27 января 2016 г.


The CFA Association (Russia) enjoyed a breakfast of exotic derivatives


On Wednesday, January 27, the members of the CFA Association (Russia) gathered early in the morning at the restaurant Movida for breakfast and to hear a talk on such exotic financial instruments as derivatives based on weather, electricity, and energy.

According to tradition, the event was opened by the executive director of the CFA Association (Russia) Vladimir Tutkevich, who reminded those present about the controversial reputation of derivatives. "Some people say that these instruments dilute share prices, while others claim that fixed-term contracts have in fact been created to help the real sector of the economy."

The speaker invited to talk about these "exotic" instruments was Yevgeny Fedorinov, a certified CFA, a second-year MBA student at McGill University in Canada, and an expert with many years of experience with structured products, as well as in the field of investment planning.

A derivative is a contract issued on the basis of an already extant asset. Derivatives allow one party to transfer financial risk to another party that is willing to accept it, with the goal of extracting a profit in the future.

As Fedorinov said at the start of his talk, "Now in US and European markets you can find some unusual and creative derivatives, which might interest people in Russia as well, especially instruments based on weather, electricity and other energy sources." In his presentation he spoke about the most common derivative types. Slides were dedicated to pricing and hedging of risks for each of the instruments examined. In spite of the early start, especially in the wintertime – the breakfast began at 8 o'clock in the morning – all present eagerly devoured the mathematical formulas that Fedorinov had painstakingly put on his slides, and they even asked him questions in English.

When discussing for whom fixed-term contracts are meant, the speaker pointed to companies whose income and sales volume depend on some kind of external conditions. Thus weather derivatives, for example, first appeared on the US stock market in August 1997, with the aim of protecting the incomes of producers whose sales volume depended directly on weather conditions. Besides the power industry, this mainly includes agriculture, the tourism industry, the food industry, production and sales of soft drinks, all the way to concert organizers and holders of open-air stadium matches.

Fedorinov gave a simple example. "If this summer isn't very hot, then companies won't be able to sell enough ice cream. We should think about transportation firms, too. Every year airlines lose millions of dollars by cancelling or delaying flights for weather-related reasons."

For different industries, one has to take different environmental factors into account. Thus, for gas, oil and coal producers, the most serious risk factor is the length and severity of the winter, since the sales volume of such industries depends on the amount of fuel needed over the cold season.

"The level of risk in structural products is determined by mathematical controls with the involvement of professional meteorologists and other experts," Fedorinov noted.

When it comes to Russia, all participants of the meeting agreed with the organizers that the Russian market has a strong potential for growth and development of structured products. These contracts can be used by any company whose revenues or sales volume is linked to weather/climate conditions that vary considerably depending on the region or part of the country.

At the close of the meeting, CFA Association (Russia) president Neil Withers said that Fedorinov is ahead of his time. Nonetheless, sooner or later the Russian market will turn towards derivatives, and perhaps now the time has come to lay the foundations for building long-term relationships with potential clients, and with those who need to analyze exotic derivatives.

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