Duncan Wood's article (KO-ed in Korea, Asia Risk May 2009) gives me a sense of déjà vu: there are many similar cases in India too, some of them of a far more complex nature. I do not, however, agree with Wood's comment that structures consisting of bought and sold options are "tough to model". They are actually quite simple but risky where the corporate is a net seller.
Again, it is not correct that "a tradereceivables hedge that lost money would be offset by an increase in underlying sales". If the contract is a genuine hedge, by definition, the loss on it should be compensated by gain on the underlying exposure. Problems arise when the underlying vanishes and the companies are 'left with naked losses'.
One difference between the Korean and Indian cases is that in India, a major issue is regulatory compliance apart from suitability and appropriateness: Indian exchange regulations allow the use of derivatives only for hedging exposures, and there is a particular responsibility cast on 'authorised dealers' (ADs); that is, banks with whom alone non-ADs can undertake foreign exchange transactions. And, transactions in violation of regulations may be void and, therefore, unenforceable.
AV Rajwade, independent consultant, Mumbai
More on Risk Management
ABSTRACT This paper develops a new financial product that allows the profit-and-loss sharing (PLS) principle to be enforced recursively in practice. A new equity-like financial product is proposed through...
Welcome to The Journal of Risk's Online Early Forum. Here you will find the latest peer reviewed, accepted papers before they are available in print. With Online Early publication, users can access...
Welcome to The Journal of Energy Market's Online Early Forum. Here you will find the latest peer reviewed, accepted papers before they are available in print. With Online Early publication, users can...
This paper deals with the performance of popular option strategies in the Nordic power derivatives market.
Sign up for Risk.net email alerts
Directional portfolios and limited diversification will hamper recovery process
Exchange plans to attract foreign money into India through enhanced technology
Systemically important status seen as business threat by asset managers
Recent Iosco consultation paper aims to better co-ordinate global regulation
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.