One of the things that keeps the junior bankers labouring long into the night is reading and proofing the prospectuses for whatever it is that the bank is trying to sell.
This is at the heart of those 90 hour work weeks.
The following is the formula for a properly structured warrant tied to Japan’s Nikkei index — which would (we presume) be easy enough to hedge for its issuer:
(Closing Level – Strike Level) x Index Currency Amount / Exchange Rate.
What follows is the formula attached to four recent warrants tied to Japan’s Nikkei index issued by Goldman Sachs:
(Closing Level – Strike Level) x Index Currency Amount x Exchange Rate.
Spot the difference?
In one, the index currency amount is divided by the exchange rate, in the other it is multiplied by the exchange rate.
The cost of this typo?
As the magazine noted last week, having spotted the error, Goldman Sachs offered a 10 per cent premium to buy the contracts back from the market. Investors, however, have not budged easily. Most are insisting that the bank honours its typo-ridden terms.
That, needless to say, would be a blow for Goldman.
The Economist estimates the typo could expose the bank to as much as HK$350m instead of the HK$10m initially offered on the warrants,
That, in part, is why bankers get so much damn money. Because mistakes are so damn expensive.