GLOBAL DERIVATIVE DEBACLES : FROM THEORY TO MALPRACTICE.

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Title:

GLOBAL DERIVATIVE DEBACLES : FROM THEORY TO MALPRACTICE.

Author:

JACQUE, LAURET L.

ISBN:

9789814366199

9789812837707

Personal Author:

JACQUE, LAURET L.

Publication Information:

SINGAPORE : WORLD SCIENTIFIC, 2011.

Contents:

Machine generated contents note: ch. 1 Derivatives and the Wealth of Nations -- What are Derivatives? -- A Brief History of Derivatives -- Derivatives and the Wealth of Nations -- Organization of the Book -- Bibliography -- pt. I FORWARDS -- ch. 2 Showa Shell Sekiyu K.K. -- Hedging Currency Risk at Oil Companies -- The Mechanics of Hedging Dollar Exchange Rate Risk and Oil Price Risk -- Was Showa Shell Hedging or Speculating? -- Concealing Currency Losses -- The Story Unfolds -- Forecasting Exchange Rates: Treacherous at Best -- The Moral of the Story -- ch. 3 Citibank's Forex Losses -- Currency Trading in the Tranquil Days of Bretton Woods -- Gambling on Currencies with Forward Contracts -- How Do Banks Keep a Lid on Their Foreign Exchange Trading Operations -- Speculating from a Commercial Bank's Trading Desk: When Citibank is Not Quite a Hedge Fund a La Georges Soros -- Hasty and Costly Conclusion -- The Moral of the Story -- ch. 4 Bank Negara Malaysia --

Contents note continued: What is Central Banking All About? -- Bank Negara as a Macro-Hedge Fund -- How Did Bank Negara Speculate? -- pt. II FUTURES -- ch. 5 Amaranth Advisors LLC -- The Rise and Fall of Amaranth Advisors LLC -- Genesis of Natural Gas Derivatives -- A Primer on Speculating in Natural Gas Derivatives -- The Alchemy of Speculation Through Natural Gas Futures -- The Story Unfolds: Amaranth Speclative Assault on Nymex -- Risk Management at Amaranth -- The Moral of the Story -- Postscript -- ch. 6 Metallgesellschaft -- The Metallgesellschaft Debacle -- The "Long and Short" of Hedging in the Oil Market -- Numerical Illustration of "Ebbs & Flows" Under a "Stack & Roll" Hedge -- The "Message is in the Entrails": Empirics of the Oil Market (1983--2002) -- If Only MGRM Had Been Allowed to Roll the Dice -- When a Hedge is a Gamble: Was MGRM Hedging or Speculating? -- MGRM as a Market Maker -- The Moral of the Story -- Bibliography -- ch. 7 Sumitomo --

Contents note continued: Was Sumitomo Manipulating Copper Prices? -- Alarm Bells -- Debacle -- Postscript -- pt. III OPTIONS -- ch. 8 Allied Lyons -- A New Mission for Allied Lyons Treasury Department -- A Primer on Currency Options: Was Allied Lyons Hedging or Speculating? -- Selling Volatility: Allied-Lyons "Deadly Game" -- Alarm Bells are Ignored as the Story Unfolds -- The Moral of the Story -- Appendix: Pricing Currency Options -- ch. 9 Allied Irish Banks -- Rusnak and Currency Trading at Allfirst -- Gambling on Currencies with Forward Contracts -- Arbitraging the Forward and Option Market: The International Put-Call Parity Theorem -- The Art of Concealment -- When Alarm Bells are Ignored -- The Moral of the Story -- Epilogue -- Bibliography -- ch. 10 Barings -- The Rise and Fall of the House of Barings -- Rogue Trader -- Arbitrage -- From Harmless Arbitrage to Lethal Speculation -- A Primer on How to Speculate with Options -- Financing Margin Calls by Selling Volatility --

Contents note continued: Warning Bells -- The Art of Concealment -- The Moral of the Story: Leeson's Seven Lessons -- Epilogue -- Bibliography -- ch. 11 Societe Generate -- The Making of a Rogue Trader -- From Arbitrage to Directional Trades -- Hasty Conclustion -- When Alarm Bells are Ignored -- The Art of Concealment -- The Moral of the Story -- Postscript -- Bibliography -- pt. IV SWAPS -- ch. 12 Procter & Gamble -- How to Reduce Financing Costs with Levered Interest Rate Swaps -- Embedded Options and Hidden Risks -- Landmark Lawsuit -- The Moral of the Story -- Bibliography -- ch. 13 Gibson Greeting Cards -- ch. 14 Orange County -- Municipal Finance in Orange County -- A Primer on Fixed Income Securities -- Anatomy of Orange County Asset Portfolio -- OCIP as a Hedge Fund -- Double Jeopardy: How Orange County Collapsed -- Was Filing for Bankruptcy Warranted? -- The Moral of the Story -- Epilogue -- Bibliography -- ch. 15 Long-Term Capital Management -- What are Hedge Funds? --

Contents note continued: The Rise of Long-Term Capital Management -- The Alchemy of Finance -- Relative Value or Convergence Trades -- The Central Bank of Volatility -- Straying Away from the Master Plan -- The Fall of LTCM -- The Rescue of LTCM -- The Moral of the Story -- Epilogue -- Bibliography -- ch. 16 AIG -- Securitization and Credit Default Swaps -- What are Credit Default Swaps (CDS)? -- The Moral of the Story -- ch. 17 From Theory to Malpractice: Lessons Learned -- Some First Principles -- Policy Recommendations for Non-financial Firms -- Policy Recommendations for Financial Institutions -- Policy Recommendations for Investors -- Policy Recommendations for Regulators.

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Summary

This book analyzes in depth all major derivatives debacles of the last half century including the multi-billion losses and/or bankruptcy of Metallgesellschaft (1994), Barings Bank (1995), Long Term Capital Management (1998), Amaranth (2006), Soci t G n rale (2008) and AIG (2008). It unlocks the secrets of derivatives by telling the stories of institutions which played in the derivative market and lost big. For some of these unfortunate organizations it was daring but flawed financial engineering which brought them havoc. For others it was unbridled speculation perpetrated by rogue traders whose unchecked fraud brought their house down.Should derivatives be feared "as financial weapons of mass destruction" or hailed as financial innovations which through efficient risk transfer are truly adding to the Wealth of Nations? By presenting a factual analysis of how the malpractice of derivatives played havoc with derivative end-user and dealer institutions, a case is made for vigilance not only to market and counter-party risk but also operational risk in their use for risk management and proprietary trading. Clear and recurring lessons across the different stories call not only for a tighter but also "smarter" control system of derivatives trading and should be of immediate interest to financial managers, bankers, traders, auditors and regulators who are directly or indirectly exposed to financial derivatives.The book groups cases by derivative category, starting with the simplest and building up to the most complex -- namely, Forwards, Futures, Options and Swaps in that order, with applications in commodities, foreign exchange, stock indices and interest rates. Each chapter deals with one derivative debacle, providing a rigorous and comprehensive but non-technical elucidation of what happened.The book is translated and available in French, Russian, Simplified Chinese and Korean.