Questions for Analysis:
1. Define future and options contracts and provide an example of settling accounts of two customers that have taken opposing sides in these contracts.
A futures contract is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality for a price agreed upon today with delivery and payment occurring at a specified future date, the delivery date. Option contract is a contract that allows the holder to buy or sell an underlying security at a given price, known as the strike price. For example, a trader believes that the price of a stock will rise from its current price of $40 to a level nearing $100. Rather than purchasing the stock …show more content…
d) Not paying for a customer's margin call from a firm's corporate funds- The first time that London approved a margin call for Mr. Leeson's trades in account 88888, it was for $750,000. Mr. Leeson arbitrarily broke down his request to $350,000 for the clients' margin calls and $400,000 for Barings itself. The margin payments, in return, were unusually large.
e) A bank should not put in excess of 25% of its capital in risk by purchasing derivatives-The purpose is to not be risky and to avoid excessive losses.
5. Who do you blame for the collapse of the Barings bank (SIMEX, Mr. Leeson, his supervisors, the bank of England)? Why?
I would solely blame Mr. Leeson for the collapse of the Barings Bank. He was the one who forgot to fix the trading error that was mistakenly done. He was careless and brought a bigger dilemma after forgetting to fix it.
6. Referring to agency theory and this case, explain the risk shifting problem.
Risk shifting occurs if managers make overly risky investment decisions that maximize shareholder value at the expense of debt holders’ interests. Just like what Mr. Leeson tried to do with the trading errors, he tried to maximize shareholder value.
7. There are several layers of agency problems in this case. Identify at least three agency problems and discuss them. Explain the relationship, discuss which