Flight

The truth is that I knew that I could fly,

Under the moon, with the birds and the winds.

How I could soar through the night’s sky,

Swimming the clouds with my wings like fins.

_

My vision would then be a clouded haze,

My mind in search for my heart’s destination,

With the future beyond my mortal gaze,

All I see, are in truth neither fact nor fiction.

_

I fear I would one day float and not fly,

In my heart, in my soul and in my very mind.

Floating to escape life’s sorrowful lullaby,

Wishing but not working for this world to shine.

_

As mirages spread to block my sight,

I hesitate to start my endless flight.

_

~ Ee Suen Zheng

The Third Proposition, Logos – The Building Blocks of Philosophy

Cuneiform

~ Our meeting today, my dear reader, is not one of coincidence, luck or blind chance. That we have met today means that we were meant to meet and our meeting could not have happened in any other way. It is inevitable that the past must be as it has been before the future can unfold. We may forget in the near future that this meeting has ever happened but we cannot change the fact that this encounter has already taken place.

~

Philosophy, like a painting, requires colours. Words are for philosophy what colours are for paintings. I have established in my last two essays, Philosophos – The Inescapable Philosophy of Philosophy and Systēma – Approaching Systematic Philosophy, that philosophy is unavoidable and our knowledge and understanding of reality is an imperfect product of reverse reengineering by the human mind. In this short essay, I wish to highlight the importance of languages in philosophy not only for those who philosophize, but also for those who read philosophical text.

Languages are probably the greatest of all human inventions. The origin of our greatest invention is however, rather a mystery. History does not record how our guttural and primeval cries of pain and joy evolved into the various languages that we know today. If we count languages the same way we count species, which is by asking whether two candidates of the same species can interbreed, and in the case of languages, breed communication, the world would contain at least 4,500 natural languages. Africa on its own contains around 700 to 3,000 languages!

It is a mistake, from a philosophical point of view, to think that languages are only those that are spoken and written like English or Mandarin. One should note that languages are essentially a form of expression. In saying so, the old pictures in caves by Cro-Magnon men may very well have been their own version of a form of writing! With that being said, we should treat music and paintings that are a form of expression as a language to convey meanings in their own right. Even mathematics can be considered a form of expression as it is almost universally understood by mathematicians all around the world.

As a means for communication, languages are the most important reason that we can live together as a community. In terms of utility, languages enable us to work together as a team by allowing us to communicate our ideas with other individuals. Without being capable of understanding what another human being is thinking, working together would be an impossible feat. This is evidently seen in the seven wonders of the ancient world, whether the Pyramids of Giza, the Hanging Gardens of Babylon, the Temple of Artemis, the Statue of Zeus, the Mausoleum of Halicarnassus, the Colossus of Rhodes and the Lighthouse of Alexandria, that would all be impossible endeavours for humanity without languages as an instrument of communication. Take for example how the construction of the Tower of Babel in the Bible came to an immediate halt when God caused everyone to speak in different languages. This gives us a glimpse of how societies would collapse if languages cease to facilitate communication.

Languages are not only a means for communication among the living. The written word enables those who are no longer living to communicate with their descendents. Through writing, human beings have been able to pass down the knowledge and experiences that previous generations have gained. The impact of the written word is often taken for granted. We sometimes forget that the developments in science and technology would not have made its leaps and bounds without the ability of men to build on top of the knowledge of previous generations. Historians note that the one of the most important elements that distinguishes primitive savages from a civilized community is the presence of the written word. Without written languages, we would all have to painfully relearn everything from scratch.

Because of the importance of language, it is imperative that we should begin the study of philosophy by understanding its possibilities and limitations. Language consists of sentences that are in turn consisted of words. Words are used to express our ideas that intend to communicate to another individual. How words are formed is more than just the materialization of our ideas. Many words are in fact concepts or classes developed through philosophy. The philosopher Plato is commonly known with his idea of the ‘forms’. For Plato, if a triangle is a two dimensional shape with three sides, all shapes that are two dimensional with three sides are triangles.

Plato’s theory is a form of generalization of the objects and occurrences in reality into classes or concepts that can be identified with words. These words are ‘universals’ that denote a property or attribute commonly shared by all members of its class. This is rather confusing because in reality there is no such thing as a walking and talking ‘universal’ concept. People like Bach, Beethoven, and Brahms are people that exist in reality. However, the universal concept of ‘man’ does not exist in the physical world. It is an idea only based on generalization and classification.

The writings of Aristotle also hold many important lessons that we can use to understand words. According to Aristotle, a good definition of a word must stand on two legs. The first leg is the universal concept that we have seen in Plato that is to put the object or occurrence in question into a class or family with all members sharing the same properties and attributes. The second leg lies in taking it out from its class of family and noting its distinct properties and attributes. Hence we can define a man as a rational animal since man requires all the living necessities of an animal while having the unique ability to think rationally.

However, no matter how well we try to define a word, our definitions will always fall short of perfection.

Like all human inventions, languages are imperfect. Every year, the dictionary would add new words that represent new terms that were previously unheard of. Translations from language to language usually adopt words taken from other languages to enhance their own respective vocabulary with words that their own languages are unable to describe. Furthermore, languages that are written and spoken have often been unable to represent their initial intended meaning. A word uttered by a person can very well mean something very different to a listener. Imperfect as it may be, languages remain to this very day the most important form of communication and is likely to remain so for the foreseeable future. Due to its importance as a means of communication, no philosophy can do without language. In order to understand the philosophy of others and to explain our own philosophy, it is an imperative that we should master a language to its highest degree.

~ Ee Suen Zheng

~

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The Second Proposition, Systēma – Approaching Systematic Philosophy

Aristotle

~ Our meeting today, my dear reader, is not one of coincidence, luck or blind chance. That we have met today means that we were meant to meet and our meeting could not have happened in any other way. It is inevitable that the past must be as it has been before the future can unfold. We may forget in the near future that this meeting has ever happened but we cannot change the fact that this encounter has already taken place.

~

In my last essay entitled, Philosophos – The Inescapable Philosophy of Philosophy, I argued that that the word ‘philosophy’ means different things to different people. However, the importance of philosophy is undoubtedly universal and relevant to everyone in our constantly changing world. Adding to that is the fact that philosophy is unavoidable for every individual with the capacity to think. When we have beliefs and we work to justify these beliefs, we without doubt construct a philosophy of our own. In this short essay, I will attempt to outline some of the stances that one should adopt when approaching the study of philosophy.

Each and every one of us comes to this world as an infant void of all knowledge and experience. Left alone, it is impossible for an infant raised in the Amazons to read and write English without first being thought how to do so. One does not become a Mozart or Beethoven with pure talent alone (although I would have to admit that talent plays a major part in music). Similarly, if Shakespeare was not exposed to the English language, he could not have become such a prominent figure in the world of English literature. Like an empty container waiting to be filled, we must first absorb the raw data of the world through our senses before synthesizing them with our minds to form knowledge and understanding. This process is the start of philosophy that every individual must go through.

Although every infant without mental and physical impairments are capable of using their senses to collect raw data, it is the mind that is responsible for organizing and synthesizing it into knowledge and understanding. As a child, this process that happens in the mind is an unconscious one that the child has no control of. Although this process happens naturally, children are commonly found with misconceptions in their initial understanding of the world and all its properties. This is to say that even though all children with intellectual capacity can think, it does not follow that these children can think correctly on their first attempt. Left unchecked, these mistakes and misconceptions would persist into their latter days and pose a barrier for future intellectual development.

It is common to find propositions that are accepted as being true and accurate in our childhood to be outrageously wrong as we mature in mind and stature. The ideal mission of the study of philosophy is to invoke a conscious process of identifying and rectifying these misconceptions in beliefs that we presume to be true, which are in reality false. As a child, our ignorance may be excused. As an adult, our ignorance is a sign of stupidity, intellectual impairment and sloth.

I believe that it is generally accepted that a physical structure built on top of weak foundations with the use of weak materials is a sure way to ensure its collapse in the near future. Should our structure of knowledge be built upon beliefs that are not proven, or worst, self-contradicting and vague, we can be sure that it will come crashing down like a house of cards. This realization that our knowledge may be an accumulation of a pile of nonsense would ultimately lead us to ask ourselves one question:

‘What do we know?’ or Que sais-je? as Montaigne would put it (he hints that we know so very little).

In order to answer this question, we should, in all humility, subject all our beliefs to the most stringent of tests to prove their validity. It is important during this process that we endeavour to erase all forms of bias and prejudice in order to produce a clean slate on which knowledge is to be built upon. If there is even a little evidence that a certain belief is doubtful, this belief must not be allowed to be accepted as true until it is completely cleared of doubt. But although we should expose all our beliefs and ideas to test their legitimacy, it does not follow that we should spend an impossible amount of time doubting each and every one of them. Every system of belief has core tenets or doctrines that once proven false would result in the destruction of its entire structure.

The Indian philosophers of antiquity were extremely good in questioning their own beliefs to such an extent that Hegel dismissed them as ‘dreamy’ and ‘childlike’. In Sanskrit, the term philosophy also stands for seeing. And at least as early as 1500BC, Indian ‘seers’ were known to raise questions that remain relevant to this very day. ‘What did the universe come from? Propelled by what does a directed mind fall upon its objects? By whom was life first set in motion? Urged by whom are these words being spoken?’, were some of those questions that were asked and largely left unanswered. Hegel may be right in saying that the early Indian philosophers were children. But being childlike is what we should be when we approach philosophy!

We should continue to ask childlike questions when we re-examine our deepest faith and beliefs. Only then can we make progress. Without looking into a mirror, how can one see his own face? The study of philosophy should be a mirror that reflects reality clearly without perversion.

The search for the truth of reality should not be one that is static and dogmatic. To philosophize correctly, we should realize that the process in which we turn raw data, provided by our sense-experience, into knowledge is one that should be continuous. It is a dynamic rather than a static state. The truth of reality over the ages has been seen in history as rather elusive. In the past, human beings thought and accepted that the Earth was in the middle of the universe. This was the generally accepted truth. The majority believed it. The Church leaders endorsed it. And it was wrong. We should be ashamed that it took not one philosopher but two, both Copernicus and Galileo to prove to the leaders of the Church their folly in this matter (please note that I am saying that the Church leaders at the time were at fault and not the Church as an institution).

The ultimate truth belongs to the heavens and no one philosophy can explain it in all its entirety. However, I believe that we can work to improve the precision of our knowledge indefinitely.  To do this, we must understand that doubt is the prerequisite and instrument of reconstructing a systematic form of philosophy.  Thesis and anti-thesis should produce a synthesis of wisdom. We should relentlessly reflect on our deepest faith and beliefs in humility and seek to reverse-engineer our understanding of a reality that we know is independent of our sense-experience. Continuously going back to the basics, letting go of false beliefs that we hold all so dear, broad-based readings and accurate observations are the ultimate virtues of a humble  and professional philosopher.

~ Ee Suen Zheng

~

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Corporate Treasury: Foreign Exchange and Interest Rate Risk Report for BG Group

Table of Contents
Details	Page Number
1. Executive Summary 2. Identify and Rank Foreign Exchange and Interest Rate Risk 2.1 Translation Exposure to the US Dollar 2.2 Basic Transaction Exposure to the US Dollar 2.3 Economic Exposure (other currencies against the US dollar) 2.4 Interest Rate Exposure to Floating Interest Rates 3. Internal Hedging Techniques 3.1 Internal Hedging Techniques 3.1.1 Matching receivables and payable 3.1.2 Centralised and decentralised treasury function 3.1.3 Switching of base currency 3.2 External Hedging 3.2.1 Forward exchange contracts 3.2.2 Currency swaps 3.2.3 Interest rate swaps/Cross-currency interest rate swaps 3.2.4 Forward rate agreements 4. Hedging Decisions 4.1 Hedging Philosophies and Industry Analysis 4.2 Hedging Transaction Exposures to the US dollar 4.3 Hedging Economic Exposure relating to the US dollar 4.4 Hedging Recommendations 5. Credit ratings 5.1 Ratings Book 5.1.1 Financial Information 5.1.2 Non-financial Information 6. Bibliography Appendixes	22-5   6-9 10-14 11-16 17-18

1. Executive Summary

• Identification of major foreign exchange and interest rate risk affecting BG Group reveals that the Group is exposed to translation and transaction risk to the US dollar. Economic risk relating to the US dollar also poses a threat to the company. Interest rate risk is containable.
• BG Group utilises forward contracts, interest rate swaps, cross-currency interest rate swaps, forward rate agreements and currency swaps. Internal hedging methods include matching receivables and payable, centralised treasury function and switching of currency base.
• Transaction and economic risk are identified as major threats to the Group. Interest rate risk should not be hedge due to currency economic landscape. Only big single transaction items are to be hedged.
• Financial and non-financial information to be included in the ratings book to acquire good credit ratings from independent credit rating agencies

2. Identify and Rank Foreign Exchange and Interest Rate Risk

2.1 Translation Exposure to the US Dollar[1]

BG Group deals mainly in oil and gas of which natural gas constitutes 71% of the Group’s business (BG Group, Annual Report, 2008). BG group has an exposure to the US Dollar mainly because the trading in the international markets of oil and gas are mainly in US Dollar while the Group reports its earnings in British pound Sterling. Justification of this translation risk can be seen in 2008 when EPS grew 74% compared with 2007 due to exceptionally high commodity prices which BG Group receives as revenues in US dollars. At constant US$/UK£ exchange rates and commodity prices, EPS only grew 28%.

Furthermore, BG Group’s annual report 2008 shows that a significant majority of the Group’s business activities are conducted in US dollars and that the Group is holding substantial US Dollar-denominated assets that are subjected to translation risk. BG Group’s 2009 estimates shows that a 10 cent strengthening (or weakening) in the US Dollar against the pound Sterling would increase (or decrease) operating profit by approximately £250 to 300 million.

Also to be noted are the huge capital investments in the Americas amounting to £3,243m. Should these investments be denominated in currencies other than the Pound sterling, there is a high probability that translation exposure would be present when the Group consolidates its financial statement at the end of the financial period. Effects of translation risk are normally seen in the income statement and balance sheet.

2.2 Basic Transaction Exposure to the US Dollar[2]

BG Group’s main revenues and costs are denominated in US Dollars. However, due to the different locations in which the company operates, BG Group may incur costs in different currencies other than the US Dollars. This may cost a mismatch between the revenues earned and the cost incurred during business operations. The annual report shows that the Group operates in mainly nine core countries, namely, Australia, Brazil, Egypt, India, Kazakhstan, Trinidad and Tobago, Tunisia, the UK and the USA.

Due to the large scale of operations in Brazil and Australia, the Group is also heavily exposed to cost incurred in Brazilian Real and Australian Dollars. The presence of long-term gas contracts are a prime example of transaction exposure to the US Dollar. If the Group locks in the price of gas in US dollars for a contract expiring 1 year later, any fluctuations in interest rates of the Brazilian real (cost of production) would mean that there would be a danger of the Brazilian Real strengthening against the US Dollar and squeezing the Group’s profit margin.

Other causes of transaction risk to the US Dollar include long-term gas contracts that must be honoured at future dates. Although being able to lock-in a certain amount of profits by using long-term gas contracts, there is an opportunity costs involved as prices of the commodities or the value of the US Dollar may increase. An example of this would be Kashima, a Japanese oil refinery that imports crude oil, refines it, and sells the refined oil in the Japanese market (Bekaert & Hodrick, 2009).

2.3 Economic Exposure (other currencies against the US dollar)[3]

Economic exposure to BG Group is also substantial due to the location of the Group’s operations. With 37% of the Group’s employees based in the Americas and a further 36% based in Africa, the Middle East and Asia, we can assume that these geographical areas hold the main portion of the Group’s costs. BG Group would have to pay employees in their respective domestic currencies while receiving US Dollars in return for its revenue.

Organisations like Gazprom and Royal Dutch Shell on the other hand, operate in different geographical regions compared to BG Group. This means that the costs of operations of Gazprom for example, are mainly denominated in the Russian ruble instead of in BG Group’s Brazilian real. The mismatch between the two currencies would mean that if the Russia ruble depreciates against the US Dollar while the Brazilian real appreciates against the US Dollar, Gazprom would gain a cost advantage as its operating cost would have gone down relative to BG Group.

This gives Gazprom room to manoeuvre in terms of profitability and volume of sales. Should Gazprom seek to gain higher sales, it can lower its US Dollar price to gain a cost advantage of BG Group. On the other hand, if Gazprom wants to increase profitability, it can maintain its US Dollar price and sell oil and gas knowing that its cost is decreasing due to the weakening Russian ruble. Either way, Gazprom would be able to benefit should there be a long-term depreciation of the Russian ruble against the US Dollar.

2.4 Interest Rate Exposure to Floating Interest Rates[4]

The Group’s gearing ratio and debt to equity ratio is around 7% and this clearly shows that the Group is exposed to interest rate risk. Net borrowings which is the net off figure of cash and cash equivalents with finance leases, currency and interest rate derivative financial instruments and short-term and long-term borrowings is £972m. Long-term borrowings are £1,897m compared to short-term borrowing which is only £ 281m.

A further look into the annual report reveals that the US Dollar is the main currency in which the company’s borrowing is comprised of. Borrowings in Sterling were £528m compared to £1,151m of borrowings in US Dollar. There were also borrowings in Brazilian reais of £397m. The total amount of financial assets excluding short-term debtors in floating US Dollars was £1,074m compared to financial assets in Sterling that amounted to £212m.

Besides that, the Group’s annual reports also show that the group is exposed to refinancing risk as some of the interest bearing assets and liabilities are maturing in one to five years time. This may negatively affect BG Group because the current credit crunch may result in financial institutions only lending for a higher amount of interest rates.

Please refer to the risk map in Appendix 2

3. Evaluation of Hedging Techniques

The three risks that will greatly affect the performance of BG Group include 1) transaction risk to US Dollars from long-term contracts, 2) economic risk relating to US Dollars and 3) interest rate risk on floating foreign denominated borrowings.

3.1 Internal Hedging Techniques

3.1.1 Matching receivables and payable

The matching of receipts and payments in the same currency would allow the Group to insulate itself from foreign exchange risk. This is because the fluctuations in the value of currencies would not have an impact on the Group because receivables are used to pay receivables in the same currency.

For example, BG Group’s operation in Malaysia would be insulate should the company match the cost of operations in Malaysian ringgits by paying them with Malaysian ringgit gained from selling their products in Malaysia. Fluctuations in other currencies, for example, the US Dollar, would be inconsequential because the company would not have the pay operating cost in Malaysian ringgit with US dollars.

However, the matching of payables and receivables are only able to succeed to a certain degree. This is because BG Group has operations in more than one country. The Group would have to borrow in US dollars in order to match revenues US dollars. This would explain why the borrowing of the group in floating rate US dollar debts is relatively high. To provide better insulation towards risk in other countries, the Group can try an obtain revenue in domestic currencies to pay operating cost in foreign countries, for example, revenues and payables in Brazilian reais. This technique ignores economic risk.

3.1.2 Centralised and decentralised treasury function

BG Group with its centralised treasury function is able to utilise multilateral netting to as a form of internal hedging against foreign exchange exposures. Multilateral netting is commonly found in enterprise-wide risk management (EWRM) where subsidiaries of the parent company would report the forecasted receipts and payments in foreign currencies and the estimated current exposures to these foreign currencies.

The central treasury would then calculate the net exposure of the company towards each currency after taking into account internal hedging and use external hedging to hedge residual exposures. This technique is applicable to BG Group because 1) the group is a large multinational corporation, and 2) the Group has operations and exposures in nine core countries.

However, multilateral netting requires the Group’s subsidiaries to have a standardised budget reporting periods and also a clear understanding of taxations and exchange controls in respective countries. Besides that, it is also important that the savings gained through the implementation of the EWRM information system is enough to offset the cost involved in setting it up.

The advantages of EWRM includes being able to reduce the cost of capital by managing the volatility of earnings. This is done through external hedging of dangerous exposures towards foreign exchange and interest rate risk. Besides that, ERM also helps organisations to exploit natural hedges (through internal hedging) and maximise the portfolio effect as stated in the capital asset pricing model.

3.1.3 Switching of base currency

Switching of base currency is a long-term strategy that involves changing the key operations of a company to another location. This hedging technique involves high cost as the company would have to inject huge sums of capital investment into new geographical regions. However, this technique is perhaps the only way to effectively manage economic risk.

According to Alan Shapiro (2005), Toyota had to change its cost base by shifting its manufacturing operations to the United States due to the rising value of the Japanese yen against the US dollar. This was done to ensure that other manufacturers that were located in other countries would not obtain a cost advantage against Japanese manufacturers in the United States.

BG Group has implemented this strategy through the proliferation of their operations in Australia, Brazil and the United States. By having operations in these geographical regions, the Group can ensure that competitors operating in the same region would not gain a cost advantage due to long-run changes in exchange rates.

3.2 External Hedging

3.2.1 Forward exchange contracts[5]

The annual report of BG Group indicates that the Group uses forward exchange contracts to hedge foreign exchange risk. This is done by locking in the exchange rates on spot for delivery in the future. By doing so, the Group would be insulated from any fluctuations in the foreign exchange markets from the time the contract is signed until the time the material products are delivered. This technique is effective in managing transaction risk exposures to foreign currencies.

For example, if the Group has a US$ 1m worth of exposures due to a contract to supply gas to the United States and seeks to hedge this risk, the Group can go into a forward contract to lock in the exchange rates of the US dollar versus the Pound sterling. The group can sell a forward contract at the current date to a bank stating for delivery at a future date. By doing this, the amount of that the bank owes you would be determine today.

Another way that would be appropriate in managing transaction exposure is to use a futures contract instead of a forward contract. According to Bekaert and Hodrick (2009), futures are different than forwards in the sense that they are exchange traded, standardised, fixed maturities, lower in credit risk and contains margins to be adhered to.  However, futures do not contain the flexibility to tailor the amounts and maturities of the contract.

Since BG Group is involved in the wholesale of natural gas, it is assumed that their customers are normally large distribution companies with a good credit rating. Should this be true, forward contracts are more practical since the Group is able to tailor the requirements of their contracts and lock in future profit margins at the current date. (See table)

3.2.2 Currency swaps[6]

According to Bekaert and Hodrick (2009), one of the first currency swaps occurred in 1981 when the World Bank and IBM decided the use it to manage the composition of their foreign exchange debts. The World Bank had a significant outstanding debt denominated in US dollars, Deutsche marks and Swiss Francs. IBM on the other hand, had debts denominated in Deutsche marks and Swiss francs. Both the World Bank and IBM entered into a currency swap because, the World Bank wanted to balance its US dollar debts with its debts in Deutsche marks and Swiss francs, while IBM wanted Deutsche marks and Swiss francs for fear of the dollar depreciating.

Currency swaps allows BG Group to change the currency of denomination of its debts and thus help in managing the composition of debts in a particular set of currencies. This allows BG Group to manage its exposure to transaction as well as translation risk. Currency swaps have a low credit risk and is a relatively cheaper way to manage foreign exchange risk. The downside of a currency swap is that they cannot be terminated in the sense that BG Group must pay the promised amount to the other party of the swap contract.

Problems may arise if BG Group expects a receivable in US dollars from a third party to fulfil its swap obligation but then realises that the counterparty defaulted. This would result in the Group having to go to the spot market to obtain US dollars at spot exchange rates and would defeat the purpose of hedging using a currency swap.

3.2.3 Interest rate swaps/Cross-currency interest rate swaps

Interest rate swaps enables the Group to manage the composition of the maturity of its debt profile. Many companies have revenues that are high during booms and low during recessions. If a corporation borrows at fixed interest rates during boom times, this would increase the likelihood of default should a recession occur as low revenues would be matched with high interest payments.

Some companies would then resort to borrowing short-term so to match revenues with floating interest rate payments. However, the danger of borrowing short-term loans is that lenders may refuse to renew loan agreements at the maturity of existing loan facilities. BG Group can utilise interest rate swaps to change the maturity of its debt profile by swapping either fixed interest rate loans with floating interest rate loans or vice versa.

Interest rate swaps can also be used to manage foreign exchange risk. Cross currency interest rate swaps can be use to swap foreign exchange interest rate payments to hedge against foreign exchange risk. BG Group uses foreign exchange swaps to change the composition of its debt denominated in foreign currencies. This is done by swapping the interest and principal amount of a debt for example, in Brazilian reais into a debt in US dollars. By doing so, the Group can match its revenue in US dollars with its operating cost that is now also in US dollars.

3.2.4 Forward rate agreements

Forward rate agreements are similar to forward currency contracts in the sense that they lock the future level of interest rates. Any movements in interest rates in the future would then result in one party having to pay cash compensation to the other party of the forward rate agreement. The advantages of a forward rate agreement is that it can create certainty as specific interest rates in are locked in on spot. Furthermore, forward exchange rates are tailored according to the needs of the company as they are not standardised.

However, forward rate agreements will result in the company losing any chance of being able to benefit from favourable movements in interest rate movements. Besides that, forward rate agreements are not traded on exchanges and therefore contain more risk of a counterparty defaulting. As with forwards, a counterparty that defaults in a forward rate agreement would probably cause the Group to suffer a huge loss on the contract.

4. Hedging Decisions

4.1 Hedging Philosophies and Industry Analysis

The three hedging philosophies are 1) to hedge nothing, 2) to hedge everything and 3) to hedge selectively. BG Group should hedge selectively by hedging only large contracts that have the potential to cause huge losses. The rationale is that BG Group with its operations in many different geographical regions is able to lower its risk by internal hedging. Besides that, it would be counterproductive to hedge everything as this would incur a high cost to the Group. Hedging selectively is extremely important for BG Group should it seek to purchase costly heavy equipment in other countries. These transactions are large one off transactions which make them exceedingly risky.

It is likely that the oil and gas industry would remain highly volatile in the coming years. Oil prices has been an unstoppable juggernaut since the early days of 2002 (back then, oil prices was merely at the US$20 level). Since the emerging economies of China and India took off, the price of oil has spiraled up to almost an alarming 600% and reaching a record high of US$147.27 on July 11 (Tee Lin Say, 2008) before subsiding. Volatile oil and gas prices call for more vigilance in hedging activities. The goal of the group is try and lock in low cost and high gas prices to ensure profit margins are high.

The US dollar on the other hand has been very volatile after the implosion of the sub-prime mortgage crisis in 2007. The US dollar has a very close correlation to oil and gas prices because both commodities are traded in US dollars in the international commodities market. The US dollar normally has an inverse relationship with oil and gas prices because if the US dollar falls, oil and gas producers would try to raise their pump prices to maintain their purchasing power. Evidence of this can be seen when oil and goal prices increase due to the weakness in the US dollar on 15 June 2009 (Financial Times).

4.2 Hedging Transaction Exposures to the US dollar[7]

Modigliani and Miller (1958) argued that hedging is irrelevant unless hedging activities can lower a company’s taxes, affect its investment decisions or can be done cheaper than the original transaction that was hedge. Furthermore, hedging will not change the investor’s perception of the firm’s systematic risk and hence will not have an impact on the company’s risk profile and the compensation needed when raising capital.

The duo also argued that individual investors can also hedge and change the composition of their portfolios themselves regardless of the firm’s hedging preferences. Since some of these investors are holding shares in the company for specific exposures, a firm’s hedging activities would actually damage the individual investor’s portfolio of assets. Although individual investors may not be able to hedge as effectively as bigger corporations, large mutual fund investment companies would not have an issue in commanding the same terms as big corporations.

The second popular argument against hedging is that hedging is costly and would not be in the interest shareholders. The argument is that selling a currency for example, at a forward discount would not be good for the company since spot rates are actually higher. This argument is not correct because the forward discount takes into account the differences in interest rates that must be discounted in order to obtain the forward value. A more accurate cost of hedging would be the bid-ask spread causes the cost of forward hedging to increase with the maturity of the contract.

Another popular theory against hedging is the capital asset pricing model (CAPM). The CAPM states that the returns on a financial asset increases with risk and if a company holds a fully diversified portfolio of financial assets, the only exposure left would be systematic risk. Hedging foreign exchange risk which is considered as systematic risk would not be possible as the cost of hedging would outweigh the benefits of hedging while hedging unsystematic foreign exchange risk is unnecessary if the company has a diversified portfolio of assets.

The zero sum theory supports the conclusion above by stating that in the long-run, all unhedged foreign exchange gains will net out and hence if a company has an infinite life expectancy, hedging is unnecessary. Furthermore, some companies have only a small portion of their operations overseas hence would feel that hedging foreign exchange risk would not be beneficial to their company.

Base on the arguments above, BG Group should hedge selectively contracts or transactions in the US dollar that is considered to be large and one off. This is because the Group has large scale operations in Australia, Brazil, Egypt, Kazakhstan and the United Kingdom that represents exposures to foreign exchange currencies other than the US dollar. The Group reduces this exposure with an internal hedging strategy by borrowing or swapping foreign denominated debts into US dollars.

This is primarily the main reason why the Group should not hedge its exposure to US denominated debt as this exposure is already a hedge against the mismatch of revenues in US dollars against cost that are in other currencies. However, there are certain benefits to hedging that need to be considered. According to Bekaert and Hodrick (2009), hedging can increase the value of a firm by reducing its expected future income taxes.

Clifford Smith and René Stulz (1985) also argued that hedging can increase the value of a firm by reducing the expected costs of financial distress. The cost of financial distress is losses in the value of a firm because of the likelihood of a bankruptcy in the future. Hedging reduces the probability of financial distress because it seeks to make earnings less volatile in the long-run. A model by Froot, Scharfstein and Stein (1993) also stated that less volatile earnings enable companies to better exercise investment opportunities and growth options.

4.3 Hedging Economic Exposure relating to the US dollar[8]

Among all the foreign exchange risk, economic risk is the hardest to identify and also the hardest to hedge. Identifying economic risk requires analysts to make a long-term forecast of exchange rate movements while taking into account relative inflation rates. Identifying economic risk also involves knowing the cost base of competitors and also any hedging done by competitors. There are namely two theories concerning whether to hedge economic exposure.

The theory is the purchasing power parity that states that the exchange rates between two currencies will adjust to reflect changes in the price levels of the two countries (Frederic Mishkin, 2007). If the purchasing power parity holds perfectly in the short-run, it would mean that there is no foreign exchange exposure as price levels would adjust to cancel them out. Even with time lags, price levels would adjust accordingly in the long-run to offset any movements in exchange rates.

However, according to Frederic Mishkin (2007), the purchasing power parity assumes that two countries are producing identical goods, low transportation cost and trade barriers and no restrictions in the flow of capital. This is usually not the case in reality as there are restrictions to the international flow of funds by capital controls and trade barriers. Frederic Mishkin (2005) continues by saying that the purchasing power parity theory is a poor predictor in the short-run.

The second theory concerning economic exposure is the market efficiency theory. According to Frederic Mishkin (2005), current prices in a financial market will be set so that the optimal forecast of a security’s return using all available information equals the security’s equilibrium return. In other words, in an efficient market, a security’s price would fully reflect all available information. Since gains and losses in the long-run would average out, the market efficiency theory implies that there is nothing to be gained from hedging. This is a serious over-generalisation by assuming that if markets are frequently efficient, they are always efficient.

BG Group faces threats from economic exposure but has managed to lessen the impacts through the diversification of markets and countries of manufacture. Furthermore, the Group uses cross-currency interest rate swaps to match US dollar revenues with US dollar costs. Furthermore, long-term gas contracts would also ensure that the Group is able to lock in profit margins for a longer term with hopes that foreign exchange movements would move according to the purchasing power parity condition.

4.4 Hedging Recommendations

BG Group should not hedge its main interest rate exposure to US dollar borrowings. Although the Group uses cross-currency interest rate swaps, this is done to change the composition of the Group’s borrowings in foreign denominated debt. It would be counter-productive to hedge interest rate risk again after the Group has already done so for foreign exchange risk exposures.

Furthermore, due to the inverse relationship between the US dollar and gas prices, if the US dollar depreciates and the interest rates on US debt increases because of the Fisher effect (Frederic Mishkin, 2007), this would mean that BG Group can increase gas prices to offset any loss in purchasing power. To add to this, economic data shows that although the Central Bank’s base lending rates are low (in the US and the UK), the credit crunch has caused banks to cease lending activities.

A credit crunch would most likely mean that banks are unwilling to lend to corporations unless at a high interest rate. Should BG Group lock in interest rates now, the Group would not be able to take advantage of favourable interest rate movements in the near future. Economic activity is likely to rebound within either this year or next year. Oil and gas prices may rise while interest rates for corporations may decrease as credit situation ease.

5. Credit ratings

It is important for BG Group to obtain high credit ratings in order to lower its cost of capital. Bonds with default risk always have a positive risk premium, and an increase in its default risk will raise the risk premium (Frederic Mishkin, 2007). However, if BG Group is able to obtain a higher credit rating for its bonds, this would mean that BG Group will need to pay a lower risk premium. Furthermore, credit ratings from big credit rating agencies like Moody’s and Standard and Poor’s are recognised internationally. This would mean that good credit ratings would decrease the cost of debt internationally on foreign denominated borrowings.

5.1 Ratings Book (Information Required, please refer to Appendix: 6)

5.1.1 Financial Information

BG Group should ensure that its yearly annual report is in line with the reporting and disclosure requirements of international accounting standards. This includes information with high accounting and earnings quality. This can be done by being conservative in recording profits and stating of cost. Revenue should only be recognised when received while costs are acknowledged when they are known with certainty. Conservative earning policies with good earnings quality are likely to obtain a higher rating.

Methods in which consolidation of balance sheet and income statement should also be clearly stated so as to provide rating agencies with a better understanding of how translation risk would impact the company. Assets like property, goodwill and intangible items should be either undervalued or recorded with a fair value. Depreciation and taxation methods should also be noted down and discontinued operations should be clearly defined. This is to foster transparency and avoid making the financial statements misleading.

Off-balance sheet activities must be clearly noted down and explanations of derivatives should be explained in the footnotes. The capital structure of the company should also be clearly reported and gearing ratios clearly shown in the rating book. Other information includes information concerning the liquidity of assets like government and corporate bonds. The ability to generate cash must also be stressed in the cash flow statement.

BG Group should also include a sensitivity and volatility analysis in the rating book. This is to bring to light BG Group’s exposure to interest rate and foreign exchange movements. Hedging activities should also be included and their effects taken into account. Relationships between energy prices and the US dollar must also be stated clearly so as to foster understanding in the industry.

The main aim at providing financial information is to prove to creditors that BG Group is able to remain a profitable business and service its debt. Hence, the company’s track record of earnings growth and also business performance is important. Sustainable earning power should also be included so as to give credit rating agencies the assurance that BG Group would be able to service its debt obligations.

5.1.2 Non-financial Information

Non-financial information is equally important as credit rating agencies would consider them crucial in examining the sustainability of business activities. Industry risk is one of the main factors to consider. In the case of BG Group, natural gas and oil are necessities that must be utilised in every country. This means that BG Group is able to transfer any increase of cost to consumers and thus has a low price elasticity of demand.

Oil and gas companies also enjoy high barriers to entry due to the high initial outlay needed to purchase expertise and equipment. In terms of market position, there are not many players in the industry and therefore the rivalry in industry is deemed to be low. Geographical regions in which the company operate would also be of interest to credit rating agencies to assess the Group’s foreign exchange exposures. Capital investments and also major R&D outlays would also be relevant in a ratings book to show the future direction of the company.

Another important aspect of the company is to state its ownership and shareholder information. To be precise, the structure of ownership and the stakeholders are important items to be included. Notes concerning the management of the company like the Group’s corporate goals and outlook, attitudes to risk, experience and background should also be included. Another important item is the performance of the company as compared to peers and competitors in the industry.

The level of protectionism in each country should also be taken into account. Operations in countries like Russia are particularly risky because of their poor historical records. International competition from other corporations should also be included. In the case of BG Group, Gazprom, British Petroleum and Royal Dutch Shell would be its main competitors.

6. Bibliography

Alan C. Shapiro, 2005, Multinational Finance 5th Edition, John Wiley & Sons, Inc, United States of America.

Alan C. Shapiro., 2005. Foundations of Multinational Financial Management. 5^th ed.           United States of America: John Wiley & Sons.

Alan Greenspan, 2007, The Age of Turbulence, Allen Lane, Penguin Group, England.

Bekaert & Hodrick, 2009, International Financial Management, Pearson Education Inc, United States of America.

BG Group, 2008, Annual Report and Account, A World Leader in Natural Gas, London: BG Group.

BG Group, 2008, Data Book, A Portfolio of Opportunities, London: BG Group.

Buckley A, Multinational Finance, 2004, 5^th Edition, Prentice Hall.

Carol Lewis, July 14, 2009, Too much caution poses threat to recovery, The Times, No. 69687, pp 46.

Cecelia Kok, 2008. Challenging Times Ahead; Banks brace for impact of slower economic growth. The Star Bizweek, 8 November 2008.

Chris Flood, July 15, 2009, Oil and gold given lift by dollar weakness, The Financial Times, The Financial Times Limited, No. 37,053, pp32.

CIMB Regional Economic Research, 2008. December 2008 Regional Economic       Compass 2008: Malaysia.Singapore.Indonesia.Thailand.Hong Kong. Kuala    Lumpur: Xpress Multimedia Sdn. Bhd.

Clifford Smith & René Stulz, 1985, The Determinants of Firm’s Hedging Policies, Journal of Financial and Quantitative Analysis, pp. 20, 391-405.

Economist’s Forum, Fixing banks quickly, Financial Times, 13^th July 2009, The Financial Times Limited, No: 37051, London, United Kingdom.

Ed Crooks & Fiona Harvey, July 15, 2009, Energy plans face delays, group warns, The Financial Times, The Financial Times Limited, No. 37,053, pp2.

Frederic S. Mishkin. 2007. The Economics of Money, Banking, and Financial Markets, Pearson Education Inc. United States.

Froot, Scharfstein & Stein, 1993, Risk Management: Coordinating Corporate Investment and Financing Policies, Journal of Finance 48, pp. 1629-1658.

Glen Arnold, 2008, Corporate Financial Management, Financial Times Professional Limited, Pearson Education Limited, United Kingdom.

Izabella Kaminska & Javier Blas, July 5, 2009, Questions grow over oil spike brokerage, The Financial Times, The Financial Times Limited, No. 37,044, pp1.

Javier Blas & Miles Johnson, July 5, 2009, Oil price rallied after 2am activity, The Financial Times, The Financial Times Limited, No. 37,044, pp 2.

Jeremy Grant, July 5, 2009, Oil drops back to $66 in wake of rogue trader, The Financial Times, The Financial Times Limited, No. 37,044, pp 2.

Loong Tse Min, Two-pronged impact, Starbiz, The Star Newspaper, 29^th July 2008, No. 17902.

Meredydd Davies, HSBC Economic Review, Spring 2009 Issue 52.

Miles Johnson, July 5, 2009, Questions grow over oil spike brokerage, The Financial Times, The Financial Times Limited, No. 37,044, pp 23.

Modigliani and Miller, 1958, The Cost of Capital, Corporation Finance, and the Theory of Investment, American Economic Review, pp. 261-297.

Paul Roberts, June 2008, Tapped Out, National Geographic, Vol. 213. No. 6, National Geographic Society, United States.

Peter Drucker (2002), Managing in the Next Society, St. Martin’s Press, United States of America.

Tee Lin Say, July 26, 2008, Oil – how low can it go?, The Star Newspaper, No. 17899, BizWeek.

The Economist, 25th July 2009, World Trade, Unpredictable tides, The Economist, 392(8641), p 69.

International Monetary Fund, 2008. World Economic Outlook April, 2008. [online]. Available at: http://www.imf.org/external/pubs/ft/weo/2008/01/pdf/text.pdf [Accessed 2 August 2009].

Miyamoto, 2003, In defence of hedging Bank of America, GT News, [online]. Available at: http://www.gtnews.com/search.cfm [Accessed 10 August 2009].

Stephen Baird, 2004, What do rising interest rates mean for treasurers? GT News, [online]. Available at: http://www.gtnews.com/article/5690.cfm [Accessed 10 August 2009].

Walter Ochynski, 2003, To hedge or not to hedge? GT News, [online]. Available at: http://www.gtnews.com/article/5194.cfm [Accessed 10 August 2009].

Appendix 1: Company Data

Table 1: Key Highlights

Points	Details
BG Group	Has a highly cash-generative business Low level of gearing Committed lines of credit Natural gas accounts for 71% of the group’s production
Natural gas	More important to BG Group’s earnings than oil Gas prices have an explicit linkage to oil prices because of inter-fuel competition UK saw gas prices increase (prices in US was in decline) Gas prices decline less severe than oil It is likely that energy prices will continue to grow
US dollar	Dominates the revenues and costs of BG Group’s business Accounts reported in pound Sterling
Core operations	Australia Brazil Egypt India Kazakhstan Trinidad and Tobago Tunisia United Kingdom United States
Commodity prices	A US$ 1.00 rise (or fall) in the Brent oil price would increase (or decrease) operating profit in the Group’s E&P business in 2009 by around £55 million Hedging methods include long-term gas contracts, sharing of price risk with gas suppliers, futures contract, forward based contracts and swap contracts The Group only hedges certain (mostly none) gas and oil revenues
Foreign exchange risk	Exposure to translation risk because income statement and balance sheet are reporter in pound Sterling but majority of business activities are in US dollars On consolidation, assets and liabilities denominated in foreign currencies are translated into pound Sterling at closing rates of exchange Trading results of overseas subsidiary undertakings, jointly controlled entities and associates are translated into pound Sterling at average rates of exchange Holds substantial US dollar denominated assets A 10 cent strengthening (or weakening) in the US Dollar against the pound Sterling would increase (or decrease) operating profit by approximately £250 to 300 million The Group borrows in or swaps majority of its borrowings into US dollars The Group does not hedge US denominated transactions (only specific transactions) Other exposures included the Brazilian real and the Australian dollar
Interest rate risk	Financing costs may be significantly affected by interest rate volatility Group’s interest rate management policy requires that borrowings are substantially in floating rate The Group limits the amount of borrowings that mature within any specific period
Financial instruments	Interest rate derivatives to manage composition of fixed and floating rate debt Currency derivatives to hedge  certain foreign currency cash flows and to adjust the currency composition of its assets and liabilities Treasury operations include the use of interest rate swaps, foreign currency swaps, cross currency interest rate swaps, forward rate agreements and forward exchange contracts
Competitors	Many new countries are looking to develop LNG import capacity, including, Canada, Chile, the Netherlands, Singapore and Thailand

Source: BG Group, 2008, Annual Report and Account, A World Leader in Natural Gas

Business performance excludes disposals, certain re-measurements and impairments as exclusion of these items provides readers with a clear and consistent presentation for underlying operating performance.

Source: BG Group, 2008, Annual Report and Account, A World Leader in Natural Gas

In 2008, EPS grew by 74% compared with 2007. This performance reflected strong growth including outstanding results from the LNG business and the contribution of exceptionally high commodity prices during the year.

At constant US$/UK£ exchange rates and E&P commodity prices, EPS grew by 28%

Source: BG Group, 2008, Annual Report and Account, A World Leader in Natural Gas

Source: BG Group, 2008, Annual Report and Account, A World Leader in Natural Gas

Source: BG Group, 2008, Annual Report and Account, A World Leader in Natural Gas

Source: BG Group, 2008, Annual Report and Account, A World Leader in Natural Gas

Source: BG Group, 2008, Annual Report and Account, A World Leader in Natural Gas

Source: BG Group, 2008, Data Book, A Portfolio of Opportunities

Table 2: Financial Derivatives
	2008
	Assets £m	Liabilities £m
Interest rate derivatives	19	-
Currency exchange rate derivatives	988	(744)
Cross-currency interest rate derivatives	7	(97)
Long-term UK gas contracts	-	(242)
Other commodity derivatives	1459	(898)

Source: BG Group, 2008, Annual Report and Account, A World Leader in Natural Gas

Table 3: Currency and interest rate profile of financial assets
	2008
	Fixed rate financial assets £m	Floating rate financial assets £m	Non-interest bearing assets £m
Currency:
Sterling	73	212	208
US Dollars	45	1074	45
Other	-	357	15
Total	118	1643	268

Source: BG Group, 2008, Annual Report and Account, A World Leader in Natural Gas

Table 4: Gearing
		2008	2007	2006	2005	2004
Net (borrowings)/funds	£m	(972)	25	(103)	(30)	(1186)
Gearing Ratio	%	7.1	(0.3)	1.6	0.4	20.6
Debt/equity Ratio	%	7.7	(0.3)	1.6	0.5	25.9

Source: BG Group, 2008, Annual Report and Account, A World Leader in Natural Gas

Table 5: Sensitivity Analysis	Market Measurement		Business Performance		Equity
	2008	2007	2008	2007	2008	2007
UK interest rates	+150 basis points	+100 basis points	2	9	10	8
US interest rates	+100 basis points	+100 basis points	(3)	(4)	(9)	(8)
US$/UK£ exchange rates	+20 cents	+20 cents	(25)	(12)	(58)	(16)
UK gas prices	+15pence/therm	+10 pence/therm	(3)	-	(133)	(89)
US gas prices	+1US$/mmbtu	+1 US$/mmbtu	(11)	10	167	51

Source: BG Group, 2008, Annual Report and Account, A World Leader in Natural Gas

Appendix 2: List of Foreign Exchange and Interest Rate Risk

Table 6: BG Group’s risk exposure

Exposures	Details	Severity	Frequency
Foreign Exchange:US Dollar   UK Pound Sterling Kazakhstan Tenge Egypt Geneih India Rupee Tunisia Dinar Thailand Baht Trinidad and Tobago Dollar Brazil Real Bolivia Boliviano Canada Dollar Australia Dollar	Production of Oil and Gas:LNG importer into US (55% of imports)   59.2 mmboe 39.6 mmboe 56.6 mmboe 13.7 mmboe 11.9 mmboe 9.9 mmboe 23.0 mmboe Largest distribution of gas (Comgas) 5.5 mmboe 0.9 mmboe Alliance with Queensland Gas Co	43   2 3 1 1 1 2 3 1 1 2	44   2 2 1 1 1 1 3 1 1 2
Interest Rate:Sterling   US Dollars Brazilian Reais Other	£m528   1,151 397 102	34   2 1	34   2 1

Source: BG Group, 2008, Data Book, A Portfolio of Opportunities

Notes: BG Group is heavily exposed to the movements of the US dollar and uses financial derivatives to swap debts denominated in other currencies into the US dollar. This is done in order to match the cost and revenues of BG Group in the same currency. Other currencies that BG Group is more heavily exposed to include the UK pound sterling and the Brazilian reais.

Justification: Individual risk identified in section 1 of this assignment is rated according to their severity and frequency according to data is appendix 1. The severity refers to how       movements in a particular currency against the US dollar or UK pound would affect the company. The frequency takes into account the likelihood of changes in the particular value of a currency would affect the company.

Most of the Group’s revenues are denominated in US dollars. Hence, the risk map takes into account the cost of operations denominated in other foreign currencies.

Appendix 3: Hedging Methods

Table 7: Forward Contract

BG Group, a sterling base company invoices another company oil and gas worth US$ 1,000,000 on 1st of January with payment to be made in three months (April 1st). The spot rate on 1st of January is US$ 1.50 to £1. BG Group gets into a forward contract with a bank and agree to fix the forward rate at US$ 1.495. No cash exchanges are made at up till now.On 1st of April, there are four possibilities.   Spot rate 1 April Dollars received by exporter? Outcome US$ 1.65 = £1 Yes Convert at agreed forward rate to sterling £ 668,900 US$ 1.65 = £1 No Bank will close out and will pay the customer £62,840 US$ 1.35 = £1 Yes Convert at agreed forward rate to sterling £668,900 US$ 1.35 = £1 No Bank will close out and will charge customer £71,840 Explanation of Close Outs: If the dollars are not received, the spot rate on 1st April is 1.65, the bank will close out as follows. Sell US$ 1,000,000 at 1.65 = £606,600 (Dr) at spot Buy US$ 1,000,000 at 1,495 = £668,900 (Cr) at agreed forward rate Net Credit to customer = £62,840 If the spot rate on 1st April had been US$ 1.35, then the close out would have resulted in a net debt to the exporter’s account as follows: Bank sells US$ 1,000,000 at 1.35 = £740,740 Bank buys back the US$ at 1,495 = £668,900 Net Debit to customer = £71,840

Table 9: Advantages and Disadvantages of Options, Futures, Forwards and FRAs

Options	Futures	Forwards and FRAs
Advantages
Downside risk is limited but the buyer is able to participate in favourable movements in the underlying.	Can create certainty: specific rates are locked in.	Can create certainty: specific rates are locked in.
Available on or off exchanges. Exchange regulations and clearing house reduce counterparty default risk for those options traded on exchanges.	Exchange trading onlyExchange regulations and clearing house reduce counterparty default risk.	Tailor-made, off-exchange.Not standardised as to size, duration and terms. Good for companies with non-standard risk exposures.
For many options there are highly liquid markets resulting in keen option premium pricing and ability to reverse a position quickly at low cost. For others trading is thin and so premiums payable may become distorted and offsetting transactions costly and difficult.	No premium is payable (however margin payments are required).	No margins or premiums payable. (Occasionally a good faith performance margin is required by one or more parties in a forward. Also credit limits may be imposed.)
Disadvantages
Premium payable reduces returns when market movements are advantages	No right to let the contract lapse. Benefits from favourable movements in underlying are foregone.	No right to let the contract lapse. Benefits from favourable movements in underlying are forgone.
	In a hedge position if the underlying transaction does not materialise the future position owner can experience a switch from a covered position, the potential loss is unlimited.	In a hedge position if the underlying transaction does not materialise the forward/FRA position owner can experience a switch from a covered to an uncovered position, the potential loss is unlimited.
Margin required when writing options	Many exchange restrictions – on size of contract, duration (e.g. only certain months of the year), trading times (e.g. when euronext.liffe is open).	Greater risk of counterparty default – not exchange traded therefore counterparty is not the clearing house.
		Generally the minimum contract size is for millions rather than a few thousand (as on the futures or options markets).
	Margin calls require daily work for ‘back office’.	More difficult to liquidate position (than with exchange-traded instruments) by creating an offsetting transaction that cancels position.

Source: Glen Arnold, Corporate Financial Management, 2008

Table 10: Hedging Transaction Risk
Against	For
Capital Asset Pricing Model (CAPM)   Hedging unsystematic foreign exchange risk is not necessary if the Group is holding a diversified portfolio of assets because movements in one currency would be offset by movements in another currency If the foreign exchange exposure is regarded as systematic risk, hedging would be futile as the cost of hedging would only destroy shareholder value	Capital Asset Pricing Model (CAPM)   Although holding a diversified portfolio of assets may cancel out all foreign exchange gains and losses in the long-run, the company may become illiquid in the short-run Financial distress may result in the Group breaching covenants with banks and increase the borrowing cost of capital which would further drain the Group’s liquidity
Modigliani and Miller   Individual investors can hedge for themselves the risk of the equity they are holding Hedging may be counterproductive if individual investors have already done so	Modigliani and Miller   Individual investors may not be able to hedge as effectively as big companies because hedging instruments contain minimum amounts
The Zero Sum theory   In the long-run, foreign exchange gains and losses will net out and there will be no exposures to foreign exchange risk	The Zero Sum theory   The zero sum theory may be relevant to the whole market and all the companies within it. However, individual companies may bear the brunt of foreign exchange movements and go into financial distress
Economic Exposure
Against	For
Purchasing Power Parity   Changes in foreign exchange rates would be offset by price levels in respective countries	Purchasing Power Parity   Does not take into account the freedom of international capital flows, trade barriers and price stickiness
Market Efficiency   Prices reflect all information held by the public and also by the private. Hence, there is no benefit from hedging in the long-run	Market Efficiency   Managers and employees cannot have a diversified portfolio of jobs. Talented workers would be motivated to stay in a company with less risk of financial distress

Appendix 4: Data on Oil and Gas

Paul Roberts, June 2008, Tapped Out, National Geographic, Vol. 213. No. 6, National Geographic Society, United States, pp87-91

Appendix 5: Economic Data

Table 11: Economic Outlook of the United Kingdom

Economic Growth	2007	2008	2009e	2010f
GDP	3.0	0.7	-3.8	-0.3
Domestic demand	3.5	0.6	-3.9	-0.3
Output trends
Services	3.5	1.5	-2.2	-0.5
Manufacturing	0.2	-2.6	-14.3	1.5
Construction	2.8	0.3	-6.0	0.5
The Personal Sector
Disposal income	0.2	2.2	-0.5	0.0
Household expenditure	3.0	1.4	-3.5	-1.9
Retail sales	4.3	3.5	-2.0	-0.5
Unemployment rate (% of workforce)	5.4	5.7	8.5	10.0
House prices (Halifax survey, q4 on q4)	5.6	-16.5	-10.0	5.0
International Trade
Trade in goods balance £bn	-89.3	-92.9	-85.0	-80.0
Current account balance £bn	-40.3	-24.5	-20.0	-15.0
Inflation and base rate
Consumer Prices Index	2.3	3.6	1.6	1.1
Bank base rate (at year end)	5.50	2.00	0.50	1.00

Notes:

1. HSBC forecasts are as at 2^nd April 2009.

2. Data and forecasts are subject to revision.

Source: Meredydd Davies, HSBC Economic Review, Spring 2009 Issue 52

Slowdown in the United Kingdom

The United Kingdom is also severely affected by the global economic slowdown with a full blown recession according to HSBC’s 2009 estimates. Domestic demand is likely to fall and fears of deflation is now looming. The manufacturing sector shows a huge drop in production while unemployment is poised to rise to 8.5 percent of the total workforce. Furthermore, the bank base rate is at its lowest in 300 years at 0.5 percent.

Survey and interview results of Chief Finance Officers of the FTSE 100 on the economy

Figure 12 shows the results of a survey and interview from Deloitte CFO Survey shows that most CFOs believe the economy will partially recover in the second half of next year. However, this recovery will be gradual and coupled with tight credit lending policies from banks. This implies that economic activity would take a longer time to return to pre-crisis levels and that the credit crunch is far from over.

Figure 12: Interview and Survey Results of Chief Finance Officers of FTSE 100

 

---

[1] Please refer to Appendix 1: Table 1 & Figure 2

 

[2] Please refer to Appendix 1: Table 1 & Figure 9

[3] Please refer to Appendix 1: Table 1

[4] Please refer to Appendix 1: Table 2, 3 & 5

[5] Please refer to Appendix 3: Table 7 & 9

[6] Please refer to Appendix 3 Table 8

[7] Please refer to Appendix 3: Table 10

[8] Please refer to Appendix 3: Table 10

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Marketing Assignment: A Marketing Plan for HSBC (7Ps)

Table of Contents
Details	Page Number
1. Executive Summary	3
2. Objectives	3
3. Marketing Strategy	4
4. Target Market	4-5
4.1 Market Segmentation and Targeting
4.2 Market Positioning
5. Marketing Mix	5-10
5.1 Product
5.2 Price
5.3 Place
5.4 Promotion
5.5 People
5.6 Physical Evidence
5.7 Process
6. Research	10-11
6.1 Pre-implementation
6.2 Implementation Stage
6.4 Post-implementation
7. Budget	11
8. Timescales	12
9. Contingency	12
Bibliography	13-14
Appendix 1	15-16
Appendix 2	17-19
Appendix 3	20-21
Appendix 4	21-22
Appendix 5	22
Appendix 6	23-24
Appendix 7	25-27
Appendix 8	28-29
Appendix 9	29-30

1. Executive Summary

• This report provides the details of the new HSBC current account package.
• A marketing plan devised from the 7Ps is outlined below to provide a practical and feasible way to implement the new current account package.
• Numerical targets and qualitative targets are stated clearly as objectives.
• Further details on the research required during the pre and post-implementation stage is discussed in detail.
• The budget and the timing of the launch of the new current account package is elaborated using a simple budget statement and Gantt chart.

2. Objectives

• This marketing plan aims to define the means of notching up HSBC’s current account market share by 1.5% (960,000 current accounts) from HSBC’s current market share of 8.9%.
• The new HSBC prepaid card that would be introduced will increase the profitability of current accounts by encouraging customers to save, hence making more funds available for further lending by the bank.
• The new current account package also aims at rebuilding consumer confidence towards HSBC by portraying the bank as a responsible and socially conscious financial institution.
• The new current account package also aims and building up HSBC’s corporate image and branding theme of being global bank with local knowledge by introducing new products that are in line with the current economic downturn.

(See appendix 2)

3. Marketing Strategy

HSBC should implement the market penetration and product development strategy by capturing current account market share from other financial institutions that have been weaken from the economic crisis. Besides that, the launch of the new prepaid card would be a step towards product development that would be useful to counter non-traditional financial institutions that are poise to enter the current account market.

The market development strategy can also be carried out at a later date by bringing the new and tested prepaid card product into other geographical markets like China and India. This would be in line with HSBC’s slogan of being the ‘World’s Local Bank’ and would also take advantage of HSBC’s global network in more than 79 countries.[1] In relation to the Porter Generic model, HSBC should aim at using a broad based differentiation strategy to capture market share from ailing financial institutions.

(See appendix 1)

4. Target Market

4.1. Market Segmentation and Targeting

A market segment should consists of a group of customers who share a similar set of needs and wants (Kotler. Etal, 2009).[2] A market segment must be accessible, measurable, large enough and profitable in order to be worth targeted by an institution. The new prepaid card should be offered as a ‘naked solution’ that all segment members value (Anderson & Narus, 1995).[3] Ways of segmenting the market should include geographical and demographic segmentation.

The new HSBC prepaid card should be launched in the United Kingdom first before being extended into other geographical regions. A time lag of half a year would be enough to test the effectiveness of the product as a method to obtain a higher market share for current accounts. Demographic segmentation on the other hand should be focussed on age and income. Special attention should be focussed on young individuals opening their first current accounts and high net worth customers.

4.2. Market Positioning

Positioning is the act of designing the company’s offering and image to occupy a distinctive place in the minds of the target market (Ries & Trout, 2000).[4] Data taken from SWOT and PESTEL analysis of HSBC enables marketers to define the points-of-difference and points-of-parity associations. Points-of-difference are attributes or benefits consumers strongly associate with a brand, positively evaluate and believe they could not find to the same extent with a competitive brand. In the case of HSBC, the bank is known to be a truly global bank with an international branch network.

Points-of-parity are associations that are not necessarily unique to the brand but may in fact be shared with other brands (Brunner & Wänke, 2006).[5] There are two types of points-of-parity, namely, category and competitive points-of-parity. Category points-of-parity includes HSBC being a reputable financial institution and also a bank entrusted with fiduciary responsibility. In terms of competitive points-of-parity, HSBC must be seen to ‘break even’ with other financial institutions in terms of service quality.

(See appendix 2)

5. Marketing Mix

Marketing for financial services pose distinctive challenges to marketers because services are intangible, inseparable and cannot be inventoried. An expanded marketing mix is required to fully answer the differences between product marketing and marketing for financial services. The expanded marketing mix aims to capture the distinctive nature of financial services (Booms & Bitner, 1981).[6]

(See appendix 2)

5.1. Product

The product is the heart of the firm’s marketing strategy. Poorly designed service products that do not create value for customers are destined to fail regardless of how well the other 6 Ps are executed. The goal of the product element is to create a service concept that would offer more value to a market segment than competitors. Working to transform this concept into reality involves designing a cluster of different but mutually reinforcing elements.

The product must be a means to solve a problem or satisfy a want in the market. To date, overspending is a major issue in the Western world. This is the reason why the new HSBC prepaid card is included in the new current account package as a means to ensure that customers do not overspend by ensuring prudential budgeting of financial resources.

Unique Features:

Prepaid Card

HSBC will launch two prepaid cards, namely, the HSBC’s Financial Manager and the HSBC’s Budget Manager prepaid card. Both prepaid cards come preloaded with £10 after the customer pays the initial card issue fee. The Financial Manager is a way to manage a monthly budget by transferring your spending money from your bank account onto the card. It has an annual load limit of £15,000. The Budget Manager on the other hand has a smaller annual load limit of £2,000.

The new HSBC prepaid cards would be fee-free while offering the same flexibility as a credit or debit card. The prepaid card however, would need to be loaded up with cash first before allowing its users to purchase products and services. The prepaid cards can also be used to withdraw money from cash machines.

Real Time Balance Alerts

Real time balance alerts will be sent to the customer’s mobile device every time a HSBC prepaid card user purchases something. This balance update will notify the prepaid card user on the amount of money spent and the amount of money left for free. HSBC may need to team up with companies like Vodafone to provide this service.

Online Banking

Another unique element of the HSBC prepaid cards are their flexibility in managing the customer’s financial resources. Bank customers can access the HSBC website and set standing orders on how much money to load onto the budget manager every month as long as the funds are available in their current account.

Optional Savings Account

Bank customers that pay more than £500 into their current account every month would qualify for the HSBC’s Current Account Advance. Regular payments can be made through the internet or by direct standing order from the customer’s current account to save a specific amount every month. This feature is ideal for customers with a fixed monthly income.

5.2. Price

The pricing component plays twin roles for HSBC in the sense that it must be able to first attract customers to purchase the service and also generate revenue for HSBC. According to Adrian Palmer (2008), there are five main factors that influence pricing decisions, namely, profit maximisation, market-share maximisation, survival, social considerations and personal objectives.[7]

While pricing strategy is highly dynamic for other products and services, pricing for current account services have become rather static in recent years. Most banks do not require any fees to set up a current account. Banks instead rely on the money that floats in the interval when they are deposited to when they are spent in order to profit from current accounts.

It is unlikely that any increases in interest rates would be able to attract customers to open up new current accounts with HSBC. The base lending rate that is now at 0.5% provides little room to manoeuvre for banks and other financial institutions. Adding to that is the credit crunch and declining asset prices that makes borrowing at a higher rate unattractive at the moment. The initial prepaid card issue fee should be around £10. This is in line with what competitors are charging at the moment.

The catch with the prepaid card scheme is that it encourages bank customers to save. Any money that is saved is held within the customer’s current account and remains available for banks to provide further lending. This may prove to be highly beneficial to HSBC during times when raising new capital is extremely difficult.

(See table 3)

5.3. Place

The place element involves delivering the product element to customers through appropriate methods and delivery channels. Delivery may involve both physical and electronic channels. Failure to make a service product readily available to customers would guarantee its failure regardless of how good the service product is. The new current account package would be made readily available throughout HSBC’s 1,492 branch network and also through the internet.

(See figure 1 & 2)

5.4. Promotion

The promotion element relies on effective communications to bring awareness in the market of the service products offered by HSBC. The three objectives of the promotion element are to gain the attention of customers, provide additional information and persuade customers to purchase the product. Advertising is mass, paid communication that is used to transmit information, develop attitudes and induce some form of response on the part of the audience (Adrian Palmer, 2008).

The choice of media that would be utilised includes newspapers, magazines, outdoor advertising and the internet. A sales promotion will also be carried during the first three weeks after the launch date to help stimulate customer purchase and the effectiveness of intermediaries (Adrian Palmer, 2008). Other promotional materials include press releases, posters and brochures.

(See appendix 3)

5.5. People

Despite technological advances, many financial services still require direct interaction between customers and bank employees. The nature of these interactions strongly influences how customers perceive service quality (Hartline & Ferrell, 1996).[8] This is particularly true for financial services as employees are often the first line of contact with the customer.

Due to the importance of this element in the marketing mix, special attention needs to be given to the training of employees concerning the new current account package. The prepaid card concept also requires some serious attention as its aim is to show HSBC’s change of stance concerning the psychology of spending.

Training should only be given to bank staffs that are directly involved in the new current account package. However, back office staff must also be formally notified concerning this new current account package to ensure that the entire organisation have a coherent understanding on the bank’s products and services. Besides that, training of IT personnel must also be stressed as new information systems may have to be put in place before the launch of the new product.

(See appendix 4)

5.6. Physical Evidence

It is generally recognized that physical evidence can be subsidized into two components (Shostack, 1982): peripheral evidence which can be possessed by the consumer but has little independent value and essential evidence, which cannot be possessed by the consumer but has independent value.[9] The peripheral evidence is the prepaid card itself while the essential evidence includes bank branches, cash machines, posters and brochures.

(See appendix 3)

5.7. Process

The process element focuses on the mechanisms by which the service is delivered, including business policies for service provision, procedures, degree of mechanization etc. It is imperative that the policies and procedures are written and tested before the launch of the new current account package.

Bank personnel are to conduct a test to determine how efficient and effective front line staffs are at explaining the new current account package and setting up new current accounts. A step by step guide on how to set up a new current account and prepaid card system is to be issued to all front line staff to ensure that no confusion is to occur during the critical launch date.

Besides that, front line staff should also be constantly monitored to ensure that the delivery of services occur smoothly. Customer feedback and complaints should be welcomed as they would provide the input needed to continuously improve service delivery and customer satisfaction.

(See appendix 5)

6. Research

Market research will be carried out before, during and after the launch of the new HSBC current account package. There are three methods for a financial services organisation to carry out its research, namely, using in-house resources, using the services of a specialist agency or a combination of the two methods. During the period nearing the launch of the new current account package, both pre and post implementation research should be carried out by specialist agency commissioned by HSBC.

6.1. Pre-implementation stage

During this stage, research should be focused on whether the market’s current external environment matches the company’s initial results during the first external environment analysis. Political, legal and economic elements of the external environment are likely to be very volatile in the coming days that may cause HSBC to either delay or bring forward the launch of the new current account package.

Furthermore, research should also be done on the company’s corporate image and the receptiveness of market for a new product and concept during a time when the banking industry is facing heavy criticism from the public.

6.2. Implementation stage

A tracking study should be carried out by the research agency during the implementation stage. The tracking study will be done through monitoring consumer’s awareness and acceptance of the new current account package. This process should be an ongoing one during the product’s life cycle. Tracking studies should be conducted with small groups of a target market segment. It would also be advisable to rotate the members of a group with another group to ensure that a variety of responses is noted.

6.3. Post-implementation stage

Post-implementation research should be aimed at obtaining tangible results on whether HSBC has indeed managed to obtain the desirable level of market share and profitability. Another goal of the new current account package is to change the attitudes and perception of the public towards HSBC. Marketing research at this stage should also determine on whether HSBC is now perceived to be a more responsible financial institution that not only aim for profits but provide value to customers.

Besides obtaining tangible results on whether marketing objectives are met, it is also important to gain feedback on customer satisfaction levels and any complains on the product offered by HSBC. This is to ensure that further improvements can be made in the future and any mistakes made would not be repeated.

(See appendix 8)

7. Budget

The budget to implement this marketing plan is estimated to be around £15 million. A contingency of 5% is included in the numerical calculations to ensure that some measure of volatility is covered should the promotion of the new current account package proves to be more expensive than anticipated

(See appendix 6)

8. Timescales

The implementation of the entire marketing plan would take around 9 months to complete. The launch date of the new current account package is the summer of 2010 when economic conditions are predicted to be more accommodating as a result of fiscal stimulus by the UK government. A Gantt chart is included in the appendix to break down the timeframes of individual tasks.

(See appendix 7)

9. Contingency Plan

A contingency plan is included in the appendix to note down various responses to some of the challenges posed in these difficult times. Among the various scenarios that might occur in the future includes the failure of the prepaid card to be a practical method to manage personal finances, a severe contraction in economic activity and the failure to gain market share in the current account market.

(See appendix 9)

Bibliography

• A. Ries and J. Trout, 2000, Positioning: The Battle for Your Mind, 20^th Anniversary Edition, New York: McGraw-Hill.
• Adrian Palmer, 2008, Principles of Services Marketing, 5^th Edition, McGraw-Hill Education (UK) Limited, United Kingdom, pp420-421.
• Andrea Felsted and Patrick Jenkins, Cash and carry, Financial Times, 20^th July 2009, The Financial Times Limited, No: 37057, London, United Kingdom, p 10.
• Andrea Felsted, Tesco Seeks to boost bank arm, Financial Times, 20^th July 2009, The Financial Times Limited, No: 37057, London, United Kingdom, p 19.
• Bernard H. Booms and Mary J. Bitner, 1981, Marketing Strategies and Organization Structures for Service Firms, in J.H. Donnelly and W.R. George, Marketing of Services, Chicago: American Marketing Association, pp47-51.
• Daft Richard L. (2008), New Era of Management, 2^nd edition, US: Thomson South-Western. p.311.
• David Fred. R., 2007. Strategic Management: Concepts and Cases. International Edition, 11^th ed. United States of America: Pearson Prentice Hall. p. 76-107.
• Dr. Orr, 2004, New Ledger, Forbes, 1 March, pp72-73.
• Hitt M.A., Ireland R.D. & Hokisson R.E., 2005. Strategic Management: Competitiveness and Globalisation (Concepts and Cases). 6^th ed. United States:     Thomson South-Western. p. 44, 45, 46.
• J.C. Anderson & J.A. Narus, 1995, Capturing the Value of Supplementary Service, Harvard Business Review, January-February, pp75-83.
• Julie MacIntosh, Back to the old school, Financial Times, 15^th July 2009, The Financial Times Limited, No: 37053, London, United Kingdom, p 11.
• Kerin, Hartley, Berkowitz, Rudelius, 2006. Marketing. 8^th ed. United States of America: Mc Graw Hill.
• Kotler, Keller, Brady, Goodman & Hansen, 2009, Marketing Management, Pearson Education Limited 2009, England, pp334.
• Michael D. Hartline & O. C. Ferrell, 1996, The Management of Customer Contact Service Employees, Journal of Marketing, 60, no.4, October 1996, pp.52-70.
• Michael E. Porter, 2008. The Competitive Forces that Shape Strategy. Harvard Business Review, 86(1). p. 79-93.
• Patrick Hosking, Banks with worst records on complaints to be exposed, The Times, 14^th July 2009, Times Newspaper Limited, London, No 69684, p 46.
• Peter Drucker (2002), Managing in the Next Society, St. Martin’s Press, United States of America (p.131-147).
• Porter, M, 1980 Competitive Advantage, Free Press, Boston : Mass.
• Shostack, G.L., 1982, How to design a service, European Journal of Marketing, 16(1), pp49-63.
• T.A. Brunner & M. Wänke, 2006, The reduced and enhanced impact of shared features on individual brand evaluations, Journal of Consumer Psychology, 16 April, pp101-111.
• Tina Harrison, 2000, Financial Service Marketing. Prentice Hall.
• William Hall, More in the trolley, Tesco taking it seriously, Financial World, July/August 2009, ifs School of Finance, p 33-36.
• Personal current accounts in the UK, An OFT market study, 2008, Office of Fair Trading. Available at: http://www.oft.gov.uk/shared_oft/reports/financial_products/OFT1005.pdf (Accessed: 1st September 2009)

Appendix 1: Marketing Strategy

Ansoff Matrix

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[1] Dr. Orr, 2004, New Ledger, Forbes, 1 March, pp72-73.

[2] Kotler, Keller, Brady, Goodman & Hansen, 2009, Marketing Management, Pearson Education Limited 2009, England, pp334.

[3] J.C. Anderson & J.A. Narus, 1995, Capturing the Value of Supplementary Service, Harvard Business Review, January-February, pp75-83.

[4] A. Ries and J. Trout, 2000, Positioning: The Battle for Your Mind, 20^th Anniversary Edition, New York: McGraw-Hill.

[5]T.A. Brunner & M. Wänke, 2006, The reduced and enhanced impact of shared features on individual brand evaluations, Journal of Consumer Psychology, 16 April, pp101-111.

[6] Bernard H. Booms and Mary J. Bitner, 1981, Marketing Strategies and Organization Structures for Service Firms, in J.H. Donnelly and W.R. George, Marketing of Services, Chicago: American Marketing Association, pp47-51.

[7] Adrian Palmer, 2008, Principles of Services Marketing, 5^th Edition, McGraw-Hill Education (UK) Limited, United Kingdom, pp420-421.

[8] Michael D. Hartline & O. C. Ferrell, 1996, The Management of Customer Contact Service Employees, Journal of Marketing, 60, no.4, October 1996, pp.52-70.

[9] Shostack, G.L., 1982, How to design a service, European Journal of Marketing, 16(1), pp49-63.

1. Market Penetration

The market penetration strategy is implemented when an organization seeks to increase market share of its current products/services. This strategy is the least risky as the organization is already equipped with the experiences, capabilities and resources to market and support its products/services. If the market is a high growth market, simply maintaining market share would suffice. However, as the market reaches the saturation stage, a new strategy must be implemented. HSBC is able to use this strategy to gain market share from competitors that have lost confidence in banks that have failed in the recent sub-prime mortgage crisis.

2. Product Development

The product development strategy requires the organisation to develop new products for existing market segments. This strategy is suitable for organisations that have a good understanding of their customer’s needs and wants. Existing products/services can be used as a platform for cross selling new products tailored to a specific customer base. As with market development, product development carries more risk than market penetration. HSBC could use this strategy by developing a new prepaid card product that O2 has launched recently together with its current account. The new prepaid card would signal a change in the psychology of spending among customers and would likely portray HSBC as a more responsible financial institution that does not just encourage people to spend.

Porter’s Generic

Target Scope	Advantages
	Low Cost	Product Uniqueness
Broad (Industry Wide)	Cost Leadership Strategy	Differentiation Strategy
Narrow (Market Segment)	Focus Strategy (Low Cost)	Focus Differentiation Strategy

Differentiation

The differentiation strategy requires the organisation to develop products/services that are able to deliver unique attributes valued highly by customers. Value added uniqueness of the product/service would enable the organisation to charge a premium against competitors. By using this strategy, the organisation would be able to charge a higher price with the knowledge that substitutes to its products are not easily available.

According to quickmba.com, firms that have successfully implemented the differentiation strategy usually have the following strengths:

• Access to leading scientific research.
• Highly skilled and creative product development team.
• Strong sales team with the ability to successfully communicate the perceived strengths of the product.
• Corporate reputation for quality and innovation.

The risk to this strategy is that other companies may be able to imitate the unique characteristics of the products/services offered by the organisation and sell them at a lower cost. Additionally, other organisations that serve a smaller market niche may be able to tailor make products/services that better cater for their respective market segments.

HSBC is able to utilise this strategy though developing and providing the new prepaid card along with its current accounts. As the prepaid card concept was recently launched by O2, many banks have yet to adopt it. This means that by providing prepaid cards along with its current account, HSBC is able to gain a short term differentiation advantage.

Appendix 2

Table 1: Current Account Market Share in the United Kingdom
Details	Financial Institution	Market Share (%)	No. of Current Accounts (m)
4 Established Banks	Llyods TSB	19	12.1
	RBSG	17	10.8
	Barclays	15	9.6
	HSBC	14	8.9
Challenges	HBOS	14	8.9
	Abbey	6	3.8
	Nationwide	5	3.2
	Others	10	6.4
Total		100	64

Source: Current Accounts, Finance Intelligence, June 2008, Mintel[1]

Table 2: Market Segmentation

Major segmentation variables for consumer markets
Geographical Region	First by countriesSecond by different geographical regions of the United Kingdom
City or metro size	Under 5000; 5000-20,000; 20,000-50,000; 50,000-100,000; 100,000-250,000; 250,000-500,000; 500,000-1,000,000; 1,000,000-4,000,000; 4,000,000 or over
Density	Urban, suburban, rural
Demographic age	Under 6, 6-11, 12-19, 20-34, 35-49, 50-64, 64+
Family life cycle	Young, single; young married, no children; young, married, youngest child under 6; young, married, youngest child 6 or over; older, married, with children; older, married, no children under 18; older, single; other
Gender	Male, Female
Income	Premier, Plus and Basic Accounts
Occupation	Professional and technical; managers, officials and proprietors; clerical sales; craftspeople; forepersons; operatives; farmers; retired; students; homemakers; unemployed
Education	Grade school or less; some high school; high school graduate; some college; college graduate
Generation	Baby boomers, Generation X, Generation Y
Social class	Lower lowers, upper lowers, working class, middle class, upper middles, lower uppers, upper uppers

Table 3: The cost of using prepaid cards

Card	Initial card issue fee	Monthly fee	Charge for ATM withdrawals	Charge for purchases	Cost to reload the card
HSBC PREPAIDVisa Card	£9.99	Nil  (But annual fee of £5.00	Nil	Nil	Free
Virgin prepaidMasterCard	£9.95	Nil	2.95%	2.95%	Free at post office or via bank transfer
Cash plus GoldMasterCard	£4.95	£4.95	99p	Nil	Free
TuxedoMasterCard	£9.95	£4.99	50p	Nil	99p at post office or free via bank transfer
The BREAD cardMaestro	£10.00	Nil	£1.50	2.00%	Free at post office
OptimumMasterCard	£9.95	£4.95	£1.50	Nil	Free at post office or via bank transfer
Splash PlasticMaestro	£5.00	Nil (But £4.95 annual fee)	£1.50 (plus 2% for withdrawals over £50	2.5%	30p per £100 loaded at post office

Appendix 3: Brief for Advertising Agency

Enclosed here are the main guidelines for the advertisement brief:

The Product:

The new current account package would include the HSBC’s Financial Manager and the HSBC’s Budget Manager prepaid card. Both cards would include the following benefits:

• Preloaded with £10 after the customer pays the initial card issue fee
• The Financial Manager is a way to manage a monthly budget by transferring your spending money from your bank account onto the card. It has an annual load limit of £15,000. The Budget Manager on the other hand has a smaller annual load limit of £2,000
• Fee-free while offering the same flexibility as a credit or debit card
• Real Time Balance Alerts
• Online Banking
• Optional Savings Account

Target Market:

The Financial Manager prepaid card would be targeted and customers with a higher net worth while the Budget Manager would be targeted at individuals with lower net worth. Ideally, the Budget Manager would also target individuals that have trouble getting qualified for credit cards due to the lack of permanent income (students, etc.). Both prepaid cards should be seen as an essential tool to help manage finances during the current economic recession happening in the UK.

Advertising Objectives:

1. To raise consumer confidence towards HSBC as a responsible and secure financial institution.
2. To change the perspective of the public towards HSBC that has been previously tarnished by the turmoil happening in the financial world.
3. To increase the awareness of the public towards a new method to manage their finances and keep themselves away from debt.
4. To create the image of HSBC as a local bank with global knowledge by introducing a solution to the domestic problems in UK.

Form of Communication:

Above the line promotion:

• Press advertisements – half a page advertisement in the national newspapers with inserted brochures
• Advertisement in certain magazines (Newsweek, the Economists)

Below the line promotion

• Brochures and posters for UK branch network
• Advertisement on the HSBC website
• Billboard advertisements on some of the main roads
• Press releases

Advertising Requirements:

All promotional material should use the colour and font that matches with HSBC.     Advertisements should portray the new current account to be beneficial to customers as a tool          to manage their finances in difficult times. Promotional material should be reviewed at least 3     months before their actual presentation to the public. A copy of the Gantt chart (that relates      only to the promotional materials) should be given to the advertising company.

Appendix 4: Brief for Internal Circulation among Staffs

A note concerning the new current account package offered by HSBC should be circulated internally in order to inform all employees of HSBC of the organisation’s plan in the coming future. This note is important to help foster a company culture that encourages employee participation and the alignment of interests among all internal stakeholders in HSBC. The note should include:

• The marketing objectives of the new current account package

The marketing objectives include the targeted gain in market share after the launch of the new current account package together with the expected increase in profitability from maintaining current accounts. The new current account package also aims at rebuilding consumer confidence towards HSBC by portraying the bank as a responsible and socially conscious financial institution.

The new current account package also aims and building up HSBC’s corporate image and branding theme of being global bank with local knowledge by introducing new products that are in line with the current economic downturn.

• The new product features (the HSBC prepaid card)

While the basic current account is in many ways similar to what other financial institutions have to offer, the new prepaid card that would be included together with new current accounts should be seen as a practical tool to manage personal finances. Being able to created standing orders through the internet would also ensure some innovativeness as compared to other competing prepaid cards.

• The details on roughly when the launch of the new current account package would be

The full Gantt chart should not be open to public viewing even for internal staffs and stakeholders. Marketing plans should be revealed as least as possible in order to gain a ‘shock effect’ on competitors. Furthermore, revealing marketing strategies to competitors would likely mean that they would devise ways to counter a marketing plan. However, internal staffs should be notified beforehand on the product and launch date so as to foster a more transparent and unified organisation.

• The hopes and expectations of the senior management towards this new current account package

It is important that the senior management in HSBC show their support and communicate their expectations towards the new current account package. Senior management are more likely to have the credibility necessary to enhance the level of acceptance among internal staffs. Approval from the senior management is essential for a marketing plan to succeed.

Appendix 5: Step by Step Procedures

Enclosed here is a brief step by step guide that should be issued to front line staff in charge of helping customers open new current accounts in HSBC.

	Steps	Details
Step 1	Choose your prepaid card	Finance ManagerBudget Manager
Step 2	Load up your card with cash	Load your card by transferring cash from the customer’s current account either through a bank branch, ATM or the HSBC website
Step 3	Utilise your prepaid card	The HSBC prepaid cards are secure chip and pin cards that will be accepted like a normal Visa card almost anywhere in the world
Step 4	Get real time balance alerts	Free balance updates would be sent to the customer’s mobile device whenever he/she utilises the prepaid card

Appendix 6: Budget Explanation

Table 4: Budget
Item	Amount (£)	Contingency (5%)	Total (£)
Product Costs
Product development (Staff wages)	10,000	500	10,500
Negotiation with telecommunications company	5,000	250	5,250
Training Costs
Personal account managers	300,000	15000	315,000
Branch staff	200,000	10000	210,000
IT support staff	100,000	5000	105,000
Other staff	100,000	5000	105,000
Promotional Costs
Advertising agency	500,000	25000	525,000
Newspaper advertisements	8,000,000	400000	8,400,000
Outdoor advertising	3,000,000	150000	3,150,000
Brochures/Posters	300,000	15000	315,000
Bank’s cost
Sales Promotion	1,000,000	50000	1,050,000
Webpage advertisement	5,000	250	5,250
Research costs
Research agency’s fee	50,000	2500	52,500
Internal research costs	5,000	250	5,250
Total	13,575,000	678,750	14,253,750

Notes:

1. The budget does not include certain hidden costs that might be incurred when striking a deal with the telecommunications company.
2. Product development costs do not include the costs of the plastic cards to be issued by HSBC.
3. The new current account package would not require HSBC to increase its workforce as existing staffs are able to cope with the anticipated rise in new current accounts with the help of advance information systems.
4. Outdoor advertising includes big posters on billboards that may be extremely costly for HSBC

Objective	Details	Time Period
Finalising prepaid card features	5 weeks would be needed to finalise the features of the new current account package (most notably the prepaid card). Brainstorming sessions would be conducted to ensure that the features included are practical and simple to use.	Week 37 – week 41 (5 weeks ending September 2009)
Product development	This process involves designing the current account package. Ways to carry out the 7Ps as effectively as possible would be finalised during this time interval. The new current account package would be ready to go into the next phase as soon as inputs from the new prepaid card are obtained.	Week 37 – week 50 (14 weeks ending October 2009)
Customising information systems	This stage involves IT programmers customising information systems to suit with the new current account package. Most notably is the ability to set standing orders to debit the new prepaid cards at the start of the month (as long as there are enough funds in the customer’s current account).	Week 51 – 42 (10 weeks ending October 2009)
Negotiations: telecommunications company	Negotiations should be carried out with prospective telecommunications company in order to secure the ‘free balance update to mobile device’ feature.	Week 49 – week 1 (6 weeks ending January 2010)
Front-line staff training and development	Training and development of staff that are immediately concerned with the new current account package.	Week 51 – week 15 (17 weeks ending April 2010)
Support staff training and development	Support staffs are help desks staff or any front-line personnel that are not directly dealing with the new current account package.	Week 2 – week 20 (19 weeks ending May 2010
Notification of other personnel	The brief for internal circulation would be circulated during this time interval to ensure that all members of HSBC are aware of the new developments in the organisation.	Week 51 (1 week ending December 2009)
Commissioning advertising agency	The advertising agency would be commissioned during this stage and promotional material will be designed by an external advertising agency.	Week 50 – week 12 (15 weeks ending March 2010)
Pre-implementation research	Research concerning consumer awareness and acceptance, initial market perception and economic research would be done by external research company commissioned by HSBC.	Week 1 – week 4 (4 weeks ending January 2010)
Promotional materials	Design of promotional materials should be ready for production. Production of promotional materials by external company.	Week 4 – week 15 (12 weeks ending April 2010)
Press conference	A press conference to announce the rolling out of the new HSBC current account package.	Week 1 (ending January 2010)
Web-page advertisement	The start of promotions through the internet.	Week 2 – week 17 (18 weeks ending April 2010)
Newspaper advertisement	The start of newspaper advertising.	Week 2 – week 30 (29 weeks ending July 2010)
Posters and brochures	Posters and brochures should be up on bank branches in the UK.	Week 5 – week 32 (28 weeks ending August 2010)
Launch date	Launch of the new current account package.	Week 18
Sales promotion	8 weeks of sales promotion in HSBC. Special counters should be set up on the first month of the sales promotion.	Week 18 – week 25 (8 weeks ending June 2010)
Post-implementation research	Research conducted on market shares, consumer confidence and customer feedback/complaints.	Week 18 – week 34 (17 weeks ending August 2010)

Appendix 8: Brief for Research Agency

Enclosed here is a research brief that should be sent to an external research agency to ensure that the research carried out would yield results that are relevant to HSBC.

Research	Research Objectives	Details
Pre-implementation research	Consumer awareness and acceptance	Level of enquiries concerning the new current account package.
	Initial market perception	A level of primary data is required to determine the initial perception of the new prepaid card as a means to manage personal finances.
	On-going economic research	Economic conditions are currently highly unstable and on-going economic research is needed to forecast where the economy in the UK is during the launch of the new current account package.
Research during implementation of marketing plan	Tracking study	A tracking study should be done in order to obtain primary data on consumer experiences concerning the new current account package. The collective of individuals chosen for the tracking study must be able to represent the targeted market segments.
Post-implementation	Market share	The increase of market share in current accounts for HSBC relative to other major financial institutions. Also important is to note the profitability of current accounts using the new prepaid card.
	Consumer confidence	Research needs to be conducted to gauge the level of consumer confidence after the launch of the new current account package. This is essential as it is one of the objectives of the marketing plan to increase consumer confidence in HSBC.
	Customer feedback/complaints	It is equally important to obtain customer feedback concerning the practicality of the new prepaid cards that were recently issued.

Appendix 9: Contingency Plans

Scenario	Possible Responses
Further deterioration of the UK economy	The launch of the new current account package may have to be postponed should the UK economy deteriorate at an unexpected rate. Economic research in the pre-implementation stage should be able to point out red flags on market conditions. Launching aggressive promotional campaigns during times of widespread uncertainty would be unwise as the public would be sceptical on the credibility of new products.
Failure of product as a tool of personal finance	This scenario is highly unlikely as the new current account package should be thoroughly examined during product development stage. Adding to that is the fact that other companies like O2 have already launched their own prepaid card concept into market. Should the product fail to generate new current accounts, additional features might have to be included to increase the value of the package in the eyes of the customers.
Failure of HSBC to increase its market share in the current account market	The reason for the failure of HSBC to gain market share in the current account market can be linked to economic or internal reasons. Internal reasons include the failure of staff to market the new current account package. Front-line staff may have to be retrained and new promotional materials implemented in order to increase sales. Failure of gaining market share may also stem from aggressive campaigning by competitors like O2. Should this be the case, HSBC may have to pump in more resources to promote the new current account concept more effectively.
Overwhelming success of the prepaid card concept	Should the new current account package achieve overwhelming success when times are bad in the UK, HSBC may want to consider opting for the market development strategy. Currently, China and India holds the largest markets together with high national savings rate. Extending this new concept to overseas market may prove highly profitable.

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The First Proposition, Philosophos – The Inescapable Philosophy of Philosophy

Minerva, Goddess of Wisdom

~ Our meeting today, my dear reader, is not one of coincidence, luck or blind chance. That we have met today means that we were meant to meet and our meeting could not have happened in any other way. It is inevitable that the past must be as it has been before the future can unfold. We may forget in the near future that this meeting has ever happened but we cannot change the fact that this encounter has already taken place.

~

We live in a world that seems to move faster in comparison to our own mechanical wristwatch. Every single day the advancements in technology supersede our ability to catch up with new innovative creations. Computers have invaded every sector and segment of our everyday lives while the World Wide Web has lifted the shroud hindering international communications and solved most of the difficulties previously faced in international relations. Such is the world of the 21^st century, a world where globalization is no longer a fairy-tale dream but a reality that we are now only beginning to comprehend.

In a world where change seems to be the only constant thing, we find yet another element that has remained unscathed through the passage of time. This element is none other than the importance of philosophy, the soul of our intellectual consciousness. Philosophy is now increasingly important as individuals of different races, cultures, personalities and backgrounds interconnect with the new platforms and avenues provided through the developments of information technology. However, these advancements are not without cost. As the world becomes a smaller place, frictions and misunderstandings between different beliefs, social norms, tenets and opinions surface to become increasingly evident, thus showing us, that we require something other than technology to bridge the gap. This is where philosophy is to play its major role.

But what is the intended meaning when a man uses the word philosophy? Every word or concept requires a definition that can at least be generally accepted for the purpose of communications. Yet the word philosophy evokes many different meanings when we hear it being uttered by another individual.

I believe that philosophy lies, like many other things, in the eyes of the beholder. Should we define philosophy as only the particular doctrines relating to some specific individual or school in history, we cannot be more wrong. On the contrary, philosophy is a personal outlook or perspective that an individual has on the world and all its properties either in reality or in imagination. This means that philosophy, as a word, would include more than just generally accepted schools of thought like Plato or Aristotle. Taking its meaning loosely, philosophy is one’s perspective of life itself. Having said so, it is not surprising that the word has a different meaning when it is used by a different person.

The difficulty of such a definition is that almost every single individual in the world has a personal philosophy that overlaps with the philosophy of others while remaining distinctively different. As Bertrand Russell once put it, ‘the definition of philosophy will vary according to the philosophy we adopt’. And in a world where so much diversity is present, it should not be surprising that the variance between different systems of beliefs should be as contrasting as night and day. Adding to that, our continuous inability to form similar definitions for the same concepts and words remains a hindrance to a desired state of seamless communication while at the same time posing a source of conflict.

Take for example, how the word ‘philosopher’ is used. Seldom it is that we regard an individual as a philosopher unless that person has written a number of books, invented some famous quotation, or has argued his ‘philosophy’ with his every known acquaintance. Yet if we acknowledge that every man has his own system of beliefs, regardless of how irrational it may be, and is capable of intellectual thoughts, would not every man be a philosopher? At least every man that matters in this world would be and should be called a philosopher! The only difference is that an individual might make for a really poor philosopher in comparison to others.

I would say that it is a common misconception that one must follow the philosophy of a single man, be it, Spinoza, Descartes or Immanuel Kant, to be a philosopher. The word philosopher came from Ancient Greece where the word, ‘philosophos’, was used to describe anyone who was a lover of wisdom. The mission of philosophy is a simple and noble one, which is, ‘to advance the cause of human reason, to perfect its methods, and to extend their application across an ever widening range of pursuits’. To this day, many have risen to the challenge and the richness and vitality of our current society in terms of the proliferation of knowledge stands testament to the labours and experiences of great men in history.

Philosophy must be understood as something that is inescapable regardless of the difference in intelligence, socio-economic status, race, gender and age. Unless one in either mentally impaired or living in an asylum, one would find that he is, inevitably, a subject to the sovereignty of philosophy and all her devices. At the core, philosophy can be divided into epistemology, metaphysics and logic. In the middle circle, one would find moral philosophy (ethics), the philosophy of language, the philosophy of mind (psychology) and the philosophy of science. On the outer circle, philosophy includes things that are more familiar to us, including, aesthetic, the philosophy of education, the philosophy of history, the philosophy of law, the philosophy of mathematics, the philosophy of religion, political philosophy and social philosophy.

When we have outlined the vast scope that philosophy covers, we realize that philosophy is something that is unavoidable and relevant in every endeavour of our everyday lives. It is no mystery that a PhD in higher education means a doctorate in the philosophy of a certain area of study. To deny the importance of philosophy is similar to believing that we should not ‘think’ at all. And this we know to be a great folly in a world as competitive and unforgiving as ours. Instead of avoiding the perils and difficulties of  knowing philosophy, let us then rise up to the challenge of being a lover of wisdom in hope that the continuous accumulation of knowledge would foster a greater understanding of the world as it is and a greater degree of tolerance in society!

~ Ee Suen Zheng

~

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The Animals of the London Zoo

African Hunting Dogs

Imitating a Peacock!

Vultures..We Feed on Anything and Everything!

One Big Happy Family..Otter Madness!

I have a Sexy Arse!

I have Vision! and probably a mission….

Defying Gravity (Sloth)

One Shy Emperor (Scorpion)

Tarantula

Waiting for some nuclear radiation to become Godzilla

Birds of different feathers flock together

I see you!

Butterflies!

More Butterflies!

Okay….

Beautiful!

Giant Butterfly

To My Lover, Philosophy

~ Our meeting today, my dear reader, is not one of coincidence, luck or blind chance. That we have met today means that we were meant to meet one another and our meeting could not have happened in any other way. We might forget in the near future that this meeting has ever happened but we cannot change the fact that this encounter has already taken place.

I find myself an ardent lover of philosophy and all her charm. Since our elopement three years ago, I cannot help but to continuously marvel at the depths and heights that she summons at will with her beauty and knowledge. That she contains both the obscurity and impenetrability of Immanuel Kant coupled hand-in-hand with the wit and wine of Voltaire, serves not to hinder my complete adoration of her grace and gentle nature. On the contrary, my sensual and intellectual pleasures are but heightened at the mere sight of her silhouette, as I endeavour to make the best of my daily allotted time.

Saddening it is that philosophy does not return the loyalty that I have shown to her. In heart-breaking sorrow, I have found that she belongs not to me alone but to all mankind, irrespective of age, race, gender and background. In truth, she belongs to every human soul save those who by ill-will of nature are born with mental impairments or in their later days possessed by raging insanity. Sorrowful to her it is that many men that she knows and loves are ignorant of her very presence though they use her in their everyday lives for guidance and for comfort.

Philosophy reigns supreme in the minds of all intellectual human beings. She holds reasoning in her right hand and the promises of ataraxia in her left. She holds no grudges against future knowledge and admits her past mistakes readily through the passage of time. How wondrous it is that she, together with the world, evolves in thought and form in the same way that time continuously enlarges itself by absorbing the past into its bulky being. And as a flower that blooms on the bright summer day, so does philosophy blossom in the hearts of men in seek of knowledge.

To know her is to love her and to know not is to care not for. Hence, the French proverb, ‘to know all is to forgive all’. It is with this saying in mind that philosophy wages her holy war against the intolerance and the injustice that we see so increasingly common in our everyday lives. Like a candle that hopes to light our way and warm our hearts, so do philosophy seeks to enlighten our minds and to comfort our weary souls. To accept her is to accept a mission: ‘to advance the cause of human reason, to perfect its methods, and extend their application across an ever widening range of pursuits’.

Blame not philosophy for the mistakes of her philosophers and embrace her not only for the sake of advancing personal glory and self-interest but for the sake of the advancement of mankind itself on all fronts, be it in heart, mind and spirit. Even as philosophy belongs to all men and not to me alone, I will unconditionally and irrevocably love her as she has loved me ever so dearly.

Roses (The Rodin Museum)

Art from the Rodin Museum

Art from Auguste Rodin

The Rodin Museum

The Formative Years

Born November 12^th, 1840, into a family of modest means, August Rodin grew up in the rue Mouffetard neighbourhood of Paris. He was a mediocre student who nonetheless expressed a passion for drawing. At fourteen, he entered the Ecole special de dessin et d’architecture, called la Petite Ecole, as distinguished from the Ecole nationale des beaux-arts.

In his very first year, he won the bronze medal in drawing class and discovered the sensual pleasure of sculpting clay. Working relentlessly from then on, he sought admission to the prestigious heights of academic teaching, but his attempts at the entrance exam to the Ecole des beaux arts met with failure three times. At eighteen, it was time to earn a living. He began creating models for goldsmiths and cabinetmakers and spent his spare time drawing and sculpting. At twenty-two, in 1862, he was profoundly shaken by the death of his sister Maria.

The Man with the Broken Nose

Back to a secular existence, Rodin was so poor that his first atelier was in a stable. He sculpted like a man possessed, in particular a man with the broken nose that expressed his refusal to idealize reality. The model of The Man with the Broken Nose is an old man, his features worn with age and poverty. The busy wears a wide headband reminiscent of the traditional headgear of philosophers of Antiquity. His clay model translated into marble was finally accepted at the Salon of 1875.

On to Italy

At the end of the Franco-Prussian war of 1870, Rodin joined the sculptor Albert-Ernest Carrier-Belleuse (1824-1887) in Brussels. Several of the works he sculpted for Carrier-Belleuse still adorn various city monuments there.

1876 marks his first trip to Italy, where he discovered the works of two great Renaissance masters, Donatello and Michelangelo.

The scandal of The Age of Bronze

The Age of Bronze occasioned the first controversy of an up till then uneventful career. It took Rodin eighteen months to complete this statue that fairly trembled with life, and that he hoped would receive official recognition.

The model Rodin chose for The Age of Bronze was a Belgian soldier of twenty-nine, Auguste Neyt. The figure was life size, standing, the eyes half-closed in suffering and reverie. Initially, Rodin armed him with a lance and titled the work The Vanquished, in reference to the defeat of the war of 1870. The lance removed, now the statue, free of any accessory allusion, told no story and was devoid of all allegory. A pure clay shadow and light with subtle contours analyzed in depth, muscle by muscle, the sculpture was Rodin’s own fervent homage to the masters of the Italian Renaissance.

In Brussels, where the work was exhibited in 1877, critics found the ‘realistic’ work disconcerting. But in Paris, a few months later, Rodin was flatly accused of casting it from nature. This was a current practice in sculpting ateliers that consisted of taking a mould of the body of a model to create a sculpture.

For Rodin, this was an immense blow. Discouraged, his reputation maligned despite abundant and irrefutable evidence of his good faith, at thirty-seven, he went back to working anonymously.

After three difficult years, a petition signed by several people prominent in the art world set this fruitless polemic to rest, and in 1880, The Age of Bronze was purchased by the State. At the age of forty, Rodin at last set out upon a career as a sculptor.

The Gates of Hell

The Gates of Hell, framed by Adam and Eve, is surmounted by a group of three identical figures pointing their arms towards their viewers (The Three Shades). Several convulsive figures, varying in size, are arranged around The Thinker, an allegory of the poet, the creator, or of Dante. At the right of the tympanum, Rodin placed The Meditations; on the left, haggard and tormented by hunger, Ugolino crawls over the cadavers of his children.

Above, a suffering Francesca contemplates the body of her lover Paolo. This group repeats the damned couple, running towards the abyss, a bit lower (Fugit Amor). The Falling Man and The Crouching Woman are depicted above the left ventail.

Many other figures originally created for the Gates, isolated or associated with others, in part or in their entirety, often enlarged and wrought in marble or bronze, would become separate sculptures or serve as the basis for new ones. For the first time, Rodin experimented with fragmentation, assemblage, multiple figures and enlargement, all aspects that would become an integral part of his working method.

The Thinker

The Thinker is perhaps the best known of all Rodin’s sculptures. The first figure he worked on for the Gates of Hell, The Thinker was exhibited in its original size, just 71.5 cm high, in 1888, then enlarged to its monumental dimensions in 1902 and offered, by subscription, to the State. Its inauguration before the Pantheon on April 21^st, 1906, in a climate of political and social crisis made it an emblematic figure of socialism. Later, in 1923, it was transported with its pedestal to the gardens of the Hotel Biron. The concentration and tension of this thinker, rendered universal in his nudity, constitutes a compelling symbol of hope and of faith in mankind.

The Burghers of Calais

From the initial model, the sculptor was preoccupied with the problem of definition of the character of each of the figures in the group. His search for the physical identity suggesting an actual psychological personality in each, in order to give them individually original expressions in the face of martyrdom, led him to multiply his studies of nudes, of heads and of hands for the second model, and then for the definitive sculpture. As for the base of the monument, Rodin hesitated for some time between two distinct conceptions, each of which would convey a particular meaning depending upon the presence of, on the contrary, the absence of a base. The heroic one was expressed in a work with a pedestal. This was his ultimate choice and the one he finally insisted upon at Calais in 1895. The other conception, lacking a pedestal, gave the observer a closer, more familiar sense of the drama and sorrow expressed by the subject.

The Gossips

The Gossips was inspired by Camille Claudel’s observation of four women chattering together in the compartment of a train. The artist has perfectly mastered its execution in marble-onyx, an extremely difficult task due to the density of the material; she succeeded in capturing the attitude of the nude figures as they listen and confide.

The Kiss

Entwined in an embrace, this couple expresses the bliss of passionate love. Rodin had initially modelled it for the Gates of Hell, but since it did not blend harmoniously with the themes and the tormented figures of The Gates, he removed it and transformed it into separate work.

The book that is suggested in the hand of the young man remains an allusion to Dante’s Divine Comedy. According to the story, Francesca da Rimini and her Brother-in-law Paolo Malatesta became aware of their mutual love as they were reading a book. Forbidden though it was, they exchanged a kiss that would condemn them to die, forever to wander in Hell.

The Tower of Labour

As a republican symbol of the advance of social progress, the theme of labour had been a popular one since the 1870s. It predominated in the works of sculptors Jules Dalao (1838-1902) or Constantine Meunier (1831-1905), evoking the condition of workers and peasants; in literature, it was at the heart of Emile Zola’s opus, Germinal, whose protagonists were miners and metallurgists.

The monument was dedicated to the builders of the future. The base of a central column dominated by a group, the Benedictions. Mounting the column in a hierarchy, allegorical bas-relief represents every aspect of human labour, from the most manual, at the bottom, to the most intellectual, depicting artists, at the top.

Balzac in a Monk’s robe

Ugolino

The Shade

The Little Water Fairy

The Danaid

Le Sommeil