Fin 444 Essay

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Pages: 14

Barings Bank and Nick Leeson
Introduction I would like to present the case of Barings Bank, one of the most famous histories in the world when one man led to the bankruptcy the oldest British bank. Barings collapsed on February 26, 1995, due to the activities of one trader, Nick Leeson, who lost almost $1.4 billion. The loss was caused by a large exposure to the Japanese stock market, which was achieved through the futures market. Leeson, the chief trader for Barings Futures in Singapore, had been accumulating positions in stock index futures on the Nikkei 225, a portfolio of Japanese stocks. As the market fell more than 15 percent in the first two months of 1995, Barings Futures suffered huge losses, which were made even higher due to
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On 21 February 1992, BFS applied for clearing membership of SIMEX and this was subsequently granted. BFS commenced trading on SIMEX on 1 July 1992.

The meaning of derivatives Generally speaking, derivatives fall into two major categories. One consists of customized, privately negotiated derivatives, which are known generically as over-the-counter (OTC) derivatives or, even more generically, as swaps. The other category consists of standardized, exchange-traded derivatives, known generically as futures. In addition, there are various types of product within each of the two categories. Since the mid-80s the volumes and value of futures, options and swaps contracts traded have increased astronomically all over the world what is well illustrated by the table and graph below:


Markets for selected Derivate Financial Instruments: Notional Principal Amounts Outstanding (US$ Billions) North America 1986 1990 1991 1992 1993 1994 1995 1996 518,1 1268,5 2151,7 2694,7 4358,6 4819,5 4849,6 4839,7 13,1 461,2 710,1 1114,3 1777,9 1831,7 2241,6 2831,7 87,0 560,5 657,0 823,5 1606,0 2171,8 1990,1 2154,0 0,0 0,2 0,5 1,8 28,7 39,5 106,8 59,3 618,2 2290,4 3519,3 4634,3 7771,2 8862,5 9188,1 9884,7 Europe Asia-Pacific Other Total

Source: IMF, International Capital Market,