unhappy NOBEL

THE Nobel prizes in physiology or medicine, physics and chemistry are the most prestigious gongs in science. The annual announcement of the winners is a big event in the scientific calendar, as is the ritzy party that takes place on December 10th to honour the winners directly. But talk to scientists in private, and many will grumble. The Nobels are a great way to get people interested in science, they’ll say, and it’s good that we have them. But there have been strange omissions, with people who should have won a prize denied. The grumpiest complain that despite the glitz of the prizes, and the ensuing media attention in articles like this one, their rules that govern them no longer reflect the way modern science works. Why (besides jealousy, perhaps) are some scientists unhappy with the Nobels?
One reason is that the committees can often be slow to recognise achievement. Alfred Nobel, the dynamite magnate who set up the prizes in 1895 (pictured above), specified in his will that the gongs should reward work done in the previous year. But experience soon showed that this was risky, as medals were given out for discoveries that later proved questionable. So a degree of caution is probably advisable. Sometimes, though, it can be taken too far. Subrahmanyan Chandrasekhar, for instance, had to wait until 1983 to win a prize for work he had done in the 1930s on the structure of stars. And caution can sometimes lead to strange results. Albert Einstein never won a prize for his theory of relativity (although he did get one in 1921 for discovering the photoelectric effect). Even though some pretty suggestive evidence had been produced by Arthur Eddington in 1919, relativity—which has subsequently passed every experimental test ever thrown at it—was still considered somewhat risky and recondite.
Another criticism concerns the tradition that no more than three people can share a prize. Science is rarely this clear-cut. Take this year’s physics prize, which recognised Peter Higgs for predicting the existence of the mass-bestowing particle that now bears his name. Dr Higgs was only one of several people with a claim. Two other teams—Robert Brout and François Englert, as well as Gerald Guralnik, Carl Hagen and Tom Kibble—submitted papers on the same idea to the same journal that published Dr Higgs’s work, all within a few months of each other. Science often works like this, with different people coming up with similar ideas at similar times. In the event, the committee decided to honour Dr Englert (Brout is dead, and therefore ineligible), whose paper was earlier than Dr Higgs’s but did not explicitly predict a particle, over Dr Guralnik and his collaborators, who were more comprehensive but a few weeks late.
The rule of three also reinforces the idea that science is carried out by a handful of geniuses, toiling by themselves in ivory towers. If that was ever true, it isn’t now. Drs Higgs and Englert won this year because their prediction was confirmed by the discovery last year of the Higgs boson. It was uncovered by CERN, which runs the Large Hadron Collider, the world’s biggest particle accelerator. The LHC cost billions to build and employs thousands of scientists and thousands more technicians to analyse the data it produces and keep its beams humming. The papers announcing the boson’s discovery had hundreds of authors. Nor is it just physics. Big science, complicated machines and papers with half a dozen authors or more are now the rule rather than the exception in many disciplines, and that trend will only intensify as science becomes both more specialised and more collaborative. There was speculation this year that the Nobel committee would break with another tradition, that organisations are not honoured in the science prizes, and give part of the physics gong to CERN itself. But they didn’t. The rules specified in Nobel's will have been reinterpreted in the past. It may be time to rejig them once again.

What Are the Risks of Quantitative Easing, Really?

What Are the Risks of Quantitative Easing, Really?

In the financial market there is a demand for risk-bearing capacity by firms and others who want to borrow but who cannot guarantee that they will be able to repay. The higher is the price of risk--the greater the risk premium interest rate spread over short-term Treasuries they must pay--the less they will borrow.
In the financial market there is also a supply of risk-bearing capacity by savers and financial intermediaries who want to lend, and are willing to accept and bear some risk in return from getting more than the short-term Treasury rate. The higher is the price of risk----the greater the risk premium interest rate spread over short-term Treasuries they must pay--the more they will be willing to lend.

When the Federal Reserve undertakes quantitative easing, it enters the market and takes some risk off the table, buying up some of the risky assets issued by the U.S. government and its tame mortgage GSEs and selling safe assets in exchange. The demand curve for risk-bearing capacity seen by the private market thus shifts inward, to the left: a bunch of risky Treasuries and GSEs are no longer out there, as the government is no longer in the business of soaking-up as much of the private-sector's risk-bearing capacity:

And this leftward shift in the net demand to the rest of the market for risk-bearing capacity causes the price of risk to fall, and the quantity of risk-bearing capacity supplied to fall as well. Yes, financial intermediaries that had held Treasuries and thus carried duration risk take some of the cash they received by selling their risky long-term Treasuries to the Fed and go out and buy other risky stuff. But the net effect of quantitative easing is to leave investors and financial intermediaries holding less risky portfolios because they are supplying less risk-bearing capacity.
How do we know that they are holding not more but less risky portfolios? We know because we know that supply curves slope up, and if they were holding more risky portfolios in total--supplying more risk-bearing capacity to the market--the price of risk would have not fallen but risen, and interest rate risk spreads would be not lower but higher, wouldn't they?
So when the intelligent and thoughtful Mark Dow tweets:

I, too, think risks [of QE] overstated, but they're non-zero. Main ones r credit leverage buildup…

I am at a loss. As long as supply curves slope up, QE does not increase but reduces the leverage of private-sector financial asset holders.
And when the intelligent and thoughtful Mark Dow tweets:

I, too, think risks overstated, but they're non-zero. Main ones r… outsized int'l capital flows

I am again at a loss. Yes, the Federal Reserve has taken some domestic risky assets off the table. Yes, U.S. financial intermediaries and savers will respond by buying foreign assets to so deploy some of their now-undeployed risk bearing capacity. Yes, they will now bear some exchange-rate risk. But, once again, the fact that QE pushes interest rate spreads down is very powerful evidence that these capital flows are not "outsized"--that the extra exchange-rate risk U.S. financial intermediaries have now taken onto their books is less than the duration risk that QE took off of their books.
At least, that is the case as long as the supply curve for risk-bearing capacity slopes up, like a good supply curve should.
Perhaps those who claim that there are big risks to quantitative easing regroup. Perhaps they claim that financial intermediaries are perverted, and that the lower is the price of risk the greater is the amount of risk-bearing capacity they supply to the market because they lose their jobs if they don't make at least three cents on every dollar of assets in a normal year in which risk chickens come home to roost.
In that counterfactual world, the supply-and-demand graph would look like this:

And in that counterfactual world, the Federal Reserve's adoption of quantitative easing policies triggered an enormous expansion of the quantity of risk-bearing capacity demanded by firms and households and a huge private-sector lending boom as firms issued enormous tranches of risky bonds and as firms and households took out risky loans. In that counterfactual world, employment in bond underwriting tripled as $85 billion a month in QE was more-than-offset by an extra $120 billion a month in private-sector bond issues. In that counterfactual world, we saw a rapid recovery of housing construction and a thorough equipment investment boom as far across the U.S. as they eye could see.
That didn't happen.
So what are the risks of QE?
It really seems to be this:

• Commercial banks traditionally accept deposits, put the deposits in long-term Treasuries, rely on the law of large numbers and on deposit insurance to allow them to always hold their long-term Treasuries to maturity, and so have a riskless and profitable business model.
• When commercial banks cannot do this, they find some way to gamble with government-insured deposits.
• ????
• LOSS!!

But this is not a source of systemic risk: because the deposits they may be gambling with are government insured by the FDIC, no run on the banking system or the shadow banking system occurs when risks come due. It would be embarrassing, yes. And the proper response to thinking that commercial banks are running undue risks with government-insured money is to send in the bank examiners--not to undertake policies that raise unemployment.

Manipulate

Gold and Silver Are Manipulated

The Guardian and Telegraph report that gold and silver prices are “fixed” in the same way as interest rates and derivatives – in daily conference calls by the powers-that-be.
Long-time trader Andrew Maguire told told King World News this week that 2 JP Morgan whistleblowers have handed over evidence of gold and silver manipulation by their bank:

Very recently [Commodities Futures Trading] Commissioner Chilton assured me, and I’m going to quote him exactly, “I can’t appropriately express my frustration and disappointment with how we’ve handled the silver investigation
And, as you know, I’m prohibited from actually saying much.  That said, I will not let September go by without speaking out if the agency doesn’t do so.”
***
I was also contacted by two JP Morgan employees who told me they had a large amount of documented evidence of market trading abuses in gold and silver by their bank (JP Morgan). [And they handed it over to the CFTC.]

We’ll have to wait to see if Maguire’s explosive allegations pan out.
As shown below, big banks have manipulated virtually every market  – both in the financial sector and the real economy – and broken virtually every law on the books.

Energy Markets Are Manipulated

The Federal Energy Regulatory Commission says that JP Morgan has massively manipulated energy markets in California and the Midwest, obtaining tens of millions of dollars in overpayments from grid operators between September 2010 and June 2011.

Commodities Are Manipulated

The big banks and government agencies have been conspiring to manipulate commodities prices for decades.
The big banks are taking over important aspects of the physical economy, including uranium mining, petroleum products, aluminum, ownership and operation of airports, toll roads, ports, and electricity.
And they are using these physical assets to massively manipulate commodities prices … scalping consumers of many billions of dollars each year.

Interest Rates Are Manipulated

Interest rates are rigged:

• The big banks have conspired for years to rig interest rates … upon which $800 trillion in assets are pegged

• This was the largest insider trading scandal ever … and the largest financial scam in world history

• Local governments got ripped off bigtime by the Libor manipulation

• Libor is still being manipulated

Derivatives Are Manipulated

The big banks have long manipulated derivatives … a $1,200 Trillion Dollar market.
Indeed, many trillions of dollars of derivatives are being manipulated in the exact same same way that interest rates are fixed: through gamed self-reporting.

Currency Markets Are Rigged

Currency markets are massively rigged.

Oil Prices Are Manipulated

Oil prices are manipulated as well.

Everything Can Be Manipulated through High-Frequency Trading

Traders with high-tech computers can manipulate stocks, bonds, options, currencies and commodities. And see this.

Manipulating Numerous Markets In Myriad Ways

The big banks and other giants manipulate numerous markets in myriad ways, for example:

• Engaging in mafia-style big-rigging fraud against local governments. See this, this and this

• Shaving money off of virtually every pension transaction they handled over the course of decades, stealing collectively billions of dollars from pensions worldwide. Details here, here, here, here, here, here, here, here, here, here, here and here

• Charging “storage fees” to store gold bullion … without even buying or storing any gold . And raiding allocated gold accounts

• Committing massive and pervasive fraud both when they initiated mortgage loans and when they foreclosed on them (and see this)

• Pledging the same mortgage multiple times to different buyers. See this, this, this, this and this. This would be like selling your car, and collecting money from 10 different buyers for the same car

• Cheating homeowners by gaming laws meant to protect people from unfair foreclosure

• Pushing investments which they knew were terrible, and then betting against the same investments to make money for themselves. See this, this, this, this and this

• Engaging in unlawful “frontrunning” to manipulate markets. See this, this, this, this, this and this

• Engaging in unlawful “Wash Trades” to manipulate asset prices. See this, this and this

• Otherwise manipulating markets. And see this

• Participating in various Ponzi schemes. See this, this and this

• Charging veterans unlawful mortgage fees

• Cooking their books (and see this)

• Bribing and bullying ratings agencies to inflate ratings on their risky investments

Sharing

Most of the past century, Americans have been the world’s greatest consumers. And usually consumption has meant ownership: just before the Great Recession, the average American household owned 2.28 cars, and had more television sets than people. But these days a host of new companies are trying to disrupt the paradigm—offering the benefits of consuming without the costs of ownership. Ride-sharing companies such as Lyft, Sidecar, and, in some cities, UberX, own no cars themselves. Instead, they sign up ordinary car owners: when you need a ride, you can use their apps to find a driver near you and ask to be picked up. Many other companies are trying to cash in on what’s often called “the sharing economy.” Airbnb now features more than three hundred thousand listings from people making their apartments and homes available for short-term rentals. RelayRides and Getaround let you rent cars from their owners (rather than from Hertz or Avis). Boatbound offers boat rentals, Desktime office space, ParkatmyHouse parking spaces. SnapGoods makes it possible for people to borrow consumer goods from other people in their neighborhood or social network. It may not be too long before you’re able to pay to sit in a stranger’s living room and “share” his home theatre.
Just a couple of weeks ago, Uber (which also runs services allowing you to book livery cars and cabs) disclosed that it had raised more than a quarter of a billion dollars in venture-capital funding, most of it from Google. The flood of new money into all these new businesses feels like a mini-bubble in the making. But beneath all the hype is a sensible idea: there are a lot of slack resources in the economy. Assets sit idle—the average car is driven just an hour a day—and workers have time and skills that go unused. If you can connect the people who have the assets to people who are willing to pay to rent them, you reduce waste and end up with a more efficient system.
In the past, this was hard to pull off, because the transaction costs involved in borrowing and lending were high: there was no easy way to find someone who had what you were looking for and no easy way to know if someone was trustworthy. So if you borrowed a lawnmower it was typically from your neighbor. But digital technology has made it much easier for buyers and sellers to find each other quickly, and to evaluate the people they’re trading with. The effect has been to make sharing a much more plausible business model. “We now have hundreds of millions of consumers who are carrying in their pockets powerful computers that are always connected to high-speed networks,” Arun Sundararajan, a professor at N.Y.U.’s Stern School of Business and an expert on the sharing economy, told me. “That makes it possible for people to rethink the way they consume.”

Sharing has also had a boost from the weak economy. People are leery of making big up-front purchases, and many have had to scramble for ways to monetize their time and their assets. More important, there are signs that the ties between consumption and ownership are loosening, particularly among younger people. Studies suggest that Millennials are less interested in owning cars than previous generations have been, and the success of sites such as Netflix and Spotify show that, at least with some goods, renting can trump ownership. For one thing, people get access to a much wider range of products than they could ever own. “There’s a mind-set that consumers are doing this just to save money,” Sundararajan said. “But I think that what’s really compelling about the sharing economy is the variety and expansion of choices that it offers. Instead of being tied to owning one car, I can drive twenty different ones. So I expect this will expand consumption, rather than shrink it.”

Before that happens, though, there are serious hurdles that the sharing economy has to get over. The most obvious of these is regulation. Cities typically have elaborate rules for cabs and limos that control drivers, vehicles, fares, and so on. These rules in part reflect the desire of vested interests (like cab companies) to protect their businesses and in part consumer concerns about safety and liability. Sharing companies circumvent some of those rules, in effect arguing that, if you choose to pay someone to give you a ride to the airport—or rent you an apartment—the state shouldn’t stop you. That’s an appealing position, but the companies are actually piggybacking on the trust that consumers feel in what is typically a highly regulated economy. If these companies become more established, they’ll have to reach some kind of accommodation with regulators, perhaps along the lines of rules that California’s Public Utilities Commission recently proposed, which would let Sidecar, Lyft, and Uber operate if they implement certain safety and driver regulations.
It isn’t just companies and regulators who will have to be flexible, though. Workers will, too, since the sharing economy requires people to function as micro-entrepreneurs. Uber is just a broker, and the drivers aren’t anyone’s employees, any more than the landlords in Airbnb’s system are. They are all independent contractors, working for themselves and giving the companies a cut of the action. This has certain attractions: no boss, the ability to set your own hours, control over working conditions. It also means no benefits, no steady paycheck, and the need to always be hustling; in that sense, it fits all too well with the free-agent nation we’re increasingly becoming. Sharing, it turns out, is often a hell of a lot of work. ♦

Rs probs

Rupee still looks vulnerable, India has three options, none very palatable. One is to let the currency fall further. In most countries a cheaper currency would boost exports and help close the current-account deficit. But India’s manufacturing industry is too small and too bound in red tape to ramp up quickly. So a turn-around in the balance of payments may take time during which investors could panic. Meanwhile the weaker currency may destabilise the domestic economy by adding to inflation and increasing the government’s subsidies on fuel and thus its borrowing.
The second option is to do the opposite and increase interest rates to attract more foreign money in, following the path of Indonesia and Brazil. But this would further hammer Indian industry, which is already in poor shape, and probably increase bad debts at banks too. If the economy slowed further as a result, equity investors might begin to worry about corporate earnings declining and pull out their roughly $200 billion of investments in listed shares. Inducing a credit crunch in India might make things even worse.
The last option is to lower government borrowing. It is running at 7% of GDP (including India’s states) and has stoked excess demand in the last few years, widening the current-account deficit. The populist political mood doesn’t make big spending cuts easy, though, and while it is often accused of epic profligacy, India’s central government has pretty low expenditure relative to GDP—about 15%. There is simply no way it can cut its way to a balanced budget. What India really needs is more tax revenues. But with a narrow tax base—only 3% of Indians pay income tax—this might mean concentrating tax rises on the formal economy, which is already reeling.
For now my sense is that the authorities’ plan is to let the rupee trade freely but hold out the threat of an interest rate rise or direct intervention in the currency market to try to scare off speculators. At the same time they will squeeze borrowing as much as is possible during an election and use administrative measures, such as higher duties, to try to cap imports. It is a bet that the economy will pick up soon and that growth will make India’s problems fade away. The trouble is that the economy is still decelerating.

Forex Expert, AV Rajwade

Rupee creating a history every day and touching new lows, currency derivatives as a hedging tool has gained a lot of ground. The general definition of derivatives of course is that it is a contract whose value depends on the value of some underlying asset; because of currency derivatives, the underlying asset is a foreign currency rather than being a share in a company or a commodity, says Forex Expert, AV Rajwade.

The essential characteristic of a derivative is its value moves in the opposite direction to that of the underlying asset, he adds. An individual cannot do without derivatives if he or she is looking at hedging any currency exposure, explains Rajwade.

There are two types of players in this market, one who want to hedge exposures which arise out of their normal business, company having imports or exports or foreign currency borrowings, he says. The others, the speculators, there is also or at least there used to be until recently a third category of players which were the arbitragers who would continuously arbitrage between prices on exchanges and prices in the over the counter which is basically into bank and bank versus client market, he adds. So if there is a price difference between the two, the arbitrager would buy in one market and sell in the other, he says.




Below is the verbatim transcript of AV Rajwade's interview on CNBC-TV18

Q: We will start a little bit with the basics, what are currency derivatives, who is suited for this product?

A: The general definition of derivatives of course is that it is a contract whose value depends on the value of some underlying asset because of currency derivatives, the underlying asset is a foreign currency rather than being a share in a company or a commodity. So the basic definition remains that its value depends on the value of a variable, an asset like a currency. That is why you call them currency derivatives.

One basic difference between currency and equity derivatives, which we need to keep at the back of our minds is that currency derivatives are traded both on exchanges as well as what is known as over-the-counter (OTC) market that is between businesses wanting to buy or sell dollars and their bankers. So there is a very large OTC market and of course the exchange traded market has also grown, there are positive and negative features to both those markets.

Q: A lot of the viewers watching this show whether they are lay investors, students looking to study abroad, businesses of different sizes in the import/export business area especially would want to know who are currency derivatives suited for, who all can take advantage of it?

A: Essentially you cannot hedge any price risk except by using a derivative and for hedging a price risk, the derivative needs to have a particular characteristic namely its value moves in the opposite direction to that of the underlying asset. That is why we call it a hedge. So that what you gain or lose on one side, you lose or gain on the other. So you cannot do without derivatives if you are looking at hedging any currency exposures, which are arising out of your basic business.

The other users of currency derivatives or in principle only exchange traded currency derivatives would be those who want to you said investors, I would call them more bluntly as speculators trying to profit speculation by definition means that taking a longer short position in the hope of profiting from price movements. Now that is what they are glorified by a being called investors, but I think essentially they are speculators.

Speculation is a very high risk high reward game so essentially there are two types of players, one who want to hedge exposures which arise out of their normal business, company having imports or exports or foreign currency borrowings. The others, the speculators, there is also or at least there used to be until recently a third category of players which were the arbitragers who would continuously arbitrage between prices on exchanges and prices in the over the counter which is basically into bank and bank versus client market. So if there is a price difference between the two, the arbitrages would buy in one market, sell in the other.

Q: We hear a lot more about the rupee’s fall against the dollar and the movement there. But what are the different currencies which can be traded in the derivatives market in India?

A: Theoretically there are contracts in other major currencies like euro and yen and so on. But we need to keep two perspectives in mind. One, there is very little liquidity in those contracts. The basic liquidity in exchange traded derivatives market is in dollar rupee and that too for the nearer maturity one-three months. There isn’t much of liquidity in longer term maturities.

The second perspective which we need to keep in mind is that there is no such thing really as a euro-rupee or yen-rupee exchange rate. In fact that is a combination of the dollar-euro exchange rate in the global markets and dollar rupee exchange rate in the Indian markets. So it is a multiplication of the two. And it is not an independent variable. Once again that price is derived in a way you can call it a derivative of the dollar-euro or dollar-yen global market and dollar-rupee market in India.



Q: You were speaking about how there is a big OTC market for currency and currency derivatives in India and then there is currency traded on the exchanges. What is the reason for having two such avenues and should they not actually be combined into one?

A: There are two reasons why at least in the Indian context they cannot be combined together. One reason is that we have what is known as Foreign Exchange Management Act (FEMA). What it means is that any resident can do an actual currency exchange transaction only with an authorised dealer. You might be an exporter and I might be an importer, we cannot sell to each other. You have to sell to your bank, I have to sell to my bank. This is part of the FEMA. Also the interbank market, the jargon is authorised dealers in foreign exchange, that market is very tightly controlled by the central bank, while exchanges do not come directly under the purview of the central bank, they are regulated by Sebi.

The third thing, one corollary following from what I said is that all the exchange traded contracts are settled not by delivery, but as contract for differences, that is you exchange the difference in prices. You have bought dollars at Rs 60, settlement price is Rs 59, you pay Rs 1 and settle the contract. While in the OTC market, in principle, contracts are settled by actual exchange of one currency for another and any resident can undertake derivative transaction in the OTC market only if that firm, unlikely that individuals will have, that firm has a genuine underlying commercial exposure, so the export contract and import contract or a foreign currency borrowing.

The other major difference between the two markets is that like all exchange traded products the performance is guaranteed by clearing company. The clearing company is a subsidiary of the exchange. Nowadays, there is a move that they should become independent companies, but it is guaranteed by a clearing company. Transactions in the OTC market are not guaranteed, so there is what is known in the jargon as a counterparty exposure, the risk that the party with whom you are contracting to buy and sell might go insolvent, might fail before the contract matures.

You do not have that kind of a problem at least in principle on exchanged traded derivatives because they are guaranteed by the clearing company at the global level. You all know that there was a major financial crisis in 2008 arising out of mortgage derivatives. These are also derivatives, but of a different kind. Thereafter the group of 20 largest economies became active, they started meeting at the head of government level. Group of 20 has been in existence since earlier, but it was meeting at the Finance Minister level or central bank governor level, at the summit level that is at for instance Prime Minister Manmohan Singh is one of the members of the G20 Summit Group now.

One of the resolution of the G20 after the mortgaged derivatives crisis in western markets in 2008 has been that they are urging all member countries to move as much derivatives trading from OTC markets to exchanges, because exchanges through a system of initial and mark-to-market (MTM) daily margins they eliminate the counterparty exposures and through the margining system are able to guarantee the deliveries by the seller, in effect the clearing company steps in between the buyer of a contract and the seller of a contract.

Q: The question that arises is like you said that there is a thriving OTC market that we have. We have exchange traded derivatives available. For someone who is watching this show, who has an import export exposure of a very small nature, but obviously the currency fluctuations like we have seen in the second half of August impact them greatly. How do they decide how much exposure they should take on the exchange-traded fund (ETF), because like you said OTC the risk is there is no counterparty to guarantee, safeguard or eliminate that risk which is the first dharma of anyone who is hedging? How does it work?

A: As I mentioned earlier, under FEMA any resident can do a foreign currency transaction only with an authorised dealer. Authorised dealers are banks and the way banking has been supervised in our country, to the best of my knowledge last 17-18 years there has been no bank exposure as such. There the counterparty exposure is far more live issue for the banks on the company rather than for the company on the bank, but there is a downside to using derivatives in the OTC market. The downside is that there is no price transparency in the OTC market. At the same point of time, a bank dealer may quote price to you, one to me, one price for a million dollar trade, another for a USD 10,000 trade. While on exchanges there is a great deal of price transparency because you can see it on the screen what price you can sell or buy a particular contract.

The other basic difference between the two is that in the exchange traded derivatives market, maturities are fixed. Futures contracts for instance, they all mature on the last working day of the month that is when they are settled. So the maturities cannot be customised to suite the requirements of an exporter or importer.

For instance, my payment may be due on the 15th of a month. I can have a forward contract or an options contract with a bank which matures on 15th. If I want to do that same hedging on the exchange I will probably have to buy the contract which is expiring nearest to that date or something like that. So customisation is not possible. The cost of customisation in the OTC market is there is no price transparency and you could be paying a much higher margin. Margin means the wholesale market price and the retail market price difference, not margin in terms of initial margin and MTM margins.


Q: For the lay investor we have a student community, a tourist community, tourism agencies now with the rupee losing a substantial amount of ground especially over the last couple of weeks how do they hedge themselves if you want to go to the exchange do you need to have any particular profile or can any Indian resident take a position?

A: Unlike over-the-counter (OTC) market, as far as exchange traded derivatives are concerned, anybody can go to the exchange. All he would need is to pay an initial margin. There will be daily mark-to-market margin on that contract, so he will have to be prepared to pay the initial margin and the mark to market margin everyday but anybody can take that position.

In terms of the kind of people, the kind of end users mentioned for instance students going abroad or their parents or whatever, we need to distinguish between two types of exchange traded derivatives. First one is the Futures. Futures is like a forward contract except that it is standardised as to amount and maturity. The other is currency options. Options is a completely different animal.

In my teaching I often compare the Forward or Futures contracts as a Hindu marriage because once you have done those seven pheras round the agni, there is no way to get out of that contract. So, the negative side of the derivatives in the forward family, forward contracts futures, contract swaps etc, is that one cannot benefit from a favourable price movement.

For instance, yesterday if one bought Futures Contract at 63, now if tomorrow the rupee goes to 60 then one cannot benefit from that. One is locked into that 63 and one has to live with it. This is something totally different from an Option contract for which one pays an upfront fee for buying an Option.

What Option allows one to do is that if the price is worse than the strike of the Option, one can exercise the Option. If the market price is there, one can tear off the option so option has no opportunity cost but it has an upfront cost.

Upfront cost can also be reduced significantly by buying what is known as out of the money Options, that is where the strike rate is much worse than today’s market rate. Let’s say today’s market rate for the September end contract is 63, but I could buy an Option without much of a fee. There will be some fee which gives me the right to buy dollars at 66 which is much worst than today’s price. But then, our exercise is if it goes to 68, I do not exercise if their price is below 66 so Option has certain advantages.

In fact, Options need to be looked at by the end user like insurance. One pays a fee, buy an insurance, one buy car you have a comprehensive insurance. One has life insurance, if one is managing a factory, one has insurance against earthquake, riots, strikes etc so one pays a fee and one is protected against adverse happenings.

Q: It is available with the exchange, it is available in demat form, you can log into your account and trade it. How are things like contract size decided, margins decided and like we have in equities- in the money, at the money, out of the money, different strike prices available how does that work for currency?

A: The money Options means that the strike price is more favourable than the forward rate. The example that I gave was that Septembe-end Futures contract is trading at 63 now 61, if I have the right to buy dollar is at 61 now that is in the money strike, if it is at 63 it is at the money, if it is at 66 then it is out of the money.

Out of the money Options will cost much less than either at the money and the costliest of course will be in the money Options where the minimum price will be what is known as the intrinsic value that is the difference between the strike and today’s price. I think it depends on how much upfront money one wants to pay for buying an option.

Q: The question that is there in the top of mind for everyone is that the rupee has lost so much of ground to the dollar and there does not seem to be anything to suggest it will stop here it might go further for businesses how would you advice them because they would have obviously like over the counter requirement. Can they make a portfolio where they have over the counter exposure as well as exchange traded exposure so that the volatility hits them a little?

A: I would not advise them to run both the portfolios simultaneously. They should be looking at very closely particularly the SME segment is doing the hedge on the exchange primarily because of price transparency. There is except one fact that in the OTC market the small people get much worse rates than the Reliance ’s of this world. The small garment exporter from Tirupur gets a far worse price than a company like Reliance in Mumbai. That is the reality of that market.

While on exchange trading there is a price on the screen and one can buy or sell at the screen price. One thing they can look at very closely is doing the hedging part on the exchange but on the date of maturity of ones underlying exposure, cancel the hedge in the exchange and simultaneously do a trade in the OTC market because then the OTC trade will be in the spot market not in the derivative market so combining the two maybe useful. I think that is part of our corporate culture we haven’t really got around to the fact that Options are like insurance that one is much better off paying a fee and buying protection rather than trying to look at zero cost products which can turn out to have risk and pricing which one is not able to understand properly.

Its Manipulations and celebrations

If We Don’t Break Up the Big Banks, They Will Manipulate More and More of the Economy … 

 

Making Us Poorer and Poorer

Interest rates are rigged:

• The big banks have conspired for years to rig interest rates … upon which $800 trillion in assets are pegged

• This was the largest insider trading scandal ever … and the largest financial scam in world history

• Local governments got ripped off bigtime by the Libor manipulation

• Libor is still being manipulated

Derivatives Are Manipulated

The big banks have long manipulated derivatives … a $1,200 Trillion Dollar market.
Indeed, many trillions of dollars of derivatives are being manipulated in the exact same same way that interest rates are fixed: through gamed self-reporting.

Currency Markets Are Rigged

Currency markets are massively rigged.

Commodities Are Manipulated

The big banks and government agencies have been conspiring to manipulate commodities prices for decades.
The big banks are taking over important aspects of the physical economy, including uranium mining, petroleum products, aluminum, ownership and operation of airports, toll roads, ports, and electricity.
And they are using these physical assets to massively manipulate commodities prices … scalping consumers of many billions of dollars each year.

Gold and Silver Are Manipulated

The Guardian and Telegraph report that gold and silver prices are “fixed” in the same way as interest rates and derivatives – in daily conference calls by the powers-that-be.

Oil Prices Are Manipulated

Oil prices are manipulated as well.

Everything Can Be Manipulated through High-Frequency Trading

Traders with high-tech computers can manipulate stocks, bonds, options, currencies and commodities. And see this.

Manipulating Numerous Markets In Myriad Ways

The big banks and other giants manipulate numerous markets in myriad ways, for example:

• Engaging in mafia-style big-rigging fraud against local governments. See this, this and this

• Shaving money off of virtually every pension transaction they handled over the course of decades, stealing collectively billions of dollars from pensions worldwide. Details here, here, here, here, here, here, here, here, here, here, here and here

• Charging “storage fees” to store gold bullion … without even buying or storing any gold . And raiding allocated gold accounts

• Committing massive and pervasive fraud both when they initiated mortgage loans and when they foreclosed on them (and see this)

• Pledging the same mortgage multiple times to different buyers. See this, this, this, this and this. This would be like selling your car, and collecting money from 10 different buyers for the same car

• Cheating homeowners by gaming laws meant to protect people from unfair foreclosure

• Pushing investments which they knew were terrible, and then betting against the same investments to make money for themselves. See this, this, this, this and this

• Engaging in unlawful “frontrunning” to manipulate markets. See this, this, this, this, this and this

• Engaging in unlawful “Wash Trades” to manipulate asset prices. See this, this and this

• Otherwise manipulating markets. And see this

• Participating in various Ponzi schemes. See this, this and this

• Charging veterans unlawful mortgage fees

• Cooking their books (and see this)

• Bribing and bullying ratings agencies to inflate ratings on their risky investments

The Big Picture

The big picture is simple:

• The big banks manipulate every market they touch

• Too much interconnectedness leads to financial instability

• The government has given the banks huge subsidies … which they are using for speculation and other things which don’t help the economy. In other words, propping up the big banks by throwing money at them doesn’t help the economy

• Top economists, financial experts and bankers say that the big banks are too large … and their very size is threatening the economy. They say we need to break up the big banks to stabilize the economy

Get it? Break up the big banks, or they will continue to take over and manipulate more and more of the economy … increasing their profits while making everyone else poorer.