About Me

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SME, RISK AND TRADING SYSTEMS, PhD [Operations Research]. I had interesting journey from small pahadi town in Uttrakhand to today (probably inspired by Phanisher Nath “Renu”’s Atho Ghumkaddo zigyasa), both in space and in time. The journey has made me a queer mix of contradictory extremes (points). I am caught up between and swing from one extreme to other, striking balance between Small town values and Big City Values, between experiences of bought up in socialistic environment and working in capitalistic environment (reaping benefits of!!), between Hindi medium schooling and English medium higher studies, between ease in connecting to small town values and issues and big city mores and list goes on…

Saturday, November 8, 2008


Last year or so I have been working with a Japanese banking giant. The bank is moving to new trading and risk management system and I did consulting work to help them in the transition. It has been a great learning experience, more so as I have worked mostly with American clients (with few European clients thrown in). As I have earned a higher degree in USA, I am more attuned to American way of doing things. As in culture so in business America and Japan are poles apart [book by one of the founders of Sony; “Business the Sony Way” gives great insight into the differences between American and Japanese way of doing business and psyche (rather philosophies)]. Japan has been a great exporter of products over the years, so it surprises one to see its insulation from importing high end product and services [though they import raw material heavily]. To get a background of Japanese capitalism we will have to go back to era of the Japanese noble families. Noble families were pretty much like English aristocracy, they ruled a precinct and maintained an army independently, were faithful to King (at the time of war they came together and fought for the King). As the modern age downed in they adapted well and became business conglomerates. This is a reason why the credit defaults in Japanese financial system were at a very low level, as one could borrow only if one belonged to one of the noble families. After world war two Japan’s rise to prominence has been nothing like but the phoenix rising from ashes. The great Quality pioneer Deming was behind the birth of made in Japan brand. So, what I have learned? And what are helpful insights into doing business with Japanese? First I discuss the opportunity (particularly for the Indian software companies), then the learnings, and finally I discuss way forward.

The Opportunity

Unlike America, most of Japanese companies do their IT work in house. Of late due to lack of highly qualified human resource (add higher cost of the human capital to it), Japanese companies had been forced to think about outsourcing. They are new to this game and as I have discussed earlier they are little insulated from outsourcing wave. So naturally one can see the discomfort of Japanese businessmen with the idea of outsourcing. Also culturally they don’t trust foreigners too quickly to do critical job for them. But law of economics leaves them with no choice but to experiment with the outsourcing. Two important things about Japanese culture and their way of doing business are, first they don’t think in term of short-term relationships, second they take their time in trusting vendors (any outsider). For Indian software companies, here lies an opportunity for long-term business engagement. Also in current business scenario, Japanese market provides an opportunity to diversify companies’ portfolio (only bet against the risk).


In following bullet points I have summarized my learnings
§ First learn their culture and their psyche. Its great opportunity to unlearn to learn; particularly if one is too influenced by American way of doing business
§ Be patient
§ Japanese like to discuss and debate. Be prepared for the meetings that go on for hours and hours, and at the end, most of the times you wont see any take-aways (conclusions). Japanese like to analyze a problem from many angles (making sure all bases have been covered), their focus is on efficiency not on effectiveness. Decision-making is very slow; they might take days to what you believe can be decided in a day. Don’t rely on verbal commitment or clarification; get everything in written. If confused see the second point.
§ Biggest challenge one would face (bigger than the business problem itself) is language barrier. One will always be working with an interpreter in one’s business communications, and lot of information will get lost in the translation. Here is what has worked for me; I used, what I call white board method, where during the meeting I noted down key points of the discussions we had since the start of meeting on the white board. If we realized that we are going nowhere or loosing context, we could go back to the board and refocus.
§ Some thing about their psyche, they expected one to be skillful in one’s area of expertise. Unlike America, where no question is stupid question, Japanese expect you to display your expertise in your communication. So it’s better to not speak for the sake of keeping the ball rolling. Speak when you have an intelligent observation, or a good point that helps them in seeing the situation from different angle. They will appreciate a lot if you add a point that opens an avenue for their internal debate.
§ Japanese like to discuss a lot while in meetings, so don’t feel lost if in the middle of a meeting they start discussing among themselves for a long period of time. If confused see the second point.
§ Be ready for the long cycle time for their responses to any of your written documents. It gets translated into the Japanese first, they answer in Japanese, which is then translated into the English before coming to you. If confused see the second point.
§ Be ready for lot of localization effort. For example Japanese accounting system is different than that of other countries, so seemingly simple P&L calculation can be very messy.
§ Try learning few words in Japanese, its really difficult otherwise. Start using San after an entity and person’s name.
§ If confused, baffled, frustrated always recall the second point.

The Way Forward
I think Japanese market provides a great opportunity for us (Indians). The good news is we have a good image as we are perceived as good in mathematics and computers. It’s a difficult market to crack, but rewards are big and long term. It’s like a clean slate so we will get freedom to showcase our creative talents. One needs to go with lot of patience and perseverance but then life wont be fun if it is easy and predictable!!

Thursday, October 30, 2008


It’s tale worth telling. The whole affair ended in recession of a scale unheard in human history. So, how it started? Who is to blame? What now?
I think there were two stories that ran in parallel, and they met to form an epic. Or shall we say two sides of a coin? It is an age-old story pertaining to human greed. But, then greed is also the stepmother of innovations (euphemism??) in trading. On one side are the investors across the world flushed with ready cash who were not too happy with the returns offered by the investment avenues available in the market. Investors realized that the available options like investing in developing countries are not as promising as they initially sounded; also lock in period was too long (kaun jeeta hai tere julf kesar ho jane tak). We want instant gratification!!! They were looking for the avenues, which can provide greater returns (easy target??). So, the only choice left was the great USA economy; and as always happens, everybody jumped to bandwagon. Now lets see what USA has to offer. It is a developed country; how come one can get greater returns out of it? Obviously it needed a booming sector; which came in the guise of real state (as the generation of baby boomers retired). Which in turn allowed Wall Street whiz kids to do wizardry and attract larger amount of funds from across the world.
Where did it start? It started when banks in USA started betting on real state boom. Banks pushed their sales teams by setting blue-sky targets. Sales guys in turn were driven by their commissions; so they hardly cared who got the mortgages. Result was a hoard of sub prime customers (whose credit rating is below par) got the housing loans. Banks turned blind eye to whole affair as they were expecting real state boom and thought if anyone defaults than they can recover more than their investments by selling of the property. But banks faced the issues of bad credits in their balance sheets and higher capital requirements due to regulations (as required capital is tied up to credit rating of the counter party). Here came in the Wall Street whiz kids they have on one-side investors looking for higher returns and other side banks flushed with bad credits in their balance sheets. They offered a trick in the guise of CDO where by forming a SPV banks can offload the bad credits from their balance sheets and convert them in bonds. CDO is essentially a mechanism of pooling up debts and then dividing them into tranches; where each tranche size is a fraction of the pool (tranches sum up to total pool size). The pool receives the monthly mortgage payments and distributes it to different tranches on priority basis. Lets take an example of simple CDO structuring; suppose the size of pool is $100 M. And we divide it in three tranches A, B, and C. Where tranches A, B, and C’s sizes are $30M, $30M, and $40M respectively. Now we say that mortgage payments will be distributed in the priority of A to C; so, tranche A has highest priority. The defaults have reverse priority so defaults will be borne by C first, then B, and A at last. One can see that each tranche is very similar to a corporate bond; where A is least risky, B is riskier, and C is very risky. Also, if SPV buys insurance for tranches he can get AAA rating for tranche A, and may be BBB for tranche B; which means your returns are guaranteed if you invest in tranche A. In other words CDO is able to convert a fraction of bad loans (the pool) into a real good loan J. Now Wall Street dudes sell these bonds (tranches) to different customers and keeping tranche C with them, as it is difficult to sell (though provide very high returns). Investors buy different tranches based on their risk preference. A municipality in USA may buy tranche A if it is looking for safer and better returns.

As expected many of mortgage owners defaulted and unfortunately real state went down. Banks were flooded with bad loans and due to real state bust recovery goes very bad. Lets see what is happening with CDO; pool is flooded with defaults. Even tranche A guy is not receiving his monthly coupons. He calls up the Wall Street guy who tells him that its real bad they did not expect so many defaults and as real state has gone down so they can’t recover the money. The investor questions but my tranche have AAA rating; Wall Street guy says rating agency screwed up too. Then he pleads my tranche is insured; “are you kidding me, no way insurance companies have this much money, they screwed up too” says the Wall Street dude.
Morale of the story “ crap will remain crap no matter how you package it” and “ There is no difference between a real smart gambler and real stupid gambler”

Where did the money go? Whose failure is this? Left to reader.

Tuesday, October 14, 2008

Must Read Blog Of Paul Krugman


Wednesday, October 1, 2008

A trip to beautiful and unexplored Kumaon Hills

Recently three of us; I, Raturi, and Dabral(friends from B Tech Days in Pantnager) went on a road trip along the hills of Kumaon. In this trip, I wanted to show my friends the places, where I was born and brought up. I was revisiting these places after a hiatus of 8 years. In between, I lived around the world, either because of my job commitments or persual of higher studies. The point I wanted to make here is; I wanted to see things objectively. With time, and with lot of travel, as Rahul Sankrityayan has beautifully underlined in his classic essay “athoo ghumakadoo zigyasa”, I am hoping to have overcome my natural biases towards my birth place.
The route we choose was Delhi – Tanakpur - Champawat – Lohaghat - Pithoragarh- Chaukori – Almora- Nainital – Delhi. The idea was to show and surprise my friends with the heavenly beauty my native area offers. The route we took is the greenest area in the hills of Uttrakhand. Tankpur, our first stop, where my family stays, is a small foothill station a la Haldwani. We had to take a detour to Champawat via Bhimtal as Tanakpur-Pithorgarh high way was closed due to landslides. We stopped at a place called Khetikhan and checked in a KMVN rest house. 20 KM away from Champawat, Khetikhan is amazingly beautiful place, one can see a large scenic valley and view of Himalayas is breathtaking from here. Then we drove to Champawat, on our way we stopped at my native village, could not muster courage to track to my House, as it stands on a hill top 1 KM away from the road. Champawat is named after Champa, a Chand dynasty queen, is one of the most beautiful towns on this route. One must see the group of temples in the Champawat called Baleshwar. The temple surprises you with its South Indian temple architecture and stone carvings. Also, the temple is of mythological importance, and is related to Ghatotkach and Bali. The Archaeological Survey of India (ASI) has declared Baleshwar temples an Indian National Heritage Monument since 1952. In Champawat, one can also see a "cement board" marking the spot where the Jim Corbett killed the famous man-eater tigress of Kumaon (read Maneates of Kumaon by Jim Corbett for more details, the tigress holds the record for the most people killed by any large animal(436)). Then we moved to Lohaghat. Three places one must visit in Lohaghat are Mayawati Ashram (belongs to Rama Krishna Mission), Abbot Mount, and Banasur Ka Kila. The 8KM detour to Mayawati takes you along the densest forest in the hills. We were really surprised at how Swami Vivekananda reached here on foot from Almora in the year 1901. Abbot Mount is on a hilltop and can be a great camping site. One would see the wonderful sunrise and breath taking view of snow peaked mountains. Banasur ka Kila, as name suggests belonged to Banasur, stands at a hilltop. From a distance it looks as if a top of a hill has been chopped off to make the fort. One has to climb thousands of stairs to reach the Banasur ka Kila from the near by high way. One interesting place one must stop, and try to talk to local people is “Khuna” 5 KM away from Champwat, on the way to Lohaghat. Now why Khuna? As the legend goes a Muslim family was hired from Firozabad by the local king to make bangles for the queen Champa. They were given a place to stay in Khuna; where they set up a bangle factory. Over time this family grew up and became a village. Khuna is wonderful example of hindu muslim social integration and coexistent. The Khunaites speak a language that is queer mix of Pahadi and Urdu. They also actively involve in local Hindu festivals and present offerings to local Hindu temples.
Our next stop was Pithoragarh. Pithoragarh was the surprise packet of the trip. Both of my friends had a different idea of pithoragarh, assuming it to be a small hill station. Pithoragarh now is the largest hill town in Uttarakhand by area. The recently laid airstrip is being extended to accommodate bigger planes. Pithoragarh has tripled in size since I was a high school student at GIC Pithoragarh. If one has been to Katmandu, then Pithoragarh will remind one of the Nepali Capital. Must visit places are Chandak, Budhha temple, Kamaksha Temple, and route to the village Badabe. The view of Pithoragarh vally from Chandak is something one has to see to believe(both at dusk and down). One would need two days to cover Pithoragarh. We roamed around in the areas covered by district of Pithoragarh. Next stop was Chaukori, where we traveled via my Eza’s (mother’s) village Bungachina. One can almost touch the snowy mountains from here. Chaukori underlines the unique propositions of the Kumaon hills; they are unexplored and unspoiled (virgin). If one has been to Europe one can appreciate what these Hills have to offer in comparison to the highly commercialized European mountains. Chaukori is almost deserted, hardly three four shops and KMVN rest house. A new resort has come up, where one can rent a tent for a night.
On our journey’s end we passed through Almora and Nainital, which helped us in understanding the contrast between these two towns and Pithoragarh. Every one of us was surprised at why Pithorgarh is not a known place. Few things we thought and discussed about Pithorgarh:
§ It is self contained town, unlike tourist places like Nainital, it’s economy doesn’t depend on tourism. The economy of Pithoragarh is known as “postal order” economy, as most of the locals are employed in Indian army, and send money home every month end. District of Pithoragarh suffered highest number of casualties in Kargil War. It has a unique character of its own, and is environmentally aware and progressive in nature. Polythene uses are banned completely in Pithoragrh.
§ Pithorgarh is also a culturaly active town. It hosts many festivals like “Chaliya Mahotsav”, “Hill Zatra” , “Sharad Mahotsav”, and excellent “Ram Lila”. These festivals can be used to bring touritst in, a la “Dadiya” festival in Gujrat.
§ The biggest hurdle is, how to reach Pithoragarh. From Delhi it takes 14hrs. Unlike Almora and Nainital the route from foothills to Pithorgarh is not a national high way. It tells story of its own. Shows political apathy towards Pithoragarh as traditionally most of political leadership in Uttrakhand has come from either Nainital or Almora. Making Tanakpur-Pithorgarh route a national high way will cut short the time of journey by 3-4 hrs. It would be a better proposition, as people would not like to drive more than 10 hrs to reach a hill station from Delhi.
§ Needs to be connected by air very soon, which is being taken care of.
§ Pithorgarh is growing exponentially so would need a ring road around the town to decrease traffic congestion.
§ A helicopter ride that gives a tour of snow peaked mountains would be wonderful idea.
§ Needs a face lift through advertising, its too good a place to be ignored for long?
§ Having said that it should keep intact its character; as an economy which is not dependent on Tourism. Tourism should be one more avenue for revenue.

I will post some snaps pretty soon

Good Site on Wall Street News

Sunday, September 21, 2008

Tuesday, September 9, 2008

Derivative Losses, Corporate Treasuries, and Accounting for Derivatives

Recently a lot of corporate treasuries in India burned their fingers by investing in Derivatives. The cumulative losses estimated to be of the tune of 20 billion rupees. The losses were incurred mainly due to the complex FX and interest rate derivative deals bought by corporate treasuries. Now let us first understand in layman’s term what derivatives are and how one can use them. Derivatives, as the name suggests, derive their values from underlying instruments e.g. the value of a FX option depends on the exchange rate, volatility, interest rates etc. Derivatives were invented to hedge risk[s] i.e. they can also be thought as an insurance against an unfavorable future event. Due to business activities a corporation faces various financial risks, and by buying a derivative or getting into derivative contract she can hedge the risk[s]. But managing risk is not the only use of derivatives; one can also use derivatives for trading; where one can bet on his/her future market view (speculation). One important feature of derivatives is leverage, which means by investing a little amount one may be able to make a big gain or loss (if one is speculating only). Other interesting feature of derivatives is, until recently, they were off balance sheet items.

Corporations primarily use derivatives to hedge their risk, but as discussed earlier as derivatives are off balance sheet items; which has potential to lure some corporate treasurers to become speculators knowingly or unknowingly. This is what exactly happened in India where corporate treasurers bought complex exotic FX and Interest rate derivatives. No body cared as long as they were making money; but as their market turned otherway (dollar weakening against rupee), they incurred heavy losses. Three issues need attention here; firstly, as these exotic deals were complex, corporations may not have understood them well and did not know how to price them (how to price correctly should be an issue when they go to the court to settle). Secondly, the ability of the corporations to “Value” that trade and calculate the profit and loss. Thirdly, Corporations’ understanding of the dynamic nature of risk, when they entered into the derivative transaction (sometimes corporations ended in short position where they thought they were in a long position). These three issues increased the size of losses as speculations went wrong.

Similar losses in other countries have led to the regulations for accounting of Derivatives. Derivatives are to be reported in balance sheet as an asset or a liability and MTM (mark to market) gains and losses on them are to be reported in earnings. But, reporting of gains and losses on all derivative trades in earnings has potential of bringing volatility in earnings; which is being watched by the market. So, naturally corporations didn’t like the idea of bringing volatility in the earning statement. Regulatory bodies in various countries balanced the need for accounting for the derivatives and concerns of corporations and came up with various regulations. FAS 133 (USA), and ISA 39(Europe and rest of World) are examples of such regulations. These regulations made accounting of Derivatives mandatory for corporations and also made the accounting for a derivative depend on the purpose of the derivative. If derivative is used for trading it will be reported in balance sheet at MTM and gains and losses will be reported in earnings. If derivatives is bought for hedging (this needs to be established with documentation and also corporations have to prove that the derivative is highly effective in hedging the designated risk); it will be reported in balance sheet at MTM and for some special cases accounting rules allow the gains and losses to be reported in OCI (a subsection of Equity). This is also known as hedge accounting. With recent losses regulatory bodies in India made reporting of gains and losses in earnings mandatory. The first cut analysis of the Indian Accouting body’s(ICAI) accounting standard 30 suggests that the body is leaning towards IAS 39 standard for derivative accounting.