Internation Finance

2 February 2017

What was Nick Leeson’s strategy to earn trading profits on derivatives? Leeson was trading derivatives contracts on the two exchanges that were, in some cases, of different types and, in some cases, in mismatched amounts. He was hoping making profits by selling put and call options on the same underlying financial instrument, the Nikkei 225 Index. 2) What went wrong that caused his strategy to fail?

He thought as the Nikkei was already low that it could not plummeted lower but due to among other reason, an earthquake and the volatility of the market it went even lower, at that time nick was already “all in “ and could not correct his position. Also at a certain point he had contracted a lot of futures without enough options to hedge his position which put him or in this case the bank money at high risks. 3) Why did Nick Leeson establish a bogus error account (88888) when a legitimate account already existed?

He created this account to be able to perform is unauthorized trading and hide his lost from Barings as this account was not shown on the statements transmitted to London.

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4) Why did Barings and its auditors not discover that the error account was used by Leeson for unauthorised trading? The error account had been presenting by Leeson as a customer account, that’s why his activities were unknown for quite a long time. 5) Why did none of the regulatory authorities in Singapore, Japan, and the United kingdom discover the true use of the error account? Fist of all because Nick Leeson was in charge of the back office, letting him he possible to hide easily what he wanted.

Also as we said above this account was represented as a customer account and differently to each group. 6) Why was Barings Bank willing to transfer large cash sums to Barings Futures Singapore? As Leeson lost money, he had to pay those losses to SIMEX in the form of margin. By falsifying accounts and making various misrepresentations, he was able to secure funding from various companies within the Barings organization and from client accounts. For example, he claimed that he needed funds to make margin payments on behalf of BSS clients.

Therefore Barings believed that they were not exposed to any looses as Leeson claimed that he was executing purchase orders on behalf of clients 7) Why did the attempt by the bank of England to organize a bailout for Barings fail? No one wanted to assume to take the additional risk concerning the additional looses that were not yet determined. 8) Suggest regulatory and management reforms that might prevent a future debacle of the type that bankrupted Barings. -Separate trading, accounting and settlement activities. -More employees supervision -Clear reporting line -Consolidation of the activities of every branch.

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