Of Oil and Oil Cakes
First of all he started off by saying that corporate finance and treasury are not that complex as one thinks. Even a mundane business like Cattle Feed can have greater challenges. He gave an example of oil-cake production. It can take about a 1000 substitutable ingredients, depending upon tastes of types of buffaloes and supply conditions etc, a large Linear Programming model is developed to find the optimal mix.
Then he talked about evolution of the financial system in India from the corporate perspective. He told about an interesting phenomenon that is financing of a long term project using Call-Money rates(ie the rate at which banks lend overnight) it was a crazy but brilliant move, because at that time the callmoney even hovered around 1-2%. But then on some days it reached 70-80%. Such volatility was the end of the brilliant scheme. Nowadays the Call money market is pretty stable around 6.00%. Then he talked about the forex markets how their depth has increased. He said a few years back ,even the action of a single corporate could change the Re/$ rate significantly , not so now. Also the interlinkages between markets have increased, forex movements affect liquidity, interest rates and vice versa.
He also gave an overview of commodity trading, used terms like Contango and Backwardation. Talked about the recent copper crisis in China. Even L&T has exploited this opportunity, and people are booking profits over the hapless Chinese.
He had also once advised the RBI a few years back to buy oil futures which were trading at 20$,
rather than invest the forex reserves in the low yield t-bills of US. If someone had heeded his advice, India could have saved billions of Dollars I guess.
Another interesting snippet was that Warren Buffet is now investing heavily in South Africa and Botswana !!, and L&T has also followed suit. The Alumnus of ours said he has now started trading in the Botswanan currency. Cool huh!.