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