Options,Futures,and Other Derivatives,5th edition ? 2002 by John C,Hull
30.1
Derivatives Mishaps
and What We Can
Learn from Them
Chapter 30
Options,Futures,and Other Derivatives,5th edition ? 2002 by John C,Hull
30.2
Big Losses by Financial
Institutions
? Allied Irish Bank ($700 million)
? Barings ($1 billion)
? Chemical Bank ($33 million)
? Daiwa ($1 billion)
? Kidder Peabody ($350 million)
? LTCM ($4 billion)
? Midland Bank ($500 million)
? National Bank ($130 million)
? Sumitomo ($2 billion)
Options,Futures,and Other Derivatives,5th edition ? 2002 by John C,Hull
30.3
Big Losses by Non-Financial
Corporations
? Allied Lyons ($150 million)
? Gibsons Greetings ($20 million)
? Hammersmith and Fulham ($600 million)
? Metallgesellschaft ($1.8 billion)
? Orange County ($2 billion)
? Procter and Gamble ($90 million)
? Shell ($1 billion)
Options,Futures,and Other Derivatives,5th edition ? 2002 by John C,Hull
30.4
Lessons for All Users of
Derivatives
? Risk must be quantified and risk limits set
? Exceeding risk limits not acceptable even
when profits result
? Do not assume assume that a trader with a
good track record will always be right
? Be diversified
? Scenario analysis and stress testing is
important
Options,Futures,and Other Derivatives,5th edition ? 2002 by John C,Hull
30.5Lessons for Financial
Institutions
? Do not give too much independence to star
traders
? Separate the front middle and back office
? Models can be wrong
? Be conservative in recognizing inception
profits
? Do not sell clients inappropriate products
? Liquidity risk is important
? There are dangers when many are following
the same strategy
Options,Futures,and Other Derivatives,5th edition ? 2002 by John C,Hull
30.6
Lessons for Non-Financial
Corporations
? It is important to fully understand the
products you trade
? Beware of hedgers becoming
speculators
? It can be dangerous to make the
Treasurer’s department a profit center