Goldman Sachs, the US investment bank, has lost money after being caught out in the derivatives markets. The loss was incurred late last month in Goldman's London swaps operation, which remains comfortably profitable in spite of the setback. Goldman refused to comment, but market rumours of a $100 million (€95 million) loss have been dismissed as far too high.

The loss occurred as market instability increased ahead of expected interest rate rises in the US and Europe, and investors and banks became more risk averse in anticipation of millennium bug fears affecting markets.

Other participants in derivatives markets said the disruption in the last week of July had been consistent with someone having to close out a large position. Banks other than Goldman are also believed to have lost money.

At less than $100 million, the loss is easily sustainable for a bank of Goldman's size, which reported pro forma net earnings of $1.27 billion in 1997-98.

Goldman lost money when the spread widened between instruments known as Libor caps, which Goldman had sold, and swap options, or `swaptions', which it had bought. A Libor cap is a contract between a buyer and a seller, which caps the cost of floating rate money at an agreed level.

An interest rate swap is a contract to exchange fixed rate payments into floating rate payments in order to reduce the risk of interest rate fluctuations. A swaption gives a holder the right to enter into such a contract at a fixed rate.