Behavioral Finance Essay

1596 WordsMay 7, 20137 Pages
J.P. Morgan trading loss and behavioral finance Overview of “London Whale” A J.P. Morgan. trader, Mr. Bruno Iksil, whose massive derivatives sales in the first quarter of 2012 earned him the nickname the "London whale" caused large trading loss initially announced to be $2 Billion while subsequently grew to $9 Billion. Unlike other rogue traders, Mr. Iksil is a london-based trader in the Chief Investment Office (“CIO”), a business within the corporate division of JP Morgan, which is formally described as the unit responsible for “managing structural interest rate, currency and certain credit risks that are created from the day-to-day operations of the firm's primary lines of business across the company” by J.P. Morgan. CIO activities primarily targets at “hedging structural risks and invest to bring the company's asset and liabilities into better alignment”. It should “focuses on managing the long-term structural assets and liabilities of the firm and is not focused on short-term profits." according to J.P. Morgan’s statements. CIO built up a Synthetic Credit Portfolio to provide benefit in a stressed credit environment, which was “intended to provide a partial hedge to credit exposures and is adjusted over time to reflect changes in macro views.”, according to J.P. Morgan’s statements. The synthetic credit portfolio generated approximately $2 Billon in P&L from 2007 to 2011, with positive P&L each year. In December 2011, the European Central Bank provided long-term loans to euro zone banks, igniting a bond rally. Suddenly, J.P. Morgan’s bearish bets were vulnerable. In order to meet the capital requirement, CIO was instructed to reduce Risk Weighted Assets. In early 2012, London-based traders in JPMorgan’s Chief Investment Office made offsetting bullish bets by selling "CDX IG 9" index, a basket of CDS contracts tied to the performance of 121 large U.S.

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