This book analyzes in depth all major derivatives debacles of the last
half century including the multi-billion losses and/or bankruptcy of
Metallgesellschaft (1994), Barings Bank (1995), Long Term Capital
Management (1998), Amaranth (2006), Société Générale (2008) and AIG
(2008). It unlocks the secrets of derivatives by telling the stories of
institutions which played in the derivative market and lost big. For
some of these unfortunate organizations it was daring but flawed
financial engineering which brought them havoc. For others it was
unbridled speculation perpetrated by rogue traders whose unchecked fraud
brought their house down.Should derivatives be feared "as financial
weapons of mass destruction" or hailed as financial innovations which
through efficient risk transfer are truly adding to the Wealth of
Nations? By presenting a factual analysis of how the malpractice of
derivatives played havoc with derivative end-user and dealer
institutions, a case is made for vigilance not only to market and
counter-party risk but also operational risk in their use for risk
management and proprietary trading. Clear and recurring lessons across
the different stories call not only for a tighter but also "smarter"
control system of derivatives trading and should be of immediate
interest to financial managers, bankers, traders, auditors and
regulators who are directly or indirectly exposed to financial
derivatives.The book groups cases by derivative category, starting with
the simplest and building up to the most complex -- namely, Forwards,
Futures, Options and Swaps in that order, with applications in
commodities, foreign exchange, stock indices and interest rates. Each
chapter deals with one derivative debacle, providing a rigorous and
comprehensive but non-technical elucidation of what happened.The book is
translated and available in French, Russian, Simplified Chinese and
Korean.
