What could be common between Barings Bank, Long Term Capital, Berkshire Hathaway and Indian companies such as ICICI bank, Wockhardt and Varun Shipping? All these companies have, in some way or the other, found themselves on the wrong side of derivatives.
Warren Buffet in his letter to the shareholders in 2003 had described derivatives as “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” While Buffet’s worst fears appear to have come true in the global corporate arena, its repercussions have begun seeping into the Indian corporate world.
The latest earnings numbers of Indian corporates have brought to fore the marked increase in loss provisioning by banks, mark-to-market losses and forex losses on overseas loans by corporates.
What are these losses and how significant are they? Are the losses recurring or would a one-time provisioning for them suffice? And most importantly, is the worst over or are these losses here to stay? Here are a few takeaways from the trends available so far.
Derivative losses for Indian companies can broadly be classified under three heads:
Forex losses arising out of revenue exposure to foreign currency (hedging direct business exposure or forex denominated overseas loans),
Provisioning of likely losses by banks to cover the risk of non-payment by corporates that have borne huge derivative losses.
Losses provisioned for by banks that have direct exposure to some of the overseas credit derivatives that have notoriously suffered de-rating after the sub-prime rout made its presence felt. Loss provisioning
While there is no mandate at present that requires companies to divulge relevant details about their derivative exposure, we will be getting there soon. The ICAI had recently asked companies to mark-to-market all outstanding derivatives contracts on the balance sheet with effect from FY08 onwards.
Notwithstanding this, ascertaining the exact amount of derivative exposure of companies is difficult. The extent of increase in loss provisioning by banks, however, may offer a few clues. Most of the banks in their March quarter results have provided for losses. This will be used to cover for losses the banks might suffer, if their clients fail to meet their payment obligations on their derivative contracts.
For instance, State Bank of India has provisioned against the forex losses of it clients, which are in the range of Rs 600-700 crore. Kotak Mahindra Bank has provided for over 45 clients with exposure to forex derivatives. Its clients have incurred MTM losses of Rs 612 crore .
To that extent, the mark-to-market provisioning by some of the top Indian banks such as ICICI Bank, SBI, Axis Bank and Kotak Mahindra Bank against their clients’ exposure to various derivative transactions has been pegged at over $175 million (about Rs 700 crore). Mark-to-market losses are arrived at by valuing the derivatives at their prevailing market price.
Warren Buffet in his letter to the shareholders in 2003 had described derivatives as “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” While Buffet’s worst fears appear to have come true in the global corporate arena, its repercussions have begun seeping into the Indian corporate world.
The latest earnings numbers of Indian corporates have brought to fore the marked increase in loss provisioning by banks, mark-to-market losses and forex losses on overseas loans by corporates.
What are these losses and how significant are they? Are the losses recurring or would a one-time provisioning for them suffice? And most importantly, is the worst over or are these losses here to stay? Here are a few takeaways from the trends available so far.
Derivative losses for Indian companies can broadly be classified under three heads:
Forex losses arising out of revenue exposure to foreign currency (hedging direct business exposure or forex denominated overseas loans),
Provisioning of likely losses by banks to cover the risk of non-payment by corporates that have borne huge derivative losses.
Losses provisioned for by banks that have direct exposure to some of the overseas credit derivatives that have notoriously suffered de-rating after the sub-prime rout made its presence felt. Loss provisioning
While there is no mandate at present that requires companies to divulge relevant details about their derivative exposure, we will be getting there soon. The ICAI had recently asked companies to mark-to-market all outstanding derivatives contracts on the balance sheet with effect from FY08 onwards.
Notwithstanding this, ascertaining the exact amount of derivative exposure of companies is difficult. The extent of increase in loss provisioning by banks, however, may offer a few clues. Most of the banks in their March quarter results have provided for losses. This will be used to cover for losses the banks might suffer, if their clients fail to meet their payment obligations on their derivative contracts.
For instance, State Bank of India has provisioned against the forex losses of it clients, which are in the range of Rs 600-700 crore. Kotak Mahindra Bank has provided for over 45 clients with exposure to forex derivatives. Its clients have incurred MTM losses of Rs 612 crore .
To that extent, the mark-to-market provisioning by some of the top Indian banks such as ICICI Bank, SBI, Axis Bank and Kotak Mahindra Bank against their clients’ exposure to various derivative transactions has been pegged at over $175 million (about Rs 700 crore). Mark-to-market losses are arrived at by valuing the derivatives at their prevailing market price.
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In short self-trading in the currency markets can be a difficult proposition. To be successful, a currency trader must follow market movements 24 hours a day and six days a week.
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In short self-trading in the currency markets can be a difficult proposition. To be successful, a currency trader must follow market movements 24 hours a day and six days a week.
http://www.muhammadazeem.com offers access to Readyforex.com Swap free Spot Forex Managed Account program. Readyforex.com Managed account program accommodates those investors who wish to allocate a portion of their risk capital to the foreign exchange markets but are either unable to watch the markets 24 hours a day or prefer to have their risk capital managed by professionals.
Forex Managed Accounts were created for investors with risk capital who chose to have the services of a full time professional Fund Manager! In a Forex Managed Account, the positions are held in the investors account, independent of other investors. Fund manager is only allowed to do trading on behalf of his clients under a limited power of attorney agreement. Fund manager can not deposit and withdraw any amount from trading account.Unlike mutual funds or hedge funds, which commingle your money with other investors, a Forex Managed Account is an account held exclusively in your name and address. All or part of your funds can be redeemed within one day. There is no lock up period and no withdrawal fees as well
Singapore’s January Annual Inflation Increases, Exceeds Expectations
Singapore’s annual inflation in January recorded highest growth since March 1982 and exceeded economists’ expectations, official data showed Monday.
The Department of Statistics announced that annual inflation stood at 6.6% in January, up from 4.4% in December. Annual inflation far exceeded the 5.6% expected by economists.
Among the various factors affecting the increase in consumer prices, housing costs jumped 11.1% year-on-year in January, while transportation and communication charges were up 6.9%. Food prices, on the other hand, grew 5.8% in January.
Based on the report of the statistical department, consumer prices rose 1.3% month-on-month in January, while on a seasonally adjusted basis, the monthly increase in the CPI was 1.5%.
On a monthly basis, food prices had a 1.1% increase, which was largely due to greater demand for food items, especially pork, ahead of the Lunar New Year period in early February.
Housing costs marked a 4.1% increase over the month in January. Education and stationery costs grew 2.5%.
The 3-month moving average inflation rose 0.8% month-on-month in January, the report added.
Singapore’s annual inflation in January recorded highest growth since March 1982 and exceeded economists’ expectations, official data showed Monday.
The Department of Statistics announced that annual inflation stood at 6.6% in January, up from 4.4% in December. Annual inflation far exceeded the 5.6% expected by economists.
Among the various factors affecting the increase in consumer prices, housing costs jumped 11.1% year-on-year in January, while transportation and communication charges were up 6.9%. Food prices, on the other hand, grew 5.8% in January.
Based on the report of the statistical department, consumer prices rose 1.3% month-on-month in January, while on a seasonally adjusted basis, the monthly increase in the CPI was 1.5%.
On a monthly basis, food prices had a 1.1% increase, which was largely due to greater demand for food items, especially pork, ahead of the Lunar New Year period in early February.
Housing costs marked a 4.1% increase over the month in January. Education and stationery costs grew 2.5%.
The 3-month moving average inflation rose 0.8% month-on-month in January, the report added.
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