Readings: Citibank & ADIA, Jim Simons of Renaissance, Dollar carry trade
- Financial Crookery: Citibank, ADIA and that pesky 11% interest rate
Lets take a look at the key features of the deal termsheet.
- Size: $7.5bn
- Type: Mandatory convertible (DECS is the Citi brand for these ubiquitous instruments, otherwise known as reverse convertibles)
- Payment rate: 11%, quarterly
- Term: Approx 4 years
- Settlement amount: (a) 235m citi shares if stock below 31.83
(b) 201.39m shares if stock above 37.24
(c) straight line interpolation between these numbers.Put another way, Citi has raised tax deductible, upper tier capital funds for 4 years at a cost equivalent to another financing source of Libor+150. Smart business.
“All of us in the quant business have conjectures and hypotheses but very little data,” MIT’s Lo says. “So we like to speculate about what Renaissance could possibly be doing. They are so far ahead of everybody else that it’s both challenging as well as exciting to engage in that kind of idle speculation.” For his part, Simons says he once explored whether sunspot activity affects the markets. He doesn’t say what he found.
. . . three strategies that Renaissance had explored. One involved swaps, which are contracts to exchange interest or other payments; another used an electronic order matching system that anonymously links buyers and sellers; and a third made use of Nasdaq and New York Stock Exchange limit order books, which are real-time records of unexecuted orders to buy or sell a stock at a particular price.
Long but must-read, especially if you dig ‘quant’ hedge funds!
Investors are borrowing dollars and using the money to buy assets in countries with higher interest rates even though U.S. borrowing costs are 4% more than the Bank of Japan’s and 1.75% above the Swiss National Bank benchmark.
Investors may switch more than $100 billion of borrowing from yen or francs into dollars in the next two years for carry trades.
This short selling will accelerate the dollar’s downtrend, until some event triggers an abrupt reversal; then, we’ll start seeing stories about an hedge fund that went bust shorting the dollar, and the end of the ‘dollar carry trade’. Endless entertainment.
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