REVIEW QUESTIONS

1. Why did Nick Leeson sell numerous short straddles for each long futures contract he bought?

When Nick Leeson was being promoted on the Singapore branch of the Barings bank, the strategy of the bank was to reduce the risk exposure by using a combination of one short straddle (combination of put / call) and for one long future. Since Nick Leeson used to be a specialist on Future contracts on Nikkei 225 and Japanese 10 years bond and was sure this market would arise.

So he decided to sell disproportionate numbers of short straddles for each long futures position he took to pay the required initial margin deposits and new trades and also to meet the mounting margin calls on his existing futures positions, he used the …show more content…

Does the fact that he was trading on two exchanges simultaneously automatically mean he was speculating, or is it what he was doing that made the trades speculative?

Nick leeson’s job was trading on the Osaka Stock Exchange and the Singapore International Monetary Exchange for arbitrage strategies. Arbitrage is not a speculative position. Speculative positions are highly exposed to risk while Arbitrage is not. So, since arbitrage includes low risk exposure and since Nick Leeson’s supervisors trusted him, they let him work without knowledge of his activities.

So, it is what Nick Leeson did that was speculative. Selling short straddle to buy long futures on Nikkei 225 index is a very speculative position.

6. Nick Leeson sold short straddles and combined them with long futures contracts. What hybrid would he have created if he combined long call options on the Nikkei Index and with short forward contracts?
Why did he sell options instead of buying them?

The hybrid would have been a Long Put.
He sold options because he was sure of the rise of the Nikkei Index so he took riskier positions to get higher returns.

7. Was the existence of the 88888 Account one of the fundamental problems at Barings Bank PLC, or was the problem with its use?

The 88888 Account was used for discrepancies caused by delays between payment and its reception so the bank’s books would balance.

Since Nick Leeson had to deal a lot with this account when he was working in the Indonesia branch of