22 March 2012

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Rs 25 lakh crore Forex derivatives Scam 19 Banks Involved Bigger than 2G Scam Tehelka Expose

Rs 25 lakh crore Forex derivatives Scam 19 Banks Involved Bigger than 2G Scam Tehelka Expose

2G scam — Rs 1.76 lakh crore Loss

Forex Derivatives Scam - Rs.25 Lakh Crore loss

What is the meaning of Derivative?
What is the definition of Derivative?




The term derivative is defined u/s.45V of the Reserve Bank of India Act, 1949 as meaning “an instrument, to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate, credit rating or credit index, price of securities (also called ‘underlying’), or a combination of more than one of them and includes interest rate swaps, forward rate agreements, foreign currency swaps, foreign currency-rupee swaps, foreign currency options, foreign currency-rupee options or such other instruments as may be specified by the Bank from time to time”.

To put it in simple language, a derivative is a financial instrument whose value depends on the values of the underlying exposure. The underlying exposure in the case of forex derivatives is the foreign exchange rates.

Commonly used forex derivatives are Forward Contracts, Option Contracts and Swap Contracts. These instruments are used to hedge the currency risk on account of adverse currency movements.

A security whose price is dependent upon or derived from one or more underlying assets.
The derivative itself is merely a contract between two or more parties.
Its value is determined by fluctuations in the underlying asset.
The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.

Derivatives are so called because they have no value of their own. They derive their value from the value of some other asset, which is known as the underlying.

Example –
A derivative contract on Gold depends on the price of Gold.

Commodity derivative - If the underlying asset of the derivative contract is coffee, wheat, pepper, cotton, gold, silver, precious stone or for that matter even weather, then the derivative is known as a commodity derivative.

Financial derivative - If the underlying is a financial asset like debt instruments, currency, share price index, equity shares, etc, the derivative is known as a financial derivative.

Exchange-traded derivatives - Derivative contracts can be standardized and traded on the stock exchange. Such derivatives are called exchange-traded derivatives.

Basic forms of Derivatives are
1. Futures - futures are derivative contracts that give the holder the opportunity to buy or sell the underlying at a pre-specified price sometime in the future.
2. Forwards - Forwards are similar contracts but customizable in terms of contract size, expiry date and price, as per the needs of the use
3. Options - Option contracts give the holder the option to buy or sell the underlying at a pre-specified price sometime in the future.
4. Call option - An option to buy the underlying is known as a Call Option.
5. Put Option - an option to sell the underlying at a specified price in the future is known as Put Option.

Now I hope you got the idea what is derivative?

Forex derivatives Scam is bigger scam than 2G scam.
The scam happened in year 2008.

Nineteen banks, which violated the Reserve Bank of India (RBI) and Foreign Exchange Management Act (FEMA) guidelines to advise and sell forex derivatives to Indian exporters in 2008, resulting in humongous losses to them, have been penalized by the RBI negligible amounts ranging from Rs 5 lakh to Rs 15 lakh each.

A PIL is filed in the Orissa High Court.
Based on the PIL, the Orissa High Court ordered a CBI investigation into these missing
funds. The court directed the CBI to hold a preliminary inquiry. Instead, the CBI just sent a questionnaire to the RBI and investigated the president of a forex derivative consumer forum, mere eyewash as opposed to the inquiry that was required.

Pravajan Patra an economist said that the total value of derivative contracts sold in India and approved by the RBI is $3 trillion, based on the statement of the then finance minister P Chidambaram in the Rajya Sabha. Compare this to the total GDP of India,
which is not more than $1 trillion, or its total export and import (including oil bills), that do not exceed $500 billion a year on average. The fluctuation in the value of the dollar during the period in question in 2008, however, was Rs 8.50-10.
If this difference is multiplied by even the (conservative) estimate proposed by Chidambaram, that of $3 trillion, we end up with a loss in excess of Rs 25 lakh crore. Compare this to the estimated loss incurred by the exchequer in the 2G scam — Rs 1.76 lakh crore. Peanuts.

whenever a derivative contract is executed for a particular amount, there is a back-to-back contract with another bank in India or abroad. They are
called counter parties. The difference goes to counter parties as service charges, at the cost of investors/exporters in India.

Understanding how it works?

Suppose 1 dollar equals to Rs. 40 in January 2008.
Then exporter got the contract.
For the exporters conversion rate is very important.
Suppose in February - One US Dollar becomes 50 Indian Rs exporter will get more money, and suppose 1 dollar becomes 30 Indian Rupees then he will get less for the goods which he has exporters.

To avoid such type of losses exporters To avoid such loss, exporters are
. Hence, to avoid such loss, encouraged by banks to enter into a contract
exporters are encouraged by whereby the exchange rate is insured or
banks to enter into a derivative sealed at a particular level, so that even if
contract there is an unexpected fall in the rate; the exporter would not suffer big losses.

Banks do not gain but the counter parties gain.

But how did 19 banks violated the rules same time?

Because of this many Indian exporters suffered losses.


It is important to note here that whenever a derivative contract is executed for a particular amount, there is a back-to-back contract with another bank in India or abroad. They are called counter parties. The difference goes to counter parties as service charges, at the cost of investors/exporters in India.

In 2008 all this happened but I no one reported it or maybe I did not read it.

Reality views by sm –

Thursday, March 22, 2012

Tags – 25 Lakh Crore Forex Scam Derivative Scam


12 comments:

anney March 22, 2012  

There's just too many scams happening all over the world!

Kirtivasan March 22, 2012  

Tehelka reports are sensational than truthful.
A lot of knowledge here. realityviews has many more such posts. Finance and rights of people posts are very good.

Nathan March 22, 2012  

Man, so many scams and such lately...

Joseph Pulikotil March 22, 2012  

Very informative post. The problem is that the Reserve Bank of India doesn't do its job except to formulate laws and expect all banks to follow them strictly. They do not have an effective mechanism to implement the laws.

Ultimately it is not only the exporters who suffer but the public will also suffer. I wonder how many Indian bank managers made money in this scam.

Excellent post.

Best wishes,
Joseph

Christy Gerald March 22, 2012  

Happy to know that another Scam will be highlighted in Tv Channels and Newspapers soon. Vazhha India!

Krishna March 23, 2012  

very sad to hear

scam everywhere

thanks mitesh for this informative post

SM March 23, 2012  

Baur,thanks.
डा. श्याम गुप्त, thanks.
anney,thanks.
ScrewsAndFeathers,thanks.
Kirtivasan,thanks.
Nathan,thanks.
Treat and Trick,thanks.
Joseph Pulikotil,thanks.
Christy Gerald,thanks.
Krishna, thanks.

Forex market September 29, 2012  

The blog was absolutely fantastic! Lot of great information which can be helpful in some or the other way. Keep updating the blog, looking forward for more contents...Great job, keep it up..