FINANCE IS ART! QUITE LITERALLY
A JUXTAPOSITION OF DERIVATIVES WITH FINE ART
A while back I visited Boston’s Museum of Fine Arts (MFA). My friend and I went to see the Monet and Boston: Legacy Illuminated exhibition. An eminent French painter of the 19th century Impressionist art movement, Claude Monet, drew inspiration from nature, the French countryside and everyday Parisian living. He saw beauty in the mundane and captured it so beautifully by emphasizing the effect of light in his paintings. Having rejected the academic teachings of one of his masters, Charles Gleyre, he freed himself saying “I like to paint as a bird sings.” The running theme in his paintings was the use of light to capture the essence rather than the details of the subject. The brush strokes gave his paintings an illusion of movement and spontaneity and the mix of hues an intense color vibration.
Curated with Monet’s paintings were Rodin sculptures. Auguste Rodin, a prolific sculptor of the same era, immortalized moments using an entirely different medium, clay, which was then recast using plaster, marble, stone or bronze. His primary aesthetic was the human body which he modeled to celebrate the individual’s character and physicality. Through this, he captured and stilled its intricacies and complexities. He is said to have described his process as “It is when my models leave a pose that they most often reveal their beauty to me. I never dictate a moment. I just tell them ‘Be angry, dream, pray, cry, dance.’ It is up to me to seize and render the line that feels right…”
Monet and Rodin used different mediums and divergent methods to hold you in their thrall. Monet’s en plein air (act of painting outdoors) was free-flowing and ethereal. Rodin, on the other hand, used a punctilious aesthetic so detailed that each part both spoke for itself and intertwined with the whole. On speaking of the Thinker, he said “What makes my Thinker think is that he thinks not only with his brain, with his knitted brow, his distended nostrils and compressed lips, but with every muscle of his arms, back, and legs, with his clenched fist and gripping toes.”
Much like art, derivatives are abstractions made real. They are creations from another (an underlying) from which their value is determined. The underlying could be an asset such as stocks, bonds, market indexes; commodities such as currencies or even variables such as the weather. The role of derivatives, just like art, varies depending on the parties. Derivatives can be used for hedging, speculative or arbitrage purposes. Hedgers use derivatives to mitigate the risk they may face from potential future movements in a market variable. Speculators, on the other hand, use them to bet on the future direction of a market variable whilst their utility to arbitrageurs is to lock in a riskless profit by taking two (2) offsetting positions. The tools (mediums) used to achieve any one of these purposes are futures, forwards, options or swaps. These instruments are contracts between two (2) parties for either the sale or purchase of an asset or the exchange of cash flows. They are traded either on an exchange or over-the-counter.
Futures and forwards are agreements to buy or sell an asset at a certain time in the future for a certain price. Both these contracts require the buyer to take delivery of the asset. The difference between the two (2) is that futures are traded on an exchange hence are standardized whereas forwards are transacted over-the-counter thus can be bespoke. Options are contracts that give the holder the right but not the obligation to buy or sell an asset for a certain price by a certain date. They can be traded both on exchanges and in the over-the-counter market. Swaps, on the other hand, are over-the-counter agreements between two (2) parties to exchange cash flows on defined dates in the future.
Derivatives, merely contracts between parties, are speculations bought or sold as bets on the future price moves of the securities they are based upon. In the same breath, the art market is speculative because the appreciation in the price of any of its pieces is held entirely in the eyes of the beholder. The value of both these markets is staggering. An optimistic estimate of the derivatives market values it at over US$1 quadrillion. Put in context, this is equal to ten (10) times the value of the world’s total GDP. The art market is similar in its command of sky-rocketing figures. In 2017, at a Christie’s auction house in New York City, Leonardo da Vinci’s Salvator Mundi sold for a jaw-dropping US$ 450 million.
The opacity and lucrative possibilities in both these markets continues to elicit the interest of amateurs and experts alike. As such, they have been at the epicenter of some catastrophic happenings and the subject of many a Hollywood movie. The greatest art heist, for example, the 1990 Isabella Stewart Gardner Museum theft, saw thirteen (13) works valued at US$500 million stolen. The case remains unsolved with the Boston museum offering a US$10 million reward for information leading to the art’s recovery. Art has also been used to park money, move it and for tax optimization purposes. The derivatives market, on the other hand, has been the cause of many a pain point in the financial markets. Black Monday, the stock market crash of 1987, was exacerbated by protective puts, a portfolio insurance hedging strategy with unlimited upside potential and limited downside risk. Major markets experienced losses in excess of 20% with the highest being Hong Kong with a drop of over 45%. Pre-Covid, the 2007 global financial crisis was the greatest US economic disaster since the Great Depression of 1929. It was a contagion triggered by defaults by mortgage-backed securities and collateralized debt obligations. These instruments were created by pooling and securitizing sub-prime mortgages. It resulted in numerous bankruptcies and shutting down of businesses, unemployment creeping into the double digits and plummeting of the real estate market resulting in the loss of homes for millions of people. The world shed 4% of its total GDP, a domino that set in motion the 2010 Eurozone crisis.
Whether it is the brush-strokes and color juxtaposition of Monet’s Meules, or the combination of a long stock and a short call option to form a covered call, intrinsic to both is creativity birthed through connecting of dots.