Presented By: Debasis Saha & Susmita Kundu

PRESENTED BY: DEBASIS SAHA & SUSMITA KUNDU

Futures on the Japanese , Nikkei 225 stock index .  futures on 10-year Japanese Government bonds (JGB futures)  Euroyen futures.  Arbitraging between SIMEX and OSE,TSE. 

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In 1992 many Japanese institutional investors set up their own execution capability in Singapore the external client business of Baring Securities Japan (BSJ) became less viable BSJ commenced proprietary trading on behalf of the Barings group. OSE implemented tighter restrictions,SIMEX became easier and cheaper. BSJ traders asked Leeson to execute Nikkei futures trades on SIMEX . Big giant in Derivative market. Leeson’s direct boss in London, Michael Killian, said in February 1995: “That guy is a turbo arbitrageur!”

Started trading on July 1, 1992, with responsibilities both for trading and the accounting .  Opened on 3rd July ‘error account’ 88888.  A large number of transactions were booked in Account 88888 in July.  On 8th July Issued Order To change Software For excluding 88888 information  Leeson developed ‘switching’.  “transfer trades” & “fictitious trades” 

Expanded long position in Nikkei futures to 49% of the open interest in March 1995 contract and 24% in the June 1995 contract  Monthly trading volume through Account 88888 increased from 2,051 in July 1992 to a peak of 96,121 in September 1994.  By November 1994, the volume of JGB futures transacted through Account 88888 represented 24% of the total volume on SIMEX. 

NEED TO KNOW MARGINE ACCOUNT Margin Account:Taking two future contract (1 contract=100kg sugar) in Rupee

Day 5th Aug 6th Aug 7th Aug 8th Aug 9th Aug 10th Aug 11th Aug 12th Aug 13th Aug 14th Aug 16th Aug

Future Price 20 19 18.2 17.00 19.10 19.15 18.60 16.80 16.10 15.95 14.40 17.70

Daily gain(loss) (200) (160) (240) 420 10 (110) (360) (140) (30) (310) 660

Cummulative Gain(loss) (200) (360) (600) (180) (170) (280) (640) (780) (810) (1120) (460)

Margin Accoun Ballance Margin Call 2000 1800 1640 1040 960 2420 2430 2320 1960 1820 1790 1480 520 2660 closed out

By the end of 1993 the cumulative losses in Account 88888 were overUS$35.8 million.  Frequent Margin Call.  Advanced margin call. 

Profit StrikePrice

S

Bottom Straddle Position

Profit(loss)

Strike price S Top Straddle position

Try to make up loss.  Thought share price would be stable.  Taking (top)straddle position In Nikkei,writing call & put option.  On January 17, 1995, Kobe earthquake.  Nikkei to fall below 18,000.  Unable to make profit  Barings has been history with $1.3 bill Loss. 

Failing of Barings Bank

Market Risk

Operational Risk      

Emphasized on Internal audit. Enhanced more board culture. Surprised visit by higher authority. Centralized Exchanges activity. Efficiency of corporate governance.

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Should calculate VaR(CVaR). Obey principle of Risk Management . Manager should behave like Manager(not Businessman). Higher authority should aware of Risk management. Must involve Risk manager in Investment activities.

Any Question?

BIBLIOGRAPHY  FIANCE JOURNALS:5.COMMODITIES TRADING: NICK LESSON INTERNAL CONTROLS & THE COLLAPSE OF BARING BANKS BY SAM BHUGALOO. DOUBLING NICK LESSON’S TRADING STRATEGY – STEPHEN J. BROWN & ONNO W. STEEPHEEN .  WWW.GOOGLE.COM  WIKIPEDIA .  WWW. NICK LESSON.COM