Money for nothing!!!!!!!

Banks have become amazingly expert at packaging derivative products to look like money for jam. And its remarkable how many normally sound CFOs are being attracted by these offers, which really pack a sucker punch. One particularly "attractive" structure doing the rounds is as follows: The company and a bank enter into a swap for, say, Rs 50 crore, where the bank will pay the company Rs 50 crore plus 2.2 per cent (that's the Rs 1.1 crore for …

…to the company--if the Swiss franc strengthened above 1.01--works out to a whopping Rs 28.33 crore! On the flip side, the best case would be a gain of Rs 3.38 crore (including the Rs 1.1 crore paid by the bank). Even under the most likely scenario, the company will end up losing around a crore of rupees at the end of the year (again, after factoring in the Rs 1.1 crore paid by the bank). Money for nothing? Hah!