tag:blogger.com,1999:blog-19649274.post8878317489481554161..comments2024-03-29T12:03:50.891+05:30Comments on The Leap Blog: Will the Indian government mount a meaningful response to the Dubai currency futures?Ajay Shahhttp://www.blogger.com/profile/03835842741008200034noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-19649274.post-91095440461966904332007-06-21T23:24:00.000+05:302007-06-21T23:24:00.000+05:30Was there a design problem? The correlations betwe...Was there a design problem? The correlations between ZCYC `model prices' and market prices for the most-liquid `benchmark bonds' (e.g. the 2015 bond) were in excess of 85%. Is that high enough to be useful for speculation and hedging? While I believe this was the case, some people disagree.<BR/><BR/>Was there a problem with banking regulation? That was unambiguous. RBI prohibited banks from adopting long positions on the interest rate futures market (while permitting them to do this on the OTC market). With banks holding ~ 80% of all government bonds in existence, and with all banks being forced to only short sell interest rate futures, the game was up. Here, there is no debate.<BR/><BR/>Design problems could have been iteratively solved. But until RBI solves the mistakes of banking regulation, there is no point in trying. Even if you get a 100% correlation, the fact remains that when banks are forced to only short sell interest rate futures, there can be no market. So the interest rate futures are dead.<BR/><BR/>I was admittedly more optimistic about the `design problems' in 2002 than I am today. I had failed to anticipate (in 2002) how badly things would work out in the 2002-2007 period for the spot market. It's really remarkable, how one of the biggest debt/GDP ratios in the world goes with one of the weakest government bond markets. But in the bottom line, statistical precision on the bond market is really elusive.Ajay Shahhttps://www.blogger.com/profile/03835842741008200034noreply@blogger.comtag:blogger.com,1999:blog-19649274.post-40828473842751110772007-06-21T23:10:00.000+05:302007-06-21T23:10:00.000+05:30The article mentions the turf wars over interest r...The article mentions the turf wars over interest rate futures. I remember reading something from around the time of their inception to the effect that their design was faulty, making them bad for hedging (too much basis risk). I also believe that you were personally involved in their design, and by impliction, their failure, Dr. Shah. So what was it: a turf issue or a design issue?Anonymousnoreply@blogger.com