Chapter 37
Derivatives Mishaps and What
We Can Learn From Them
Options, Futures, and Other Derivatives, 11th Edition,
Copyright © John C. Hull 2021 1
Big Losses by Financial Institutions
Allied Irish Bank ($700 million)
Amaranth ($6 billion)
Barings ($1 billion)
Enron Counterparties (Several over $1 billion)
Kidder Peabody ($350 million)
LTCM ($4 billion)
Midland Bank ($500 million)
Société Générale ($7 billion)
Subprime Mortgages (many billions)
UBS ($2.3 billion)
Options, Futures, and Other Derivatives, 11th Edition,
Copyright © John C. Hull 2021 2
Big Losses by Non-Financial
Corporations
Allied Lyons ($150 million)
Gibsons Greetings ($20 million)
Hammersmith and Fulham ($600 million)
Metallgesellschaft ($1.8 billion)
Orange County ($2 billion)
Procter and Gamble ($90 million)
Shell ($1 billion)
Sumitomo ($2 billion)
Options, Futures, and Other Derivatives, 11th Edition,
Copyright © John C. Hull 2021 3
Lessons for All Users of Derivatives
Risk must be quantified and risk limits defined
Exceeding risk limits not acceptable even when
profits result
Do not assume that a trader with a good track
record will always be right
Be diversified
Scenario analysis and stress testing is important
Options, Futures, and Other Derivatives, 11th Edition,
Copyright © John C. Hull 2021 4
Lessons for Financial
Institutions
Do not give too much independence to star traders
Separate the front middle and back office
Models can be wrong
Be conservative in recognizing inception profits
Do not sell clients inappropriate products
Beware of easy profits
Liquidity risk is important
There are dangers when many are following the same
strategy
Options, Futures, and Other Derivatives, 11th Edition,
Copyright © John C. Hull 2021 5
Lessons for Financial
Institutions continued
Beware of potential liquidity problems when
long-term funding requirements are financed
with short-term liabilities
Market transparency is important
Manage incentives
Never ignore risk management, even when
times are good
Options, Futures, and Other Derivatives, 11th Edition,
Copyright © John C. Hull 2021 6
Lessons for Non-Financial
Corporations
It is important to fully understand the products you
trade
Beware of hedgers becoming speculators
It can be dangerous to make the Treasurer’s
department a profit center
Options, Futures, and Other Derivatives, 11th Edition,
Copyright © John C. Hull 2021 7
