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FX volatility creates opportunities
The British pound has strongly decreased in value against other major currencies such as the US dollar and the euro. Such FX movements can negatively impact firms’ financial statements and destroy firm value. On the other hand, they can also create opportunities. I would like to demonstrate this on the basis of a real case of a European based industrial firm which has the euro as functional currency. We’ll discuss two scenarios.
First, some time ago the firm was negotiating a takeover of a British firm. In anticipation of the M&A transaction it purchased British pounds against euros. However, the deal was unexpectedly cancelled. As a result the firm had to sell the pounds again. Luckily, the pound had strengthened against the euro in the meantime and the firm ‘gained’ millions due to the failed acquisition. This could however easily have been a ‘loss’ in case of a weakening of the pound. The ‘no FX strategy’ was in the firm’s favour this time, but I wouldn’t bet on it.
If you are thinking about a takeover in the UK (or any other country where the local currency is under pressure) it is wise to consider multiple FX hedging strategies. For instance, using options for these type of transactions not only provides you with a way out if the acquisition is not closed as an option gives you the right but not the obligation to purchase the FX. Furthermore, when the payment is due it also gives you the opportunity to buy the currency at the option’s strike price or at the lower prevailing market rate if the case.
Second, a characteristic of this industrial firm is that it is very dominant in its core markets. Due to this position, the firm predominantly sells its products in euro, also to customers with a different home currency. While it may seem that there is no FX risk, this strategy has led to currency issues, for instance in the Russian market. Due to the weakening of the Russian rouble against the euro, the firm’s products have become more expensive up to a point where sales in Russia have nearly ceased to exist. Russian customers cannot afford to pay the euro prices and demand pricing in roubles or a discount on the euro price.
This is an example where a firm’s exchange rate policy influences its core business activities. A solution could be to move production to Russia, and possibly to produce for other regions as well, although this has consequences far beyond the FX issue which have to be taken into account.
Both examples show that FX volatility can create opportunities. FX risk management should support the core activities of a firm and not the other way around. But if creative FX management helps create firm value, why not benefit?
Victor Macrae
Owner of Macrae Finance
Blockchain and Hyperledger Hackfest: from another planet
| 17-10-2016 | Carlo de Meijer |
From another planet
For me as a ‘normal’ economist who thought to know a lot about blockchain and distributed ledger technology, trying to bridge the gap between this technology and the financial world, this was sometimes different (and difficult) stuff. Just as if I was on another planet. But for many of them the other way around may also be true. The present financial world is often a complex one for these technical people. To realise that this technology should fit in this financial world they also need to understand what is happening there in other to bridge their gap. That means we should learn from each other in order to get the best of both worlds.
Blockchain platform Iroha
I have learned a lot at this event. But for this blog I like to restrict myself to an interesting offering that is a real example of such a cross-disciplinary research approach: the Japanese blockchain platform Iroha. One of the speakers from the Japanese fintech Soramitsu, was just returning from the Geneva SIBOS event where he had announced the open sourcing and proposal of a blockchain network called Iroha to the Hyperledger Project (see my earlier blog about Hyperledger Project). Once the proposal is accepted by the Hyperledger Project and its members, Soramitsu will be able to collaborate with a wider range of partners and corporations in testing the network and finding easier methods in deploying blockchain networks to private companies.
What is Iroha?
Iroha, jointly sponsored by leading Japanese technology firms, including NTT DATA Corporation, is a distributed ledger technology and smart contract platform using Java-based smart contracts and a Byzantine Fault Tolerant consensus algorithm, called Sumeragi. This network is adapted from the Hyperledger Fabric architecture, with plans for greater interoperability in the future
Soramitsu intends to increase the availability of smart contract enabled networks to open opportunities for companies in using the blockchain technology. Iroha is expected to provide private businesses, financial institutions and organization with a simple blockchain architecture that is easy to understand, develop, and integrate. That will enable businesses of any size to implement its network with substantially lower costs, as well as run smart contract-based applications with improved security measures.
All of Soremitsu’s partnering institutions and research firms will support the development of Iroha, by running experiments on Iroha’s local currencies and the network’s overall efficiency.
Expected use cases for the Iroha blockchain network include: Payment and Settlement, Contract management, Securities clearing, Development of financial products such as Insurance, Supply Chain Management, Smart Grid, Trade finance, and Internet of Things (IoT), and efficient compliance with Know Your Customers (KYC) regulations.
Soramitsu collaborative approach
Soramitsu, started in February 2016, and a member of the Hyperledger Project, currently oversees various research projects and developments with Japan’s leading research institutions, technology and financial firms.
Weather derivatives
The company’s Iroha project can be implemented outside the realm of finance. Recently, Soramitsu began the development of derivative insurance contracts using blockchain technology, such as weather derivatives, together with the Japanese insurance company Sompo Japan Nipponkoa Holdings.
KYC
In addition, the company is working with Rakuten Securities to develop a Know Your Customer (KYC) using blockchain technology. They are now looking for global KYC partners.
Smart currencies
Soramitsu has also created a new joint research project with The University of Tokyo, The University of Aizu, and the Center for Global Communications (GLOCOM) of the International University of Japan to study the creation of local currencies running on blockchain and distributed ledger technology (Iroha network), so-called ‘smart currency”, and their effects on regional development. This project will focus on the area around Aizu, in Fukushima Prefecture, Japan.
Thereby the University of Tokyo and its Interfaculty Initiative in Information Studies, Professor Hideyuki Tanaka researched the effects of network economics and information technology (IT). The University of Aizu OpenAppLab and regional technology center looked into the relationships of local smart currencies to solve regional problems. Lastly, GLOCOM, who founded the Blockchain Economics Research Lab back in March 2016, focused its efforts on socio-economic systems and the impact of distributed ledger technology.
Blockchain and cross-disciplinary approach
What may we learn from this? Intensive collaboration between the financial and the technology world is a must. This in order to meet the needs of both worlds. The Hyperledger Project is already a platform where all these disciplines come together. Given its open-source approach this gives the best guarantee to make further progress. It is no up to the regulators to make that a reality!
Carlo de Meijer
Economist and researcher
Funding Planning & Execution with your Bank, a Consultant, an Interim Manager or DIY?
| 14-10-2016 | Pieter de Kiewit |
Funding has been the primary trade of the bank, they do have wide and broad knowledge. Over the last years they have lost their credibility due to scandals, but also because they did not supply when the need was high. The banks themselves also struggle with increased regulation and are trying to adjust their business model to changing market circumstances. Can the advice of a supplier be fully objective?
The objectivity of consultants depends upon their business model. There is a portion that is on the broker side that is paid upon success, either by the supplier or their client. They will be deal driven and will not only have the interest of the client in focus. At the same time, without them quite often, there will be no deal, no funding. The consultants that are paid a fixed fee or hourly rate can be expected to be more impartial. They often have the knowledge base, but will not take responsibility. Also their rate can be steep.
The third solution is an interim manager who has been responsible for funding in the past. Often his rate is more acceptable and he will better speak the language of the entrepreneur. Also he is an obvious candidate to do much of the operational work. Of course he will not have an organisation to fall back upon and will not accept any liability. I notice interim managers are getting a bigger market share.
Finally a CFO and entrepreneur can do the funding planning and execution themselves. At first glance this may be the cheapest option.
What questions did you ask before funding your company? Who did you chose to accompany you?
Cost, expertise, success, liability, gut feeling….. So many variables, no easy answer. I look forward to your input.
Pieter de Kiewit
Owner Treasurer Search