Let me give you an example. A flat in Malabar Hills , Bombay - 1500 sqft cost about 2.2 crores in 2005 ; in 2008 January - the same flat was having an estimated market value of 5 crores. Now my name is say Himmat Shah and I want to become really rich in this lifetime - so Himmat goes to ICICI/CIT/HDFC Bank etc and ask them to give him an overdraft of 5 crores by mortgaging his house. He gets his 5 crore and Himmat uses 4 crores to take positions in Reliance Natural , Reliance Petroleum and DLF shares and he uses a crore to subscribe to Reliance Power IPO. The total leverage he has is of 25 crores worth of futures - and if that rises by even 10% - he makes a profit of 2.5 crores in a month....but the market crashes and the shares fall by 40% and he loses 9 crores . His house is worth 5 crores- but that may not have buyers at that rate. The bank loses as it cannot recover the cost. The financial system goes for a toss.
RE:Leveraging - the most dangerous tool in the hands of men
by rahul shah on Mar 15, 2008 07:31 PM Permalink
There is always a risk management system to monitor all the transaction a banks has to do. Banks and Exchanges only allows one to take derivative trades when mark to market requirements calculated by span considerations are dealt by one. So the person first of all cant leverage in an exchage traded instrument unless he marks to market his position. Hence youe exapmple is highly unlikely
RE:Leveraging - the most dangerous tool in the hands of men
by rahul shah on Mar 15, 2008 07:55 PM Permalink
The span margins for most of the volatile stocks were more than 50% in the month of jan. In case of stocks like IVRprime they were 150%, which i m sure u will not understand.....
