What went wrong with

INDUSINDBK

?

Before we delve into the details, let's first understand swap contracts with the help of a simplified example. Say, an individual has 1 Cr of investment in equities and he expects the equities to go down in the near future but to rise in the long term. Here, he can sell his equities and rebuy the same after a few months. But selling will be a tax event and he will need to pay taxes on the profits so rather than selling, he approaches a swap dealer and asks him to swap his equity returns with the debt return for the next 3 months. The dealer agrees after accepting a certain premium to get into the trade and offers a 7.5% p.a. debt return. Straight forward three months, the equity portfolio of the investor is down by 2%. The swap dealer absorbs this 2% negative return and makes a total payment of 3.87% (2% of equity loss and 1.87% of debt he committed. The currency swaps, widely used in institutional markets to convert the loan in one currency to other currency work on the same principal as above with a bit complexity of exchange rates and interest rates in different currencies involved. What may have happened in

Trading Desk Now let’s come on what may have happened within IndusInd Bank (IIB). Say, IIB has accepted a deposit in Yen equivalent to 1 Mn USD (14,89,31,417 Yen) for a 5-year term and at 1.5% p.a. interest. IIB wants to convert this deposit into INR and lend it at a 9% p.a. interest for a 5-year period in India. Good trade, yeah! But the INR may depreciate against Yen over the 5 years and erode the gains on the trade, hence the Bank enters into a swap contract with its internal trading desk and the internal trading desk enters in an opposite trade with an external dealer to hedge the trade, the assumed structure of the contract is below –