Derivatives: Mexico and Brazil come to terms with meaning of exotic
Corporate losses on currency derivatives have increased the pressure on banks, as well as calls for improved transparency, the enforcement of margin-call documentation, regular marking to market, exchange trading of products and the use of clearing houses. Chloe Hayward reports.
EXOTIC DERIVATIVES HAVE had a bad 12 months. They have been branded the evil product behind the global recession, while the banks that created them have paid a heavy price for their use. In Mexico and Brazil some corporates used exotic currency derivatives to bolster their balance sheets. Now the regulators, bankers and corporates are sorting through the damage hoping to develop solutions that will make this a one-off problem.
"The exporters started selling multiples of their FX revenues. Why on earth would anyone do that? It’s the equivalent of saying: ‘We’re an exporter and our margins are shrinking because the real is strengthening. How about we take some of our working capital to Las Vegas to see if we can boost our margins?’"
Arminio Fraga, BM&F Bovespa