Forex derivative losses likely to touch $3-5 bn

Corporate India may be sitting on a $3 billion to $5 billion (Rs 12,000 crore - Rs 20,000 crore) notional loss on its exposure to foreign exchange derivatives.

''It's difficult to estimate the losses. But if you were to ballpark it, the extent of mark-to-market losses could be $3 billion to $5 billion,'' said Jamal Mecklai, CEO of risk management firm Mecklai Financial.

That doesn't mean that companies will report this level of losses. ''Companies could cover up their positions by the time these trades mature, offset losses on some trades with profits on others, or carry-forward them,'' said a forex expert.

When the price of the underlying asset (derivatives in this case) depreciates, companies that have invested in these derivatives have to account for the loss in their books. This process is called marking to market.

On Tuesday, Finance Minister P Chidambaram said in a statement in the Rajya Sabha that banks operating in India had an exposure of Rs 127.86 trillion ($3.16 trillion) of derivatives on their books on December 31, 2007.

While that appears huge by any standards, experts said that the number does not mean much.

''It doesn't reveal the mark-to-market value of each bank or the amount of risks they are carrying,'' said Mumbai-based risk-management consultant AV Rajwade.

Experts said the figure of Rs 127.86 trillion reflects the trading book while ''the customer transactions would not be more than 10 per cent of that,'' added Rajwade.

Other forex experts, however, felt the government's estimate looked high because of possible double-counting of trades.

If customer transactions are a tenth of the derivatives trading book, the actual transactions could be $316 billion.

Experts said that a majority of the trades (around two-thirds) are plain vanilla hedges while a third of the trade could involve knock-outs, where losses could be very large.

''If one assumes just one per cent of the trade have a problem, the mark-to-market losses would be around $3.16 billion. That's a highly conservative estimate,'' said a forex consultant, who advises mid-size companies, but requested anonymity.

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