Note #12

Note #12 - ECON 133 Securities Markets Lecture 12 Jia-Yuh...

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ECON 133 Securities Markets Lecture 12 Jia-Yuh Chen August 21, 2009
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The Rogue Trader I Nick Leeson I The trader who brought down the oldest investment bank in UK, Barings I Speculating on the Singapore International Monetary Exchange I Using error account to hide losses (account number: 88888) I Losses ballooned to £ 208 million in 1994 I Entering into short straddle on Japanese stock index futures I Kobe earthquake in January 1995 I I The bank declared bankruptcy in February 1995 I Sentenced to 6 1/2 years in jail in Singapore I Released in 1999 and survived a colon cancer
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Exchange Rate Forwards I A customized contract in which one party agrees to deliver something on a future date I Determined by interest rates and spot exchange rate I Spot 100 yen/$ I Japanese interest rate 1% I U.S. interest rate 5% I Forward rate is determined by no-arbitrage I gain from interest di±erentials must be o±set by loss in forward exchange rate I U.S. has higher interest rate: the dollar has to "depreciate" in forwards I f < 100 I 1 + 1 % 1 + 5 % = f 100 ) f = 96 . 19
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Note #12 - ECON 133 Securities Markets Lecture 12 Jia-Yuh...

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