Exclusive: Westpac hit by forex options losses

Sealed section – 15 April

Crikey hears that Westpac has just dropped $12 million on long-dated
yen foreign exchange options and fired the head trader who was
responsible.

However, we hit a brick wall when we put this to Westpac this morning
as the bank simply pointed out that they restructured their foreign
exchange business two weeks ago appointing Paul Quilkey and Paul
Verschuer as joint bosses.

Therefore, we can’t say this is confirmed but here is the scenario as
it has been explained to Crikey by someone close to the Westpac bunker
in Martin Place.

The traders took a punt on the yen in long-dated options between two
and 10 years. This market is particularly illiquid so when the bank
spotted the losses and decided to close it out, they had to cover the
spread and that increased the losses.

The Westpac spokeswoman maintained the line that their were “no irregularities” and nothing had happened that was “material”.

Indeed, but she didn’t deny that $12 million had been lost on yen options.

Meanwhile, a subscriber has emailed claiming that 25 traders have left
the NAB over the past four weeks alone. Wow, that sounds on the high
side but there is no doubt that new CEO John Stewart is tearing through
the place.

Why Westpac blew up FX options

Sealed section – 15 April

An options trader writes:

Crikey, regarding your note on Westpac’s rumoured $12 million loss,
this is not really a surprise that they might have a blow up in their
FX options book. A quick look at their accounts shows that Sold FX
Options increased from $18.5b in 2001, up to $35b in 2002, and by the
end of last year, had increased massively to $84.5b. Clearly some big
bets going on there, and a big increase in their risk appetite.

This compares to ANZ (which has a similar sized institutional business)
selling just $16b worth of options, and CBA (which is a smaller player
in that part of the market) at $35b.


Westpac’s $12m forex options loss


Sealed section – 16 April

Crikey’s story yesterday about Westpac dropping $12 million on
long-dated yen-based foreign exchange options wasn’t picked up in the
mainstream media except for a passing mention by David Koch on last
night’s Sky Business Report.

This is because Westpac refused to confirm it and because $12 million
is small beer, as this foreign exchange options trader explains:

“I reckon $12 million would not really register as anything to worry
about in most FX dealing rooms and it is definitely not a firing
offence for the chief dealer. Dealing in long dated options would be
the alarm raiser and is a very dumb idea if the motive was speculation
alone with no hedging requirement or counter party or interest rate
play to offset. In fact it’s not speculation – it’s madness.”

Peter Fray

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