BizStd: Exotic derivatives, Poor F&O selection
A couple of interesting reads via Business Standard:
The recent market volatility has led companies and banks to enter into complicated foreign exchange derivatives structures, termed ‘exotic’ in market parlance.
An example of such exotic derivatives is a ‘target knockout option’ (referred to as target redemption), which is the current flavour in the market. In this structure, the bank and company enter into a structure wherein pay-in or pay-outs are linked to the currency movement.
Another such product preferred for trading is ’snowball’ structures, where if the currency in the structure runs favourable to a bank�s customer, it may lead to cumulative gains.
Analysts said the exchange has ignored stocks that have more liquidity, while stocks with lower trading volumes get into the elite F&O list.
In the latest list, one inclusion that surprised many analysts is Lakshmi Machine Works. The average daily volume on the counter has been hardly 3,000 shares. Another perplexing inclusion is CMC, where the average daily turnover was a mere 5,000 shares on BSE.
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