Gbp Sterling

[sonicdragon]

Yes, they are. It just depends on how you define risk and return. These concepts are very well understood and defined within the realms of financial economics (my background), but others may have a different interpretation or understanding that causes disagreements like this.

.....

An individual may feel quite comfortable taking a risk, but not be able to sustain the losses that the risk may very likely give rise to (hence the word Risk).

That's not a very satisfactory definition of risk.

Well if you are going to black cat me with 'the realm of economics being your background'....

I'm trying to explain that other people from different backgrounds may have a different understanding/definition. I don't know what it means to "black cat" someone, but I have difficulty in understanding how you can frame risk in terms of someone being comfortable with taking a risk yet at the same time being unable to sustain the losses that the risk may very likely give rise to [excuse me for adding emphasis].

As my specialization for which I provide consultancy across the organization I work for is Risk Analysis/Management - I'd be interested to hear your definition of Risk, Consequences, Risk Reduction and Risk Mitigation. As you say, risk is well understood in Financial Economics, the expression borrowed as it is from the well understood field or Risk Analysis (Common theory across a range of activity, including economics).

Saying that that the risk a person feels they can take is the same thing as the risk a person can tolerate in terms of maximum negative consequences is not a good start.

When I talk about risk tolerence I mean the extent to which a person is risk-averse. The

"maximum negative consequencies" idea is not something I really think about in isolatation - it is part of the whole risk-tolerence spectrum. If I buy a stock today then the "maximum negative consequence" is that it goes to zero. That's part of the risk I take when I buy it. If I invest money in Thailand in, say, an appartment, the "maximum negative consequence" is that I have to walk away from it and lose all. That's part of the risk I take.

Anyhow, I always think a person who understands a subject can explain his subject in simple terms - the floor is yours.

Risk?

I did explain it in simple terms. I said it is the "variability of outcomes". So you want me to explain it in more detail ? The trouble is, that will inevitablty lead to further questions that will require more explanations. This is why textbooks on the subject are written - as the academic literature is not accessible to most. I'll start by taking a quote from one of the most popular introductory textbooks on the subject: Brigham and Ehrhardt: Financial Management: Theory and Practice

"When we think of investment risk, along with the chance of actually receiving less than expected, we should consider the chance of actually receiving more than expected. If we consider investment risk from this perspective, we can define risk as the chance of receiving an actual return other than expected, which simply means there is variability in the returns, or outcomes, from the investment. Therefore, investment risk can be measured by the variability of the investment's returns. Investment risk, then, is related to the possibility of actually earning a return other

than expected – the greater the variability of the possible outcomes, the riskier the investment. And as we will soon discover, the return expected from an investment is positively related to the investment's risk – a higher expected return represents an investor's compensation for taking on greater risk"

You asked about risk mitigation/reduction: The last sentence of the above quote refers to the various theories of how investors optimize their portfolios to reduce risk while maximising returns. The bulk of textbooks such as this are concerned with these theories, two of the most important being the Capital Asset Pricing Model (Sharp, 1964) and Arbitrage Pricing Theory (Ross, 1976). Both of these models suggest that investors should hold a combination of a diversified (risky) portfolio of assets and risk-free assets such as government bonds or bank deposits. Very risk averse investors will hold higher proportions of risk-free assets, while less risk-averse investors will place more weight on the diversified risky portfolio. This is how investors reduce risk. The key insight of the CAPM is that it does not matter how volatile a stock is on it's own - rather how it contributes to the volatility of the portfolio. This is the concept of an asset's "beta". The APT is a more general theory which removes some of the assumptions of the CAPM but arrives at much the same conclusions. For more details of both, see here:

http://ocw.mit.edu/NR/rdonlyres/Sloan-Scho...154336capm1.pdf

This is a lecture note which is neither too lenghty and terse, nor over simplistic.

PM me if you want to discuss it further - I doubt that any others here are interested.

Edit:typo

Edited December 18, 2007 by sonicdragon

[chiang mai]

Anyone reckon Sterling will see a drastic upturn against the Baht or weakening of the Baht over the next few days? Poised to buy a house and a little bit concerned over the last couple weeks.

XE currently doing 1.00 GBP = 61.2840 THB, with BB down to about 67.5.

:D

The end of the calendar year is typically a poor time for GBP exchange rates - has something to do with folks unwinding their year end positions. On that note, from experience, the early part of most weeks finds GBP lower against THB, don't know why this is.

[chiang mai]

Hmm, if the pound sterling falls to the pits of the 50s then I dread to consider what the US$ will fall to.

Lets not forget that the on-going election will also have an influence as well.

Yeah GH likes to talk alright but what he says is usually relevant to the Topic, although I just think we need more people posting on the very important topic.

I think that the tourism industry would will grind to a standstill the way some of the doom mongers are making out the £s demise next year...

Was the tourist industry at a halt when the GBP was 40 or below?

Very short term memory or short term visitors we seem to have?

35 Baht to the Pound is still very much in my mind.

[chiang mai]

Hmm, if the pound sterling falls to the pits of the 50s then I dread to consider what the US$ will fall to.

Lets not forget that the on-going election will also have an influence as well.

Yeah GH likes to talk alright but what he says is usually relevant to the Topic, although I just think we need more people posting on the very important topic.

I think that the tourism industry would will grind to a standstill the way some of the doom mongers are making out the £s demise next year...

The US Dollar is unlikely to move much since the negative trade at present is in GBP alone.

As for the tourist industry grinding to a halt next year, dream on. As stated previously THB/GBP at 35 is still fresh in my mind.

[Naam]

PM me if you want to discuss it further - I doubt that any others here are interested.

your doubt is not warranted Dragon! i (very much) like to follow these kind of discussions.

[Naam]

When trading GBP into another currency in say HK or Sing there is usually a bank requirement in each country to convert into the local currency before the final conversion is made into the destination currency. Whilst HSBC HK offers multi-currency accounts the need to convert twice remains. Has anyone found a way around this other than to fly to HK or Sing and open an account in the destination currency?

There is no such requirement. You are misinformed. All major currencies are directly tradeable with each other.

all said! i can't think of any bank which would enforce that kind of brain-amputated scheme and i can't think of any client who would accept it. of course... present company excluded

[Prakanong]

Hmm, if the pound sterling falls to the pits of the 50s then I dread to consider what the US$ will fall to.

Lets not forget that the on-going election will also have an influence as well.

Yeah GH likes to talk alright but what he says is usually relevant to the Topic, although I just think we need more people posting on the very important topic.

I think that the tourism industry would will grind to a standstill the way some of the doom mongers are making out the £s demise next year...

Was the tourist industry at a halt when the GBP was 40 or below?

Very short term memory or short term visitors we seem to have?

35 Baht to the Pound is still very much in my mind.

Psycholigically I think we choose a rate as an anchor that is most relevant to ourselves. While it was 34 on my first holiday in Thailand my chosen arbitary rate is 60 as that is the rate when I worked in Thailand in 99.

Depending on arrival or personal circumstances different peopl will have a different arbitary notion of "Their Exchange Rate"

Just looked on oanda and I did not realise the GBP was so low - they are saying 61

[Prakanong]

PM me if you want to discuss it further - I doubt that any others here are interested.

your doubt is not warranted Dragon! i (very much) like to follow these kind of discussions.

Same for me when i can keep up

I have printed the Sloan School article though and will read it on the bus home tonight

[Mosha]

For a reality check. At the money changing booths last week in Patong high end of 67. Coinmill.com gives 67.75 today

Edited December 18, 2007 by Mosha

[chiang mai]

When trading GBP into another currency in say HK or Sing there is usually a bank requirement in each country to convert into the local currency before the final conversion is made into the destination currency. Whilst HSBC HK offers multi-currency accounts the need to convert twice remains. Has anyone found a way around this other than to fly to HK or Sing and open an account in the destination currency?

There is no such requirement. You are misinformed. All major currencies are directly tradeable with each other.

all said! i can't think of any bank which would enforce that kind of brain-amputated scheme and i can't think of any client who would accept it. of course... present company excluded

In all fairness (to myself) I only discovered that plot about six months ago when I asked my account manager why a particular rate was so poor. HSBC HK was somewhat reluctant to disclose the details of the interim exchange but did so only when pressed - clearly I have never used it but now wonder how many, if any, other HSBC customers are also unaware of this scam. Since most UK residents transferring GBP via HSBC HK would simply ask for the rate and as long as it is better than the derisory onshore UK rates, they would I suppose be inclined to accept it on face value. It's a bit like not knowing the onshore Thai Baht rate exists - as long as the offshore rate is better than the rate in the UK that could be OK for some folks. Heads up HSBC HK customers!

[chiang mai]

For a reality check. At the money changing booths last week in Patong high end of 67. Coinmill.com gives 67.75 today

True, but Baht per pie is in the ascent.

[sonicdragon]

PM me if you want to discuss it further - I doubt that any others here are interested.

your doubt is not warranted Dragon! i (very much) like to follow these kind of discussions.

Ahh, OK then

I wanted to add to my last post, that another very important outcome of finance theory in terms of risk reduction and maximising expected returns is diversification, which I mentioned several times in the preceeding post but only in passing in the last one. By keeping ones assets in a single currency and not taking advantage of other non-correlated assets that may be available in other currencies, risk is increased. The aim with diversification is to create a portfolio where the co-variances between the constituent assets are maximised - in the CAPM this results in what is known as the "efficient frontier", the (typically concave) border where all points on it are maximised values in terms of expected returns vs risk - at any point inside this frontier an alternative mix of assets can be chosen which either reduces risk with returns unchanged, increases returns with risk unchanged, or both. This is partly why, in my own case, I have investments in a range of currencies, countries and asset classes, many of which are simply not available in the UK. I do take on board GuestHouse's points about the risks of withdrawing from ones home country and currency - where I think we disagree, which is quite fundamental, is what we mean by risk. I'm not saying that an economists definition of risk is any better than other definitions, and I apologise to GuestHouse if that is how my last post came over. In fact, I would say that economists have a great deal to learn from other disciplines - it is sad that the last 40-50 years of advancement in econonics has come almost exclusively from within the "neo-classical" framework that emphasises mathematical rigour and "theory" at the expense of practicality; and this is borne out by the recent resurgence of heterodox approaches such as the Austrian school as well as new approaches such as Post-Keynsianism. One of the over-riding problems in economics, as with most social sciences, as compared to the physical sciences and engineering for example, is that controlled experiments are not possible - only observations in a "live" environment, and this is something that some heterodox approaches deal with as a starting point.

OK, I'm really rambling on now. I have some real work to do

[sonicdragon]

PM me if you want to discuss it further - I doubt that any others here are interested.

your doubt is not warranted Dragon! i (very much) like to follow these kind of discussions.

Same for me when i can keep up

I have printed the Sloan School article though and will read it on the bus home tonight

You can download the whole course from here:

http://ocw.mit.edu/OcwWeb/Sloan-School-of-...eHome/index.htm

[Prakanong]

PM me if you want to discuss it further - I doubt that any others here are interested.

your doubt is not warranted Dragon! i (very much) like to follow these kind of discussions.

Same for me when i can keep up

I have printed the Sloan School article though and will read it on the bus home tonight

You can download the whole course from here:

http://ocw.mit.edu/OcwWeb/Sloan-School-of-...eHome/index.htm

Thanks - I have actually used some of ther other material for my MBA

I will be taking some financial course on the MBA but its not a strongly biased to Finance MBA though. I was going to take the Deriviative and Risk Management course in November but decided against it as in the route I am taking it would stand pretty much alone (and so be bloody hard )

[jackr]

Hmm, if the pound sterling falls to the pits of the 50s then I dread to consider what the US$ will fall to.

Lets not forget that the on-going election will also have an influence as well.

Yeah GH likes to talk alright but what he says is usually relevant to the Topic, although I just think we need more people posting on the very important topic.

I think that the tourism industry would will grind to a standstill the way some of the doom mongers are making out the £s demise next year...

Was the tourist industry at a halt when the GBP was 40 or below?

Very short term memory or short term visitors we seem to have?

35 Baht to the Pound is still very much in my mind.

Was that when it was 10 baht for a beer? Could handle that...

[Prakanong]

Hmm, if the pound sterling falls to the pits of the 50s then I dread to consider what the US$ will fall to.

Lets not forget that the on-going election will also have an influence as well.

Yeah GH likes to talk alright but what he says is usually relevant to the Topic, although I just think we need more people posting on the very important topic.

I think that the tourism industry would will grind to a standstill the way some of the doom mongers are making out the £s demise next year...

Was the tourist industry at a halt when the GBP was 40 or below?

Very short term memory or short term visitors we seem to have?

35 Baht to the Pound is still very much in my mind.

Was that when it was 10 baht for a beer? Could handle that...

I can remember 10p a pint - Silver Jubilee 97!

It was 17p a pint the first time I had a drink in a pub though at 14 or 15 I was!

My memory is hazy but 25 THB a Singha rings a bell on my first trip

[GuestHouse]

I'm not sure if an MBA trumps and MSc in Applied Mathematics (Quantitative Risk Based Decision Making) - But anyway.

I'll give you my (simplified) take on Risk

An individual wants to make an investment and wants to understand what is an appropriate level of risk.

What is his tolerable risk?

I define that as two DISTINCT AND SEPERATE parts.

Part 1 of Risk Tolerance. (The Comfort Zone) He as a personal tolerance to risk in terms of what we might loosely call his 'Personality' - He, like all of us has a psychological tolerance to risk that falls somewhere along the scale between at one end 'Give me Death or Glory' and at the other end 'I can't sleep nights unless I'm cuddling my piggy bank'.

Determining this 'psychological tolerance’ to risk is, I am absolutely sure, the stuff of much academic study.

Part 2 of Risk Tolerance. (The Danger Zone) He has a financial balance book tolerance to risk (The Colour is Black and Red) - That is, he does not have limitless funds - There is a level of financial loss below which he cannot sustain himself, his family, his future. This is the money he cannot afford to loose - And hence should never risk.

Calculating this figure is not the stuff of high academic study - it is the stuff of back of a fag packet and a sharp pencil.

However, there is a problem with actually making the calculation (As demonstrated in some of the answers above).

While the safe limits of investment are defined by 2nd Part Risk Tolerance. The emotional response to the 1st Part 1 of risk Tolerance acts to cause people to disregard Part 2 (The Danger Zone).

This is precisely were we are at when we define Risk in terms of the positive gains to be made without addressing the likely losses.

Consequences of Taking Risk

The consequences of Taking a Risk are of course +ve or –ve (they may of course be null)

We all of us like to dream away of the Positive Consequences – More money, and with money a nice car, a nice house, and easy life – More Choices.

We non of us like to think of the Negative Consequences – Less money, and with less money, no car, no nice house, no easy life – Less or even no choices.

Compound Risks

A particular problem with risk is ‘Common Mode Failure’ simply put it is where one failure causes multiple Consequences. And this is where it is important to understand that the 2nd Part of Risk Tolerance (The Danger Zone) is absolutely distinct and separate from the 1st Part (The Comfort Zone).

As I mentioned before, the vast majority of expatriates in Thailand are living on Non Immigrant Visas (The have no tenure). They all have a minimum level of income they need to live in Thailand, but they may also (pensioners especially) have a minimum level of income they need to get that Non-Immigrant (read Guest) Visa.

But they do have a safety net – Going back home if they can’t stay in Thailand – or at least they do if they have not put that at risk too.

I think they loosely call getting this wrong ‘Catch 22’ - No money to stay, no money to go home.

How do we Manage these risks

Well there are lots of strategies, but the first is to coldly identify what you cannot afford to loose. (The problems some are having with understanding why it is not a good idea to put at risk the money they would need to return home if need be is an example of how difficult it is to make that decision coldly).

Thereafter nice risk curves examining investment against ‘Risk Tolerance (of Part 1 type) are helpful in deciding what risk are appropriate for an individual’s personality.

Examining what risk are appropriate for an individual’s life circumstances are defined by the very simple (but difficult to face) examination of Part 2 of risk tolerance.

Quoting from academic journals/websites is no excuse for not understanding or worse still ignoring the Compound risks added to Part 2 or risk tolerance that come with being an expatriate.

[JimsKnight]

Hmm, if the pound sterling falls to the pits of the 50s then I dread to consider what the US$ will fall to.

Lets not forget that the on-going election will also have an influence as well.

Yeah GH likes to talk alright but what he says is usually relevant to the Topic, although I just think we need more people posting on the very important topic.

I think that the tourism industry would will grind to a standstill the way some of the doom mongers are making out the £s demise next year...

Was the tourist industry at a halt when the GBP was 40 or below?

Very short term memory or short term visitors we seem to have?

It was a minnow back then, a lame duck pre 97.

It was only after the crash that the trickle became a flood post 2000.

But I think when possible currency rates are spoken of you always get the 'money-invested-in-thailand / Sat-on-the-farm-married/retired-types' ballyhooing and trumpeting for a super-strong baht/super-weak pound.

Then the single, men-about-town / money-sitting-abroad-types.' lambasting and singing for a weaker baht / stronger pound.

So we'll all make our little noises and wait out what out what the weather brings .....

Edited December 18, 2007 by JimsKnight

[Prakanong]

Hmm, if the pound sterling falls to the pits of the 50s then I dread to consider what the US$ will fall to.

Lets not forget that the on-going election will also have an influence as well.

Yeah GH likes to talk alright but what he says is usually relevant to the Topic, although I just think we need more people posting on the very important topic.

I think that the tourism industry would will grind to a standstill the way some of the doom mongers are making out the £s demise next year...

Was the tourist industry at a halt when the GBP was 40 or below?

Very short term memory or short term visitors we seem to have?

It was a minnow back then, a lame duck pre 97.

It was only after the crash that the trickle became a flood post 2000.

Give us the figures then?

Arrivals say in 96 and 97 plus 2000 and 2006

What do you define as minnow - less than 5 million say?

What % of GDP was related to tourism in 96 and in 2006?

[sonicdragon]

GuestHouse,

I'll omit quoting your post for the sake of readability.

I don't disagree with that analysis. In fact I still don't see it as very different from what I am talking about. Your 1st part is equivalent to a finance-theory definition of risk, while your 2nd part is what I call "risk tolerence", unless i'm still misunderstanding your meaning, or vice versa. What I really don't understand though is the need to criticise me for making a reference to a website where further details of what I have been saying are available. I'm sure you have some links where further details of your analysis can be found, and I would welcome that.

SD

Edited December 18, 2007 by sonicdragon

[GuestHouse]

Sonicdragon,

I'm not criticizing you for posing an internet link I am being critical of the absence, for whatever reason, of any clear and self evident explanation of what Risk management is. Posting a link says 'Yes I have heard of Risk Management - here is a link'.

But the link (or as many links as there might be) adds no weight to an argument about ‘Risk’ where understanding 'Unacceptable Risk' and the part it plays in Risk Management is obvious by its absence.

But please, that is not a personal attack, but it is a criticism in terms of our difference of opinion.

I would add, it has been my experience when discussing setting the boundaries of acceptable risk with Project Managers, that there is often a struggle getting over the ideas of looking at risk form the impact of negative consequences.

We see this time and time again on TV, and in this thread, where people talk themselves into believing only the good news, ignoring blatant warnings of pitfalls,

I think its human nature to do that, not a bad thing, not a good thing – Just the way we are put together I guess.

Edited December 18, 2007 by GuestHouse

[sonicdragon]

I must say I find it surprising that you can distill my entire posts down to "Yes I have heard of Risk Management - here is a link". If that is your honest opinion, then so be it. I have not said anything about you making a personal attack. I thought I had provided information useful to the discussion by providing a link for further information which expanded on what I had said in my preceeding text, and I found it surprising for that to be criticised.

[chiang mai]

You are both having a really useful debate about a hugely serious discussion point, a little offtrack from the original post but nevertheless, really instructive and helpful. But you both perhaps need to read each others replies more closely before you reply.

[camerata]

Let's get back on the topic of Sterling, please.

[sonicdragon]

Let's get back on the topic of Sterling, please.

The fact that you think we are off topic, would, I believe, be the very point that GuestHouse is making ! With respect, we are not off-topic. We are discussing strategies for dealing with exchange rate fluctuations in sterling for british expats, which is the subject of the OP. GuestHouse has raised some valid issues regarding the risk of moving ones assets out of the UK and sterling and that is what we are talking about.

[jackr]

Hmm, if the pound sterling falls to the pits of the 50s then I dread to consider what the US$ will fall to.

Lets not forget that the on-going election will also have an influence as well.

Yeah GH likes to talk alright but what he says is usually relevant to the Topic, although I just think we need more people posting on the very important topic.

I think that the tourism industry would will grind to a standstill the way some of the doom mongers are making out the £s demise next year...

Was the tourist industry at a halt when the GBP was 40 or below?

Very short term memory or short term visitors we seem to have?

35 Baht to the Pound is still very much in my mind.

Was that when it was 10 baht for a beer? Could handle that...

I can remember 10p a pint - Silver Jubilee 97!

It was 17p a pint the first time I had a drink in a pub though at 14 or 15 I was!

My memory is hazy but 25 THB a Singha rings a bell on my first trip

Silver Jubilee - '77. I remember it well.

A bag of Walkers was about 6p

[camerata]

The fact that you think we are off topic, would, I believe, be the very point that GuestHouse is making ! With respect, we are not off-topic.

If you look back in the thread you'll see it was the OP who requested moderator intervention because folks were going off-topic. There have been several long posts recently that are not directly concerned with Sterling and are diluting an otherwise focused discussion. So let's not hijack the OP's topic. "Risk Management" is worth a topic of its own.

[zzSleepyJohn]

Hmm, if the pound sterling falls to the pits of the 50s then I dread to consider what the US$ will fall to.

Lets not forget that the on-going election will also have an influence as well.

Yeah GH likes to talk alright but what he says is usually relevant to the Topic, although I just think we need more people posting on the very important topic.

I think that the tourism industry would will grind to a standstill the way some of the doom mongers are making out the £s demise next year...

Its all a conspiracy. Same as the moon landings.

Pound will go to 100 baht tomorrow. No probs.

An early warning on the direction Sterling and other currencies that offer relatively high interest rates to investors are headed can be obtained by watching interest rates in Japan. In recent years, Japan has had interest rates close to 0%, and corporate investors have been borrowing in Japan almost free, and re-investing in countries like UK and NZ.

A nice money-making machine while it lasts! The effect has been to boost sterling and other higher interest yielding currencies.

However when Japanese rates rise the game wil be up and all these investors will be forced to pull out from Sterling etc. and repay their original Japanese loans.

For these high financiers to have been making money out of nothing this way all seems highly immoral to me, because at the end of the day, others, probably ourselves, are going to end up paying for this money which has been *obtained* without being earned.

But I suppose that since my own GBP and NZ$ accounts too have benefitted from the artificial strength of these currencies, I can't speak too loudly. Just keep an eye on Japanese rates!

+ SJ

[cclub75]

An early warning on the direction Sterling and other currencies that offer relatively high interest rates to investors are headed can be obtained by watching interest rates in Japan. In recent years, Japan has had interest rates close to 0%, and corporate investors have been borrowing in Japan almost free, and re-investing in countries like UK and NZ.

A nice money-making machine while it lasts! The effect has been to boost sterling and other higher interest yielding currencies.

However when Japanese rates rise the game wil be up and all these investors will be forced to pull out from Sterling etc. and repay their original Japanese loans.

When japanese rates rise ? Probably... in the next century.

They're speaking right now.... to reduce them !

There is no way the Jap's will rase. Like there is no way the US, UE, China will rase. The first one who will do it, will loose. It's the great game leading to the big zero.

Toshihiko Fukui's final act as governor of the Bank of Japan may be to cut borrowing costs for the first time in more than six years. (Bloomberg)

[Naam]

However when Japanese rates rise the game wil be up and all these investors will be forced to pull out from Sterling etc. and repay their original Japanese loans.

When japanese rates rise ? Probably... in the next century.

i hope to live long enough to see JP¥ rates go up