Barings Case Essay

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Assignment #2 The Collapse of Barings Case 1. What was Nick Leeson’s strategy to earn trading profits on derivatives? He aggressively speculated in the futures and options of Nikkei 225 stock index and Japanese government bonds. Mr. Leeson was pretty much gambling on the assumption that Japanese equity prices will rise; assumption from which he expected to gain a considerable amount of income. 2. What went wrong that caused his strategy to fail? Even though Nick Leeson proved to be a bright individual when he solved the “back-office” issue in Jakarta, Indonesia; he was a very reckless, dishonest individual, who also had his share of bad luck. Leeson kept betting on the Nikkei 225; a market that was declining from the beginning and one of the biggest stock indexes in Asia. In the hopes that the market will recover, Lesson kept betting on the Nikkei 225, the more it declined. His decisions kept driving Barings bank into enormous amount of debt that was tactful covered through lies and mock up gains in other accounts. Leeson’s inexperience as a trader made his gambling be based on emotions rather than calculated risk. These speculations racked up the losses to an amount close to $1.4 billion dollars. 3. Why did Nick Leeson establish a bogus error account (88888) when a legitimate account (99002) already existed? First, Leeson set up this account to hide embarrassing losses that could result from mistakes made by his traders. However, as soon as he set up that account, it facilitated his furtive trading activities; making it “legit” for it too trade in the SIMEX. 4. Why did Barings and its auditors not discover that the error account was used by Leeson for unauthorized trading? Leeson was falsifying accounts and making misrepresentations, obtaining the capital from accounts of different Barings’ clients. Leeson’s
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