PART A (1000)
In the online trading we have chosen three different contracts copper and natural gas and corn giving us a well balanced portfolio. Below is a clear explanation on each commodity traded in the Plus500 platform.
Copper is considered as one of the oldest metal. This metal has a huge future predicted price as emerging markets opens up to increase their consumption levels. To date, the greatest consumers of this metal are the developed nations. The recent demand hike witnessed two years ago was a result of demand opening up in China and India. The greatest supplies of copper is mined from South America, so because of this concentration risk any disruption to the mining site will translates to price hike in the market as supplies reduces(Reason,1997). From 2012 the price of copper has been going done as more substitutes open up to replace its use.
As can be seen in the chat below we are bearish about the prices of copper in the short run. We closed 31st December 2015 when the prices were coming down; therefore we began trading by purchasing 78837 of copper in the future contracts which we sold off as prices began to increase. As such, we decided to trade in copper because of the price of copper which at the close of 2015 was trading at a low value and with higher predication of rebound as be beginning of 2016. It will equally offer a better gain in price as prices moves up to match the November, 2015 trading periods. China being the main market for copper, the decrease in its interest rates negatively affected the price of commodity future. Therefore, the increase may not survive for long and we shall sell them off on any slight increase and wait to purchase higher volumes later as prices continue to decline.
Natural gas is one of the energy products whose demand is high in the future market. This type of energy is common is the future market and used commonly for heating purposes and industrial use. Based on reports from NASDAQ and Bloomberg historical data, there has been a steady performance of natural gas for the four quarters closing 2015 with the fourth quarter realizing slight decline (Baimbridge, Whyman & Burkitt, 2010). We are therefore bullish on the commodity prices in the future market, however this is only for a season in the long run we expect the prices to decline further as new natural gas deposits opens up. As such, we began trading by purchasing 279022 volume expecting to sell it off when the prices reaches somehow at the peak towards the close of January before final decline to avoid getting loses. Our expectation was the current low price will rebound as the demand of energy increases during the cold seasons expected and we shall be able to make more profits.Besides, market realists posits that there is an indication that prices of natural gas is expected to fall as the amount of natural gas increases therefore we are keen to ensure that we benefit from any slight positive change in price future to avoid making loses as prices begins to decline. Other factors that are likely to hamper the pricing of natural gas are the presence of temperature change that may affects the demand of the products. However, our bearish position was characterized by a loss towards winter as prices shoot nearly from 2.452 dollars to 2.472 dollars. Saefong et al (2015), has argued that the prices of energy commodities towards the close of 2015 was attributed to the impact of Greece bailout plan. Market analysts have places forecast on decrease on demand for energy produces in the European countries. Additionally, the prices of all other substitutes to the natural gas have equally decreased due to demand and supply forces (Perry & VanZandt, 2006). The supply is outweighing demand as big consumers like the United States discover their own deposits hence decreasing their demand as supply increases.
Corn is one of agricultural commodities products used to make starch, cornmeal, oil, ethanol and penicillin drugs. Over the last three months, the prices of corn have been unsteady which is making it a good bet for future speculation as prices hike. We decided to choose this commodity due to various uses and steady demand it has in the international market (Dertouzos, Pace & Anderson, 2008). At the close of November 2015, the market began at high levels and this drastically declined towards December to a small hike and low moments quickly rebound to witness the lowest level within a period of three months on 16th January 2016. With this in mind, we are therefore bullish about the future commodity price so we began trading by purchasing 256447 waiting to benefit as prices increases during periods of low supply when prices are expected to hike. Our prediction is the supply levels may begin to shrink in the international market owing to low supply of rains the previous year giving the product a good bet for greater margins as shortages set in the international market.
All the above are future contacts expected to be traded and exchanged at a price in future. This assist in providing a forum whereby market risks can easily transferred among hedgers, speculators in expectation for opportunity profit.
PART B (771 words)
The story is about the collapse of Baring Bank one of the oldest Bank in London dating as far as 1762. The collapse of 233 years old bank in 1995 is a classical example of history where financial risk management can be said to have gone wrong. This failure was abrupt and unexpected and within a matter of few days, the bank grew from strength to bankruptcy. But what exactly were the main causes of these mishaps? Are there some lessons the current financial and nonfinancial institutions can learn from this incidence? This essay therefore, will explore the main underlying reasons why this wonderful bank that had made a history in the old times came under so fast and the subsequent lesson this incidence teaches current managers.
Causes of the collapse of Baring Bank
Central to the collapse of this bank is the man Nick Leeson, who grew to be a star employee and customer to the bank. However, his office in Singapore was grossly understaffed resulting to his staffs involving themselves in several errors and omissions on the transactions they did. So it all started with account ‘8888' which was merely created by one of the new phone clerk staff who realized a loss of 20,000 pounds and wanted a way of hiding the same. When Leeson saw this, he decided to cover up this loss and this was the beginning of him involving in unauthorized trading practices. To assist him made up his deal, Leeson decided to sell options secretly as well as taking a special position in SIMEX. Moreover, the bank and the general public had developed a good perception of him as being a smart trader so less control could be exercised on his deals. At the time he gave the bank a loss of $296 million, his boss was not able to detect this and instead thought he brought in a profit of $46 million(Drummond, 2007). Through using the error account 8888 Leeson used the technique of cross trade and manipulated another account 92000 where he could change trade prices and posts all profits to that account and therefore, confused everyone that the guy was doing fine while not considering what was happening to the loss account ‘8888.' Then on December and November, 1994 Lesson sold 34400 options without seeking for permission from Baring London Bank thereby making premium income. Through using the same error account ‘8888,' Lesson started an active and aggressive buying program which by close of March 1995 had nearly reached 55,000 contracts which were not real but a bull trap. The market then came down and that is how Baring Bank collapsed as a mere fact of concentration risk and lack of stringent internal control to the system.
Lessons from the collapse of Baring Bank to Financial and Non- financial institutions
There is nearly so much that can be learnt from this case. First, is the ethical issue as well as the fault of management to offer supervision and put in place effective control to unleash mistakes before they go bad. The management at Baring Bank thought the training was not necessary for the young man. It's important for all financial and non- financial institution not to judge their employees based on their past performance for a mere fact that past staff performance should not be taken to mirror future performance. Each time an employee is given a task, it should be treated as a special case and relevant training need to be given to reshape and prepare him/her fully to the new tasks. There must be proper controls in every employee's desks to ensure that one person does not have overriding powers in one transaction throughout but work should be segregated to help reduce the inherent risk of concentration. A manager should not place his or her trust fully on a staff but constantly check and guide the employees wherever mistakes are realized. Financial institutions require establishing risk control department with competent employees who have vast knowledge on risk management practices and understand organizations processes well. In that order, errors and omissions can easily be detected and mitigation measures developed to avert the organization from any impending loss that may be catastrophic to the organization.
Therefore, the first lesson every organization can learn from this case is that of segregation of duties. Any organizationwith back office team should act as immediate supervisors to what the front office team is doing. All entries must be authorized and at no particular time should one employee be responsible to pass transactions of material significant alone. The management team should also be vigilant and able to detect frauds being perpetrated by employees in time (Laurent, 2010).Secondly, there is the lesson of senior management involvement in effectively monitoring what the staffs are doing. Wherever staffs know senior management are watching them they will be keen to details to ensure that work remain perfect. The third lesson is that, organizationsneed proper working capital management (proper capital adequacy to safeguard it from collapse in case of any shock). The fourth lesson is that thereis need for effective internal control systems that can safeguard and detect any impending danger facing the organization at every employee’s desk. Finally, the role of supervision in ensuring that work is properly done well.
Its arguable that Baring Bank collapsed due to laxity in management which could have been prevented through effective internal controls including creation of risk management department, internal audit, compliance department and more so segregation of duties such that no one person can pass one transaction alone in the organization.
Baimbridge, M., Whyman, P., &Burkitt, B. (2010).Moored to the continent?. Exeter: Imprint
Dertouzos, J., Pace, N., & Anderson, R. (2008). The legal and economic implications of
Electronic discovery. Santa Monica, CA: Rand Corp.
Drummond, Helga (2007). The Dynamics of Organizational Collapse: The Case of Barings
Bank. London: Routledge. ISBN 978-0-415-39961-6.
Jacque, Laurent L. (2010). Global Derivative Debacles: From Theory to Malpractice. Singapore:
World Scientific.ISBN 978-981-283-770-7. Chapter 10: Barings, pp. 143–178
Perry, N., & VanZandt, Z. (2006).Exploring future options. New York: International Debate
Reason, James (1997). Managing the Risks of Organizational Accidents. Ashgate Publishing
Limited. p. 29
Saefog,M.,Yep,M., &Hoyle, R. (2015)available:http://www.marketwatch.com/story/oil-tumbles-
4aftegreek-voters-reject-creditors-reform-proposal-201507-06. Accessed 27th January