Financelab Magazine 2015

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

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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 .

3

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 !

4

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.

5

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 d’ 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)

1

1

TheCar l y l eGr oup

29, 065

Was hi ngt ong,DC

2

5

TPG

27, 631

F or t hWor t h

3

2

Kohl ber gKr av i sRober t s

26, 513

NewYor k

4

3

TheBl ac k s t oneGr oup

23, 289

NewYor k

5

4

Apol l oGl obalManagement

20, 223

NewYor k

6

6

CVCCapi t alPar t ner s

19, 292

L ondon

7

11

EnCapI nv es t ment s

19, 264

Hous t on

8

10

Adv entI nt er nat i onal

14, 334

Bos t on

9

14

War bugPi nc us

13, 885

NewYor k

10

21

Bai nCapi t al

13, 268

Bos t on

FI NANCELAB-I SSUESEPTEMBER2015

Headquar t er s

7

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.

8

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 .

9

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 ?

11

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

12

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 .

13

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.

14

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 e–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 .

15

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 .

18

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.

19

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.

20

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 ’ 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 .

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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.

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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 ’ sdi r ec t i on.

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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 .

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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.

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Bas elI I I ’ 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

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28

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.

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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.

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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.

31

How DoesI tWor k?

What ’ sNext ?

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.

32

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.

“ 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) �

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.

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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 .

FI NANCELAB-I SSUESEPTEMBER2015

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

35

FI NANCELAB-I SSUESEPTEMBER2015

TheBi gBadWol fofWal lSt r eet ?

36

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

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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 .

FI NANCELAB-I SSUESEPTEMBER2015

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.

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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 ’ 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 ’ 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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