Book description
Risk Takers: Uses and Abuses of Financial Derivatives goes to the heart of the arcane and largely misunderstood world of derivative finance and makes it accessible to everyone—even novice readers. Marthinsen takes us behind the scenes, into the back alleyways of corporate finance and derivative trading, to provide a bird’s-eye view of the most shocking financial disasters of the past quarter century.
The book draws on real-life stories to explain how financial derivatives can be used to create or to destroy value. In an approachable, non-technical manner, Marthinsen brings these financial derivatives situations to life, fully exploring the context of each event, evaluating their outcomes, and bridging the gap between theory and practice.
Table of contents
- Title Page
- Copyright
- Dedication
- About De|G PRESS
- Acknowledgments
- Contents
- Preface
- Chapter 1: Primer on Derivatives
- Chapter 2: Employee Stock Options A User’s Guide
-
Chapter 3: Metallgesellschaft AG Illusion of Profits and Losses, Reality of Cash Flows
- Metallgesellschaft: Evolution of the Company and Its Product Lines
- Energy Derivatives at MGRM
- Risk Notepad 3.1: What Is the Difference Between Contango and Backwardation?
- MGRM’S Innovative Energy Derivative Products
- MGRM’s Embedded Options
- Hedging MGRM’s Forward Energy Exposures
- Cash Flow Effects of a Stack-and-Roll Hedge
- Stack-and-Roll Hedge Ratios
- MG Calls It Quits
- MGRM Butts Heads with NYMEX and the CFTC
- MGRM’S Profitability: It’s All in How You Account for It
- MGRM’S Credit Rating
- The Effects of an Itchy Trigger Finger
- Was MGRM Hedging or Speculating?
- Corporate Governance Issues
- Conclusion
- Review Questions
- Bibliography
-
Chapter 4: Swaps That Shook an Industry: Procter & Gamble versus Bankers Trust
- P&G’s Motivation for the Swaps
- The U.S. Dollar–Denominated Swap
- P&G’s Gamble: The Speculative Side-Bet
- Risk Notepad 4.1: Security Yield versus Price
- German Mark-Denominated Interest Rate Swap
- The Suit against Banker’s Trust
- Risk Notepad 4.2: Value at Risk
- The P&G-BT Settlement
- How Did BT Fare After the Swaps?
- P&G-BT from an Investor’s Perspective
- The Landmark P&G-BT Court Opinion
- Disclosure Reform after P&G-BT
- Should Corporate Treasuries Be Profit Centers?
- Conclusion
- Review Questions
- Bibliography
- Appendix 4.1: What Is an Interest Rate Swap?
-
Chapter 5: Orange County The Largest Municipal Failure in U.S. History
- Robert Citron and the Orange County Board of Supervisors
- The Orange County Investment Pool
- The Major Risks Facing Assets in the OCIP Portfolio
- OCIP’s Assets and Funding Sources
- Risk Notepad 5.1: Other Assets in the OCIP Portfolio
- Leveraging the OCIP Portfolio
- Effects of Leverage on OCIP’s Return
- The Consequences
- Monday-Morning Quarterbacking
- Sentences, Blame, and Reform
- Lessons Learned from Orange County
- Conclusion
- Review Questions
- Bibliography
-
Chapter 6: Barings Bank PLC Leeson’s Lessons
- Barings Bank PLC
- Nick Leeson: From London to Jakarta to Singapore
- What Was Leeson Supposed to Be Doing at BFS?
- Risk Notepad 6.1: What Are Stock Indices and Stock Index Futures Contracts?
- Five Eights Account
- Risk Notepad 6.2: Errors Accounts
- Leeson’s Trading Strategy: Doubling
- Risk Notepad 6.3: Doubling
- Funding Margin Calls
- Risk Notepad 6.4: Leeson’s Most Flagrant Falsification Scheme
- Net Profit/Loss Profile of Leeson’s Exposures
- Beyond Irony: The Barings Failure in a Broader Time Frame
- A Bank for a Pound
- Aftermath of the Barings Failure
- How Could Barings Have Caught Leeson Sooner?
- Conclusions
- Review Questions
- Bibliography
-
Chapter 7: Long-Term Capital Mismanagement “JM and the Arb Boys”
- Risk Notepad 7.1: What Is a Hedge Fund?
- LTCM: The Company
- LTCM’S Strategy
- LTCM’S Impressive Performance: 1994–1997
- LTCM’S Contributions to Efficient Markets
- Why and How LTCM Failed
- Risk Notepad 7.2: What Is Contagion?
- The Fed, Warren Buffett, and the Rescue of LTCM
- Risk Notepad 7.3: Another Look at Warren Buffett’s Offer for LTCM
-
Conclusions and Lessons
- Be Careful What You Wish For
- Beware of Model Risk
- All for One and “1” for All
- Leverage Is a Fair-Weather Friend
- Financial Transparency Is the First Step in Meaningful Reform
- In the Long Run, Bet on Global Financial Market Efficiency
- You Can’t Float Without Liquidity
- Some Things Are Worth Doing for the Greater Good —
- Epilogue
- Review Questions
- Bibliography
- Appendix 7.1: Primer on LTCM’s Major Trades and Financial Instruments
- Appendix 7.2: UBS and the LTCM Warrant Deal
-
Chapter 8: Amaranth Advisors LLC Using Natural Gas Derivatives to Bet on the Weather
- Amaranth Advisors LLC
- Natural Gas Markets
- Amaranth’s Natural Gas Trading Strategy and Performance: 2005–2006
- Risk Notepad 8.1: Measuring Natural Gas and Putting Amaranth’s Positions into Perspective
- Risk Notepad 8.2: Primer on Spread Trades
- What Caused Amaranth’s Catastrophic Losses?
- Explosion or Implosion? Who Got Hurt?
- Questions Remaining After Amaranth’s Fall
- Risk Notepad 8.3: A Tale of Two Hedge Funds
- Conclusion
- Review Questions
- Bibliography
-
Chapter 9: Société Générale and Rogue Trader Jérôme Kerviel
- Société Générale (SocGen)
- Jérôme Kerviel (JK)
- Back, Middle, and Front Office Jobs at SocGen
- Arbitraging Turbo Warrants
- How JK Built His Mountainous Positions
-
JK’s Fraudulent Methods
- Gaining Unauthorized Access to SocGen’s Computer Systems
- Using Contract Cancellations and Modifications to Mask Positions and Risks
- Entering Pairs of Offsetting Trades at Artificial Prices
- Posting Intra-monthly “Provisions”
- Navigating SocGen’s Dysfunctional Risk Management System
- Exploiting Supervisor Turnover
- How JK Was Caught
- Paying the Piper
- Did SocGen Know about JK’s Fictitious Trades?
- Network Incentives: Why Did JK Go Undetected for So Long?
- SocGen’s Bonus Incentives
- Doubling Strategies, Prospect Theory, and Survival Theory
- SocGen’s Risk Management Reforms
- Conclusion
- Review Questions
- Bibliography
-
Chapter 10: AIG: Two Roads to Ruin
- AIG: The Company
- AIG-INV
- AIGFP
- AIG’s Chief Regulators
- What Went Wrong?
- Securities Lending at AIG
- AIG’s Bailout
- What If AIG Was Allowed to Fail?
- Criticisms of the AIG Bailout
- Postscript
- Conclusion
- Review Questions
- Bibliography
- Appendix 10.1: Primer on Credit Derivatives
- Risk Notepad 10.1.1: The Long and Short of Credit Derivative Lingo
-
Chapter 11: JPMorgan Chase and the “London Whale”
- JPMorgan & Company, the CIO, and the SCP
- The SCP Time Line
- Risk Notepad 11.1: What Are Risk-Weighted Assets?
- Risk Notepad 11.2: What Are the Basel Accords?
- What Went Wrong at the SCP?
- Risk Notepad 11.3: The SCP’s Five Major Risk Measures
- Risk Notepad 11.4: Basel II.5 Accord’s Four New Risk Measures
- Risk Notepad 11.5: What Is the Volcker Rule?
- Dysfunctional Regulation
- Conclusion
- Aftermath
- Risk Notepad 11.6: Aftermath
- Review Questions
- Bibliography
- Appendix 11.1: Alphabetical List of the Main “London Whale” Decision Makers and Players
- Appendix 11.2: Markit Group Limited
- Risk Notepad A 11.2.1: A Rosetta Stone for Understanding Markit Group’s Credit Indices and Abbreviations
- Index
Product information
- Title: Risk Takers
- Author(s):
- Release date: May 2018
- Publisher(s): De Gruyter
- ISBN: 9781547400058
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