Indigenous Studies Elective - my reflection

Throughout the semester, various events and ideologies have been explored and discussed in class. The week that is chosen and will be discussed in this essay is the topic on ‘Media’ (Week 6), where the misrepresentation, stereotypes and images from media are analysed and illustrate the implications the Indigenous community had to go through. Through the understanding of various ideologies, such as ‘Peace Journalism’, as well as gaining knowledge and observing from different perspective (from an Indigenous perspective), the learning experience surrounding media will be discussed.

The media has portrayed a bias and misrepresented impression of the Indigenous community. This wrong portraying is particularly evident in Australian news media, such as the Australian and Sydney Morning Herald, where the Indigenous community are portrayed to be dark-skin coloured and of a lower socioeconomic class, even though it is not true. According to Bullimore, the Australian news media lacks in Indigenous voices or Indigenous voices were outnumbered by non-Indigenous voices in their news reporting (Bullimore, 1999). As of today, the Indigenous population is highly dominated by the non-Indigenous population, as there are only 3% of the Australian population identifying themselves as Indigenous (Creative Spirit, 2014). This creates an uneven ratio between non-Indigenous voices and Indigenous voices in news reports, as they would tend to be more bias and favourited towards non-Indigenous voices. This misrepresentation of the Indigenous community allowed me to see a new perspective, allowing me to see beyond the ‘facts’ presented and question the authenticity of where they are coming from, as well as the perspectives they were written from. Since 1972, the ideology of ‘Peace Journalism’ has been continuously developing, in an article that was published in 2011, it encourages voices of both the racial background that are being written and those that are involved in the articles (Mcmahon, 2011). This development is intended to help achieve a fairer position for both races and to assist with the matter of ‘cold conflict’, the conflict between two races (Mcmahon, 2011). Media is still pivotal to the transmission of information, but I believe it would require a renewed management system that incorporates ‘Peace Journalism’ into it’s daily reports. Without media and with the ever-growing advancement of modern technology, the spreading of information may be even worse as there could be very outrageous claims with a lack of authenticity. This could be particularly problematic for the Indigenous community as gullible audiences would believe any information that is fed to them, creating a very disadvantageous and hostile environment for the minority.

The main key issue with media is the stereotypes that are portrayed, a stereotype is a standardised assumption based on a first impression. These stereotypical misrepresentations can be dangerous and harmful to the Indigenous community, as it can lead to acts of racism, such as verbal or physical abuse. When the term Indigenous is mentioned in media reporting, they are usually revolved around the following terminologies ‘dark-skinned’, ‘alcoholic’, ‘violent’, or ‘low-level educated’ (Creative Spirit, 2014), leaving a stereotyped impression of the Indigenous community to the mass media. This understanding is shocking and surprising as I had realised the power of the media after looking at the news reports from another perspective, the Indigenous Community’s perspective. The news reports cover the truth and make them appear to be the “truth”, even though they are not, by consistently and continuously enforcing the same stereotypical reports to the general public. These stereotypes are formed by the images and stereotypical reports produced by the mass media. Images are a powerful instrument in representing what a photographer wants to convey. As said by Frederick R. Barnard, “A picture is worth a thousand words”, depicting the multiplicity of inferences possible from an image (Gary Martin, 2014). These inferences were discussed in a class activity, where various images were displayed and students were asked to infer from the images. One overlaying aspect was the sense of identity in these images, as it was commonly divided into fair and non-fair people, defined by their skin colour, hair colour, or language group. These images used in media consists of the Indigenous community in low socio economic work roles (Pattel, 2007), establishing and enforcing that misrepresentative identity. This identity should not be imposed, as “one’s [identity] is not determined by a single gene or gene cluster” (World Mysteries, 2011).  I believe that Indigenous Identity should not be judged by their skin colour, language, or how they were presented by the media. Their identity is who they believe they are, whether they are ‘dark-skinned’ and isn’t Indigenous or ‘fair-skinned’ and is Indigenous. Therefore, after this lesson, the reliability of description that are put with images and news articles are now being questioned.

The sense of identity created by media misrepresentations and stereotypes causes enormous problems, such as unfair treatment in education, job opportunities and physical or mental abuse.  The Indigenous and non-Indigenous lifestyle and culture are very different and would be very difficult to unify them into a single society.  However, assimilation of Indigenous to non-Indigenous society was being forced by government policies, such as the Education policy. This was particularly evident in the lecture with guest speakers (Week 2), detailing the horrific experiencing they had encountered. This experience should never have to happen to any individual as it is extremely traumatising and immoral. Even travelling to school usually is time consuming, encountering horrible acts of racism by the “White children”, making education a lesser priority and less appealing in attending school. The lack of identity, as well as forced assimilation (long commute to school), discouraged them from education,  providing support for the misrepresentative Indigenous stereotype. Hence, I believe that is why there has been a lack of involvement of Indigenous voice in the society. Indigenous people mostly live in remote areas with limited access to technology, even if there is Internet connectivity, there may be no power to run the computer (Australian Indigenous Health Info Net, 2013). That means it is very hard to use technology to bring awareness to the media and gain support, as it is primarily non-Indigenous voices. Even if Indigenous want to work in the media industry and bring awareness to the unfair situation, the required job opportunities as non-Indigenous people but not provided to the Indigenous people. This is primarily because of the stereotypes associated to the Indigenous community, which essentially acts as a loop, they were disadvantaged from the same job opportunities as non-Indigenous people.

Media has imposed a biased and incorrect impression of the Indigenous community to the general public. Misrepresentation via stereotypes and images were used to portrayed them in stereotypical situations, such as ‘dark-skinned’, ‘alcoholic’, ‘violent’, or ‘low-level educated’. I believe that this is primarily due to the lack of Indigenous voices that the media has purposefully disregarded. The media sector should have more involvement by Indigenous voices as it should be their responsibility to incorporate all voices in the discussion. This would help prevent ‘cold conflict’, minimising the harshness of media content and present honest and truthful news reports that reflect information from both perspectives. The Indigenous community is greatly affected from these media misrepresentations and would be affected negatively, such as emotional or physical trauma. Ultimately, I believe that Indigenous Identity should not be judged by their skin colour, language, or how they were presented by the media. Their identity is who they believe they are, whether they are ‘dark-skinned’ and isn’t Indigenous or ‘fair-skinned’ and is Indigenous. The main knowledge learnt from this topic would be the ability to critically analyse a situation, determining the quality, authenticity and reliability of the information presented. This would be beneficial for future endeavours as it would open up a new perspective whenever information is given. Additionally, from this unit, various common misconceptions were learnt, such as, Indigenous people being ‘fair’ and the horrific experiences in their past. I believe in the future, media should be more responsible for their actions, after the information being released and the effects the causes to those affected.

What is Quantitative Investing

1.1) Investing vs Trading

·         Trading = short-term strategy of buying and selling stocks, bonds, commodities, FX, derivatives, etc

o   Often intra day

o   Includes high frequency trading/algorithmic trading (these often have trading horizons of seconds or micro-seconds)

·         Trading strategies include:

o   Trend following

o   Pairs trading (E.g. BHP vs RIO)

o   Statistical arbitrage

o   Event arbitrage (E.g. around M&A, Earnings surprise, etc)

o   Mean reversion

·         Investing = longer term objective 

·         Investing may include:

o   Buying and holding an investment (E.g. stocks or bonds) for a long period of time (mths but usually for yrs)

o   Includes both active managers (whom seek to beat their chosen benchmark), as well passive managers (E.g. Vanguard)

1.2) Active vs Passive Investing

·         Quantitative Investing falls into the Active or Enhances Index Categories!!

·         Passive Managers

o   Believe that markets are efficient and so construct portfolios that replicate their chosen benchmark

o   Have negligible risk vs benchmark and typically charge very low fees (E.g. < 15bps – 15 bps = 0.15% of AUM)

·         Active Managers

o   Believe that they can outperform their chosen benchmark (otherwise known as adding “alpha”)

o   Usually charge much higher fees and carry much greater risk relative to their benchmark

·         Enhanced Index Managers

o    Get enhanced index products – which sit between active and passive in terms of risk and fees

1.3) Fundamental vs Quantitative Investing

·         Strengths: Fundamental vs Quant Investing

·         How can Fundamental Investors excel

o   Understand stocks in detail

o   Understand industry specific economics (E.g. Porter Analysis)

o   Able to predict certain types of future economic issues (E.g. Regulatory changes)

·         How can Quantitative Investors excel

o   Systematic exploiting know alpha sources (minimizes some analyst bias)

o   Universe breadth & hence scalability

o   Risk modeling and Portfolio construction’

1.4) Careers in Qualitative Investing

·         Quants come from two key areas:

o   Finance, Economics, Actuarial or Accounting backgrounds

o   Maths, Engineering, Stats or Computer Sciences background

·         Backtest these alpha signals in industrial scale databases, and implement these into production environment (for trading stocks)

·         Quantitative investing =

o   Longer term active investing approach that systematically exploits alpha signals (such as value, quality, momentum, and sentiment

o   Build and backtest these alpha signals in large databases, and implement these into a production environment (for trading stocks) using risk models and quantitative portfolio construction techniques

What do Venture Capital’s look for in an investment?

1.       Attractive market/industry

How to assess if a market is attractive?	Characteristics of an attractive market
Market size	Large market with many potential customers
Market rate of growth	High growth markets help businesses to grow revenues and are often positively correlated with profitability
Demographic, lifestyle or other trends	Trends which support the growth of the market
Regulations	Low regulation (but note regulation can also be a positive factor)
Impact of technology on the market	Market supported by technology trends (Sustaining vs. disruptive innovations)
Porter’s five forces	Generally low level of forces (customer bargaining power, supplier bargaining power, threat of substitutes, threat of new entrants and intensity of rivalry)

2.       Attractive business model

How to assess if a business model is attractive?	Characteristics of an attractive business model
Market position/competitive advantage	Defensive market position with clear competitive advantages. Potential for market leadership
Sustainability – Barriers to replication	Strong barriers to replication
Financial characteristics	Strong cash flow and working capital characteristics

3.       Experienced and entrepreneurial management team

How to assess if a management team is suitable?	Characteristics of a suitable management team
Experience and suitability	Business and technical experience to deliver on business plan
Entrepreneurial track record	Serial entrepreneurs or first time entrepreneurs with strong credentials
Appropriate alignment of interest	“Skin in the game” (E.g. significant shareholding in business, performance-based compensation)

·                           Are serial entrepreneurs more likely to succeed than first-time entrepreneurs?

o   First time entrepreneurs:

­   Driven by a personal passion

­   Can be obsessive and stubborn

­   May struggle to build a company around the product

o   Serial entrepreneurs

­   Experienced at building and running a company

­   May not be driven by a personal passion

­   May suffer from the “second album effect” (E.g. Puff Daddy)

o   There’s no difference, however industry experiences helps

4.       Attractive valuation/returns potential

·         Methods to value a company?
1.       NPV of discounted CFs (DCF): details way to look at a company, building a company in an excel model

Advantages	Disadvantages
Because DCF are so details, startups usually lose money and eventually it will make money – with a 10 year DCF a company can look at when will the company break-even (Make money)	It is really the product of your input – if put garbage into the DCF and garbage is going to be coming out
Sensitivity	Hard to predict short term for a startups so it will challenging to forecast the future
Good for infrastructure such as toll roads (where you have 20-30 years period and the owner is entitled to all the tolls that come to them – can be roughly valued)
Useful for resource companies (determining the amount of gold an metal and a certain percentage that can be extracted and the resources won’t last forever, so DCF can be used)

2.       Option methods: takes uncertainty into account

Advantages	Disadvantages
Can take uncertainty into account which you can’t explicitly with the other methods	Not really used in a particle investment world and it is really hard to explain to a startup founder

3.       Multiples: standardized the value of a dollar – compare companies across the industries (easiest method for startups always)

­   Enterprise value/EBITDA  (a negative value)

­   Price/Earnings (P/E) (also a negative ratio)

­   Enterprise value/Revenue (Mainly use this to value because startups earnings are generally negative so we don’t want to add more negative value to earnings)

·         VC valuation – Pre-money and Post-money:

o   Companies raise VC funding through issuing new shares to VC firm

o   Funding occurs in “funding rounds” (E.g. Round A, Round B, Round C; or Series A, Series B …)

o   Each funding rounds has a pre-money and a post-money valuation:

a)      Post-money valuation = the value of the company after the funding round

 (# of existing shares + # newly issued shares) * share price of funding round

b)      Pre-money valuation = the value of the company before the funding round

Post-money valuation – funding amount

o   Example 1: If a company has a pre-money valuation of $5million, and raises $3million in VC funding, it has a post-money valuation of $8million.

o   Example 2: Wizztech.com currently has 100, 000 shares on issue. It is seeking a raise $2.25 million in new VC funding at $150 per share in a series A funding round.

                                                              I.      How many new shares will Wizztech.com be issuing?

=$2.25m/$150 = 15, 000 new shares

                                                            II.      What % of ownership will the VC firm have in Wizztech.com?

= 15, 000/(100, 000 + 15, 000) = 13.4%

                                                          III.      What is Wizztech.com’s series A post-money valuation?

= (100, 000 + 15, 000)*150 = $17, 250, 000

                                                          IV.      What is Wizztech.com’s series A pre-money valuation?

=$17, 250, 000 - $2, 250, 000 = $15, 000, 000

5.       Clear exit path

·         VCs often look to sell their shareholding in a portfolio company within three to seven years

·         Exit timing may be driven by the requirements of the VC fund – many funds are 10 years closed-end funds

·         Exit options:

a)      IPO *

b)      Trade Sale/Merger *

c)       Wind-up/Liquidation (last resort)

The Black-Litterman (BL) Model - Expected Returns based on investor's view & market equilibrium

The Black-Litterman (B-L) model follows a complex portfolio composition approach developed by Fischer Black and Robert Litterman in 1990 (Idzorek4, 2005). This model uses the Bayesian approach to combine the views of an investor’s expected returns from various assets and the market equilibrium’s expected returns, generating a new and consolidated estimation of expected returns. By applying the B-L asset allocation model, it can alleviate the three major problems in MV models used above, “insensitive and highly-concentrated portfolio, input-sensitivity, and error in estimated mean” (Idzorek4, 2005).

The B-L model can mitigate the problem of input sensitivity via reverse optimization. In other words, by creating consistent mean-variance efficient portfolios based on a diversified market portfolio, reverse engineering the expected returns. Furthermore, the model primarily improves the estimation error in maximization by spreading the errors throughout the calculated expected returns. This is extremely beneficial, since the expected return is the most important input for mean-variance optimization (Lee5, 2000). This model also looks into a number of alternative methods to forecast and generate extreme portfolios, which include historical returns, risk adjusted equal mean returns, and non-risk adjusted equal mean returns. Extreme portfolios are portfolios that have large long and short positions when unconstrained, or they are portfolios concentrated with relatively small amount of assets when subject to long constraint.

The B-L model begins with an unbiased starting point, the equilibrium returns. The equilibrium returns are derived from the following formula using reverse optimization.

The risk aversion coefficient (λ) scales the reverse optimization estimate of excess returns based on risk, the greater the weighted reverse optimized excess returns per unit of risk the higher the estimated excess returns.

By re-arranging the first formula and substituting μ (any vector of excess return) for Π gives the second formula, which alleviate the problem of an unconstrained maximization: .

Using the second formula, the optimum weights for the portfolios can be found based on the expected excess return vectors calculated using the formulas abovementioned. The results of the new recommended weights is then calculated to compare the highest and lowest between weights based on the  different vectors.

The Black-Litterman formula is then introduced; it is the new Combined Return Vector (E(R)) as follows.

(Note: K represents the number of views and N represents the number of assets in the formula)

The next step is to translate an investor’s views into input for the B-L formula; this can be done through matrix. The variance of each individual view portfolio can be calculated. The scalar (τ) is comparatively inversely proportional to relative weight on Π, but process to determine the scalar (τ) is unclear. The calculated scalar value (τ) is normally set from between 0.01 and 0.05. This would allow the model to be calibrated and according to the target level of tracking error (Idzorek4, 2005. Once the scalar (τ) and covariance matrix of error term (Ω) is defined, this is inputted into the B-L formula to calculate the New Combined Return Vector (E(R)). The newly calculated results should now show that the weights of stocks are different from their original market capitalisation weights. Hence, it is recommended to add investment constraints such as risk, beta and short selling constraints to help alleviate the intuitiveness of the B-L model and generating a well-informed estimation.

It's all about the SWAP

Valuing in terms of FRAs

FRAs stands for forward rate agreements. It can be valued by assuming that forward interest rates are known, as it cannot be more than a portfolio of an interest rate agreement. There are three main steps to an FRA valuation. First, determine the forward rate using BBSW or swap zero curves. Second, find the swap cash flows based on the assumptions that BBSW rates found in the previous step is equal to the forward rates. Third, discount the swap cash flows to find the value of the swap.

A ‘Plain Vanilla’ interest rate swap is the most common type of interest rate swap. It is when one party (the payer) agrees to pay a fixed-rate of interest while the other party (the receiver) agrees to pay at a floating-rate of interest. They agree to make payments within the counterparties based on the increase or decrease of the floating interest rate. In most Australian interest rate swap agreements the floating rate will be based on the Australian BBSW.

There are potential benefits and risk for both parties. If the interest rate increases, the payer will benefit, as their fixed rate is unchanged and the receiver will owe the payer the difference between the fixed and floating rate. On the other hand, if the interest rate decreases, the receiver will benefit as their floating rate will be lower than the fixed rate, and then will be receiving the difference between the payer.

Generally between regular retail consumers and banks there are no fees or other direct costs associated with an interest rate swap. The price of an interest rate swap is the fixed rate of interest at which the swap is agreed between a bank and a customer. However, in regards to the relationship between financial firms and financial intermediaries, the cost associated with an interest rate swap is the swap spread. The swap spread is the difference acquired between the fixed rate of interest of a swap and the yield on a fixed-income investment holding with a similar maturity. Companies enter into swaps with the idea and intention to hedge risk on a particular cash flow which is dependent on their views about the fluctuation and volatility of interest rates. Prior to the commencement of swaps, firms believe that they are able to exchange comparative interest rates advantageously thus seeking to swap for a rate that would suit the needs of the firm more appropriately. A firm with a fixed interest rate may seek to swap the rate of interest with another firm with who is currently experiencing a floating exchange rate and similarly, a firm with a floating interest rate may deem it more appropriable to swap interest rates with a firm of a fixed nature. The swap spread on a given contract reflects the level of risk that is associated with the swap; the nature of the spread reflects the level of risk borne by the contract where the spread shares a positive correlation with the risk. As the spread widens, the corresponding risk increases, equally, if the spread between the two rates decrease, the risk therefore decreases.

A swap can be utilised to mitigate and hedge the cost of future borrowings. If a firm seeks to borrow X amount of dollars over a span of Y amount of years, a firm can utilise an interest rate swap to minimise the amount owing at the end of the time period. In a plain vanilla swap, a firm can choose to utilise either a fixed or floating exchange rate for the repayments of the particular future borrowing. A firm can speculate the possible future movements of interest rates and decide whether or not they will be financially advantageous using a particular cash flow. Whichever option the company decides, there will be a counterparty who seeks the opposite type of cash flow ready to engage in the interest rate swap. An interest rate swap acts as a powerful instrument to help mitigate risk during times of uncertainty, but it is integral that a firm carefully analyses their financial situation and the possible movements of interest rates before making any decisions.

“In an interest rate swap, financial institution as an intermediary exposes two types of risk, price risk and credit risk” (Gregg 1987). The reason for price risk is relative to the change in swap price. Usually a change in interest rate will lead to a gain or loss to the financial institutions. But price change is a small portion of a swap portfolio to intermediaries. For example, if AMX pays 10% fixed interest rate in exchange for a variable interest rate, a change in the market interest rate would lead to a change in the payments but no change in the payments it receives. Hence, there is a capital gain/loss just as use lower or higher fixed interest rate to exchange floating rate. However, to facing price risk financial institution always can offset risk from using futures market, such as hedge Treasury securities and future contracts.

The most common risk is credit risk. If the interest rate changes, one party will lose while the other party will profit by same amount. AMX as an intermediary can hedge against price risk, but it is possible that if one party defaults, then the intermediary loses the hedging value of against risk and could suffer a capital loss that mean the AMX has an obligation to support the swaps. However, no matter which side of end-users default in interest rate swaps, this should be called credit risk. Typically, intermediaries always are setting swap price and making portfolio diversification to against the credit risk.

The calculations are based on the swap where an AMX financial institution pays 10% p.a and receives three-month BBSW in return on a notional principle of $100 million with payment being exchange every three months. The remaining life on the swap is 14 months. The average of the bid and offer fixed rates currently being swapped for three-month BBSW is 12% p.a. for all maturities. The three-month BBSW rate one month ago was 11.8% p.a.

Time	Bfix CF	Bfl CF	Discount Factor	Bfix PV	Bfl PV
0.1666667	2.5	102.95	0.980487057	2.451217644	100.941143
0.4166667	2.5		0.951929232	2.379823079
0.6666667	2.5		0.924203186	2.131050797
0.9166667	2.5		0.897284693	2.243211733
1.1666667	102.5		0.871150233	89.29289891
Total				98.67765933	100.941143

The time periods are 2 months, 5 months, 8 months, 11 months and 14 months.

The cash flow of the fixed bond can be calculated:  2.5

The cash flow of the floating bond can be calculated as:

R_c= 11.8235%

Discount factor: e^(-11.8235%*2/12); e^(-11.8235%*5/12); e^(-11.8235%*8/12); e^(-11.8235%*11/12); e^(-11.8235%*14/12)

The present value of the fixed rate bond is 98.68 million and the present value of the floating interest rate bond is 100.94 million

Since the floating rate is received and the fixed rate is paid by AMX, the value of the swap is 100.941143-98.67765933= 2.26348Million.

Time	Fixed CF	Floating CF	Net CF	Rc	Discount Factor	PV of Net CF
0.1666667	-2.5	2.95	0.45	0.1669	0.9808	0.44136
0.4166667	-2.5	3	0.5	0.1183	0.9519	0.47595
0.6666667	-2.5	3	0.5	0.1183	0.9242	0.4621
0.9166667	-2.5	3	0.5	0.1183	0.8973	0.44865
1.1666667	-2.5	3	0.5	0.1183	0.8712	0.4356
Total						2.26366

Figure 2

The first row of Figure 2 shows the cash flow exchange in 2 months, i.e. 0.1667 years from now. In fact the value in 2 months had been determined already. The financial institution will pay a fixed rate interest of 10%p.a., a cash outflow (indicated as negative) will be 100 x 0.1 x 0.25 = $2.5 million. Floating rate on the other hand, by the set 3-month BBSW rate of 11.8% p.a. will lead to a cash flow of 100 x 0.118 x 0.25 = $ 2.95 million. Second row shows cash flow exchange in 5 months, i.e. 0.4167 years from now. Cash outflow is $2.5 million as before. As stated offer fixed rates currently being swamped for 3-month BBSW is 12% p.a. for all maturities, compounded quarterly. Hence the forward rate will be the same as 12% with quarterly compounding. Cash outflows hence becomes 100 x 0.12 x 0.25 = $3 million. The third, forth and fifth row shows similar, but the cash flow exchange in 8months, 11months and 14months respectively, i.e. 0.6667, 0.9167 & 1.1667 years from now respectively. Net flow is calculated through cash inflow less cash outflow, positive values indicate inflow and negative values indicate outflow. R_c, the rate of interest with continuous compounding, is determined through the equation R_c = mln[1+R_m/m], where R_m is the equivalent rate with compounding m times p.a..  Discounted factor are calculated through e^{-Rc x time} . Present Value (PV) of the period is calculated through Net Cash Flow x Discounted Factor. For instance,  PV_0.9167 = +0.5 x 0.8973 = + $ 0.44865 million. The total value of the swap is $2.26366 million.

The swap is valued at $2.26348 million by valuing in terms of two bonds and $2.26366 million. The values computed from both methods produce a similar answer with a difference of $0.0002 million. This difference could be due to rounding earlier in the calculations. Both methods of valuing a swap should produce the same value for the same interest rate swap.