Derivatives and Financial Risk Management Essay

2359 WordsMay 26, 200910 Pages
Derivatives and Financial Risk Management Bad Bets, Big Losses SG Trading Loss Incident Executive Summary Jerome Kerviel, a futures trader in Socit Gnrale, caused a 4.9 billion loss through series of fake transactions in 2008. This size of incident was even regarded the most notorious trading event in the corporate history. The trader began taking unauthorized directional positions in 2005 and 2006 for small amounts, and from March 2007 for larger amounts without being uncovered until January 2008. The entire matter should bring regulators, bank boards and management back to the issue of how one person or relatively small groups of people make huge gambles on complex financial instruments. Especially, Socit Gnrale, France's second-biggest listed bank, should review and improve the systems and their controls to protect the bank against rogue trader risk, like Jerome Kerviel event. 1. Company Background Socit Gnrale (SG), founded in 1864 and headquartered in Paris, is one of the leading financial services groups in Europe. With more than 135,000 staff from 119 different nationalities and over 1,130 billion in assets as of December 31, 2008, the bank is serving more than 5 million customers in 82 countries. The Group is organized around five core businesses: French Networks, International Retail Banking, Financial Services, Global Investment Management & Services, Corporate & Investment Banking. The long term debt of the group is currently ranked AA by S&P, Aa2 by Moody's and AA- by Fitch. 2. Biggest Fraud in Financial History On January 24, 2008, Socit Gnrale announced that a single futures trader had fraudulently lost the bank 4.9 billion, the largest such loss in history. The trader began taking unauthorized directional positions in 2005 and 2006 for small amounts, and from March 2007 for larger amounts. These positions were uncovered between January

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