Market risk case studies
April was a great months for putting together case studies around market risk. We managed to do three before we ran out of steam and had to include our review of Michael Lewis’ Flash boys in the list.
Technically speaking Flash boys is not a market risk case study but it covers so many inter connecting themes and has raised such a fuss in markets and communities with its coverage of the HFT industry that we had to include it in our list of cases below.
Without further ado, here is a list of our weekend read. Four market risk case studies.
China Aviation Oil – Jet Fuel Hedging leads to Speculative options trading leads to the path down south. The China Aviation Oil (CAO) disaster made headlines in the Far East. The case raised eye brows because it originated out of conservative Singapore and no one expected a State owned firm to drop US$ 550 million in speculative trading. Timeline 2004.
JP Morgan rewrites Moby Dick – The London Whale story. The London Whale story has been retold many times. Here is our version with a link to the official JP Morgan investigation. There are bit of oversights, some conflict of interest, cut and paste in Excel gone wrong (supposedly) and lot of egg on the face on the bank that had supposedly managed to steer clear of ginormous losses.
Ceylon Petroleum Corporation (CPC) oil hedging attempts lead to court. The case that all airlines love to talk about when it comes to fuel hedging in the region and regional bank don’t. They wish that it would simply go away, which is possibly the reason why there is so little information available about the Ceylon Petroleum scandal. Despite its relative size and the impact it had on the Sri Lankan economy.
The juiciest bit deal with speculations around why Citi finally lost its claim in the courts in Singapore while Standard Chartered and Deutsch Bank emerged victorious in their court cases against Ceylon Petroleum.
Lewis makes it official – The markets are rigged. Flash boys is a must read for all equity market traders. And if you have ever wondered what the fuss is about HFT, Lewis presents an easy to understand review of the HFT industry. The industry understandably is not very pleased.
Of the four it’s the Lewis piece that we had the most fun writing and we suspect the most fun you will have reading too. While the cumulative losses on the first three cases added to US$ 7 billion and change, the Lewis story is significantly more interesting.
And here is a bonus fifth. Ever wondered about how Economic Capital is calculated? Here is our guide on Calculating economic capital for the banking industry. An outline of an alternate model, followed by a indepth case study featuring Goldman, JP Morgan, Barclays, Wells Fargo and Citibank.