Do Trading and Power Operations Mix?

The author uses the case of Constellation Energy to show the challenges, and pitfalls, of running an energy and power trading unit as a profit center within a large power company. Sophisticated trading and risk management operations do play important supporting roles in power companies that face competitive wholesale markets. The complicated dynamics of power prices and the complex operations of generation assets and supply obligations require careful assessment of risks and returns. Trading operations can help extract more value from physical assets and supply obligations. But problems are bound to arise when companies attempt to manage the trading function as a stand‐alone profit center. Determining the amount of capital required for proprietary trading portfolios and other elements of trading businesses is complicated. It is easy to underestimate the capital required and so exaggerate the profitability of trading. When profit center trading operations share a balance sheet with other business units—especially units with physical assets like generation—the natural tendency is for the trading operation to piggyback on the capital of the other units. The actual amount of capital consumed becomes apparent only in times of crisis. We have seen this mistake made repeatedly in the short history of trading operations in U.S. power companies. Only truly independent trading operations, with their own balance sheets, can be evaluated clearly and held accountable.     

Fast, global, and entrepreneurial: supply chain management, Hong Kong style. An interview with Victor Fung. Interview by Joan Magretta

Li & Fung, Hong Kong's largest export trading company, has been an innovator in supply chain management--a topic of increasing importance to many senior executives. In this interview, chairman Victor Fung explains both the philosophy behind supply chain management and the specific practices that Li & Fung has developed to reduce costs and lead times, allowing its customers to buy "closer to the market." Li & Fung has been a pioneer in "dispersed manufacturing." It performs the higher-value-added tasks such as design and quality control in Hong Kong, and outsources the lower-value-added tasks to the best possible locations around the world. The result is something new: a truly global product. To produce a garment, for example, the company might purchase yarn from Korea that will be woven and dyed in Taiwan, then shipped to Thailand for final assembly, where it will be matched with zippers from a Japanese company. For every order, the goal is to customize the value chain to meet the customer's specific needs. To be run effectively, Victor Fung maintains, trading companies have to be small and entrepreneurial. He describes the organizational approaches that keep the company that way despite its growing size and geographic scope: its organization around small, customer-focused units; its incentives and compensation structure; and its use of venture capital as a vehicle for business development. As Asia's economic crisis continues, chairman Fung sees a new model of companies emerging--companies that are, like Li & Fung, narrowly focused and professionally managed.     

碳金融业务分层模型及发展思路

碳金融的内涵从狭义到广义可划分为三个层次,分别基于碳交易、碳减排和气候变化的应对行动.广义的碳金融业务据此分为三个市场:低碳产业投融资市场、碳交易市场和气候风险资本市场,这三个市场共有绿色信贷、低碳产业直接融资、碳指标及衍生品交易、碳交易中介服务、碳金融理财产品、天气衍生品和巨灾债券七种业务模式.本文以制度、市场和组织...     

借助资本市场发展我国商业银行的策略探讨

商业银行与资本市场之间存在一种既竞争又融合的关系.本文首先分析了当前我国资本市场的发展现状,在此基础上重点讨论了资本市场的发展对商业银行构成的挑战和机遇:资本市场的发展分流了商业银行信贷客户和存款资金,使商业银行面临更大的经营风险和竞争压力;同时,资本市场的发展有利于商业银行负债业务、资产业务和表外业务的拓展、资产质量的改善和资产结构优化.作者最后提出了借助资本市场发展商业银行的具体策略,包括负债业务证券化、积极争取同业存款、创新信贷业务品种、大力拓展表外业务、信贷资产证券化、银行资本证券化、完善信息技术系统建议、加快人才培养和创新市场营销等.     

Explaining Size Effect for Indian Stock Market

Using data for BSE 500 companies from October 2003 to January 2015, we confirm the presence of strong size effect in Indian stock market. Controlling for penny stocks, we find that returns decrease almost monotonically with firm size. The findings are robust for alternative size measures, i.e. market capitalization, total assets, net fixed assets, net working capital, net sales and enterprise value. We find the presence of non-synchronous trading bias and reverse seasonality effect. It is observed that market, size, value and business cycle factors explain size effect while liquidity and momentum factors have little role in this process. Thus, rational sources explain the size anomaly in the Indian context.     

Morgan Stanley Roundtable on Capital Structure and Payout Policy

A group of finance academics and practitioners discusses a number of topical issues in corporate financial management: Is there such a thing as an optimal, or value‐maximizing, capital structure for a given company? What proportion of a firm's current earnings should be distributed to the firm's shareholders? And under what circumstances should such distributions take the form of stock repurchases rather than dividends? The consensus that emerged was that a company's financing and payout policies should be designed to support its business strategy. For growth companies, the emphasis is on preserving financial fl exibility to carry out the business plan, which means heavy reliance on equity financing and limited payouts. But for companies in mature industries with few major investment opportunities, more aggressive use of debt and higher payouts can add value by reducing taxes and controlling the corporate “free cash flow problem.” Both leveraged financing and cash distributions through dividends and stock buybacks represent a commitment by management to shareholders that the firm's excess cash will not be wasted on projects that produce growth at the expense of profitability. As for the choice between dividends and stock repurchases, dividends appear to provide a stronger commitment to pay out excess cash than open market repurchase programs. Stock buybacks, at least of the open market variety, preserve a higher degree of managerial fl exibility for companies that want to be able to capitalize on unpredictable investment opportunities. But, as with the debt‐equity decision, there is an optimal level of financial fl exibility; too little can mean lost investment opportunities but too much can lead to overinvestment.     

银行间利率衍生品市场交易管理业务探索与展望

冲销与电子化交易确认是当今国际场外衍生品市场的新兴交易管理业务,代表着危机后场外衍生品市场信息更透明、更集中的发展趋势。随着国内利率互换交易规模的扩大,制约利率互换市场发展的因素逐渐显现。为此,中国外汇交易中心在中国人民银行金融市场司的指导下深入研究国际经验,在充分调研的基础上积极筹备推出了利率互换冲销和电子化交易确认业务。相关业务的推出与不断完善有效提高了银行间利率互换交易的标准化程度,降低了市场整体风险,提高了市场成员的资本利用效率和授信管理效率,是银行间市场基础设施建设的重要进展。     

How much cash does your company need?

In late 2001, the directors of Pfizer asked that very question. And with good reason. After its 2000 merger with rival Warner-Lambert, the New York-based pharmaceutical giant found itself sitting on a net cash position of $8 billion, which seemed extraordinarily conservative for a company whose products generated $30 billion in revenues. Most large companies with revenues that healthy would increase leverage, thereby unlocking tremendous value for shareholders. But knowledge-intensive companies like Pfizer, this author argues, are in a class apart. Because their largely intangible assets (like R&D) are highly volatile and cannot easily be valued, they are more vulnerable to financial distress than are firms with a preponderance of tangible assets. To insure against that risk, they need to maintain large positive cash balances. These companies' decisions to run large cash balances is one of the key reasons their shares sustain consistent premiums. Only by investing in their intangible assets can knowledge-based companies hope to preserve the value of those assets. A company that finds itself unable to do so because unfavorable market conditions reduce its operating cash flows will see its share price suffer almost as much as if it were to default on its debts. By the same token, with the right balance sheet, knowledge companies can profitably insure against the risk of failing to sustain value-added investments in difficult times. An optimal capital structure that calls for significant cash balances is certainly at odds with the results of a traditional capital structure analysis, the author demonstrates, but it explains the financial policies of many well-run companies, from Pfizer to Intel to ChevronTexaco.     

德利国际：持续创造被利用的价值

德利国际新能源控股有限公司（以下简称＂德利国际＂）董事长杜德利是一位智慧型的企业家,虽然创业初期他的学历仅初中文化,但他对企业经营及发展战略的思考却有着一整套自成系统的理论体系。正是基于此,从1997年开始经营太阳能热水器的他,带领企业从众多太阳能光热企业中脱颖而出,于2005年3月登陆美国资本市场,成为太阳能热水行业全球首家上市公司;继而,他利用上市融到的800万美金,开始实施企业跨越式发展战略,以全球首家低碳生态全案解决商的战略定位,向新能源整合运营与低碳技术系统集成领域进军,不争而胜。杜德利的成功秘笈是什么？且看《国际融资》记者对德利国际新能源控股有限公司董事局主席兼总裁杜德利先生的独家专访     

Risk Management and the Cost of Capital for Operating Assets

This article attempts to clarify the effect of risk management on a company's cost of capital in the spirit of the traditional M&M/CAPM model. The traditional cost of capital model can and should be used to find the hurdle rate for a company's operating assets, since it can be applied regardless of the composition of the firm's non‐operating assets or its risk management policy. The author's main message is that if a firm manages idiosyncratic risk, the correct cost of capital for the operating investment is not the firm's enterprise WACC, but rather the required return on the assets being funded. Using the case of a company with a single line of business that is evaluating an investment opportunity, the author demonstrates how to adjust the firm's overall WACC to find the cost of capital for the operating assets to be acquired.     

Finding your next core business

How do you know when your core needs to change? And how do you determine what should replace it? From an in-depth study of 25 companies, the author, a strategy consultant, has discovered that it's possible to measure the vitality of a business's core. If it needs reinvention, he says, the best course is to mine hidden assets. Some of the 25 companies were in deep crisis when they began the process of redefining themselves. But, says Zook, management teams can learn to recognize early signs of erosion. He offers five diagnostic questions with which to evaluate the customers, key sources of differentiation, profit pools, capabilities, and organizational culture of your core business. The next step is strategic regeneration. In four-fifths of the companies Zook examined, a hidden asset was the centerpiece of the new strategy. He provides a map for identifying the hidden assets in your midst, which tend to fall into three categories: undervalued business platforms, untapped insights into customers, and underexploited capabilities. The Swedish company Dometic, for example, was manufacturing small absorption refrigerators for boats and RVs when it discovered a hidden asset: its understanding of, and access to, customers in the RV market. The company took advantage of a boom in that market to refocus on complete systems for live-in vehicles. The Danish company Novozymes, which produced relatively low-tech commodity enzymes such as those used in detergents, realized that its underutilized biochemical capability in genetic and protein engineering was a hidden asset and successfully refocused on creating bioengineered specialty enzymes. Your next core business is not likely to announce itself with fanfare. Use the author's tools to conduct an internal audit of possibilities and pinpoint your new focus.     

Solvency, Capital Allocation, and Fair Rate of Return in Insurance

In this article, we consider the links between solvency, capital allocation, and fair rate of return in insurance. A method to allocate capital in insurance to lines of business is developed based on an economic definition of solvency and the market value of the insurer balance sheet. Solvency, and its financial impact, is determined by the value of the insolvency exchange option. The allocation of capital is determined using a complete markets’ arbitrage‐free model and, as a result, has desirable properties, such as the allocated capital “adds up” and is consistent with the economic value of the balance sheet assets and liabilities. A single‐period discrete‐state model example is used to illustrate the results. The impact of adding lines of business is briefly considered.     

Bankers Trust and the Birth of Modern Risk Management

A leading financial practitioner traces the origins of the risk management concepts and applications widely used in today's financial institutions to their development at Bankers Trust in the 1970s. The bank became a pioneer out of necessity and entrepreneurship. Lacking the relationships with large corporations enjoyed by J.P. Morgan and Chase, Bankers Trust had to find ways to offer financial products its well‐established competitors could not. The innovations in risk management came from the Bank's “Resources Management” group, which was responsible for its trading and funding activities (but not corporate lending). By applying probability theory to its trading positions, the bank found an effective way to measure “market risk.” Extensions and refinements of this methodology were then used to measure credit risk and, later, liquidity risk and operational risk. These statistical methods and probabilistic concepts were brought together in a metric called Risk Adjusted Return On Capital, or “RAROC,” as it eventually became known throughout the financial services industry. RAROC was a concise way to measure and communicate the economic profits that had been generated by a transaction, product, or business unit, given the amount of “risk‐based” equity capital that was necessary to generate that profit. At Bankers Trust, RAROC eventually was used not only to evaluate profitability, but to guide strategic planning, capital allocation, and incentive compensation. And tools incorporating the same concepts, but with names like Value at Risk (or VaR), were later adopted by many other banks as well as regulators, including the framers of the Basel Accords. The author closes by suggesting how and why Bankers Trust's risk management culture began to deteriorate after 1995, and the bank was acquired by Deutsche Bank in 1998.     

金融资产分类的决定性因素研究——管理者意图是否是真实且唯一标准

《企业会计准则》要求上市公司应根据管理者意图对金融资产进行重新分类、确认和计量。本文新设了评价管理者意图的指标,并在此基础上考察了准则实施后交易性金融资产与可供出售金融资产的分类情况。我们发现,在实务中管理者意图并不是金融资产分类的主导因素;盈余管理中平滑业绩的动机是分类的出发点,持有金融资产的多少决定管理层的态度。     

Commodity tax straddles and the valuation of domestic futures exchanges: An analysis of the 1981 Economic Recovery Tax Act

The Economic Recovery Tax Act (ERTA) of 1981 substantially altered the taxation of commodity tax straddles. Prior to 1981, commodity tax straddles were actively promoted and used to defer income, to convert ordinary income into capital gains, or to convert short-term into long-term capital gains. ERTA imposed a mark-tomarket rule of account settlement for the taxation of futures transactions. This study examines the impact of ERTA on the futures industry by utilizing futures exchange seat prices for all domestic futures exchanges. Futures exchange seats represent specialized capital assets whose value reflects the discounted present value of expected future economic rents derived from trading activity. The results indicate that ERTA produced a large decrease in the market valuation of futures exchange capital which was not recaptured in the ten months following the announcement.The financial support of the Columbia Futures Center was essential to the research reported here. The authors thank two anonymous reviewers for helpful suggestions, and Matthew Deno, Darrell Petter, and Shan Guo for valuable research assistance.     

MORGAN STANLEY ROUNDTABLE ON Capital Structure and Payout Policy

A group of distinguished finance academics and practitioners discuss a number of topical issues in corporate financial management: Is there such a thing as an optimal, or value‐maximizing, capital structure for a given company? What proportion of a firm's current earnings should be distributed to the firm's shareholders? And under what circumstances should such distributions take the form of stock repurchases rather than dividends? The consensus that emerges is that a company's financing and payout policies should be designed to support its business strategy. For growth companies, the emphasis is on preserving financial flexibility to carry out the business plan, which means heavy reliance on equity financing and limited payouts. But for companies in mature industries with few major investment opportunities, more aggressive use of debt and higher payouts can add value both by reducing taxes and controlling the corporate free cash flow problem. In such cases, both leveraged financing and cash distributions through dividends and stock buybacks signal management's commitment to its shareholders that the firm's excess cash will not be wasted on projects that produce low‐return growth that comes at the expense of profitability. As for the choice between dividends and stock repurchases, dividends provide a stronger commitment to pay out excess cash than open market repurchase programs. Stock buybacks, at least of the open market variety, preserve more flexibility for companies that want to be able to capitalize on unpredictable investment opportunities. But, as with the debt‐equity decision, there is an optimal level of financial flexibility: too little can mean lost investment opportunities, but too much can lead to overinvestment.     

Accounting for power and control: The Anglo-Iranian oil nationalisation of 1951

The paper uses accounting and stock market data to evaluate the power of protagonists in a political crisis and their respective ability to assert control over disputed assets. It employs a case study of the expropriation of the assets of the AIOC by the Iranian government in 1951. An event study and accounting data analysis show that the stock market reaction to the nationalisation strongly predicted the ability of the company to recover its assets implying a significant market value associated with political support. They also show that the company was able to use the publication of its annual report to reassure shareholders and that due to the assumed presence of political support this signal was received as credible.     

Is Historical Cost Accounting a Panacea? Market Stress,Incentive Distortions,and Gains Trading

Accounting rules, through their interactions with capital regulations, affect financial institutions’ trading behavior. The insurance industry provides a laboratory to explore these interactions: life insurers have greater flexibility than property and casualty insurers to hold speculative‐grade assets at historical cost, and the degree to which life insurers recognize market values differs across U.S. states. During the financial crisis, insurers facing a lesser degree of market value recognition are less likely to sell downgraded asset‐backed securities. To improve their capital positions, these insurers disproportionately resort to gains trading, selectively selling otherwise unrelated bonds with high unrealized gains, transmitting shocks across markets.