Dear Mr. Venkatesh, I had lost my 25000/- hardearned money in the capital Market due to Bear sworms/the US crisis, but oneday I gained a 14000/- by buying a put option. The speculation is vital of the capital market. It leads to derivatives/gambling.Any business is a war. The option writer only the initate the debate. Shiva Chennai.
the world is increasingly becoming a bunch of gamblers! its ok to gamble with stocks because they are just financial assets, and have no use other than appreciation and dividends. there is no intrinsic worth with them. nobody needs shares to survive. but commoditites! people are just gambling with them and causing the prices to rise and the people who actually need them get hit heavily. but i guess thats the wealth being distributed in the zero sum game of gambling.
Mr. M. R. Venkatesh (38) is a Chennai based Chartered Accountant who addresses the Business concerns relating to International trade and focuses on business strategies. As a policy analyst and a corporate economist he has developed expertise in diverse areas of economic intelligence, viz., competitiveness, exchange rate movements, privatisation and Government finances. Though an accountant, economics remains his first love.
M. R. Venkatesh passed Chartered Accountancy in 1992 with an all India Ranking and has been in active practice since 1993 as partner of GSV Associates, Chartered Accountants, Chennai. He has been retained by different segments of the Indian Industry to analyse the implications of various Policy initiatives brought about by the Government, especially in the context of the WTO regime as well as in the context of the New Economic Policy regime. He has interacted with the officers of the Government of India at the policy formulation level. He has also handled professional assignments pertaining to Anti-dumping, Countervailing, Competition Law and other WTO related issues independently.
M. R. Venkatesh is also a commentator on International Trade and Economic Affairs. He is also the Associate Editor of the Consolidated Commercial Digest and is a regular contributor to the Hindu Business Line and the Industrial Economist. He is a visiting faculty in various professional institutions.
M. R. Venkatesh has authored "A Handbook on Anti-dumping" which was re
Do indian banks and companies understand the danger in derivaties of other countries mainly US? Are derivatives issued by foreign private companies safe? Are they same as treasuries bonds? Will US compensate if the derivatives go bad? How many of you are aware that US is slowly compensating Europe for losses. Will it ever treat Indian bansk similarly? F and O are totally different issues and have no relevance here.
1. Speculation - This is extremely risky and this is the one that gives derivatives the bad name.
2. Hedging - This in fact is meant to reduce your risks.
3. Arbitrage - This is absolutely ZERO RISK way to make money - It is safer than investing even in Govt. Bonds theoretically.
So it all depend on how you use derivatives that will determine whether you will make money or kill yourself. By itself Derivatives are not bad. It is a very powerful weapon and like all powerful weapons, it should be handled carefully. It lets you choose your handling method. Now it is all upto you.
Most retail investors in the Indian market burn their hands because they speculate using derivatives purely on the advice of their brokers. And these brokers have their own axe to grind. They want to churn your portfolio so that they can make more money for themselves. In the bargain the lay investor gets burnt.
RE:Derivatives Usage
by m s mani on Mar 20, 2008 05:07 PM Permalink
Would you please explain more about ARBITRAGE in derivatives,how it is zero risk?? where speculation is involved,how can it be zero-risk??
RE:Derivatives Usage
by Good_man on Mar 16, 2008 08:14 PM Permalink
The real world works on the principle of 'Prey and Predator'. Number and health of predators depends on number of prey available. The time evolution of two species goes in a predictable manner.
If we are able to lure many millions of small investors to put their savings in to stock market by sustained advertising etc, the 'prey' population will be fairly constant, and 'predators' can happily continue to make money.
In fables that we learn as children, a kind hearted man teaches parrots to repeat 'be careful of the hunter'.
Parrots nodoubt learn their lessons well, and when caught irretrievably in the trap, do not forget to chant 'be careful of the hunter'.
If we want to help the situation, and aim for general prosperity, there is enough experience available from advanced economies and overall functioning and behaviour of free market, to rethink about strategies for larger good.
Clever strategies like hedging funds are needed because direct investment is vulnerable to violent ups and downs etc. caused by various things.
Primary markets alone are not generating the wealth, and many more evolved options proliferate. Operators with 'deep' study, (meaning thereby those who have learnt their lessons through numerous 'small gains' and 'large losses') are more comfortable with complexities.
New entrants have no clue whatsoever about overall happenings and readily confess to it, while hoping to make big any how__ by 'speculation' or 'investing' etc.
Congrats and hats off to the author for this bold article.
This article should be an eye opener to the authorities concerned including the FM. Eventhough it is not possible to do away with this vice, the best thing is to control and regulate them by bringing them within the Indian Laws.
RE:Remember the Great Chartered Accountants........
by Munish Oberoi on Mar 16, 2008 05:33 PM Permalink
Hey why are you going ballistic?
Relax. Why are CAs feeling threatened? Because this Options stuff is too tough? Don't worry ... the core competency of CAs is accountancy and it shall remain so, they need not be afraid. And yes, as far as the field of investments is concerned, which was the fiefdom of CAs before the advent of Options, it is going to slip out of the hands of CAs specially the derivatives part.
Getting High Salaries...... Marketing Everything ...... Following Norms in Letter but no in Spirit..... Highly Unethical...... Inflencing Regulator at any Cost...... Has become the Buzzword.....
RE:Market Goondas ------- Who Follows in Regulation in Letter & not in Spirit
by Munish Oberoi on Mar 16, 2008 05:37 PM Permalink
Hey you are confusing 2 different issue - the market of derivatives and the issue of rogue people in the market.
Just because there are some bad elements in the market, should we close down the market itself?
Just because there are goondas on streets, should we close down the streets?
RE:Market Goondas ------- Who Follows in Regulation in Letter & not in Spirit
by Good_man on Mar 16, 2008 11:33 PM Permalink
Munish, there appears to be some mess up. If a system is prone to oscillations small negative feedback is used to stabilize it. One may also use a large 'flywheel' or 'reservoir' (the gold eg) to establish the system prone to depletions.
At three trillion dollar per day, (a mighty 100 times global goods and services ) the derivatives are nothing but a bubble. TOTALLY VIRTUAL MONEY which can not hedge a real calamity.
If one or two percent among users of derivatives are hedged it will be only at the cost of 98 percent others. If more than, let us say, 20 percent are crucially dependent on hedge funds to buffer them at the time of violent volatility, the situation will turn into a severe chaos.
Mr. M R Venkatesh has not given any sample calculations to demonstrate his views. But it can certainly not be inferred that 'he does not understand what are derivatives'.
As regards QUANTS, pl read again what the article says "And when currencies or prices of commodities or stock exchange indices gyrated against each other, often violently, traders faced newer and higher risks. And in the process newer theories were introduced, instruments revealed, and in the process of neutralising higher risks once again newer theories were written -- a classical case of catching the tiger by the tail.
It is in this connection readers may recall that the Black-Scholes Model for determining the value of options was published in the eighties. The net consequence was that many
RE:Market Goondas ------- Who Follows in Regulation in Letter & not in Spirit
by Munish Oberoi on Mar 17, 2008 07:45 AM Permalink
You are not correct my friend... you have quoted about the gold standard... please go through the reasons why gold standard was removed.... gold standard was removed because it was causing more wild swings in the economy than the floating currency system.
I guess you have messed up the concept of "bubble". Just because derivatives trade around 3 trillion usd /day doesn't make it a bubble. Yes the positions are leveraged. But I won't call that a bubble.
And my friend who told you that Hedge Funds are about hedging ??? In fact they are just the OPPOSITE !!! They have rather extremely leveraged positions !
If people are hedged then the system will be stable and not chaotic as you say. You don't understand much about it i guess. I can explain with example if u desire.
As regarding quants - when BS came it was early days and it was very simple it made lot of assumptions which were not present in the real world. So it is natural hat it would fail in the real world. So it also natural that the theories would evolve and come closer to real world situation. Where is the problem with that? That is how SCIENCE progresses. I guess being not from the scientific community and not being aware of the methods of science, the author and you seem to view this process of evolution of theories as a failure. This is ignorance and stupidity.
RE:Market Goondas ------- Who Follows in Regulation in Letter & not in Spirit
by M Kisan on Mar 17, 2008 10:04 AM Permalink
Dear Munish
i do not understand derivatives, futures, options, hedging... and i am following the discussion with interest... but i still feel that those indulging in these are trying to predict the future without knowing the significant, if not all the parameters (except when they are Arbitraging). i may be wrong here.
However i suspect that the reasons given for why gold standard was removed, may not be all the actual reasons, and wild swings may only be a small part of the story.
for instance, with the rising population, there will not be enough dollors pegged to gold to put in every ones pockets!, and at the same time assuring a certain minimum wages for every one (which have to only increase as time passes by-minimum wages would be very difficult to reduce).
This is because the mining of gold will not keep pace with the rise in population, and the rise of minimum wages, and anyway gold is not the only resources in this world, human beings are also one of significant resources along with other commodities.
and once a currency, is removed from any sort of pegging, the scope for manipulation seems limitless, and therefore need to be cautiously done, and so more scope for things going wrong.
RE:Market Goondas ------- Who Follows in Regulation in Letter & not in Spirit
by Mahendra Patel on Jun 03, 2008 09:54 AM Permalink
in Hedge, You don't Put Full ammount say 5 To 7% of face value- when it go reverse,you are called to pay full ammount- derivative is like calculus- rate of change of stock price
The author neither understands derivatives nor bonds. His assertion that the FM's proposal to develop the exchnage traded corporate bonds market is a potential dynamite is preposterous. He doesn't have any understanding of finance it seems. In fact 80% of the indian debt market is illiquid and that is its bane. And we have fellows like Venkat who thinks it is dynamite to make it more liquid.
