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- [00:01]
A
Hi everyone, Skip Montreux here. Thank you for downloading D2B today here at down to Business English, our goal is to produce self study learning content that is both stimulating and relevant for your language studies. This is why we choose business news topics that are making headlines around the world. It is our hope that by using this original content, you you will be able to develop your listening comprehension skills and expand the range of professional words and phrases that you can use in your business Life. All of D2B's content is available for no charge. Both the episodes and the audio scripts are now and always will be 100% free. But today I need to ask you for your support. If you if you find down to Business English useful in your language studies, why don't you consider becoming a D2B member? What do you get with a D2B membership? First, your membership will help us bring you even more episodes on a more regular basis. Second, as a member you will have access to the D2B audioscript library where you can download our entire catalog of audio scripts from one convenient location. No longer will you need to fill in and submit a registration form each time you want to download an audio script. Third, as a member, you will have the option of having audio scripts of newly released D2B episodes emailed directly to you, saving you the hassle of logging into your account. To become a D2B member, simply visit our website at tab down to businessenglish.com and click on the D2B membership link at the top of the page. On behalf of myself, Des and Samantha, we thank you for your support.
- [02:04]
B
From Tokyo, Japan and Abu Dhabi, uae. This is down to Business English Business News to improve your Business English with your hosts Git Montreux and Des Morgan.
- [02:20]
A
So this feels a little strange. Listeners don't know this, but we usually record on a Saturday night. But here we are in the middle of the week recording on a Wednesday.
- [02:31]
C
It is a bit odd, isn't it?
- [02:33]
A
So let me ask you, Des, do you have any plans for the upcoming weekend?
- [02:38]
C
Actually, for once I do. In fact, I have too many plans. I've been invited to a pool party on Saturday, but some other friends were planning to go to the Formula one track and watch the cyclists in the Tour of Abu Dhabi.
- [02:53]
A
Oh, two very nice options. So what have you decided to do?
- [02:58]
C
Well, I've agreed to go to both and then I guess I will need to pull out of one before Saturday.
- [03:05]
A
So you're hedging your bets there a bit?
- [03:07]
C
Uh, yes, I guess that I am how about you? Are you up to anything exciting this weekend? I imagine there must be a poker game somewhere in the mix.
- [03:17]
A
As I told you last time, Des, I'm taking a little bit of a break from the tables. No, nothing too exciting planned for this weekend. Although There are some DJs performing who I'd like to check out. But I'm not sure if I can get tickets. Just in case, I have a few good books I could spend some time with.
- [03:37]
C
Sounds like you're hedging your bets a bit too there.
- [03:40]
A
I suppose so. You know, Des, that idiom hedging your bets is quite common. I use it quite often. In fact, it basically means to have another plan or option ready in case the first planner option doesn't work out.
- [03:55]
C
Yes, I use it somewhat myself, but
- [03:57]
A
it actually is a common business practice used by many companies. And in. In a business context, I don't really have a good understanding of what it means or how it works.
- [04:09]
C
Well, Skip, you are in luck because that's our topic for today.
- [04:13]
A
Great. Let's do it. Let's get D2B down to business with hedging. What is it, who uses it? And how is hedging generally used in the financial markets? So, Des, can you start off by giving me a simple explanation of hedging from a business point of view?
- [04:42]
C
That's a very good starting point. Sure. Hedging simply means for a company to take precautionary steps to offset any losses that might arise due to fluctuations in prices connected to their business or any other changes in financial markets that impact their business model.
- [05:05]
A
So it is kind of like putting an umbrella in your bag in the morning just in case it rains later in the day.
- [05:11]
C
Yes, that's a good example of hedging. And just as the umbrella is heavy and you have to carry it around all day even when it isn't raining, all forms of hedging have a price that needs to be paid.
- [05:25]
A
Okay.
- [05:27]
C
Shall I try to explain using an example?
- [05:30]
A
Yes, that might be very helpful.
- [05:33]
C
Do you remember Farmer Skip from my example of derivatives in our episode on the Deutsche bank situation?
- [05:41]
A
Sure I do. He was a wheat farmer and a really nice guy. Handsome, hard working, charming.
- [05:49]
C
Okay, the same charming, hard working Skip. Oh, that was hard to say without laughing. Is now Skip the tailor.
- [06:01]
A
Skip the tailor. Okay, got it.
- [06:04]
C
Good. Now Skip the tailor makes really nice suits in Tokyo, but he imports all the fabric he uses to make his suits from Italy. Because that's the look his customers like. When customers come to his shop and order a Suit Skip tells them the price the suit will cost when it's finished. But before Skip can start making the suit, he needs to order the material from his supplier in Italy.
- [06:33]
A
Right. Skip orders the material after he has quoted a price for the finished suit.
- [06:38]
C
Do you see the risk he's taking?
- [06:41]
A
Sure, the material he ordered could go up in price.
- [06:45]
C
That could be a risk. But fabric prices are usually not that volatile. There is a much bigger risk that he's taking. Ah.
- [06:56]
A
Skip has sold the suit in Japanese yen, but he has to buy the material from Italy in euros. So if the currency exchange rate moves significantly, then poor old Taylor Skip will lose money.
- [07:10]
C
That's right. So what Taylor Skip does, because he's a pretty astute guy, is to buy forward his euros to hedge against currency fluctuation.
- [07:22]
A
Of course, I buy forward my euros. And what exactly does buy forward euros mean?
- [07:31]
C
Sorry, Skip. Buying forward simply means to agree on an exchange rate now for an exchange that will be made in the future.
- [07:41]
A
But the fluctuation in the exchange rates could go in Taylor Skip's favor, couldn't it?
- [07:47]
C
It could. So he probably wouldn't buy all of his euros forward, just some portion to provide his business with a degree of protection.
- [07:57]
A
And providing protection is hedging.
- [08:00]
C
Exactly. Easy enough?
- [08:03]
A
Maybe. But what are the mechanics of it? I mean, do I go out to a hedge store and walk up to the counter and say, excuse me, can I have a bottle of currency protection, please?
- [08:15]
C
Umm, what you would do is go to an investment bank and explain that you're worried about the euro yen exchange rate and then agree on a rate of exchange at a given time in the future, say one year. Built into that rate is their charge or commission.
- [08:36]
A
So in this case, I need to talk to a bank.
- [08:39]
C
That's correct.
- [08:40]
A
Okay, so Taylor Skip and his Italian suits was one example. Can you give us some other examples of situations or businesses that use hedging?
- [08:51]
C
Certainly. Hedging is very common when you're involved in trading stocks. Let us say that the stocks in your portfolio have increased in value a lot over the last few years.
- [09:04]
A
That would be very nice.
- [09:06]
C
Yes, it would. But you're beginning to get nervous that there's going to be a market correction or even a crash. What would you do?
- [09:14]
A
Hmm. That is a quandary. Of course I would consider selling, but I would be worried that I was making a mistake and my stocks would keep going up after I cashed out. I would feel pretty silly if that happened.
- [09:29]
C
Well, what you could do instead is buy an option that gives you Some protection on the downside?
- [09:36]
A
Yes, that's exactly what I would do if I knew what an option was.
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C
Well, we won't go too deeply into what options are, but essentially, by buying this financial instrument, you have hedged your position and insured the profits that you've made. Of course, you would need to pay for that safety in the price you would pay for the option, but you think that it's worth it.
- [10:01]
A
So my hedge costs me a bit, but I can sleep better at night. How much would one of these options cost me then?
- [10:09]
C
Options are available at different prices and durations, as you would expect. The greater the protection and the longer the time until expiry, the more the option costs. You can think of the costs like house or car insurance, if you like.
- [10:26]
A
All right, that is all pretty clear to me. So who uses these hedging techniques?
- [10:34]
C
Typically, any business that either exports or imports something would hedge the price of the currency exchange or the commodity they produce or the materials they use in production. For example, airlines tend to hedge the price of aviation fuel to protect them if fuel prices go up. Conversely, an oil company might hedge against falling oil prices.
- [11:02]
A
We always hear about hedge funds in business news. What exactly are they?
- [11:08]
C
Hedge funds are basically any fund that has the right to invest in any product. Compared to mutual funds that can only invest in stocks.
- [11:19]
A
Okay. I'd imagine they must be very good investments, right?
- [11:22]
C
In theory, hedge funds should be safer than normal long only mutual funds or index funds.
- [11:30]
A
A long only fund.
- [11:32]
C
Long only means to hold stocks, commodities or currencies. So when a trader says he is long, it means he currently holds that position.
- [11:43]
A
So it doesn't mean he is a tall person then?
- [11:46]
C
Oh no, that is not what it means. Most funds that regular people like us can buy are long only products, which means they are unhedged or unprotected if you like. So instead they try to get some protection by holding a lot of stocks or diversifying in some way.
- [12:09]
A
Kind of like making a lot of small bets on many different horse races instead of putting all your money on one horse in one single race.
- [12:18]
C
Sure, that's one way to put it. Yes. Now, there are many different types of hedge funds, some of which are extremely risky, while others are relatively safe. Hedge funds got their name because they allowed large investors to hedge against losses in other investments they were holding.
- [12:41]
A
So hedging is used to provide protection for another holding or asset outside of the fund. Right.
- [12:49]
C
For example, you might take a position in a hedge fund that makes most of its money when markets fall. If you were holding a lot of stocks hoping they would go up.
- [12:59]
A
You can make money when markets go down. That is really hard to grasp.
- [13:05]
C
It is difficult to get your head round, I agree. But using options or a technique called shorting hedge funds can make money in a falling market. Hedge funds are allowed to trade options or go short, which the more traditional mutual funds are not. So in theory, a hedge fund could be safer than a mutual fund.
- [13:31]
A
So the bottom line is that hedge fund are designed to protect businesses and investors from an uncertain future. But also, even though a hedge fund can potentially be lucrative, they are generally more risky than a mutual fund or individual stocks.
- [13:50]
C
Yes Gib, I think you've got the gist of it. As in life, the higher the risk, the greater the return.
- [13:57]
A
Tell me about it. And with that I think it is time for us to get D2V down to vocabulary.
- [14:14]
B
Down to Business English audio scripts are a great learning tool. Be sure to visit the D2B website and download your free audio script of today's podcast, DowntoBusinessEnglish.com that's www.downtobusinessenglish.com.
- [14:36]
C
I will start off today with the adjective precautionary, which is probably easier to understand if I break it down for you. Pre means before and caution means to take care. So in the noun form, a precaution is something you do before an event to make sure it happens safely.
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A
You mean like when a software company does beta testing of its latest software among a few volunteers as a precaution against a huge problem if they just released it?
- [15:09]
C
Very good example of a precautionary measure. In the story I explained that to hedge and to take precautionary measures means pretty much the same thing. In other words, hedging is the same as taking care before something bad happens.
- [15:28]
A
Did I ever tell you that I always keep a precautionary 2,000 yen note in my shoe for an emergency taxi home when it's raining outside?
- [15:38]
C
Nice hedge on a wet, cold night.
- [15:40]
A
True enough. Let's move on with another adjective, volatile. To be volatile means to change very quickly and usually violently.
- [15:51]
C
It's often used to describe dangerous chemicals that need to be transported without being shaken up or vibrated.
- [15:59]
A
That's right. But in the story, Des says that currency exchanges can be volatile. What he meant was that foreign exchange markets can and do change quickly or unexpectedly.
- [16:12]
C
Yeah, people can be volatile too. If your boss was volatile, you would need to take care so that he or she didn't lose his temper with you. My current boss can be moody and when he's in a bad mood or watch out, he's very volatile.
- [16:30]
A
Now I know what that's like.
- [16:32]
C
I'm sure you do. Next up, we have yet another adjective to be astute.
- [16:39]
A
Adjectives are such an important part of speech, they are.
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C
Now, to be astute means to be able to judge a situation quickly and correctly and then use that judgment to make a decision that benefits you.
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A
It is quite often used to describe people who are good with money.
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C
It certainly is. And in the story, I said that Taylor Skip hedged his currency position because he is an astute guy.
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A
You did say that. And he is good at making decisions with money. But I will tell you about someone who isn't particularly astute.
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C
Alright, who do you consider as not being astute?
- [17:23]
A
Whoever it was at Microsoft who decided that $26 billion was a fair price for buying LinkedIn.
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C
Microsoft does have a history of overpaying, it would seem. Still, they do make a good operating system. At least every second version is good.
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A
I wouldn't know. But I do know that it was a real quandary for Windows users when Microsoft replaced the much loved XP operating system with the widely hated Vista.
- [17:54]
C
Oh, that was a long time ago. Even more recently, I had the same quandary about moving from Windows 7 to Windows 10.
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A
And that is our next word.
- [18:06]
C
Our next word is Windows 10.
- [18:09]
A
No, our next word is the noun quandary, which is another way to communicate that a decision a person needs to make is difficult or confusing. In the story, I said that selling stocks that are rising in value is always a quandary, as they may continue to rise even after you sell them.
- [18:30]
C
Still better than the quandary of whether to sell a stock that has fallen or wait till it recovers.
- [18:38]
A
I will probably never understand stocks in the stock market.
- [18:42]
C
Hang in there, Scott. Skip, I'm sure you can get your head around the concept someday.
- [18:48]
A
I'm sure you're right. And is that our final phrase, to get your head around something?
- [18:54]
C
That's right. This very common expression simply means you cannot understand something. In the story, I commented that financial instruments such as shorting and options are too complex for a simple guy like you, Skip.
- [19:13]
A
Says the guy who struggles with simple software updates on his laptop.
- [19:17]
C
Hey, that's not fair. Maybe six or seven years ago, but I'm pretty capable with computers now.
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A
I know. Just teasing.
- [19:27]
C
But one thing I will never get my head around is poker. This card is good and that card's bad. But the other players might be bluffing and I have to Raise or hold? I don't get it.
- [19:40]
A
Well, the best way to get your head around poker is is to sit down with me and some of my friends and play for a while.
- [19:47]
C
Yeah, thanks, but that sounds a little too volatile for me. And as a precaution I think I should stick to the stock market.
- [20:01]
B
Would you like to support down to Business English? Be sure to visit the D2B page in iTunes and subscribe to this show. While you are there, why don't you leave a rating and a comment. This will help D2B reach more people wanting to improve their business English skills. Down to Business English. Business News to improve your business English.
- [20:32]
A
Well, thank you Des. I can confidently say that I now understand hedging a lot better than I did 30 minutes ago. Although I certainly should not be giving anyone any financial advice, nor should I.
- [20:46]
C
And listeners, remember this is an English language learning podcast, not a financial podcast. You should always consult a professional before investing your money. Do not base any investment decisions on what you hear us discussing.
- [21:04]
A
That is a very nice hedge, Des.
- [21:05]
C
Better to be safe than sorry.
- [21:08]
A
No argument here. Just before we finish up today, I would like to give a great big shout out to Milder Mendoza from Nicaragua in Central America.
- [21:19]
C
Oh, a beautiful country.
- [21:20]
A
I would love to go there one day. Now, Milder is one of our D2B executive members and he sent us a note the other day. He says, hi Skip and Des. I just found your outstanding podcast not so long ago and right off the bat I thought I should be part of your club. Thanks a million for your killing effort to give us a hand in pursuing our dreams. I'm so passionate about languages, I'm in the process of brushing up my English and your creative approach is the icing on the cake for self learners. As myself, my target for next year is to start French, but I'm going to continue practicing your method.
- [22:00]
C
How nice. Thank you very much Milda. Glad to Hear you're finding D2B English useful for your language studies. And good luck with the French.
- [22:09]
A
Yes, thank you Milder. Not only for the kind words, but for your Support as a D2B executive member. In fact, thanks to all of our D2B members for your support.
- [22:20]
C
If you find down to Business English useful and you are enjoying our stories, why don't you consider becoming a D2B member?
- [22:29]
A
Membership includes unlimited access to the entire Catalog of the D2B audio script library and you have the option of signing up for for our audio script delivery service. Each time we release a new episode, you can automatically have the audio script emailed directly to your inbox.
- [22:48]
C
A very reasonably priced service.
- [22:51]
A
Check out our website for details. Thanks for listening everyone. See you next time.
- [22:56]
C
Bye bye.
- [23:01]
B
Have a comment or question about today's show? Don't be shy. Visit the D2B website or the Facebook page and post any comments or questions there. Skip Des or Samantha will be sure to leave a reply. Want to get even more down to Business English? Sign up for the D2B Newsletter and receive updates on some of the stories covered on down to business English. That's www.downtobusinessenglish. down to business English Business News to improve your business English.