World Cup fever has hit us hard here at Chatham. Our television screens, normally displaying financial news and world events, now show the beautiful game whenever a match is played. More than fifty of us have completed World Cup prediction brackets, with all entry fee proceeds going to a partner orphanage of our Polish office. Many of us would murmur silent assent to the late Pope John Paul II’s statement that of all the unimportant things, [soccer] is by far the most important thing. And while our hearts were broken when Belgium eliminated the US after unbearable extra-time drama, it’s hard to argue with one colleague that it’s the most wonderful time of every quadrennial cycle.
Yet despite our love for the game’s pinpoint passes, powerful shots, miraculous saves, and breathtaking goals, all set within glorious national pageantry, we cannot bear its incessant diving. In a game with relatively few converted scoring chances, many players and teams cannot resist the temptation to flop, and thus to create another goal-scoring opportunity, or to burn precious minutes off the clock when leading. With histrionics worthy of Overactors Anonymous, even some of the most highly skilled soccer players appear to have missed a theatrical calling.
Even more troubled by the diving phenomenon than we were, the Wall Street Journal commissioned a special study of the first thirty-two games of this World Cup. Their objective was simple: they wanted to understand “writhing time,” the period when players were “rolling around in pain, crumpling into a fetal position or lying lifeless on the pitch as the referee stopped the match.” But as we read the Journal’s comprehensive analysis of 293 faux injuries, we couldn’t help but marvel at the abundant risk management parallels that presented themselves.
Who is the fairest of them all? For those wondering which team qualified as world champions of rapid recovery from suffering on the pitch (over the first thirty-two games), it was the tournament hosts themselves, Brazil. The Seleção had 17 separate incidents of writhing time in just two matches! By contrast, Bosnia and Herzegovina only spent 24 seconds over a mere 2 “injuries.” Perhaps, the Journal reasoned, they are too new to the tournament to understand how it’s played. But we like to think that in the World Cup of ethical play, Bosnia and Herzegovina just might have been the fairest of them all.
You might be asking the same question when you go to execute an interest rate swap or cap transaction: which bank prices the closest to mid-market for the specific kind of trade I’ll be putting in place? Fortunately, Chatham has gathered tens of thousands of data points on that very question – having transacted on our clients’ behalf with major market-making banks in a variety of different instruments, strikes, and maturities, we are often able to given significant detail about the question: for this particular transaction, who will price the sharpest of them all?
Numbers never lie If writhing time were sincere, it would likely be experienced equally by both teams regardless of game situation. But if insincere, we would expect far more artificial agony for teams currently leading in the game and wishing to run out the clock. Sure enough, teams with a lead experienced 2.5x as many “injuries” and nearly 4x as much time in simulated suffering as teams that were behind! This correlation is overwhelmingly statistically significant.
Statistical methods aren’t merely useful for studying the beautiful game. We’ve also had clients and prospects approach us to analyze their historical FX spot execution quality with custodian banks. Given a statistically significant sample size of trades, and using just the bought and sold currency amounts and trade date, we can use statistical methods to demonstrate for clients whether or not their average execution levels have been reasonable. Depending on transaction volumes, millions of dollars can be at stake, the loss of which can produce real rather than artificial agony!
The whole story The most frequently falling player for Brazil during the first two matches was their wunderkind striker Neymar; he went down 5 times, and was always back on his feet within 15 seconds. So during Brazil’s quarter-final match, when Neymar fell clutching his back after being clattered into from behind, the casual fan might have been forgiven for suspecting insincerity. However, the referee carefully inspected the scene and then directly called for the stretcher-bearers; the grimace on Neymar’s face was unfortunately genuine, and his fractured vertebra means that his World Cup is over.
World Cup fouls aren’t the only place where first glances can be deceiving. Engaging an experienced advisor to take a second look at your hedging transactions can be helpful in understanding a counterparty bank’s rationale behind pricing as it does. For instance, if your lender/swap provider cites a specific justification for a certain swap spread, that justification may or may not have real merit. At Chatham, we’re trading in the markets every day they’re open, giving us an always-ready finger on the pulse of market pricing behavior – we’d be happy to listen to the rationale and give you our perspective, or discuss directly with a marketer on your behalf.
Global rulebook Players like Neymar excel not only in their superb play, but also in crafting their strategies in ways that properly acknowledge the rules of the game. Soccer has had the benefit of a single-rulemaking body, FIFA, and the rules have evolved over decades. Derivatives market participants have not been so fortunate. With derivatives reforms nearing completion in the US, rapidly catching up in Europe, and making significant headway in Asia and other jurisdictions, understanding overlapping rules has become a key challenge when transacting across borders. Chatham has stepped in to help clients avoid taking on the regulatory equivalent of red and yellow cards. We are helping clients understand and comply with new rules, helping to craft and implement strategies that take into account the many rulebooks now in play.
It’s been a wonderful month of World Cup soccer, and we’re sad to see it drawing to a close this Sunday. But even when the games end, risk management questions will still remain: Who is the sharpest pricer of them all for this structure? How’s the quality of my FX spot execution? Does the reasoning I heard behind the swap spread I was quoted make sense? Do my hedging strategies take new derivatives rules into account? If you’d like to talk about any of these, or just tell us your pick for the most watched sporting event in the world (the World Cup final), please give us a call at 610.925.3120 or email us.