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Finally, Currency Futures

August 24, 2008

Related Post: Derived Misfortune

On August 29th, perhaps the single most important step for Indian export industry will be launched. One that will help put forth some perspective in the appropriate hedging and maintaining of profits arising from currency risk.

Off late, Indian software/textiles/pharma has seen a huge work at hand due to the pathetic absence of any instrument to mitigate currency risk. And hence banks went on to do some ‘financial innovation’. They came up with esoteric derivatives, which they claimed will limit the losses.  Bull!

In the big credit meltdown, which will be spoken in trepidation and fear in the years to come, all these derivatives backfired. All of them!

And the losses? Well, as usual passed on to the customers! Banks ain’t gonna take the albatross,will they?

It is an albatross, the clients albatross. This led to defaulting of hundreds of crores of rupees and almost near bankrupting of companies, in the beginning of the FY08.

Currency risk, is a huge risk to overlook and in no ways of its own can be tackled by third party derivatives. A transparency is required, and this problem was very much local to only India.

Why?

We didnt have exchange traded instruments to mitigate currency risk. But what is currency risk? Everytime we buy a share of any company which is dealing even remotely with export or import, we subject ourselves to a risk posed by the fluctuating currency. Not ony the shareholders but also the employees and clients. Infosys shares have been found to rise around 1.1% for every 1% fall in Re. Well, thats currency risk for you.

Now, what comes forth is this fact that, corporate entities will have a better way to deal with it. Its transparent, volumes will pick up and of course its regulated. August 29th is going to be the day when one huge step in monetary policy reform will take place. Because thats the day, NSE is going to launch currency futures.

One downside is, only $/Re currency pairs are allowed trading. Well, thats myopic, for I strongly believe Euro-Re pairing is imperative for this to be a truly beneficial step for all the companies in IT/Pharma.

So August 29th it is then.

For a humorous take on the bankruptcy issue on exotic derivatives read Derived Misfortunes

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