- 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
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