However, the market price of oil began to rise. To hedge itself, the company chose a strategy to stack and roll settled contracts.This strategy was only profitable if oil prices begin to rise and the organization gets more contracts at the same price. However, the situation became difficult since the organization took future contracts with the expectation that oil prices would rise. This was not to be as oil prices reduced significantly causing MGRM to incur a large magnitude of losses. The board of supervisors elected a new managerial team which suspended the hedging program before its maturity. This assumption was reached since oil prices rose significantly from which the company could have made profits if the hedging program still in existed (Culp & Merton, 1995). At the time the issue was resolved, the company had recorded an over $1 billion dollars of loss (Culp & Merton, 1995).In analyzing the effectiveness of derivative in this case, it is an obvious assumption that the company failed since it overestimated its derivatives. In an argument by (Culp & Merton, 1995) it was a bad decision to predict the direction of the price of oil considering the fluctuating capacity of the prices. By the company taking up future contracts based on the direction of the prices,it was risky and exposed the organization to a great risk. From this argument, one may point out that derivatives are hazardous. The problem was not created by the traders since they considered the profits the company could have generated. In addition, the traders considered shielding the company from losses by taking up another derivative which proved to be costly (Culp & Merton, 1995). If derivations were not taken up at the first place the organization could not have incurred heavy losses.However, one may point out that greed on the side of the traders made them take up future contacts at the current price. The derivation strategy was effective but overestimation of the notional price and direction on the side of the trader exposed the organization to great risks.Baring bank was one of the first financial institutions to be successful in the late centuries. The bank was created by two German brothers. The bank’s main branch was in London where it gained its popularity. From this popularity, the bank was the banker for the queen and most of the royal family members. The exceptional legacy of the bank lasted from 1762 to 1995 where a huge magnitude of
Culp, C. & Merton H., 1995. “Basis Risk and Hedging Strategies,” Derivatives Quarterly, 1(4): 20–26.
Irving, R., 1995. “Beyond Barings,” Risk, 8, 6.
Kuprianov, A., 1995. “Derivatives Debacles Case Studies of Large Losses in Derivatives Markets,” Economic Quarterly 81(4):1-7.
Mello, A. & Parsons, J., 1995.“Hedging a Flow of Commodity Deliveries with Futures: Problems with a Rolling Stack,” Derivatives Quarterly, 1, 16–19.
Stoll, H., 1995. “Lost Barings: A Tale in Three Parts Concluding with a Lesson,” The Journal of Derivatives, 3, 109–15.
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