Devangshu Datta: Hedge your bets

BEATING THE STREET

Let us suppose that you run a BPO, which is dependent on the US markets for your revenues. Let us further suppose that you believe John F. Kerry has a more protectionist attitude than George W. Bush.

You are apprehensive about Kerry becoming president since you expect him to introduce anti-BPO legislation.

If you live abroad, you could hedge this possibility. You could try and sign up Republicans who live outside the US. You could also create financial hedges.

There are dozens of betting centres offering odds on the US elections. If you chose to, you might place large bets on John Kerry winning. If that occurred, your winnings wouldcompensate for the revenues you expect to lose when Kerry brings in anti-BPO laws. If Bush won, you'd be happy anyway despite losing the bet!

However you cannot do this if you're based in India. Ironically, you can probably aid in rigging the US elections or help to locate overseas Republican voters.

It is however, illegal for you to bet on the elections. While you may now take money abroad and invest it there, the RBI would look askance on your betting on an important political event.

It is also illegal for you to open a book in India on the US elections despite the fact that a rupee-betting exchange could not possibly create a law and order problem or pressures on reserves.

This is an extreme example of how silly laws hobble our economic freedom. After all, it is your money, and as we have seen, there may be sound reasons for you to indulge in a flutter.

Even if there aren't sound reasons, it is still your money: If you want to open a book on the US presidential elections, or any other event whose outcome you cannot manipulate and, you are prepared to pay taxes on the proceeds, why should the government prevent this?

In moral terms, if the government is prepared to allow horse-racing and lotteries, why does it ban other, more esoteric, forms of speculation? Moral considerations aside, a relaxation of the laws with respect to gambling would certainly result in significant new revenue accrual.

In some cases, I suspect the problem is lack of imagination. For example, the stock exchanges report dollar-denominated indices like the Defty and the Dollex, which track the Nifty and the Sensex respectively. This is a convenience for the FII "" it could also be a useful hedge.

If the exchanges created rupee futures instruments on the Defty and the Dollex, traders would be happy to use these to try and hedge rupee-dollar fluctuations. There is no reason why the same principle cannot be extended to create rupee-euro or cross-currency instruments or crude-price futures.

So long as the futures were traded strictly in rupees and there was no question of delivering the underlying, there would be no actual forex impact. Such instruments would merely offer traders a zero-sum option on currency fluctuations.

Some of them would win, others would lose and after reconciliation, the exchanges would make some money. In fact, if such hedges existed, you might even have a situation where companies with forex exposures created fewer forward positions in markets abroad and dealt on the exchanges in rupees instead.