Question

1.What is the responsibility of a bank that is offering and promoting these derivative products to its customers? Does it have some duty to protect their interests? Who do you think was at fault in this case?

1.If you were a consultant advising firms on their use of foreign currency derivative products, what lessons would you draw from this case, and how would you communicate that to your clients?

Answer 1

1.To make you understand this let us take the following illustration.

Suppose you have invested in a stock.To protect yourself against potential price falls.You could purchase a put option from a bank.You pay an option premium and buy the right to sell the stock at an agreed date.At that date,if the stock price has fallen significantly, you can exercise the option and sell the stock at the agreed exercise price. The bank receives the option premium, and they take on the risk that they may have to buy the stock from you at a price much higher than the market price.In this case the bank is at fault.

1.If I was in the customer's place.I would have done the same thing as in money market I would go for earning as much profit as I can depending on the current market scenario.