金融代考 Business Snapshot – SocGen’s Big Loss in 2008

Business Snapshot - SocGen's Big Loss in 2008

金融代考 Derivatives are very versatile instruments. They can be used for hedging, speculation, and arbitrage. One of the risks faced by a company

Derivatives are very versatile instruments. They can be used for hedging, speculation, and arbitrage. One of the risks faced by a company that trades derivatives is that an employee who has a mandate to hedge or to look for arbitrage opportunities may become a speculator.

Jérôme Kerviel joined Société Générale (SocGen) in 2000 to work in the compliance area. In 2005, he was promoted and became a junior trader in the bank's Delta One products team. He traded equity indices such as the German DAX index, the French CAC 40, and the Euro Stoxx 50. His job was to look for arbitrage opportunities. These might arise if a futures contract on an equity index was trading for a different price on two different exchanges. They might also arise if equity index futures prices were not consistent with the prices of the shares constituting the index.

Kerviel used his knowledge of the bank's procedures to speculate while giving the appearance of arbitraging.  金融代考

He took big positions in equity indices and created fictitious trades to make it appear that he was hedged. In reality, he had large bets on the direction in which the indices would move. The size of his unhedged position grew over time to tens of billions of euros.

In January 2008, his unauthorized trading was uncovered by SocGen. Over a three-day period, the bank unwound his position for a loss of 4.9 billion euros. This was, at the time, the biggest loss created by fraudulent activity in the history of finance. (Later in the year, much bigger losses from Bernard Madoff's Ponzi scheme came to light.)

Rogue trader losses were not unknown at banks prior to 2008. For example, in the 1990s Nick Leeson, who worked at Barings Bank, had a similar mandate to Jérôme Kerviel. His job was to arbitrage between Nikkei 225 futures quotes in Singapore and Osaka. Instead he found a way to make big bets on the direction of the Nikkei 225 using futures and options, losing $1 billion and destroying the 200-year-old bank. In 2002, it was found that John Rusnak at Allied Irish Bank had lost $700 million from unauthorized foreign exchange trading.

In 2011, Kweku Adoboli, a member of UBS's Delta One team, lost $2.3 billion by engaging in activities very similar to those of Jérôme Kerviel. The lesson from these losses is that it is important to define unambiguous risk limits for traders and then be very careful when monitoring what they do to make sure that the limits are adhered to.

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