SocGen_Kerviel_case

SocGen_Kerviel_case - UNIVERSITY OF ESSEX DEPARTMENT OF...

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Unformatted text preview: UNIVERSITY OF ESSEX DEPARTMENT OF ECONOMICS The Strange Case of Socit Gnrale & 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) Jrme Kerviel, an employee of Socit Gnrale, 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.Socit Gnrale]. 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 SocGens margin accounts with SocGens 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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SocGen_Kerviel_case - UNIVERSITY OF ESSEX DEPARTMENT OF...

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