Description
This is about detailed Case analysis of Barings bank: Whatever happened at barings bank.
Analysis of Fall of Barings bank
Click to edit Master subtitle style Presented by: Group RJH(P) Jimmy Dalal Rohit Shanbhag Harish Choudhary Prithvish Sahu
2/2/13
Outline
? ? ? ? ? ? ? ?
Background What happened Strategies adopted by Leeson What went wrong? Why did it happen? Fraudulent activities Strategies that could have been adopted Signals Overlooked
2/2/13
Background
?
Unauthorized trading began from the time he took his appointment Leeson took up long and short positions in futures-not matched by the corresponding offset positions Open positions were concealed by accounting and reporting techniques 1992-activity was quite small, in Feb 95losses grew three fold
?
?
?
2/2/13
What Happened
High Bonus More Profit More Risk High Loss Fraudulent Activity Management negligence What Happened to Barings
2/2/13
Strategies adopted
?
Leeson’s Strategy:
? Long ? Short ? Short ? Used
positions in Nikkei futures – bullish view
positions in JGB futures – bonds were over valued volatility position in Nikkei exchange traded options short straddle – limited profit on limited day unhedged trades short position in Euroyen futures risk
? Intra
? Open
2/2/13 ? Profitable
if:
Where did it go wrong?
?
January, Nikkei fell sharply – Kobe earthquake Led to suffer positions both in Nikkei futures and options positions. Fall in Japanese interest rates saw losses incurred from the short JGB futures positions
Movement (predicted) Bets were not hedged Share Price upward Interest rate upward Price Movement (happened) downward downward
?
?
?
2/2/13
Why did it happen?
? ?
Failure of risk management systems Leeson was in charge of both the front office and back office: he could conceal all fraudulent information Barings internal audit failed to act on the warnings raised by the members No reconciliation was done by BSL on request for funding by BFS Loans were classified as “loans to clients” but never subject to check
?
?
?
2/2/13
Leeson’s poor judgment
?
Net positions were in the opposite direction of the market
? Nikkei ? JGB
– net long in the falling market
– net short position in the rising market
?
Recession in the Tokyo Stock Exchange, financial sector suffering from low profitability No potential for rising share price – still Leeson invested
?
2/2/13
Fraudulent Trading
?
Transfer trading
? ?
Secret error account 88888 Transferring losses to 88888 and profit to BSJ & BSL is funded by margin payments of Baring group trades between 88888 and BSL & BSJ.
? 88888
? Fictitious
?
Not disclosed unhedged positions in BSL & BSJ account of margin calls
2/2/13 ? Understatement
Funding Manipulation
Losses posted to 857 88888 BSL 317 BSLL 110 BSJ 284 Total Barings group 701 Misrepresented margin requirements to BSL Japanese bank
•
• Used the surplus funds to finance losses in Borrowed from 156 account 88888
2/2/13
Strategies Could Have been Adopted
? ? ?
Long Butterfly Put Ratio Spread Delta Neutral Spread
2/2/13
Long Butterfly
Long 1 call at time X-a • Short 2 call at time X • Long 1 call at time X+a
•
2/2/13
Put Ratio Spread
Buy 1 put at higher strike price • Sell 2 put at lower strike price
•
2/2/13
Delta Neutral Spread
?
Delta – rate of change of options price relative to one unit change in underlying asset Delta neutral – Net delta 0.
?
- Buy X call options with delta ‘2d’ and buy 2X put options with delta ‘d’ - Net delta = X*2d – 2X*d = 0
?
Low risk
2/2/13
THANK YOU
2/2/13
doc_639083782.pptx
This is about detailed Case analysis of Barings bank: Whatever happened at barings bank.
Analysis of Fall of Barings bank
Click to edit Master subtitle style Presented by: Group RJH(P) Jimmy Dalal Rohit Shanbhag Harish Choudhary Prithvish Sahu
2/2/13
Outline
? ? ? ? ? ? ? ?
Background What happened Strategies adopted by Leeson What went wrong? Why did it happen? Fraudulent activities Strategies that could have been adopted Signals Overlooked
2/2/13
Background
?
Unauthorized trading began from the time he took his appointment Leeson took up long and short positions in futures-not matched by the corresponding offset positions Open positions were concealed by accounting and reporting techniques 1992-activity was quite small, in Feb 95losses grew three fold
?
?
?
2/2/13
What Happened
High Bonus More Profit More Risk High Loss Fraudulent Activity Management negligence What Happened to Barings
2/2/13
Strategies adopted
?
Leeson’s Strategy:
? Long ? Short ? Short ? Used
positions in Nikkei futures – bullish view
positions in JGB futures – bonds were over valued volatility position in Nikkei exchange traded options short straddle – limited profit on limited day unhedged trades short position in Euroyen futures risk
? Intra
? Open
2/2/13 ? Profitable
if:
Where did it go wrong?
?
January, Nikkei fell sharply – Kobe earthquake Led to suffer positions both in Nikkei futures and options positions. Fall in Japanese interest rates saw losses incurred from the short JGB futures positions
Movement (predicted) Bets were not hedged Share Price upward Interest rate upward Price Movement (happened) downward downward
?
?
?
2/2/13
Why did it happen?
? ?
Failure of risk management systems Leeson was in charge of both the front office and back office: he could conceal all fraudulent information Barings internal audit failed to act on the warnings raised by the members No reconciliation was done by BSL on request for funding by BFS Loans were classified as “loans to clients” but never subject to check
?
?
?
2/2/13
Leeson’s poor judgment
?
Net positions were in the opposite direction of the market
? Nikkei ? JGB
– net long in the falling market
– net short position in the rising market
?
Recession in the Tokyo Stock Exchange, financial sector suffering from low profitability No potential for rising share price – still Leeson invested
?
2/2/13
Fraudulent Trading
?
Transfer trading
? ?
Secret error account 88888 Transferring losses to 88888 and profit to BSJ & BSL is funded by margin payments of Baring group trades between 88888 and BSL & BSJ.
? 88888
? Fictitious
?
Not disclosed unhedged positions in BSL & BSJ account of margin calls
2/2/13 ? Understatement
Funding Manipulation
Losses posted to 857 88888 BSL 317 BSLL 110 BSJ 284 Total Barings group 701 Misrepresented margin requirements to BSL Japanese bank
•
• Used the surplus funds to finance losses in Borrowed from 156 account 88888
2/2/13
Strategies Could Have been Adopted
? ? ?
Long Butterfly Put Ratio Spread Delta Neutral Spread
2/2/13
Long Butterfly
Long 1 call at time X-a • Short 2 call at time X • Long 1 call at time X+a
•
2/2/13
Put Ratio Spread
Buy 1 put at higher strike price • Sell 2 put at lower strike price
•
2/2/13
Delta Neutral Spread
?
Delta – rate of change of options price relative to one unit change in underlying asset Delta neutral – Net delta 0.
?
- Buy X call options with delta ‘2d’ and buy 2X put options with delta ‘d’ - Net delta = X*2d – 2X*d = 0
?
Low risk
2/2/13
THANK YOU
2/2/13
doc_639083782.pptx