Foreign exchange derivatives

Vinod Kothari Consultants' page on foreign exchange derivatives

• Among all OTC derivatives, foreign exchange derivatives, also referred to as FX derivativs or forex derivatives, are the most complicated. Well, complication is all in the mind of the beholder, but to anyone not intimately into the nitty gritty of the foreign exchange markets, the sheet interplay of different currencies, and the impact of variety of macroeconomic factors on movement of exchange rates, and the possibility of playing between interest rates and exchange rates, creates massive intriguing field of study.
• Foreign exchange derivatives in terms of volumes form second largest OTC derivative, next after interest rate derivatives.

In India, foreign exchange derivatives are intensively talked about in legal circles as there numerous examples of alleged mis-selling of derivatives by aggressive banks to unwary users, mostly in 2007 and 2008 period. Clearly, avarice overtook rationality, and users bit the bait of derivatives which were least suited to their requirements. The queer thing is that in India, as in several other countries, derivatives are permitted only for the purpose of hedging. However, authorised dealers and derivatives users exploited a vague line in the RBI derivatives' regulations about "zero cost structures" and "cost reduction structures" and structured derivatives where the user becomes a protection seller rather than a protection buyer.

Vinod Kothari appeared as an expert witness in arbitration proceedings between a major bank and a leading company. We have done extensive research about the way foreign exchange derivatives were sold to derivatives users in India and emerging markets, resulting into losses running into billions.

Currently, several of the derivatives transactions are into litigation at various forums.

• Basics of foreign exchange derivatives:
  • Article explaining foreign exchange derivatives -written from students' viewpoint.
• Derivatives accounting:
  • Articles on mark to market accounting, IAS 39, IFRS 7, IAS 32
  • Generally on fair value accounting

• Mis-selling of derivatives and derivatives losses in India
  • Vinod Kothari's article on law of Forex derivatives in India - the article is a scathing criticism of RBI's role as a regulator.
• Mis-selling of derivatives in other countries:
  • Ronald Dodd's article on use of exotic derivatives in several emerging market countries: Dodd of IMF argues that there is a pattern by which derivatives losses were transmitted to several emerging market countries
  • Playing with fire - another article by Ronald Dodd of IMF
  • Korean companies go to bankruptcy due to forex derivatives
• Foreign exchange derivatives in India
  • RBI takes measures to make derivatives more “suitable” and more “appropriate”, by Bijoyeta Chakrabarty, 6th August 2011

• Related pages

• See section on Credit Derivatives