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On the fifth of March 2013, the Swedish business journal Veckans Affärer released their list of the

125 most powerful women in the Swedish business world. Ingrid Bonde, CFO and deputy CEO at Vattenfall, the state-owned energy giant, was ranked number three on the list. It goes without saying that we at Capital Magazine are delighted to have met her and proud to present our exclusive interview in this issue.

It is evident that gender equality in general and the scarceness of top tier female leaders in particular are hot topics in the Swedish public debate. We are constantly fed with new statistics documenting the female to male ratio in all kinds of private and public fields. The controversial nature of the issue is also manifested in the often heated debates regarding affirmative action, flaring up on a regular basis.

It is of course very positive that the media is raising these issues; surely none but the most archaic conservative would argue against gender equality. However, it is of immense importance that gender is not reduced to an isolated variable. By doing so, we run a serious risk of trivializing the issue and judge people solely based on their gender. In general, women might well be able to offer skills and experiences that men do not, and vice versa. Let us then compare, contrast and assess how those different skills and experiences might contribute in value creation in any given situation, instead of getting stuck in a discussion of gender alone.

Two out of three Capital Magazine front pages have now been occupied by female leaders (Annika Falkengren and Ingrid Bonde). It is my firm belief that their insights and stories would be valuable and inspiring, regardless of their gender.

EDITOR-IN-CHIEF Sibo Wei

EXECUTIVEAlexander GustafssonFarzad KhoshnoudRasmus Wiman

ART DIRECTOR Rui-Xin “Xinga” Li

CONTRIBUTORS Louisa BrandtEkaterina DiakovaHampus EngsnerLouise GranathSebastian HaqFarzad KhoshnoudJohan Källmark Lukas MagnussonChristopher MutsaertsSamuel SiddiqueFarhad Tatar Lennart WangRasmus WimanLulu Zhang

SALESIda LaurénSofia Karlsson

WEBMASTER Lukas Kikuchi

WEBSITE www.capitalmagazine.se

CONTACT editor@capitalmagazine.se

DISCLAIMER Opinions published in Capital Magazine do not necessarily represent the opinions of the editorial staff or KTHFS

PRINTING HOUSE Wikströms tryckeri AB

CONTENTS

Sibo WeiEditor-in-chief

CAN STOCKHOLM BECOME A NEW SILICON VALLEY?

MANAGING EMERGING MARKETS

UNLEASH THE DRAGON

UK ON THE WAY OUT OF EU?

INTERVIEW WITH INGRID BONDE

HYDRAULIC FRACTURING

INTRODUCTION TO COMMODITIES

NUCLEAR POWER

THINK ANTIFRAGILE INVESTING

FRAGILE SYSTEMS

RISKY RISK-FREE PROMISES

INTERVIEW WITH MARCEL GLEICHMANN

CONTENTS 3

HYDRAULIC FRACTURINGChanging the Global Energy Landscape

Page 18

CAN STOCKHOLM BECOME A NEW SILICON VALLEY?

PAGE 4

UNLEASH THE DRAGONInnovation In ChinaPage 10

INTERVIEW WITH INGRID BONDE

Insights on Leadership from the

New CFO of VattenfallPAGE 14

UK ON THE WAY OUT OF EU?PAGE 12

4 ENTREPRENEURSHIP & PRIVATE EQUITY

Stockholm from the venture capital perspective

According to David Sonnek, the most important aspect which Stockholm misses, when compared with Silicon Valley, is the interaction between small companies, large companies, and universities. “How many business angels walk in the INDEK (the Department of Industrial Economics and Management) premises, for instance? How many entrepreneurs and innovators walk in and out of the Ericsson office in Kista? There is very little interaction, and I think that is the main thing to make big companies more interested in what small companies do, and what academic innovators can offer them.” European-based large corporations have lack for the basic understanding of how a company functions at the management level. They see new technology and innovations only as costs, but not a competitive advantage. With such a management approach, it is unfairly difficult to organize even one meeting between a startup and Swedish large company.

The Swedish government is contributing to the entrepreneurial environment. The patent system is organized in a way that patents are issued to a person, not for his or her employer. “I think it is great, because we always want to invest in something where there is a person behind a patent.

We do not want to buy a patent from some company or university, we absolutely hate that.” Unfortunately, the government mostly uses standard measures to identify the profitability of a project, which drives away the energy from industrial fields. The government should not be indifferent to problem-solving researches for social and industrial challenges. It should be interested in business incubators, science parks, and environments where the first millions are injected in a company. The transaction costs of finding investors for startups, and vice versa, are rather high, that affects the whole market on a global scale. However: “the government can do a lot by just creating meeting places for VC’s and entrepreneurs.”

From David’s point of view, high taxes is not such a problem for entrepreneurs. On one hand, with lower taxes the share of rich people who could act as the first investors, “family and fools”, for entrepreneurs would be higher than now. On the other hand, Swedish entrepreneurs normally are not driven by the wish to become rich, they want to gain independency. “In Sweden there is another way to be an entrepreneur, to be independent, not to be employed by someone, and to control your destiny”. Neither the Swedish mentality affects the positive spirit of entrepreneurship. “There is a kind of stubborn independence in people. Thus, those who want to become independent have entrepreneurial drive, and those who really do not want to do that

Sweden is certainly one of the most innovative countries of Europe. In 2012, according to

the 2012 Global Innovation Index, Sweden became the second most innovative country in the world after Switzerland. Innovation and entrepreneurship always go together. Does this mean that Stockholm can be called the European Silicon Valley? Can it be done in the future? What does it lack? This article is created not from dry facts, but from insights into the actual Stockholm innovation and entrepreneurial society. In order to answer these questions we have interviewed David Sonnek, global head of SEB Venture Capital, and Joel Eriksson Enquist, co-founder of Startup GRIND Stockholm and an associate at Creandum, a venture capital firm. Joel founded six non-profit ventures and conducted his master thesis research focused on the world’s fifty leading university incubators.

CAN STOCKHOLM BECOME A NEW SILICON VALLEY?

ENTREPRENEURSHIP & PRIVATE EQUITY 5

can become really great in collaborating in large systems companies like H&M, Ikea, and others”.

“The policymakers care more about the stagnating regions of Sweden like Lapland, where communities with 500 people living in the woods exist. I would say that Sweden is too small to be divided into a lot of regions; there are actually only three or four relevant regions. I would care more about Göteborg than Lapland. There is one region defined by Stockholm, Uppsala, and Västerås, which is doing very well. Then there is Malmö, being a part of the great Copenhagen area, which is also doing fairly well. There is the third region of Gothenburg, which is a little bit behind. It is difficult to keep an entrepreneurial spirit and entrepreneurship along the coastline of Northern Sweden. Instead of putting billions of dollars in wasted stimulation for regions of Northern Sweden, I think that a lot of that should go to innovation instead, where there is this dynamic to build upon. For instance, in the Stockholm area, there is a lack of governmental early stage funding.” Sometimes it is much easier to find startup events in other regions but Stockholm, because the government tries to improve the entrepreneurial environment all around the country. It is a very noble idea; however, it will be more advantageous to put all the government attention into the three main areas in order to successfully boost the entrepreneurial spirit.

Stockholm’s climate is very favorable for entrepreneurship. There are big institutional investors, which funding starts from SEK 10-15 million, and there are business-angels, who can invest a couple of millions. Thus, there is a slight lack of capital if your company needs SEK 8 million. However, the solution for such a situation is simple: to collect investments from incubators and business-angels to become mature enough for big institutions. However, as David states, in Stockholm a company will grow slower, due to less “friendly buyers” in the surrounding environment. This is the reason why Nordic companies have to pick up U.S. customers very quickly.

One significant approach, which Stockholm needs to learn from Silicon Valley, according to David, is the ability to grow companies’ products or capabilities on acquisitions. Surely, in Europe people know how to grow their companies by acquisitions, but not how to gain new skills from acquisitions. In the U.S., large companies scan the market for small companies with skill sets or products that they themselves do not have. By acquiring such companies the large firms fill their gaps of knowledge. In Europe, acquisition is more about money; they do not understand how to refrain the talent and innovations of a small company. “You never only buy a patent; you buy a patent, a product, and the people around it. That is what is called dynamic capability of the units you acquire.”

“One practice in which the Nordic VC market must become much better in is syndication. Unfortunately, most companies invite new investors in the company when there is bad news. They have to pick up on practice to let people invest in on the good news, and forming broader syndicates that can grow the company faster and be capable of dealing with any glitches or problems along the road”. Moreover, when Swedish investors look at startups, they should not only focus on the finance part, but also on the entrepreneurial and industrial point of views.

In order for entrepreneurs to become successful in Stockholm, they must not be solitary, but always collaborate with their environment. For instance, inviting experienced entrepreneurs on their company board of directors, and networking with people that have done it before to understand about building a business. “Stubborn independence can be good for having a small farm somewhere in the woods.”

According to David, Stockholm can become a new Silicon Valley; the key approach for Europe is to be positive about the future. “The next 30 years will be fantastic for a young person.”

Coming startup events for spring 2013 Stockholm, Sweden:

5th of March 6:00 pm - 9:00 pm Startup Grind Stockholm hosts Lars-Henrik Friis Molin (Universum Group) (www.startupgrind.com)

19th of March 5 pm - 9:30 pm PitchMeUp! Pitching competition for ICT startups .(www.pitchmeup.se)

21th of March 12:00 pm - 14:00 pm Nordic APIs. A half-day in Stockholm with 5 presentations from API experts about API trends. (www.nordicapis.com)

20th of April Start-up Day 2013.Stockholm School of Entrepreneur-ship’s annual event for start-ups, student entrepreneurs and investors. (www.startupday.se)

6 ENTREPRENEURSHIP & PRIVATE EQUITY

Stockholm from the entrepreneurial perspective

According to Joel Eriksson Enquist, the best thing about Silicon Valley is that every person has a collaborative mind-set. “In the Valley everyone wants to help, support and push each other to do disruptive things. For instance: when you need a person with a specific kind of experience, people can find the right person very quickly because of the informal networks. In Stockholm we start to see this drive more and more, but sometimes people in Stockholm think too much in silos. When you are a foreign entrepreneur from another country, from Finland for instance, it can be a bit hard to break into those networks. Those networks or silos could be divided into IT and clean-tech for example, a more sector divided approach. Innovation accelerates when you have cross competences.” Thus, the climate is changing in Stockholm. It is clear that we need to change our traditional view on the silo competence networks towards a more cross-functional approach.

The main driver in an entrepreneurial-minded event is inspiration. “I think that one of the most important things in an entrepreneurial ecosystem is inspiration and focus on learning what you can from others and get help from others. What I like about start-up GRIND, for instance, is that they have the inspiration part, where they invite some of the most interesting entrepreneurs, and also the networking part where there is a strong focus on helping each other. Thus, they are facilitating an environment where entrepreneurs of all levels can support each other. They have a statement: ‘don’t network, make friends’, and I kind of like that mind-set.” Different universities and other parties are organizing events to stimulate entrepreneurship to create this inspiration. There are conferences like SIME, Start-up day, and Start-up GRIND. Next to these events, Joel states that Stockholm is in need of an accelerator: “one thing that can be valuable for Stockholm is an accelerator in terms of development. One thing is that the accelerator inspires people and it also functions as a gravity point, like the

Startup Sauna in Helsinki. They have this open co-working space and I think that is functioning as a gravity point where a lot of people meet informally. A similar event in Stockholm could work, but a requirement is that it should be sustainable: it must be beneficial in the long-term.” This could be considered as a great opportunity for (potential) entrepreneurs reading this article.

The communication of these events is quite inconsistent and could be much better. As our own research also showed, some websites project events, but somehow potential stakeholders are reached inefficiently. Joel states that there should be one single Internet page, which provides events, links and all other relevant information. “On the other hand, it shouldn’t be overdone. One page or site, like Stockholm start-up events where you just brand it enough so you can make it the place to go when you want to search for events. Just one site where all the events are listed with a link to the page of the event.”

Concerning governmental issues Joel could not make statements based on his research, but he definitely has opinions. The government must be more involved in stimulating the entrepreneurial climate: “…the government probably could put the entrepreneur more on the map. They try to simulate entrepreneurship in some way, which is great, but sometimes it feels if they forget the entrepreneur himself. It does not feel like they attend entrepreneurship events and really meet entrepreneurs. It is like customer development: when you are an entrepreneur you need to talk to your customers all the time to understand what the need is. That is the same thing for the government, they need to talk with entrepreneurs all the time and participate in all the events. But instead I think they base their judgment from other data points.”

Stockholm lacks three things. First of all, a more open mind-set and collaborative spirit. Not only among entrepreneurs but also concerning large corporations: “they also need to be more risk taking to try start-

ups’ products and listen to what startups have to say…in Silicon Valley it is what you do when you are a large corporation: you listen to start-ups and see if you can buy their products really early.” Secondly, there is always a lack of capital: “Creandum does their best to seed fund as well, but we can’t finance everyone. We would like to help even more entrepreneurs, not only with cash but with experience.” And thirdly, Stockholm lacks an accelerator: “they help to connect the entrepreneurship community: investors, entrepreneurs, angels and also the government. Then you can try to extract the best mentor to the accelerator and it could happen that people from all over the world want to participate, which will help to put Stockholm on the map. It has a branding purpose and also a mediator purpose, to connect everyone.” Also Swedish character and culture play an important role: “I think we’re on a good track but we can be even more open and collaborative. I’m a very positive person and I think everything is always changing to become better. In the end game everyone is striving for something better, I believe.”

In conclusion, Silicon Valley should definitely not be copied but Stockholm has to rely on its own strengths. The most interesting thing Joel has seen in his research is the incubator at Stanford University: “…because students ran it all: it was the students who decided everything. They have some sort of a hacker space where people sleep on couches, with coke cans everywhere, but still deliver quality in the end. They have the founders of Yahoo as mentors and they are able to assign three teams that can call them whenever they want.” Stockholm has its own drawbacks and pluses, strengths and weaknesses. In some aspects, VC and entrepreneurial points of view share the same opinion, in others, they are different. However, it is obvious that Stockholm has every chance to become the new Silicon Valley. Whether it happens depends only on the people themselves.

Writer Christopher Mutsaerts / Ekaterina DiakovaIllustration Xinga Li

EMERGING MARKETS 7

Creating a powerful emerging-market strategy has moved to the top of the

growth agendas of many multinational companies. 15 years from now, 57 percent of the nearly one billion households with earnings greater than US$ 20,000 a year will live in the developing world. Seven emerging economies—China, India, Brazil, Mexico, Russia, Turkey, and Indonesia are expected to contribute about 45 percent of global GDP growth in the coming decade. Figures like these create a real sense of urgency among many multinationals (MNCs), which recognize that they are not currently tapping into those growth opportunities with sufficient speed or scale. Even China, forecasted to create over half of all GDP growth in those seven developing economies, remains a relatively small market for most multinational corporations: ranging between -5 to 10 percent of global sales; often less in profits.

We have identified six core practices that the next generation of business leaders need to adopt in order to be successful in realizing the business potential that emerging markets offer. These are: innovation, talent management, global corporate culture and values, risk awareness and mitigation, transparency, and ability to implement business strategies based on a more granular level.

MANAGING EMERGING MARKETS

How Multinationals Should Shape Their Emerging Markets Strategies

8 EMERGING MARKETS

#1 Using innovation to adapt to local markets

Product standardization is the possibility for a firm to offer a product with uniform characteristics that matches the needs of consumers in all markets. For a firm that strives to break into and develop their business in emerging economies, product standardization poses a problem because there are significant differences in consumer needs, income, and literacy to name a few factors. Hence, products that are targeted and sold in developed markets do not always translate into maximized profits in emerging markets. Even if the consumer needs of a product would be the same in all markets, a company needs to supply a similar product at a very low price in a low-income economy because of the price sensitivity of the consumers.

An example of this kind of cost-differential executed very well are the various global telecommunication service providers that offer similar services in their developed markets and in their emerging markets, but at a fraction of the price. However, most multinational companies struggle to reach the level of innovation necessary to truly experience success in emerging markets. When big firms try to innovate they tend to be slower than their local competitors due to organizational structures not being flexible enough and because of the sheer size of the firm. Another dilemma is that as soon as a firm have successfully innovated and brought a product to a local market, it is very tempting to believe that all emerging markets are homogeneous, and thus export the concept to another emerging market. Whilst this might work well, the product is possibly not capturing the full potential of the market. For any company, it is important to weigh relative advantages. On one hand, it is beneficial for multinational companies to build strong global brands with standardized products. On the other hand, they want to develop products targeted for local markets with specific consumer demand. An interesting example of a company who has succeeded in developing a product that works well in an emerging market is multinational brewer SABMiller. The company struggled with supplying a low-priced beer that could

attract additional consumers who would not be able to afford the conventional but relatively expensive SABMiller beer. For emerging markets, the company was able to produce beer from cassava, which is a local root crop that in Africa is taxed at a lower rate than conventional crops used for beer production. The result was an affordable beer that the local consumers enjoyed.

#2 Identifying and retaining local talents

At a new market, multinationals tend to struggle to get the right people at the right place within the organization. There is often a deficit of local leaders who have the skills needed to work both locally and globally and who understand both the local market and also the global operations of the firm. Often there is also a shortage of senior leaders, both home and abroad, with a truly global mindset, an understanding and experience of entering new undeveloped markets. A company faces strong competition for talent at all levels of seniority from both local and global competitors who compete for competent employees. Hence, it is difficult to find employees at all levels, and retaining them might be even harder. Successful executives in emerging markets might not be content working for the local branch of a global company and they might find other more attractive opportunities at local companies as these firms grow global. It does not matter if an executive leaves because he or she sees little possibility of upward mobility at the local branch or if he or she is poached by local competitors- the result is the same: a shortage of competent staff at the top.

In order to combat this problem, companies need to make sure that there are multiple ways for local leaders to develop and move up in the organization. One approach is to invest in training and development of local leaders and make sure to make the most use of them in the global organization. One way of achieving this is to use expat programs where potentials from emerging markets is stationed at the global headquarter. The expat programs can vary in length.

A company could also shift more responsibilities to functional or geographical hubs in emerging markets

instead of managing those markets from the head office. An example of this is the Cisco Globalization Center East in Bangalore. The leaders trained in Bangalore will account for 20% of Cisco’s senior leadership team in emerging markets. Equally important is to look over incentive schemes to make sure that they adequately motivate employees in emerging markets. If incentives are designed so that pay is aligned to a firm’s global performance, emerging markets that outgrows the global growth rate of the company will be de-motivated due to low payouts. A company could hence reallocate the global bonus pool to raise payouts in high-performing emerging markets.

It is also crucial to recognize cultural differences when it comes to the various kinds of incentives that employees value. In some cultures, workers would for example value high salaries and prestigious titles instead of long-term compensation packages such as pensions and stock options. Naturally, a good understanding of local compensation preferences is key when trying to attract the best local talent.

#3 Creating a globally coherent corporate culture and values

To function across different cultures can be a challenge for multinational corporations as cultural differences must be addressed. Strong corporate values that truly guide the everyday function of the enterprise can act as the glue that holds a global company together, speeds up decision-making processes, and improves employee attraction and retention. When the company values are communicated clearly by top management, behaving in accordance with these values will become intuitive even in remote locations far from the corporate headquarters.

The company values must also resonate with the personal values of the employees and the values therefore need to guide hiring decisions at all levels. To become cemented in the organization’s culture, everyone must be held accountable for living up to and demonstrating the company’s values in their day-to-day work. Because of this, values need to be incorporated into compensation and promotion decisions.

EMERGING MARKETS 9

#4 Assessing and mitigating relevant risks

Emerging market investments are exposed to additional risk compared to developed markets, including accelerated inflation, exchange rate fluctuations, adverse repatriation laws and fiscal measures, and macroeconomic and political distress. These elements clearly call for a different approach to investment decisions.

Unfortunately, the perception of the elevated risk leads companies to reject good investment opportunities and to underestimate the performance of existing businesses. What should be a clinical evaluation of a company’s many investment decisions become distorted, affecting even the analyses used to evaluate a project’s risk-and-return profile. As a result, analysts and business managers overestimate the risk premium, assigning it to levels that even substantial underlying risk would not justify. Addressing these risks correctly may therefore lead to better investment decisions for the multinational corporation.

#5 Creating credibility through transparency

This scenario plays out all too often in emerging markets: A company wants to get a new facility up and running as quickly as possible and assigns a manager to deal with regulatory obstacles. The manager meets with a local official that makes it clear that for $500 certain obstacles will be “resolved” and the project can move forward quickly. The payment would be illegal, but the company will gain millions in revenue by opening the facility sooner and the manager has thousands of dollars in bonuses riding on the project’s success. What should he or she do? Unfortunately, bribery is not uncommon in emerging markets. New York Times reported that a 2005 internal investigation at Walmart found evidence that executives in the company’s Mexican subsidiary paid more than US$ 24 million in bribes to officials in “virtually every corner of the country” to clear the way for the rapid expansion of the retail empire. Consequently, there are two factors that are in work. Firstly, local officials can tell when a foreign company is in a hurry to get things done, which they naturally

leverage. Secondly, local competitors may be “accustomed” to paying bribes, which gives a competitive disadvantage for multinational corporations (which wants to be bribe-free). The question remains, how can business leaders tackle this problem? Business leaders need to accept certain facts, e.g. that it takes time to set-up new facilities, projects, and businesses in emerging markets. Providing bonus rewards for quick delivery creates incentives for bribery. Instead, business leaders may want to accept the difficulties from the beginning, adopt a transparent business model, and be consistent and defend their policy of not accepting bribery. By doing so, it may provide long-term sustainability as the organizational values are protected and corporate scandals may be avoided.

#6 Go beyond country-level and build strategy at a granular level

A massive wave of urbanization is propelling growth across the emerging world. This urbanization wave is shifting the world’s economic balance toward the east and south at unprecedented speed and scale. It will create an over-four-billion-strong global “consumer class” by 2025, up from around one billion in 1990. Moreover, nearly two billion people will be living in emerging market cities. These cities will inject nearly US$ 25 trillion into the global economy through a combination of consumption and investments.

In order to accelerate growth in China, India, Brazil, and other large emerging markets, it is not enough, as many multinationals do, to develop a country-specific strategy. Opportunities in these markets are also rapidly moving beyond the largest cities, which often are the focus of many multinational companies. For sure, the top cities are important: by 2030, Mumbai’s economy, for example, is expected to be larger than Malaysia’s economy today. Even so, Mumbai would in that year represent only 5 percent of India’s economy, and the country’s 14 largest cities will be 24 percent. China has roughly 150 cities with at least one million inhabitants. The emerging markets cities’ population and income characteristics are so different and changing so rapidly that consumption of a given product category is forecasted,

over the next five or ten years by McKinsey, to range from a drop in sales to growth of five times the national average. Understanding such variability can help business leaders to invest more shrewdly and ahead of the competition rather than following others into the fiercest battlefields.

Conclusion

Emerging Markets will have a significant impact on multinationals’ growth prospects. The six core competencies as stated above will prove important for future business leaders who wish to capture these growth opportunities successfully, and lead their corporations in tomorrow’s business landscape.

Writer Farzad Khoshnoud / Louisa BrandtIllustration Xinga Li

10 EMERGING MARKETS

There is a strong consensus that China’s competitive edge is heavily dependent on being a low-cost manufacturer. This model can easily be imitated by other fast-growing economies with similar prerequisites. In order for China to take steps towards its ambitious aims, it should aspire to bring the design process to local grounds, instead of being a mere mass-producer. There are, however, recent trends indicating that China is indeed moving into a new, more innovative era.

UNLEASH THE

DRAGON

Innovation in China

EMERGING MARKETS 11

One can observe that innovation is growing in China in several ways and across numerous different industries; amongst the industries on the upturn are pharmaceuticals and telecommunication. Prominent examples are the mobile handset divisions of Huawei and ZTE, which historically have been regarded as low-cost producers. In contrast, they are now often seen as a combination of both low-cost as well as innovative, often producing products outdoing their high-cost competitors. Furthermore, China is forecasted to overtake the U.S. in absolute numbers of patents filed over the nearest future. Nonetheless, that is also where a part of the problem lies: not enough of the patents filed actually continue past the R&D phase. This is where the Chinese government can introduce measures in order to propel innovation.

The latest five-year plan

The government in China has the ambition of turning the country into a global R&D midpoint. It seems though that the goal is harder than what meets the eye. Scholars have different opinions on the best way to unleash innovation in China. Perhaps leaving it to the Chinese government to establish some ground rules might pave the way for a new innovation trend. This is

exactly what the

government in China did. A new five-year plan was outlined in 2011 concentrating on growth, industrial upgrading and promoting domestic consumption on a more frequent basis. In 2009, the domestic growth as a percentage of GDP fell from 45 % to 36 % compared to a decade earlier. The long-term goal is to establish a macro-environment that will boost domestic spending and subsequently work as an incentive for entrepreneurs. The expected effect is that low-end manufacturers to a higher degree find themselves pressured as high-value products become more desirable. The main aim of the plan is to shift the economy more towards domestic growth in order to boost the economy instead of solely depending on export.

Unleash the dragon

Fueling innovation in China is certainly not an easy task and there are several factors that need to be thoroughly considered. For domestic companies the key factors lies in promoting a more acceptable approach to risk-taking instead of the traditional top-down approach. Low-level initiatives are often frowned upon and employees are expected to be obedient. The immediate effects of encouraging a more freethinking

environment are obvious. We have seen several examples where

companies (e.g. Apple and Google) with innovative employees are doing great both in financial development but also in terms of self-fulfilling goals. Multinational companies on the other hand should have to intensify their understanding of the Chinese consumers and the retention of Chinese talents, who often pursue careers abroad. Multinational companies should try to create more attractive career paths by offering, on a more frequent basis, valuable positions abroad within the company but also establish an atmosphere resembling a community where loyalty is prioritized.

Even though there are some signs indicating that China might be moving into a more innovative era, a more accurate description of the situation is that there are many things that need to be in place before we can see a significant change. There has to be stronger focus on breakthrough technology instead of iteratively developing existing technology. Also, the government will be a very important player in order to unleash innovation, but the lead actors are going to be the multinationals and domestic companies.

Writer Sebastian HaqIllustration Lulu Zhang

UK ON THE WAY OUT OF EU?

Britain’s vicious quest for superiority could mean “BREXIT” happening sooner rather than later

MACRO 13

When people are busy talking about Greece’s exit from the Eurozone, one should take sight for the possible exit of the U.K. as a more serious issue. With close trading ties to the world’s largest economies, the question one should ask is if the Eurozone can cope with losing the U.K. as a source of wealth.

There is a lot to be said about the recent developments in Europe

with debts spiralling out of control and a recession glooming in each corner, but the ever increasing threat of “BREXIT” is nevertheless an unsolved issue that begs to be clarified if not conceptualised. The core of the discussion lies in the very heart of Britain’s soul – the immense need for power and control. Both within and outside coalition parties, there are voices arguing whether the European Union even make any sense at all for the U.K.’s public, with bailouts being funded by the taxpayers’ money.

The impact of a possible exit

One of the biggest concerns of the U.K. is that of how the markets within the European Union function. Long has it been evident that the U.K. favours a more open market structure within the union, rather than the more integrative approach as proposed by the various countries in mainland Europe. An exit from the union would be seen as a direct denial of the European treaty in which goods and services shall move freely within the member states, and this requires a cooperative behaviour. Thus, an exit from the union could impact the interdependences between the member

states as it would be severely weakened by losing a major trading partner. Furthermore, the U.K. is also important due to its overseas ties with both China and the United States, both in terms of politics and trade.

In terms of trade, it is perceived that the impact of an exit is far worse than the notion of market integration. In terms of the U.K.’s ten largest trading partners, eight of them are EU counterparts. Not surprisingly, an opt out from the union should mean enhanced hardship for everyone involved, as trading terms can change drastically. Many argue that trading will be on different terms with different trading partners, which could render in worse terms of trade. There are fears of the use of irrational trade barriers such as restrictions and tariffs. Stronghold industry

The U.K.’s finance minister George Osborne has expressed his feelings about the newfound Eurozone and consider it to be of illogical nature as it undermines the interests of individual nations. That includes the U.K.. Perhaps the fear comes in regards to the one industry that serves as the epicentre of British pride, namely the financial industry. The macroprudential rules and bank regulations, which are currently being implemented across Europe, affects the financial industry in Canary Wharf. It is not without saying that the U.K. will fight to protect this industry. The argument is such that the voting system within the union itself undermines the leadership of U.K.’s interests, with one single bloc meaning that one vote represents all the countries. Leaving the union would let

the U.K. to stand on its own feet and create its own rules and regulations, which could work in favour for the financial industry. The problem is that the backing from the whole continent in times of crisis will not be there anymore.

Sharing the pain for what?

Whilst other are willing to share the pain in order to get other benefits within the Eurozone, the U.K. has foremost been a primary critic of the Eurozone’s handling of the recent developments in regards to budget deficits and such likes. With U.K. winning the first battle of reducing the budget for Eurozone countries, one could argue that the threat of and exit can be viewed as a tactical move to strengthen its own economy. Alternatively, it could be seen as the faltering leadership by one of the foothold nations in the Eurozone agreement.

The future of the European Union without the U.K.

Although it is too early to determine exactly what a “BREXIT” would mean, there are still some concerns in regards to the recent developments. One such concern is that of losing a strong partner since the U.K.’s economy is important, with strong ties to emerging and growing markets. The most important effect on a macroeconomic level would be that of trade decline, rather than leadership issues, although German economy could step in, in a worst case scenario, and emerge as a saving grace. The question is whether this is viable as well.

Writer Samuel SiddiquePhoto Dave Kellam

INTERVIEW / INGRID BONDE 15

Ingrid Bonde, the CFO and deputy CEO of Vattenfall since May 2012, has recently made the journey from AMF Pension, a leading Swedish pension fund manager, to Vattenfall, a Northern-European energy giant. Capital Magazine had the delightful opportunity to meet Bonde in her energy effective office in Solna, Stockholm.

According to Bonde, the change from financial services to the

energy industry has not implied as many differences as people might believe at a first glance. One of the most striking similarities is that both industries deal with long investment cycles. Furthermore, both industries are highly regulated and under political supervision.

“Energy is the question of tomorrow. From my perspective, I feel excited to

be participating in creating the solution. Moreover, I am positively surprised of how similar the questions I dealt with at AMF Pension are with the ones I deal with now. They are more alike than I would have thought.”

“In the pension fund business it takes 30 years to know if an investment is good or not. That holds for the energy business as well - the business cycles are very long. We define our assets as short-term if they are 15 years to maturity. Normal assets are defined in the span of 40-50 years.”

As the new CFO of Vattenfall, Bonde believes that she can add value through bringing new perspectives and useful experience from her earlier positions. She highlights that what has made her the person she is today is not only her position as the CEO of AMF Pension, but also her previous experiences from both public and private organizations.

“My most important assets do not only originate from my time at AMF Pension. They have developed through my entire professional career, during which I have been switching between the public and the private sector. I have had various leading positions for almost 30 years now, and the experience that I have accumulated makes it easier for me to undertake different challenges of a large corporation.”

Bonde began her career at the Stockholm School of Economics (SSE), from which she graduated in 1982. Academically, the time at SSE opened up an opportunity for Bonde to study international corporate finance as an exchange student at New York University (NYU). This was a unique opportunity for a Swedish student, as such courses were not taught in Sweden at that time.

INGRID BONDE Insights on Leadership from the New CFO of Vattenfall

QUICK-FACTS

NAME Ingrid Anne-Sofie Åkesson Bonde

BORN 1959

CAREER

1982 First Chicago Bank

1984 Swedish National Debt Office

1987 SAS

1996 Swedish National Debt Office

2003 Swedish Financial Supervisory Authority

2008 AMF Pension

2012 Vattenfall (Current)

16 INTERVIEW / INGRID BONDE

What were the ambitions of a young Ingrid Bonde?

“She didn’t have very clear ambitions. I had a quite easy time learning new things in school, which in the 70’s was not always very positive. This resulted in the fact that my time in school was not very fun. When I began studying at SSE I met, for the first time, a lot of people that were quite similar to me. Socially, I had a very fun time at SSE.”

How did the studies at New York University affect your further career?

“It became natural for me to work within corporate finance. It became a comparative advantage to me, as the subject international corporate finance was not taught at Swedish universities at the time. I also got the opportunity to work in an American bank, which I enjoyed.”

So you didn’t have a clear career path in mind at the time of your university studies?

“A lot of what I have achieved in life has been much of a coincidence. However, I believe that it is no coincidence that I have remained where I am. I enjoy numbers, and

I believe that if you enjoy doing something, you will naturally excel. I started out in an industry that I liked, and consequently I did a good job. It is only natural that you remain in an industry that you like, and that you get new opportunities and new offers.”

Today, being the CFO of Vattenfall, Bonde stresses the importance of collaboration and teamwork. She claims that in her leadership there is always a will to achieve the goals by a joint effort, and that she never expects more from others than from herself.

“I can be quite tough and demanding, but there is a genuine will that we shall achieve something good together.”

What is your greatest driving force?

“I still enjoy learning new things. I really do. Also, if I see something that needs to be dealt with, I cannot resist the urge to do it.”

Being the CFO of Vattenfall, what is the most amusing part of your work?

“I feel that it is very exciting to learn about a whole new industry. Even if there are similarities with pensions, which make it possible for me to bring a lot of valuable experience, the problems are different. Additionally, I really enjoy working in

a technically oriented industry - there is a high concentration of engineers here.”

What is the difference between being a leader in a public and a private company?

“There is a surprisingly small difference, but what differs most is the language. Very few people move between the public and the private, so there exist a lot

of myths and misconceptions which are derived from the lack of translation and interpretation between private and public ‘languages’. As I have moved between the sectors several times, I can sometimes see myself as an interpreter.”

“I can be quite tough and demanding, but there is a genuine will that we shall achieve something good together.”

INTERVIEW / INGRID BONDE 17

How would your coworkers describe you as a leader?

“Maybe you shouldn’t ask me. I believe that it is a bit too early to tell from Vattenfall, because I started to work here relatively recently, but what is usually said is that I am demanding, but clear. There is no doubt about what I want and there is no hidden agenda. Everything is very predictable.

When it comes to personal values, Bonde has one special value that she wants to highlight in her leadership: respect.

“I believe that it is extremely important to show other people respect. We may not always have the same opinions, and unfortunately it may sometimes happen that a person is not perfectly suitable for a certain task, but we must always show each other respect. That is very important to me.”

Another value that is central to Bonde’s leadership is diversity, in the sense that

we should take advantage of each other’s complementary competencies. This is reflected in her view on education; Bonde emphasizes that when working with business we need a combination of skills, and it is therefore not too important if you have studied law, engineering or economics. At the same time, however, Bonde believes that it is valuable to have an academic degree.

“An academic education teaches you how to handle complex questions and how to structure yourself, as well as how to cooperate with others. I believe that what matters is not exactly what courses you have studied, but that you have managed to complete an academic

degree and that you have made that special journey. This gives you a certain self-confidence, which I believe is highly important for certain kind of jobs.”

Furthermore, before searching for a job

Bonde advices students to do some research about the employer and the culture of the company.

“I consider it important not only that you do something that you enjoy, but also to set yourself in an environment you enjoy. On one of my first jobs I had a great boss that believed in me and gave me challenging tasks. I was very lucky to experience this, since it gave me a certain self-confidence that has been valuable later in my professional life.”

Do you have any advice to recently graduated students?

“I believe that there is a point in doing something you enjoy, because then you will naturally excel. If you do something good and if you go the extra mile, then it will be noticed.”

Writer Farzad Khoshnoud / Louise GranathPhoto Xinga Li

“If you do something good and if you go the extra mile, then it will be noticed.”

18 ENERGY & COMMODITIES

The commodity industry is often subject to a high degree of scrutiny and discussion, whether it concerns pumping oil or genetically modifying wheat. New jobs, energy independence, and growth are arguments heard amongst those who promote hydraulic fracturing, a method to obtain fossil fuels that used to be too difficult to reach. However, this method has proved to be highly controversial.

Hydraulic fracturing or “fracking” is a method of obtaining natural gas and

oil from the sedimentary rock type called shale. Extraction is initiated by drilling a vertical passage down to the shale deposit; horizontal drilling then commences enabling extraction from a much larger area when compared to regular methods. After this, explosives are used to create small cracks within the rock formation. Lastly, a

mixture called fracturing fluid consisting of water, chemicals and sand is pumped in to increase the pressure resulting in the cracks to propagate, releasing the materials held within.

This method in itself is not all that new. However, recent developments in horizontal drilling and a higher price for oil has sparked an interest and the method is now often mentioned as something that could ultimately change the energy industry.

As of today, deposits of shale gas have been identified in a vast amount of countries with the United States amongst those who have been confirmed holding the largest deposits. The U.S. is currently also pioneering the commercial use of fracking. During the year 2000 shale gas contributed to about zero percent of their total natural gas production; in 2010 this number had increased to 23 percent, followed by 29 percent in 2011, and lastly 35 percent in 2012.

Estimates from the Energy Information Administration (EIA) predict that this upward trend is likely to continue. By the year 2035 as much as 49 percent of the natural gas produced in the U.S. could consist of shale gas, with the most optimistic predictions saying the industry will contribute with no less than 1.8 million new jobs by then.

Implications

The seemingly never-ending increase of shale gas production is impressing, but it has created a dilemma for U.S. politicians. Currently the price of U.S. produced natural gas is US$ 3.28/MMBtu (Million British thermal units), significantly lower than the natural gas produced in Europe and Asia, partially as a result of the large quantities now being available. As natural gas is used for a variety of purposes in the U.S., this gives the domestic industry an advantage in the global competition as the price of goods and electricity decreases due to cheaper energy.

On the other hand, companies producing natural gas from fracking now see smaller profits as the sales price is closing in on production costs. In order for them to increase their profits they need to increase the demand for their products. Currently the best option for doing so would be to increase export. The authorization of natural gas export is handled by the Department of Energy and they are the ones being forced to consider the implications such a move would cause. Either the Department of Energy limits the export, thus keeping the gas price in the U.S. low, hence benefiting the domestic market. Alternatively, they could allow more export and embrace

HYDRAULIC FRACTURINGChanging the Global Energy Landscape

ENERGY & COMMODITIES 19

the free market idea, though leading to a higher domestic gas price.

Complicating things further is the fact that the infrastructure required for increased exports would take time to build and expand. Exporting gas across the oceans requires the gas to be cooled to a liquid state, which enables it to be transported by ship. This is called Liquid Natural Gas (LNG) and requires cooling plants, specialized LNG-tankers, and facilities where the liquid is converted back to gas on the receiving end.

Global developments in fracking

Given the developments in the U.S. it remains to be answered why the shale gas revolution has not taken place to a similar extent on other continents where shale gas deposits have been confirmed to exist.

Finding a single answer explaining this would not be possible as it differs depending on where you look. In Europe, France has banned fracking due to fear of potential harm to the environment. Until recently this was the case in the U.K. as well where fracking was banned after it was shown to have caused two smaller earthquakes (the U.K. has now lifted the ban). It is argued that contamination of groundwater by leakage of fracturing fluids and methane gas pose a serious environmental risk and could ruin large areas of land for years to come. Even if shale gas would be profitable for France, the ban is said to stay in place

until progress is made reducing its potential risks.

To the east, Poland is in possession of the largest shale gas deposits on the European continent, believed to contain enough energy to potentially keep them self sustained for more than 30 years. This is interesting for a country which, together with many other European counterparts, is currently largely dependent on Russia for gas supply.

However, tests have proven that the geological factors in Poland are somewhat unfavourable for fracking as costs for obtaining gas from their deposits have been shown to be nearly three times as high as in the U.S. (this problem concerns not only Poland but most of the countries with shale gas deposits). If this continues to be a problem in the future it could shatter the Polish hope of becoming a major shale gas exporter.

Lastly, one must also take a look at China. The severe problems with pollution associated with burning coal could be dampened by using natural gas instead, a much cleaner energy source. There is definitely potential to make this happen, with estimates showing Chinese shale gas deposits to be amongst the largest in the world. One big obstacle to overcome would be the widespread problem of water shortage, especially in the northern parts of China. Fracking requires large quantities

of water, preferably naturally existing water close to the extraction site.

Fracking is here to stay

Despite the risks, fracking is here to stay. Discussions regarding the benefits in comparison to the environmental effects will continue but are not likely to halt the increasing interest. Instead, regulations will be put in place to a varying degree, depending on the possible future gains for each specific country.

Increased U.S. LNG export, said to commence around the year 2016 according to the EIA, would contribute to lower European natural gas prices due to increased supply. In combination with more extensive usage of fracking across the globe, this would also present buyers with additional options, resulting in, for example, reducing Russia’s influence over countries currently dependent on their gas. Even if the conditions for hydraulic fracturing currently seem to show less potential outside the U.S., it remains to be seen how things will develop over the coming years.

Writer Johan KällmarkIllustration Xinga Li

20 ENERGY & COMMODITIES

#4 Demand trendsAs developing countries

become wealthier both physical and speculative demand for commodities increase. Also,

there are trends in how much commodities are used in the

industry.

This article will focus on the futures trading of commodities, why there is a commodities market for this kind of trading. Also, factors affecting commodity prices in general as well as more specific factors for precious metals will be covered.

Exposure to commodities can be gained in several ways. A first option is to buy the

physical asset at a spot price and receive it immediately. A second option is to buy stocks in companies and funds that are exposed to the commodity. A third option is to buy a derivative, which has the commodity as the underlying asset. The advantage of buying a commodity derivative is that you do not have to worry about the storage and transportation of the physical asset as in the first option. Also, you will only be exposed to the fluctuations in the price of the asset and not other factors such as business risk, which you would have been if the second option was chosen.

The simplest of these derivatives are forwards and futures. The main difference between forwards and futures is that futures contracts are standardized and traded on open markets such as the Chicago Mercantile Exchange, whereas forwards are customized contracts between two counterparties traded directly between them “over-the-counter” (OTC).

Trading commodity futures

The main reason for trading commodities derivatives is hedging. Imagine you have 20 000 ounces of silver you want to sell in one month. Say the current price of silver is US$ 31 per ounce. If the price of silver would increase to US$ 35 per ounce in one month you would benefit a total of 80 000 dollars. However, if the price would instead decrease to US$ 26 per ounce you would lose 80 000 dollars.

Often companies want to hedge this kind of future earnings volatility. To do this they can short silver futures today. In doing this they enter an agreement where they promise to sell 20 000 ounces of silver at a pre-specified price in the future, for example at the current silver price. By doing this they have hedged for the uncertainty of future price movements. In our example above this would mean that you would sell you silver at a total of 700 000 regardless the future spot price of silver.

Writer Lennart WangIllustration Xinga Li

#1 Foreign exchange rates

As most commodities are priced in U.S. dollars,

commodity prices will fluctuate with the currency. For example,

if the dollar weakens, foreign currency will strengthen and

investors tend to invest more in dollar denominated assets

such as commodities.

#3 State of the global economy

In recessions investors tend to escape the stock markets and

try to find so-called “safe havens”. Commodities, and especially precious metals, are often seen as “safe havens”. So, in times of market turmoil or high

inflation rates, the price of precious metals, for example gold and

silver, tend to increase.

PRICESThe general forces driving the prices

in the commodities markets are the

following:

#2 Interest ratesThe attractiveness of

investing in commodities will depend on how much the rewards

from investing are compared to other investment alternatives, such as government bonds. If the interest rate is low there is less incentive to invest in federal or government paper, thus the

commodities prices tend to rise. The opposite applies when

interest rates are high.

PALLADIUMIs used in the auto industry and in jewelry manufacturing.

SILVERThe price of silver

is tightly correlated with the price of copper, zinc and lead since new

silver production is a by-product from the production of these

metals.

RHODIUMJust as platinum, the auto industry

relies on rhodium in the manufacturing process. Also,

rhodium is used in the manufacturing of glass in

flat screen displays.PLATINUM

Platinum can be seen both as a precious metal

and an industrial metal as it is heavily used in automotive

catalysts. Therefore, when analyzing the price movements

of platinum it is wise to keep a close eye on the auto

industry.

PRECIOUS METALS

specific driving forces

GOLDAs central

banks of many countries have large

gold reserves the price of gold is influenced by the increase or decrease of

these reserves.

INTRODUCTION TO COMMODITIESPrecious Metals

ENERGY & COMMODITIES 21

PLATINUMPlatinum can be seen

both as a precious metal and an industrial metal as it is heavily used in automotive

catalysts. Therefore, when analyzing the price movements

of platinum it is wise to keep a close eye on the auto

industry.

Nuclear power as a primary source of electricity has since ages been a controversial subject. Despite the disastrous outcomes such as in Fukushima and Chernobyl, the usage of nuclear power plants has evidently not shown any downward trend. Fueled by the notion of zero carbon emission statute, the question begs to be answered if we can predict any decline in nuclear power generation in the near future.

The use of nuclear power as we know it might be facing the beginning of the

end after a long era of ecstatic use as one of the world’s primary sources of electricity. The old adage of nuclear power being a clean energy source, with carbon emissions close to zero, is met by raised doubts about the security of nuclear power as a primary source of electricity, following disasters such as in Fukushima and Chernobyl. The contemporary debate mainly deals with health and safety, but there are other points that ought to be regarded as well, such as the cost of alternative energy sources, the policy making process, and other issues that have not been dealt with in detail.

Despite the concerns, facts suggest nuclear power is still quite strong, with nuclear power being one of the primary sources albeit with slight decreases in recent years. This has been offset somewhat by increased usage of natural gas; there are, however, concerns regarding these natural resources as many argue that the nuclear power still is and continue to be the most efficient and low cost production of electricity existing today. With the world facing the immense need of improving its infrastructure, the interdependence between railways, roads and other public utilities is heavily dependent upon energy sources being produced cheaply in order to be of beneficial for the public. An economically viable energy option

The supply and demand for electricity are not just governed by public authorities for private use, but also by large industrial manufacturers. As with many natural resources, the idea behind the usage of nuclear power plants can be found in the very nature of costs and benefits, in which the public view has been that low costs reap great benefits. The open understanding has also been that nuclear power is an emission free energy source. In recent years, this has been contested with the cost of disposal and waste. The main disadvantage with nuclear power plant investments mainly concerns the large upfront costs of building the plants and the long payback time for any one investment.

Recent studies suggests that in comparison with other natural resources, nuclear power plant costs in terms of capital and investments, are far less than other close substitutes. It is believed that the operating cost of nuclear power makes it a very good source for electricity generating purposes since once the plant has been built, the supply can be instantaneous and reliable. Vast array of options available – are none viable?

Considering the vast amount of options available instead of nuclear power, such as coal, wind, and solar power, the old adages of greenhouse effects and global warming lures in the background and one should ask if these substitutes are viable solutions at all. Also, the argument can be made whether nuclear power exhibits first-mover advantage when governments all over the world have spent lots of money in various nuclear power plant productions. The returns on such investments might surmount any proceeds in finding other alternative sources, as governments might want to be tied up to such investments many years to come. It is believed that this

w i l l h inder the process of finding a l t e r n a t i v e sources.

The future of nuclear power

Despite the cost savings associated with nuclear power plants, there are some initial concerns whether nuclear power is in a declining trend. Despite the huge processes involved in extracting electricity from nuclear power plants, there seems to be an agreement that costs comes to play when comparing different sources. Recent studies show that the total costs of nuclear power is as low as US$ 0.019/kWh, which is much lower than other energy resources. With such low costs, the demand for nuclear power will remain high and supply will always ensure the equilibrium outcome. With advances in technology and construction management, there are some voices that argue that nuclear power will be extracted in even far greater amounts as risks can be manageable for a foreseeable future.

However, the biggest argument for nuclear power plants is that of greenhouse emission and carbon footprint. In a recent study conducted by researchers at MIT, the scientist concluded that the use of nuclear power as a primary source will lower 1.800 tonnes of carbon emission in the future as compared to other closely related energy resources.

Writer Samuel SiddiqueIllustration Xinga Li

NUCLEAR POWERThe Great

Decline?

QUESTIONS TO THE BOARD

Q1. What’s your social role within the board?

Q2. What’s your future goal for KTHFS?

Q3. Trivia?

05 ASTRID GUSTAFSSON HEAD OF MARKETING

Q1. The big sister who is always right.Q2. Everyone at KTH knows what KTHFS is, what they do and would like to be a part of it.Q3. Addicted to social media.

09 AMADEUS WENNSTRÖM TRADING LAB

Q1. The confident leader to whom others turn for guidance.Q2. Raise the level of expertise of the members and promote excellence.Q3. Worship the sun.

Capital Magazine is delighted to introduce the 2013 Board of KTH Finance Society

01 ALI SANGARI CHARIMAN OF THE BOARD

Q1. The funny guy.Q2. To increase the number of opportunites for our members and to maintain as the premier student society of KTH.Q3. Excellent sushi chef.

08 ALEXANDER GUSTAFSSON CAPITAL MAGAZINE

Q1. Ambitious and relaxed.Q2. Help more students at KTH broaden their knowledge within their field of interests and getting in touch with companies and potential employers.Q3. Excessive coffee drinker.

22 KTHFS

01 02

05

08 09

03 NEHA PRAKASHMEMBER RELATIONS

Q1. I am the little sister in the group.Q2. To make KTHFS the largest and best student organization in Sweden.Q3. I am obsessed with coca-cola and I drink one can a day!

02 JOHN STEINKELLER VICE CHAIRMAN OF THE BOARD

Q1. Ultimately responsible for the marketing group and Capital Magazine team also assist the Chairman in major strategic decisions.Q2. Increase the number of members by 100% and the revenue by 50%.Q3. Volunteered as First Aid Responder for the Red Cross in Tel-Aviv.

06 ANDRE FLYKTCORPORATE RELATIONS

Q1. The tech guy saying stuff no one understands.Q2. To get technology as one of KTHFS main pillars.Q3. The only one with full beard to be elected to the board of directors!

10 FARHAD TATAR CORPORATE RELATIONS

Q1. The spontaneous guy with all the crazy ideas and suggestions.Q2. Increase turnover and the amount of KTH-students to recieve London offers.Q3. I can eat a 600g cheese n bacon burger anytime.

04 PETER TOUMACORPORATE RELATIONS

Q1. I’m the group’s padawan and provide a different perspective.Q2. I want to make it easier for students that are interested in finance to be more involved by demythifying the world of finance.Q3. My new year’s resolution is to be able to eat with chopsticks.

07 LOUISE LINDEVALLHEAD OF TREASURY

Q1. You can call me the organizier aka “Morsan”.Q2. My goal with KTHFS is to feed the member’s of our society with information and knowledge in purpose to prepare us for the business world.Q3. I like to play soccer and make people smile.

KTHFS.ORG

KTHFS 23

03 04

06 07

10

24 FINANCIAL INSTRUMENTS & TRADING

What has been the aim for societies through many decades has been to seek stability by reducing small variations (control prices, depress riots, etcetera) in a variety of fields - politics, foreign affairs, markets, and medicine. According to Nassim Taleb, an influential philosopher, author, and trader, the problem with this approach is that it actually creates more harm and a false sense of security where large risks become hidden in the system. In Taleb’s latest book, he brilliantly describes things that are fragile and contrasts them with the notion of antifragility, i.e. things that benefit from disorder. In this article we apply this concept on investing and discuss how one may take advantage of volatility.

Before the financial bubble burst, things seemed to look great - 2008

was to become a record profit year for many companies. Furthermore, in August 2008 the VIX index, which measures the expected volatility of the S&P 500, suggested no reasons for concern, showing a value of 18.81. If one were to believe in the market, everything looked great and

it was the perfect time to invest. However, we all know how this great story ended – with a massive stock crash, VIX peaking at 80, bank bailouts, and governmental rescue loans. Going with the trend poses serious risks and may result in the greater fool belief where one buys an asset in anticipation for selling the asset at a higher price, without considering the true value of the security. Here lies the irony – when volatility is low and the outlook seems great, one should err on the side of caution instead of investing heavily and being too optimistic.

Adding volatility to your cup of tea

To remedy this, one should learn to love volatility and take advantage of the great opportunities Mr. Market sometimes brings to an investor. To demonstrate, we will look at one of Warren Buffett’s investments. In 1973, Buffett bought The Washington Post Company when it was selling for US$ 80 million in the market and, according to Buffett, you could have sold the assets for more than US$ 400 million at that time. Apparently, Washington Post was trading at a substantial discount (around 75 percent) to its intrinsic value. What would have happened if the price had dropped rapidly to US$ 40 million? The stock’s volatility would most likely have increased as well as its beta. Moreover, many “pundits” would have argued the stock had become more

risky. Buffett and other value investors argue differently and here lies the beauty of buying in a volatile market: if the price declines, you have decreased the risk of overpaying and have greater upside potential. In effect, this should provide the same feeling as when you are shopping your favorite clothes at a substantial discount.

”Invert, Always Invert”

The mathematician Carl Gustav Jacob Jacobi has been quoted for saying “invert, always invert”.

As it has turned out, this contrarian thinking has been applied to most successful investment ideas in history. Often they have been a bet against the market and/or bought at depressed prices. In Michael Lewis’s book, The Big Short, one gets to know the people who profited from the financial crisis. One of these successful people was Michael Burry, a physician and former hedge fund manager. Burry bought CDS’s against targeted subprime deals, where he paid a modest premium of 2 percent annually. The reason for the low premium was that these securities were deemed to be safe. In the aftermath of the subprime crisis, Burry made a personal profit of US$ 100 million. This example shows the power of contrarian thinking and how an investor may benefit from volatility by buying insurance. So, why not just buy volatility friendly insurances?

THINK ANTIFRAGILE INVESTINGLet Volatility be Your Friend

FINANCIAL INSTRUMENTS & TRADING 25

Price is key

When considering whether one should buy insurance that gain from volatility, it always boils down to price. Consider the following real-life example: a student with a lousy car, worth some US$ 1 000, would probably be reluctant to buy full protection against theft and accidents if the premium paid were to reach a certain threshold, say US$ 500 per year. Likewise, protection in financial markets may prove to be expensive. In option markets, particularly after the stock crash in 1987, near term equity options show a volatility smile, meaning in-the-money and out-of-the-money options have higher implied volatility than at-the-money options of the same underlying, thus implying a higher price for the former options. For instance, buying short maturity put options to hedge against market declines and increased volatility may prove to be expensive and unnecessary. In contrast, longer-dated options on equities and indices show a reverse skew, i.e. in-the money calls and out-of-the money puts have a higher implied volatility than out-of-the money calls and in-the-money puts. Therefore the former are more expensive.

A strategy to employ

Taleb suggests one should employ a barbell strategy, i.e. put 90 percent in risk-free assets and put 10 percent in extremely risky bets where there is a “win all or get nothing”

potential. The 10 percent could correspond to several long dated out-of-the money call options. And here comes the key argument summarizing this article: even if out-of-the money call options will only be exercised when the underlying price is higher than the strike price, the option price will still benefit from increases in volatility even if the call option goes further out-of-the-money (since its delta is close to zero), for instance due to a market crash.

What about the price?

We have now constructed a portfolio that gains from volatility, but will the price justify the purchase? If the risky part of the portfolio consists of long-dated out-of-the-money call options, it is probable that the implied volatility is reversely skewed, meaning a cheaper price for this type of option. Further, if you buy this option in calm markets (low volatility) the options are generally cheaper and you get an even better price. However, you will lose small amounts of money most of the time since nothing happens, but when the extreme and adverse events do occur, your portfolio will gain in value! An easier way to gain from volatility would be to always equip your portfolio with a certain percentage of cash, say 20 percent. This cash amount works as a buffer; when volatility increases and a subsequent crash occurs, one is prepared to buy securities at depressed prices where the risk is lower and the upside higher. In this

way, volatility can indeed be your friend.

Writer Rasmus WimanIllustration Xinga Li

CENTRAL CLEARING

26 FINANCIAL INSTRUMENTS & TRADING

In a hundred years we might have a holiday in the autumn called the “Night of Fragility”. People will run down the streets, setting off fireworks and chanting “Remember remember, the fifteenth of September, ‘twas finance treason week”. It might sound like a joke but I think it is a valid point to raise. Let me explain why.

It all begun on the 15th of September 2008. It was the first trading day after

the historical bankruptcy of Lehman Brothers, the legendary investment bank. Policymakers were holding their breath waiting for the judgment of Mr. Market. To their astonishment the day started out quite reasonably and many allowed themselves a short breath of air. Little did they know that this was just the calm before the storm. On the 16th of September, American International Group (AIG), an American multinational insurance corporation, was unraveling and was later that night nationalized by the United States government. The N word of finance was broadcasted throughout the airwaves. Policymakers had to go to sleep that night with the feeling of something heavy in their stomachs and being all cold inside. In fact, it was probably the same feeling traders feel after they have lost major money and fear

being fired, though this was on an entirely new scale.

So what has this got to do with fragility?

Please bear with me. The problem was that little regulation existed for insurance companies, which allowed them to insure others’ debt, set aside minimal amount of collateral, and book the rest as profits. This had been, amongst others, the practice of a division at AIG for some time. They had insured more than US$ 440 billion worth of assets and posted little collateral. The dilemma was that if the government allowed AIG to fail, the insurances would become worthless and an intricate web of protection would disappear. This could in turn topple all major banks on Wall Street, which would effectively freeze the entire financial system.

Interesting but can you get to the point?

Please cope with me a little more. Fast forwarding a few years to the present, policymakers still remember the feeling they had back then. The nausea and sick feeling, like if they would vomit any second. So they pursue any means possible to prevent that feeling from ever returning again. One aspect of the AIG dilemma was that they had issued insurance on virtually every possible asset to almost all

major actors in the financial system. They were the spider in the web, so to say. It was impossible to untangle the web in time as the health of the financial system was rapidly declining.

So AIG was too big to fail?

Exactly, and the most favored solution to this problem was to create a mother entity of too big to fail: by forcing all OTC derivative transactions onto a Central Clearing Counterparty (CCC). The idea behind a CCC is that all open positions are netted and collateral is posted. If one member fails, the other members will cover the losses through the CCC. Since OTC derivative transactions constitute the majority of all derivative trades, policymakers are eager to move all OTC transactions onto exchanges with a CCC.

But what is the problem; it just makes derivative transactions safer, right?

It cannot, because of time. To explain this I will introduce a concept framed by one of my favorite authors, Nassim Taleb: the concept of antifragility. A system which is antifragile thrives on chaos as opposed to a fragile system. An egg is fragile; it will break if you drop it from a sufficient height. In comparison, imagine a packagethat is antifragile. That package might have a sticker on it saying “Antifragile,

FRAGILE SYSTEMSWhy a Central Clearing House for OTC

Derivatives is a Bad Idea

CENTRAL CLEARING

FINANCIAL INSTRUMENTS & TRADING 27

please kick”. UPS employees will punch the package all they can since it is good for the package. Note that this is not the same thing as a robust package; a robust package does not care. UPS people can be reckless with a robust package as it will not break, but it will not improve either, as opposed to an antifragile package. Thus we can introduce a scale, with “fragile” in one end, “robust” in the middle, and “antifragile” on the other end. Systems can be classified on this scale, though it is not as easy as it might seem. A mountain could at first look robust, but given enough time it will turn to dust. Nature is a good example of an antifragile system; it has remarkable survival abilities and when it is damaged it will come back with vengeance, given enough time. For example, take the asteroid which hit the earth and killed the dinosaurs. A tremendous event but now, 250 million years later, a new, much more dangerous, species of predators roam the earth, humans.

Cool, but what has this to do with CCC?

It is fairly simple actually: CCC is a fragile system. CCC got what is called a concave return. The system works for moderately volatile events. These events might knock out one member, but the CCC, and thus the system, will survive. This will decrease the negative effects of moderate volatility and

policymakers will pat each other’s backs claiming to have accomplished something great, leading to a feeling of safety. But this is just the fool fooling himself. In fact, we have traded away the problems of moderate volatility for the dangers of those once in a life time disastrous volatility periods. We have exposed the system by pooling all the eggs in the same basket, i.e. negative Black Swan exposure. The Black Swan concept build on the idea that one might observe 1000 white swans and extrapolate that all swans are white, but in fact black swans also exist, they are just rare. One recent example of a Black Swan event was the nuclear disaster in Fukushima. There was a massive amount of safety systems in place but nobody had thought about the risk of a massive tsunami. This happened even in the country that coined the word “tsunami”. By definition we cannot predict a Black Swan event, since then it would not have been a Black Swan event. What we can predict is that given enough time, all fragile systems fail.

That sounds quite gloomy, so what should we do instead?

We should learn from nature and other antifragile systems. We should change the way we view systems. We like to build big and massive when we want safety, i.e. higher capital requirement ratios, CCC etcetera. However, that is not the right

solution; no system can survive forever. We should instead construct them smaller and with failure in mind, so that we can try to control the inevitable crashes as much as possible.

I hope that policymakers will recover from their posttraumatic stress and realize the importance of this lesson of the financial crisis. I think the best thing to do is to instate a national holiday, “Night of Fragility” in memory of the events in 2008. Then we might remember, and we might even learn.

Writer Lukas MagnussonIllustration Xinga Li

28 FINANCIAL INSTRUMENTS & TRADING

Due to compliance reasons, many investors need to invest a certain portion of their portfolio in what is deemed as “risk-free” assets. The government bonds of the developed countries are the basis for what is considered the risk free rate. However, ageing populations, growing competition, and implicit government debt in form of pensions may soon make these ”risk-free” investments a great deal riskier than one might think.

Kyle Bass is a Texan investor, little known compared to the likes of

Warren Buffet, George Soros, or John Paulson. However, that may change soon. In 2006, Mr. Bass was amongst the small group of investors who realized that the U.S. was in a real estate bubble and bet accordingly by buying credit default swaps, essentially buying insurance against mass mortgage defaults. Since this was exactly what happened in the crisis that ensued, he was amongst the few (along with the aforementioned Soros and Paulson) who made a fortune on the crisis, and his fund Hayman Capital delivered huge returns to its investors.

This alone is not what makes Mr. Bass interesting; several people did predict the credit crunch of 2008. However, Kyle Bass went one step further. During 2007 he started investigating the debts of developed countries and, after some supposedly heavy number crunching, he came to the realization which the rest of the world only understood years later: Greece, Ireland and several other European countries would not be able to pay back their sovereign debts. As with the subprime mortgages, his fund Hayman Capital started investing in credit default swaps against the government

bonds of the countries he deemed most susceptible to defaults. Needless to say, these bets turned out to be highly successful as well.

Trouble ahead

The point of my introduction to this prominent debt expert above is not to admire what he has already predicted correctly, but to lend weight to his bold claims about the future. Mr. Bass firmly believes that Japan, France, and eventually the U.S., will be unable to sustain their government debts. Notably, Mr. Bass calls Japan a better investment opportunity than the subprime crash; so convinced is he of the nation’s eventual collapse. If any of this indeed happens, either due to inflation or simple default, the world will surely be put on its end and the measly one-point-something percent you get on the supposedly risk-free Japanese or U.S. government bonds will seem very low indeed.

A good read on this issue in particular, and the monetary system in general, is the relatively unknown book Paper Promises: Debt, Money and the New World Order by Financial Times’s journalist Philip Coggan. I will not give a complete recital of the book, but I do want to summarize the conclusions that Mr. Coggan reaches in his work.

According to Mr. Coggan, the developed nations, viewed as a whole, will not be able to repay its debts. This is largely due to the well known issue of ageing populations in the developed countries and especially due to the implicit government debts in the form of promises for the future, such as pensions and healthcare for the increasing number of retirees. Also, as the rest of the world is catching up, the developed countries cannot expect the advantage in

education, productivity and technology that has allowed it to stay on top for so long. Hence, some form of default will be the result in the end, either directly or indirectly in the form of inflation.

Macroeconomics affect investors

The attentive reader may now wonder why I, who is a member of this magazine’s Financial Instruments & Trading research team, would be interested in these macroeconomic questions. First of all, a lot of funds place a large part of their capital in government bonds as a risk free investment to counter it’s more speculative endeavor, so knowledge of these kind of risks is essential, even for the most quantitative of fund managers.

As a second answer, and also my final remark, I will provide a piece of history. In 1998, a well-known “quant-fund” which made profits from arbitrages (price discrepancies which can be exploited to guarantee a capital gain) was affected by a catastrophic event which made it impossible to acquire vital short term financing. Thus its arbitrage positions, which were certain to ultimately pay off, resulted in a loss of US$ 4.6 billion, nearly all its assets under management. The fund had to be rescued by the Federal Reserve and was eventually liquidated, even though its managers were world class economists, including a Nobel Prize laureate. As some may have guessed, the fund was called Long Term Capital Management, and the event which dried up the money markets was the default of Russia on its government debt.

Writer Hampus Engsner

RISKY RISK-FREE PROMISES You are Not Getting Paid

Enough for Risk-Free Bonds

The global recession of recent years has not only brought

countries to their knees, it has also made it quite a bit harder for us students interested in finance careers. For Swedish students, perhaps the most notable effect of the recession has been its impact on available employment opportunities. Since 2007, the financial services industry has started to employ massive job cuts, while at the same time reducing recruitment efforts. What then, can you as a student at the Royal Institute of Technology do to overcome these adversities in both the recruitment process

and in your future career? Capital Magazine has met up with someone who experienced the recession first hand at an investment bank in the City of London, but who eventually decided to move home for a full time position at one of the most prestigious firms in the business.

Would you please tell me a bit about your background?I have been interested in finance since my first years of secondary school, an interest that led me to apply to the Stockholm School of Economics, where I completed my bachelor’s degree in accounting and finance in 2011.

My interest in corporate finance crystallised while at SSE: I believe it is difficult to know if a job will suit you until you have actually tried it out. One of the most important aspects when selecting a career is trying to understand your role and your tasks on a day-to-day basis, and this is hard to asses from only listening to company presentations and attending company events. For me, the experiences that shaped my decision to work in corporate finance were my part-time jobs at Handelsbanken and ABG Sundal Collier, and an internship at Morgan Stanley’s Nordic Coverage group. In general I think that it is a wise decision to do an internship in the business before committing full-time to anything.

After completing my bachelor’s degree, I decided not to pursue a master’s degree, as I felt content with my education. At this point I had already landed an offer with Nomura’s Nordic Investment Banking Team in London. After 8 months at Nomura, last February, I left the company to return to Stockholm and an analyst position at Rothschild.

HOW TO SUCCEED IN THE FINANCE INDUSTRY

Interview with Marcel Gleichmann

INTERVIEW / MARCEL GLEICHMANN 31

You have obviously had a great start to your career, what would you say are some of the key factors to your success?The single most important factor for me is to be goal oriented and have a plan for where you are going with your career. At the same time, I think you have to be humble about the fact that some things are not up to you. Indeed, your success in an interview will depend on a lot of factors that are outside of your control. Maybe the interviewer is having a bad day; the team you are interviewing with is looking for someone with a specific background, etcetera. It is important to realise this and not be too upset when things are not going your way. In relation to this, another great skill to have is to be able to turn setbacks around, to see new opportunities. In hindsight, you will be able to connect the dots.

Furthermore, I believe networking is very important in the world of finance. When I was at university, I tried to establish connections with a lot of people at the type of companies I could see myself working for. Try to build relationships with several different companies; I still have connections I made at company events during university whom I meet up with every now and then for a lunch. You never know where your career will take you, not to mention where your contact’s careers will take them, so make sure to stay in contact with the people you get a good connection with. Simultaneously, I would advise you not to come across as too demanding – people in the business are generally busy and if you manage to meet up for lunch once or twice a year you should be happy.

When asking what is important to include on your resume, bankers and HR representatives alike talk a lot about extracurricular activities. What is your take on this?As for me, I was only involved in one career evening event during my time at SSE, but I do think that extracurricular activities is something you can leverage when trying to balance your CV. What I am saying is that if you have not had the chance to work part-time, try to instead use extracurricular activities to show your commitment to finance. At the same time, if you feel that you can do both, that is the perfect situation. Nevertheless, I think it is

crucial not to get involved without having a genuine interest, as anyone interviewing you will surely notice this. Finally I believe that many people (at least at SSE but I am sure that you have this at KTH at well) have a tendency to rush into these sort of things early on in their education, not realising that as you progress, you will get much better opportunities. Do not feel obliged to jump on the first thing that passes you by.

Lest talk a bit more about your background. You have worked for some of the biggest names in finance; what would you say are the main differences between working for Nomura or Morgan Stanley as opposed to Rothschild?Morgan Stanley, Nomura and Rothschild are indeed very different organisations. Morgan Stanley has a market leading position, Nomura is a smaller player trying to break into the European market, while Rothschild relies on an independent advisory model, long-term relationships and a strong heritage.

The two main differences, I would say, are the culture and how each of them works to gain new clients. Regarding culture, Morgan Stanley draws from its American background, often meaning long hours, hard work and a strict hierarchy. Nomura, on the other hand, is a Japanese company. However, Nomura entered Europe by acquiring much of what was left of Lehman Brothers. Therefore, some of Lehman Brothers’ entrepreneurial culture was still left. Rothschild, being an independent firm, has less of a hierarchical setup, with closer relationships among employees on all levels. The firm has one of the lowest personnel turnovers in the industry, so generally people are very secure in their roles.

Concerning my second point, Morgan Stanley, as one of the market leaders, will in many situations have an advantage when it comes to winning deals, as it can be easier for an executive to hire a well know adviser. If anything goes wrong with the transaction, at least he/she did not hire wrong firm to do the job. As a junior, you can expect work on deals, which is always great. When it comes to Nomura, they can be seen as “the new kid on the block”, and are not that established in Europe yet. Due to this, Nomura has to focus more on building relationships and reputation, meaning that

a substantial amount of my time went to pitching. The pitching was also made harder due to the fact that the M&A market was deteriorating. All in all, the market timing was bad when I joined Nomura and the general mood in London at the time was quite depressed. Rothschild, as I mentioned previously, has an independent model, long lasting relationships and a strong heritage, which leads to a lot of repeat business. Also, being independent results in a lower exposure towards adverse markets conditions. In bad markets, clients become increasingly aware and seek to avoid counterparty risk, meaning avoiding advisory firms which could be hit by a trading scandal or has aggressive balance sheet exposure. Rothschild is a great place to work in terms of continuous deal flow and stability through the cycle.

So you would say that one should definitely be aware of differences in culture when deciding where to start one’s future career?Absolutely, however, I should add that it is also important to be aware of the differences between different teams at the same bank. Sometimes, these differences are even greater than those in-between different firms; at the same bank, one team could have a strong work-hard-play-hard culture, while another has a softer approach. Here, I would like to highlight again the importance of internships in deciding where to work. Through internships, you get a feeling of a team’s culture – it is not a great idea to commit to a full-time offer only to find out that you do not fit in with your new team’s culture or way of working.

Finally, how do you see your future? Is your interest in corporate finance still as strong as when you started out in the business?

So far in finance, my learning curve has been very steep, meaning that I feel motivated to continue on my current path. My aspiration is to continue working for Rothschild as I feel that I have found a very strong platform on which I can grow and develop my skills and I have colleagues I enjoy working with.

Writer Farhad TatarPhoto Xinga Li

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