“A trader with Barings Bank engaged in an unauthorized position in exchange. He traded in features and options contracts with Nikkei 225 Stock Index. The futures contract was unhedged and was placed at $27 billion position. However, the market did not move in favor of the speculations of the trader for the future position, and resulted to losses of approximately $1 billion.”
There is much behind the failure of Barings, most of which are weaknesses in governance processes. There were numerous breakdowns/subversion of proper internal controls. There is a difference between futures on a stock market index, which is a notional concept, and futures on currencies. Proper controls are needed for both, but the risks of stock market index futures are higher than that for currency futures.
Nick Leeson was not the first such rogue trader nor is he likely to be the last. Each of the disasters created by such traders ultimately traces back to failed or improper internal controls. We must assume that there will be rogue traders in the future. We cannot change their mind-sets but we can prevent their acting on those mind-sets through proper internal control systems
Discuss you thoughts on this?
“Use academic/journal references”
References
Boze, KM 1990, ‘Accounting for Options, Forwards and Futures Contracts’, Journal Of Accounting, Auditing & Finance, 5, 4, pp. 627-638, Business Source Complete, EBSCOhost, viewed 14 February 2013.
Chang, C, & Chang, J 1990, ‘Forward and Futures Prices: Evidence from the Foreign Exchange Markets’, Journal Of Finance, 45, 4, pp. 1333-1336, Business Source Complete, EBSCOhost, viewed 16 February 2013.
Intrisano, C 2012, ‘How Firm Can Hedge from Currency Risk’, China-USA Business Review, 11, 9, pp. 1295-1306, Business Source Complete, EBSCOhost, viewed 15 February 2013.
Rashty, J, & O’Shaughnessy, J 2010, ‘Foreign Currency Forward Contracts and Cash Flow Hedging’, CPA Journal, 80, 10, pp. 24-31, Business Source Complete, EBSCOhost, viewed 15 February 2013
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