Ease and Unease of Brexit

Ease and Unease of Brexit

Brexit is widely used term across the world today meaning a possible exit of the United Kingdom from the European Union. The UK electorate will address the question again on 23 June 2016 in a referendum on the country's membership, following the passage of the European Union Referendum Act 2015.

What could be the possible financial and social impact of Brexit on UK, EU and rest of the world?

I would start with a funny yet practical impact on Brits

• Cheaper flights will become a history: David Cameron warns that family holidays could be an average of £230 more expensive if UK leaves the EU
• Food Inflation: Brexit would add £220 a year to the Brit’s family's food, clothes and shoe shopping David Cameron claims
• Better Control over laws: UK will have total control on her laws as currently 60% comes from Brussels. UK can tailor her own legislation to protect the human rights
• Social Chapter: The treasury warns that the GDP will fall by 6% and house prices by 18% if UK leaves EU
• Threat to British trade: At present, The UK can sell tariff-free to Europe, the home market, accounting for 44% of the total exports. Leaving would put that at risk and potentially leave thousands of jobs at risk
• Trade Benefits: Leaving means UK is free to trade with the whole world and can strike better deals with China, India and Australia
• Freedom of movement will be gone: Staying in the EU means UK can live, work and move through Europe with ease which soon may be gone and trouble UK. The 1.4 million Brits living abroad in the EU could find movement around the continent more difficult if UK leave. For example, UK driving licences are currently valid across Europe
• Safer border protection: The EU rather than UK has control over who enters the UK meaning UK can't stop dangerous individuals entering the country
• Loss of Jobs: Unemployment could rise by 820,000 and average wages fall by 4% in two years if UK wants to leave
• Savings in money: UK sends over £250 million to the EU every week. Leaving means UK can choose to spend this money on things such as the NHS. Also, not having to contribute to the EU budget will mean an immediate cost reduction of around €180 per person in the UK, raising the prospect of tax reductions that could benefit businesses(The NHS is a rare example of truly socialized medicine)
• A second Scottish referendum: Nicola Sturgeon warns Brexit could trigger a second independence referendum forcing Scotland to leave the EU against its will
• The domino effect: Justice Secretary Michael Gove said that if UK leaves the EU others will follow leading to 'the democratic liberation of a whole continent'
• A Brexit result would also send shockwaves through the global economy and is likely to lead to a further drop in the value of the pound. UK’s currency has already weakened ahead of the referendum. (Another viewpoint: Nigel Farage said: “Even if sterling is to fall a few percentage points after Brexit, so what? The point is UK has a floating currency and it will be good for exports.")
• The vast majority of small and medium sized firms do not trade with the EU and British farmers would lose billions in EU subsidies
• If the door shuts to immigration, rents are likely to fall, not so good for landlords
• For Brits, holidays could become pricier, as sterling has fallen and for rest of world pound depreciation means cheaper holidays at UK
• Legislation: UK wouldn't be bound by the European Parliament, which is considered by many to be undemocratic. This is because its Commission which proposes legislation is not directly elected

What could be the after effects of Brexit?

It would be really tough and uncertain to judge what would follow after Brexit as rest of the world’s reaction is yet to be seen. However, few expected short term action plans could be that UK would start lengthy talks to renegotiate EU agreements and build new trade links with Europe and the rest of the world. There are concerns these negotiations could be made more difficult because EU bosses would want to discourage other countries from following suit by also leaving the EU. Cuurent PM, David Cameron may be asked to resign as he would have failed to save Project Fear

Secondary research based upon facts mentioned on http://www.express.co.uk/ and other prominent sources

Designing Standard Operating Procedures (SOP)

Designing Standard Operating Procedures (SOP)

SOPs are basically set of data flow diagrams combined with templates and guidelines for a business process. Different types of business processes could be:

• Procure to Pay (P2P) (material and production planning, procurement, production, and payment to vendors)
  
  
• Order to Cash (O2C) (receiving customer orders, processing orders, customer invoicing, sales returns and payment receipts from customers/ follow up on outstanding payments)
  
  
• Inventory Management (IM) (inbound logistics, warehousing, distribution, and outbound logistics

Each business process (say P2P) will have many sub processes (like material and production planning, procurement, production, and payment to vendors). For each sub process which has a significant impact on business should have a SOP.

Why SOP should be made?

1) Streamlining of Processes

2) Tasks performed correctly and consistently

3) Tasks performed in accordance to company policies

4) Preventive, Detective and Corrective controls

5) Benchmarking is possible

6) Knowledge Transition to a new employee

7) Training of new employee

8) Company bible for reference

Now that we understand, SOPs are essential part for a company, let's see how to draft and finalize a SOP.

Any SOP is about designing a data flow diagram for a process i.e. chronological process steps defined in an organized manner to understand what should follow once an activity has been completed. For eg, in case of vendor payment the process should be: Vendor invoices are received, invoices are verified by user department, validated invoices are sent to finance team, finance team reviews and further validates the invoices w.r.t. completeness of invoices (3 way matching: Purchase Order  vs. Goods Receipt Note  vs.  Invoice details), accounts the invoice in books, makes the payment on due date. These steps are to be defined in a flow chart show casing activities under departments involved in this process (like in the discussed example, departments involved are: User Department, Finance Department (Accounting) and Finance Department (Payments/ Treasury)) and putting control activities/ decision boxes after each required step. Every SOP contains some symbols- activity boxes, decision boxes, process inter-linkages, and control actions. 

(Refer snapshot of an SOP and symbol chart below for better clarity)

 

Following approach can be used to make an SOP:

• Conduct process discussion in detail with Process Owners. Draft some questions before the discussion which can be asked in initial meeting
• Basis process discussion, draft an SOP (as is process)
• Discuss the draft SOP with process owner, understand the changes required and identify gaps in current process and controls required
• Work on controls required and build up a detailed framework for the process. Prepare a final draft of SOP (to be process)
• Discuss the final SOP draft with Head of Department, Internal Controls Team/ Finance Controller. Make changes, if any.

An SOP has input column, department column, output column and few notes attached to it.

P.S.: Mail the final SOP to all stakeholders at each stage of discussion for documenting the understanding acquired in order to avoid confusions at later stage. “As is” is the process followed in the business at present. It may lack basic controls and have design issues. “To be” is a desired stage of process. It contains all controls built in and no design gaps

Tools for making SOPs:  draw.io (online), Microsoft visio (offline) etc.

Understanding Options and Call Options Chain (NSE)

What is an option and types of options? How options are traded?

Many people get confused when it comes to the topic of OPTIONS. Isn’t it?

An option is a financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).

Most confusing about options understanding is that which party has a right and which party has an obligation? Who can be at larger loss and for whom losses are limited? For getting some clarity let’s begin with basic definitions of call and put option.

Call Option: A Call is a right, not an obligation to buy an underlying asset at a predetermined date at a predetermined price by paying a certain amount upfront

Put Option: A Put is a right, not an obligation to sell an underlying asset at a predetermined date at a predetermined price by paying a certain price upfront.

You buy Call Options when you think a share is going to go up in value and you buy Put options when you think a share is going to go down in value. This means that the value of your Calls go up as the stock rises, while the value of your Puts go up when your share falls.

Let us take example of NSE Options Chain to better understand how options really work!

The above screenshot has been taken from the Options chain sectionof the NSE website, and this shows the Call Option and the Put Option details for NIFTY which expires on 30th June 2016 (nearest future). Every Option has an expiry date and the Option becomes worthless on that expiry date. The expiry date is the predetermined date in the definition.

Refer to Calls Side (left)

The Strike Price which is the right most column shows at what price you will be buying Nifty. This is a Call option to buy components of the Nifty, so the Nifty is the underlying asset from the definition.

Now, if you look at the sixth column from the left of this picture – that’s “LTP” which stands for “Last Traded Price” and this shows you at what cost per unit the last transaction happened for this contract.

The Nifty closed at 8,170 this week, and let’s look at the last highlighted (light yellow) row in this picture which is for the strike price of 8,150 (closest strike price of table) and see how that fits our definition.

This Call is a right, not an obligation to buy Nifty at a predetermined date of June 30th 2016 at a predetermined price of Rs. 8,150 by paying Rs. 135 (LTP) per unit upfront.

So if you bought this contract today, you will have to pay Rs. 135 and in return you will have the right to buy a Nifty contract at Rs. 8,150 on June 30th 2016. If Nifty is at say 8,500 on that date, then your Call option will be worth a lot more than Rs. 135 because you can buy it at 8,150 and then sell it at 8,500 (gross margin of Rs. 350). That’s also why in the image above you see that the price of the Options keep increasing as the Strike Price keeps going down. Chances of achieving higher nifty price (8,500; 8,600; 9,000) is less likely to occur in near future.

If the Nifty closes below 8,150; the Option will expire worthless because why would you buy Nifty, say at 8,000 when you can buy it for lower in the market. The part of the definition where it says that the Option is a “right but not an obligation” comes into play here because if Nifty closes below what you paid for it then you don’t have to do anything at all as it is your right to buy, but you aren’t obligated to buy.

This means that when you buy a Call Option your loss is defined to what you paid for it (which is called margin). You can’t lose more than that on the transaction.

The seller of the Call however who is known as the person who writes the option doesn’t have a cap on how much he loses and can lose an unlimited amount (theoretically) in the transaction. This is because the person who writes the option has an obligation to sell you the underlying asset at the price decided in the contract.

Details about how put options work (right side of picture) will be covered in next article.