Derivatives Deja Vu

I just raced through the latest book from Satyajit Das titled “Traders, Guns and Money” and you would think it was a year in review on the global financial markets…WRONG.  The book was penned in 2006 and describes his last 25 years in the derivatives market which happens to be what is ailing most investment funds and banks.  Many of the financial products that were used in the past have made their reappearance, repacked and rebranded.  Structured products, foreign currency convertible bonds (FCCB’s) and yen carry trades are just the tip of the iceberg.  In India all 3 have been in vogue lately and peddled by the banks.  It’s very easy to compare a product giving 8% vs 6% when all other factors are the same but with structured products it’s not so easy to decipher what the fu#$% is going on. 

India’s version of the sub-prime mess is the yen carry trade.  Many locals banks pitched the idea to corporate treasuries as a way to get funds cheaply and grow their business.  Instead many took the loans at 1-2% and speculated in the local equity markets which were giving over 45% returns in 2006 and 2007. Now that the markets have tanked and the yen has gone to hell, most companies are sitting on hugh losses. Most won’t report these losses as yen carry trades but some other financial engineering exercise.  Which leads to the whole issue of credibility, can you really trust what a company pimps in their annual and quarterly numbers.  

The last 50 pages of the book starts to drag as he gets into detailed calculations. However, the book is a great read and provides insight into a sector of the financial markets that most people have no clue exists or how it functions.  If you plan on getting into these complex derivatives transactions…read this book first.

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