Hello friends this blog is about a Bank name Barring which collapsed because of the wrong speculative strategies followed by them.
It is interesting because how something can get you into trouble when it was supposed to benefit you,It can if you play it wrong.
Barring Bank:
It was a merchant bank based out of London, one of the oldest merchant bank established in 1972 & closed down in 1995 because of bad futures strategies.
Operation:
Barring banks used to leverage on arbitrage opportunities that existed in SIMEX and OSAKA markets,typically quotes on OSAKA market on Nikkiei 225 futures were cheaper then on the SIMEX market,so the best way to capitalize on arbitrage is by being long on one and short on another exchange.
Crisis and our rockstar
Nick Lesson was a smart chap he took bank on ride which costed them $1.6bn,the problem arised because instead of taking short and long positions, he has taken long position on both the markets(greed) thinking that market will keep on rising this strategy has exposed bank to an unbearable risk,but how did such a risk has gone unnoticed.
Hiding
During the initial days of his career Nick lesson worked in settlement process.He managed to keep his trades off the books by creating an infamous error account (8888),this account is generally to record errors and settle them later on,this account is generally not shown in the books.
Nikkie 225 prices
Everything was rosy until Japan went into darkness of earthquake and made Nikkie plunged from 20000 to 17500 with in a week,which increased margin calls on the bank which bank managed initially.Nick thought this is a temporary downturn and he doubled the long position but Nikkie didn't rise and so is the bank which was eventually declared bankrupt in 1995.
It is interesting because how something can get you into trouble when it was supposed to benefit you,It can if you play it wrong.
Barring Bank:
It was a merchant bank based out of London, one of the oldest merchant bank established in 1972 & closed down in 1995 because of bad futures strategies.
Operation:
Barring banks used to leverage on arbitrage opportunities that existed in SIMEX and OSAKA markets,typically quotes on OSAKA market on Nikkiei 225 futures were cheaper then on the SIMEX market,so the best way to capitalize on arbitrage is by being long on one and short on another exchange.
Crisis and our rockstar
Nick Lesson was a smart chap he took bank on ride which costed them $1.6bn,the problem arised because instead of taking short and long positions, he has taken long position on both the markets(greed) thinking that market will keep on rising this strategy has exposed bank to an unbearable risk,but how did such a risk has gone unnoticed.
Hiding
During the initial days of his career Nick lesson worked in settlement process.He managed to keep his trades off the books by creating an infamous error account (8888),this account is generally to record errors and settle them later on,this account is generally not shown in the books.
Nikkie 225 prices
Everything was rosy until Japan went into darkness of earthquake and made Nikkie plunged from 20000 to 17500 with in a week,which increased margin calls on the bank which bank managed initially.Nick thought this is a temporary downturn and he doubled the long position but Nikkie didn't rise and so is the bank which was eventually declared bankrupt in 1995.
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