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U NIVERSITY OF E SSEX D EPARTMENT OF E CONOMICS The Strange Case of Société Générale & Mr Kerviel This note – originally prepared in February 2008 – discusses the aspects of the SocGen scandal relevant for EC372, keeping in mind that the case has yet to be fully resolved. The main facts (inasmuch as they can be ascertained): 1. Sometime in early January 2008 (probably 8th/9th) Jérôme Kerviel, an employee of Société Générale, apparently acting alone, purchased futures contracts the underlying assets for which were stock indices, mainly the Euro Stoxx 50 (traded on Eurex), Xetra DAX (traded on Eurex) and FTSE 100 (traded on Euronext.liffe). The SocGen statement refers to this as ‘portfolio A’, the components of which “were genuine and consistent with the volumes traded by a large investment bank [i.e.Société Générale].” The total value at purchase was about e 50 billion. The delivery date for the contracts appears to have been one to three months in the future (i.e., with only a short time to maturity). 2. In the days preceding 18th January global stock prices were volatile, mainly declining: the stock price indices underlying the futures contracts were falling. Consequently (in accordance with the arbitrage principle), the futures prices also fell. 3. As the futures prices fell, marking-to-market would have resulted in depletion of funds in SocGen’s margin accounts with SocGen’s brokers, and hence the exchanges’ clearing houses. Eventually, margin calls would have been made. It appears that margin calls of about e 2.5 billion were made (and paid by SocGen) before SocGen began its investigations late on Friday 18th January. 4. On 21st-23rd January SocGen ‘unwound’ – i.e., it sold – the futures contracts purchased by Mr Kerviel. As a consequence SocGen incurred a total loss of about e 4.9 billion ($7.2 billion or £3.6 billion).
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