Financelab Magazine 2015 by FinanceLab

FI NANCELAB MAGAZI NE

wwww. f i nancel ab. dk

Sept ember201 5

I sTheChi nes eDr agonLos i ng I t sFi er yBr eat h? TheUni queChi nes eMar ket s Out l ook:Emer gi ngMar ket s p.1823

Smal lCap I nves t i ng p.3

Pr i vat eEqui t y:

Si gni f i c antPEDeal si n 2014/ 2015 p.7

Car eer :

Br eaki ngI nt oI nves t mentBanki ng Wi t haSummerI nt er ns hi pp. 11

Ener gy:

Shal eOi landLNG p.30

Tel ec om:

Ef f ec t sofaCons ol i dat i onont he 24 Eur opeanTel ec om Mar ketp.

Sec ur i t i s at i onandBas elI I I p. 34

p. 26

Swi s sUnpeg:

AnUnf or s eenEvent ? p.38

F I NANCEL ABMAGAZI NE

CONTENTS

Smal lCapI nv es t i ng

p.3-5

Si gni f i c antPEDeal si n2014/ 2015

p.7-9

Br eak i ngI nt oI nv es t mentBank i ngWi t h aSummerI nt er ns hi p

p.11-15

TheUni queChi nes eMar k et s

p.18-20

Emer gi ngMar k et sOut l ook

p.21-23

Tel ec om:Ef f ec t sofaCons ol i dat i onon t heEur opeanTel ec om Mar k et

p.24-25

Bas elI I I-St r at egi cef f ec t songl obal bank i ng

p.26-29

Shal eOi landL NG-TheNewOut l ook onTheEner gyMar k et

p.30-32

Sec ur i t i s at i on

p.34-36

Swi s sunpeg-AnUnf or s eenEv ent ?

p.38-40

Whoi sF i nanc eL ab? F i nanc eL abi sanonpr of i t ,v ol unt ar ys t udentor gani s at i on c ov er i ngal lmaj oruni v er s i t i esandc ol l egesi nDenmar kwi t h mor et han2, 750r egi s t er edmember s .

Wear et hepr i mepoi ntofc ont ac tbet weent hef i nanc i al i ndus t r yandt heac ademi cwor l d.

Moni c aWong Pr es i dent

Dani elJ .Ber t el s en Vi c ePr es i dent

MSc .Appl i edEc onomi c s&F i nanc e CopenhagenBus i nes sSc hool

MSc .I nt er nat i onalBus i nes s CopenhagenBus i nes sSc hool

Thank st o Cont r i but or s J es perKj ærBahl k e F r eder i k k eBec k Al exanderBor r es k ov J ak obBr i x Mar c usBr oder s s on

L ay out er Dani elJ .Ber t el s en

Kr i s t of f erGams t J ak obAmr os i usGar f f Ras musJ ac obs en Mi k aelJ ac obs en J ohanSt axJ ak obs en

Dav i dKj aer um Mal t eKr us e Gr egorNanut F r eder i kSc hmi dt Sebas t i anSør ens en

Edi t or Dani elJ .Ber t el s en Moni c aWong

MagnusSør ens en TheaSt ens ak er Si menThor s hei m Bj ar k eTor nager Mat hi asVi ndber g

Can you build a railroad with a spreadsheet? The question is can you build a railroad without one? What gets important projects moving is capital. Join us and help build the things that change the world. There’s work to be done.

What Will You Create? morganstanley.com /c ampus

Lyndal Analyst, Global Capital Markets

8282486 EMEA SSE Careers Flyer m1.indd 1

7/2/2015 7:00:22 PM

Smal lCapI nves t i ng: Somet i mess i z edoesmat t er ByJ es perKj ærandJ ohanSt ax

Compar edt opr of es s i onali nv es t or s ,weass t udent shav ef ew adv ant ageswhent r y i ngt ogener at ear et ur ni nf i nanc i almar k et s ;wehav el es st i me,l es sc api t alandl es sdat a.Ev ent hes i mpl es t MeanVar i anc es t r at egyev ent ual l yent ai l sunbear abl et r ans ac t i onc os t sandt husr ev eal si t s el fi noper abl e.Howev er ,t het r adi t i onal“ s mal lc apv al ue”i nv es t ments t r at egyi smanageabl ef ora s mal li nv es t orandof f er sgoodhi s t or i c alr et ur ns .

Cont empl at i ng t he r ol e ofi ns t i t ut i onal i nv es t or si n as mal lc ap mar k etunc ov er sanoppor t uni t yt o ut i l i z ei nef f i c i enc i es embedded i n t hats egment . Thi si smot i v at edbyi ns t i t ut i onali nv es t or s ’pr opens i t yt odi v er get hei r i nv es t mentf l owsawayf r om s mal l er c ompani esduet os ev er aladdi t i onal s our c esofr i s k . Mos tobv i ousi sl i qui di t yr i s kt hat c oupl edwi t ht hes mal lmar k etc api t al i z at i onmak esi tdi f f i c ul tt ot ak ea s i gni f i c antpos i t i oni nagi v ens t oc k wi t houti mmens epr i c ei mpac t . The abs enc e ofi ns t i t ut i onali nv es t or si mpl i est hatt hes ef i r mswi l lbe l es ss c r ut i ni z edbyf i nanc i alanal y s t s and t hef i nanc i alr epor t sar eof t en t hei nv es t or s ’onl ys our c eofi nf or mat i on;i nev i t abl ygi v i ngr i s et oi nf or mat i onas y mmet r yl eadi ngt oad v er s es el ec t i on,andf i nal l yhamper i ngac c ur at epr i c edi s c ov er y .

F ur t her mor e,t hef i nanc i alc r i s i sf ac i l i t at edi nc r eas i ngr i s kav er s i on;Dani s hl ar geandmi dc api ndi c eshav eof f er edahi ghr et ur n f r om t hel ow i n2009whi l el eav i ngt hes mal lc api ndexbehi nd– s eef i gur ebel ow. Thi si sanat ur alc ons equenc eoft headdi t i onalr i s kc ons i der at i onsandt her ec ent l yunpr ec edent edl owi nt er es tr at es . I nv es t or snowpr ef ers af erequi t yi nv es t ment sc ompar edt os mal l c ompani es . Howev er , aswes t andatt hebegi nni ngofanec onomi cex pans i on,t hi si saper f ec toppor t uni t yt oi nv es ti n qual i t y s mal lc apc ompani esast heys t i l lhav eac ons i der abl egr owt hpot ent i al . Wehav ear guedt hatt hes egmentofhi ghqual i t ys mal l c aps t oc k s of f er sanat t r ac t i v ei nv es t mentoppor t uni t y ,buti ti snotaf r ee l unc h. F ewmut ual f undsar ei nv es t i ngex c l us i v el yi ns mal l c apequi t i es . Ev enf undsl abel l ed“ s mal lc ap”wi l lof t enhav eac ons i der abl e pr opor t i oni nv es t edi nl ar gec aps t oc k s .Thi st endenc yi spr obl emat i c ,butal s oanoppor t uni t y ,s i nc ei ti sc umber s omet o“ buy ” y ourex pos ur et ot hi ss egment .Thus ,t or eap t hepr of i t sand c ount ert heas y mmet r i ci nf or mat i on,weneedt odoourhomewor kandhav et hec our aget omak eourowni nv es t mentdec i s i ons . FI NANCELAB-I SSUESEPTEMBER2015

I nv es t i ngi ns mal lc apqual i t yent er pr i s es i s an at t r ac t i v e opt i on f or s t udent / pr i v at ei nv es t or ss eek i ngt o mak ean abov e“ mar k et ”r et ur n as s mal lc ompani es hi s t or i c al l y hav e out per f or medbl uec hi pent er pr i s es .

I ns pi r edbyBenj ami nGr ahamsVal ueI nv es t i ng,wes ear c ht hes t oc kmar k etf or equi t i est r adi ngatadi s c ountt ot hei ri nt r i ns i cv al ue.Al li nv es t or swi l ldev el op t hei rown f r amewor k ,butt hr ee s t eps wi l lal way sbec r uc i al :s c r eeni ng,anal y s i s ,andv al uat i on.Ast heDani s hs mal l c apmar k etonl yi nc l udesappr oxi mat el y 100c ompani es ,i ti spos s i bl et os c r een t hes egmentbyl ook i ngatc l as s i cr at i os s uc h aspr i c eear ni ngs ,pr i c et o book , et c .us i ngt hef i nanc i alr epor t s .Al t er nat i v el y ,onec an al s os c r een f orc ompani esexpos edt ogl obalmegat r ends ,e. g. di abet es ,or mac r oec onomi c dev el opment s .

FI NANCELAB-I SSUESEPTEMBER2015

Next , c ompani ess ur v i v i ngt hes c r eeni ng pr oc es smus tbeanal y s edi ndept h.Thi s ent ai l ss c r ut i ni z i ng t he f undament al s , e. g.bal anc es heet sandc as hf l ow s t at ement s ,andl ook i ngatt hei rs t r at egi cpos i t i on.I ti sv i t alt oas s es st hepr os pec t s oft hec ompany ;ani nv es t menti sbuy i ng as t ak ei nt hef ut ur eoft hec ompany .We mus tbe c onv i nc ed t hatt he c ompany hasas t r ongc ompet i t i v epos i t i on,pr ef er abl y a mar k et l eader , and t hat demandf ort hei rpr oduc t swi l lendur e f ory ear st oc ome. Tof ac i l i t at et hi sai m,managementmus t bet r us t wor t hyandhav et her i ghtc ompet enc i es .Howev er , t obeagoodi nv es t mentt heymus tal s obei nv es t or mi nded. Byexper i enc e,t hi sc anbeapr obl em i n s mal lc ompani esi nwhi c ht hef oundi ng f ami l yi smaj or i t ys har ehol der .I ndi c at or sofqual i t yandi nv es t or mi ndednes s ar e management buy i ng s har es at mar k etpr i c eanddi s t r i but i onofexc es s c api t al t oi nv es t or st hr oughdi v i dendsor s har ebuy bac k s . F i nal l y ,one s houl d mak eav al uat i on us i nge. g. aDi s c ount edCas hF l owmodel orpeeranal y s i s-I ft hemar gi nofs af et y i sl ar ge,t heni nv es t !

Pot ent i alWi nner sOvert heNextTwel veMont hs

Br i ef :Pr oper t ydev el operwi t hf oc usonr et ai lands hoppi ngc ent er s .I nc r eas i ngexpos ur e t or es i dent i alandc ommer c i alpr oper t y . •L owi nt er es tr at eenv i r onment . •F i nal i z i ngr es t r uc t ur i ngandc ons ol i dat i onoft hei rbus i nes spl at f or m. •Rec ent l yr ec ei v edCSM appr ov aloft obui l dCi t y c ent erBROENi nEs bj er g. •P/ E: Negat i v e •P/ E2015/ 16: 22 •P/ B: 0, 60 •Di v i dendYi el d : 0, 0% •Sol i di t y : 53%

Br i ef :Ent r epr eneur i alEnt er pr i s ewi t hc or ec ompet enc i eswi t hi nc ons t r uc t i on,r oadmai nt anc e,f oundat i on,andpi pi ng. •L i ndI nv es ti sal ar ges har ehol dert oget herwi t ht hef oundi ngf ami l y . •St r ongex pos ur et omac r oec oni mi cex pans i on. •Q1r epor tdi s c l os edr ev enuegr owt hof26% andpr of i tgr owt hof116%. •P/ E: 12, 7 •P/ E2015: 10, 8 •P/ B: 0, 9 •Di v i dendYi el d: 0, 7% •Sol i di t y : 47%

•L owi mpai r mentandqual i t yl oanpor t f ol i o. •Nor emar k sf r om F i nans t i l s y netaf t erl as ti ns pec t i onul t i mo2014. •Q1r epor tdi s c l os edl endi nggr owt hof2, 3% andpr of i tgr owt hof29% •P/ E: 8, 1 •P/ E2015: 7, 4 •P/ B: 0, 77 •Di v i dendYi el d: 2, 2% •Sol i di t y : 14, 2%

FI NANCELAB-I SSUESEPTEMBER2015

Br i ef :Commer i c albank i ngonF unenandi nF r eder i c i a.OwnerofNor df y nsF i nansof f er i ng nat i onwi del eas i ng.

Si gni f i c antPEdeal si n2014/ 2015 F ol l owi ngy ear sofdec l i ne,t heappet i t ef orf undr ai s i nghasr et ur nedt ot hepr i v at e equi t ys ec t or

Thef i v ey earf undr ai s i ngamongt het op50pr i v at e equi t yf unds has ,ac c or di ng t o Pr i v at e Equi t yI nt er nat i onal ,been dec l i ni ngs i nc et he c ol l aps eofL ehmanBr ot her s .Howev er , t henegat i v et r endhasnow beenr ev er s ed,andf ort he f i r s tt i mes i nc e2009,t hes oc al l edpos t L ehman per i od,t her ei sapos i t i v edev el opmenti nt he t ot alf undr ai s i ngamongt hewor l dâ&#x20AC;&#x2122; sl ar ges tpr i v at eequi t yf unds . Thus ,t he t op 50 pr i v at e equi t yf i r msr ai s ed 508bnEURi n2015.Oft he508bnEUR,t he10 l ar ges tpr i v at eequi t yf i r msac c ount edf or207bn EUR,equi v al entt o41pc t .

I ti snot ewor t hyt hat9outoft he10s pot sar eoc c upi edbyUSbas edpr i v at eequi t yf i r msast he onl yEur opeanpr i v at eequi t yf i r mr epr es ent edi n t het op10i sCVC Capi t alPar t ner swi t h19. 3bn EURi nr ai s edf undsdur i ngt hef i v ey earr ol l i ng per i odt oApr i l1s t2015. I ngener al ,New Yor kdomi nat est het ot alPr i v at e Equi t yf undr ai s i ngwi t hat ot alof295bnEURout of992bnEUR, equi v al entt o30pc t .L ondoni st he s ec ond l ar ges tc i t y ,r ai s i ng10pc t .oft het ot al f unds .

I nt er msoft hef i v ey earf undr ai s i ngmeas ur e, t he Car l y l e Gr oup r emai nt he l eadi ngpr i v at e equi t yf und wi t h at ot alof29. 1bn EUR,whi l e Tex as bas edTPGmov edf r om t hef i f t hl ar ges tt o t he s ec ond l ar ges tr ai s i ng 27. 6bn EUR.KKR, Bl ac k s t oneGr oup and Apol l o Gl obalManagementeac hf el lonepl ac e,butr emai nedi nt he t op5.

2015Rank

2014Rank

Fi r m

PEI300Fi veYear Fundr ai s i ng( EURm)

TheCar l y l eGr oup

29, 065

Was hi ngt ong,DC

TPG

27, 631

F or t hWor t h

Kohl ber gKr av i sRober t s

26, 513

NewYor k

TheBl ac k s t oneGr oup

23, 289

NewYor k

Apol l oGl obalManagement

20, 223

NewYor k

CVCCapi t alPar t ner s

19, 292

L ondon

EnCapI nv es t ment s

19, 264

Hous t on

Adv entI nt er nat i onal

14, 334

Bos t on

War bugPi nc us

13, 885

NewYor k

Bai nCapi t al

13, 268

Bos t on

FI NANCELAB-I SSUESEPTEMBER2015

Headquar t er s

Pr i vat e equi t y buyer s have mai nl y been ac t i ve i n ac qui r i ng mi nort ar get si n201415YTD I nt heper i od,1, 330 deal swi t h apr i v at eequi t y bi dderandadi s c l os eddealv al uewasmade.Of t hes edeal s ,mor et han 50pc t .wasmi nordeal s wi t hadealv al uebel ow 100m EUR.Onl y72deal s hadadealv al uegr eat ert han1bnEUR. Whenl ook i ngi nt ot he72deal swi t hadealv al ue gr eat ert han1bnEUR,t hemos toft heac t i v i t yhas beenwi t hi nt hes er v i c esi ndus t r ywi t h11deal s . The r emai ni ngi ndus t r i esi nt het op5ar emanuf ac t ur i ng,medi c al ,ener gyandr eales t at e.

Themos ts i gni f i c antpr i vat eequi t ydeal s ac c ountf or9pc t .oft ot aldealval uei n t heper i od L ook i ngatt het op10deal sbyent er pr i s ev al ue,mos tof t hepr i v at eequi t ybi dder sar eamongt he10l ar ges tf und r ai s er st hel as t5y ear s .Mos tac t i v ebi dder shav ebeen TheCar l y l eGr oupandCVC Capi t alPar t ner swi t ht wo megaac qui s i t i onseac h. Thet ar get shav emai nl ybeenUSbas edas6oft hedeal s hav ehadanAmer i c ant ar getwi t ht her emai ni ngf our deal sal lt ak i ngpl ac ei nEur ope.Themos tac t i v i t yhas t ak enpl ac ei nH1of2014,wher eas2015hav ebeena qui ety ears of arwi t honl yt wodeal swi t hanent er pr i s e v al uegr eat ert han2. 5bnEUR.Bot hoft hes eoc c ur r edas r ec ent l yasJ une,wher eApol l o ac qui r ed F r enc h gl as s bot t l eand j armanuf ac t ur erVer al l i aand CVC Capi t al Par t ner sac qui r ed t he Ger manbas ed r et ai l erofper f ume,j ewel l er yandf as hi onpr oduc t s ,Dougl asHol di ng, f r om Adv entI nt er nat i onal . Al l oft het op10deal shav ehadadeal v al uegr eat ert han 2. 5bnEURwi t hac ombi nedv al ueofmor et han30bn EUR.Thec ombi nedent er pr i s ev al ueoft het op10deal s ac c ount sf or9pc t .ofal l1, 330deal swehav eanal y s ed f ort heper i od.

FI NANCELAB-I SSUESEPTEMBER2015

I nt hef ol l owi ng,wepr es entt he10mos ts i gni f i c antpr i v at eequi t ybac k eddeal si nt er msofdealv al uei nt he per i od201415YTD.

Bl ac ks t onemakest hel ar ges tpr i vat eequi t ybuyoutdur i ngt heper i od

FI NANCELAB-I SSUESEPTEMBER2015

TheBl ac k s t oneac qui s i t i onofaut opar t spr oduc erGat esGl obalI nc .i st hel ar ges tpr i v at eequi t y buy outofani ndus t r i alc ompanyi nmor et han5y ear s .Ac c or di ngt oWal lSt r eetJ our nal ,Bl ac k s t onewasbi ddi ngagai ns tTPG,whi c hi s2ndont hepr i v at eequi t yf undr ai s i ngl i s t . Bl ac k s t onei sex pec t edt ohav eputabout1. 5bnEURoft hei rownmoneyi nt ot he3. 9bnEURdeal –oneoft hel ar ges tequi t yc ont r i but i onsi napr i v at eequi t ybuy outi nt hepas ts ev er al y ear s–and hav ebor r owedt her es tt of i nanc et het ak eov er . Oneoft hes t r at egi cr at i onal esbehi ndt heac qui s i t i oni st ot ak eadv ant ageofc ount r i eswhi c hhas ex per i enc edbur geoni ngec onomi cgr owt hs uc hasChi na, wher emanymot or i s t sar eex pec t edt o s oonneedr epl ac ementpar t saf t erowni ngv ehi c l esf ors ev er aly ear s .

Br eaki ngi nt oi nves t mentbanki ng wi t has ummeri nt er ns hi p Par t1:I nt r oduc t i ont oi nves t mentbanki ngi nLondon Ev er yy earhundr edsoft hous andsofy oungf i nanc es t udent sappl yf ors ummeri nt er ns hi psat t hewor l d’ sl ar ges ti nv es t mentbank s .I n2014,Mor ganSt anl eyr epor t edt heyr ec ei v ed90, 000appl i c at i onsf or1000i nt er ns hi ppos i t i ons–t hati sj us tov era1% ac c ept anc er at e.St at i s t i c al l y ,t hi s mak esl andi ngani nv es t mentbank i ngi nt er ns hi pmuc ht oughert hanget t i ngi nt oHar v ar dwhi c h, i nc ompar i s on,hasanac c ept anc er at eof5. 9%.Sowhyar es omanyy oungs t udent sat t r ac t edt o al i f eonWal lSt r eet ?Ac c or di ngt oF or bes ,oneans weri st hats omeoft hebes ti nt er ns hi psi nt he wor l dar et obef oundi nt hei nv es t mentbank i ngc api t al sofL ondonandNewYor kCi t y .

F ort heas pi r i ngappl i c ant s ,an i nt er ns hi pi sanoppor t uni t yt o ex per i enc el i f easaf ul l t i mei nv es t mentbank er .I ti sal s oa t oolf orbank st ot es tt hei rpr os pec t i v e empl oy ees ,t os ee i f t heyar eagood f i tf oraf ul l t i mepos i t i on.Ass uc h,t y pi c al l y af t ert hes ummer ,y oumaybe of f er edaf ul l t i mepos i t i on.Thi s i swher et he at t r ac t i on s t ems f r om –t hes ummeri nt er ns hi p i st hemos twi del yadopt edr ec r ui t ment mec hani s m f or bank s . Notal lbank sar ec r eat edequal howev er . Thel ar ges t ,and mos tpr es t i gi ous ,ar er ef er r ed t o as‘ bul ge br ac k et ’ bank s .

Whi l e t he member s of t hi s br ac k ethav ec hangedov ert i me, t odayt heyar e:BankofAmer i c a Mer i l lL y nc h,Bar c l ay s ,Ci t i gr oup, Cr edi t Sui s s e,Deut s c he Bank , Gol dman Sac hs ,J . P. Mor gan, Mor gan St anl ey ,UBS,Nomur a andHSBC. Thet er m bul gebr ac k etr ef er st o howadv i s or sonapar t i c ul ardeal ar epr es ent edont het ombs t one. Thet ombs t onei sat y peofc er t i f i c at e hi ghl i ght i ng t he par t i c i pant soft hedealandt hei radv i s or sac c or di ngt ot hei rr ol e. Her et hebank sar er es pons i bl e f or r unni ng t he book ‘ bul ged’ out .Bul ge br ac k et bank s ar e v er yl ar ge and gl obal l yr epr es ent ed, howev ert heyar enott he onl ypl ac est ogetani nt er ns hi p. Popul aral t er nat i v est ot hebul ge br ac k et bank s ar e s o c al l ed ‘ mi ddl emar k et ’i ns t i t ut i onsand ‘ el i t ebout i que’ s hops . Thes ef i r ms ar e of t en s mal l er andhav eamor enar r owf oc usi n t er msofex per t i s eands er v i c es . Al t hough s mal l er , many bout i que i nv es t ment bank sc ar r y j us tasmuc hpr es t i geandhav e gr ownt oempl oyhundr eds ,and i ns omec as es ,t hous andsofempl oy ees .

Al mos tal loft he wel l k nown bank sand bout i quesof f eri nt er ns hi ps . Thepos i t i ont y pi c al l ys t r et c hes ov ert en week s ,wher et hei nt er ns f i r s tr ec ei v e a week of t r ai ni ngf ol l owedbyni neweek s ofhar dwor ks i debys i dewi t h t hef ul l t i meempl oy ees . Whi l et he s t r uc t ur e ofi nt er ns hi psv ar i esf r om i ns t i t ut i ont o i ns t i t ut i on,i ti snotunc ommon t hatt hei nt er nsr ot at eamongs t t he di f f er ent gr oups wi t hi n t hei rr es pec t i v edi v i s i on,s oas t ogetasmuc hex pos ur et ot he l ar geroper at i onoft hebankas pos s i bl e.

FI NANCELAB-I SSUESEPTEMBER2015

Howev er ,i nt er ni ngov ert he s ummeri snotj us tan ei ght hour wor k day wi t ht i me t o enj oyt hes ummerweat herwi t h ac ol dpi nti ny ourhand. Rat her , ani nt er ns hi pi nL ondoni sal i f es t y l e,af or merGol dmanSac hs i nt er nr ev eal s ;y ou ar e mos t l i k el yt os pendatl eas t50% of t hedayatt heof f i c e,dur i ngt he 10week s .Sowhy“ was t e”y our s ummer ?

L ar gebank sar eof t endi v i dedi nt of r ontof f i c e, mi ddl e of f i c e and bac kof f i c e.Wi t hi nf r ont of f i c e,whi c hwi l lbet hef oc usoft hi sar t i c l e, t her e ar et wo mai n di v i s i ons :The Sal es& Tr adi ng( S&T)andt heI nv es t mentBank i ngDi v i s i on( I BD) .S&Ti sof t endi v i dedupi nF i xed I nc ome,Cur r enc yandCommodi t i es ,andEqui t i es . Popul ar r ol es i nc l ude t r adi ng ( exec ut i ngc l i entor der s ,mar k etmak i ng,pr opr i et ar yt r adi ng) ,r es ear c h( anal y s i ng pr oduc t s , i ndus t r i esormar k et st ogener at epot ent i ali nv es t menti deas and s t r at egi es ) ,and s al es( s el l i ngpr oduc t sandi nv es t menti deas t ot hebank ’ sc l i ent s ) . I BDi nc l udesMer ger sandAc qui s i t i ons , L ev er aged F i nanc e,Equi t y Capi t alMar k et ,Debt Capi t alMar k et s ,and Res t r uc t ur i ng.Thedepar t ment smayv ar yi nnami ngands t r uc t ur e t os omeext ent .Wi t hi nt hes ear easy ouwi l l f i nd i ndus t r ys pec i f i cgr oupswhos e ac t i v i t y s t r et c hesac r os st hemai nf unc t i onalar eas .

Themy t hsabouti nv es t mentbank i ngar ec ount l es s .Wehav ebeent al k i ngt os omeoft hebank er s c ur r ent l yi nt er ni ngi nL ondonands omeoft hem who madei tt o af ul l t i meof f eri ns omeoft he bank s : Dani elJ ay s onwhoi sc ur r ent l yi nt er ni ngi nWeal t h ManagementatBar c l ay ss ay s : “ i ti sdef i ni t el yl i v i ngupt ot heexpec t at i ons .I t ' sa l otofwor kbuti t ' sr ewar di ng( atl eas ti nt hedi v i s i onIam i n) .I ' v el ear nedmor et hanIhav ei nal l myy ear si ns c hool andIf eel l i k ei ti sagr eatwayt o s t ar tac ar eer .Iwoul ddef i ni t el yr ec ommendi tbut al s or ec ommendr es ear c hi ngwhatar eaandwhi c h f i r my ouwantt owor ki nbec aus ec ul t ur ei sv er y di f f er entac r os sgr oupsandf i r msandt hec ul t ur e pl ay sahuger ol ei nt heexper i enc e. ” F r eder i kKoef oedi nt er ni ngi nJ . P. Mor ganaddst he poi nt ,t hat“ ev ent houghpeopl eus ei tt ogetaf ul l t i meof f er ,y ouc oul dr i s ks pendi ngy ourent i r el i f e wor k i ng–andnot hi ngel s e. ”

Ther ear epr osandc onst obot hS&TandI BD. S&Thasl es swor k i nghour swi t hf r eeweek endsduet omar k ethour s . Ont heot herhand, I BDi nv ol v esmor ewor k( 100hourweek sar e notunhear dof ) ,butal s oof f er sdeeperc l i ent i nt er ac t i onandar guabl ymor eexi t oppor t uni t i es .

FI NANCELAB-I SSUESEPTEMBER2015

Par t2:Pr osandCons

Sodoesi nv es t mentbank i ngl i v eupt ot hehy pe andgl amourt hats ur r oundsi t ?Wel l ,whi l ei t doesof f eramaz i ngoppor t uni t i est ogetf i l t hy r i c h,t her ear eal s omanyt al esofc aut i ont hat y ous houl dnoti gnor e! One s uc hs t or yc onc er nsMor i t zEr har dt ,an i nt er ni nt hes ummerof2013atBankofAmer i c aMer r i l lL y nc h,whot r agi c al l ydi eddur i nghi s i nt er ns hi pi nL ondon af t erher epor t edl ydi d t hr eeMagi cRoundabout s . AMagi cRoundabout i sa s hi f tt hatbegi nsat7am and c ont i nues ar ound t he c l oc k ,c ul mi nat i ng i n ac ab r i de

home 24 hour sl at er .Wi t ht he met ert i c k i ng whi l es hower i nganddr es s i ng,y out henr et ur n wi t ht hes amec arbac kt ot heof f i c e30mi nut es l at er . Hedi edofanepi l ept i cs ei z ur e, whi l et ak i ng as howers ai dt hei nques t , butt hei nc i dentpr obabl yc oul dhav ebeenav oi dedi fi twas n’ tf ort he ext r emewor k l oadt hathewasputt hr ough. Howev er , t r agedi esl i k et hes ear ef ewandf arbet ween.Manyoft hel ar gerf i r mshav es t ar t edt o f oc usmor eont hewel l bei ngoft hei rj uni orempl oy eesandt hei rwor khour s ,andmos ti nt er ns hav ef unl ear ni ngov ert hes ummer .

Mos thi r esei t hergetoutf ol l owi ngt hei ranal y s ts t i nt ,goi ng ei t heri nt o bus i nes ss c hoolor t o a PE/ Hedge F und orot her “ hi gh pay i ng, l es s wor k i ng hour s ”t y pe ofbuy s i de pos i t i on.Theoneswhos t ayf ora c ar eer mus t pr epar e t hems el v esf oral ongr oad ahead, wi t h as t r ong pos s i bi l i t y of nev er r eac hi ng t he ul t i mat e goal of “ managi ng di r ec t or ” . Her e, of f i c epol i t i c ss t ar tt opl ay al ar ger ol e,asdoesy ourper s onalaf f i ni t yf orat t r ac t i ngnew bus i nes st ot hef i r m. Manypeopl emayf i ndi thar d t os wi t c hf r om bei ngan ex c el monk eyt oaper s ont hathast o pl ayt heof f i c egameands our c e new bus i nes s .L i k ewi s e,y our paypac k agewi l lal s o bec ome mor ev ol at i l e as y ou r i s ei n r ank ,wi t hagr eat erpor t i onat t r i but edt oy ourbonus . Lear ni ng, net wor ki ng and br andi ng. Ani nt er ns hi pwi l lpr ov i dey ou wi t h an unpar al l el ed i ns i ght i nt o hi gh f i nanc e. As one s ummeranal y s t ,we s pok et o s ay s :“ I ' v el ear nedmor et hanI hav ei nal lmyy ear si ns c hool andIf eel l i k ei ti sagr eatwayt o s t ar tac ar eer . ”I ti si ndeed a gr eatwayt os t ar ty ourc ar eeri f y ouwantt owor ki ni nv es t ment bank i ng.

Thenet wor k i ngt hatani nt er ns hi p pr ov i des i s i nv al uabl e wheni tc omest ol oc k i ngi nt hat f ul l t i meof f er .L i k ewi s e, y ouwi l l meeta l otofambi t i ous and dr i v en peer s wi t h whom y ou wi l ls har et heupsand downs wi t hi nt het r enc hes .Thi sk i nd ofex per i enc ebui l dsl as t i ngr el at i ons hi ps and c an bec ome v er yv al uabl el at er i n y our c ar eer . L as t l y , ev eni fy ouc hoos enott o c ont i nue i ni nv es t mentbank i ng,t he pr es t i gi ous i mage of s uc hani nt er ns hi pi swor t hi t s wei ghti n gol d when appl y i ng el s ewher e. Thi si s es pec i al l y t r uei fy ouar eappl y i ngf orpos i t i onsatt opc ons ul t i ngf i r ms , who of t en c ompet ef or t he s amet al entast hei nv es t ment bank s .

“ I nves t ment banki ng i s al l aboutbot t l esandmodel s ! ” Sur e,t her ei sal otofgl amour and pr es t i ge i n i nv es t ment bank i ng,butasananal y s t ,t he onl ymodel sy ou wi l ls ee ar e di s c ount ed c as hf l ows i n an Ex c els pr eads heet ! Thet r ut hi st haty ouwi l lbet oo t i r edt odr i nkandt oobus yt o dat e.May bet hati sabi thar s h. J ok esas i de,y ou wi l lbui l d an i mpr es s i v e and at t r ac t i v e r és uméatav er year l ypoi nti n y ourc ar eerandonc ey our i s e i ns eni or i t yandas s umemor e r es pons i bi l i t y and f r eedom, may bet heny ougett or eal i z e s omeoft hes emy t hs . F ort heanal y s t. . .wel lt her e’ s al way st heChr i s t maspar t y !

FI NANCELAB-I SSUESEPTEMBER2015

Wher ei st he r ealv al ue?The t r ut hi st hatwhi l emanypeopl e appl yf ori nt er ns hi psi n or der t or ec ei v ef ul l t i me of f er s ,a l ongt er m c ar eeratt he s ame bank or wi t hi n i nv es t ment bank i ngi ngener al ,i sr ar el yt he end goal .The ex t r emel yhi gh t ur nov err at eofy oungs t af fr ef l ec t st hi s .

Par t3:Get t i ngani nt er ns hi p Sohowdoy ougeti n? I t ’ snotgoi ngt obeeas y .I nv es t ment bank i ng r ec r ui t ment i s not or i ous l yt ough. Thet r adi t i onalwayi st oupl oad y our r és umé onl i ne, s i tt he onl i ne l ogi c aland numer i c al t es t sandpr ayt ot hegodst hat y ou hav et he ac ademi c pedi gr ee and exper i enc er equi r ed t ogetnot i c ed. They of t en l ook f or peopl e goi ng t o s o c al l ed t ar get s c hool s . I nt heUni t edKi ngdom, t hes ei nc l udei ns t i t ut i onss uc h asOxf or d,Cambr i dge,L ondon Sc hoolofEc onomi c st onamea f ew. You al s o need a nearper f ec t GPAoratl eas ta2: 1. Ev en i fy ou l i v e up t ot hes e t hi ngs ,y ou al s o need t o hav e had s omepr i orexper i enc eor ext r ac ur r i c ul ar ac t i v i t y t hat demons t r at esy ouraf f i ni t yand i nt er es tf orf i nanc e.Thats ai d, bank er ss pendal mos tnot i me l ook i ngatr és uméss oy our shas t obepol i s hedt oper f ec t i onas wel lasbei ngc onc i s eandi nt er es t i ng.

FI NANCELAB-I SSUESEPTEMBER2015

Whati fIdon’ tf ul f i lt hes ec r i t er i a,i sal lhopel os t ?Thank f ul l y no.

The ent r epr eneur i al s t udent wi l lal way sf i ndaway .Thek ey her ei snet wor k i ng.I fy our eal l y wanti tbad enough,y ou wi l l hav et o demons t r at ei tt ot he r ec r ui t er sbyc al l i ngandemai l i ngas k i ngf ort hi ngsl i k ei nf or mal i nt er v i ews ,c of f ee c hat s andt hel i k e. Soony ouwi l lhav eas ol i dc ol l ec t i on ofnamesand c onnec t i onst hatmaybeabl et o get y ouani nt er v i ew.

I nf ac t ,y oumaynet wor ks oef f ec t i v el yt haty ouc ans k i pt he pr el i mi nar yi nt er v i ew and i nt er v i ew di r ec t l y wi t ht he s pec i f i cgr oup t haty ou hav enet wor k edwi t h. I tal s o hel pst o br oaden y our s ear c hi nc l udi ng manyoft he s mal l erbout i que and mi ddl e mar k ets hopswhodon’ tgett he s amev ol umeofappl i c at i onsas t he bul ge br ac k etbank s .The k eyher ei sper s i s t enc eandr es i l i enc e. You wi l l be t ur ned down many t i mes ,buti twi l l paydi v i dendsi nt hel ongr un. St i l l ,i fy oudonotl andani nt er v i ew f oras ummeri nt er ns hi p, y oumayt r yy ourl uc katl andi nganof f c y c l ei nt er ns hi p. Of f c y c l ei nt er ns hi psgener al l y t ak epl ac ei nt hef al l ands pr i ng, butc ant ec hni c al l ys t r et c hov er anyper i od dependi ng on t he need and pr ef er enc e of t he bankandt hei ndi v i dual gr oups . Thes ei nt er ns hi psar et y pi c al l y l ongert hant hes ummeri nt er ns hi p,of t en l as t i ng ar ound 6 mont hs . Theyar eal s or ec r ui t edf oron an adhocbas i s ,and t y pi c al l y s ee l es s i nt er es tt han t he s ummer i nt er ns hi ps . As a r es ul t ,y ou mayhav eabet t er c hanc eatl andi ngoneoft hes e. I fyou ar el uc ky enough t o l and an i nt er vi ew,whatc an youexpec t ? Wel l weal l k nows omeone, who k nows s omeone who had a hor r i bl ei nt er v i ew exper i enc e, wher et hey got gr i l l ed and c hok edbi gt i mel i k eEmi nem i n 8Mi l e. I ni nv es t mentbank i ng,i ti sno di f f er ent

I nf ac t ,y ou s houl d expec tat l eas tt hr eet of i v ei nt er v i ewsat mi ni mum,wi t hbot hj uni orand s eni orr epr es ent at i v es . Thes ei nt er v i ewsc an be bot h t ec hni c al and per s onal i n nat ur e.I fy ou ar eappl y i ngt o t he I BD,y ou s houl d pr epar e y our s el ff or di s c ount ed c as h f l ow and v al uat i on t y peques t i ons .Conv er s el y ,i fy ouappl y i ng t o S&T,y ou s houl d es pec i al l ybr us hupony ourmat hemat i c als k i l l sand k nowl edge of f i nanc i ali ns t r ument s and mar k et s .

Par t4:Conc l us i on

FI NANCELAB awor l dbet weent heor yandpr ac t i c e

www. f i nanc el ab. dk

FI NANCELAB-I SSUESEPTEMBER2015

Toc onc l ude,ourov er al lv er di c ti st hatani nv es t - Thek eyi st haty our eal l yneedt ohav et heambi t i on mentbank i ngs ummeri nt er ns hi pi nL ondonwi l l anddes i r et owor kwi t ht hes et hi ngsal lday . pr ov i det hec andi dat ewi t hv al ueexper i enc eand net wor k i ng. I ft hatdoesnots oundappeal i ngt oy ou,t henal way s r emember ,i nv es t mentbank i ngi snott hebeal l ,endI ndeed,i fac ar eeri nf i nanc ei sy ourendgoal ,i t al lofl i f eâ&#x20AC;&#x201C;t her ear epl ent yofs uc c es s f uli ndi v i dual s mayr epr es entt hebes twayofget t i ngas ol i d outt her e,whodi dnots t ar tt hei rc ar eer swi t hanI BD s t ar tt oy ourpr of es s i onalc ar eer .Howev er ,one i nt er ns hi p. t hi ngi sf ors ur e:bef or ey ouqui ty ourj oband l eav ey ourhomec ount r yf orgood, y ous houl dbe awar e,t hatani nt er ns hi pi nL ondoni shar dwor k i nas t r es s f ulandt oughenv i r onment .

I sTheChi nes eDr agon Los i ngI t sFi er yBr eat h? TheUni queChi nes eMar ket s : TheChi nes eEqui t yRi ot ByMar c usBr oder s s onandGr egorNanut

Chi nes emai nl andequi t i es ,al s ok nownasAs har es ,hav ehadat ur bul enty ears of art os ayt hel eas t .The CSI 300,ac ompos i t ei ndexoft he300l ar ges tc ompani esf r om t heShanghaiandShenz ens t oc kexc hanges , c l i mbed146% f r om J anuar yt oJ unei n2015.I tpeak edat5353. 7bef or edr oppi ng36% j us ti nt hef ol l owi ng mont h, wi pi ngoutav al ueofnear l y$4t r i l l i on.Des pi t et hi s , t hei ndexwass t i l lup9. 6% YTDasont he27t hof J ul y .

WhatFuel edTheBubbl e? Rec entChi nes eGDPdat as howeda7% gr owt h YOY, whi c hi sc er t ai nl yhi ghbywes t er ns t andar ds , buthi s t or i c al l ys peak i ngt hi si sal ow numberf or t hewor l d’ ss ec ondl ar ges tec onomy .

Howev er ,t he mos tf undament aldr i v erbehi nd t hef r enz yhowev er , wasper hapst heal l owanc eof mar gi nt r adi ng,whi c hhasexpl odeddur i ng2015 ( Char t1,l ef taxi s ) .

I naddi t i on,i ti sques t i onabl ehowac c ur at et hes e number sr eal l yar e.I ndi c at or st hatar ec ons i der edmor er el i abl e,s uc hasener gyc ons umpt i on, hav ebeendec l i ni ngs t eadi l yov ert hepas ty ear s . Mor eov er ,t hel uxur yc armar k ethav eenc ount er edheadwi nds .

Ani nt er es t i ngf ac ti st hatChi nes er et ai li nv es t or s mak eupmor et han80% oft het r adi ngv ol umei n As har es .

FI NANCELAB-I SSUESEPTEMBER2015

Chi na i sal s o exper i enc i ngnetc api t alout f l ows ( Char t1,r i ghtaxi s ) .Des per at el yt r y i ngt of i ghta s l owi ngr ealec onomy ,t heaut hor i t i esmades ev er ali nt er es tr at ec ut swhi c hev ent ual l ys entbot h t heequi t yandhous i ngmar k et st odanger ous l y hi ghl ev el s . Ther ewer eal s of av or abl er egul at or yf ac t or s .I n Nov ember2014,t heShanghai HongKongSt oc k Connec t ,anexc hangeenabl i ngc r os s mar k eti nv es t i ng,opened.Thi senabl edeas i erf l ow ofc api t albet weent het womar k et s ,addi ngf ur t herent hus i as mf orequi t i es ,andwasas t ept owar dsa f r eemar k et .

Thi sc aus est heChi nes emar k ett obemor emoment um dr i v enands pec ul at i v et hant hewes t er n, mor edev el opeds t oc kmar k et s . Thi sf ac thasbeenev i dentt husf ari n2015.The r at eatwhi c ht heCSI 300i nc r eas edi n2015has mat c hedt hatoft heNASDAQaheadoft heI Tbubbl ei n2000( Char t1,l ef taxi s ) . Chi naqui c kf ac t s : Popul at i on: Unempl oy ment : I nf l at i on( CPI ) : F DII nf l ow:

1, 4bi l l i on 4. 6% 2. 6% $123. 9bi l l i on

GDP( PPP) : •$13, 4t r i l l i on •7. 7% gr owt h •8. 9% 5y earc ompoundannualgr owt h •$9, 844perc api t a

Compani eswant edt ot ak eadv ant age oft hef av or abl ec ondi t i onsandI POf i l i ngsr eac hedhi s t or i c alhi ghs . Ar ec or dnumberofc ompani eswer e al s oal l owedt ogopubl i cbyt heChi nes e Sec ur i t i es Regul at or y Commi s s i on( CSRC)i n2015. Thenumberofappr ov edI POsnear l y doubl edf r om Q1t oQ2i n2015.

Mar ketCor r ec t i on St oc k sev ent ual l yhi thi gh v al uat i ons . Chi Next ,t heChi nes eequi v al entt ot he NASDAQ,wast r adi ngataP/ Eof130, whi c h c an be c ompar ed t o t he NASDAQ t r adi ngat175i n2000ahead oft heI Tbubbl ebur s t . Mor eov er ,85% oft hel i s t ed Chi nes e c ompani eshadahi gherP/ Et hanwhat t heydi ddur i ngt hec r as hi n2007. Chi nes eAs har esal s ot r adedatas i gni f i c antpr emi um c ompar ed t ot hei r Hong Kong c ount er par t s ,HShar es , des pi t et henow eas i erf l ow ofc api t al bet weent het womar k et s .

Hi gh v al uat i ons and t he i nc r eas e ofequi t ys uppl y t hr oughnewI POsev ent ual l yl edt oac or r ec t i on. Howev er ,whatdi f f er st hi sr ol l er c oas t err i def r om pr ev i ous Chi nes e mar k etc or r ec t i ons i st he al l owanc e of mar gi nt r adi ng( Char t1,l ef taxi s ) . Ast hemoment um dr i v enmar k ets t ar t edt ot ur ns out h, i nv es t or sr us hedt odel ev er aget hei rpos i t i ons . Equi t i esev ent ual l yr eac hedl ev el s ,wher eev ent hemos t r el uc t ant t os el l i nv es t or s ,wer ef or c edt ol i qui dat et hei r hol di ngsi nor dert omeetmar gi nc al l s .

Gover nmentRes pons eandMar ketReac t i on Theaut hor i t i esdi dnott ak el i ght l yont hec ol l aps eand wer equi c kt or eac t ,c ut t i ngbenc hmar ki nt er es tr at esby 25bpsandt her equi r edr es er v er at i o( RRR)by50bps . F ur t her mor e,t he CSRC s t ar t ed pur c has i ng bl uec hi p s t oc k sandETF st os uppor tt hemar k et , andanumberof upc omi ngI POswer es us pendedunt i lf ur t hernot i c et o l i mi tt hes uppl yofequi t i es . Thegov er nmentdi dnots t opt her e.I nv es t or shol di ng mor et han5% ofanyonec ompanywer ef or bi ddent o s el lt hei rs har esf ort henext6mont hs .Shor ts el l i ngwas al s or es t r i c t ed,andbyJ ul y13t hmor et han50% oft he publ i c l yl i s t edc ompani eswer es us pendedf r om t r adi ng ( Char t2) .

FI NANCELAB-I SSUESEPTEMBER2015

New i nv es t or s want ed t o ent ert he mar k etandt henumberofnew br ok er ageac c ount ss k y r oc k et ed.

F ol l owi ng t he dr as t i c meas ur es f r om t he gov er nmentt her api ddel ev er agi ngs l owed andt hedec l i nes t ar t edt of i nds uppor t .

Conc l us i onsandTakeAways F i r s t l y ,t hegov er nmenthav ec or ner edi t s el f f ort hef ut ur easi nv es t or swi l l nowr el yoni t t os av et heday .

FI NANCELAB-I SSUESEPTEMBER2015

Thi sc oul dpot ent i al l yl eadt omor alhaz ar d i s s uesasi nv es t or swho woul d ot her wi s e l i qui dat et hei rpos i t i ons ,putf ai t hi nt he gov er nmentt opus hpr i c eshi gheri ns t ead.

The s t r ong dependenc e on gov er nment s uppor twas ev i dent ,when r ec entGDP number ss howed a YoY i nc r eas e of7%, whi c hbeates t i mat esof6. 8%.TheCSI 300, t hens ubs equent l ydr opped5% asi nv es t or s f ear edt hatt hes t r ongergr owt hmayr educ e i nc ent i v esf orf ur t hers t i mul us . Sec ondl y ,r ec entev ent sar ec l ear l yas t ep bac k war df r om Chi na bec omi ng a f r ee mar k et ,wi t hCEOsandmaj ors har ehol der s bei ngpr ohi bi t edf r om s el l i ngt hei rs har es . Thi sc oul ds hyawaymoneymanager sand weal t hyi nv es t or sf r om Chi nes es t oc k s .

Thi r dl y ,des pi t et het ur moi li ti si mpor t antt o k eepi nmi ndt hatt het ot al Chi nes emar k etc api t al i z at i ononl yac c ount sf orabout40% oft he c ount r y â&#x20AC;&#x2122; sGDP. Thi snumberi sus ual l yabov e100% i nmor edev el opedc ount r i es . Thus , as t oc kmar k etc r as hi n Chi nawoul dhav eal es s eri mpac tont her eal ec onomy ,asoppos edt oac r as hi namor edev el opedc ount r y . Ther ealc onc er nl i eswi t ht heweak err ealec onomyasChi nai sahugedr i v i ngf or c ef ort he wor l dec onomy .

Emer gi ngMar ket sOut l ook Emer gi ngMar k et s( EM)ar es etf orar oc k i er t i met hi sy ear–s i gni f i c ant l ydi f f er entt hanj us t af ew y ear sagowheni nt er es tr at eswer enear z er o,c ommodi t ypr i c eswer es t i l lhi ghandt he dol l arwasweak .

Thi sc oul di nt ur nl eadt ogr eat erf i nanc i al mar k etv ol at i l i t yand c oul ds i gni f i c ant l yr educ ec api t alf l owst oEM c ount r i es . The s i t uat i on c oul d be wor s ened by pr obl ems c aus ed by t hel ow c ommodi t ypr i c esand s t r ong dol l ar due l ar gel yt o Chi na’ s dec l i ne i n ec onomi c gr owt handal ac kofdemand. L ook i ng at t he f i gur e,whi c h c ompar es emer gi ng i ndexes andt heMSCIWor l dI ndexs i nc e 2010,one c an c onc l ude t hat manyEMsar es t i l ls t r uggl i ngt o k eepupwi t ht hes amemar k et r et ur ns as i nt he r es toft he wor l d.

Chi na Chi na’ s gr owt h has i nr ec ent y ear sbegun t os l ow c ons i der abl ydownc ompar edt ot hel as t c oupl e of dec ades .F or t he s ec ond quar t erof2015i twas expec t edt hatChi nawoul dnot meeti t s

expec t at i onof7% GDPgr owt h,but s ur pr i s i ngl yt heymeett hi st ar get . I nJ une2015,t hePeopl e’ sRepubl i c BankofChi nai nt r oduc edquant i t at i v eeas i ngandc utt her es er v er equi r ementr at i o,t hi swasdonei n or der t os t abi l i z et he ec onomi c gr owt hl ev elandr eac ht heannual 7% t ar get . Cur r ent l y ,Chi nai st hewor l d’ sl ar ges ti mpor t erofoi landc oalandi s t her ef or ebei ngpos i t i v el yaf f ec t ed byt hel owoi l pr i c es , meanwhi l eexper i enc i nghi s t or i c al l yl ow dr ybul k f r ei ght r at es ( Meas ur ed by t he Bal t i cDr yBul kI ndex) . Thi sef f ec ti sexpec t edt opr oc eed i nt hes hor tt er m.Thef ut ur er i s k s f ac i ng Chi na der i v es es pec i al l y f r om i t shi ghl yv ol at i l es t oc kmar k et s ,i nc r eas i ngc ompanydebtdue t ot heappr ec i at i ngUSD as25% of Chi nes ec ompani esdebti sdenomi nat ed i n USD,and t he pr obl ems ar i s i ngf r om t r ans i t i oni ngmor et owar dst er t i ar ybus i nes sar eas .

I ndi a I nr ec ent y ear sI ndi a has been s t r uggl i ngwi t hi nf l at i onatt he10% l ev el ,butt heRes er v eBankofI ndi a hasi n20132014boughtbac kgov er nmentbondsandadopt edf l exi bl ei nf l at i on t ar get i ng,whi c h has r es ul t edi nal ower i ngofi nf l at i ont o ar ound5% i n2014andt her ebyi nc r eas edc r edi bi l i t y . Thec ur r entl ow oi lpr i c eand t he pr os pec tofi ts t ay i ngati t sc ur r ent l ev elwi l lbe benef i c i alt oI ndi a’ s ec onomi cgr owt hi nt he s hor tt o medi um t er m. Pot ent i al r i s k s ar i s es es pec i al l y f r om i t sownec onomi cpol i c ygov er nanc e,andext er nalt hr eat ss uc h ashi ghl yv ol at i l ef i nanc i almar k et s , andt heUSr ai s i ngi t si nt er es tr at es , whi c hwi l l dec r eas ei t sc ompar at i v e adv ant agei nt er msofexpor t .

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I ft heF eder alRes er v ei nc r eas es r at es i n Sept ember ,i nv es t or s c oul dr et r eatf r om EMs ,ac c or di ngt oWor l dBank ’ sl at es t2015 “ Gl obal Ec onomi c Pr os pec t s ” r epor t .

Rus s i a Gr owt hi n Rus s i ac ont i nued t os l i dei n2015,r ef l ec t edby t hei mpac tofs har pl yl ower oi lpr i c es ( oi lac c ount sf or 54% ofRus s i a’ sexpor t s )and t headv er s ei mpac tofs anc t i ons due t ot he Uk r ai ni an c onf l i c t . Apl ungei nexpor tr ev enues , as har p dev al uat i on oft he r ubl e and t r ade r es t r i c t i ons onf oodi mpor t sr es ul t edi nf l at i oni nt odoubl edi gi t s . I nv es t mental s os hr ank on f al l i ng bus i nes sc onf i denc e, t i ght ened f i nanc i ng c ondi t i ons ,and r es t r i c t ed ac c es s t oi nt er nat i onalc api t almar k et sbec aus eofs anc t i ons . TheRus s i ans t oc kmar k eti s hav i ng bi g di f f i c ul t i es wi t h gener at i ngt hes amemar k et r et ur nsasi not herEMsand t he r es toft he wor l d.Key r i s k si nc l udef ur t herdec l i nes i n oi lpr i c es ,es c al at i on of geopol i t i c al t ens i ons , and abr uptt i ght eni ngofgl obalf i nanc i alc ondi t i ons .

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Shoul d oi lpr i c esdec l i ne or geopol i t i c alt ens i ons i nt he r egi on es c al at e,t he c ons equenc ec oul dbeadeeperr ec es s i on i nt he Rus s i an F eder at i oni n2015,whi c hc oul d al s oext endt o2016.

Ni ger i a

Sout hAf r i c a

The Ni ger i an ec onomy and c ur r enc ynai r adependheav i l yon oi lf orr ev enuesand f or ei gn r es er v es .Ther ef or e, due t o oi l pr i c es dec l i ne, gr os si nt er nat i onalr es er v es f el l20% t o $34. 25 bi l l i on ( 6. 0% ofGDP) ,dr awn down byt hec ent r albanki ni t sat t emptt os uppor tt henai r a. I nMar c h,St andar d& Poor ’ s downgr aded Ni ger i a’ sc r edi t r at i ngf r om B+t oBB.Ni ger i ai sexpec t edt ogr ow ata s l owerpac ei n2015,asf i s c al pol i c yt i ght ensi nr es pons et o l oweroi lpr i c esanddomes t i c demandc ont r ac t s .

Gr owt hi n Sout h Af r i c a,t he r egi on’ sl ar ges t oi l i mpor t i ng ec onomy ,was s t r onger t han expec t edi nt hef our t hquar t er of2014,s uppor t ed by a r eboundi nt hegoods pr oduc i ng s ec t or s ,af t ers l owi ngear l i eri n t hey ear .

Howev er ,gr owt hi sexpec t ed t o pi c k up i n 2016 as t he f i s c aldr agmoder at es ,hel pi ngboos tac t i v i t yi nt henonoi ls ec t or ,andt henew gov er nmenti mpl ement ss t r uc t ur al r ef or ms t o enhanc e pr oduc t i v i t y .

Howev er , t hi sr eboundf ai l edt o c ar r yi nt ot he f i r s tquar t erof 2015.Gr owt hwashel dbac kby ener gys hor t ages ,out putc ont r ac t i oni nagr i c ul t ur e,weaki nv es t or c onf i denc e,pol i c y unc er t ai nt y ,and t he ant i c i pat ed gr adualt i ght eni ngofmonet ar y and f i s c al pol i c y . Ec onomi c gr owt hi n Sout h Af r i c ai sexpec t edt oi mpr ov emoder at el y , ast heongoi ng di f f i c ul t yofr es ol v i ngt heel ec t r i c i t ys uppl yc ons t r ai ntc ont i nuest ohamperec onomi cac t i v i t y ,l abor r el at i ons r emai n t ens e,i nv es t orc onf i denc edec l i nes ,andf i s c alc ons ol i dat i on r educ esgov er nments pendi ng.

Br az i l

Br az i l i swi t houtadoubtnott heemer gi ngec onomyi tonc ewas , ands houl dnot bec ons i der edt obeoneatt hemoment . I nt hef i r s tquar t erof2015, t heBr az i l i anec onomyc ont r ac t edby0. 2%, whi l eex per i enc i ngc ompar abl yhi ghi nf l at i on. Thi sev i dent l yf or c est hepol i c ymak er st o i nt er f er eheav i l ywi t hi nr eas onabl et i me.Cur r ent l y ,c ommodi t ypr i c eshav e r eac hedl owl ev el s ,t her ebyhur t i ngnetex por t . Thes t r engt heni ngUSec onomyandappr ec i at i ngUSdol l ari sar guabl yoneof t hemor epos i t i v eas pec t si nt er msofec onomi cpr os per i t yf orBr az i l ,ast heUS i si t sc l os es tt r adi ngpar t ner .

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TheBr az i l i anec onomyi smai nl ybei ngt hr eat enedf r om t hepr os pec t sofc ont i nueddec r eas i ngpubl i cs pendi ng, andi t spol i c y mak er swi l landpowert oc hange t hec ount r y â&#x20AC;&#x2122; sdi r ec t i on.

Ef f ec t sofac ons ol i dat i oni nt heEur opean t el ec om mar ket Ov ert hel as t10y ear s ,t hemobi l enet wor k s er v i c esi nt heUni t edSt at eshasunder gonea mas s i v ec ons ol i dat i on pr oc es s ,wher ef our pl ay er snow domi nat et hei ndus t r y .I nc ompar i s ont heEur opeanmar k etc ons i s tofov er 100 f i r ms oper at i ng i n af r agment ed and hi ghl yc ompet i t i v emar k et ,whi c hgi v esi nc ent i v eandmot i v at i onf orc ons ol i dat i ngt hei ndus t r y .Mer ger sandac qui s i t i onsar ei nc r eas i ngl yc ommonv ehi c l esf ori ndus t r yc ons ol i dat i on.Changes i nt he pol i t i c al ,ec onomi c al , s oc i alandt ec hnol ogi c alf ac t or s( PEST)t r i gger mer gerwav esandt hemer ger sar eatl eas ti ni t i al l y dr i v en by r at i onalmot i v es .Rec ent l y , PEST c ondi t i ons hav ec hanged i n Eur ope, whi c hi swhyanewwav eofc ons ol i dat i onc an beexpec t edi nt heEur opeant el ec om s ec t or .

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Ass eeni nf i gur e1,t her ewasamer gerwav e i n 20032008,whi c h wasmai nl yduet ot he c ons ol i dat i oni nt heUS.Si nc e2012,t her ehas beenas t eadyi nc r eas ei nM&A’ si nt heTel ec om s ec t or ,and t hi st i me i ti sdue t oi nc r eas edac t i v i t yi nt heEur opeanmar k et .

TheEur opeanTel ec om s ec t orhasbeens t r uggl i ngf ort hel as tf i v ey ear s ,under per f or mi ng c ompar ed t ot he gener alEur opean equi t y mar k et .Theunder per f or manc ewasonl yunt i l t heendof2014,wher et heTel ec om equi t i es now hav es t ar t edt oper f or m bet t er .Thei ndus t r yi sk nownf orhav i ngext ens i v ebenef i t s f r om l ar ges c al e oper at i ons , wher e t he mar k etpl ay er sc ont i nuous l yar ef ac i ngs mal l erpr of i t sduet ohar s hc ompet i t i onands t r i c t r egul at i on.Henc eM&A’ spr ov i deanoppor t uni t yf orgr owt h,c r i t i c almas s ,ec onomi esof s c al eandc os tr educ t i onsf r om s y ner gi es .The gr owt hc omesf r om i nc r eas ed i nv es t i ngop por t uni t i es ,wher ees pec i al l ymobi l edat aand f i berhass hownt oi mpr ov er ev enues . Thef r agment edEur opeanmar k etc ons i s t sof nat i onalpl ay er s ,wher ei ti sc ommonwi t hup t of ouroper at or si nev er yc ount r y .Duet ot he hi ghc os t sandneedf orec onomi esofs c al e, t hi shasr es ul t edi n“ unheal t hy ”mar k et swi t h har s hc ompet i t i on.Henc e,t her ei saneedt o r educ et henumberofnat i onaloper at or sas wel lasc r os s c ount r yc ons ol i dat i on.

Wi t hnat i onal mer ger s , t her ei sonl yonegov er nment and/ or t he EU c ommi s s i on i nv ol v ed, wher easf orc r os s c ount r ymer ger st her emay bes ev er alc ount r i espl ust heEU i nv ol v ed.The nat i onal c ons ol i dat i on pr oc es s has al r eady s t ar t edwi t haf our t ot hr eepr oc es si nAus t r i a andGer many ,andi sexpec t edt oc ont i nuewi t h Denmar k ,F r anc e,UK,Spai nandI t al yi n2015. Af t er t he nat i onalf our t ot hr ee mer ger s ,a c r os s c ount r yc ons ol i dat i on c an be expec t ed, wher et heendr es ul twi l lbeaf ew gi antEur opeant el ec om oper at or s . Hi s t or i c al l yt he EU c ommi s s i on,who ens ur es t hatt heEur opeanmar k etdoesnotnegat i v el y

Whenf i r msappl yf orac c ept anc eofamer ger , t heEUc ommi s s i onhast hr eeopt i ons :appr ov e, appr ov e wi t h r es t r i c t i ons or pr ohi bi tt he mer ger .F or t el ec om oper at or s ,t he mos t c ommonopt i oni sc ur r ent l yappr ov alwi t hr es t r i c t i ons ;s uc h as f or c i ng t he f i r ms t o gi v e whol es al eac c es st oMVNO’ s( mobi l ev i r t ualnet wor k oper at or s ) ,s el ls pec t r um r i ght sand/ or agr eet oc ont i nuenet wor k s har i ngagr eement s . Ther es t r i c t i onsens ur et hatnof i r msbec ome t oobi g,wher et hemar k etdev el opsmonopol i s t i ct endenc i esr es ul t i ngi ni nc r eas edpr i c es . Aswel lasbuy i ngandmer gi ngwi t hr i v al s ,t he t el ec om s ec t ori sal s ogoi ngt hr oughs ubs t ant i al c hangewi t hbundl i ngofpr oduc t sand“ quadpl ay ” .Thi smeanst el ec om f i r msmov et owar ds c ombi ni ngTV,I nt er net ,c el l phoneandl andl i ne. Thi spr ov i desl owerc os t s ,hi gherr ev enuesand i nc r eas edc us t omers at i s f ac t i onf ort het el ec om

af f ec tc ons umeri nt er es t ,has made t el ec om mer ger sdi f f i c ul tduet ot her i s kofpot ent i al l y expl oi t i ngc ons umer s . Mer ger st y pi c al l yl eadt ol es sc ompet i t i onand hi gherent r ybar r i er s , whi c hr es ul t si ni nc r eas ed pr i c esandmonopol i s t i ct endenc i es . Thi shasnow c hangedandt her egul at or yr i s k hasdec r eas ed.Eur opei sl aggi ngbehi ndc ompar edt oot herk eymar k et ss uc hasChi naand t heUSi nt er msofi mpl ement i ng4Gandl ongdi s t anc epr i c esass howni nf i gur e2. Duet ot hi s , t heEUc ommi s s i onnowwel c omesa c ons ol i dat i on oft he t el ec om s ec t or .F ut ur e mer ger sopenupf orgr owt h,mor ei nv es t ment s andbet t erqual i t ypr oduc t si nt her egi on,whi c h c oul dc l os et he per f or manc e gap bet ween Eur opeandot herr egi ons .

s ec t or .I tal s obenef i t st hec ons umer s ,aspr oduc tbundl i ngal l owst hem t odealwi t honl yone f i r mf oral lt hei rpr oduc t s .Thi spr ov i dest hem wi t hl owerpr i c esandmor ec onv eni enc e.F ur t her mor ei tl eadst ohi gherav er ager ev enueper us er( ARPU) ,andgr eat ermar k etv al uef ort he t el ec om f i r ms .Thef i r mswho do not“ quad pl ay ”ar et her ef or el i k el yt o mi s sout ,whi c h gi v est heot herf i r msgr eatbuy outpos s i bi l i t i es , andev engr eat erec onomi esofs c al e. Af t eraEur opeanc ons ol i dat i on, t her ei sl i k el yt o beaf ew,bi gf i r msl ef t ,whooper at enotonl yi n t hec ommuni c at i onbus i nes s ,butal s oi nt heI nt er netandTVi ndus t r y .Duet ol es sc ompet i t i on, c os tr educ t i ons ,mor ei nv es t ment sl eadi ngt o bet t erpr oduc t sandmor es at i s f i edc us t omer s , t heEur opeant el ec om s ec t orc anbeexpec t edt o onc eagai nbec omepr of i t abl e.

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Thef i r s tf ew y ear soft heEur opeanc ons ol i dat i onpr oc es swi l ll i k el yc ons i s tofnat i onalmer ger s ,ast heyar emor eeas i l yi mpl ement edand appr ov ed.

Bas elI I I â&#x20AC;&#x2122; sLi qui di t yRat i os-St r at egi cEf f ec t s ont heGl obalBanki ngSec t or Thegl obal f i nanc i al c r i s i sof2008andt hef ol l owi ngr ec es s i onhav ebeent wooft hedef i ni ngev ent soft he 21s tc ent ur y . Ev enbef or et hec ol l aps eofL ehmanBr ot her sonSept ember15t h2008, i thadbec omec l eart hatanov er r el i anc eons ubopt i malc r edi tpr oduc t sands hor t t er mf i nanc i ngc oupl edwi t hex c es s i v el yl ev er aged bankbal anc es heet shads ev er el yex pos edt hegl obalf i nanc i als y s t em t os uddenc hangesi nmar k etl i qui di t y .Whenbor r ower ss t ar t eddef aul t i ngont hei rl oansandl i qui di t ymar k et sdr i edup,bank shadno wayt of undt hei rhi ghl yl ev er agedbal anc es heet sandt hegl obalf i nanc i alc r i s i sens ued.

Bas elI I I TheBas elCommi t t eef orBank i ngSuper v i s i on r eac t edwi t hanagr eementr ef or mi ngc api t al and l i qui di t yr equi r ement s ,now k nown as Bas elI I I .Themai nf i nanc i alr equi r ement sof t heBas elI I If r amewor kar e1)addi t i onalc api t alr equi r ement s under l i ned by i nc r eas i ng bot ht hequal i t yandquant i t yofc api t al ,wi t h an i nc r eas ed f oc us on c ommon equi t yf or bank st obet t erabs or bs y s t emi cs t r es s ,2)l i qui di t yr equi r ement st hr ought hei mpl ement at i onoft wol i qui di t yr at i os , and3)i mpl ement at i onofal ev er ager at i oonbankas s et sand of fbal anc es heetex pos ur es .

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Whi l et heBas elCommi t t eehasunder l i nedt he i mpor t anc eofc api t alr equi r ement si ns t abi l i z i ng t he bank i ng s ec t or ,t he f i nanc i alc r i s i s s howed t hedanger sofi l l i qui d mar k et sand c or r es pondi ngl yt hei mpor t anc eofhi ghl ev el s ofl i qui di t yi npr ev ent i ngs ol v enc yi s s uesand s t agnantmar k et s .Bef or eBas elI I Inoat t empt had been madet oi mpos eanyi nt er nat i onal r egul at i on on l i qui di t y . Howev er as ment i oned,t henew f r amewor ki nt r oduc edt wol i qui di t yr at i os ,as hor t t er mr at i oandal ongt er mr at i o.

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BASEL SWI TZERLAND

Bas el ,Swi t z er l and

FI NANCELAB-I SSUESEPTEMBER2015

TheLi qui di t yCover ageRat i o

TheNetSt abl eFundi ngRat i o

The L i qui di t y Cov er age Rat i o( L CR)i sa s hor t t er m l i qui di t yr at i oi mpl ement ed wi t ht heobj ec t i v eofbal anc i ngc api t ali nf l ows and out f l ows ov er a one mont h per i odt oens ur et hatbank shav es uf f i c i ent Hi ghQual i t yL i qui dAs s et s( HQL A)t owi t hs t anda30days t r es ss c enar i o, wi t houten c ount er i ngl i qui di t yr el at edpr obl ems :

TheNetSt abl eF undi ngRat i o( NSF R)i sal ongt er ml i qui di t yr at i owi t hat i mehor i z onofone y ear ,ai mi ng t o pr ov i de a mor es us t ai nabl e s t r uc t ur e ofas s et sand l i abi l i t i es .I ti si mpl ement edt opr omot et hel ongt er mr es i l i enc yofa bank ’ sl i qui di t yr i s kpr of i l ebyc r eat i ngi nc ent i v es f orbank st ous emor es t abl es our c esoff undi ng.

HQL Aar ehi ghl yr at edgov er nmentand c or por at ebonds .Thes eas s et ss houl dbe f r eeofl i abi l i t i esandt her ef or el i qui di n s t r es s edmar k ets i t uat i ons .TheNetCas h Out f l ow ( NCO)i st he bank ’ sout f l ows , s uc h as depos i t s and undr awn c r edi t l i nes ,mi nust hebank si nf l ows ,s uc has l oan amount s due,dur i ng a 30day per i od.I n es s enc e,t he L CR r equi r es bank st ohav eenoughHQL At opr ev ent s hor t t er m l i qui di t yi s s ues under di s t r es s edmar k etc ondi t i ons .

The r at i o ai mst ol i mi tt he ov er r el i anc e on s hor t t er ms our c esoff undi ngdur i ngt i mesof hi ghl yl i qui d mar k et sbyenc our agi ngamor e pr udentas s es s mentofac t ualon-andof fbal anc es heetr i s k s .TheAv ai l abl eSt abl eF undi ng ( ASF )i st hepor t i onofl i abi l i t i esandc api t alt hat ar eex pec t edt obes t abl eov ert het i mehor i z on oft heNSF R, wher east heRequi r edSt abl eF undi ng( RSF )ar eas s et st hats t ayon t hebal anc e s heetf orar el at i v el yl ongper i odoft i me.The amountofASFofeac hi ns t i t ut i oni smeas ur ed bas edont hes t abi l i t yofani ns t i t ut i on’ sf undi ng

Cons equenc esf orbanks t r at egy Thei nt r oduc t i onofBas elI I I ,andi npar t i c ul ar t heL CRandt heNSF R,hav eal r eadyhad( and wi l lc ont i nuet ohav e)t womai ni mpl i c at i ons ont hes t r at egyofgl obalbank s .F i r s t ,i twi l l c aus ebank st oengagei nr api dbal anc es heet r es t r uc t ur i ng.Sec ond,i twi l lc hanget hepr i c i ngofbank i ngpr oduc t sasbank sar enow i nc ur r i nghi gheroper at i onalc os t s .

Bal anc eSheetRes t r uc t ur i ng

BankPr oduc tPr i c i ng

Bas elI I Ihass pec i f i c al l yf oc us ed on f or c i ng bank st odel ev er aget hei rbal anc es heet sby r educ i ngt hei rl oant odepos i tr at i o. Thi sl eads bank st ounder t ak er adi c albal anc es heetr es t r uc t ur i ngs , by i nc r eas i ng l i abi l i t i es and equi t yr el at i v et oas s et s . Thi si sdone, 1)byr educ i ngas s et st hr ough dec r eas i ngout s t and i ngl oans( donebyabandoni ngr i s k yandl ow pay of fpr oj ec t s ) ,and2)byi nc r eas i ngl i abi l i t i est hr ough mor ec l i entdepos i t s( doneby gr owi ngt hec us t omerbas e)and3)byi nc r eas i ngt hequant i t yandqual i t yofc api t ali nc ompl i anc ewi t hBas elI I I ’ sc api t alr equi r ement s . Al t hought hes ei ni t i at i v eshav eal r eadyt r ans f or med manybankbal anc es heet s ,wewi l l s eeev enf ur t herac t i onsi nt hef ut ur el eadi ng t o maj ors t r uc t ur alc hanges i nt he gl obal bank i ngs ec t or .

Manybank sus et heRet ur nOnRi s kAdj us t edCapi t al ( RAROC)modelt o meas ur e pr oduc tpr of i t abi l i t y . Howev er ,Bas elI I Ihast r i gger edc hangesaf f ec t i ng s ev er al v ar i abl esi nt heequat i on. Thei nc r eas edc os t ofc api t alwi l ldec r eas et heav er ageRAROConpr oj ec t s ,i . e.dec r eas eov er al lpr of i t abi l i t y .An anony mouss our c ef r om amaj orEur opeanbankr ec ent l y i ndi c at edt hatav er ageRAROC,hasdec r eas edf r om apr ec r i s i sl ev elof1824% t oameagr epos t c r i s i s 37%.Thei nc r eas edpr es s ur eonbank ’ mar gi nswi l l l eadbank st oc hanget hei rpr oduc tpr i c i ngbyc har gi nghi gherpr i c esi nor dert or es t or epar toft hei r pr ev i ouspr of i t abi l i t y . Toi l l us t r at e, t heRAROCequat i oni ss hownbel ow:

I nes s enc e, Bas el I I Iwasdev el opedt or educ et hef r equenc yandi nt ens i t yoff i nanc i al c r i s es .Thei nt r oduc t i onofs t r i c tl i qui di t yr equi r ement spr es s ur ebank s ’pr of i t abi l i t yandc ombi nedwi t hi nc r eas i ngr equi r ement sf orc api t al ,bank sar eex per i enc i ngdec r eas i ngr et ur nonequi t y .Asar es pons et ot hi snew r egul at or yenv i r onment ,bank swi l lhav et oadaptt hei rs t r at egi esandr et hi nkt hepr oduc tof f er i ngs .

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Bas elI I Iwi l les pec i al l yaf f ec tl i qui di t yc os t ,oper at i ngc os t ,andal l oc at edc api t al .Thei nc r eas ei nal lt hr ee v ar i abl esi st hemai ndr i v erbehi ndt hedec r eas ei nRAROCandt hust hec hangei nbankpr oduc tpr i c i ng.

Ener gy: Shal eOi landLNG -TheNew Out l ookont heEner gyMar ket Wi l l s hal egas s esr emai nr el ev anti nt hef ut ur e, orwi l l wes eeot herener gys our c esi nt er v eneandt ak eov ert heener gymar k et ? BySebas t i anTof t

TheEnvi r onment Shal egas ,anat ur algasf oundt r appedwi t hi n s hal ef or mat i ons ,hasi nc r eas i ngl ybec ome a c r uc i als our c eofnat ur algas ,es pec i al l yi nt he Uni t edSt at esandal s oi nc r eas i ngl yi nt her es t oft hewor l d.

Env i r onment al l y ,t he us e and ext r ac t i on of s hal egashast hepot ent i alef f ec tofaf f ec t i ng t heenv i r onmentbyl eak i ngofext r ac t i onc hemi c al sandt hought hewas t el eak i ngi nt owat er s uppl i es .

Ener gypr oduc t i onf ors hal egaspr ov i dedonl y 1% ofU. S. nat ur al gaspr oduc t i oni n2000andi s now ov er20%,wi t ht heU. S.gov er nment ' sEI A pr edi c t i ngt henumbert obe46% by2035.

F ur t her mor e,t hel eak i ngofgr eenhous egas es t hr oughoutt heext r ac t i onpr oc es sandt hepol l ut i onf r om i mpr operpr oc es s i ngofnat ur algas c an hav e a negat i v ei mpac ton t he env i r onment .

Thepr oduc t i onofs hal egasc anpot ent i al l ypr ev entRus s i aand Per s i an Gul fCount r i esf r om di c t at i ngt hepr i c el ev el sf orgasi nEur opean Count r i es ,andwi l li nc r eas et hef r eec ompet i t i onoft hemar k etf ornat ur algas .

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TheObamaadmi ni s t r at i onhasas t r ongbel i ef t hatt he pr oduc t i on ofs hal e gas wi l lhel p r educ e gr eenhous e gas emi s s i ons ,wi t h US c ar bon di oxi de emi s s i ons dr oppi ng t ot he l owes tl ev el ss eeni nov er20y ear s . Suc hi mpac t c an pot ent i al l y benef i t human and publ i c heal t h,ass hal e gasc an di s pl ac es ubs t ant i al amount sofc oalbur ni ng.

Onel ar gec hal l engei st oc ont r olt hes epr oc es s esandc al i br at et hepr oduc t i ont oeac hs hal e gasext r ac t i on,aseac h wel lr eac tdi f f er ent l y . Buti ft hes ei s s uesar edeal twi t h, t hent heenv i r onmentc anbenef i ts ubs t ant i al l yf r om t heus e oft hi sener gys our c e.

Pol i t i c alCl i mat e I nt heUni t edSt at es ,Bar ac kObamaandhi sadmi ni s t r at i on hasbeen pr omot i ng t he us e of s hal e gas ,s ev er alt i mes .The ar gument at i on of t enr el i esont hebel i eft hatt her el eas i ngof gr eenhous egas s esi ss ubs t ant i al l yl owert han f r om ot herener gys our c es ,i . e.f os s i lf uel s .

Res ear c h Anac ademi cr es ear c har t i c l edev el opedand pr es ent ed by Manc hes t erUni v er s i t y ;" F i r s t f ul ll i f ec y c l eas s es s mentofs hal egasus edf or el ec t r i c i t ygener at i on. "s t at est hats hal egas pot ent i al l yc anhav eagl obalwar mi ngef f ec t , al t houghs hal egashast hepot ent i alofbei ng l es snegat i v el yenv i r onment al l yi mpac t i ng,i f t he f ugi t i v e met hane emi s s i ons ar ec ont r ol l ed.I ns um t her es ear c hc onc l uded: -Shal egaswor s et hanc oalf ort hr eei mpac t s andbet t ert hanr enewabl esf orf our . -Shal e gas a s ound env i r onment alopt i on onl yi fac c ompani edbys t r i ngentr egul at i on.

Ri s kofEar t hquakes Thef r ac t ur i ngpr oc es sus edf orpr oduc t i on ofs hal egas s eshasbeens ai dt opot ent i al l y beabl et oc aus eear t hquak es .

Eval uat i on Wi t ht heabov ei nmi nd,s hal egasasener gy s our c es eemst ohav et hepot ent i alofgr owi ngs ubs t ant i al l ydur i ngt hec omi ngy ear s .I f t he env i r onment ali s s ues c onc er ni ng pr oduc t i onc anbedeal twi t h,t hent her ewi l lbe al ar gepos s i bi l i t yf ort hemar k ett ogr owand bec omeoneoft hemos ti mpor t ants our c es ofener gy ,av ai l abl e.

APot ent i alNew Sour c eofEner gy Nuc l earpoweri sahi ghl ydi s c us s edt opi cand r ai s esal otofs c ept i c i s m. Theel ec t r i c i t ygener at edf r om nuc l earpower c an beal mos tl i mi t l es s ,butc an al s o ent ai l s ev er alr i s k s ,i nc l udi ng weapons dev el opment ,mel t downs ,andt hehaz ar dsofdi s pos i ngofi t swas t epr oduc t s . Thos er i s k sar epr i mar i l yas s oc i at edwi t ht he s pec i f i ck i nd of nuc l ear ener gy pr oduc ed t hr oughnuc l earf i s s i onofur ani um orpl ut oni um i s ot opes .The ot her k i nd ofnuc l ear ener gy ,whi c hpot ent i al l ymi ghti nt ak eas ubs t ant i al s pot , wheni tc omest oener gypr oduc t i oni snuc l earf i s s i onus i ngt hor i um. Thi si seas i l ywi t hi nourr eac hwi t hr egar dst o pr oduc t i onandt het i mehor i z onf orpot ent i al i mpl ement at i on,and wi l lhav es ubs t ant i al l y l owerr i s kf ac t or sc onc er ni ngt hepr oduc t i on andot herout s i der i s k s ,s uc hasweaponpr oduc t i on. Wi t hmanygl oball eader sf oc us s i ngongr een ener gyandenv i r onment ali s s uesr at hert han weaponpr oduc t i on,s ev er alnat i onshav eal r eadybeen t ak i ngac l os erl ookatt hor i um powergener at i on.

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Hy dr aul i cf r ac t ur i ngpr oduc esmi c r os ei s mi c ev ent s ,whi c h gener al l yar es os mal l ,t hat t heyc annotbedet ec t ed,ex c eptbyv er ys ens i t i v ei ns t r ument s . Ther ehav ebeendet ec t edmor et hant hr ee i ns t anc eswor l dwi de,wher ehy dr aul i cf r ac t ur i ngc anbes ai dt ohav et r i gger edear t hquak es s t r ong enough t o be not i c ed by peopl e.

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Thor i um,Th232,c omesf r om r oc k si nt he gr oundl i k eur ani um,andt her es er v esar e al mos tunl i mi t edc ompar edt ot heamount us edf ort hepr oduc t i on.Thet hor i um r eac t orwor k sl i k et hi s :“ Th232i spl ac edi nar eac t or , wher ei ti sbombar dedwi t habeam of neut r ons .I nac c ept i nganeut r onf r om t he beam,Th232 bec omes Th233,butt hi s heav i eri s ot opedoes n’ tl as tv er yl ong.The Th233dec ay st o pr ot ac t i ni um233,whi c h f ur t herdec ay si nt o U233.The U233 r emai nsi nt her eac t orand,s i mi l art oc ur r ent nuc l earpowerpl ant s ,t hef i s s i onoft heur ani um gener at ei nt ens eheatt hatc anbec on v er t edt oel ec t r i c i t y ” .

I nChi na,i thasbeenannounc ed,t hatt he pr oduc t i onoff unc t i oni ngt hor i um r eac t or s wi l lbepos s i bl ewi t hi nt henext10y ear s . I ndi ai sal s ooneoft het oppl ay er swheni t c omest or es ear c h on t hor i um asa new ener gys our c e.Mor eov er ,I ndi ahasoneof t hel ar ges tt hor i um r es er v esont hepl anet , andt heoppos i t ewheni tc omest our ani um, whi c hwi l lonl yes t abl i s hev enbet t eri nc ent i v esf orI ndi at os t ar tt hepr oduc t i on.I n I ndi a,r es ear c her sar epl anni ngt o hav ea pr ot ot y pe t hor i um r eac t orr eadyf orpr oduc t i on and oper at i on wi t hi n a y ear . Nor wayi sal s ol eadi ngi nt her es ear c hand ev er y onei nt er es t ed i nt hi sener gys our c e s houl d hav eal ook t owar ds Nor way ,as Nor wayi sc ur r ent l yr unni ngaf our y eart es t ofus i ngt hor i um f uelr odsi nal r eadyexi s t i ngnuc l earr eac t or s .

Thi spr oc es swi l l c ont i nuei nc hai nr eac t i ons andwi l lus ual l ybec ont r ol l edors t oppedby t hei ns er t i onofr odsofneut r onabs or bi ng mat er i ali nt ot her eac t orc or e. Mor eon,t hor i um r eac t or sc anbebui l tt o oper at ei nal i qui ds t at e.Ther eac t orwi l lbe des i gned wi t h apl ugt hatwi l lmel ti ft he t emper at ur ei nt he r eac t ori nc r eas est oo muc h,whi c hwi l lf or c et her eac t ort oc l os e downbef or eanyr i s kwi l lber eal i t y .

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Wi t hanamountoft hor i um appr oxi mat el y equalt ot wo t enni sbal l s ,wi l lenabl et he pr oduc t i onofoneper s on’ sl i f et i meener gy us e.Wi t ht heamountoft hor i um r es our c es al r eady k nown,we c an pr oduc e enough ener gyf ort i mehor i z on s ol ongt hati ti s har dt oc al c ul at eandi magi ne.

Tof ur t herdoc umentt her el ev anc eoft hi s ener gys our c e,nat i onsasUni t edKi ngdom, Canada,Ger many ,J apan,andI s r aelc anbe ment i onedasbei ngac t i v ei nr es ear c hoft he t opi c . One downs i de, whi c ht hor i um r eac t or s hav ebeenc r i t i c i z edf or ,i st hepot ent i alof l eak i ngmor eneut r ons ,whi c hwi l li nc r eas e t heneedofs hi el di ngandot herpr ot ec t i on f orwor k er satt hepowerpl ant s . Wi t h nuc l earener gyasa hi ghl ydebat ed t opi c ,mai nl ydue t ot he r i s k sas s oc i at ed wi t hur ani um r eac t or s ,i tmi ghtt ak es ev er al dec ades bef or et hi ss our c e wi l lbec ome hi ghl yr el ev ant .Onet hi ngi sf ors ur e,t he ener gys our c ewi l lbebot henv i r onment al l y andec onomi c al l ybenef i c i al ,t heonl yques t i oni swhowi l lbec omet hef i r s tt or ec ogni s et her el ev anc eand benef i t sf r om t hi s ener gys our c eandpr oduc ear eac t ort hat s er v est hepur pos e.

Sec ur i t i s at i on ByMi k aelJ ac obs enandKr i s t of f erGams t

Synt het i cSec ur i t i s at i on-TheSavi ouroft heBanks ? Si nc et hef i nanc i alc r i s i s ,t her ehasbeenani nc r eas eddi s c us s i onaboutr egul at i onoft hef i nanc i ali ndus t r y . As i gni f i c antpar toft hi sdi s c us s i onhasbeenaboutc api t al r equi r ement si nt hebank i ngs ec t or . Thi sdi s c us s i onhasl edt oi nc r eas edc api t alr equi r ement s .Wi t hbank soppos i ngagai ns ti nc r eas ed r egul at i ons ,r egul at or shav egi v enbank st heoppor t uni t yt oc i r c umv entt hec api t alr equi r ement s t hr oughs ec ur i t i s at i on.

â&#x20AC;&#x153; Sour c e:Sy nt het i cSec ur i t i s at i oni naBankCapi t alF r amewor kbyAl ex anderKr i s t of f er s en( 2015) â&#x20AC;?

Thec api t alr equi r ement spr opos edbyt heBas elCommi t t ee def i neshowbank sar er equi r ed t oc al c ul at et heamountofc api t alt heyneedt ohol d.

Theydot hi st hr ought heus eof r i s kwei ght sas s i gned t ot hei r expos ur es ,i . e.l oans ,ac c ount s et c .Ther es ul ti sar i s kexpos ur e amountf r om whi c ht he bank sar er equi r ed t o hol d at l eas tac er t ai nper c ent ageofi t i nc api t al .Themi ni mum c api t al r equi r ementi sc ur r ent l y 8%, howev er ,al mos tal lbank sar e r equi r edt ohol danaddi t i onal amountofc api t al duet ot hei nc r eas edc api t alr equi r ement s . The r egul at or yr equi r ement s pr opos edbyt heBas el Commi t t eegi v et hebank st heoppor t uni t yt ol ower t he c api t alr equi r ementbyus i ngs ec ur i t i s at i on. Sec ur i t i s at i on y i el ds a t r ans f erofc r edi tr i s kf r om t he bank t oi nv es t or s . Thi sc an

Thi s c an ei t her be done t hr ough a t r ue s ec ur i t i s at i on wher et hes ec ur i t i s edpor t f ol i o ofexpos ur esi sr emov edf r om t he bank s bal anc es heet ,or t hr ough a hedge k nown asa s y nt het i cs ec ur i t i s at i on.

Sec ur i t i z at i oni st hepr o-

c es soft ak i ngani l l i qui d as s et ,orgr oupofas s et s ,and t hr oughf i nanc i alengi neer i ng,t r ans f or mi ngt hem i nt oa s ec ur i t y . At y pi c alex ampl eofs ec ur i t i z at i oni samor t gagebac k ed s ec ur i t y( MBS) ,whi c hi sa t y peofas s et bac k eds ec ur i t y t hati ss ec ur edbyac ol l ec t i on ofmor t gages .

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Thef i nanc i alc r i s i sand i t sr eper c us s i ons has l ed t o i nc r eas edc api t al r equi r ement si n t hebank i ngs ec t ort opr omot e f i nanc i al s t abi l i t y . Regul at or s c ons i deri nc r eas ed c api t alr equi r ement s as one of many meanst opr ev ent i onofanew f i nanc i alc r i s i s .Thehi ghert he c api t alr equi r ement sputon a bankar e,t hemor el os s est he banki sc apabl e ofabs or bi ng. The mos ti nf l uent i alofs uc h c api t alr equi r ements c hemesi s bei ngs etoutbyt heBas el Commi t t eeonBank i ngSuper v i s i on.

Whati sal lt hehypeabout ? f i tas pec i f i cr i s k r ewar dpr of i l es demandedbyi nv es t or st hr ough c r edi t enhanc ement .Of t en an ext er nalr at i ng agenc ys uc h as S&P,F i t c horMoody ’ si shi r edt o as s i gnanof f i c i al r at i ngt oeac hof t het r anc hes . Mos ts y nt het i c s ec ur i t i s at i ons ut i l i z eaf ul l yf undedappr oac hi n whi c hc ol l at er alf ort hei ns ur ed t r anc hesi nt her ef er enc epor t f ol i oi spos t edbyt heSPVt hr ougha depos i tac c ountwi t ht hebank . I n or derf ort hes y nt het i cs ec ur i t i s at i ont obef ul l yf unded,t hei nv es t or swi l lhav et opayanupf r ont i s s ue pr i c e on t he not es t hey i nv es ti n.I n gener alt hi swoul d bet hepr ef er r edc hoi c eofabank s eek i ng a c api t al r el i ef s i nc e c ount er par t yr i s ki si nt hi sc as e av oi ded. Abanks eek i ngac api t al r el i efwi l l optt obuyf ul lpr ot ec t i onont he mez z ani ne and j uni ort r anc hes whi l er et ai ni ng t he r i s k on t he s eni or t r anc he.Of t en t hi s wi l l amountt oappr oxi mat el y5% of

t he r ef er enc e por t f ol i o.Due t o t hewat er f al ls t r uc t ur el os s eswi l l f i r s tbei nc ur r edbyt hei ns ur ed t r anc hes ,andt hepr obabi l i t yof oc c ur r i ng l os s es i nt he s eni or t r anc het her ebyl ower ed. Henc e,t he c r edi tr i s k on t he s eni or t r anc he has dec r eas ed. Sy nt het i cs ec ur i t i s at i on t her eby al l owst hebankt oputz er or i s k wei ght sont hei ns ur edt r anc hes and -mor ei mpor t ant l y– s y nt het i cs ec ur i t i s at i on l ower st he r i s kwei ghtont hes eni ort r anc he. The ov er al lr es ul t ,due t ot he l owerr i s kwei ght sandt her ebya r educ edr i s kexpos ur eamount , i s t hatt he bankobt ai nsac api t al r el i efwhi c hal l owst hebankt oal l oc at ei t sf undsmor epr of i t abl y .

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Sy nt het i c s ec ur i t i s at i on ef f ec t i v el yt r ans f er st he c r edi tr i s k f r om a r ef er enc e por t f ol i oc r eat edbyt hebankt oaSpec i al Pur pos eVehi c l e( SPV)s etupbyt he bank .TheSPVi sani ndependent l egalent i t y ,andi t ss ol epur pos e i st oac tasani nt er medi ar yi nt he t r ans f erofc r edi tr i s kf r om t he bankt oi nv es t or s . TheSPVpac k agest hec r edi tr i s k f r om a r ef er enc e por t f ol i oi nt o t r adeabl es ec ur i t i es ,al s ok nown ass y nt het i cCDO’ s . Ther ef er enc e por t f ol i or ef er st ot heexpos ur es f orwhi c ht hebankwantt omi t i gat et hec r edi tr i s k . F ors i mpl i c i t yi tc an bedi v i ded i nt ot hr eet r anc hes ,buti nr eal i t y onewi l lexper i enc eanar bi t r ar y numberoft r anc hes . Thet r anc hesar er ank edac c or di ng t os eni or i t ys uc ht hatt he j uni ort r anc hewi l lbet hef i r s tt o t ak el os s esands oon. Commonl y t hi si sr ef er r edt oasawat er f al l s t r uc t ur e.Ther i s kpr of i l eofeac h oft het r anc hesc anbet ai l or edt o

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TheBi gBadWol fofWal lSt r eet ?

Thepr oponent s ’ar gumentf ors y nt het i cs ec ur i t i s at i ont oac hi ev eac api t alr el i efi sr at herobv i ous . Opponent showev erputf or war dnumer ousc onc er nsaboutt heus eandi t si mpl i c at i ons .Thet er m ‘ s y nt het i cCDO’ i ni t s el fhasr ec ei v edar at hernegat i v ec onnot at i onduet oi t si nv ol v ementi nt hef i nanc i alc r i s i s . Di s r egar di ngt her i s koft hepubl i copi ni ont ur ni ng agai ns tt hem,t heus eofs y nt het i cs ec ur i t i s at i on mayal s oc hanget hei nc ent i v es t r uc t ur eoft he bank s .

Anot herc onc er nofus i ngs y nt het i cs ec ur i t i s at i oni swhot hei nv es t or sac t ual l yar e.F orexampl e, t hef i nanc i al s t abi l i t ymaybedi s t ur bed i fbank ss t ar tt os el lof ft hec r edi tr i s kt oot her bank s .Wi t hmor alhaz ar di s s uespos s i bl yi nf l uenc i ngt hebank si nc ent i v es ,t hi sc anhav e s ev er ec ons equenc eswhen t he def aul t sof c us t omer si nonebankaf f ec tanot herbank . I nv es t or st hatar emor e‘ s ui t abl e’mayt her ef or ebehedgef undsorot hert y pesofi nv es t or s .

As i gni f i c antc onc er ni st hatbank sc anl ac kani nc ent i v et os c r eent hequal i t yofi t sc us t omer sand mai nt ai nas oundbus i nes smodelwhent hebank buy sc r edi tr i s kpr ot ec t i on.Thi sc anl eadt ol oans bei ngext endedt opeopl et hatar enotc r edi t wor t hyasi twass eeni nt hes ubpr i mec r i s i si nt heUS whi c hl ed t o an uni nt ended ef f ec tofi nc r eas ed s y s t emi cr i s k .

Among ot herf ac t or st he abov e ment i oned has c aus ed i nc r eas ed r egul at or yr equi r ement sf ort hebank st ogetappr ov al f r om l oc al F i nanc i alSuper v i s or yAut hor i t i espr i ort oobt ai ni ngt hec api t al r el i eff r om s ec ur i t i s at i on. I n t heaf t er mat hoft hef i nanc i al c r i s i s , s ec ur i t i s at i onhasac c or di ngt oI MFbeeni nas t at eof dec l i ne.Howev er ,wi t ht hei nc r eas edr egul at or yc api t alr equi r ement ss ec ur i t i s at i onmi ght i nt hef ut ur er egai nf av our .

Bec omeanac t i vememberof FI NANCELABoneofDenmarkslargeststudentorganizations •BECOMEI NVOLVEDi nt hef i nanc i ali ndus t r y •enhanc eyourNETWORK •gai nvol unt eerEXPERI ENCE •TESTt hewat er s www. f i nanc el ab. dk

Swi s sUnpeg,anunf or es eenevent ? Endi ngoft heSwi s sguar ant ee:Whatc anwel ear n? Si nc e2011t heSwi s sNat i onalBank( SNB)hadgi v enani c ec ar r yt r adeoppor t uni t yt oF XTr ader s ,l eav i ng manyi nv es t or shi ghl yl ev er aged, al li nbel i efoft hec ommi t mentoft heSNBguar ant eei ngami ni mum exc hanger at eoft heEUR/ CHFr at eat1. 20.Ont he15t hofJ anuar y2015t heywok eupt oac hangei nSNB’ s pol i c yandas uddenext r emes t r engt heni ngandi nc r eas edv ol at i l i t yoft heSwi s sf r anc .Wer et her eany ear l ys i gnsi nt hemar k ett hats ugges t edmi s t r us tt ot heSNBandt hei rc ommi t mentt opr ot ec t i ngt hemi ni mum exc hanger at e? How di dt hi sev entc hanget hef or ei gnexc hangemar k etandi ni t i at es pec ul at i on agai ns tt heDani s hpeg?

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To ans wert hes e ques t i ons , one mus t under s t and t he dr i v er soft heSwi s sec onomy and t hemar k etr el at i ons hi p wi t ht heSwi s sf r anc .TheSNB hads i nc et hei rpr es sr el eas e onSept ember6t h2011el ec t i v el ybeenpr ot ec t i ngami ni mum EUR/ CHFr at eof1. 20by r epeat edl yl ower i ng t he i nt er es tr at eandpr i nt i ngmor e f r anc s .TheSwi s sec onomyi s heav i l y r el i ant on s er v i c e bas edexpor t s , wher eexpor t s wi t hi n t he EU r egi on ar e domi nant . Gi v en t he ec onomi ct ur moi lt hatf ol l owed t hef i nanc i alc r i s i smanyi nv es t or swer es eek i ng as s et s wi t hv er yl i t t l er i s k .As t he Swi s sf r ancandSwi s sgov er n mentbonds ar ev i ewed as ‘ s af e hav en’as s eti nv es t or s boughtt hes e as s et sand i n ef f ec ti nc r eas edt hev al ueof t he Swi s sf r anc .To pr ot ec t Swi s sexpor t si twasi nt he

v al ueoft heSwi s sf r anc . To pr ot ec t Swi s s expor t si t wasi nt heSNB’ si nt er es tt o def end t he Swi s sF r anc f r om appr ec i at i ng t oo muc h. I n pr ot ec t i ng t he guar ant ee,t heSNBbui l tupar es er v e off or ei gn c ur r enc y as s et s wor t h 540 bi l l i on CHFormor et han70% of t he Swi s s GDP expos i ng i t s el fheav i l yt ot hev al ueof t he eur o.On t he 15t h of J anuar y2015,t heSNBannounc ed t hatt hey woul d no l onger mai nt ai n t he mi ni mum r at e.The dec i s i onwasmadewi t ht hear gumentt hatt heCHFi ni t s pur s ui toft heeur ohadal r eadydepr ec i at ed c ons i der abl y agai ns t t he US dol l ar and ot her c ur r enc i es .Theupc omi ngquant i t at i v e eas i ng i nt he ECB

woul dmos tl i k el yi mpl yaf ur t heri nc r eas ei nt heSwi s sr es er v esf r om i nt er v ent i onand af ur t herdepr ec i at i onagai ns t USdol l ari ft hec apwer et obe mai nt ai ned.I tc oul dv er ywel l bet hatt heSNBdi dnotwi s h t ohol das t agger i ngandr i s k y r es er v ei neur os ,es pec i al l yi n l i ghtofr ec entev ent sc onc er ni ngt heGr eekdebtt ot heECB. Thes e unc er t ai nt i es gav e r eas on t o doubtSNB’ sl ong t er mc ommi t mentt ot hepeg. Can we i n anywayquant i f y t hi sandobs er v ei ft hemar k et had al t er ed expec t at i ons of howl ongt heSNBwoul dk eep t heguar ant ee?

Af t ert her emov al oft heSwi s sf l oor s pec ul at or spoi nt ed outt hatt he Dani s h k r oner woul d pos s i bl y s uf f ert hes amef at eandbef or c ed outofi t sf or ei gn ex c hange r at e pol i c yagai ns tt heeur o,whi c ht o t hi sdayhasbeens us t ai nedbyt he Dani s h Nat i onalBank s i nc et he ear l y 1980' s( pegged agai ns tt he Ger man mar kpr i ort ot heeur o) . Thei nc r eas ed c onc er n aboutt he EUR/ DKKr at ei sc l ear l ys eenf r om mar k etdev el opmentaf t erJ anuar y 15t h, whi c hi snotonl yi ndi c at edby t hei nc r eas ed v ol at i l i t y ,butes pec i al l yal s obyopt i on pr i c es .Si nc e t her ei sbot hac ap

Putpr i c eofas t r i k e=1. 2EUR/ CHFi nt heday supt opegSNB’ spegr emov al

andf l ooront heDKKpegt ot heEURatat i ghti nt er v al ar ound 7. 46038,one c oul dr oughl y modelt he obs er v edEURDKKr at eas :EURDKKPEGt =EURDKKUNPEGt+ St r addl et,wi t ht hes t r i k eoft hes t r addl e=7. 46038.The r ealunpegged v al ue oft he EURDKK woul d be t he peggedobs er v edr at emi nuss omes c al i ngoft hev al ue oft hes t r addl e.Ther ef or et hepr i c eofas t r addl ewoul d benat ur alt of ol l ow t omoni t ort hemar k et ’ sex pec t at i onoft heDani s hNat i onalBank ’ sc ommi t mentt odef endi ngt hepeg. Bel ow, wes eeagr aphoft heannual i z edv ol at i l i t yoft he EURDKKandEURCHF .Opt i onpr i c esi nc r eas ei nv ol at i l i t yandf r om t hegr aphbel ow, weobs er v et hatt hev ol at i l i t yhasi nc r eas eds ubs t ant i al l yandk eptahi ghl ev el s i nc et hen. Thi si mpl i est hatF Xputandc al l opt i onsonEURDKK hav ei nc r eas edi npr i c eandt hatt hemar k etas s i gns hi gherpr obabi l i t yoft heex c hanger at emov i ngaway f r om t hef i x edr at et hanbef or e.Thi snewenv i r onment and i nc r eas ed pr es s ur ef r om s pec ul at or sf or c ed t he Dani s h Nat i onalBankt or epeat edl ys t at et hatt hey woul dk eept hepegwi t hal lmeansnec es s ar ywi t ht he bac k up oft heDani s h gov er nmentand t op bus i nes s l eader s .Ther eas onf oramor ef i er c ec ommi t mentby t heDani s hNat i onalBankc ompar edt ot heSNBi st hat t heDani s hex por ti smor edependentonEur oz oneex por t st hanSwi t z er l and.Ast i mehaspas s edt hepr es s ur e haseas ed,butnev er t hel es si ts eemst hatt he mar k ethasc hanged i t sex pec t at i onsoff or ei gn ex c hangeandt hatt heSNBac t i onshav es pi l l edov ert o ot herc ur r enc i es .

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Wet ak eanopt i onbas edappr oac h: The SNB’ sguar ant ee meanst hat t he hol derofa eur oc an s el li t whenhewant sandget1. 20Swi s s f r anc s .Thi si saput opt i on.I nt he day supt i l lt hedayoft heguar ant ee r emov al , s t r i k ebel ow1. 20 put st r adedatpos i t i v eandi nc r eas i ng pr i c es ;a c l ear s i gn of t he mar k ethav i ngl es st hanf ul l f ai t hi n t heSNB guar ant ee.As s umi ngf ul l f ai t hi nt heSNBk eepi ngt hef l oor onewoul dnotpr of i tonas t r i k e1. 2 put opt i on and t hey woul d be t r adedatpr i c e0.I nt hi sway ,t he v al ueofanopt i onc anbeamar k et i ndi c at oroft hepr obabi l i t yt hata c ent r albankwi l lk eepi t speg.

I nt hewor l dofc ent r albank i ng,s l ow and pr edi c t abl e dec i s i ons ar et he ai m.Bi gunexpec t edc hangesal way s c aus eal otofpeopl et ol os et onsof money . Wec aneas i l ys eef r om t hegr aphof annual i z edv ol at i l i t i es( f i gur e3)t hat t hedec i s i onwasnotexpec t ed.Us i ng anopt i onbas edappr oac hbyv i ewi ng ac ur r enc y â&#x20AC;&#x2122; s peg t o anot hermaj or c ur r enc y ;onec angetaquant i t at i v e i ndi c at i onofhow t hemar k eti sv i ewi ngac ent r albank â&#x20AC;&#x2122; sc ommi t mentof k eepi ngt hei rpeg.

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Manyc ount r i eshav edec i dedt opeg t hei rc ur r enc yt oanot hermaj orc ur r enc yandmar k eti ndi c at or s ,s uc has opt i onpr i c es , c anper hapsbeus edi n t hef ut ur eandgi v er edf l agst hatone i snav i gat i ngi nec onomi c al l yt oxi cenv i r onment .

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