Cityboy, what exactly is a derivative?
To the untrained eye a derivative is an overly complex financial instrument whose sole purpose is to enrichen the cunning institutions which design them and then trade them in their trillions. But to the highly trained eye… that is also exactly what they are (or 'socially useless activity' according to Lord Adair Turner). It is only those in the middle who may mistake them for legitimate products that help investors hedge their risk.
A derivative, as the name suggests, is an instrument whose value derives from a separate asset (for example a bond, index or equity). And these punts, I mean clever things like futures and options, are nearly always dramatically geared to minor price movements in the underlying asset. Hence, they are a really quick way of making you millions or, more likely, ending up with plastic bags for shoes, selling The Big Issue to your former colleagues.
These "financial weapons of mass destruction", as legendary investor Warren Buffet dubbed them, helped ensure that no-one had the slightest clue who owed what to whom when Lehmans fell in 2008 and will, almost certainly, be at the heart of our next financial crisis. Yep, they really are wonderful things.
The best tip I can give is to do exactly the opposite of what I did on my first business trip there… I was so hungover on arrival that I could barely see
I'm off to Japan on business – any tips?
The best tip I can give is to do exactly the opposite of what I did on my first business trip there back in 2002.
BA's generous hospitality ensured I was so hungover on arrival that I could barely see. Still, I waltzed into that first meeting, ready to wow the investor and this polite fellow handed me his card. I immediately chucked it in my top pocket without looking at it (a huge faux pas) while he proceeded to examine mine as if he might discover the colonel's secret recipe within.
The presentation began and I was soon surprised to find that the client's English was slightly worse than my Japanese. My surprise only increased when this character's eyes rolled back and he started having a kip. I looked at my accompanying salesman and we decided that banging my PowerPoint presentation on the desk was probably the best course of action. This led to a startled client flailing his arms around and spilling two cups of green tea.
The meeting ended with my salesman and I in a lift standing opposite our unenlightened client matching his every bow with an even lower one. I swear we'd still be there banging our foreheads on the ground had that lift not eventually sounded a face-saving 'ping'.
Journalists keep calling me. Should I speak to them – and can I use them?
The Russian revolutionary Lenin famously referred to Western socialists as "useful idiots" and the same kind of cynical mentality should be employed by City folk when dealing with the Fourth Estate.
Early on in any City career comes the time when you see yourself quoted in the Financial Times and you proudly show Auntie Marge et al that you have become 'a man whose opinion matters'.
But that childish urge soon wears off and you quickly begin to realise that a misquote or a passing drunken comment about something you shouldn't really mention could in fact cost you your job.
However, journos can still be used for two, admittedly dubious, purposes. Traders can give them 'anonymous' tips about upcoming results or takeover rumours in order to manipulate an asset price and so benefit their book. This is, of course, highly illegal and, of course, it happens all the time
Secondly, 'the scum' can be exploited in order to 'take ownership of an idea'. For example, a competitor had been saying for years that a utility was going to cut its dividend but six months before it materialised I started telling every journo I knew that it was coming and so got all the glory. Nasty… but you know what they say: all's fair in love and broking.
Do you have any questions for Professor Cityboy? Email them to letters@squaremile.com. Follow him on Twitter: @cityboylondon
