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SHAFAHAD JAN M SHAHZEB KHAN (Hashmatullah)

BARRINGS BANK

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What is a Bank???

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Barings Bank

Barings Bank (1762 to 1995) was the oldest bank in London until itscollapse in 1995.

The bank was established in 1762 by two sons of German

1995 Was the end of 233 years old bank

4,000 employees

 Assets of $10 billion in 1994,

Market of Asia, Latin America and Eastern Europe Its moneymanagement arm managed about $46 billion

Customers, Queen of England.

Talented corporate finance team

Good connections in British industry.

Re opening of trade with America.

Helped US.

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1995 the chairman was PeterBaring

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COUNT…..  Barings concentrated on the old-fashioned business.

Securities trading arm (1984).

Clash of cultures.

Investment banking and securities operations.

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Derivatives A security whose price is dependent upon or derived from

one or more underlying assets. The derivative itself is merelya contract between two or more parties. Its value isdetermined by fluctuations in the underlying asset. The mostcommon underlying assets include stocks, bonds,commodities, currencies, interest rates and market indexes.

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Conti…

Currency.

Commodity.

Stock.

Forward contract.

Future contract.

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Example of a derivative contract for a

currency

Derivatives are generally used as an instrument to minimize

risk, but can also be used for planning purposes. Forexample, a European investor purchasing shares of an

 American company of an American exchange (using U.S.dollars to do so) would be exposed to exchange-rate riskwhile holding that stock. To hedge this risk, the investor could

purchase currency futures to lock in a specified exchangerate for the future stock sale and currency conversion backinto Euros.

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 Example of a derivative contract for a

commodity

Consider A Company That Knows It Will Need To Purchase 1 Million

Barrels Of Oil In Six Months. Imagine that the current price of oil is $15 per barrel, but the company

fears that the price may rise substantially over the next six monthsbecause of turmoil in Saudi Arabia, the world’s  largest oil exportingnation.

The company can either wait or bear the risk that the price of oil mightraise in six months, or it can enter into a futures contract today.

Under this contract, it might agree to purchase the price of oil in sixmonths at $16 per barrel. The $1 difference between the price of oiltoday and the price specified in the contract represents an insurance, orhedge, against a possible rise in the future price of oil. By entering intothe contract, the company has reduced its exposure to future rises in oilprices; it has reduced its risk.

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Example of a derivative contract for

a stock A stock option is a contract that gives the owner the right to

purchase or sell a specific number of shares at a fixed pricewithin a definite time. For example, imagine that you hold 1,000 shares of Compaq

Computer, which is trading at $50 per share (the market value ofyour holding is $50,000). You fear that due to a temporaryslowdown in the growth rate of personal computer sales, theprice of Compaq might fall in the near future, but you don’t want

to sell the stock because you like Compaq’s  long-termprospects. You know that it is by no means a sure thing that sales are

slowing, and Compaq could continue to do well even if sales doslow. You might decide to take out insurance against thepossibility that the stock will fall by purchasing a put option.

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PUT OPTION Selling

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CALL OPTION BUYING, PURCHASING

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NICK LEESON

27-year-old Englishman.

Employed at the Singapore office of Britain’s oldest bank,

Barings.

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He was your average English guy who likes to go out for abeer after work, and sometimes has a few too many. Iwouldn’t have said anything negative about him. 

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RESIGNATIONS Things came to ahead. ($20 million loss)

Christopher Heath, the head of Barings Securities in 1992.

 Andrew Tuckey, the deputy chairman of Barings.

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 YOU MAY THINK?????

How is it possible that this one man

was able to cripple a financial giant?

What was the role of senior management in this situation anddid they contribute to the demise?

  How effective were the internal control systems and was theSingapore operations managed effectively?

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Nicholas Leeson – The Rogue Trader

Worked for Morgan Stanley after graduating university. Hired as a relatively young clerk, he went to Barings' Singapore

office in 1992.

He was put in charge of operations for Barings Singapore Later in1992 many Japanese institutional

Leeson alone made about 10 million Pounds that year, which wasabout 10% of the bank profits of that year.