Myth Busting - Football Finance

[MR_BEN]

You missed fixing currency - but apart from that a pretty good summary

By Fixing Currency - I mean, forward buying or selling of forex to ensure that the price you agreed on day one of the transfer is the price you pay / receive.

IE - say we sell Modric to Madrid for £30,000,000, and they are paying £10,00,000 per year for 3 years. Today, that would cost them €12,700,000 - but if the exchange rate was to increase to £1/€1.45 next year - then next years instalment would cost them €14,500,000.

To prevent this, you agree to forward purchase X number of euro's on X dates, at todays rate, less a certain % which is linked to countries interest rates. However - you usually cannot do this more than 1 year in advance, hmmm.... wonder how that works?

 

[wishkah]

You missed fixing currency - but apart from that a pretty good summary

By Fixing Currency - I mean, forward buying or selling of forex to ensure that the price you agreed on day one of the transfer is the price you pay / receive.

IE - say we sell Modric to Madrid for £30,000,000, and they are paying £10,00,000 per year for 3 years. Today, that would cost them €12,700,000 - but if the exchange rate was to increase to £1/€1.45 next year - then next years instalment would cost them €14,500,000.

To prevent this, you agree to forward purchase X number of euro's on X dates, at todays rate, less a certain % which is linked to countries interest rates. However - you usually cannot do this more than 1 year in advance, hmmm.... wonder how that works?

you can go 2years out on most G10 currencies, but as you indicate you would be massively hit on the forward points (although GBPEUR is very flat at the moment).

some use barrier option structures to match the cashflows, others you agree to do at spot for a fixed margin. i prefer the option as you can utalise the time value of the options to outperform the wieighted average forward.

 

[Stoof]

You missed fixing currency - but apart from that a pretty good summary

By Fixing Currency - I mean, forward buying or selling of forex to ensure that the price you agreed on day one of the transfer is the price you pay / receive.

IE - say we sell Modric to Madrid for £30,000,000, and they are paying £10,00,000 per year for 3 years. Today, that would cost them €12,700,000 - but if the exchange rate was to increase to £1/€1.45 next year - then next years instalment would cost them €14,500,000.

To prevent this, you agree to forward purchase X number of euro's on X dates, at todays rate, less a certain % which is linked to countries interest rates. However - you usually cannot do this more than 1 year in advance, hmmm.... wonder how that works?

Baby steps, MR_BEN.

 

[Stoof]

(I've moved the LIBOR stuff to a separate thread in the Discussion/Debate forum).

 

[JimmyG2]

Lend us a tenner Stoof.
Proof that if you shut up and listen for long enough
you can learn something every day.

 

[sloth]

what you need to understand is if banks had a currency, (corp banks not investment) it would be RISK. so why in hell would we do these products for a pompy or a rangers. its quite clever, and something Stoof correctly hit, when you actually guarentee your own payment. but in rangers case who can you cry to when you owe yourself.

the banks have something called a PG/DG/RATING which is very simply how close you are to default. 1 is v strong, 21 is pomey. if, on the invoice discount, i was to discount a rangers cashflow. i might charge 80% commission as i have no belief i would get the funds.

where, if you are to think slightly outside the box, spurs go well. is that DL always leaves the club in good stead, so why, as his relationship contact in a bank, would i not lend to DL (thats not my job btw). but you get my point.

lend to DL - cool. Lend to Rangers = NOPE - and when i say lend i;m talking about the bank making an exposure to pompy via product, not cash per se.

Is this right then... a club which pushes the boat out a bit beyond what is sensible on this transfer or that, or maybe though a couple of windows, is not only risking paying over the odds for sub-standard players a la Liverpool last season, is not only in material terms leaving itself with less dosh with which to purchase future targets, but is also likely to increase the cost of these products of which you speak, loan guarantees, LOC's and the like, which in fact means it's putting an additional premium on all future dealings?

Put in terms I'd relate too, the worse your credit rating the higher the cost of borrowing, and since every transfer requires you to borrow from the bank (in the form of these financial products you speak of), then Levy's 'penny pinching', reduces the Bank's Premium on every transfer made. Spurs is like the UK (AAA and all that) and can borrow very cheaply as long as it keeps to the constraints, West Ham will be more like Spain or Ireland (BBB) and have to borrow expensively, even if it's trying now to keep to the constraints. Which it isn't

 

[JimmyG2]

Same old story, the people who can borrow cheaply, or at all these days,
are the people who don't really need the money
And money shall be given unto money unto the fourth generation.
In desperate need? let me help you become even poorer.
And the poor shall inherit the earth, but not in this world.
There seems to be a log jam in that eye of the needle ahead.

 

[nailsy]

Good work Stoof

 

[Hoopspur]

Cheers guys. I hope your mum had a better understanding than I did. I thought I understood previously but I am now getting more confused - this discounting etc.

Don't re attempt to explain to me. I'll just accept the player!

 

[The Apprentice]

You'd never get Waddle for 15 million.

 

[MR_BEN]

Cheers guys. I hope your mum had a better understanding than I did. I thought I understood previously but I am now getting more confused - this discounting etc.

Don't re attempt to explain to me. I'll just accept the player!

I know u don't want it explained but meh... Discounting is used in many businesses - I have used it myself in a number of companies.

Basis is - you can have all the sales, or all the stock in the world - but without cash your business won't survive. So effectively the bank are providing you with an overdraft facility on the basis that you have made a sale and will be getting the money at a later date.

You can do this on all, or just selected sales. And you can include stock if your agreement allows it too. It's a good model, and fairly low cost.

It's currently keeping HMV afloat - and kept woolworths going for years beyond its means too. I'm sure many football clubs would not survive without it.

 

[Hoopspur]

I know u don't want it explained but meh... Discounting is used in many businesses - I have used it myself in a number of companies.

Basis is - you can have all the sales, or all the stock in the world - but without cash your business won't survive. So effectively the bank are providing you with an overdraft facility on the basis that you have made a sale and will be getting the money at a later date.

You can do this on all, or just selected sales. And you can include stock if your agreement allows it too. It's a good model, and fairly low cost.

It's currently keeping HMV afloat - and kept woolworths going for years beyond its means too. I'm sure many football clubs would not survive without it.

This assumes that your commodity has an actual value I take it? I would expect Spurs or any other company to take out insurances against the lowering value of this stock through unexpected changes in the market? Let's call it the Bentley Effect for now.

Anyway, all these different criteria and stages all get charged by the banks are varying degrees of interest I take it.

 

[MR_BEN]

This assumes that your commodity has an actual value I take it? I would expect Spurs or any other company to take out insurances against the lowering value of this stock through unexpected changes in the market? Let's call it the Bentley Effect for now.

Anyway, all these different criteria and stages all get charged by the banks are varying degrees of interest I take it.

Yes, the bank charges, of course. lol. The bank ALWAYS charges.