12_big_losses_and_lessons

12_big_losses_and_lessons - ● Separate the front middle...

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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 don’t 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 Treasurer’s department a profit center...
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This note was uploaded on 05/10/2011 for the course MGT D78 taught by Professor Wei during the Spring '11 term at University of Toronto.

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12_big_losses_and_lessons - ● Separate the front middle...

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