12_big_losses_and_lessons

12_big_losses_and_lessons - Separate the front, middle and...

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BIG LOSSES AND LESSONS J. Wei, Department of Management, U of T 1 MGTD78 Big losses Lessons
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BIG LOSSES J. Wei, Department of Management, U of T 2 MGTD78 (Business Snapshot 22.1, p442) Allied Irish Bank ($700 million) Barings ($1 billion) Enron’s Counterparties Hammersmith and Fulham Kidder Peabody ($350 million) LTCM ($4 billion) National Westminster Bank ($130 million) Orange County Procter and Gamble Société Générale Subprime Mortgage Losses (2007)
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LESSONS – RISK LIMITS J. Wei, Department of Management, U of T 3 MGTD78 Risk must be quantified and risk limits be set Exceeding risk limits not acceptable even when handsome profits are produced Do not assume that you can outguess the market Be diversified Scenario analysis and stress testing is important
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LESSONS – TRADING J. Wei, Department of Management, U of T 4 MGTD78 Do not give too much independence to star traders
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Unformatted text preview: Separate the front, middle and back offices Models can be wrong Be conservative in recognizing inception profits Do not sell clients inappropriate products Beware of easy profits (e.g., AAA-rated ABS CDOs) LESSONS LIQUIDITY J. Wei, Department of Management, U of T 5 MGTD78 Liquidity risk is important There are dangers when many are following the same strategy Do not finance long-term assets with short-term liabilities (ABCP) High market transparency (so that investors dont lose confidence or panic) LESSONS CORPORATIONS J. Wei, Department of Management, U of T 6 MGTD78 It is important to fully understand the products you trade Beware of hedgers becoming speculators It can be dangerous to make the Treasurers department a profit center...
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12_big_losses_and_lessons - Separate the front, middle and...

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