But lack of trust and regulatory uncertainty means few businesses have fully committed. Here’s a look at where companies are in their blockchain journey, and four strategies for navigating this new world.
Signs of the new blockchain world
Tokenised everything The representation of real or virtual assets on a blockchain is spreading to raw materials, finished goods, membership rights, and more. These digital tokens will transform company processes and usher in new business models.
ICOs are self-funding the tech Initial coin offerings, in which a company sells a predefined number of digital tokens to the public, are a growing alternative to classic debt/capital funding. They’re raising billions of dollars for the development of blockchain technology platforms.
ERP + blockchain Enterprise software platforms that are the engine for company operations like finance are beginning to integrate blockchain. Using blockchain with their ERP systems, companies can streamline processes, facilitate data sharing, and improve data integrity.
New leaders emerge Our survey respondents still perceive financial services to be the current and near-term future leader of blockchain, but other industries are on the rise (see the diagram above).
It’s hard to trust blockchain
By design, blockchain can foster trust. But in reality, companies confront trust issues at nearly every turn. 45% believe lack of trust among users will be a top barrier.
The story of Q2 begins with a rally that saw the total value of all cryptocurrencies rise to $100 billion, up from $25 billion at the start of the quarter.
Another way to put it is that the total market value of blockchain tokens skyrocketed 4x to an all-time high above $100 billion.
ICOs emerge as ‘killer app’
ICOs helped propel this growth and established a powerful trend in Q2.
The supply of new tokens exploded and crowdfunding and investment returns stunned the world. (To track the escalating funding totals, CoinDesk even went so far as to launch its own dedicated ICO tracker, a free tool that tallies fundraisings via the mechanism).
One useful metric that underlines ICO dominance is how much more successful ICOs were versus traditional VC funding in the blockchain industry.
Mixed sentiment around ICOs
As part of the State of Blockchain, CoinDesk conducted a sentiment survey designed to leverage the insights of its global readership.
This quarter’s survey had over 1,300 respondents, and it served to capture the unease some investors felt as the blockchain use case took off.
In 2017, bitcoin’s total domination of the ecosystem shrunk considerably.
At the start of the year, bitcoin represented almost 90% of all the value in cryptocurrencies. By the end of Q2, that number tracked down to almost 41%.
France Stratégie, laboratoire d’idées public, a pour mission d’éclairer les choix collectifs. Son action repose sur quatre métiers : évaluer les politiques publiques ; anticiper les mutations à venir dans les domaines économiques, sociétaux ou techniques ; débattre avec les experts et les acteurs français et internationaux ; proposer des recommandations aux pouvoirs publics nationaux, territoriaux et européens.
Pour enrichir ses analyses et affiner ses propositions France Stratégie s’attache à dialoguer avec les partenaires sociaux et la société civile. France Stratégie mise sur la transversalité en animant un réseau de sept organismes aux compétences spécialisées.
Le département Développement durable et Numérique est chargé des politiques sectorielles (environnement, énergie, transport), du développement du numérique (technologie, implications numériques et sociales) et de leurs déclinaisons industrielles.
Il place, pour l’ensemble de ces sujets, le développement durable, en particulier la lutte contre le changement climatique et la préservation de la biodiversité, au cœur de ses préoccupations sans oublier pour autant la compétitivité industrielle et les questions de redistribution.
Dans le cadre de ses travaux, le département est amené à collaborer avec des organisations non gouvernementales, des universités et des entreprises ainsi qu’avec d’autres administrations et instances gouvernementales.
La blockchain, technologie sous-jacente à la crypto-monnaie Bitcoin, est inscrite à son programme de travail. Un groupe de réflexion ad hoc a été créé en vue de la production et de la publication d’un rapport à l’automne 2017.
The Global Financial Centres Index (GFCI) provides ratings, rankings and profiles for financial centres, drawing on two separate sources of data – instrumental factors and responses to an online survey. The GFCI was created in 2005 and first published by Z/Yen Group in March 2007. The GFCI is updated and republished each September and March. This is the twentieth edition (GFCI 20). 103 financial centres are actively researched. 87 financial centres appear in GFCI 20. The remaining 16 ‘associate centres’ will join the index when they receive sufficient assessments.
Many factors combine to make a financial centre competitive. We group these factors into five broad ‘areas of competitiveness’: Business Environment, Financial Sector Development, Infrastructure, Human Capital and Reputational Factors. Evidence of a centre’s performance in these areas is drawn from a range of external measures. For example, evidence about the telecommunications infrastructure competitiveness of a financial centre is drawn from the ICT Development Index (supplied by the United Nations), the Networked Readiness Index (supplied by the World Economic Forum), the Telecommunication Infrastructure Index (supplied by the United Nations) and the Web Index (supplied by the World Wide Web Foundation). 101 factors have been used in GFCI 20.
Financial centre assessments
GFCI uses responses to an ongoing online questionnaire1 completed by international financial services professionals. Respondents are asked to rate those centres with which they are familiar and to answer a number of questions relating to their perceptions of competitiveness. Responses from over 2,400 financial services professionals were collected in the 24 months to the end of June 2016. Of these 1,852 provided 23,006 valid financial centre assessments which were used to compute GFCI 20, with older assessments discounted according to age. More details of the methodology behind GFCI 20 can be found in Appendix 3.
Distributed ledger technology (DLT), more commonly called “blockchain”, has captured the imaginations, and wallets, of the financial services ecosystem. DLT provides transaction immutability, which is a key requirement for eliminating the need for an enforcer of trust in the ecosystem. Tamper-proof distributed data enables an environment in which trust is not an issue and allows counterparties to operate with a single version of the truth.
Traditionally, asset and transaction information was stored within physical books to independently reference previous actionsinternally and externally. As technologies advanced, physical books were translated into digital ledgers.
Today, every FI maintains its own digital “book of record” repository.
As a result, central intermediaries proliferate in the industry, providing unbiased reconciliation services to facilitate transactions between counterparties without requiring them to trust each other. For transactions executed internal to the organization, reconciliation is performed within lines of businesses.
DLT transformative potential
At its core, DLT is a growing repository of transactions organized in chronological blocks where the technology intrinsically makes changes to previous transactions functionally impossible.
DLT has been designed to replicate data among participating nodes in real time, ensuring all parties operate off of a single version of the truth at all times.
Financial services implications
Challenges information silos between market participants and eliminates the need for inter-firm reconciliation.
Disintermediates central intermediaries and reduces the fear of arbitrage within the ecosystem.
Enables audit trailsto be established for assets and transactions with a significant reduction in disputes.
The concept of distributed ledger technology — or blockchain as it is commonly called — has taken the financial services sector by storm, with venture capital and investment pouring into technology startups. Debate over blockchain’s promise, as well as its limitations, is ongoing. For every believer who says blockchain is the most revolutionary technology platform to emerge since the internet, there are skeptics who claim it is merely the latest tulip mania.
Nonetheless, a broad consensus is emerging that it represents a real innovation over many of the systems and processes used in financial services and banking today.
Our view of the credibility of blockchain technology is informed by candid discussions with clients, banks, exchanges, central securities depositories and existing market service providers. There has been an influx of attention and initiatives from market participants, including startups and newly formed industry consortia focused on driving technical standards and fostering collaboration.
While in the United States, the Depository Trust & Clearing Corp. is fielding proposals for a complete replacement of its credit default swap (CDS) settlement and reporting infrastructure, the Australian Stock Exchange is attempting to address changing regulatory requirements with a blockchain-based pilot. Regulators such as the Bank of England and European Securities and Markets Authority (ESMA) have published thoughtful commentary on the feasibility of digital cash and distributed ledger technology. Collectively, the tone of conversations has shifted from “Is this worth exploring?” to “How do we best engage?”
Financial commitments to blockchain are also growing. Investments in blockchain startups to date have reached $300 million, a figure that is growing swiftly. Investments totaled $125 million in 2015, and this has already been surpassed in the first half of this year. Although predominantly venture capital-backed, a handful of companies have attracted significant bank investment. Furthermore, we see growing internal spending by banks, which we estimate totaled $80 million in 2015.
Fundamentally, an option premium reflects two components: “intrinsic value” and “time value.” A number of mathematical models are employed to identify the fair value of an option notably including the Black-Scholes model.
Premium = Intrinsic Value + Time Value
The purpose of this section, however, is not to describe these models but to introduce some of the fundamental variables which impact upon an option premium and their effect.
The intrinsic value of an option is equal to its in-the-money amount. If the option is out-of-the-money, it has no intrinsic or in-the-money value. The intrinsic value is equivalent, and may be explained, by reference to the option’s “terminal value.” The terminal value of an option is the price the option would command just as it is about to expire.
When an option is about to expire, an option holder has two alternatives available to him. On one hand, the holder may elect to exercise the option or, on the other hand, may allow it to expire unexercised.
When an option is about to expire, it is either in-the-money and exercisable for a value reflected in the difference between market and strike price or, it is at- or out-of-the-money and has zero intrinsic value.
As such, the issue revolves entirely on whether the option lies in-the-money or out-of-the-money as expiration draws near. If the option is out-of-the-money then, of course, it will be unprofitable to exercise and the holder will allow it to expire unexercised or “abandon” the option. An abandoned option is worthless and, therefore, the terminal value of an out-of-the-money option is zero. If the option is in-the-money, the holder will profit upon exercise by the in-the-money amount and, therefore, the terminal value of an in-the-money option equals the in-the-money amount.
An option contract often trades at a level in excess of its intrinsic value. This excess is referred to as the option’s “time value” or sometimes as its “extrinsic value.” When an option is about to expire, its premium is reflective solely of intrinsic value. But when there is some time until option expiration, there exists some probability that market conditions will change such that the option may become profitable (or more profitable) to exercise. Thus, time value reflects the probability of a favorable development in terms of prevailing market conditions, which might permit a profitable exercise.
Generally, an option’s time value will be greatest when the option is at-the-money. In order to understand this point, consider options that are deep in- or out-of-the-money. When an option is deep out-of-the-money, the probability that the option will ever trade in-the-money becomes remote. Thus, the option’s time value becomes negligible or even zero.
An option’s extrinsic value is most often referred to as time value for the simple reason that the term until option expiration has perhaps the most significant and dramatic effect upon the option premium. All other things being equal, premiums will always diminish over time until option expiration.
In order to understand this phenomenon, consider that options perform two basic functions – (i) they permit commercial interests to hedge or offset the risk of adverse price movement; and (ii) they permit traders to speculate on anticipated price movements. The first function suggests that options represent a form of price insurance. The longer the term of any insurance policy, the more it costs. The longer the life of an option, the greater the probability that adverse events will occur … hence, the value of this insurance is greater. Likewise, when there is more time left until expiration, there is more time during which the option could potentially move in-the-money. Therefore, speculators will pay more for an option with a longer life.
CME Group’s Exchanges have offered options exercisable for currency futures dating back to 1982. Like the Exchange’s family of currency futures products, these options may be used as an effective and efficient tool to manage currency or FX risks in an uncertain world.
The purchase of an option implies limited risk and unlimited potential reward. The sale of an option implies limited reward and unlimited risk.
This post is intended to provide an overview of the mechanics of options on currency futures. Note that options contemplate the establishment of a currency futures position. These contracts are accessible through the CME Globex electronic trading platform.
What is an Option?
Options provide a very flexible structure that may be tailor made to meet the risk management or speculative needs of the moment. Options may generally be categorized as two types: calls and puts … with two very different risk/reward scenarios.
Two Types of Options
Call options convey the right, but not the obligation, to buy a specified quantity currency at a particular strike or exercise price on or before an expiration date. One may either buy a call option, paying a negotiated price or premium to the seller, writer or grantor of the call; or, sell, write or grant a call, thereby receiving that premium.
Buying a call is a bullish transaction; selling a call is bearish.
Put options convey the right, but not the obligation, to sell a specified quantity currency at a particular strike or exercise price on or before an expiration date. Again, one may buy or sell a put option, either paying or receiving a negotiated premium or price.
European-style vs American-style
Options may be configured as European- or American-style options. A European-style option may only be exercised on its expiration date while an American-style option may be exercised at any time up to and including the expiration date.
Profit/Loss for Call Option
The purchase of a call option is an essentially bullish transaction with limited downside risk. If the market should advance above the strike price, the call is considered “in-the-money” and one may exercise the call by purchasing currency at the exercise price even when the exchange rate exceeds the exercise price. This implies a profit that is diminished only by the premium paid up front to secure the option. If the market should decline below the strike price, the option is considered “out-of-the-money” and may expire, leaving the buyer with a loss limited to the premium.
Option buyers pay a premium to option sellers to compensate them for assuming these asymmetrical risks.
The risks and potential rewards, which accrue to the call seller or writer, are opposite that of the call buyer. If the option should expire out-of-the-money, the writer retains the premium and counts it as profit. If, the market should advance, the call writer is faced with the prospect of being forced to sell currency when the exchange rate is much higher, such losses cushioned to the extent of the premium received upon option sale.
Profit/Loss for Put Option
The purchase of a put option is essentially a bearish transaction with limited downside risk. If the market should decline below the strike price, the put is in-the-money and one may exercise the put by selling currency at the exercise price even when the exchange rate is less the exercise price. If the market should advance above the strike price, the option is out-of-the-money, implying a loss equal to the premium.
Buying a put is a bearish transaction while selling a put is a bullish transaction.
The risks and potential rewards, which accrue to the put writer, are opposite that of the put buyer. If the option should expire out-ofthe-money, the writer retains the premium and counts it as profit. If, the market should advance, the put writer is faced with the prospect of being forced to buy currency when the exchange rate is much lower, such losses cushioned to the extent of the premium received upon option sale.