The Zaccaria Deal :
Contracts and options to fund a Genoese shipment of alum to Bruges in 1298
Eric Briys, Didier Joos de ter Beerst
IEHC Congres, Helsinki, 23 August 2006
Session 110 « Tools for trade »
The original document (Archivio di Stato, Genoa, notai antichi)
A methodological starting point : Alfred Marshal
"I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics, and I went more and more on the rules :
(1) Use mathematics as a shorthand language, rather than an engine of inquiry;
(2) Keep to them until you have done ;
(3) Translate into English;
(4) Then illustrate by examples that are important in real life;
(5) If you can't succeed in (4) and (3), burn the mathematics
This last I did often."
A map of Zaccaria’s route (1298-1299)
Bruges
Phocea
GenovaAigues-Mortes
Cadix (Puerto San Maria)
Majorca
Sardegna
Sicily
Places mentioned in the contract
Potential calls
650 cantari of alum (= 35 tons)
3000 people working for Zaccaria in Phocea
Large fleet of a dozen of galleys, nave, cocha
Stock in key location
Call
Problem 1 : long distance cash-and-carry (no order, forward/futures)
Cash in
+ Revenues
Cash out
-Goods-Transport-Tax
• Time• Distance• Lack of Information
Upfront fixed capital
Risky payoff
• Price• Casualty• Currency
=Working capital requirementsPayoff volatilityRisks of liquidity mismatch
=Working capital requirementsPayoff volatilityRisks of liquidity mismatch
ArrivalDeparture
Classical medieval risk management tools
• Mitigation 1 : Assets diversification
• Mitigation 2 : Geographical diversification
• Mitigation 3 : Pooling shipments between traders
• Mitigation 4 : diversify assets into different galleys
• Transfer risk
• Finance risk
• Trader of many different types of commodities
• Alum was shipped to France, Flanders, England,
• Convoy with Zaccaria and other alum traders before « Officium Gazarie »
• Large fleet to spread assets
ZaccariaZaccariaExampleExample
Sea loanPignus
Commenda
Insurance ?
Societatis
Adapt business model to create flexibility : « real options »
-alum-Transport to Aigues
+ Sales in Champagne
+ Sales to other tradersIn Aigues-Mortes
+ Sales in Bruges
Expand
- Transport
Roads
Sea
Aigues-Mortes
Stop
Phocea
Business assets required to unlock option value
Critical assets
• Information
• Storage
• Transport capability
Functions
• Learn about market conditions in distance places
• Wait-and-decide at the right time:
– before decision to stop or expand
– Organise « expand » decision (management, pool shipments, fund venture)
• Ability to move quickly from one market to another
Zaccaria
• Admiral of Philip the Fair (Flanders, England)
• Supply « monopoly » : information on traders, shipments, price,…
• Storage capabilities in key strategic location (Aigues-Mortes)
• A large fleet of nave, galleys, cocha
Contracting constraints and supports
• Agency issues but reputation and kinship (albergo)
• Incomplete markets (no stock exchange, no derivatives, no « insurance ») but many existing standard contracts
• Usury prohibition: Naviganti vel eunti ad nundinas of 1234 : Pope
Gregory IX
• Cost/time of contract to deal with business and contracting risks vs benefits
• Trade-off between contract complexity and simplicity(incompleteness) : usually from complex to simple but ….
Structure of the transaction
Enrico Suppa
Baliano Grillo
VentureVenture PaleologoZaccaria
GabrieleSpinola
SocietatisSocietatis·1000 £
·2000 £
·1 or 2 galleys
·Venture’s management
·Operational expenses and taxes
·Alum
·Galleys
Procuratio
Procuratio
Contract 1Notary G. de
Camulio (26 Juin 1296)
Contract 2Notary J. Abendo
(21 Octobre 1298)
Contract 3 : Notary A. de
Laneris (29 Octobre
1298)
BenedettoZaccaria
+ risk coverage by Suppa &
Grillo
+ risk coverage by Suppa &
Grillo
Decision to buyback
Decision to start
The basic story
Function (I) : circumvent usury prohibition (Put/call parity)
Long Asset + Borrowing + Long Put Option Cash + Short Asset (Sales) + Long Call Option
Short Put Option + Short Asset + Lending - Cash + Long Asset (Sales) + Short Call Option
The Zaccarias
Suppa & Grillo
=
=
Protective Put Fiduciary Call
Prohibited by the Church Accepted by the Church
Function (I) : The logic of Put/call parity (H. Stoll, 1969)
Portfolio 1: BUY CALL ON ASSET
Portfolio 2 : BUY PUT ON DEBT
Payoff Portfolio 1 = Payoff Portfolio 2
=
CASH (From DEBT or SALES)
ASSET
Read also Knoll (2002, 2004)
+
Function (I) : Put/call parity at work in Zaccarias deal
Call (buy right to buyback later)
Put
Put
Call
- asset + cash from sales (3000 £)
- transport
- loss at sea to Bruges (max 3,000 £)
- buyback price of 3,780 £
- Pignus indemnity to Bruges (max 3,000 £)
Sales
Sales + Put on Call on Put on Call Sales + Put on Call on Put on Call
Put (buy right to put later on debt)
Put
Put
Put
+ asset + cash of debt issue (3000 £)
- transport
- « sea loan » indemnity to Bruges (max 3,000 £)
- principal with interest 3,780 £
- Pignus indemnity to Bruges (max 3,000 £)
Borrow
Borrow + Put on Put on Put on Put Borrow + Put on Put on Put on Put
Aigues-Mortes
Genoa
Bruges
Genoa
=
Function (II) : Risk management of real options with financial options
RisksRisks
Stocks +Transport capabilities = value of management flexibility, information, …but costs + risks
Stocks +Transport capabilities = value of management flexibility, information, …but costs + risks
Value of finance/insuranceValue of finance/insurance
MarketCurrencyCasualty
Low operating leverageCash-and-carry
Business model/contracts
External risks
Banchiarus (« Financiers ») = cash £ + risk transfer
1. Interaction between financial and real options
2. The higher the risks, the higher the value of options
Merchant = alum + Foundouks (warehouse) + Gallei/Cocha/Nave (ships)
Conclusion (functions from Merton 1995, Merton & Bodie, 2005):
• Pooling funds : 3,000 £ were gathered jointly from Suppa and Grillo
• Transfer funds: Zaccaria received cash for a venture to-from Bruges
• Complete incomplete markets: The contract fills gaps (insurance, …)
• Manage Risk. Risk (sea, market, …) transfer and financing
• Control agency risks. agency and informational issues. • Screening/monitoring: quality of alum, accounting books and scriba on board.• Incentives : e.g. option to start + Investment (“no “cheap talk”)• Asset-backed loan (cfr Contract theory literature, also Gonzales de Lara, 2002)
• Increase asymmetry of information with Competitors.
• Fostering family and business networks.
• Create Legal arbitrage (State, Church).
Empirically we have crunched numbers :
Buyback option
=
always out-of-the-money in Bruges
The metaphore : Rubik’s cube
Insurance
Debt
Equities
Option Contract
Sales
Management
Leasing
The unpredictable loop between institutions and markets
The institutional context
The business model
Co
ntr
acti
ng
co
nst
rain
ts
Co
ntr
acti
ng
inn
ova
tio
ns
Sometimes standardized by
markets sometimes not
Sometimes driven towards efficiency,
sometimes not (polity, monopolies, …)
Sometimes failure, sometimes innovations sometimes rationality
sometimes luckSometimes significant,
sometimes easy to go around(e.g. kinship solutions)