The Hindu Business Line : Selling derivatives

I am surprised that the entrepreneurs of Tirupur with such business acumen were not really able to comprehend the simple fact that nothing comes risk-free (Business Line, July 5). When I was working in that region, I heard about an incident. The derivatives were even then being sold aggressively by many banks. One of the banks reportedly approached our Mr Common Sense (CS). After giving a patient hearing to the banker, he asked him two simple questions:

1) What will I earn from this at the end of the contract? The banker in his enthusiasm to sell, took out his calculator and told him some figure (let’s say Rs 25 lakh).

2) What is the maximum I can lose on this deal? Again, the banker in his enthusiasm averred that “though loss is possible technically, the exporter will actually never lose anything because…” Immediately Mr CS asked the banker, “If you are so sure that I will make Rs 25 lakh and will never lose money, then why don’t you just give me a cheque for Rs 25 lakh and go away?”

I do not know if the above incident was true or was just circulating as a joke, but I wish the Armstrong Palanisamys had these two questions for their bankers. Referring to your doubt if banks were actually selling down positions that they had already built up, I do not think it is possible as there are stringent guidelines about proprietary positions of banks and they can only carry a minimum uncovered customer risk.

S. Kumar, Riyadh

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