Comments on: Currency Bets Gone Bad Hit Companies in Developing Economies http://www.nakedcapitalism.com/2008/10/blog-post.html Sun, 22 Nov 2009 07:56:24 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: PeeDee http://www.nakedcapitalism.com/2008/10/blog-post.html#comment-22696 PeeDee Thu, 23 Oct 2008 03:04:00 +0000 http://www.nakedcapitalism.com/2008/10/currency-bets-gone-bad-hit-companies-in-developing-economies/#comment-22696 Why is it these stories are always about forex losses? By its nature, any forward, futures or derivative contract has someone on the other end. Why not a story about "... making unexpected forex gains"?<br/><br/>Any move in currency is going to have some winners, some losers. Why are the losers news? Why is it these stories are always about forex losses? By its nature, any forward, futures or derivative contract has someone on the other end. Why not a story about “… making unexpected forex gains”?

Any move in currency is going to have some winners, some losers. Why are the losers news?

]]> By: bena gyerek http://www.nakedcapitalism.com/2008/10/blog-post.html#comment-22666 bena gyerek Wed, 22 Oct 2008 19:05:00 +0000 http://www.nakedcapitalism.com/2008/10/currency-bets-gone-bad-hit-companies-in-developing-economies/#comment-22666 some anectodal evidence from having spent a year working on the latin america credit structuring desk of a big investment bank in new york last year.<br/><br/>a lot of latam exporter companies entered into currency derivative transactions as a "hedge" for their business. structurally, these companies are long dollars through their business, as their export earnings are in hard currency, but their cost base typically in local currency. so it made sense for them not only to borrow in dollars, but also to overlay that borrowing with a currency derivative in which they shorted the dollar even more.<br/><br/>unfortunately, these companies overlooked three rather important points:<br/> - a lot of the derivatives they traded were way too leveraged. in particular, they often traded "one-touch" transactions that would lose them a lot of money with a temporary spike in the dollar, whereas their business benefits only with a sustained dollar rally.<br/> - they did not consider that a dollar rally would be associated with a global recession and therefore a fall in the volume of exports and therefore a fall in dollar revenues.<br/> - they did not think about cashflow implications - i.e. the derivative loss may need to be paid upfront, whereas the benefit of a stronger dollar will be realised only over many months.<br/><br/>more worryingly, i am also aware that one of our competitors specialised in providing "dual currency" loans to less sophisticated medium sized companies, especially in brazil. i believe these loans run into the tens of billions. the currency derivative embedded in these loans typically generates a huge one-time loss to the borrower if there is a sudden move in the dollar / real exchange rate. the reason for these brazilian companies to enter into these loans was because they offered a superficially very low interest rate (i.e. unlike with the big exporter companies, it had nothing to do with hedging). i would expect a lot of these smaller companies to get blown up by these loans in the current market environment. <br/><br/>moreover, given that they were nearly all arranged (and i believe the currency risk internally managed) by that one big competitor investment bank i mentioned, i would expect that investment bank to potentially face very big credit exposures as these brazilian borrowers prove incapable of meeting the big one-time payments now due. some anectodal evidence from having spent a year working on the latin america credit structuring desk of a big investment bank in new york last year.

a lot of latam exporter companies entered into currency derivative transactions as a “hedge” for their business. structurally, these companies are long dollars through their business, as their export earnings are in hard currency, but their cost base typically in local currency. so it made sense for them not only to borrow in dollars, but also to overlay that borrowing with a currency derivative in which they shorted the dollar even more.

unfortunately, these companies overlooked three rather important points:
– a lot of the derivatives they traded were way too leveraged. in particular, they often traded “one-touch” transactions that would lose them a lot of money with a temporary spike in the dollar, whereas their business benefits only with a sustained dollar rally.
– they did not consider that a dollar rally would be associated with a global recession and therefore a fall in the volume of exports and therefore a fall in dollar revenues.
– they did not think about cashflow implications – i.e. the derivative loss may need to be paid upfront, whereas the benefit of a stronger dollar will be realised only over many months.

more worryingly, i am also aware that one of our competitors specialised in providing “dual currency” loans to less sophisticated medium sized companies, especially in brazil. i believe these loans run into the tens of billions. the currency derivative embedded in these loans typically generates a huge one-time loss to the borrower if there is a sudden move in the dollar / real exchange rate. the reason for these brazilian companies to enter into these loans was because they offered a superficially very low interest rate (i.e. unlike with the big exporter companies, it had nothing to do with hedging). i would expect a lot of these smaller companies to get blown up by these loans in the current market environment.

moreover, given that they were nearly all arranged (and i believe the currency risk internally managed) by that one big competitor investment bank i mentioned, i would expect that investment bank to potentially face very big credit exposures as these brazilian borrowers prove incapable of meeting the big one-time payments now due.

]]> By: vlade http://www.nakedcapitalism.com/2008/10/blog-post.html#comment-22608 vlade Wed, 22 Oct 2008 12:22:00 +0000 http://www.nakedcapitalism.com/2008/10/currency-bets-gone-bad-hit-companies-in-developing-economies/#comment-22608 Richard: I call this "the martingalian man" - tomorrow will be the same as today (or, at worst the same as yesterday).<br/>What I find fascinating is that these would-be speculators tend to get hit both ways. First, they bet goes spectacularly wrong only to be proved right few days/months after their run out of money/their costly hedge expired.<br/><br/>Volatility kills. Richard: I call this “the martingalian man” – tomorrow will be the same as today (or, at worst the same as yesterday).
What I find fascinating is that these would-be speculators tend to get hit both ways. First, they bet goes spectacularly wrong only to be proved right few days/months after their run out of money/their costly hedge expired.

Volatility kills.

]]> By: Richard Kline http://www.nakedcapitalism.com/2008/10/blog-post.html#comment-22605 Richard Kline Wed, 22 Oct 2008 11:54:00 +0000 http://www.nakedcapitalism.com/2008/10/currency-bets-gone-bad-hit-companies-in-developing-economies/#comment-22605 The kinds of price swings we have seen globally this year are extraordinary, and concepts of risk haven't kept pace. Look at wheat; oil, $ down, now $ up, soon $ ??. This is what the onset of chaotic disequilibrium looks like. A major rivet point node in the global financial economy is shredding: the dollar. We will only stability when the system reconfigures with a different stress distribution, which all but inherently means a different weighting for the dollar. Everyone's money and experience are tied up with where the dollar was, not where the dollar is going, and the transition will be anything but smooth. Why do I keep feeling that at some point a key value in this system goes to zero for a time? The kinds of price swings we have seen globally this year are extraordinary, and concepts of risk haven’t kept pace. Look at wheat; oil, $ down, now $ up, soon $ ??. This is what the onset of chaotic disequilibrium looks like. A major rivet point node in the global financial economy is shredding: the dollar. We will only stability when the system reconfigures with a different stress distribution, which all but inherently means a different weighting for the dollar. Everyone’s money and experience are tied up with where the dollar was, not where the dollar is going, and the transition will be anything but smooth. Why do I keep feeling that at some point a key value in this system goes to zero for a time?

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