I wrote this piece a few months ago and submitted it to a literary magazine. Sadly, it was rejected so here it goes. I'd like to think that I've come a long way as a writer since I wrote this and I hope to do a lot better in the future. At the time, I envisioned this one being a middle chapter in a novel.
-Imran
-Imran
--------------------
 |
| Image is the property of CryptikFox |
“Is this for real?” Tyler repeated, “It just seems too good to be true.”
“Theoretically something like this shouldn’t exist,” I pondered, “But we all know how seldom theory translates into practice.”
The team’s manager, Harold, scratched his balding head at his desk. It was strange to see Harry so apprehensive; I was so used to hearing him punctuate the air with his catchphrases and witty one-liners that seeing him worried about anything made me feel the need to worry too. Usually it was I who was the devil’s advocate, always shooting holes in everyone’s strategies, playing the role of the eternal sceptic. But this time, not even I could find a mistake in our plan.
“Yuri, run those numbers again,” Harold shouted off to the man hunched over his keyboard in the corner. Yuri was the programmer or ‘risk simulation engineer’ as the men upstairs preferred.
“Running the simulations again, sir,” Yuri called to us. There really had been no need. I’d done the hard calculations myself under the most skeletal of assumptions. On paper, any quantitative tool in the world would tell us that the plan was perfect. Every scenario played out in our favour, even the worst cases had us raking in absurd profits. Perhaps that meant that any problem might come from outside of our control. Maybe that’s what was so worrisome; it was safer to fear the known than the unknown.
“One hundred thousand simulations completed, sir,” Yuri called, “One hundred thousand out of one hundred thousand lead to a positive net outcome. The only way we could lose money on this one is if the world ends.”
That was the third time we’d run the simulations today alone; the results didn’t seem to pacify Harold one bit. Maybe it was a bit like chasing a rainbow: if you ever managed to find that pot of gold at the end you would have to keep pinching yourself just to convince yourself that it wasn’t going to disappear.
Harold sighed and raised his head to look at me, “You know if this works out,” he started with the faintest glimmer of hope, “Then, Vigo, you are a genius.”
I smiled, “Please sir,” I answered, “Tyler was the one who spotted the opportunity.”
“Yes but you’re the one who figured out how to take advantage of it,” Harold replied, “You’re the one who made the impossible, possible.”
“Let’s save the congratulations for the end of this thing,” I answered, looking away, scratching my neck, “Let’s not get carried away until we have the results.”
My eyes shifted uncomfortably to Tyler seated at the right side of Harold’s desk. Since we’d entered the room I’d felt his eyes boring into me, making me feel unsteady and uncomfortable. More often these days I’d caught him glaring at me from across the room or whispering in hushed voices to our colleagues and then quickly becoming silent as I neared them. I hated having to feel anxious around Ty. He was a good man, he had looked out for me so many times before, I reminded myself. And yet since the two of us had joined Harold’s team and my reputation had grown, I’d felt a distance, ever so subtle, forming between my friend and I. I sighed.
The annoying humdrum of the telephone interrupted my thoughts. Harry snatched it up.
“Who’s this?” he grumbled into the receiver.
…
“Ah Mr Erikson, so nice of you to call. I was just going to give you a ring myself.”
…
“Yes.”
…
“Yes.”
…
“I’ll get on it right away.”
…
“Alright.”
…
“Alright.”
…
“I’ll see you soon.”
Harold discarded the receiver with a sigh, “Christ, not this idiot again.”
“What’s the problem?” I asked.
“It’s that goon upstairs,” Harold complained, “He wants me to go up there and explain why all that cash has just gone out of our portfolio.”
“So what’s the problem, boss?” Tyler asked, “It’s a good strategy, isn’t it?”
“It’s not the strategy,” Harold lashed out, “It’s that buffoon who’s supposed to be ‘managing’ us. He doesn’t understand a Goddamn thing about derivatives or hedging or speculating or about anything we do here. That kid is so daft he can’t tie his own shoelaces but every time I make even the smallest change, he calls me up and I have to answer to him.”
“How did someone like him even get that position?” I asked.
“His name is James Erikson,” Tyler answered me coldly, “As in, the son of Stefan Erikson from the board of directors.”
“That explains a lot,” I answered.
“It’s worse than explaining the stock market to a five year old,” Harold ranted, “At least the five year old will admit they don’t understand. Christ, I don’t have the energy for this.”
I considered something for a moment before replying, “Tell you what, sir,” I told Harry, “Why don’t you let me go up and talk to him. I’ll take care of it for you.”
Harry looked at me gratefully, “Would you please?” he asked.
“Sure,” I replied, “I’ll take care of it.”
“The man is a complete airhead,” Harry warned, “I don’t think he can spell ‘investment’ let alone tell you what one is.”
“I’ll be nice,” I smiled.
“Thanks a million Vigo,” Harry sighed, “I mean really, I need a drink or something. This whole thing is either going to make us all insanely rich or turn us into the laughing stock of the industry.”
“I don’t see it why it can’t be both, sir,” I teased, grabbing my jacket off the chair; “I’ll be back soon.”
“By all means,” Harry called out to me as I left, “Take your time. We’ve got plenty of that for the next six months.”
I hurried out of our department office and into the elevator. I’d just felt like I needed to get away for a bit. Between Harold’s overly pessimistic paranoia and Tyler’s piercing eyes, the atmosphere amongst us had quickly turned from its usual jovial state. It was funny in a way. The first genuine arbitrage opportunity anyone had found in years and instead of jubilation and excitement, everyone was wracked with worry.
*******
“I’m here to see Mr Erikson,” I told the young blond secretary dolled up and sporting an ear piece, “Harry Wilcox sent me.”
“Just a minute,” the secretary replied, buzzing her boss, “A Mr Vigo from Harry Wilcox to see you, sir. Should I send him in?”
After a short pause, the secretary answered me, “Mr Erikson will see you now. You can go right on in. Have a nice day.”
“You too,” I waved to her, walking over to the door. ‘James L. Erikson MBA’, it read, ‘Head of Speculative Investment Division’.
The door opened in front of me to reveal man in his late twenties beckoning me in. He had short oiled-up brown hair and his tailored suit seemed horribly mismatched; it was grey and he wore it with an ocean blue shirt and a striped pink tie.
“Iker Vigo,” I introduced myself, extending a hand, “Harold sent me to answer your call?”
Erikson took my hand, looking somewhat confused, “Sure, sure, nice to meet you,” he stammered, “Right this way, Mr Vigo.”
As Erikson lead me to a chair, I took a look around his spacious office with its subtle blue carpet and its darkwood furnishings. Behind his desk was a magnificent view of the cityscape, the gleaming green lights of Faith’s Towers visible in the distance. In the corner of the room was an impressive flat-screen TV, at least 50 inches. In the corporate world, we’d say that Erikson had made it; he’d worked his way up and now he was on the gravy train. But his desk, told a different story. It lacked any kind of report or paperwork; instead it was littered with desk toys, playing cards and what looked suspiciously like a Spider-man comic hidden under an empty ring binder.
“So,” I broke the silence with a smile after Erikson sat down, “What can I do for you, sir?”
“Well,” he started, “Usually before Harold does one of his big transaction things, he lets me know about it. But then today I just heard that twelve million dollars of the company’s money was spent and I got a little concerned.”
I started to reply but Erikson cut me off.
“Look,” he continued, “I know you guys in Harold’s team are big boys and you can take care of yourselves, but I’m just following company policy. When the directors or the CEO ask me what my teams are up to, I need to be able to tell them. You understand?”
“I understand,” I nodded.
“So first thing,” Erikson asked me, “Why did you guys spend twelve million dollars of the company’s money on wheat?”
I nearly burst out laughing when Erikson said that. His confusion combined with the outlandishness of our plan just made the whole thing seem comical.
“Are you guys going into farming or something?” Erikson asked, “Or is that one of your new complicated investment derivables or something?”
I ignored Erikson’s misuse of terms, “No, sir, we really did buy twelve million dollars’ worth of grade A wheat. But we aren’t going into farming. Wheat is a tradable commodity and one of our team members found a legitimate arbitrage opportunity yesterday morning. We found a way to take advantage of the delayed market reaction to exploit it. I’m sorry that we were unable to inform you sir, but within fifteen minutes of us acting on it, it had disappeared entirely.”
“Hold on a sec, hold on a sec,” Erikson interrupted me, “Can you run that by me again?”
“Ok sir,” I asked, “What part of it isn’t clear to you?”
“Well,” he started, “Can you just take it from the top? Like explain it in layman’s terms. Like what you guys are doing and everything?”
“Are you familiar with arbitrage opportunities, sir?” I asked, my eyebrow raised.
“Well kind of,” he shrugged, “Sort of, I guess.”
“Risk free trading profit from the mispricing of assets?”
“Look,” Erikson interrupted me again, “I’m more of a big picture guy so there’s no reason to use such technical terms with me. I think just explain this whole thing in layman’s terms and we’ll be alright.”
I sighed, marvelling at this man’s incompetence. The lettering outside his door read MBA: ‘Masters in Business Administration’. And here I was speaking to a ‘Masters’ degree holder who didn’t even know what arbitrage was. I was starting to see why Harold and his short fuse struggled with these meetings.
“Alright,” I answered, realizing how to handle this, “Do you mind if I explain our strategy using very basic analogies?”
“Go for it,” Erikson prompted me, looking a tad nervous now that I took note.
“Ok then let me explain,” I took over, “Let’s say Sally is selling apples and she’s selling them at $5 an apple.”
“That’s an awful lot of money for an apple,” Erikson interrupted me.
“It’s just an illustration, sir,” I told him, “The figures are made up, bear with me.”
“Alright,” Erikson nodded.
“So Sally is selling apples at $5 each. And then we hear that Timmy down the road is buying apples at $7 each.”
“That’s ridiculous,” Erikson scoffed, “I’m sorry but $7 for an apple is just unrealistic.”
I gritted my teeth in frustration, “Well these are rare magical apples, sir. $7 is reasonable for them.”
“Well ok,” Erikson accepted, unconvinced.
“So here’s what I can do to exploit this,” I continued, “I can take $5 from the bank, buy an apple from Sally for $5, walk down the road, sell the apple to Timmy for $7 and then repay my outstanding loan of $5 to the bank.”
“And then you get to keep $2 for yourself?” Erikson asked. At least the man could do simple addition and subtraction.
“Exactly,” I told him, “That’s arbitrage.”
“That’s so simple!” Erikson exclaimed, suddenly excited.
“On paper it is,” I told him, “Its risk free because I don’t have to use any of my own money to make a guaranteed profit, and there’s no risk of future loss. It’s a free lunch.”
“So this is what you guys are doing?” Erikson asked, “You’re making arbitrages?”
“Something like that,” I nodded with strained patience.
“Ok wait, wait,” he resumed, “If this arbitrage thing is so easy and it’s so safe, then why doesn’t everyone do arbitrage?”
“Well,” I started, “Everyone does look for these kinds of opportunities, but they’re noticed very quickly so the market adjusts and then they disappear. Back to our Sally-Timmy example, if you keep doing this, eventually Sally and Timmy are going to find out and then they’re going to cut the middle man out and just buy and sell directly from each other. Maybe they agree to go halfway and price apples at $6.”
“I see, I see,” my senior manager nodded.
“Also,” I went on, “In practice, it’s very difficult to spot these opportunities because of market complications. I gave you a very simple example. But what would happen if Sally sold her apples in bundles of four and Timmy bought them in bundles of seven? Or if it costed 20c to transport an apple from Sally to Timmy? Or you got taxed on apple profits? Or if the bank wanted interest on that loan?”
“I’m not that good with the numbers,” Erikson gulped.
“In reality, there are always many confounding factors,” I continued, “It takes real skill to spot a genuine arbitrage opportunity and even more skill to exploit it. And then once you’ve found it, it disappears in the blink of an eye, like it was never there to begin with.”
“But you guys think you found one?” Erikson inquired.
“Yes,” I nodded, “We found that wheat was under-priced so we’re longing put options at a strike price that guarantees a profit.”
“Please, please,” Erikson raised his hands, “In English. Layman’s terms remember? I’ve got to explain this guys who aren’t that clued up on the markets.”
I sighed again. I wondered if Erikson really thought he had me fooled with regards to his ‘understanding’ of the markets. If he did, perhaps he was even more unqualified than I’d initially assumed.
“Ok well here’s what we did,” I replied, “Farmers sell wheat at whatever price the market buys it for. But experts in the industry are predicting that next year’s harvest isn’t going to be very large, so that means we expect wheat to become scarcer in the future. So the price should go up right? You with me?”
“Sure.”
“But the market hasn’t reacted to that yet; wheat is still relatively cheap,” I continued, “We didn’t ask why, we just saw a golden opportunity to make something happen. So we ran the numbers and then bought up all the wheat we possibly could. We bought tons and tons and tons of the stuff from any farmer that was willing to sell, and we got it a cheaper price than we calculate it’s actually worth. Now here’s where it gets better: we bought so much wheat that we actually created a shortage. Now what happens when something is scarce?”
“The price goes up?” Erikson suggested, lacking confidence in his answer.
“Yes, the price goes up,” I affirmed, “And that’s exactly what happened. We bought all this wheat on the cheap and then, fifteen minutes later, we could have sold it right back for more and made a killing. But that’s not what we ended up doing. We actually found a way to make even more without even taking a calculated risk.”
“Ok, I’m with you,” Erikson nodded.
“So here’s what we did till this afternoon,” I continued, “We paid some of our friends in the media to keep spreading stories about this wheat shortage and we scheduled some experts to give talks on how it’s going to impact the economy over the next few weeks. In anticipation of all of this, the market reacted again and got scared, and the price for wheat went up even further.”
“I’m following,” Erikson nodded.
“But we didn’t stop there,” I went on, growing excited; “We actually found a way to make potentially even more profit. You see, there are these derivatives called ‘Put Options’ and, essentially, they allow us to sell the wheat at a much higher price in six months’ time if we want to; but we don’t have to if we don’t want to. So we took up a whole lot of put options with a several different granaries to sell the wheat in six months’ time, locking in the profit, while also diversifying away the credit risk.”
“Ok I’m not so sure about that part,” Erikson answered scratching his head.
“Never mind that for now, bear with me,” I continued impassioned, “So we took all this wheat and we paid various farms and warehouses to store it for us. And to be doubly safe, we insured the wheat as well. Are you following so far? This is where it gets really good.”
“I think so,” Erikson replied, “You guys have a whole lot of wheat and wheat is expensive.”
“Correct,” I nodded, “So this is how it’s going to play out. In six months’ time, when the contracts mature, we’re allowed to sell the wheat at a certain price to all those granaries; let’s call that price X. Now X is already higher than the price we paid for it, plus the costs of storage, plus the insurance premiums, plus the option prices, plus the insurance on creditor default. So no matter what happens, we’re guaranteed to sell the wheat for X, recoup our costs and make a profit.”
“That’s incredible,” Erikson marvelled.
“It gets even better,” I smiled, “You see, we’re only protected from the downside risk. The upside can, and is very likely to, happen. You see, in six months’ time, if the wheat price is higher than X, we’re not forced to sell the wheat to those granaries because we only bought options and we don’t have to exercise them. So if the wheat price is higher than X, which is likely based on market anticipation, we can sell the wheat for even more and make an even bigger killing.”
“Wow,” Erikson mouthed, “So it’s all upside and no downside.”
“Exactly,” I smiled, proud of myself for managing to convey my message.
“That’s amazing,” Erikson looked dumbfounded.
“In the free market, that’s what we call arbitrage,” I smirked.
“You guys are real whizzes,” Erikson shook his head, “How do people think of these things?”
I just smiled, drinking in Erikson’s incredulous admiration.
*******
The next six months crept by one dragged-out day at a time. With much of our funds tied up in this project, there was little left for us to do but wait. Yuri ran close to a million simulations a day just to keep Harold happy. But after a time, Harry grew tired of worrying about our project and took to spending his days on the golf course. He kept on nagging me to join him, but after a few polite refusals he seemed to get the message. Tyler was scarce. I wasn’t sure if he was avoiding me, or if he just didn’t come in to work these days. Every few weeks, Erikson would call me up to his office just to check up on our team and I’d just placate him with the figures and affirm that everything was going according to plan. And as for me? I just decided to forget about the whole thing and pass the time elsewhere. I stocked up my library on all the books I hadn’t read in the last few years and I passed the days catching up on my reading. I even took Valerie to a few fancy dinners and operas; I ended up sleeping through most of the latter.
Autumn fluttered away in a flurry of pages and winter drifted by while I snuggled up next to Val by the fireside with a mug of steaming coffee. There were days where I could almost forget about our big investment and just become lost in the words of Tolstoy or Taleb. I heard some of my colleagues were following the wheat price day in and day out; on the days it went down, they scurried around in a panic and on the days it up went, they sat at their desks praying desperately that a sudden market hiccup wouldn’t undo all their hard work. I simply saw no point in wasting my life stressing about things I couldn’t control.
Eventually, six months did pass, and the day did come. And when it came, it came with a bang. By now, most of the granaries had heard about our option deals and, in anticipation of us finally deciding to sell, the price went up even further. We cleared out the grain in a day, signing deals for figures that were beyond the scope of our imagination. In the worst case scenario, we would have made a massive profit. The kind of money we made on that day couldn’t have been done justice by any adjective I could think of. We had made more in six months than some of the other teams had made in the last thirty years; in this one stroke of good fortune, we’d made our entire careers. The bonus I received was enough for me to retire then and there if I wanted; instead I settled for a Mercedes.
And then the accolades started flying in. Newspapers wanted to interview us, the Economist wanted to write articles on us; some publishing company even asked us to write a book. James Erikson got more than his fair share of the credit. The board of directors were so impressed by the way he’d ‘managed’ and ‘advised’ Harold’s investment team that he got promoted into upper management. Naturally, his old job as the head of the Speculative Investment Department went to Harold, much to the chagrin of the other investment team leaders. And Harold’s promotion was what paved the way for me to take his old job as our team’s leader; I’d never asked for it, but Erikson had been so impressed by my explanations that he’d practically demanded that I take the job.
But dreamland wasn’t without its problems. Success breeds jealousy and words like ‘gamblers’ and ‘lucky bastards’ were being thrown at us from behind closed doors. We were the talk of the company in more ways than one. Charlatans queued up to offer us ‘once in a lifetime investment opportunities’, family members I didn’t know I had knocked on my door asking me for money. Some academics were writing papers claiming that we’d used their models and were demanding credit. Some were backwards rationalizing that our success was ‘obvious’ and that anyone was bound to have done it sooner or later. Others were claiming that we were crooks who’d ripped the market off. There were as many opinions as stars in the sky and for the most part, I just chose to ignore the chatter. Life was more peaceful that way. But there was one opinion that I couldn’t ignore; the scowling look of my former best friend, Tyler. If we went out together, it was only in a large group and we’d barely say a word to each other. When we waited in the elevators, he’d stand by me in silence. Whenever he greeted me now, it was with the most subtle trace of contempt. I’d fought long and hard to make sure that we’d all received equal bonuses but to Tyler that didn’t matter. To him, the arbitrage opportunity was always his and I’d stolen his credit when I’d been promoted. Just another thing I couldn’t control, I supposed.
But the false friends and the true enemies aside, there was a lot to be positive about. I could finally move out of our apartment and give Valerie the house of her dreams with the garden and a swimming pool she’d always wanted. I got offered jobs to work at international firms promising me limitless funds to manage; the board of directors responded by doubling my salary and giving me my own office. I was moving up in the world and everyone knew it now. The name of Iker Vigo was becoming famous in the realm of portfolio management. I was finally getting closer to where I wanted to be.
And so it was with a great feeling of accomplishment and pride that I stepped into my beautiful office and gazed out at the sprawling cityscape in front of me. For a moment I imagined that my name was slowly becoming more and more known by its inhabitants. And so I turned around and sat into my leather chair, sighing with delight. It was moments like these that I was in this job for. As I leaned back into my chair and gazed up at the ceiling, something on the table I caught the corner of my eye. I leaned forward to it; the morning’s newspaper.
I picked it up off the table and took in the headline. The picture was a mass of men, women and children so thin and malnourished that their ribcages were visible underneath their mottled skin. The first few lines of the article read as follows: “Wheat Shortage Continues: Over 450 dead by starvation as price of bread and maize hits record high. Hundreds below breadline have resorted to petty crime. Thousands more expected to lose their jobs as cost of living skyrockets.”
“Theoretically something like this shouldn’t exist,” I pondered, “But we all know how seldom theory translates into practice.”
The team’s manager, Harold, scratched his balding head at his desk. It was strange to see Harry so apprehensive; I was so used to hearing him punctuate the air with his catchphrases and witty one-liners that seeing him worried about anything made me feel the need to worry too. Usually it was I who was the devil’s advocate, always shooting holes in everyone’s strategies, playing the role of the eternal sceptic. But this time, not even I could find a mistake in our plan.
“Yuri, run those numbers again,” Harold shouted off to the man hunched over his keyboard in the corner. Yuri was the programmer or ‘risk simulation engineer’ as the men upstairs preferred.
“Running the simulations again, sir,” Yuri called to us. There really had been no need. I’d done the hard calculations myself under the most skeletal of assumptions. On paper, any quantitative tool in the world would tell us that the plan was perfect. Every scenario played out in our favour, even the worst cases had us raking in absurd profits. Perhaps that meant that any problem might come from outside of our control. Maybe that’s what was so worrisome; it was safer to fear the known than the unknown.
“One hundred thousand simulations completed, sir,” Yuri called, “One hundred thousand out of one hundred thousand lead to a positive net outcome. The only way we could lose money on this one is if the world ends.”
That was the third time we’d run the simulations today alone; the results didn’t seem to pacify Harold one bit. Maybe it was a bit like chasing a rainbow: if you ever managed to find that pot of gold at the end you would have to keep pinching yourself just to convince yourself that it wasn’t going to disappear.
Harold sighed and raised his head to look at me, “You know if this works out,” he started with the faintest glimmer of hope, “Then, Vigo, you are a genius.”
I smiled, “Please sir,” I answered, “Tyler was the one who spotted the opportunity.”
“Yes but you’re the one who figured out how to take advantage of it,” Harold replied, “You’re the one who made the impossible, possible.”
“Let’s save the congratulations for the end of this thing,” I answered, looking away, scratching my neck, “Let’s not get carried away until we have the results.”
My eyes shifted uncomfortably to Tyler seated at the right side of Harold’s desk. Since we’d entered the room I’d felt his eyes boring into me, making me feel unsteady and uncomfortable. More often these days I’d caught him glaring at me from across the room or whispering in hushed voices to our colleagues and then quickly becoming silent as I neared them. I hated having to feel anxious around Ty. He was a good man, he had looked out for me so many times before, I reminded myself. And yet since the two of us had joined Harold’s team and my reputation had grown, I’d felt a distance, ever so subtle, forming between my friend and I. I sighed.
The annoying humdrum of the telephone interrupted my thoughts. Harry snatched it up.
“Who’s this?” he grumbled into the receiver.
…
“Ah Mr Erikson, so nice of you to call. I was just going to give you a ring myself.”
…
“Yes.”
…
“Yes.”
…
“I’ll get on it right away.”
…
“Alright.”
…
“Alright.”
…
“I’ll see you soon.”
Harold discarded the receiver with a sigh, “Christ, not this idiot again.”
“What’s the problem?” I asked.
“It’s that goon upstairs,” Harold complained, “He wants me to go up there and explain why all that cash has just gone out of our portfolio.”
“So what’s the problem, boss?” Tyler asked, “It’s a good strategy, isn’t it?”
“It’s not the strategy,” Harold lashed out, “It’s that buffoon who’s supposed to be ‘managing’ us. He doesn’t understand a Goddamn thing about derivatives or hedging or speculating or about anything we do here. That kid is so daft he can’t tie his own shoelaces but every time I make even the smallest change, he calls me up and I have to answer to him.”
“How did someone like him even get that position?” I asked.
“His name is James Erikson,” Tyler answered me coldly, “As in, the son of Stefan Erikson from the board of directors.”
“That explains a lot,” I answered.
“It’s worse than explaining the stock market to a five year old,” Harold ranted, “At least the five year old will admit they don’t understand. Christ, I don’t have the energy for this.”
I considered something for a moment before replying, “Tell you what, sir,” I told Harry, “Why don’t you let me go up and talk to him. I’ll take care of it for you.”
Harry looked at me gratefully, “Would you please?” he asked.
“Sure,” I replied, “I’ll take care of it.”
“The man is a complete airhead,” Harry warned, “I don’t think he can spell ‘investment’ let alone tell you what one is.”
“I’ll be nice,” I smiled.
“Thanks a million Vigo,” Harry sighed, “I mean really, I need a drink or something. This whole thing is either going to make us all insanely rich or turn us into the laughing stock of the industry.”
“I don’t see it why it can’t be both, sir,” I teased, grabbing my jacket off the chair; “I’ll be back soon.”
“By all means,” Harry called out to me as I left, “Take your time. We’ve got plenty of that for the next six months.”
I hurried out of our department office and into the elevator. I’d just felt like I needed to get away for a bit. Between Harold’s overly pessimistic paranoia and Tyler’s piercing eyes, the atmosphere amongst us had quickly turned from its usual jovial state. It was funny in a way. The first genuine arbitrage opportunity anyone had found in years and instead of jubilation and excitement, everyone was wracked with worry.
*******
“I’m here to see Mr Erikson,” I told the young blond secretary dolled up and sporting an ear piece, “Harry Wilcox sent me.”
“Just a minute,” the secretary replied, buzzing her boss, “A Mr Vigo from Harry Wilcox to see you, sir. Should I send him in?”
After a short pause, the secretary answered me, “Mr Erikson will see you now. You can go right on in. Have a nice day.”
“You too,” I waved to her, walking over to the door. ‘James L. Erikson MBA’, it read, ‘Head of Speculative Investment Division’.
The door opened in front of me to reveal man in his late twenties beckoning me in. He had short oiled-up brown hair and his tailored suit seemed horribly mismatched; it was grey and he wore it with an ocean blue shirt and a striped pink tie.
“Iker Vigo,” I introduced myself, extending a hand, “Harold sent me to answer your call?”
Erikson took my hand, looking somewhat confused, “Sure, sure, nice to meet you,” he stammered, “Right this way, Mr Vigo.”
As Erikson lead me to a chair, I took a look around his spacious office with its subtle blue carpet and its darkwood furnishings. Behind his desk was a magnificent view of the cityscape, the gleaming green lights of Faith’s Towers visible in the distance. In the corner of the room was an impressive flat-screen TV, at least 50 inches. In the corporate world, we’d say that Erikson had made it; he’d worked his way up and now he was on the gravy train. But his desk, told a different story. It lacked any kind of report or paperwork; instead it was littered with desk toys, playing cards and what looked suspiciously like a Spider-man comic hidden under an empty ring binder.
“So,” I broke the silence with a smile after Erikson sat down, “What can I do for you, sir?”
“Well,” he started, “Usually before Harold does one of his big transaction things, he lets me know about it. But then today I just heard that twelve million dollars of the company’s money was spent and I got a little concerned.”
I started to reply but Erikson cut me off.
“Look,” he continued, “I know you guys in Harold’s team are big boys and you can take care of yourselves, but I’m just following company policy. When the directors or the CEO ask me what my teams are up to, I need to be able to tell them. You understand?”
“I understand,” I nodded.
“So first thing,” Erikson asked me, “Why did you guys spend twelve million dollars of the company’s money on wheat?”
I nearly burst out laughing when Erikson said that. His confusion combined with the outlandishness of our plan just made the whole thing seem comical.
“Are you guys going into farming or something?” Erikson asked, “Or is that one of your new complicated investment derivables or something?”
I ignored Erikson’s misuse of terms, “No, sir, we really did buy twelve million dollars’ worth of grade A wheat. But we aren’t going into farming. Wheat is a tradable commodity and one of our team members found a legitimate arbitrage opportunity yesterday morning. We found a way to take advantage of the delayed market reaction to exploit it. I’m sorry that we were unable to inform you sir, but within fifteen minutes of us acting on it, it had disappeared entirely.”
“Hold on a sec, hold on a sec,” Erikson interrupted me, “Can you run that by me again?”
“Ok sir,” I asked, “What part of it isn’t clear to you?”
“Well,” he started, “Can you just take it from the top? Like explain it in layman’s terms. Like what you guys are doing and everything?”
“Are you familiar with arbitrage opportunities, sir?” I asked, my eyebrow raised.
“Well kind of,” he shrugged, “Sort of, I guess.”
“Risk free trading profit from the mispricing of assets?”
“Look,” Erikson interrupted me again, “I’m more of a big picture guy so there’s no reason to use such technical terms with me. I think just explain this whole thing in layman’s terms and we’ll be alright.”
I sighed, marvelling at this man’s incompetence. The lettering outside his door read MBA: ‘Masters in Business Administration’. And here I was speaking to a ‘Masters’ degree holder who didn’t even know what arbitrage was. I was starting to see why Harold and his short fuse struggled with these meetings.
“Alright,” I answered, realizing how to handle this, “Do you mind if I explain our strategy using very basic analogies?”
“Go for it,” Erikson prompted me, looking a tad nervous now that I took note.
“Ok then let me explain,” I took over, “Let’s say Sally is selling apples and she’s selling them at $5 an apple.”
“That’s an awful lot of money for an apple,” Erikson interrupted me.
“It’s just an illustration, sir,” I told him, “The figures are made up, bear with me.”
“Alright,” Erikson nodded.
“So Sally is selling apples at $5 each. And then we hear that Timmy down the road is buying apples at $7 each.”
“That’s ridiculous,” Erikson scoffed, “I’m sorry but $7 for an apple is just unrealistic.”
I gritted my teeth in frustration, “Well these are rare magical apples, sir. $7 is reasonable for them.”
“Well ok,” Erikson accepted, unconvinced.
“So here’s what I can do to exploit this,” I continued, “I can take $5 from the bank, buy an apple from Sally for $5, walk down the road, sell the apple to Timmy for $7 and then repay my outstanding loan of $5 to the bank.”
“And then you get to keep $2 for yourself?” Erikson asked. At least the man could do simple addition and subtraction.
“Exactly,” I told him, “That’s arbitrage.”
“That’s so simple!” Erikson exclaimed, suddenly excited.
“On paper it is,” I told him, “Its risk free because I don’t have to use any of my own money to make a guaranteed profit, and there’s no risk of future loss. It’s a free lunch.”
“So this is what you guys are doing?” Erikson asked, “You’re making arbitrages?”
“Something like that,” I nodded with strained patience.
“Ok wait, wait,” he resumed, “If this arbitrage thing is so easy and it’s so safe, then why doesn’t everyone do arbitrage?”
“Well,” I started, “Everyone does look for these kinds of opportunities, but they’re noticed very quickly so the market adjusts and then they disappear. Back to our Sally-Timmy example, if you keep doing this, eventually Sally and Timmy are going to find out and then they’re going to cut the middle man out and just buy and sell directly from each other. Maybe they agree to go halfway and price apples at $6.”
“I see, I see,” my senior manager nodded.
“Also,” I went on, “In practice, it’s very difficult to spot these opportunities because of market complications. I gave you a very simple example. But what would happen if Sally sold her apples in bundles of four and Timmy bought them in bundles of seven? Or if it costed 20c to transport an apple from Sally to Timmy? Or you got taxed on apple profits? Or if the bank wanted interest on that loan?”
“I’m not that good with the numbers,” Erikson gulped.
“In reality, there are always many confounding factors,” I continued, “It takes real skill to spot a genuine arbitrage opportunity and even more skill to exploit it. And then once you’ve found it, it disappears in the blink of an eye, like it was never there to begin with.”
“But you guys think you found one?” Erikson inquired.
“Yes,” I nodded, “We found that wheat was under-priced so we’re longing put options at a strike price that guarantees a profit.”
“Please, please,” Erikson raised his hands, “In English. Layman’s terms remember? I’ve got to explain this guys who aren’t that clued up on the markets.”
I sighed again. I wondered if Erikson really thought he had me fooled with regards to his ‘understanding’ of the markets. If he did, perhaps he was even more unqualified than I’d initially assumed.
“Ok well here’s what we did,” I replied, “Farmers sell wheat at whatever price the market buys it for. But experts in the industry are predicting that next year’s harvest isn’t going to be very large, so that means we expect wheat to become scarcer in the future. So the price should go up right? You with me?”
“Sure.”
“But the market hasn’t reacted to that yet; wheat is still relatively cheap,” I continued, “We didn’t ask why, we just saw a golden opportunity to make something happen. So we ran the numbers and then bought up all the wheat we possibly could. We bought tons and tons and tons of the stuff from any farmer that was willing to sell, and we got it a cheaper price than we calculate it’s actually worth. Now here’s where it gets better: we bought so much wheat that we actually created a shortage. Now what happens when something is scarce?”
“The price goes up?” Erikson suggested, lacking confidence in his answer.
“Yes, the price goes up,” I affirmed, “And that’s exactly what happened. We bought all this wheat on the cheap and then, fifteen minutes later, we could have sold it right back for more and made a killing. But that’s not what we ended up doing. We actually found a way to make even more without even taking a calculated risk.”
“Ok, I’m with you,” Erikson nodded.
“So here’s what we did till this afternoon,” I continued, “We paid some of our friends in the media to keep spreading stories about this wheat shortage and we scheduled some experts to give talks on how it’s going to impact the economy over the next few weeks. In anticipation of all of this, the market reacted again and got scared, and the price for wheat went up even further.”
“I’m following,” Erikson nodded.
“But we didn’t stop there,” I went on, growing excited; “We actually found a way to make potentially even more profit. You see, there are these derivatives called ‘Put Options’ and, essentially, they allow us to sell the wheat at a much higher price in six months’ time if we want to; but we don’t have to if we don’t want to. So we took up a whole lot of put options with a several different granaries to sell the wheat in six months’ time, locking in the profit, while also diversifying away the credit risk.”
“Ok I’m not so sure about that part,” Erikson answered scratching his head.
“Never mind that for now, bear with me,” I continued impassioned, “So we took all this wheat and we paid various farms and warehouses to store it for us. And to be doubly safe, we insured the wheat as well. Are you following so far? This is where it gets really good.”
“I think so,” Erikson replied, “You guys have a whole lot of wheat and wheat is expensive.”
“Correct,” I nodded, “So this is how it’s going to play out. In six months’ time, when the contracts mature, we’re allowed to sell the wheat at a certain price to all those granaries; let’s call that price X. Now X is already higher than the price we paid for it, plus the costs of storage, plus the insurance premiums, plus the option prices, plus the insurance on creditor default. So no matter what happens, we’re guaranteed to sell the wheat for X, recoup our costs and make a profit.”
“That’s incredible,” Erikson marvelled.
“It gets even better,” I smiled, “You see, we’re only protected from the downside risk. The upside can, and is very likely to, happen. You see, in six months’ time, if the wheat price is higher than X, we’re not forced to sell the wheat to those granaries because we only bought options and we don’t have to exercise them. So if the wheat price is higher than X, which is likely based on market anticipation, we can sell the wheat for even more and make an even bigger killing.”
“Wow,” Erikson mouthed, “So it’s all upside and no downside.”
“Exactly,” I smiled, proud of myself for managing to convey my message.
“That’s amazing,” Erikson looked dumbfounded.
“In the free market, that’s what we call arbitrage,” I smirked.
“You guys are real whizzes,” Erikson shook his head, “How do people think of these things?”
I just smiled, drinking in Erikson’s incredulous admiration.
*******
The next six months crept by one dragged-out day at a time. With much of our funds tied up in this project, there was little left for us to do but wait. Yuri ran close to a million simulations a day just to keep Harold happy. But after a time, Harry grew tired of worrying about our project and took to spending his days on the golf course. He kept on nagging me to join him, but after a few polite refusals he seemed to get the message. Tyler was scarce. I wasn’t sure if he was avoiding me, or if he just didn’t come in to work these days. Every few weeks, Erikson would call me up to his office just to check up on our team and I’d just placate him with the figures and affirm that everything was going according to plan. And as for me? I just decided to forget about the whole thing and pass the time elsewhere. I stocked up my library on all the books I hadn’t read in the last few years and I passed the days catching up on my reading. I even took Valerie to a few fancy dinners and operas; I ended up sleeping through most of the latter.
Autumn fluttered away in a flurry of pages and winter drifted by while I snuggled up next to Val by the fireside with a mug of steaming coffee. There were days where I could almost forget about our big investment and just become lost in the words of Tolstoy or Taleb. I heard some of my colleagues were following the wheat price day in and day out; on the days it went down, they scurried around in a panic and on the days it up went, they sat at their desks praying desperately that a sudden market hiccup wouldn’t undo all their hard work. I simply saw no point in wasting my life stressing about things I couldn’t control.
Eventually, six months did pass, and the day did come. And when it came, it came with a bang. By now, most of the granaries had heard about our option deals and, in anticipation of us finally deciding to sell, the price went up even further. We cleared out the grain in a day, signing deals for figures that were beyond the scope of our imagination. In the worst case scenario, we would have made a massive profit. The kind of money we made on that day couldn’t have been done justice by any adjective I could think of. We had made more in six months than some of the other teams had made in the last thirty years; in this one stroke of good fortune, we’d made our entire careers. The bonus I received was enough for me to retire then and there if I wanted; instead I settled for a Mercedes.
And then the accolades started flying in. Newspapers wanted to interview us, the Economist wanted to write articles on us; some publishing company even asked us to write a book. James Erikson got more than his fair share of the credit. The board of directors were so impressed by the way he’d ‘managed’ and ‘advised’ Harold’s investment team that he got promoted into upper management. Naturally, his old job as the head of the Speculative Investment Department went to Harold, much to the chagrin of the other investment team leaders. And Harold’s promotion was what paved the way for me to take his old job as our team’s leader; I’d never asked for it, but Erikson had been so impressed by my explanations that he’d practically demanded that I take the job.
But dreamland wasn’t without its problems. Success breeds jealousy and words like ‘gamblers’ and ‘lucky bastards’ were being thrown at us from behind closed doors. We were the talk of the company in more ways than one. Charlatans queued up to offer us ‘once in a lifetime investment opportunities’, family members I didn’t know I had knocked on my door asking me for money. Some academics were writing papers claiming that we’d used their models and were demanding credit. Some were backwards rationalizing that our success was ‘obvious’ and that anyone was bound to have done it sooner or later. Others were claiming that we were crooks who’d ripped the market off. There were as many opinions as stars in the sky and for the most part, I just chose to ignore the chatter. Life was more peaceful that way. But there was one opinion that I couldn’t ignore; the scowling look of my former best friend, Tyler. If we went out together, it was only in a large group and we’d barely say a word to each other. When we waited in the elevators, he’d stand by me in silence. Whenever he greeted me now, it was with the most subtle trace of contempt. I’d fought long and hard to make sure that we’d all received equal bonuses but to Tyler that didn’t matter. To him, the arbitrage opportunity was always his and I’d stolen his credit when I’d been promoted. Just another thing I couldn’t control, I supposed.
But the false friends and the true enemies aside, there was a lot to be positive about. I could finally move out of our apartment and give Valerie the house of her dreams with the garden and a swimming pool she’d always wanted. I got offered jobs to work at international firms promising me limitless funds to manage; the board of directors responded by doubling my salary and giving me my own office. I was moving up in the world and everyone knew it now. The name of Iker Vigo was becoming famous in the realm of portfolio management. I was finally getting closer to where I wanted to be.
And so it was with a great feeling of accomplishment and pride that I stepped into my beautiful office and gazed out at the sprawling cityscape in front of me. For a moment I imagined that my name was slowly becoming more and more known by its inhabitants. And so I turned around and sat into my leather chair, sighing with delight. It was moments like these that I was in this job for. As I leaned back into my chair and gazed up at the ceiling, something on the table I caught the corner of my eye. I leaned forward to it; the morning’s newspaper.
I picked it up off the table and took in the headline. The picture was a mass of men, women and children so thin and malnourished that their ribcages were visible underneath their mottled skin. The first few lines of the article read as follows: “Wheat Shortage Continues: Over 450 dead by starvation as price of bread and maize hits record high. Hundreds below breadline have resorted to petty crime. Thousands more expected to lose their jobs as cost of living skyrockets.”
No comments:
Post a Comment