［2008］Topic 67: Case Studies相关习题 following, contract, factors, discuss

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AIM 1: Identify and discuss the factors that led to the financial crisis at Metallgesellschaft, huge losses at Sumitomo, the collapse of Long-Term Capital Management, and the bankruptcy of Barings Bank.

 

1、Metallgesellschaft’s mismanagement in its long-term fixed contract strategy was evidenced by which of the following?

      I. Refunding payments to customers who willingly paid to cancel their long-term obligations.
     II. Canceling the program too soon while the positive legs of the contracts could have been sold at a profit or used to secure additional financing.
    III. Not considering the sale of the program to another firm.

A) I only.
 
B) I and III.
 
C) II and III.
 
D) I, II, and III.

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The correct answer is D

Metallgesellschaft committed all three errors in its handling of its liquidity crisis.

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 2、Which of the following increases the cost of rolling a long hedge (i.e., using long futures contracts to hedge a pre-existing short position)? I. A market shift from normal backwardation to contango. II. A market shift from contango to normal backwardation. III. Futures prices rising above the spot price. IV. Futures prices falling below the spot price.

A) I and IV.
 
B) II and III.
 
C) II and IV. 
 
D) I and III. 

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The correct answer is D

Normal backwardation exists when futures prices are generally less than spot prices, with the difference being larger for longer-term contracts. Contango exists when futures prices are greater than spot prices. As a market shifts from normal backwardation to contango, futures prices rise above the spot price, and rolling a long hedge involves selling relatively cheap short-term contracts and buying relatively expensive long-term contracts, thereby increasing the cost of rolling the hedge.

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3、Metallgesellschaft could have addressed the cash flow crisis created by their stack-and-roll hedge strategy by:

  I. Buying puts.
 II. Selling puts.
III. Selling calls.

IV. Requiring periodic cash settlements from customers.

A) I and IV only. 
 
B) I only. 
 
C) IV only. 
 
D) II and IV. 

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The correct answer is A

Metallgesellschaft’s long stack-and-roll hedge strategy created interim cash outflows that triggered a liquidity crisis for the firm because petroleum prices dropped dramatically and because the market shifted from backwardation to contango. Requiring periodic cash settlements from its customers on the fixed rate contracts would have mitigated this cash flow crunch. Another solution would have been to purchase put options, which would have generated cash to offset marked-to-market losses and margin calls as spot prices declined. Selling puts would have further exposed the firm to declining petroleum prices. Selling calls would have offer only limited protection against small movements, not the large price drops that triggered the liquidity crisis.

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4、All of the following affect the role of operational risk management in preventing large trading losses EXCEPT:

A) the breadth of responsibilities and power given to traders.
 
B) marked-to-market losses. 
 
C) the degree of supervision and oversight.
 
D) multiple approvals for large trades by senior management. 

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 The correct answer is B

Using the Sumitomo case as an example, Yasuo Hamanaka, a trader, attempted to corner the copper market. His fraudulent activities were possible because of weak operational controls. He was given broad powers, including granting power of attorney to brokerage houses, to create a financing scheme to fund his copper purchases in the spot market. Because of weak management oversight, he was able to keep two sets of books and execute large transactions without approval from senior management that would have been aware of and understood the trading strategies.

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5、The high degree of operational risk in the Sumitomo case was illustrated by which of the following?

  I. Model risk.
 II. Lack of informed supervisors to approve large trades.
III. High degree of autonomy, allowing the trader to execute highly levered positions.
IV. The trader’s ability to keep two sets of books trading books and hide trading losses.

A) I only. 
 
B) II, III, and IV. 
 
C) I and IV only. 
 
D) II and III only. 

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The correct answer is B

The lack of operational oversight gave Sumitomo’s copper trader the autonomy to execute large highly-levered transactions in the spot market. The large trades in the both the spot and futures market should have required the approval of a supervisor who was informed about the trader’s strategies and competent to understand them. The trader’s broad authority allowed him to manipulate the reporting system and thereby hide his huge losses. Model risk is the risk that a hedging or pricing model is flawed, which is not pertinent in this case.