereum.

Why should I be interested in this post?

Ethereum, the pioneering blockchain platform, is an essential topic for management students due to its potential to transform industries, create innovative business opportunities, and disrupt traditional financial systems. Understanding Ethereum’s smart contracts, DeFi ecosystem, NFT market, and global impact can provide students with a competitive edge in a rapidly evolving business landscape, enabling them to navigate emerging trends, make informed investment decisions, and explore entrepreneurship in the digital economy.

Useful resources

Academic research about risk

Longin F. (2000) From VaR to stress testing: the extreme value approach Journal of Banking and Finance, N°24, pp 1097-1130.

Longin F. (2016) Extreme events in finance: a handbook of extreme value theory and its applications Wiley Editions.

Data

Yahoo! Finance

Yahoo! Finance Historical data for Ethereum

CoinMarketCap Historical data for Ethereum

About the author

The article was written in December 2023 by Snehasish CHINARA (ESSEC Business School, Grande Ecole Program – Master in Management, 2022-2024).

Posted in Contributors, Financial techniques | Tagged Blockchain, Ethereum | Leave a comment

One can never determine when a stock has reached its lowest point

Posted on December 11, 2023 by David GONZALEZ

One can never determine when a stock has reached its lowest point

In this article, David GONZALEZ (ESSEC Business School, Global BBA, 2023-2024) comments on the quote by Peter Lynch, “one can never determine when a stock has reached its lowest point”.

“one can never determine when a stock has reached its lowest point”. – Peter Lynch

Analysis of the quote

In the market, it’s common to witness some investors attempting to take advantage of the plummet of a financial asset, hoping to purchase it at a lower price, with the sole reference being its current price. As Peter Lynch wisely noted, “Trying to buy a plummeting asset is like trying to catch a falling knife. As a rule, it’s best to wait until the knife hits the ground, sticks, vibrates for a while, and only then attempt to catch it. Grabbing a rapidly falling stock leads to unpleasant surprises.”

About the author of the quote

Peter Lynch is one of the most renowned American investors who directed the Fidelity Magellan Fund from 1977 to 1990, under his leadership, it became one of the most successful mutual funds of all time. Currently, Peter Lynch serves as the Vice President of Fidelity Management & Research Company.

His book emphasizes an investment policy grounded in facts, implying that any small investor who recognizes a company’s success even before it becomes popular in the market can profit by purchasing shares before the flood of Wall Street buyers arrives. He also underscores that following “market experts” is a recipe for financial ruin.

Financial concepts related to the quote

I explain below three financial concepts related to this quote: volatility, price, and uncertainty.

Volatility

In precise terms, volatility in the financial market pertains to the speed at which an asset’s price can fluctuate. For instance, “one of the most volatile assets currently present in the market is cryptocurrency. In 2018, the monetary value of a single Bitcoin plummeted from slightly below $20,000 to less than $3,500” (Bodie, Kane, Marcus; 2021). Consequently, it is imperative to comprehend that when the price of an asset experiences rapid changes, it is typically attributable to a volatile market atmosphere. An effective gauge for assessing volatility is the VIX or Volatility Index. Once this index surpasses a threshold of 20, it indicates the presence of a volatile market climate. It is incumbent upon investors to remain cognizant of market volatility prior to taking positions.

Price Signifies Nothing

It must be understood that the price of an asset will never be a reliable indicator to determine whether an asset is oversold or not. To illustrate this point, let’s consider the case of oil prices, which on April 20, 2020, reached $0 USD. Clearly, many investors who sought to buy futures on this asset “at a bargain” ended up losing a significant amount of money. It is essential, therefore, for investors to look at other indicators before taking positions. Some of these indicators may include the previously mentioned VIX, keeping an eye on economic news such as the Federal Open Market Committee (FOMC), where the Fed communicates its decisions regarding interest rates, or even waiting for specific company results. Each trader must analyze the fundamentals of an asset to determine whether it is undervalued or not, as determining this solely based on price is misleading.

Uncertainty

One of the most common reasons for financial market downturns is uncertainty. During crises such as the COVID-19 pandemic or the subprime crisis, all investors seek to withdraw their money from the market simply because it is unclear what the future holds. The question for the trader is: if other investors are withdrawing their funds because they do not know what the near future holds for that asset, why invest there? It is better to have certainty that, based on results or improved expectations, the asset can be purchased at a lower price.

My opinion about this quote

Indeed, it is one of the key principles all traders should keep in mind when managing their finances. I believe that the most important aspect of investing is not just making money, it is avoiding losses due to lack of knowledge. I am among the investors who believe that as you gather more information, the risk of investing decreases. Therefore, determining that an asset is oversold with the sole source of information being its price is one of the biggest risks one can take in this business. I encourage traders to analyze this quote, as to succeed in the stock market, the most important thing is to avoid making impulsive decisions. Each investment decision should be executed following a consistent strategy or research.

Why should I be interested in this post?

Are you interested in starting to invest in the financial market? Do you want to learn how volatility and uncertainty affect asset prices? Would you like to take advantage of price drops in assets but are unsure when to buy? If your answer to these questions is affirmative, I invite you to read this post, as it will discuss all the topics related to these ideas. It will provide you with a more realistic view of what happens in the market, allowing you to resist the temptation of impulsive investing.

Useful resources

Hull J.C. (2021) Options, Futures, and Other Derivatives Pearson, 11^th Edition.

Lynch, P. (2015) One Up On Wall Street. Editorial: Titivillus.

About the author

The article was written in December 2023 by David GONZALEZ (ESSEC Business School, Grande Ecole Program – Global BBA, 2023-2024).

Posted in Contributors, Quotes | Tagged Peter Lynch | Leave a comment

Discovering the Secrets of a Bank Trading Room

Posted on December 11, 2023 by David GONZALEZ

Discovering the Secrets of a Bank Trading Room

In this article, David GONZALEZ (ESSEC Business School, Global BBA, 2023-2024) delves into the amazing yet often concealed aspects that frequently transpire within different bank trading rooms. This investigation is rooted in his experiences at Banco Industrial y de Comercio Exterior (BICE).

BICE Bank

BICE Bank was founded in 1979 in Santiago, Chile, under the name Banco Industrial y de Comercio Exterior by a significant group of Chilean investors associated with some of the country’s leading export companies. Currently, BICE Bank has focused on providing services to high-income individuals in Chile. Currently, it is the seventh-highest commercial bank in Chile.

Logo of the company.
Logo of Banco BICE
Source: the company.

My Internship at BICE

Ever since I was young, I have been drawn to the financial markets. This was the primary reason that led me to select a nine-month internship in the Market Risk and Liquidity division, a component of the trading room at BICE Bank. My primary responsibility was to provide daily reports on various risk indicators to the trading room, with a particular emphasis on highlighting the changes resulting from different trades conducted during the day. In the following paragraphs, I will provide a brief overview of some of the main indicators I was tasked with explaining, after that, I am going to talk about some interesting things that every aspiring trader should know about this business.

The risk indicators that I was in charge of

Value at Risk (VaR)

This indicator aims to quantify the worst-case scenario of losses in the bank’s portfolio, taking into account historical market data. In other words, it provides an estimate of the likely amount of money the portfolio could lose in a day of financial crisis (a stress scenario).

Present Value of 1 Basis Point (PV01)

This indicator seeks to quantify the potential loss in the portfolio resulting from a one-basis-point increase in interest rates. It is important to note that this indicator is applicable only to fixed-income assets, as it attempts to predict the change in the value of a bullet bond that is dependent on interest rate fluctuations.

Liquidity Coverage Ratio (LCR)

Have you ever heard of interbank loans? This indicator is of paramount importance to bankers as it assesses whether the bank possesses sufficient liquidity as required by regulatory standards or even for normal day-to-day operations. If the LCR falls below a certain threshold, the bank may need to enter into arrangements with a counterparty to borrow funds and restore this indicator to compliance.

Credit Value Adjustment (CVA)

Have you ever heard of the over-the-counter (OTC) market? Unlike centralized exchanges that guarantee the money or assets being traded, the OTC market lacks such centralized assurance. Banks frequently engage in OTC transactions, and the primary means by which they protect themselves against counterparty risk is through CVA. This is computed based on the credit rating of the counterparty. The CVA indicator reveals the bank’s exposure in relation to the counterparties with whom it conducts transactions.

Required skills and knowledge

In general, large trading rooms not only trade on the stock exchange, which is widely known, but they also engage in transactions in the over-the-counter (OTC) market. It was crucial for me to understand how this market operates, including what a swap is, what a forward contract entails, and how interest rates and inflation expectations influence the financial market. This knowledge was essential because I needed to stay informed about how macroeconomic factors or new transactions affected the bank’s portfolio. Every move in each risk indicator had to make economic or financial sense before being reported to the traders.

As for soft skills, effective communication when required was clearly important. Maintaining composure and seeking solutions rather than assigning blame when issues arose at work were vital skills as well. Furthermore, the ability to proactively seek solutions independently before seeking assistance from someone who might be occupied with their own tasks was crucial.

What just few people know (knowing the business)

Understanding Different Types of Trading Rooms: A Crucial Insight for Aspiring Traders

When I started working at BICE Bank, my boss told me that the bank had two trading rooms: one of them was the main trading room of the bank, and the other was the trading room of the stockbrokerage (which is a subsidiary of the bank). Obviously, this didn’t make sense to me, and I wondered, what is the reason for having two different trading rooms on two different floors of the building? When I expressed this concern to my boss, he explained, “It’s because they are oriented towards different sides. The main trading room focuses on the buy side, which means that traders manage, invest, and build portfolios while seeking returns within the risk level stipulated by the risk department. Usually, hedge funds, banks, insurance companies, and pension funds have this emphasis.” He continued, “The other trading room is part of the stockbrokerage, which is a subsidiary of this bank. They focus on the sell side. In this case, traders are responsible for executing transactions for clients who use our brokerage service. In other words, these traders don’t make decisions; they simply follow clients’ orders. Examples of this side include investment banks, brokerage firms, and market makers.”

Future traders must be clear on which side of the market they want to be on, so they can choose the right path for their careers. If the goal is to build their own portfolio and invest based on their own analyses and expectations, while assuming a higher level of risk, the trader should opt for the buy side. Conversely, if the aim is to avoid the risk of losses associated with maintaining a personal portfolio and only focus on achieving the best prices in the market, the sell side is the preferable choice. In this scenario, all the risk would be borne by the clients, as the trader would merely act as an intermediary between them and the market.

Financial concepts related my internship

The trader who triumphed over the 2008 crisis (Risks)

During my tenure at the bank, I had the privilege of meeting several senior traders, most of whom had over 20 years of experience in the market. One of them shared a fascinating story about how he navigated through the 2008 crisis.

Banks typically maintain a rather conservative investment policy, meaning they are risk averse. Consequently, one of the most common strategies is securities arbitrage (buying securities in a market where they are undervalued and selling them in other more expensive market). This strategy carries zero exposure, and profits are guaranteed when operating with substantial sums of money. This particular trader happened to be engaged in arbitrage on the day the 2008 financial crisis erupted. Upon realizing the unfolding catastrophe, he promptly closed his long positions remaining the shorts, that resulting in astronomical profits at a time when the global economy was collapsing.

Future traders looking to be on the buy side need to consider which financial institution is the best for advancing their career. Hedge funds, commercial banks, insurance companies, and pension fund managers tend to differ in terms of risk tolerance, either due to their own institutional policies or regulatory guidelines. For instance, in Chile, the regulatory commission does not allow commercial banks to invest in stocks.

Why a Chilean bank is concerned about federal reserve FED (Interest rates)

I had the fortune of gaining my experience at this bank during a period when the Fed and most central banks worldwide were raising their interest rates as a measure to control inflation stemming from the expansive policies implemented during the COVID-19 pandemic. I noticed that the traders were always closely monitoring the Fed’s announcements and whether they aligned with market expectations.

Intrigued by the heightened anticipation surrounding the market, I decided to seek insight from one of the traders. He offered the following explanation: “There are several factors contributing to this heightened attention. Primarily, monetary policy decisions in an inflationary environment tend to shape our trading strategies. On one hand, rate hikes affect all fixed-income assets, potentially causing our portfolio to depreciate in value and elevating risk indicators like VaR. Additionally, when the Federal Reserve tends to raise interest rates, it becomes more profitable for institutional investors to purchase bonds due to the relatively low levels of risk premium and liquidity premium demanded. Lastly, we also consider short positions in emerging market currencies since the dollar typically appreciates in the midst of Fed rate hikes.”

Federal Reserve announcements typically tend to influence financial markets. This is mainly because they shed light on the current state of the economy, enabling institutional investors to assess whether it is more profitable to invest in fixed income or equities. This assessment considers the risk premium and liquidity premium demanded from assets.

Liquidity the most important but the most avoided for banks (Banks Liquidity)

Every Monday afternoon, we held our weekly meeting where the latest developments were reported to the company’s top executives, including the CEO. During one such meeting, the bank’s CEO noticed that the bank’s liquidity indicators were quite comfortable, indicating an ample reserve of funds in the bank’s coffers.

Normally, customer deposits do not remain dormant in their accounts; instead, this money is put to use for investments or lent to other customers. Hence, the surplus liquidity captured the CEO’s attention. In the end, money entails a trade-off, and maintaining it in reserve can prove rather costly. The CEO raised a query regarding this with the head of the trading room, who clarified that the excess liquidity was a result of the impending release of the decision on whether to change the Chilean constitution or not, anticipated for that week. In anticipation of an adverse outcome, the trading room needed to uphold substantial liquidity to accommodate depositors wishing to withdraw their funds. The head of the trading room confirmed that, indeed, maintaining such high liquidity levels cost millions each day since interest rates were exceedingly high and the funds could have been invested. Nevertheless, this course of action was deemed necessary in light of the country’s political crisis.

Why should I be interested in this post?

Are you interested in pursuing a career in a trading room? Do you aspire to become a trader one day? If the answer is yes, you must read this post. By doing so, you will gain insights into how trading rooms operate and the various types of trading rooms available in the marketplace. Additionally, you will learn about some important concepts in finance, accompanied by an interesting story to introduce them.

Useful resources

Hull J.C. (2021) Options, Futures, and Other Derivatives Pearson, 11^th Edition.

Banco BICE (2022) Memoria Anual.

About the author

The article was written in December 2023 by David Gonzalez (ESSEC Business School, Grande Ecole Program – Global BBA, 2023-2024).

Posted in Contributors, Professional experiences | Tagged Bank BICE, Credit value adjustment, Liquidity coverage ratio, Value at risk | Leave a comment

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