Questions for Analysis:
1. Define future and options contracts and provide an example of settling accounts of two customers that have taken opposing sides in these contracts.
A futures contract is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality for a price agreed upon today with delivery and payment occurring at a specified future date, the delivery date. Option contract is a contract that allows the holder to buy or sell an underlying security at a given price, known as the strike price. For example, a trader believes that the price of a stock will rise from its current price of $40 to a level ...view middle of the document...
3. Compare Mr. Leeson's frequent career moves with that of a Japanese employee with a lifetime corporate loyalty. Comment on the advantages and the shortcomings of each system.
Mr. Leeson’s constant and fast career moves would not be taken well in Japan. In Japan, they are known to stay loyal with the company they work with, no matter how ridiculous and demanding the job, which is also a downside of the Japanese employee. Mr. Leeson’s constant career move allows him to climb up the success ladder faster and gave him more opportunities to try out which job he likes best.
4. What are the purposes of the following rules and how did the deviations from these rules help bring down Barings?
a) Separation of the settlement and general trading functions- Mr. Leeson's position as manager in control of both settlement and floor operations was unusual. In this regard Barings was not following the common practice in the brokerage business. Settlement staff serve as control for a firm's operations, while the trading staff are aggressively pursuing profits.
b) Margin requirements- the purpose of this is to pay for the percentage of marginable securities that an investor must pay. London did not fully understood Mr. Leeson's operations. It was hard to go to one supervisor and get an accurate assessment of the Singapore operations. Mr. Leeson reported to four different individuals: the head of financial products, the regional manager of Barings Asia, an immediate supervisor in Singapore, and one in Tokyo.
c) Deducting errors from year-end bonuses- the purpose of this is like an incentive to correct the orrors made faster so that the deduction from the bonus wouldn’t be as staggering. The problem is that the Barings Bank excessively gave Mr. Leeson bonuses without further investigation of his work.
d) Not paying for a customer's margin call from a firm's corporate funds- The first time that London approved a margin call for Mr. Leeson's trades in account 88888, it was for $750,000. Mr. Leeson arbitrarily broke down his request to $350,000 for the clients' margin calls and...