It’s very difficult to find out the real culprit of the whole mess-up in financial market but we can surely conclude that it’s because of loose financial policies and slapdash risk management towards the financial product. Somewhere in the race of competition we have forgotten the basic rule of financial system that every product have equal probability of profit and loss (RISK). I would like to discuss some example which I found could be the some of the rational behind this financial meltdown.
OTC Product (Over the counter)
These are the products which are traded over the counter. That means there is no defined market available for them. These products are not available for the every one, it is custom design product. If there is not a proper market for the product then how one can track the product performance and risk associated with it. In every country issuer of the product has to pay some margin on the product to the exchange to safeguard the products performance from any type of the risk. But this is also not possible for these products.
Excess loan
Here banks should have taken proper track records or ratings of customers and considered the sufficient capability of the customer before passing any loan toward them. And central bank should collect adequate margin from the banks for the advances. But in this competitive world it was not possible for the bank also to loose their customer so they ignored all basic requirements for the loan and advances.
One and half year back interest rate of bank of Japan (BOJ) was around 0% and Japanese Yen was trading at around 120Yen per $, which allowed the investors from different country borrow in Yen at very minimal interest rate and lend it in some other country’s currency at very high interest rate. This was pure arbitrage for the investors. But now conditions are not in the favour of those investors. Now interest rate of BOJ is 0.5% and Yen is trading below 100Yen per $ which force those investor for reverse carry trade.
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