Six Derivatives Mishaps
| FI475-Project Study | Six Derivatives Mishaps |
2012/5/8 |
Sumitomo (future contracts)
Background:
1996, Sumitomo Corporation was one of the top copper market makers in the world. During the over 10 years under Hamanaka, who was a genius charged on allegations that he could manipulate the price of the metal, Sumitomo lost at least $1.8 billion as a result of what it said were unauthorized trades, which then lost a third of its value on world markets in less than two months. The affair was a major scandal which is at times compared in magnitude to the Silver Thursday scandal, involving the Hunt family's attempt to corner the world's silver markets. It currently ranks in the top 5 trading losses in financial history.
Cause:
In this whole scandal, Hamanaka keept two sets of trading books, one was reported showing big profits for Sumitomo and a second which secret account that was recorded unauthorized trades for over 10 years that how he used company’s money to made own profit.
Because Sumitomo’s poor managerial, financial and operational control systems, which enabled Hamanaka to carry out unauthorized trading activities undetected by the top management. There was a lack of effective monitoring and supervision of his trading activities. The sorts of risks that cause this loss are market risk, operational risk – supervision and fraud – market manipulation.
Aftermath:
Even though, Sumitomo was able to cover the losses since it had a net worth of $6billon and another $8billon in hidden reserves. Also the losses estimated to be $2.6billon which is amount of only 10 % of Sumitomo’s annual sales. Otherwise Sumitomo was also able to prevent further escalation of losses by aggressive liquidation of its uncovered position. Sumitomo’s reputation still went down for the traders. Every time speculators tried to move the price, the company threw more money at Hamanaka. Hamanaka was transferred from his trading post and charged for the forgery on his supervisor's
2012/5/8 |
Sumitomo (future contracts)
Background:
1996, Sumitomo Corporation was one of the top copper market makers in the world. During the over 10 years under Hamanaka, who was a genius charged on allegations that he could manipulate the price of the metal, Sumitomo lost at least $1.8 billion as a result of what it said were unauthorized trades, which then lost a third of its value on world markets in less than two months. The affair was a major scandal which is at times compared in magnitude to the Silver Thursday scandal, involving the Hunt family's attempt to corner the world's silver markets. It currently ranks in the top 5 trading losses in financial history.
Cause:
In this whole scandal, Hamanaka keept two sets of trading books, one was reported showing big profits for Sumitomo and a second which secret account that was recorded unauthorized trades for over 10 years that how he used company’s money to made own profit.
Because Sumitomo’s poor managerial, financial and operational control systems, which enabled Hamanaka to carry out unauthorized trading activities undetected by the top management. There was a lack of effective monitoring and supervision of his trading activities. The sorts of risks that cause this loss are market risk, operational risk – supervision and fraud – market manipulation.
Aftermath:
Even though, Sumitomo was able to cover the losses since it had a net worth of $6billon and another $8billon in hidden reserves. Also the losses estimated to be $2.6billon which is amount of only 10 % of Sumitomo’s annual sales. Otherwise Sumitomo was also able to prevent further escalation of losses by aggressive liquidation of its uncovered position. Sumitomo’s reputation still went down for the traders. Every time speculators tried to move the price, the company threw more money at Hamanaka. Hamanaka was transferred from his trading post and charged for the forgery on his supervisor's