irs market without any underlying exposure in the fixed rate long - term loans, then they will obviously be paying overnight and receiving ois fixed rates and, therefore, they lose both on the floating rate side as also on the fixed rate side because during the same period, five year ois rates also increased, though only, by 0. 6 %. we thus see if they have speculated in interest rate markets, rather than hedge, they have lost both ways any which way one looks at it! what i have said about management of rupee interest rate risk applies just as much to floating rate libor - linked long - term foreign currency loans as well and i would, therefore, strongly commend to business and industry to go in for interest rate swap - enabled fixed rate longterm financing both in domestic and foreign currencies. 9. as regards commodity prices, business and industry can use international commodity exchanges to hedge dollar price risk, and domestic commodity exchanges to hedge rupee price risk. in fact, whenever some commodities, like crude oil, are in backwardation ( the futures price being lower than the current spot price ), in addition to buying price protection, business and industry also earn what is known as “ rolling ”, or “ convenience ”, yield. bis central bankers ’ speeches 10. by now, i am sure this learned audience must have got a fairly good sense of the repertoire of derivatives to choose from in management of financial risks business and industry need to contend with day in and day out. however, as regards derivatives, i would like to quote financial times columnist wolfgang munchau and warren buffett who famously described derivatives “ as probably the most dangerous financial products ever invented ” and “ financial weapons of mass destruction ”, respectively. i would beg to differ because, to my mind, they are as strong statements as saying that cars and driving are most dangerous because they might lead to accidents! the problem is not so much with derivatives, or with cars, for that matter, but with how we use them!! in this context, as this distinguished audience is well aware, there have reportedly been massive derivatives - related losses incurred by business and industry in india. these losses arose primarily because derivatives were used by business and industry not for hedging, but for speculative, purposes. as reported in the media, huge losses were sustained by business and industry on account of complex structured and synthetic, but so much less transparent, derivatives. in other words, business and industry must

go in for plain vanilla derivatives which upfront, transparently, and explicitly, disclose cost of hedging strategy rather than arcane, complex, synthetic and structured derivatives which camouflage risk. as regards prudent use of derivatives, the touch - stone that business and industry can use with profit is that any derivatives strategy which promises reduction, or elimination, of hedging cost, or promises enhancing income, is intrinsically speculative and the one that involves incurring hedging cost and promises no income enhancing is intrinsically a hedging strategy. 11. to sum up, such is the insidiousness of risk that its under - pricing is perceived as low, or no risk, and, therefore, economic agents including banks, business and industry are caught unawares and unpleasantly surprised when risk suddenly eventuates. therefore, to my mind, nothing conveys and expresses the risk management mantra more trenchantly than the following : “ just as you make friends when you don ’ t need them, not when you need them and certainly not after you need them, so also you hedge when you don ’ t need it, not when you need it and certainly not after you need it ”. complete internalization and ingraining of this holistic risk hedging culture, attitude and temper by business and industry will, in equilibrium, reduce cost of both debt and equity capital by reducing volatility of roe as markets will perceive them as much less risky and more safe! if i have succeeded in alerting and sensitizing the learned and discerning audience to the financial risk management imperative enough, i will feel vindicated that i have delivered on my dharma today. and, i have no doubt, if business and industry completely internalize and ingrain this mantra and dharma, they will exemplify the following fairy tale ending viz. “ and they lived happily ever after ”! finally, with the fond hope that i have not unwittingly come across as pontificating on the mantra and dharma of financial risk management, i conclude my address and going forward wish business and industry a truly blissful risk management nirvana! 12. thank you all so very much indeed!! bis central bankers ’ speeches