Global derivative debacles: From theory to malpractice

This book analyzes in depth all major derivatives debacles going back to Citibank's forex losses in its Belgian branch in 1964, to Amaranth's $5.4 billion loss on gas futures in 2006 and Societe Generale's loss of $7.8 billion in early 2008. Contrary to widespread belief, derivatives products are welfare-enhancing from a macroeconomic point of view. Unfortunately, financial innovations are used and abused by financial institutions and corporations when control systems are not properly designed. The proliferation of financial derivatives does not increase systemic risk but allows players in speculative markets to optimize their risk-return profile in line with their strategic goals and comparative advantages in the marketplace. Regulation is not necessarily called for; instead, proper guidelines for the use and monitoring of derivatives by firms should be established and enforced. The book groups cases by derivatives category, starting with the simplest and building up to the most complex - namely, Forwards, Futures, Swaps and Options, in that order, with applications in commodities, foreign exchange, stock indices and interest rates. Each chapter deals with one derivatives debacle, providing a rigorous and comprehensive but non-technical elucidation of what had happened

Forwards: Citibank (1964); Bank Negara (1989); Shell Showa (1993); Allied Irish Bank (2002); Sumitomo (1997); National Australian Bank (2004); Futures: Metallgesellschaft (1993); Barings (1995); Amaranth (2005); Societe Generale (2008); Swaps: Orange County (1995); Procter & Gamble (1994); Long-Term Capital Management (1998); SK Securities (1998); Options: Allied Lyons (1991); China Oil Aviation (2004)