Global Investment Management

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Prof Bruno Solnik

Asset Allocation

Portfolio Construction

Risk Management

Performance Evaluation

Prof Bruno Solnik

Objective of Portfolio Management

Maximize return for a given level of risk

Minimize risk for a set objective of return.

This is all about risk management: Eliminate bad risks, diversify risks, and take risks that will generate extra returns.

Prof Bruno Solnik

Strategic Asset Allocation

Decide of an asset allocation over the long run

Often takes the form of a benchmark

Based on Long-term Capital market expectations

Based on risk estimates

Prof Bruno Solnik

Tactical Asset Allocation

Strategic is the long-term anchor (say many years)

Based on current market conditions and revisions in expectations/risks, managers apply “tactical” revisions (shorter-term).

Prof Bruno Solnik

Asset Allocation Principles

An optimal strategic asset allocation is derived based on:

CME (Capital Market Expectations)

Investment objectives

Investor’s risk tolerance

Investor’s investment constraints

Investor’s liabilities

Risk estimates

Prof Bruno Solnik

Optimization

Investment firms use an optimizer

The basic one is the Mean-Variance optimizer). This is a quadratic program with constraints.

Some more sophisticated versions are sometimes used (shortfall risk, Bayesian updates, Tail risk, etc..).

We will talk about tail risk later. For the time-being, it is useful to think in terms of Mean-Variance optimization as all asset management companies mostly do.

Prof Bruno Solnik

Some Mathematics (for specialists)

Prof Bruno Solnik

Optimization: Efficient frontier

Prof Bruno Solnik

Optimization

Risk measures (volatility, correlation,..) are rather stable and can be easily updated.

Expected returns are difficult to asses and the most difficult part of the asset allocation optimization.

Prof Bruno Solnik

Strategic Asset Allocation

Derive “neutral” market expectations, meaning expected returns that are implied by market equilibrium.

Update those based on some beliefs of the portfolio manager (CME or Capital Market Expectations)

Construct an asset allocation based on those CME and a risk optimization.

Prof Bruno Solnik

Three Major Methods

There are three major methods used to derive neutral CME:

Use Historical returns for neutral expected return

Derive neutral expected return from CAPM

Derive neutral expected return from reverse optimization (Black-Litterman)

Prof Bruno Solnik

1. Long Term Capital Market Expectations: Historical

Historical records for mean returns, volatility, and correlation can simply be projected to repeat in the future. BUT:

Economic conditions in the past, especially the distant past, may not be relevant for the future. A market that has done exceptionally well (or poorly) in the past because of some specific events (e.g., liberalization of the economy) may not do so in the future because that specific event will not repeat.

Prof Bruno Solnik

Long Term Capital Market Expectations: Historical

The exceptional equity risk premium in the twentieth century (6 percent for U.S. stocks) was caused by two factors:

Earnings per share grew steadily.

Valuation multiples, such as the price / earnings ratio, grew dramatically over time.

Prof Bruno Solnik

Long Term Capital Market Expectations: Historical

Stock prices went up in part because of real growth, but more importantly, because valuation multiples rose impressively until 2000. To expect a similar equity risk premium in the future, an analyst must make the assumption that valuation multiples will continue upward to unprecedented levels.

Prof Bruno Solnik

Exhibit 13.4: Stocks, Bonds, Bills, Inflation: The Global Record (1900-2000) (Nominal returns in local currency in %: means calculated using geometric mean)

Source: Dimson Marsh and Staunton (2002) MAR: Mean Annual Return SD: Standard Deviation

Country	Equity		Bonds		Bills		Inflation
	MAR	SD	MAR	SD	MAR	SD	MAR	SD
Australia	11.9	18.0	5.7	13.0	4.5	4.2	4.0	5.5
Canada	9.7	16.8	4.9	9.0	4.9	3.7	3.1	4.9
Denmark	10.4	22.6	7.0	10.6	7.0	4.5	4.1	6.6
France	12.3	24.7	6.9	8.8	4.3	2.3	8.0	14.6
Germany	9.9	36.4	2.8	13.6	4.6	3.4	5.2	15.8
Italy	12.1	34.4	6.7	9.1	4.7	3.3	9.2	36.8
Japan	13.1	30.5	6.1	15.1	5.5	1.9	7.7	40.4
The Netherlands	9.1	22.7	4.1	7.6	3.7	2.4	3.0	5.0
Sweden	12.2	23.7	6.1	9.2	5.8	3.1	3.7	6.8
UK	10.2	21.9	5.4	12.6	5.1	3.9	4.1	6.9
US	10.3	20.0	4.7	8.1	4.3	2.8	3.2	5.0

Prof Bruno Solnik

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Second level

Third level

Fourth level

Fifth level

Update for Equity Risk Premium (1900-2010)

Prof Bruno Solnik

2. Long Term Capital Market Expectations: Forward-Looking (UBS and some others)

This method 2 is primarily used for asset allocation across asset classes (equity, bonds, real estate, etc..)

Calculate an updated covariance matrix (volatility and correlation of asset classes).

Infer expected returns for each asset class using the CAPM.

Adjust expected returns for possible market segmentation and illiquidity.

Prof Bruno Solnik

Recap of CAPM in matrix notations

By transformation

Prof Bruno Solnik

Exhibit 13.5: The Reward for Risk for Conventional & Alternative Investments

Source: Terhaar, Staub and Singer (2003)

Prof Bruno Solnik

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Second level

Third level

Fourth level

Fifth level

Long Term Equilibrium CME is the sum of:

Cash Return (Expected real rate plus inflation)

Market Risk Premium (à la CAPM)

Illiquidity/Segmentation Risk Premium

Non-Normality Risk Premium (hedge funds)

See UBS documents

Prof Bruno Solnik

Strategic Allocation

After optimization the SAA is derived with targets and range as in the example below:

Prof Bruno Solnik

Example: UBS Global Perspectives Fall 2009

Neutral/Equilibrium SAA

Tactical deviations based on misvaluation model.

The model is more complex than briefly described in the document. The idea is that UBS derives an over/undervaluation of each asset class and assume convergence in three years. Hence an expected return that will deviate from the long-term expectations.

Prof Bruno Solnik

3. Black & Litterman (Goldman Sachs & others)

This method 3 is primarily used for allocation within equity class.

The Black-Litterman model starts with equilibrium expected returns.

According to the Capital Asset Pricing Model (CAPM), prices will adjust until the expected returns of all assets in equilibrium are such that if all investors hold the same belief, the demand for these assets will exactly equal the outstanding supply. This set of expected returns is the neutral reference point of the Black-Litterman model.

The investor then can express her views about the markets.

Prof Bruno Solnik

Steps of Black-Litterman Portfolio Optimisation

Prof Bruno Solnik

Reverse Optimization (see Efficient frontier equations)

Prof Bruno Solnik

Inputting Investor’s Views (Bayesian) source J.P. Morgan

Views are incorporated in the form of matrices as inputs into the model.

Impact on Portfolio Weights source J.P. Morgan

Prof Bruno Solnik

The Whole Process source J.P. Morgan

Prof Bruno Solnik

Conclusions

Method 2 is primarily used for allocation across asset classes.

Method 3 is primarily used for allocation within the equity asset class.

They both rely on some theoretical foundations and are preferable to a simple mean-variance optimization which is too sensitive to the expected returns inputs and can yield extreme results.

Of course, a simple alternative to Method 3 is simply a passive investment in international index funds.

Prof Bruno Solnik

Key Takeaways: Asset Allocation 1

Markets are very efficient, we only play at margin.

Risk Allocation/Management is crucial in portfolio management.

We build a neutral/strategic allocation inspired by market considerations (CAPM)

We deviate tactically based on current views.

Prof Bruno Solnik

Key Takeaways: Asset Allocation 2

In allocation optimization we have three vectors:

E (expected returns)

X (allocation weights)

V (covariance matrix)

Given V and E

Given V and X E implied returns

Traditional optimization uses 1. and typically derives returns from history, CAPM and various personal inputs.

Reverse optimization uses 2. Derives equilibrium returns, adjust them by personal input and redo a direct optimization.

Prof Bruno Solnik

CLASS 1: Markets and Major Players

Equity (stocks)

Bonds

Others

Prof Bruno Solnik

Investment Markets

Stock Markets

Prof Bruno Solnik

Historical Differences in Trading Procedures – Price-Driven vs. Order Driven Markets

Automated trading systems have followed two different paths:

A market organization dominated by dealers making the market (also known as a price driven or quote driven market).

A market organization with brokers acting as agents in an auction system (also known as an order driven market).

Prof Bruno Solnik

Price-Driven Systems (Dealer Markets)

For example, NASDAQ, Forex

Market makers stand ready to buy or sell at posted prices.

The bid and ask quotes are firm commitments by the market maker to transact at those prices for a specified transaction size.

Only American stock markets have retained a price driven model.

This system is useful for trading large blocks. Also for small stocks to provide liquidity. But is costly for “average trades”.

Prof Bruno Solnik

Price-Driven Systems (Dealer Markets)

Advantages:

Easier to execute large block trades than an order-driven system.

Provides liquidity for “small” (illiquid) stocks.

Disadvantages:

More expensive to operate than the order driven markets.

Requires more human intervention.

Prof Bruno Solnik

Order-Driven Systems (Auction Markets)

For example, Paris, Frankfurt, Tokyo and elsewhere

Traders publicly post their orders and the transaction price is the result of the equilibrium of supply and demand.

Most markets (including emerging markets) have adopted this system.

All buy and sell orders are entered in a central order book and a new order is immediately matched with the book of limit orders previously submitted.

To improve liquidity, most have retained periodic call auctions.

Prof Bruno Solnik

Example on order book

Prof Bruno Solnik

LVMH (Moët Hennesy Louis Vuitton) is a French firm listed on the Paris Bourse. You can access the central limit order book directly on the Internet and find the following information (the limit prices for sell orders are ask prices and those for buy orders are bid prices):

Sell Orders		Buy Orders
Quantity	Limit	Limit	Quantity
1,000	58	49	2,000
3,000	54	48	500
1,000	52	47	1,000
1,000	51	46	2,000
500	50	44	10,000

Order-Driven Systems (Auction Markets)

Advantages:

Requires little human intervention.

Less costly to operate.

Markets with lesser transaction volumes have found it more efficient to adopt.

Disadvantages:

The absence of developing market making (orders with no price limits).

Difficulty in executing large trades.

Prof Bruno Solnik

Risks in Order-Driven and Price-Driven

In Price-Driven, dealers stand a risk of being “picked up”.

In Order-Driven, limit orders stand a risk of being “picked up”.

Prof Bruno Solnik

What about the NYSE?

The NYSE has developed a hybrid market that combines traditional floor-trading and electronic auction trading.

The automated platform is based on the Archipelago system.

The electronic system allows one to find the best transaction price on the NYSE or elsewhere.

BUT competing markets have developed in the USA, especially for large trades.

Prof Bruno Solnik

BUT competing markets have developed in the USA, especially for large trades.

Prof Bruno Solnik

What about Hong Kong?

In 1891 the first formal securities market, the Association of Stockbrokers in Hong Kong, was established. A few decades later it was renamed the Hong Kong Stock Exchange (HKSE) or the Stock Exchange of Hong Kong (SEHK). A second exchange, the Hong Kong Stockbrokers' Association was opened in 1921. The two exchanges merged to form the Hong Kong Stock Exchange in 1947.

The HKSE also merged with other four national exchanges in the end of the 20th century. The new exchange started trading through a computer-assisted system on 2 April 1986. The unified exchange had 570 participating organizations.

In 1993, the Exchange launched the Automatic Order Matching and Execution System (AMS) that was replaced by the third generation system (AMS/3) in October 2000. The new system enabled the exchange participants to trade from their offices.

The HKSE launched its traded stock options market in 1995. In 1999, the HKSE opened the Growth Enterprise Market (GEM) that made the access to the capital market easier for riskier businesses. Finally, the Stock Exchange of Hong Kong together with Hong Kong Futures Exchange Ltd. established in 1976 and Hong Kong Securities Clearing Company Ltd. incorporated in 1989 merged to form a unified company Hong Kong Exchanges and Clearing Limited (HKEx) in 2000.

Prof Bruno Solnik

Market Sizes of Stock Markets (in billion US$, End 2014, right column is “largest regional markets”)

Prof Bruno Solnik

Evolution of Market Share

Total World market cap end 2014: US$ 67 trillion

Total World market cap early 1975: US$ 1 trillion

Reached US$ 63 trillion end-2007

The relative market capitalization of national equity markets has changed dramatically over time.

The share of the U.S. equity markets moved from two-thirds of the world market in the early 1970s to only one-third by the early 1990s, when Japan had about the same market size as the United States.

In 2014, American equity markets represented 45% of the world market cap, with Asia-Pacific accounting for approximately 31% and Europe 24%.

Prof Bruno Solnik

Cross-Holding: An Overevaluation of Market Cap

Company A is founded with 100 shares worth 1.

Company B is founded with 100 shares worth 1.

Total market capitalization is = 100 + 100

Then, each company issue 100 new shares and swap them.

So company A controls 50% of company B, and company B controls 50% of company A.

Total market capitalization = ?

Prof Bruno Solnik

Balance Sheet before new share issue

A Assets	A Equity
100	100

B Assets	B Equity
100	100

Prof Bruno Solnik

Balance Sheet after new share issue

A Assets	A Equity
100	200
Shares B: 100

B Assets	B Equity
100	200
Shares A: 100

Prof Bruno Solnik

Cross-holding artificially inflates market capitalization

This is frequent in Asia (Korean Chaebol, Japanese keiretsu, Family groups in HK, etc… )

An adjustment has to be made by subtracting crossholdings.

Adjusted free float = value of total outstanding shares − value of shares held by other companies of the Group

Prof Bruno Solnik

Cross-holding Adjustments – An Example

Question

Company A owns 40% of Company B

Company B owns 30% of Company C

Company C owns 20% of Company A

Each company has a total market capitalization of 200 million. You wish to adjust for cross-holding to reflect the weights of these companies in a market weighted index. What adjustment would you make to reflect the free float?

Prof Bruno Solnik

Cross-holding Adjustments – An Example

Solution:

The apparent market cap of these three companies taken together is 600 million.

But the “float” (shares available to investors outside the Group) of Company A should be reduced by the 20% held by Company C: 200 – 20% × 200 = 160

The adjusted market capitalization is:

160 + 120 + 140 = 420 million

Prof Bruno Solnik

Formula to compute Free Float

Adjusted free float = value of total outstanding shares in company i − value of shares held by other companies of the Group

Examples:

Adjusted market value of company A

= 200 − 20% × 200 = 160

Adjusted market value of company B

= 200 − 40% × 200 = 120

Adjusted market value of company C

= 200 − 30% × 200 = 140

Prof Bruno Solnik

Liquidity

Turnover ratio is computed as transaction volume relative to market capitalization.

Sometimes called “share turnover velocity”.

Illiquidity tends to imply higher transaction costs.

Depending on the years observed, comparison of national market liquidity based on turnover ratio can lead to different conclusions.

Prof Bruno Solnik

Liquidity: Annual Turnover on Major Stock Markets

Prof Bruno Solnik

Concentration

Investors need to know whether a national market is made up of a diversity of firms or concentrated in a few large firms.

A market that is dominated by a few large firms provides fewer opportunities for risk diversification and active portfolio strategies.

On the NYSE and Tokyo Stock Exchange, the top 10 firms represent less than 20% of total market cap.

Conversely, in Switzerland, the top 10 firms account for approx. 70% of total market cap.

In Finland, Nokia was larger than the sum of all the other Finnish companies.

Prof Bruno Solnik

Concentration: Share of the Ten Largest Listed Companies in the National Market capitalization

Prof Bruno Solnik

Tax Aspects

Taxes can be applied in:

Investor’s country

Investment’s country

Transactions, capital gains and income

The international convention on taxing income is to make certain that taxes are paid by the investor in at least one country, which is why withholding taxes are levied on dividend payments.

Hong Kong does not have tax treaty with many countries, but that is changing.

Prof Bruno Solnik

Formula for Tax paid at home: Dividends

Net dividend received in foreign currency

DR= Dividend per share in foreign currency × no. of shares × (1 − dividend withholding tax rate)

Gross Taxable Dividend income to be declared at home

DI = Dividend per share in foreign currency × no. of shares × exchange rate

Tax credit to be claimed at home:

TC = Dividend per share in foreign currency × no. of shares × exchange rate × withholding tax

If t is your home tax rate on dividends, tax to be paid

= DI × t - TC

Prof Bruno Solnik

Formula for Tax paid at home: Capital Gains

Prof Bruno Solnik

Capital gains are not taxed in foreign country

Capital gains in home currency

= Sale of shares in local currency − Purchase of shares in local currency

Apply your home capital-gain tax rate. Capital gains are not taxed in foreign country

Example

The shares of Volkswagen trade on the Frankfurt stock exchange. A U.S. investor purchased 1,000 shares of Volkswagen at €56.91 each, when the exchange rate was €1 = $0.9790 (this is the value of one euro, or €/$, or $ per €). Three months later, the investor received a dividend of €0.50 per share, and the investor decided to sell the shares at the then prevailing price of €61.10 per share. The exchange rate was €1 = $0.9810. The dividend withholding tax rate in Germany is 15% and there is a tax treaty between the U.S. and Germany to avoid double taxation.

How much did the U.S. investor receive in dividends in dollars, net of tax?

What were the capital gains from the purchase and sale of Volkswagen’s shares?

How would the dividend income be declared by the investor in the U.S. tax returns?

Prof Bruno Solnik

Solution

1. Net dividend in Euros, after deducting withholding tax = €0.50 per share × 1,000 shares × (1 – 0.15) = €425. So, the net dividend in dollars = €425 × $0.9810/€ = $416.93.

2. The investor bought the shares for €56.91 per share × 1,000 shares = €56,910, or €56,910 × $0.9795/€ = $55,743.35.

The investor sold the shares for €61.10 per share × 1,000 shares = €61,100, or €61,100 × $0.9810/€ = $59,939.1.

Thus capital gains = 59,939.1 – 55,743.35 = $4,195.75.

3. The investor would need to declare the total dividends, that is, without deducting the withholding tax, as dividend income. So, the dividend income to be declared is €0.50 per share × 1,000 shares × $0.9810/€ = $490.50.

Note that because of the tax treaty between the U.S. and Germany, however, the investor can deduct from income tax a tax credit for the dividends withheld in Germany; the tax credit is 490.50 – 416.93 = $73.57. (The tax credit can be computed alternatively as €0.50 per share × 1,000 shares × 0.15 × $0.9810/€ = $73.57.)

Prof Bruno Solnik

Execution Costs

Execution costs can reduce the expected return and diversification benefits of an international strategy.

Best execution refers to executing client transactions so that the total cost is most favorable to the client under the particular circumstances at the time.

Prof Bruno Solnik

Execution Costs

We can look at three costs (listed in order of decreasing reliability of estimation):

Commissions, Fees and Taxes.

Explicit and easily measurable.

Market Impact.

Dependent on order size, market liquidity for the security and the speed of execution desired by the investor.

Opportunity Costs.

Loss (or gain) incurred as the result of delay in completion of, or failure to complete in full, a transaction following an initial decision to trade.

Prof Bruno Solnik

Estimation and Uses of Execution Costs

Global Surveys:

These give market averages for a typical trade in each country.

Total execution cost is a function of transaction size and market depth.

VWAP (volume-weighted average price):

The difference between the actual trade price and the VWAP benchmark price is an indication of execution costs.

Implementation Shortfall:

Difference between the value of the executed portfolio (or share position) and the value of the same portfolio at the time the trading decision was made.

Prof Bruno Solnik

For “small” Orders

Measure the bid-ask spread as quoted by Dealer or as implicit in the Order Book.

Execution costs:

Commission & Tax

Half the bid-ask spread (assumes that the “true” market value is the mid-point)

Prof Bruno Solnik

Execution Costs in Basis Points (2010)

Prof Bruno Solnik

Using Expected Execution Costs

The annual expected return net of execution costs is measured as:

Net expected return = E(R) − Turnover ratio × Execution costs

Prof Bruno Solnik

Impact of Execution Costs – an example

Question: Basil Richards follows an active international asset allocation strategy and observes the following data. The average execution cost for a buy or a sell order is forecasted at 0.75 percent. The portfolio has a turnover ratio of 1.2 times a year. The annual expected return before transaction costs is 11%. What is the annual expected return net of execution costs?

Prof Bruno Solnik

Impact of Execution Costs – an example

Solution:

Net expected return = E(R) − Turnover ratio × Execution costs

Net expected return = 11% − 1.2 × 1.5% = 9.2%

Prof Bruno Solnik

Bond Markets: for comparison purposes

Prof Bruno Solnik

World Bond Market

The World bond market is made up of three different types of markets:

Domestic Markets

Foreign bonds

International bonds (formerly known as Eurobonds)

Prof Bruno Solnik

World Bond Market Capitalization (all maturities)

Total market cap as of 2013: around US$ 90 trillion

National Markets (incl. foreign bonds): US$ 65 trillion

International bonds: US$ 25 trillion

Prof Bruno Solnik

Other Markets

Derivatives: futures, forward, options

Alternative investments (detailed later)

Prof Bruno Solnik

Major Players

Private investors

Institutional Investors

Investment Professionals

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Private Investors

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Number and Financial assets of HNWIs, 2014 World Wealth Report, CapGemini-RBC Wealth Management

In 2014, there were some 14 million HNWIs (financial wealth over $1 million).

Their wealth around $53 trillion.

Ultra-HNWIs (financial wealth over $30 million) own some $17 trillion. They are 1% of the HNWI population but 35% of the wealth.

The financial assets of high net worth individuals (HNWI) are huge and present an attractive market for investment professionals.

Asia, Europe and North America have approximately equal wealth of 12 to 15 trillion. The rest is in the Middle East, Latin America and Russia.

Prof Bruno Solnik

Total Wealth of HNWI, CapGemini-RBC

Prof Bruno Solnik

Asset Allocation

The investment behavior of individual investors is somewhat different from that of institutional investors described below.

Individuals tend to invest relatively more in non-tradable assets such as real estate, hedge funds or structured products. But there are also marked differences in the profile and behavior of HNWI across regions.

Prof Bruno Solnik

HNWI’s Allocation of Financial Assets

Institutional Investors

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Institutional Investors

Mutual Funds (unit trusts)

Pension Funds (called Retirement Schemes, MPF in HK)

Insurance Companies (Life and P&C)

Endowment and Foundation

Prof Bruno Solnik

Mutual funds

Open-end funds (vast majority):

NAV

Redemption (different clauses, games)

Fees

ETF, see later

Closed-end funds

See Global Investments

Prof Bruno Solnik

Pension Systems

Various types:

PYG (pay as you go): current workers contribute for benefits (pension) of current retirees.

Capitalized: current workers invest (contribute) in savings (pension fund) that will pay benefits when they retire.

Prof Bruno Solnik

HONG KONG

Two types of retirement schemes:

In December 2000 was launched a Mandatory Provident Fund (MPF) system, providing retirement based on mandatory and voluntary contributions by employers. Around 40 MPF providers (schemes) with AUM over HK$540 billion in 2014.

Prior to it, voluntary ORSO (Occupational Retirement Schemes Ordinance). Each scheme can be different. AUM around HK$290.

There are some statutory pension or provident funds (civil servants, public school teachers,…).

Prof Bruno Solnik

Pension Funds

The investment approach of pension funds is greatly affected by the way future benefits are planned.

There are basically two plan types and a combination thereof:

A defined benefit pension plan (DB) which promises to pay beneficiaries a defined income after retirement. The benefit depends on factors such as the workers’ salary and years of service.

A defined contribution plan (DC) where the amount of contributions paid is set, usually as a percentage of wages, but future benefits are not fixed.

Prof Bruno Solnik

Pension Funds — Types

In a traditional pension fund, all contributions are pooled and the total money is managed collectively. A board of Trustees sets the investment policy of the fund.

A recent trend is to give more investment decision power to each employee. (E.g., 401(k) plans in the U.S., or MPF in HK)

Prof Bruno Solnik

Institutional Investors: Endowments and Foundations

Concerned about total return in the long run.

Capital gains and income on the assets can be used to meet budgetary needs.

Tend to have great investment freedom, because they operate under few regulatory constraints.

Often the most aggressive institutional investors, with many having extensive global and alternative investments.

Prof Bruno Solnik

Institutional Investors: Insurance Companies

Collect premiums on life insurance and on property and casualty insurance, which are invested until claims are paid.

Heavily regulated in each country and state in which they operate.

Tend to adopt conservative investment policies.

Tend to focus on fixed income assets, in order to assure their claim-paying ability.

This is a financial intermediary with large AUM.

Prof Bruno Solnik

The Economics of an Insurance Company

Business profits come from combined ratio:

Financial profits come from return on invested premiums

Prof Bruno Solnik

Example of Zurich Group, in US$ billion, June 2007

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A simple illustration of the importance of ALM

Typical Balance Sheet with total assets & liabilities of 100.

Investment portfolio of 75 made up of 15 in equity and 60 in bonds

Shareholder’s equity 10

Prof Bruno Solnik

A simple illustration of the importance of ALM

Typical balance sheet1 of an insurance company (excluding unit-linked business)

Asset Allocation: 20% Equities of Group Investments or 15% of total assets

Interest Rate Mismatch Modified Duration: - Fixed Income: 5 years - Insurance Liabilities: 7 years

100

Assets

Liabilities

Shareholders’

Equity

Group Investments

Fixed Income

Insurance Liabilities

Other Assets

Other Liabilities

100

Equities

Prof Bruno Solnik

Simple example

Of an insurance company

“Surprising” impacts of capital market movements

Simplified economic balance sheet

Asset and liabilities

Assets dominated by investment

20% allocation to equities - 15% of total assets

Dominance of fixed income

duration 5 years.

Simple liabilities

Modified duration 7 years.

Like negative bond - duration of 7 years.

This investment strategy looks normal

What happens to the balance sheet

Case of recession.

equities fall 40%

interest rates fall by 2%.

Typical scenario in 2001 to 2003.

Reminder on Bonds and Duration

There is an inverse relationship between the price of a bond and changes in interest rates.

If the bond's cash flows are fixed, the price is solely a function of the market yield. Practitioners usually define interest rate sensitivity, or duration, as the approximate percentage price change for a 100 basis points (1%) change in market yield. Mathematically, the duration D can be written as:

where P/P is the percentage price change induced by a small variation r in yield.

Prof Bruno Solnik

Negative equity markets can have a significant impact on shareholders’ equity

Prof Bruno Solnik

Typical balance sheet1 of an insurance company (excluding unit-linked business)

Assets

Liabilities

Balance sheet1 after a 40% decrease in equity markets

100

Assets

Liabilities

Shareholders’

Equity

Group Investments

Fixed Income

Insurance Liabilities

Other Assets

Other Liabilities

100

Equities

-40%

equities

1 Balance sheet on an economic basis

In addition falling interest rates lead to a further deterioration of economic capital

Prof Bruno Solnik

Balance sheet1 after a fall of interest rates by 2%

100

Assets

Liabilities

100

Balance sheet1 after a 40% decrease in equity markets

Shareholders’

Equity

Insurance Liabilities

Other Liabilities

Group Investments

Fixed Income

Other Assets

Equities

Assets

Liabilities

-2% interest rates

1 Balance sheet on an economic basis

First step is to model liabilities

Depending on the type of contract (Life insurance, P&C, ...), the model can be quite different.

While a Bond-like model is a first approximation for each type of liability, there are some optional contract clauses to be incorporated.

Typically the liabilities can be summarized in a bond-like benchmark with some average duration. This will be the “risk-free” benchmark.

Prof Bruno Solnik

Insurance Company: Asset Allocation Optimization Principles

Economic: We value assets and liabilities at market value and perform asset liability optimization.

Accounting: Some securities are “held to maturity” and hence not marked to market. Present value of insurance liabilities are not frequently revalued. Hence a focus on the “accounting” net income from investments.

Regulatory: Regulators have their own views of risk. They use (and so do insurance companies) Risk Based Capital.

Prof Bruno Solnik

Major Players: Investment Professionals

Prof Bruno Solnik

100

Investment Managers

Brokers

Consultants and Advisers

Custodians

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101

Investment Managers

Range from the asset management department of banks to independent asset management boutiques specializing in offering specific investment products. Hedge funds are a recent breed of investment managers.

Some asset managers cater to retail clients as well as institutional clients, while others serve the needs of one type of client.

Prof Bruno Solnik

102

Brokers

Play an important role in terms of implementing security trades and in research of companies and markets.

Sell-side analysts: work for brokerage firms and make recommendations to clients.

All CFA® charter holders and CFA candidates must follow the CFA Institute® Code of Ethics and Standards of Professional Conduct, wherever they work and invest.

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Consultants and Advisers

Better known for their work with pension funds, but they also work with private clients and other types of investors.

Play a major role in the asset management industry.

Independent consulting firms have traditionally advised U.S. pension funds, while actuaries played a similar role in the U.K.

Consultants also focus on services such as recommending asset allocation, selecting investment managers and monitoring performance, and giving tax and legal advice.

Their most sensitive role is the process of selecting, hiring and firing external managers.

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Custodians

Securities owned by investors are deposited with a custodian, which often uses a global network of sub-custodians.

Information technology is an important component of custodial services

With the high development costs of software, many banks have sold their custodial activities, and further consolidation is expected in the future, because economies of scale can be significant in this business.

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Key Takeaways: Major Markets and Players 1

Financial markets are diverse. A good understanding of their mechanisms can help get better trading prices.

Market Cap is important because many investors benchmark to market indices. Need to better understand free float.

Execution costs are of great importance and should be focused on.

Explained how global taxes work.

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Key Takeaways: Major Markets and Players 2

Investors are diverse and we reviewed some of their asset allocation.

To better understand how some institutional investors act, we spent time on one of the lesser-known but huge investor type, insurance companies. Stressed the importance of ALM

This also provides a link to the next topic : asset allocation

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From Asset Allocation to Portfolio Management

Equity

Fixed Income (Brief, see Module 6)

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Global Equity Investment

Passive approach (ETF)

Factor Models (Roll & Ross, BARRA)

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Global Investment Philosophies

An investment management organization must make certain major choices in structuring its global decision process, based on:

Its view of the world regarding security price behavior

Its strengths, in terms of research and management

Cost aspects

Its location and prospective domestic / global marketing strategy

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From Passive to Very Active

Asset Allocation:

Strategic Asset Allocation

Active Asset Allocation (TAA)

Index Funds (ETF, trackers etc…)

Portfolio construction:

Managing/Selecting Risk Exposures

Looking for Alphas (individual securities)

“Deals”

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From Passive to Very Active

Portfolio Management is about taking risks:

Avoid bad risks

Diversify risks (free lunch)

Take some bets (good risks)

A passive index is usually assigned as benchmark.

Increase/reduce the risk exposure (betas) of the portfolio opportunistically

Try to generate alphas by selecting undervalued securities.

Note: We do not do company valuation here (see Module 6)

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Risk-Adjusted measure: Asset Allocation

From an Asset allocation viewpoint, one looks at the total risk taken and compare return to a no-risk investment (risk-free asset).

The total risk is simply the sigma (s) and the risk-adjusted return is the Sharpe ratio:

Where R0 is the risk-free rate.

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Risk-Adjusted measure: Portfolio

Looking at an asset class (say US equity), one looks at the risk taken relative to the benchmark (tracking error) measured as the standard deviation of excess returns.

Then one compares the realized excess return over the risk taken (tracking error).

More in Class 6

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Global Investment Philosophies: Passive Approach

This approach simply attempts to reproduce a market index of securities (index fund approach).

It is an extension of modern portfolio theory, which claims that the market portfolio should be efficient.

The trend toward global indexing is strongly felt among institutional investors.

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Global Investment Philosophies: Passive Approach

Various indexing methods can be used:

Full replication

Stratified sampling

Optimization sampling

Synthetic replication

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Index Funds

Mutual Fund

ETF (Exchange Traded Fund or Trackers). The big names are BlackRock (iShares), State Street Global Advisors (Spiders), Vanguard..

There are many ETF traded in Hong Kong, and Singapore or elsewhere.

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Fund Management Fees

Investment companies charge fees, some as one-time charges and some as annual charges.

- For managed funds, loads are simply sales commissions charged at purchase (front-end) as a percentage of the investment. A redemption fee (back-end load) is a charge to exit the fund. Redemption fees discourage quick trading turnover and are often set up so that the fees decline the longer the shares are held (in this case, the fees are sometimes called contingent deferred sales charges). Loads and redemption fees provide sales incentives but not portfolio management performance incentives.

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Fund Management Fees

Investment companies charge fees, some as one-time charges and some as annual charges.

- Annual charges are composed of operating expenses including management fees, administrative expenses, and continuing distribution fees.

- Typical example for active stock portfolio could be: Load of 3%, expense ratio of 1.5% (1% management fee, 0.25% administrative expenses, 0.25% distribution fee).

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What are Exchange Traded Funds (ETFs)

They are shares of a portfolio, not of an individual company.

ETFs are index-based investment products that allow investors to buy or sell exposure to an index through a single financial instrument.

The market maker commits to bid and ask prices around the index value. For active ETFs the bid-ask spread is small. (See detailed description in Global Investments textbook)

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Exchange Traded Funds (ETFs)

ETF is a special case of a fund that tracks some market index but that is traded on a stock market as any common share.

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Exhibit 8.1 Creation/Redemption Process of Exchange Traded Funds

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II. Factor Models

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The factors are measured as the return on some index portfolio representative of the factor (“mimicking portfolios”). For example, the oil industry factor could be proxied by the return on a global stock index of oil firms. Various statistical techniques can be used to optimize the factor structure.

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The exposure can be assessed a priori by using information on the company studied. This usually leads to a 0/1 exposure. For example, Exxon would have a unitary exposure to the oil industry factor and zero exposures to all other industry factors, because it is an oil company.

The exposure can be estimated using a multiple regression approach. The exposures would then be the estimated betas in a time-series regression.

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Macro factor: Roll-Ross APT

Attribute factor: Barra

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II a) Roll & Ross APT

Confidence factor

Time horizon factor

Inflation factor

Business cycle factor

Market-timing factor

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Roll & Ross (APT)

Confidence factor (ƒ1).

This factor is measured by the difference in return on risky corporate bonds and on government bonds.

The default-risk premium required by the market to compensate for the risk of default on corporate bonds is measured as the spread between the yields on risky corporate bonds and government bonds. A decrease in the default-risk spread will give a higher return on corporate bonds and implies an improvement in the investors’ confidence level.

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Roll & Ross (APT)

Confidence factor (ƒ1) continued

Confidence risk focuses on the willingness of investors to undertake risky investments.

Most stocks have a positive exposure to the confidence factor (1 > 0), so their prices tend to rise when the confidence factor is positive (ƒ1 > 0).

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Time horizon factor (ƒ2)

This factor is measured as the difference between the return on a 20-year government bond and a one-month Treasury bill.

A positive difference in return is caused by a decrease in the term spread (long minus short interest rates). This is a signal that investors require a lesser premium to hold long-term investments.

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Time horizon factor (ƒ2) continued

Growth stocks are more exposed (higher 2) to time horizon risk than income stocks. The underlying idea is to view the stock price as the discounted stream of its future cash flows. The present value of growth stocks is determined by the long-term prospects of growing earnings while current earnings are relatively weak (high PE ratio). An increase in the market-required discount rate will penalize the price of growth stocks more than the price of value stocks.

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Inflation factor (ƒ3).

This factor is measured as the difference between the actual inflation for a month and its expected value, computed the month before, using an econometric inflation model.

An unexpected increase in inflation tends to be bad for most stocks (3 < 0), so they have a negative exposure to this inflation surprise (ƒ3 > 0). Luxury goods stocks tend to be most sensitive to inflation risk, whereas firms in the sectors of foods, cosmetics, or tires are less sensitive to inflation risk. Real estate holdings benefit from increased inflation.

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Business cycle factor (ƒ4).

This factor is measured by the monthly variation in a business activity index.

Business cycle risk comes from unanticipated changes in the level of real activity. The business cycle factor is positive (ƒ4 > 0) when the expected real growth rate of the economy has increased. Most firms have a positive exposure to business cycle risk (4 > 0). Retail stores are more exposed to business cycle risk than are utility companies, because their business activity (sales) is much more sensitive to recession or expansion.

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Market-timing factor (ƒ5).

This factor is measured by the part of the Benchmark total return (e.g. S&P 500 for US) that is not explained by the first four factors.

It captures the global movements in the market that are not explained by the four macroeconomic factors. The inclusion of this market-timing factor makes the CAPM a special case of the APT. If all relevant macroeconomic factors had been included, it would not be necessary to add this market-timing factor.

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How to use Factor Models

Factor models are linear. Hence the betas (exposures) of a portfolio are simply the weighted-average betas of the stocks in the portfolio

The benchmark (market index) has some exposure to the various factors. A difference between the portfolio betas and the benchmark betas implies that the future return on the portfolio is going to be different from the return on the benchmark.

A manager takes bets on the various factors to try to beat the benchmark.

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A Simple Example

Discuss the various exposure (start with S&P 500)

What are the exposures of a portfolio invested half in Tata and half in SuperMark.

You believe that confidence and business activity will improve without affecting inflation. Which company would you overweight?

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A Simple Example: solution 2) & 3)

If confidence and business activity will improve without affecting inflation, I should overweight Tata.

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II b) BARRA Models (BIM, etc…)

World factor

Country factor

Industry factor

Style factor (Size, value, Momentum) inspired by Fama and French model

Other factors (leverage, volatility)

Currency

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Styles or Attributes

Value stocks do not behave like growth stocks. A value stock is a company whose stock price is “cheap” in relation to its book value, or in relation to the cash flows it generates (low stock price compared to its earnings, cash flows, or dividends). A growth stock has the opposite attribute, implying that the stock price capitalizes growth in future earnings. This is known as the value effect.

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Styles or Attributes

Small firms do not exhibit the same stock price behavior as large firms. The size of a firm is measured by its stock market capitalization. This is known as the size effect.

Winners tend to repeat. In other words, stocks that have performed well (or badly) in the recent past, say in the past six months, will tend to be winners (or losers) in the next six months. This is known as the momentum, success or relative strength effect.

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Currency Factor

See article FT: Multinationals drive US rally on weak dollar, Oct 2, 2007.

“2007 will go down as the year the rest of the world saved America,” said Joseph Quinlan, chief investment strategist at Bank of America. “The belief that the dollar is going to weaken further is prompting investors to own int’l large-cap stocks.”…Companies with large overseas operations have been at the forefront of the rally. Since the Dow’s previous record – on July 19 – eight of the top ten performers have been multinational companies, led by P&G but also including Hewlett-Packard, Johnson & Johnson and McDonald’s.

The weakness in the dollar, which has hit a series of all-time lows against major currencies, benefits multinational companies in two ways: it makes their US-made products cheaper on international markets and increases the dollar value of their overseas earnings.

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A Hot Topic: Smart Beta

Smart Beta strategies attempt to deliver a better risk and return trade-off than conventional market cap weighted indices by using alternative weighting schemes (rules) based on measures such as volatility or various fundamental factors. Usually a very passive approach.

The basic idea is that you can construct non-market-cap-weighted portfolio with better return and lower volatility than a typical market index.

There are many variants of Smart Beta strategies from simple (equal-weighting) to complex (factor/fundamental investing). All require some periodic rebalancing (transaction costs) and do not work all the time.

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Low Volatility is a typical strategy that avoid the index concentration in big cap stocks that induce high volatility. An equal-weighted index has lower volatility than a market-cap-weighted index. The claim is that such portfolio (with a bias toward small cap) delivers similar or better performance with less risk.

One can go beyond equal-weighting to minimize volatility.

S&P DJ, Russell, MSCI, … all provide low volatility indices and ETF have been created to match them. Invesco PowerShares are an example of the “intelligent” ETFs.

Low volatility strategies have done quite well but have also underperformed during significant periods of time

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Factor or Fundamental Investing allocates to various factors (value, size, momentum, Book Value, Free Cash Flow, Total Sales, Total Cash Dividend..) while controlling volatility.

The claim is that you can generate better return/risk performance than a typical market-cap-weighted index or ETF.

For example Research Affiliates provide a RAFI fundamental index used in FTSE RAFI Low Volatility and Russell Fundamental indices.

This leads to a semi-passive approach tilting the portfolio away from market-cap indices based on factor exposures. But the exposures can be dynamically tilted.

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Fixed Income Investment Management

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Yield curves

Yield play (ride,…)

Duration

Multi-currency

Dual currency, currency option

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Interest Rate Forecast

Remember the “duration” relation:

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Interest Rate Forecast – Example

On the U.S. dollar yield curve, the current (mid-2007) yields are 4.6% for both five-year and ten-year. You expect the yields to drop uniformly to 4.1% in the near future.

What should you do on your U.S. bond portfolio?

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Interest Rate Forecast – Solution

The approximate capital gain for both maturities are:

Five-year:

Ten-year:

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Interest Rate Forecast – Example

On the U.S. dollar yield curve, the current (mid-2007) yields are 4.6% for both five-year and ten-year. You expect the yields to drop to 3.1% for 5-year and 3.9% for 10-year in the near future.

What should you do on your U.S. bond portfolio?

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Interest Rate Forecast – Solution

The approximate capital gain for both maturities are:

Five-year:

Ten-year:

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Currency Forecast

“Break-even” or “Implied” Forward exchange rate:

Where:

S is spot rate e.g. $1.5 per €

Ft is the implied forward for maturity t

r is the interest rate for the quoted currency (€), e.g., 4%

r* is the interest rate for the

measurement currency ($), e.g., 5%

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Currency Forecast

For one-year forward euro we get:

F = 1.5000 x (1.05)/(1.04) = 1.5144

If euro is above $1.5144 a year from now, an investor in one-year euro bond is better off.

If euro is below $1.5144 a year from now, an investor in dollar bond is better off.

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Currency Forecast - Example

For example, the 5-year yields given on the previous Exhibit are 4.6% in dollars and 1.25% in yen. The Spot exchange rate is ¥120 per $. The quoted currency is the $ and the measurement currency is the ¥. The implied 5-year forward exchange rate, or breakeven exchange rate, is equal to:

Which amounts to a 15% depreciation of the dollar.

If your expectations for the next 5 year is that the dollar would depreciate by more than 20%, then Yen bonds look attractive. But bonds in other currencies could look even more attractive.

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Key Takeaways: Portfolio Management

Portfolio Management is about taking risks:

Avoid bad risks

Diversify risks (free lunch)

Take some bets (good risks)

A passive index is usually assigned as benchmark.

Increase/reduce the risk exposure (betas) of the portfolio opportunistically

Try to generate alphas by selecting undervalued securities.

To manage an equity portfolio, one uses a factor model (BARRA, Sungard APT, Axioma, Northfield,…).

Factor models are either ‘macro factors’ model or ‘attribute factors’ models, or some (difficult) mix.

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CLASS 3 Should We Hedge Currency Risk in Global Asset Management ?

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Structure

Some General Considerations

Hedging with Currency FUTURES/FORWARD

Optimal Currency Hedging

The Contribution of Behavioral Finance

Currency Overlay Managers

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1. Currency Risks: Some General Considerations

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Currency risk can be significant in the short run.

For example, an American investor who decided not to hedge currency risk would have incurred a currency loss of some 40% on its eurozone assets from late 1998 to late 2000.

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Currency risk can be significant in the short run.

Let’s look at a Japanese investor:

The dollar was 260 yen per dollar 20 years ago, 85 ten years ago, 135 early 2002, 75 in late 2012, 115 in Nov 2014.

The euro was introduced in 1999 at 130 yen, two years later it was down to 90 yen, went to 167 in July 2007, 100 in late 2012, 144 in Nov 2014.

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Currency Risks

There are many current and expected variables (Purchasing power, deficits, interest rates, growth, politics...) that influence exchange rates at different times.

Short term variations of exchange rates are extremely hard to predict.

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My Model for the ¥/€ Exchange Rate

Xt is the number of bottles of Cognac

drunk in Tokyo at time t

Z is the number of tries scored by the

Japanese team in the Rugby World Cup

yt is the probability of a typhoon in Japan,

divided by the probability of an earthquake

in Europe

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Currency changes are quite volatile.

Currency risk can be cheaply hedged.

Currency risk is relatively small in well-diversified global equity portfolios. But very high in global bond portfolios.

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Unrelated Parenthesis: My Personal thoughts on the euro

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Currency Considerations

The return and risk of an asset depend on the currency used. For example, the dollar value of an asset is equal to its local currency value (V ) multiplied by the exchange rate (S) (number of dollars per local currency):

The rate of return over the period is:

where

R = return in local currency

s = percentage exchange rate movement

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Illustration

You are US investor and invest $20,000 in British equity. The exchange rate is 1£ = $2.

The British market goes up by 10% and the new exchange rate is 1£ = $2.1 (5% appreciation of the £).

What is your return in $?

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British market goes up 10% and £ goes up 5%

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Return

The new value is $23,100

or a dollar return of 15.5% =

(23,100 – 20,000)/20,000

The rate of return is 15.5% =

10% (capital gain in £)

+ 5% (currency gain on initial capital)

+ 0.5% (currency gain on capital gain)

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2. HEDGING with CURRENCY FUTURES/FORWARD

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Table of Content

Definition

Quotation

Gain/Loss at maturity

Valuation Principles

Use in Hedging a Portfolio

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Definition

A Forward or Futures contract is a commitment to purchase (buyer) or deliver (seller) a specified quantity of an underlying asset on a designated date in the future, for a price (“futures/forward price”) determined competitively when the contract is transacted.

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Definition

For example, suppose that today’s spot exchange rate is S = 1 dollar per euro.

An investor could buy forward 100,000 euros for delivery on December 10, at a Forward price F = 1.01 dollars per euro.

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Forward and Futures Contracts

FORWARD contract: A private contract between two parties (one is usually a bank). Nothing happens till maturity. A margin is usually deposited.

FUTURES contract: A standardized contract transacted on a futures exchange. Standardized in terms of size, delivery date. With a marking-to-market procedure.

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Quotation

Simply quote the Futures/Forward price

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Gain/loss at Maturity: Straightforward

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Valuation Principles

The Futures price F is linked to the Spot price S by arbitrage.

The “cost of carry” of the arbitrage is simple.

Example:

S = 1 dollar per euro

R$ = 5%

R€ = 4%

F = ?

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Valuation Principles

Example:

S = 1 dollar per euro

R$ = 5%

R€ = 4%

F = ?

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Use in Hedging

The “naïve” approach is simply sell the foreign currency for an amount equal to the portfolio position in the foreign currency.

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Hedged Portfolio - Example

An Italian investor owns a portfolio of U.S. stocks worth US $10 million. The current spot rate and one-month forward exchange rates are €1 per $. Interest rates are equal in both countries. The investor sells forward $10 million to hedge currency risk because he is concerned about the outcome of the US elections. A week later, the US stock portfolio has gone up to $10,350,000, and the spot and forward exchange rates are now €0.94 per $. Analyze the return on the hedged portfolio.

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Hedged Portfolio - Example

The U.S. stock portfolio went up by 3.5%, but the dollar lost 6 percent relative to the euro. If the portfolio had not been hedged, its return in euros would have been:

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Hedged Portfolio - Example

As per equation 11.3, the profit on the hedge portfolio in euros is:

Profit = 10,350,000 x 0.94 – 10,000,000 x 1 – 10,000,000 x (0.94 – 1)

Profit = 329,000

The rate of return on the hedged portfolio is 329,000/10,000,000 = 3.29%

Or we could directly apply Equation 11.4:

Return = – 2.71% + 6% = 3.29%

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3. Optimal Currency Hedging: The traditional approach (MV)

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Minimum-Variance Hedge Ratio

One objective is to search for minimum variability in the value of the hedged portfolio.

Investors would like to set the hedge ratio, h, so as to minimize the variance of the return on the hedged portfolio.

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Minimum Variance Hedge Ratio

Where R* = rate of return on the original portfolio (unhedged)

RF = % times change in futures price , approximately equal to exchange rate variation = s

REMEMBER: Here * means in the investor’s currency, no * means in the asset local currency.

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Derivation of Optimal Hedge Ratio

Minimize relative to h

Hence

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Minimum Variance Hedge Ratio

The minimum-variance hedge ratio is equal to:

where

translation risk hedge is:

economic risk hedge is:

The optimal hedge ratio is sometimes called the regression hedge ratio

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Translation Risk

Translation risk comes from the translation of the value of the asset from the foreign currency to the domestic currency.

A hedge ratio of 1 will minimize translation risk.

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Economic Risk

Economic risk comes when the foreign currency value of a foreign investment reacts systematically to an exchange rate movement.

If an investor worries about the total influence of a foreign exchange rate depreciation on her portfolio value, measured in domestic currency, she should hedge both translation and economic currency risk.

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Economic Risk

The hedge ratio required to minimize economic risk can be estimated by:

This is the slope that we would get on a regression of the foreign currency return of the asset on the exchange rate movement.

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Illustrations

Individual firms

Stock indexes developed

Stock indexes emerging

Bonds

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A Global Survey of Institutional Investors

What is the typical currency hedging benchmark of institutional investors?

- Very diverse!

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Distribution of Accounts by Base Currency and Hedge Ratio Russell Mellon

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4. The Contribution of Behavioral Finance

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Behavioral Finance: The Early Days

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Behavioral Finance

It has long been recognized that a source of judgment and decision biases is that cognitive resources such as time, memory, and attention are limited. Since human information processing capacity is finite, there is a need for imperfect decision-making procedures, or heuristics, that arrive at reasonably good decisions cheaply.

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Behavioral Finance

However, there are other possible reasons for systematic decision errors. Feeling or emotion-based judgments can explain mood effects (market sentiment).

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Behavioral Finance: Examples

Overreaction

A cognitive bias (investor overreaction to a long series of bad/good news) could produce predictable mispricing of stocks; DeBondt and Thaler (1985).

Extrapolation

Investors use past performance as an indicator of future performance in mutual fund and stock purchase decisions; Sirri and Tufano (1998), Grinblatt et al. (1995), Carhart, (1997).

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Behavioral Finance: Examples

Overconfidence

Individuals trade too much, overconfidently thinking that they can pick winners, whereas the stocks they buy do worse than the stocks they sell; Odean (1998, 1999), Barber and Odean (2000).

Disposition effect

Investors are reluctant to sell losers (and mentally “declare” the loss), even though tax considerations should make them prefer selling a loser to selling a winner; Shefrin and Statman (1985), Odean (1998).

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Reactions to Behavioral Finance

Traditional Finance Professor

It is a collection of ad-hoc stories. Small anecdotes of little general value.

Psychology produces too many answers and no theory.

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Reactions to Behavioral Finance

Practitioners

It is not really useful. Cannot make money on anomalies:

Many “anecdotes” apply to minuscule market value.

all attempts on “January effect”, “day of the week effect”, etc, have been unsuccessful.

For example, private investors are overconfident, so what!

Does not tell me how to structure a portfolio. Little implications for investment choices.

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Regret Theory

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Nobel Prize Thinking

“I should have computed the historical covariance of the asset classes and drawn an efficient frontier. Instead I visualized my grief if the stock market went way up and I wasn’t in it-or if it went way down and I was completely in it. My intention was to minimize my future regret, so I split my [pension scheme] contributions 50/50 between bonds and equities.”

- Harry Markowitz.

As quoted in Jason Zweig, "How the Big Brains Invest at TIAA-CREF", Money, 27(1), p114, January 1998

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Regret

Regret is defined as a cognitively-mediated emotion of pain and anger when, with hindsight, we observe that we took a bad decision in the past and could have taken one with better outcome. Ex post, one compares the investment outcome with the best outcome that could have been achieved.

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Regret

Contrary to mere disappointment (prospect Theory), which is experienced when a negative outcome happens relative to prior expectations, regret is experienced relative to the best outcome of alternative choices that could have been made (foregone alternatives).

As the opening quote suggests, the anticipation of future regret was strong enough to turn Harry Markowitz away from his very own portfolio allocation theory when faced with a financial decision on his pension plan.

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Regret (2)

Regret is very present in life (“missed opportunities”)

Regret influences investment choices. We look at the performance of peers (competitors). It is more than looking at passive benchmarks.

As stressed by Statman (2005), currency hedging is a dimension where regret clearly applies.

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Currency Hedging is a Dimension where Regret Applies

The euro was introduced in 1999 at 130 yen, two years later it was down to 90 yen, went to 167 in July 2007, 100 in November 2012, 144 in Nov 2014.

For example, a Japanese investor who decided not to hedge currency risk would have incurred a currency loss of some 30% on its eurozone assets from 1999 to 2001, with a vast regret of not having fully hedged.

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Currency Hedging is a Dimension where Regret Applies

Conversely a fully-hedged Japanese investor would have missed the huge appreciation of the euro from late 2001 to late 2007. Again, a vast regret of not having taken the "right" hedging decision (90 to 167).

But an unhedged Japanese investor would have lost a huge amount on the currency side from 2007 to 2012.

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The 50% Hedging Rule is Not New Among Investment Managers

"A partial hedging policy – such as 50/50 or 70/30 – means the investor won’t ever experience the major highs of an unhedged portfolio, but won’t be subject to the lowest returns either.“

"To Hedge or not to hedge", Simon Segal, SuperReview.com.au, 21 march 2003

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The 50% Hedging Rule is Not New Among Investment Managers

"The 50% hedge benchmark is gaining in popularity around the world as it offers specific benefits. It avoids the potential for large underperformance that is associated with "polar" benchmark, i.e. being fully unhedged when the Canadian dollar is strong or being fully hedged when it is weak. This minimizes the "regret" that comes with holding the wrong benchmark in the wrong conditions.“

"Managing Currency Risk: A Canadian Perspective", Gregory Chrispin, State Street Global Advisor, Essays and Presentations, March 23, 2004.

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The 50% Hedging Rule is Not New Among Investment Managers

The 50% hedge ratio is the simplest currency hedging policy that attempts to deal with regret.

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In a recent paper (Michenaud-Solnik, 2008), we apply regret theory to the determination of optimal currency hedging. This is a tough mathematical task.

Investors care about the portfolio expected return and volatility (as in mean variance) but also about expected regret.

We find optimum hedging depending on the level of risk aversion and of regret aversion of the investors.

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100%

- regret term

+ speculative term

+ covariance term

With large regret aversion, the optimal hedge ratio nears 50%.

But regret aversion does not necessarily dominates traditional risk aversion.

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In Practice: Use the Model to Derive Optimal Hedging

Expected currency return (currency risk premium?)

Correlation between asset and currency return

Regret aversion compared to risk aversion

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Using Currency Options

Currency options allow to « insure » the portfolio rather than « hedge ».

But there is the cost of the premium.

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Key Takeaways: Currency Hedging

Using currency futures/forward to hedge is easy.

The “naïve” approach is simply to sell the foreign currency for an amount equal to the portfolio position in the foreign currency (hedge ratio = 1 or 100%).

The minimum-variance hedge ratio takes into account translation risk (hedge ratio of 1) but also economic risk (the sensitivity of the local-currency asset price to exchange rate movements).

Investors have very different hedging policy. So there is not obvious one-fits-all optimal policy.

Regret theory is often used for currency hedging decisions.

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The Eurozone Crisis and Implications for Investment Management Some Provocative Views

This is not a Euro crisis but a Eurozone crisis

Financial markets and Politicians have different objective functions

A fixed exchange rate system is explosive as shown historically

Past research has shown that brutal medicine is often better than lingering sickness

There are REAL problems and NOMINAL ones. The Eurozone has primarily real problems.

In a crisis, there is always some serious underlying cause but it needs a trigger:

2007-2008: too much leverage in households and banks; trigger: subprime.

2011-2012: too much leverage of governments; trigger: Greek creative accounting.

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What Determines Exchange Rates

Real Aspects (competitiveness)

Purchasing Power Parity (CPI, unit labor costs)

Current Account

Expected growth

Nominal Aspects

Monetary policy

Investments Aspects

Financial attractiveness (return and risk)

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The Euro is not under gigantic speculative pressure

EUROUSD 36161 36192 36220 36251 36281 36312 36342 36373 36404 36434 36465 36495 36526 36557 36586 36617 36647 36678 36708 36739 36770 36800 36831 36861 36892 36923 36951 36982 37012 37043 37073 37104 37135 37165 37196 37226 37257 37288 37316 37347 37377 37408 37438 37469 37500 37530 37561 37591 37622 37653 37681 37712 37742 37773 37803 37834 37865 37895 37926 37956 37987 38018 38047 38078 38108 38139 38169 38200 38231 38261 38292 38322 38353 38384 38412 38443 38473 38504 38534 38565 38596 38626 38657 38687 38718 38749 38777 38808 38838 38869 38899 38930 38961 38991 39022 39052 39083 39114 39142 39173 39203 39234 39264 39295 39326 39356 39387 39417 39448 39479 39508 39539 39569 39600 39630 39661 39692 39722 39753 39783 39814 39845 39873 39904 39934 39965 39995 40026 40057 40087 40118 40148 40179 40210 40238 40269 40299 40330 40360 40391 40422 40452 40483 40513 40544 40575 40603 40634 40664 40695 40725 40756 40787 40817 40848 40878 40909 40940 40969 41000 41030 41061 41091 41122 41153 41183 41214 41244 41275 41306 41334 41365 41395 41426 41456 41487 41518 41548 41579 41609 41640 41671 41699 41730 41760 41791 41821 41852 41883 41913 41944 41974 42005 1.1594 1.1193 1.0873999999999999 1.0713999999999999 1.0620000000000001 1.0389999999999999 1.0348999999999999 1.0610999999999999 1.0488999999999999 1.0708 1.0330999999999999 1.0107999999999999 1.0125 0.98399999999999999 0.96579999999999999 0.9466 0.90839999999999999 0.94940000000000002 0.94030000000000002 0.90549999999999997 0.87219999999999998 0.85509999999999997 0.85399999999999998 0.9002 0.93940000000000001 0.92230000000000001 0.91039999999999999 0.89 229999999999998 0.87649999999999995 0.85360000000000003 0.86050000000000004 0.90090000000000003 0.91220000000000001 0.90590000000000004 0.88859999999999995 0.89190000000000003 0.88429999999999997 0.87009999999999998 0.87560000000000004 0.88580000000000003 0.91669999999999996 0.95469999999999999 0.99270000000000003 0.97799999999999998 0.97970000000000002 0.98070000000000002 1.0019 1.0198 1.0618000000000001 1.0777000000000001 1.0785 1.0857000000000001 1.1555 1.1672 1.1382000000000001 1.1153999999999999 1.1249 1.1701999999999999 1.1712 1.2291000000000001 1.2596000000000001 1.2616000000000001 1.2264999999999999 1.2011000000000001 1.1999 1.2146999999999999 1.2274 1.2197 1.2204999999999999 1.250699999 9999999 1.3002 1.3394999999999999 1.3141 1.3005 1.3204 1.2942 1.2695000000000001 1.2168000000000001 1.2040999999999999 1.2294 1.2272000000000001 1.2034 1.179 1.1852 1.2089000000000001 1.1951000000000001 1.2019 1.2242999999999999 1.2762 1.2669999999999999 1.2703 1.2801 1.2737000000000001 1.2616000000000001 1.286 1.3198000000000001 1.2997000000000001 1.3064 1.3236000000000001 1.3498000000000001 1.3521000000000001 1.3418000000000001 1.3704000000000001 1.363 1.3884000000000001 1.4225000000000001 1.4665999999999999 1.4558 1.4699 1.4722 1.5484 1.5761000000000001 1.556 1.5569999999999999 1.578 0000000000001 1.4994000000000001 1.4394 1.3361000000000001 1.2707999999999999 1.3467 1.3354999999999999 1.2813000000000001 1.3033999999999999 1.3205 1.3633 1.4012 1.407 1.4254 1.4548000000000001 1.4806999999999999 1.4895 1.4602999999999999 1.4280999999999999 1.3680000000000001 1.3577999999999999 1.3442000000000001 1.262 1.2213000000000001 1.2756000000000001 1.2911999999999999 1.3029999999999999 1.3893 1.3695999999999999 1.3212999999999999 1.3352999999999999 1.3645 1.4000999999999999 1.4435 1.4340999999999999 1.4381999999999999 1.4306000000000001 1.4341999999999999 1.3804000000000001 1.37 1.3587 1.3184 1.2892999999999999 1.3220000000000001 1.3211999999999999 1.3169 1.284 1.2534000000000001 1.2309000000000001 1.2383999999999999 1.2854000000000001 1.2968999999999999 1.2827 1.3105 1.3279000000000001 1.3383 1.2975000000000001 1.3012999999999999 1.2983 1.3174999999999999 1.3072999999999999 1.3318000000000001 1.3343 1.3633999999999999 1.3494999999999999 1.3694 1.3633 1.3644000000000001 1.3825000000000001 1.3806 1.3742000000000001 1.3597999999999999 1.355 1.3328 1.2909999999999999 1.2670999999999999 1.2476 1.2319 1.1666000000000001

Current Eurozone: 17 out of 27 EU countries

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Fixed parity: History

Historically, a regime of fixed exchange rate has always been unsustainable because the speculative tensions and moral hazard built into the system.

The system is asymmetric. Small countries must be stronger than big countries. But that has a cost too (Hong Kong)

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What is specific to the Eurozone

There is a fixed parity with strong disparity among countries.

Following the introduction of the euro, some countries (esp PIIGS) got huge subsidies 1) from EU and 2) from increased borrowing capacity (who wants to lend in risky escudos or drachmas?).

But rather than seizing this opportunity to engage in structural reforms to lift the country to international standards and competitiveness, several countries got into free spending.

This was aggravated by the politicians’ plans to offset the 2008 credit/liquidity crisis resulting in wild spending.

The “trigger” was the discovery of Greek creative accounting.

Note that each country has some specific problems (e.g. Spain engaged in huge real estate bubble sponsored by regions, cities and banks)

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Real Problems: Competitivity

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Situation is not really improving Eurozone-wide

France current account deficit in 2011: $55 billion

France current account deficit in 2012: $63 billion

France current account deficit in 2013: $59 billion

Germany current account surplus 2011: $224 billion

Germany current account surplus 2012: $239 billion

Germany current account surplus 2013: $257 billion

But situation is somewhat slowly improving in Southern Europe.

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Real Problem: Down to Earth

“A decade ago, France was more price-competitive than Germany; today it is the other way around. That's evident in the macroeconomic numbers as well as on the ground. France used to produce as much asparagus as Germany, but these days Germany cultivates more than four times as much. Labor is the biggest cost in the asparagus business, and German seasonal workers cost half as much as their French counterpart."

Time magazine, 16 July, 2012, page 27.

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How can a country remain competitive when it borrows @ 3% when others @ 1% and a debt level above 100% of GDP

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Government 10-year bond yield 30 January 2015

Eurozone		Yield
Germany		0.3%
France		0.5%
Italy		1.6%
Spain		1.4%
Netherlands		0.4%
Portugal		2.6%
Greece		10.8%

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Other Aspects: Monetary Policy and Financial Attractiveness

Eurozone countries have no monetary independence. So they cannot adjust disparity among member countries by monetary policy.

If you want to invest in Euro, would you consider investing in countries like Greece or Portugal given the social unrest and the risks involved? Hence such countries have both a current account deficit, because they are not competitive, and a potentially-large financial account problem that will not offset the current account deficit as in the U.S. case.

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How can the PIIGS problems be solved

Devaluation and foreign debt restructuring, leading to inflation and domestic debt devaluation (deemed politically impossible: Eurozone).

Default (called debt restructuring) without devaluation (politically difficult and creates problems for banks, reduces past debt but not current or future needs).

Belt tightening and structural solutions (long-term solution, burden is borne unevenly, local politics make it very difficult if not impossible: no government can survive on this program).

Non-PIIGS taxpayers keep financing PIIGS (the easy politician’s solution: thank you Germany, thank you ECB).

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The structural problems are not fully addressed because:

politicians are politicians guided by elections not the long-term good.

very painful to do structural adjustments very fast; a devaluation is so much easier. Past research has shown that brutal medicine is better than lingering sickness

So resort to tricks (ECB buys sovereign bonds and finance banks to take them). EuroBonds with guarantee from all Eurozone governments….

Without severe structural changes, the sickness will linger for many years. The major adjustment can be through deflation. But how popular is reducing drastically pension benefits, civil servant wages,… Drastic reforms are not compatible with political will and electoral cycles in Southern countries.

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Implosion (divorce)

Lingering sickness (prozac)

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Implications for Financial Markets : Two Scenarios

Foreign Exchange

The Eurozone will implode or linger sick. The sooner it implodes the better (I wish they had done it early 2010 rather than wasting trillions). Several countries (many) will leave the euro and only the strong Northern countries (and some satellite) will keep it.

A devaluation of some of Eurozone countries is the least-bad solution to the real problem, not the cause of the problem

The uncertainty will be bad for the euro exchange rate.

But only the strong countries will retain the euro, so its fundamental value should increase.

Unless South keeps the euro and North the DM.

The question is what will happen to the existing sovereign debt (restructuring?). And the private debt?

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Financial markets: Bonds

Before the euro implosion

Bond yield will rise in most countries (e.g. France). But how can you sustain such huge differential in financing cost with Germany. The trigger of the euro implosion might be some elections somewhere. Triggers are hard to predict. Could happen in Greece, Portugal, Spain, Italy, France…

Many government bonds are more risky than corporate bonds. But only large corporations have access to the bond market; smaller corporation have difficult time borrowing from banks, adding to the recession. There is no corporate/loan bond market in Europe like in the US and European banks are deleveraging.

One has to be very selective with sovereign and credit exposure

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After the euro implosion

There will be more “emerging” currencies and huge spreads.

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Financial markets: Equity

A divorce is usually very messy. Prozac is no better.

Recession can be bad in many European countries and will affect the rest of the world to some extent.

But many real assets will retain real value.

A short-lived crisis addressing fundamentals is better than being on Prozac while the problems get worse and worse (note that Greece still borrows @10%).

Governments will have learnt to be more thrifty, although new politicians will quickly forget and politicians’ objective function will remain the same.

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Europe Stocks vs U.S. Stocks, past 5 years

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One has to be selective

Exposure to the European “political” risks vary greatly among European companies.

Some sectors are more exposed than others

Some European companies have less European exposure. In the short run they followed the market index. In the long run their profits will be quite different.

Example of Peugeot vs BMW

There are no fire sales, but…

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CLASS 4: OPTIONS IN INVESTMENT MANAGEMENT

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INSURING with OPTIONS

I. The Basics: Insuring with Options

II. Use of Options

III. Using Options to Manage Currency Risk

IV. Currency overlay

V. Introduction to Structured Products

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I. The Basics of Options (reminder)

Definition

Quotation

Gain/Loss at maturity

Valuation Principles

Use in Insuring a Portfolio

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Definition

In general, an option gives the buyer the right, but not the obligation, to buy or sell an asset, and the option seller must respond accordingly. Many types of option contracts exist in the financial world. The two major types of contracts traded on organized options exchanges are calls and puts.

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Definition

A call gives the buyer of the option contract the right to buy a specified number of units of an underlying asset at a specified price, called the exercise price or strike price, on or before a specified date, called the expiration date or strike date.

A put gives the buyer the right to sell a specified number of units of an underlying asset at a specified price on or before a specified date.

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Definition

In all cases, the seller of the option contract, the writer, is subject to the buyer’s decisions, and the buyer exercises the option only if it is profitable to him or her. The buyer of a call benefits if the price of the asset is above the strike price at expiration. The buyer of a put benefits if the asset price is below the strike price at expiration.

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Wonderful!!!!!!!!!!

The buyer of an option can only win and never loses!

- Example of a car insurance

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Quotation

The terms of the option are FIXED

Quote the Option Price or Premium

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Gain/Loss at Maturity

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Valuation Principles

The Premium p is linked to the Spot price S by arbitrage.

The Premium p is equal to the intrinsic value plus the time value.

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Call Option Intrinsic Value, as a Function of Asset Price (S)

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Call Option Intrinsic Value, as a Function of Asset Price (S)

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Determinants of Option Premium

Asset Price relative to Strike Price

Volatility

Time to expiration

Interest rate(s)

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II. Use of Options

Speculation (with limited risk)

Insuring a portfolio

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Example of Speculation with Futures on HSI

Futures on HSI, multiplier HK$10  Index

This is Mini-HSI contract. Full is HK$50 times index

Quote for December Futures is 30,000.

ASSUME that the margin is set at HK$15,000 per contract (1,500 per index).

You believe that the market will go down.

What can you do using HSI futures?

Look at the result for ONE contract, if the HSI is equal to 40,000; 35,000; 30,000; 25,000; and 20,000 in December.

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Example of Speculation with Futures on HSI

Short futures

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HSI	Gain / Loss
40,000	-100,000
35,000	-50,000
30,000	0
25,000	50,000
20,000	100,000

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Example of Speculation with OPTIONS on HSI

OPTIONS on mini-HSI, multiplier HK$10Index

HSI is at 30,000

December CALL at the money (K=30,000) quote at 2,000 per index.

December PUT at the money (K=30,000) also quote at 2,000 per index.

You believe that the market will go down.

What can you do using HSI options?

Look at the result for ONE contract, if the HSI is equal to 40,000; 35,000; 30,000; 25,000; and 20,000 in December.

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Example of Speculation with OPTIONS on HSI

Long put

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HSI	Gain / Loss
40,000	-20,000
35,000	-20,000
30,000	-20,000
25,000	30,000
20,000	80,000

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Insuring a Portfolio: Example of Stock Portfolio

A portfolio manager has an allocation of €4 million to French equity. The French portfolio is well diversified and tracks the local CAC stock index. The manager believes that the French market offers excellent returns prospects. However, the manager is worried that French elections taking place next month (April) could lead to a severe market correction. Although the probability of such an outcome is quite small, the manager wishes to insure against it. The current value of the CAC index is 4,000. Futures on the CAC with maturity in June also trade at 4,000.

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Insuring a Portfolio: Example of Stock Portfolio

Put options with maturity in June trade as follows:

Strike Price	Premium (€ per unit of index)
3,900	30
4,000	100

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Insuring a Portfolio: Example of Stock Portfolio

CAC options and futures have a multiple of €10 times the index. Thus, the total premium for one put with exercise price €3900 is 30 x €10 = €300, for example. The manager hesitates between selling 100 futures contracts, buying 100 puts with a strike of 3,900, or buying 100 puts with a strike of 4,000.

Calculate the outcome of each strategy if the CAC is equal to 3,500, 4,000, or 4,500 at expiration of the contracts in June.

2. Recommend a strategy to the portfolio manager.

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Solution

The value of the portfolio under the various strategies is given below:

Value of CAC at expiration	Initial Portfolio (No Futures or Options)	Portfolio Hedged with Futures	Portfolio Insured with Puts 3,900	Portfolio Insured with Puts 4,000
3,500	3,500,000	4,000,000	3,870,000	3,900,000
4,000	4,000,000	4,000,000	3,970,000	3,900,000
4,500	4,500,000	4,000,000	4,470,000	4,400,000

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Solution

2. Hedging with futures provides the best protection in case of a drop in the market, but it deprives the manager of any profit potential. Buying puts provided protection in case of a market drop while keeping most of the upside potential (the put premium is deducted from the portfolio value). Given the manager’s expectations, buying puts is a natural strategy. Out-of-the-money puts are cheaper, so they are more attractive in case of an up-movement, but offer less protection in case of a down-movement. To get the best downside protection while retaining upside potential, the portfolio manager should buy 100 puts with a strike price of 4,000.

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III. Insuring Currency risk with Options

The difficulty with currency option is to pick the correct option as an exchange rate implies two currencies.

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An Example

You are a U.S. investor holding a portfolio of European assets worth €1 million. The current spot exchange rate is $1=1 euro but you fear a depreciation of the euro in the short term. The three-month forward exchange rate is $0.9960 = 1 euro. You are quoted the option premiums for calls euro and puts euro with a three-month maturity. These are options to buy (call) or sell (put) on euro at the dollar exercise price mentioned for each option. The contract size on the CME is €125,000.

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Another Example

The quotations are as follows:

Euro Options (All Prices in U.S. Cents per Euro)
Strike	Call Euro	Put Euro
105	0.50	6.50
100	2.10	3.00
95	6.40	0.50

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Another Example

You decide to use options to insure your portfolio.

Should you buy (or sell) calls (or puts)? What quantity?

You decide to buy at-the-money options (strike price of 100 U.S. cents) for €1 million. Suppose that you can borrow the necessary amount of dollars to buy these options at a zero interest rate. Calculate the result at maturity of your strategy, assuming that the euro value of your portfolio remains at €1 million.

You have the choice of three different strike prices. What is the relative advantage of each option? What is the advantage relative to hedging, using forward currency contracts?

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Solution

To insure, you need to buy options. Here, you want to be able to translate euros at a fixed exchange rate, so you should buy euro puts for €1 million, or eight contracts.

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Solution

You buy at-the-money puts on €1 million. The cost (premium) is equal to €1,000,000 x $0.03 / € = $30,000

If the euro rises in value, the put will expire worthless.

If the euro depreciates, you gain exercise the put and get $1,000,000 minus the option premium of $30,000, or $970,000.

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Solution

The simulation of the dollar value of the position for a different value of the exchange rate at maturity is given in the first column of the following table. The portfolio is insured for down movements in the euro and benefits from up movements. But the cost of the insurance premium has to be deducted in all cases.

Exchange Rate at Maturity (US cents per Euro)	Using Puts 100	Using Puts 105	Using Puts 95	Hedging with Forward
110	1,070,000	1,035,000	1,095,000	996,000
105	1,020,000	985,000	1,045,000	996,000
100	970,000	985,000	995,000	996,000
95	970,000	985,000	945,000	996,000
90	970,000	985,000	945,000	996,000

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Solution

3. The preceding table simulates the results of using the various options as well as the forward. An “expensive” option (in-the-money, put 105) gives better downside protection at the expense of a lesser profit potential in case of an appreciation of the euro. A “cheap” option (out-of-the-money, put 95) provides less downside protection but a larger profit potential. Using forward contracts freezes the value of the portfolio at $996,000. You are well protected on the downside, but you cannot benefit from an appreciation of the euro.

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Solution

You will decide on the strategy, depending on your scenario for the euro exchange rate. If a depreciation of the euro seems very likely, you will hedge; if a depreciation seems very unlikely, you will buy out-of-the-money options, which are the cheapest. The other two strategies lie in between.

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General Comment

To find the exchange rate that will be relevant when insurance is needed (option exercised) you compute the “all-in-cost/revenue”:

1. If the direction of quotation requires to buy a put, the relevant exchange rate (‘you receive’) is:

Strike price – put premium

In the example you receive an exchange rate of 0.97

2. If the direction of quotation requires to buy a call the relevant exchange rate (‘you pay’) is:

Strike price + call premium

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IV. Currency Overlay Managers

Delegation of Currency Position: Management of Currency Risk Profile

Currency as an Asset Class

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Management of Currency Risk Profile

Technical Approach

Fundamental Approach

“Currency for alpha” funds

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V. Using Structured Products in Global Asset Management

A Deal: Example of LTCM-UBS

Structure Notes

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1. Example of LTCM-UBS

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2. Other Example: Structured Notes

A structured note is a bond issued with some unusual option-like clause. These notes are bonds issued by a name of good credit standing and can therefore be purchased as investment-grade bonds by most institutional investors, even those that are prevented by regulations from dealing in derivatives. Another attraction for investors is that these structured notes offer some long-term options that are not publicly traded. Structured notes with equity participation are in strong demand in many countries, especially in Europe, where they are sometimes called guaranteed notes.

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Guaranteed notes with equity participation are bonds having guaranteed redemption of capital and a minimum coupon; in addition, some participation in the price movement of a selected index is offered if this price movement is positive.

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An Example

For example, let’s consider a two-year note that guarantees the initial capital (redemption at 100%) plus an annual coupon of 3 percent and offers a 50 percent participation rate in the percentage price appreciation in the Japanese Nikkei index over the two years. At time of issue, the yield curve was flat at 8 percent. The 50 percent participation rate works as follows: If the stock index goes up by x percent, the investor will get 50 percent of x. For example, if the Nikkei stock index goes up by 30 percent from the time of issue to the time of redemption, the option will yield a profit of 15 percent and the bond will be redeemed for 115 percent. The participation rate is, in effect, the percentage of a call option on the index obtained by the investor.

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In summary, the structured note can be viewed by investors as the sum of

a straight bond with a coupon of 3 percent

plus 50 percent of an at-the-money call option on the Nikkei

All of these bonds can be analyzed as the sum of a straight bond with a low coupon plus an option play

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Problem

Value the call option implicit in the bond.

Assume that you offer a similar bond but with a coupon set at zero. What is the equity participation that you could offer?

Consider the guaranteed note on the Nikkei described in the text:

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Solution Question 1.

The present value of the straight bond is

Because the bond is issued at 100 percent, the implicit value of 50 percent of a call option on the Nikkei is therefore equal to

And the implicit value of 100 percent of one call option on the Nikkei index is equal to

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Prof Bruno Solnik

Module 4 – Prof Bruno Solnik

Solution Question 2.

There is clearly a negative relation between the amount of the guaranteed coupon and the participation rate that can be offered in the option. A structured note with a zero coupon will leave more money to invest in the call option:

The difference between the redemption value and the current market value of the zero-coupon bond (14.27% = 100  85.73) can be invested by the issuer in call options. The number of call options that can be purchased is equal to the participation rate that is set in the structured note. In the example, one call option on the Nikkei index is worth 17.84, and 14.27 is available to invest in options. Hence, this allows a participation rate of:

instead of 50 percent, as above.

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Second level

Third level

Fourth level

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Fourth level

Fifth level

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Fourth level

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CPI: Bullish on EUR

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How can we Offer (Construct) such a CPI?

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Bearish on EUR

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Modest bullish/bearish AUD

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Module 4 – Prof Bruno Solnik

Key Takeaways: Insuring with Options

Options on an index can be used to speculate, up or down, with limited risk.

Options on an index can be used to insure a portfolio against market risk.

To insure you always need to BUY an option, not sell (write) an option. Writing options is reserved to specialist traders.

Insuring with an expensive (in the money) option provides good protection against adverse movements but with a cost, hence reduces profit potential.

Insuring with a cheap (out of the money) option provides less protection against adverse movements but with a lower cost, hence better profit potential.

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Key Takeaways: Currency Options

The difficulty with currency option is to pick the correct option as an exchange rate implies two currencies.

To find the exchange rate that will be relevant when insurance is needed (option exercised) you compute the “all-in-cost/revenue”:

1. If the direction of quotation requires to buy a put, the relevant exchange rate (‘you receive’) is:

Strike price – put premium

2. If the direction of quotation requires to buy a call the relevant exchange rate (‘you pay’) is:

Strike price + call premium

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Key Takeaways: Structured products

Options are extensively used in large “deals”.

Structured products using optional features are (still) extensively used for retail and institutional clients.

They can be decomposed as a mixture of zero-coupon bonds and options.

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CLASS 5 ALTERNATIVE INVESTMENTS

Alternative Investments

Private Equity, Hedge Funds

LTCM

304

Alternative Investments

Many kinds, have in common relative illiquidity:

Real Estate

Venture Capital, Private Equity

Distressed securities

Commodities

Anything

305

Private Equity (very brief, see other Modules)

306

Private Equity

Private equity investing has grown rapidly in the 2000s.

Private equity investments are equity investments that are not traded on exchanges.

The limited partnership is called the “Fund”.

General partners are sometimes designated as the “Management Company”.

307

Private Equity

There are three main categories of private equity:

Venture capital

Leverage buyout

Distressed investing

308

Private equity – Leveraged buyout investing

The largest category of private equity

Investors put up an equity stake (20-40%) and borrow the rest.

Company is then taken private. Private equity firm then gets involved in the management of the acquired company and takes steps to increase its value.

The objective is to resell the company a few years later at a higher price.

309

Hedge Funds

310

Definition

Legal structure

Type of strategy

Fee structure

Funds of funds

The pros and cons

Index / performance

311

Hedge Funds: Definition

Huge Industry:

The 1990s witnessed rapid growth in hedge funds.

In 2007, assets under management surpassed $2 trillion.

In 2007, the number of hedge funds exceeded 13,000.

In 2008, AUM peaked to $2.5 trillion, then dropped sharply late 2008/mid 2009. Recovered a bit late 2009.

As of End-2014, AUM $2.85 trillion for Hedge funds (including 0.45 for FoFs).

312

Hedge Funds: Definition

Today, funds using the “hedge fund” appellation follow all kinds of strategies and cannot be considered a homogeneous asset class.

Hedge funds can be defined as:

Funds that seek absolute returns

Having a legal structure that avoids some government regulations

Have option-like fees, including a base management fee and an incentive fee proportional to realized profits.

313

Hedge Funds

Hedge fund managers can create leverage in trading by:

Borrowing external funds to invest more or sell short more than the equity capital that they put in.

Borrowing through a brokerage margin account

Use of financial instruments and derivatives.

314

Legal Structure in US

The legal structure of a hedge fund largely depends on who its investors will be. For example, a private investment vehicle formed for the benefit of persons who reside outside of the United States will be organized differently than an investment vehicle formed for the benefit of United States residents.

315

Legal Structure in US

Domestic US: A Limited partnership (LP) where investors are limited partners and the manager is General partner. Under Investment Act, no more than 100 investors, and no public solicitation

316

Legal Structure in US

International: For the purpose of managing the assets of persons residing outside of the US, and also tax-exempt US investors, an offshore fund is ordinarily structured as a corporation and organized in a tax haven jurisdiction (e.g. Bermuda, British Virgin Islands, Cayman Islands, Ireland).

317

Legal Structure in US

Often, the manager of an offshore fund forms a corporate entity to provide advisory services to the fund. This entity serves as the investment manager of the fund. If the hedge fund manager already manages the assets of a domestic partnership through a single corporate entity, the general partner of the partnership may also serve as the investment manager of the offshore fund.

318

Master Feeder Structure (“hub and spoke”)

- “Feeder” refers to the legal structure used.

- The master fund is generally an offshore fund

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Prof Bruno Solnik

Types of Investment Strategies

Classifications are arbitrary and vary across data providers.

Hedge funds can be classified as:

Long/short

Market neutral

Fixed income

Global macro

Emerging market funds

Managed futures funds

Event driven

Distressed securities funds

Risk arbitrage in M&A

320

Long / Short

Long/short funds are the traditional type of hedge funds, taking short and long bets in common stocks. They vary their short and long exposure according to forecasts, use leverage, and now play on numerous markets throughout the world.

321

Long / Short

These funds often maintain net positive or negative market exposures; so they are not necessarily market-neutral. In fact, a subgroup within this category is funds that have a systematic short bias, known as dedicated-short funds, or short-seller funds.

The distinction with traditional funds is getting blurred, as some mutual funds offer a 130/30 strategy (or 120/20 etc..). And some hedge funds started to compete with similar products.

322

Example: Long / Short

A hedge fund has a capital of 10 million and invests in a market neutral long/short strategy on the British equity market.

323

Example: Long / Short

Shares can be borrowed from a primary broker with a cash margin deposit equal to 18% of the value of the shares. Given the high level of cash margin, no additional costs are charged to borrow the shares. The hedge fund has drawn up a list of shares regarded as undervalued (list A) and a list of shares regarded as overvalued (list B). The hedge fund expects that shares in list A will outperform the British index by 5% over the year, while shares in list B will underperform the British index by 5% over the year.

324

Example: Long / Short

The hedge fund wishes to retain a cash cushion of 1 million for unforeseen events. What strategy would you suggest?

325

Answer

The hedge fund would sell short shares from list B and use the proceed to buy shares from list A for an equal amount. Some capital needs to be invested in the margin deposit. The hedge funds could take long/short positions for 50 millions:

326

Answer

Keep 1 million in cash

Borrow 50 million of shares B from a broker,

Deposit 9 million in margin (18%50 million),

Sell shares B for 50 million in cash,

Use the sale proceeds to buy 50 million worth of shares A

The positions in shares A & B are established so that the portfolio’s beta is close to zero.

The ratio of invested assets to equity capital is roughly 5:1.

327

Answer (2)

If expectations materialize, the long/short portfolio of shares should have a gain over the year of 10% on 50 million whatever the movement in the general market index. To be market neutral, the fund would aim for a beta of zero.

This 5 million gain will translate into an annual return before fees of 50% over the invested capital of 10 million.

328

Answer (2)

This calculation does not take into account the return on invested cash (1 million) and assumes that the dividends on longs will offset dividends on shorts.

329

Market Neutral hedge funds

Market-neutral funds are a form of long / short funds that attempt to be hedged against a general market movement. They take bets on valuation differences of individual securities within some market segment.

330

Market Neutral hedge funds

Long / Short equity funds are a form of market neutral funds. But there are all kinds of market neutral strategies, mostly based on some form of arbitrage:

equity long/short

fixed-income hedging,

pairs trading,

warrant arbitrage,

mortgage arbitrage,

convertible bond arbitrage,

closed-end fund arbitrage, and

statistical arbitrage.

331

Example : Merger Risk Arbitrage

A merger has been announced between a French company A and a German company B. A will acquire B by offering one share of A for two shares of B.

332

Example : Merger Risk Arbitrage

Shares of B were trading in a €15 to €20 range prior to any merger discussion. Shares of B currently trade at €24, while shares of A trade at €50. The merger has been approved by both boards of directors but is awaiting ratification by all shareholders (that is extremely likely) and approval by the EU commission (there is a slight risk because the combined company has a large European market share in some products). How could a hedge fund take advantage of the situation? What are the risks?

333

Answer

The hedge fund should construct a hedged position where it buys two shares of B for every share of A that it sells short. As the proceeds of the short sale of one share of A (€50) can be used to buy two shares of B (€48), the position can be highly leveraged. Of course the cost of securities lending and margin deposit should also be taken into account. When the merger is completed, the hedge fund will make a profit of approximately 2 euros for each share of A.

334

Answer

The risk is that the merger will be cancelled. It is hard to tell what will be the stock price reaction to this announcement, but it is clear that the stock price of B will drop more, because it was to be acquired at a price well above its pre-merger market value. That would mean a sizable loss for the hedge fund.

335

Fee Structure

Total fee = Base (fixed) fee + Incentive (performance) fee

Typically 2% (fixed) plus 20% (performance).

The calculation of performance fee varies and is somewhat complicated because of “high watermark”.

336

Funds of Funds

Definition: Funds of funds (FOF) have been created to allow easier access to small investors, but also to institutional investors. A FOF is open to investors and, in turn, invests in a selection of hedge funds.

Additional fee: typically 1% and 10%, on top of the hedge funds fees (typically 2% and 20%).

337

Fund of Funds – Advantages

Retailing

Diversification

Managerial expertise

Due diligence process (but is it really done?)

338

Step	Action
1	Define the equilibrium market weights and covariance matrix
2	Calculate the equilibrium-expected excess returns through reverse optimisation
3	Express investor views and confidence level of view
4	Compute combined equilibrium view adjusted expected returns
5	Run mean variance optimisation

Market View	Confidence Level
MSCI EMU will have an absolute excess return of 6.50%	50%
MSCI Far East will out-perform MSCI North America by 0.40%	60%

0.4481640509	Americas	30,269	NYSE	19,351
			NASDAQ	6,979
			Canada	2,093
			Brazil	843
			Mexico	480
0.3121261475	Asia-Pacific	21,081	Tokyo	4,377
			Shanghai	3,932
			Hong Kong	3,233
			Shenzhen	2,072
			India	1,558
			Australia	1,288
			Korea	1,212
			Taiwan	850
			Singapore	752
0.2397098016	Europe-AME	16,190	London	4,012
			Euronext	3,319
			Germany	1,738
			Switzerland	1,495
			Noridc	1,196
			Spain	992
			Johannesburg	933
	Total	67,540


Stock	Exchange	Total value in $ billion	% of total
		2001	2001
NYSE 48.2%	NYSE	10489	48.2	NYSE	134.00%	13887	NYSE	134.00%	NYSE
Japan 7.5%		1640	7.5	Japan	126.00%	2490	Tokyo SE	126.00%	Canada
Nasdaq 12.6%	London	2740	12.6	Nasdaq	270.00%	2215	Nasdaq	270.00%	U.K.
U.K. 6.8%	All exchanges	1482	6.8	U.K.	125.00%	1090	United Kingdom	125.00%	France
Euronext 4.9%	Paris	1064	4.9	Euronext	116.00%	1168	Euronext	116.00%	Germany
Hong Kong 3.9%	Main exchanges	848	3.9	Hong Kong	64.00%	364	Hong Kong	64.00%	Switzerland
Canada 2.5%	Milano	553	2.5	Canada	76.00%	528	Canada	76.00%	Netherlands
Germany 2.1%	All exchanges	460	2.1	Germany	174.00%	611	Germany	174.00%	Italy
Spain 2.6%	Main exchange	573	2.6	Spain	167.00%	620	Spain	167.00%	Spain
Switzerland 2.8%	Amsterdam	604	2.8	Switzerland	130.00%	562	Switzerland	130.00%	Other Europe
OMX 1.8%	Stockholm	385	1.8	OMX	135.00%	235	OMX Nordic Exchange	135.00%	Japan
Australia 1.1%	All exchanges	241	1.1	Australia	88.00%	275	Australia	88.00%	Australia
Italy 1.1%	All exchanges	244	1.1	Italy	163.00%	372	Italy	163.00%	Other Asia
China 0.8%	Helsinki	181	0.8	China	200.00%		China	200.00%	United States
Korea 0.3%	Singapore	68	0.3	Korea	171.00%		Korea	171.00%	Canada
				India	32.00%		India	32.00%
Total	Major Markets	21758	100

Australia	Australia	Australia
Austria	Austria	Austria
Belgium	Belgium	Belgium
Brazil	Brazil	Brazil
Canada	Canada	Canada
Chile	Chile	Chile
China	China	China
Denmark	Denmark	Denmark
Egypt	Egypt	Egypt
Finland	Finland	Finland
France	France	France
Germany	Germany	Germany
Hong Kong	Hong Kong	Hong Kong
India	India	India
Indonesia	Indonesia	Indonesia
Israel	Israel	Israel
Italy	Italy	Italy
Japan	Japan	Japan
South Korea	South Korea	South Korea
Malaysia	Malaysia	Malaysia
Mexico	Mexico	Mexico
Netherlands	Netherlands	Netherlands
New Zealand	New Zealand	New Zealand
Norway	Norway	Norway
Poland	Poland	Poland
Russia	Russia	Russia
Singapore	Singapore	Singapore
South Africa	South Africa	South Africa
Spain	Spain	Spain
Sweden	Sweden	Sweden
Switzerland	Switzerland	Switzerland
Taiwan	Taiwan	Taiwan
Thailand	Thailand	Thailand
Turkey	Turkey	Turkey
United Kingdom (Buys)	United Kingdom (Buys)	United Kingdom (Buys)
United Kingdom (Sells)	United Kingdom (Sells)	United Kingdom (Sells)
U.S. (NYSE)	U.S. (NYSE)	U.S. (NYSE)
U.S. (NASDAQ)	U.S. (NASDAQ)	U.S. (NASDAQ)

Global Investment Management

Sheet1

Graph2

EXHIBIT 5.3

EXHIBIT 5.3

EXHIBIT 5.4

EXHIBIT 5.4

Chart1

Sheet1

Graph4

Feuil1

Feuil1

Feuil2

Feuil3

MBD00109405.unknown

MBD0013D1AC.unknown

MBD000001AA.unknown

MBD000004C8.unknown

Graph2

Feuil1

Feuil1

Feuil2

Feuil3

MBD00109405.unknown

MBD00141328.unknown

MBD000001AA.unknown

MBD000004C8.unknown

Sheet1

Sheet1

Graph1

Feuil4

Feuil1

Feuil1

Feuil2

Feuil3


	% of total national market capitalization
NYSE	18%	NYSE	18%
Japan	18%	Japan	18%
Nasdaq	29%	Nasdaq	29%
U.K	41%	U.K	41%
Euronext	32%	Euronext	32%
Hong Kong	52%	Hong Kong	52%
Canada	24%	Canada	24%
Germany	45%	Germany	45%
Spain	42%	Spain	42%
Switzerland	70%	Switzerland	70%
OMX	42%	OMX	42%
Australia	37%	Australia	37%
Italy	55%	Italy	55%
China	25%	China	25%
Korea	40%	Korea	40%
India	34%	India	34%

	Country	Commissions	Fees	Market Impact	TOTAL BP
	Australia	21.32	0.17	11.66	33.15
	Austria	16.83	0.39	16.41	33.63
	Belgium	16.22	0.14	13.4	29.76
	Brazil	22.14	1.81	18.64	42.59
	Canada	20.97	0.11	10.85	31.93
*	Chile	31.73	3.05	23	57.78
	China	18.72	9.3	17	45.02
	Denmark	17.94	0.32	10.57	28.83
*	Egypt	22.39	0.46	27.81	50.66
	Finland	15.8	0.57	15.85	32.22
	France	15.84	0.7	9.14	25.68
	Germany	16.07	0.1	7.22	23.39
	Hong Kong	17.85	10.3	11.87	40.02
	India	25.34	11.28	20.69	57.31
*	Indonesia	32.66	9.05	15.74	57.45
*	Israel	23.77	1.69	23.9	49.36
	Italy	16.3	0.35	14.12	30.77
	Japan	15.04	0.1	7.41	22.55
	South Korea	22.46	15.26	12.35	50.07
	Malaysia	23.82	5.31	13.55	42.68
	Mexico	20.89	0.08	13.48	34.45
	Netherlands	16.32	0.38	10.48	27.18
	New Zealand	18.58	0.4	13.48	32.46
	Norway	16.47	0.13	10.33	26.93
*	Poland	26.51	1.62	8.89	37.02
*	Russia	18	0.04	13.37	31.41
	Singapore	19.86	2.64	11.19	33.69
	South Africa	19.08	11.98	14.14	45.2
	Spain	16.01	0.2	21.58	37.79
	Sweden	16	0.1	11.86	27.96
	Switzerland	16.36	0.21	10.93	27.5
	Taiwan	23.37	15.46	12.97	51.8
	Thailand	28.77	1.47	14.67	44.91
*	Turkey	22.62	2.19	12.74	37.55
	United Kingdom (Buys)	15.17	49.98	10.98	76.13
	United Kingdom (Sells)	14.37	0.04	11.05	25.46
	U.S. (NYSE)	9.86	0.07	4.89	14.82
	U.S. (NASDAQ)	12.47	0.04	6.06	18.57

Assets	Liabilities
Investment Portfolio 310	Equity 27
Other assets 64	Various obligations 348
Total 374	Total 374

Risk Factor	Exposures Tata Ltd	Exposures SuperMark	Exposures S&P 500
Confidence Risk	0.7	0.1	0.3
Time Horizon Risk	0.8	0.9	0.6
Inflation Risk	-0.5	-0.1	-0.3
Business Cycle Risk	4.2	0.8	1.7
Market Timing Risk	1.5	0.6	1.0

U.K.Gilt (£)	5.35	5.57	5.52	5.3		5.07		4.52
U.S. Treasury ($)	4.96	5.04	4.65	4.57		4.67		4.85
16-Apr-07	5.35	5.51	5.49	5.3		5.1		4.58
plot curves	5	5.08	4.76	4.69		4.76		4.93
9-Apr-07	5.35	5.47	5.43	5.22		5		4.47
plot curves	5.03	5.09	4.72	4.65		4.74		4.92
2-Apr-07	5.35	5.48	5.44	5.22		4.97		4.43
plot curves	5.03	5.06	4.58	4.54		4.65		4.84
23-Apr-07
U.S. Treasury ($)
	3 Month	6 Month	2 Year	5 Year	7 Year	10 Year	20 Year	30 Year
£	5.35	5.57	5.52	5.3	5.2	5.07	4.75	4.52
US$	4.96	5.04	4.65	4.57	4.61	4.67	4.75	4.85
Yen	0.2	0.2	0.8	1.25	1.4	1.7	2.1	2.4
Euro	3.9	4	4.1	4.15	4.18	4.2	4.35	4.35
	3 Month	6 Month	2 Year	5 Year	7 Yer	10 Year	20 Year	30 Year
JGB yen	0.2	0.2	0.8	1.25	1.4	1.7	2.1	2.4
181.8181818182			F
181.02824	1.4802442849	3.1058482083	86.2778860052

Hedge Ratio	Base Currency	0%	CAD
0%	AUD	0%	CAD
0%	AUD	0%	CAD
0%	AUD	0%	CAD
0%	AUD	0%	CAD
0%	AUD	0%	CAD
0%	AUD	0%	CAD
0%	AUD	0%	CAD
0%	AUD	0%	DKK
0%	AUD	0%	DKK
0%	AUD	0%	DKK
0%	AUD	0%	HKD
0%	AUD	0%	HKD
0%	AUD	50%	CAD
0%	AUD	50%	CAD
0%	AUD	50%	CAD
0%	AUD	50%	CAD
0%	AUD	50%	CAD
0%	AUD	50%	CAD
0%	AUD	50%	CAD
0%	AUD	50%	CAD
0%	AUD	50%	CAD
0%	AUD	50%	CAD
0%	AUD	50%	CAD
0%	AUD	50%	CHF
0%	AUD	50%	CHF
0%	AUD	50%	CHF	Hedge	USD	AUD	YEN	EUR	GBP	Others	Total
0%	AUD	50%	NZD	0%	113	36	13	26	17	13	218
0%	AUD	50%	NZD	50%	111	31	15	10	2	20	189
0%	AUD	50%	NZD	100%	37	3	14	11	3	12	80
0%	AUD	50%	NZD	Others	43	14	1	5	5	8	76
0%	AUD	50%	NZD	Total	304	84	43	52	27	53	563
0%	AUD	50%	NZD
0%	AUD	100%	CAD	All Accounts	97
0%	AUD	100%	CAD	USD	109
0%	AUD	100%	CAD	AUD	46
0%	AUD	100%	CAD	YEN	142
50%	AUD	100%	CAD	EUR	106
50%	AUD	100%	CAD	GBP	68
50%	AUD	100%	CHF
50%	AUD	100%	CHF
50%	AUD	100%	CHF
50%	AUD	100%	SGD
50%	AUD	100%	SGD
50%	AUD	100%	HKD
50%	AUD	other	CAD
50%	AUD	other	CAD
50%	AUD	other	CAD
50%	AUD	other	CAD
50%	AUD	other	CAD
50%	AUD	other	CHF
50%	AUD	other	CHF
50%	AUD	other	CHF
50%	AUD
50%	AUD
50%	AUD
50%	AUD
50%	AUD
50%	AUD
50%	AUD
50%	AUD
50%	AUD
50%	AUD
50%	AUD
50%	AUD
50%	AUD
50%	AUD
50%	AUD
100%	AUD
100%	AUD
100%	AUD
other	AUD
other	AUD
other	AUD
other	AUD
other	AUD
other	AUD
other	AUD
other	AUD
other	AUD
other	AUD
other	AUD
other	AUD
other	AUD
other	AUD
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
0%	EUR
50%	EUR
50%	EUR
50%	EUR
50%	EUR
50%	EUR
50%	EUR
50%	EUR
50%	EUR
50%	EUR
50%	EUR
100%	EUR
100%	EUR
100%	EUR
100%	EUR
100%	EUR
100%	EUR
100%	EUR
100%	EUR
100%	EUR
100%	EUR
100%	EUR
other	EUR
other	EUR
other	EUR
other	EUR
other	EUR
0%	GBP
0%	GBP
0%	GBP
0%	GBP
0%	GBP
0%	GBP
0%	GBP
0%	GBP
0%	GBP
0%	GBP
0%	GBP
0%	GBP
0%	GBP
0%	GBP
0%	GBP
0%	GBP
0%	GBP
50%	GBP
50%	GBP
100%	GBP
100%	GBP
100%	GBP
other	GBP
other	GBP
other	GBP
other	GBP
other	GBP
0%	JPY
0%	JPY
0%	JPY
0%	JPY
0%	JPY
0%	JPY
0%	JPY
0%	JPY
0%	JPY
0%	JPY
0%	JPY
0%	JPY
0%	JPY
50%	JPY
50%	JPY
50%	JPY
50%	JPY
50%	JPY
50%	JPY
50%	JPY
50%	JPY
50%	JPY
50%	JPY
50%	JPY
50%	JPY
50%	JPY
50%	JPY
50%	JPY
100%	JPY
100%	JPY
100%	JPY
100%	JPY
100%	JPY
100%	JPY
100%	JPY
100%	JPY
100%	JPY
100%	JPY
100%	JPY
100%	JPY
100%	JPY
100%	JPY
other	JPY
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
0%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
50%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
100%	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD
other	USD