ociete General Group is the second largest bank in France. One of her business units is investment banking where shares and derivative on shares (e.g: futures long on the German stock market index (DAX futures) are traded. Traders of investment banking take responsibility of an investment amount of maximum 200 million EUR. For derivative positions trading partners demand margin calls (e.g 10% of the investment amount has to be provided as collateral (either in cash or nearly riskless state bonds) to cover potential losses of traders. During the financial crisis in January 2008 internal audit of Societe General detected an open position of 50 billion EUR in DAX futures long of the trader Jerome Kerviel as the counterparties demanded an additional margin call amount of 5 billion EUR. On the day of detection the open position of Jerome Kerviel had a negative instrisic value of -4 billion EUR. 1. Please identify 2 risks which Societe Generale has been confronted with 2. Briefly explain the internal risks. What happened/ did not happen in the bank causing the risk. 3. Explain the second risk very briefly. How can the bank get rid of the risk of open position?
Societe General Group is the second largest bank in France. One of her business units is investment banking where shares and derivative on shares (e.g: futures long on the German stock market index (DAX futures) are traded.
Traders of investment banking take responsibility of an investment amount of maximum 200 million EUR. For derivative positions trading partners demand margin calls (e.g 10% of the investment amount has to be provided as collateral (either in cash or nearly riskless state bonds) to cover potential losses of traders.
During the financial crisis in January 2008 internal audit of Societe General detected an open position of 50 billion EUR in DAX futures long of the trader Jerome Kerviel as the counterparties demanded an additional margin call amount of 5 billion EUR.
On the day of detection the open position of Jerome Kerviel had a negative instrisic value of -4 billion EUR.
1. Please identify 2 risks which Societe Generale has been confronted with
2. Briefly explain the internal risks. What happened/ did not happen in the bank causing the risk.
3. Explain the second risk very briefly.
How can the bank get rid of the risk of open position?
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