Remember many years ago that the Hubble space telescope launched and didn’t quite work. It turned out that some scientists confused imperial and metric measurements. That required a costly repair.
The economic equivalent of this would be when you didn’t understand how exchange rates were calculated. For instance, the news in Australia reports the US dollar exchange rate at 1.0645 (which has the convenient interpretation that up is good). The US media report the same exchange rate the same way which, of course, has the opposite interpretation from the US perspective (up is supposedly bad). For anyone dealing with exchange rates it is critical to know which way is up.
Apparently, for Goldman Sachs, this has created a problem. They wanted to create a Nikkei warrant based on:
(Closing Level – Strike Level) x Index Currency Amount / Exchange Rate
But ended up with one based on this:
(Closing Level – Strike Level) x Index Currency Amount x Exchange Rate
Oops. If the exchange rate interpretation changes, both are equivalent but if not there is a problem. It turned out that for Goldman Sachs the adjustments were not made.
And the cost of failing International Economics 101? HK$350m which is A$41m or A$2.8b depending on how you calculate it.