'Case Study Barings\r'

'Summary: One of the most ill-famed tales of financial demise is that of Barings m unrivalledy box. Trader cut by Leeson was supposed to be exploiting number one-risk arbitrage opportunities that would l constantlyage price low rage releases in similar equity derivatives on the capital of Singapore Money Exchange (Simex) and the Osaka change. In fact, he was taking much riskier positions by buy and selling polar amounts of the contracts on the 2 exchanges or buying and selling contracts of different types.Thanks to the lax attitude of senior instruction, Leeson was effrontery control over both the handicraft and back hitice functions. As Leesons losings mounted, he increase his bets. However, after an quake in Japan after ca utilise the Nikkei mogul to drop sharply, the losings increased rapidly, with Leesons positions deviation more than $1 one million million million into the red. This was likewise much for the bank to sustain; in parade of 1995, it was leverag ed by the Dutch b bank ING for just one power hammer sterling.Overview: Barings Bank had a long story of success and was much respected as the UKs oldest d merchandiser bank. But in February of 1995, this highly regarded bank, with $900 one thousand thousand in capital, was bankrupted by $1 billion of unauthorised craft losings. In 1993, Nick Leeson was appointed customary manager of the banks Barings Futures subsidiary appointed in Singapore. In this capacity, he was fit to hold in his unauthorised profession activities for over a year because he managed both the art and back office functions.The senior managers at a Barings came primarily from a merchant banking background and knew very little to the highest degree(predicate) traffic. Even in the face of hand about profits, which should pack tipped management off to the fact that substantial risks were creation taken, they proceed to believe that Leeson held matched Leeson positions on the Singapore international Monetary Exchange (Simex) and the Osaka exchange, and hence was do a low-risk profit. low In fact, Leeson was handicraft derivatives contracts on the two exchanges that were, in some cases, of different types and, in some cases, in mismatched amounts.For example, Leeson rent executed a trading strategy kn give as a â€Å"straddle,” with the objective of soak up a profit by selling impute and c all options on the same implicit in(p) financial instrument, in this case, the Nikkei th 225 Index. A straddle will commonplacely promote positive earnings when foodstuffs are still only when can result in magnanimous losses if markets are volatile. Leeson created an actus reus narration numbered 88888 as a property area for every premiums or losses that he do. Leeson claims that he initially assail equal the flyer to c at a timeal a exclusive loss of e. 0,000 pounds sterling that had resulted from an accounting computer geological fault until he could make up the difference through trading. However, he continued booking various losses into the account and as well as continued to increase his volume of trading and level of risk taking. Leeson took unauthorized tough positions primarily in future(a)s linked to the Nikkei 225 and Japanese government bonds (JGB) as well as options on the Nikkei. He hid his trading in an unused BSS error account, number 88888. just now why Leeson was speculating is unclear.He claims that he originally used the 88888 account to hide some demeaning losses resulting from mistakes make by his traders. However, Leeson started actively trading in the 88888 account around as soon as he arrived in Singapore. The sheer volume of his trading suggests a simple desire to study. He lost money from the origination. Increasing his bets but made him lose more money. By the end of 1992, the 88888 account was under pee by about GBP 2 million. A year later, this had mushroomed to GBP 23 million.By the end of 1994, Leeson s 88888 account had lost a total of GBP 208 million. Barings management remained blithely unaware. On February 23, 1995, Nick Leeson hopped on a plane to Kuala Lumpur leaving bum a GBP 827 million hole in the Barings balance sheet. As a trader, Leeson had super liberal luck. By mid February 1995, he had accumulated an enormous position†half(prenominal) the broadcast interest in the Nikkei future and 85% of the open interest in the JGB future. The market was aware of this and probably traded against him.Prior to 1995, however, he just made consistently bad bets. The fact that he was so jinxed shouldnt be too much of a surprise. If he hadnt been so misfortunate, we probably wouldnt fork up ever heard of him. Traders some sentences speculate without authorization. Presumably, a few are able to cover their tracks. Others are caught. When they are caught, they are fired, and their employer eats the loss. Usually, neither the trader nor his employer has any interest in publiciz ing the incident. Leeson made headlines precisely because he was so unlucky.By the time he was discovered, he had bankrupted his employer. Publicity was unavoidable. What is staggering about Leesons activities is the fact that he was able to accumulate such staggering losses without Barings management noticing. As Leeson lost money, he had to pay those losses to SIMEX in the edition of margin. Leeson needed cash. By falsifying accounts and making various misrepresentations, he was able to true(p) funding from various companies within the Barings giving medication and from leaf node accounts.His misrepresentations were flimsy at best. For example, he claimed that he needed funds to make margin payments on behalf of BSS clients, and he gave a technical argument related to how the SIMEX equanimous margin as justification. This claim was false. It was very against SIMEX rules for a broker to post its own money as margin for a client. Even if the claim were true, the funds would eat up been needed exactly temporarilyâ€until the client could make payment. Instead, Leeson continued to ask for ever more funding.Leeson increased the size of his open positions even as his losses increased due to volatility in the markets. When an quake in Japan caused a center drop in the Nikkei 225 equity force , however, Leesons unauthorised trading positions suffered huge losses and his operation unravelled. On March 3, 1995, the Dutch bank ING purchased Barings for 1 pound sterling, providing the final chapter in the story of the 223-year-old bank that had once helped the United States to finance the Louisiana purchase.The beginning of the end occurred on January 16, 1995, when Leeson placed a short straddle (an options trading strategy) in the Singapore and Tokyo stock exchanges, fundamentally degraded that the Japanese stock market would not move significantly overnight. However, the Kobe temblor hit early in the good morning on January 17, sending Asian markets , and Leesons investments, into a tailspin. Leeson attempted to recoup his losses by making a series of progressively risky new investments, this time betting that the Nikkei Stock Average would make a rapid recovery.But the recovery failed to materialize, and he succeeded only in digging a deeper hole. Realizing the dryness of the situation, Leeson left a note variation â€Å"Im Sorry” and fled. Losses eventually reached ?827 million ($1. 4 billion at then-prevailing exchange rates), then prevailing twice the banks on tap(predicate) trading capital. This led to the banks collapse. After fleeing to Malaysia, Brunei and in conclusion Germany, Leeson was arrested and extradited back to Singapore on March 2, 1995. While he had authorization for the January 16 short straddle, he was charged with raud for deceiving his superiors about the riskiness of his activities and the scale of his losses, although some observers (and Leeson himself) engage place much of the placed hel lish on the banks own deficient inbred auditing and risk management practices. Sentenced to six and a half years in lock away in Singapore, he was released from prison in 1999, having been diagnosed with colon cancer, which he has survived disrespect gamy forecasts at the time. While in despite prison, in 1996, Leeson published an autobiography, Rogue Trader, particularisation his acts.There may be a come-on to view this debacle as being caused by just one relegate †the â€Å"rogue trader” †but in reality the fiasco should be attributed to the implicit in(p) structure of the firm, and particularly to the lack of subjective checks and balances. Events: 1993: Nick Leeson becomes general manager of Barings Futures (Singapore), raceway the banks Simex (Singapore International Monetary Exchange) activities. January 1994: By this leave (at the latest), Leeson started selling put and call options on the Nikkei 225 equity index, placing the premiums earned into an error account number 88888.This strategy, known as a straddle, is essentially a bet on the stability of market prices. 24 February 1994: A memorandum from the Barings asset and liability deputation values the 4 options portfolio at 2. 8 billion yen. July 1994 †grand 1994: James Baker, an natural auditor, spends two weeks in Singapore canvass the immense profits being made there. Baker identifies the weakness of inner(a) controls and recommends that the general manager should no longer be responsible for(p) for the back office.In response, a separate financial manager in Hong Kong is wedded part part-time responsibility for ceremonial occasion over the back office. ng August 1994: In an attempt to better treasure its overall risk, Barings sets up an integrated multitude Treasury and Risk function, insurance coverage to a new asset and liability direction (Alco). December 1994: A later Barings investigating reveals that, for unknown reasons, Leeson has run up an accumulated loss amounting to Y7. 7 billion on the account by the end of 1994. 23 January 1995: The Nikkei 225 drops by 1000 points after an seism hits Japans industrial heartland. 6 January 1995: The London futures team up gives Barings Alco Committee a presentation on the Baring Futures (Singapore) operation, which states that Leeson is operating a absolutely perfectl matched book †long in Osaka, but short to the same amount on Simex. 8 February 1995: Coopers & Lybrand decides to hold off signing off on Barings accounts until it becomes realizable to clear up a few points with Leeson. 23 February 1995: At close of trading, the error account contains 55,399 Nikkei contracts trading, expiring in March and 5640 expiring in June.As of February 25, this totalled a loss of 59 billion yen on Simex. 24 February 1995: The Barings mesa meets to discuss a hastily nimble analysis of the hastily-prepared transactions in flier 88888. March 1995: The Dutch Bank ING agrees to purch ase Barings for 1 pound and assume all of its liabilities (Bull, 1995). Lessons to be Learned: Lack of internal checks and balances Even when segregation of duties was suggested by internal audit, the concentration of power in the Leesons give was scarcely diluted. Lack of understanding of the business.If Barings auditors and hook management had understood the trading business, they would perk up realised that it was not possible for Leeson to be making the profits that he was reporting without taking on undue risk, and they susceptibility have questioned where the money was coming from. merchandise is supposed to be a low risk, and hence low profit, business, so Leesons large m. profits should have inspired deject rather than praise. Given that arbitrage should be cash cashneutral or cash-rich, additional alarms should have gone off as the Bank wired hundreds of rich, millions of dollars to Singapore.Poor supervision of employees Although Leeson had never held a trading licen se prior to his arriver in Singapore, there was little attention of his activities and no individual was directly responsible for monitoring his trading strategies. Lack of a clear reporting line Leesons charade may have been facilitated by the disorderliness caused by two reporting lines: one to London, for proprietary trading, and another to Tokyo for trading on behalf of customers. customer Allikas: http://www. erisk. com/Learning/CaseStudies/ref_case_barings. asp Kusimused:1. Millist kauplemisstrateegiat Nick Leeson oma ulemustele teadaolevalt kasutas? Kuidas selle strateegiaga teoreetiliselt raha on voimalik teenida? 2. Millist kauplemisstrateegiat Nick Leeson tegelikult kasutas? Kuidas selle strateegiaga teoreetiliselt raha on voimalik teenida? 3. Mis on back-office funktsioonid? 4. Mis sundmus sai Barings pangale saatuslikuks? Mis selle tulemusel juhtus Leesoni positsioonidega? 5. Mis olid pohjused (mida tehti valesti), et kaesolev Baringsi case sai uldse juhtuda (5 pohj ust)? 6. Milliseid eetilisi noudeid Nick Leeson oma tegutsemisega rikkus ning kuidas oleks tulnud korrektselt kaituda?\r\n'