Skip to main content

Taken for ride on freaky derivative deals

I remember a conversation with a friend who was a Head of Derivative Sales at a major bank. He told me how laws were circumvented to reach targets of everybody: sales targets for the sales team and revenue targets for corporates. Effectively, corporates played their shareholders' money to speculate so that they could assure bonus. And this was sometime back, so there were not much disaster-stories to share.

Derivatives can be pretty freaky - freaky when it gives you great returns and freaky when it makes a big hole in the pocket. Indian firms, who were unleashed on international markets after liberalization are learning the lessons the hard way. Good times are over, well atleast in short term. Actually derivatives have burnt the fingers of almost everybody (sub-prime) in 2007. But this is the first time Indian firms are loosing heavily in their foreign exchange exposures. A fascinating snippet from Bloomberg:

-------
Sundaram, which has no business in Switzerland, paid nothing on Oct. 24 when it bought a contract betting on the Swiss franc's value against the dollar. On that day, the franc traded for 1.17 to the dollar, according to data compiled by Bloomberg.

The contract guaranteed Sundaram $36,000 as long as the franc was valued at more than 1.23 to the dollar within a month, according to the company's lawsuit. If the Swiss currency appreciated past 1.095, a record high, in three months, Sundaram would have to buy $6 million at 1.23 francs to the dollar.

The franc rose to 1.08 on Nov. 20 as concerns about a U.S. recession lured traders to the Swiss currency. A second contract with a $22,000 potential profit also turned into a loser, forcing Sundaram to buy an additional $7.5 million at 1.23.

ICICI demanded 60 million rupees, more than Sundaram's annual profit, to cover the losses.
--------

Yet again proves how ignorant people are taken for a ride by smooth talking jargon spouting sales people.
Labels:

Comments

Post a Comment

Popular posts from this blog

Cognitive rules of business presentations

In his recent book, Clear and to the Point, Kosslyn explained that the four rules of PowerPoint are: The Goldilocks Rule, The Rudolph Rule, The Rule of Four, and the Birds of a Feather Rule. Here's how they work. The Goldilocks Rule refers to presenting the "just right" amount of data. Never include more information than your audience needs in a visual image. As an example, Kosslyn showed two graphs of real estate prices over time. One included ten different numbers, one for each year. The other included two numbers: a peak price, and the current price. For the purposes of a presentation about today's prices relative to peak price, those numbers were the only ones necessary. The Rudolph Rule refers to simple ways you can make information stand out and guide your audience to important details -- the way Rudolph the reindeer's red nose stood out from the other reindeers' and led them. If you're presenting a piece of relevant data in a list, why not mak...
Post a Comment
Read more

Value of dollar - Part 1

A Simple Perspective Will Do The date is 2000-05-28. Don't you get tired of all the bad news bears reminding you of all these instabilities, excesses, and 'potential' tensions in the global economy? After all, hasn't it always been like that? Yes it has, but not in money it hasn't. Increasingly, investors find it harder to know where to put their savings. What about Government Bonds? Wrong. Their recent record of capital losses have wiped out your guaranteed yields, probably because the stock market keeps crowding them out, and this even in a strong dollar and low inflation environment. Furthermore, there is no reliable liquidity and potentially poor quality debt in the corporate sector. Foreign assets? Wrong. Most of the world's economies are riskier, have been under performing, and also, there is this thing called currency risk. Like how is the average person gonna cope with currency...
Post a Comment
Read more

Depreciation of British Pound 1900-2000

When the Bank of England was formed the powers to create money was finally transferred to private hands. The creation of Fed in US, was just a part of this cycle. Though it is a common knowledge US Dollar has depreciated nearly 100% since the creation of Federal Reserve, the same is the case of all the currencies across the globe. For example, below is the UK Parliament data that highlights the depreciating value of Pound.
2 comments
Read more