Demonstrate your understanding of money and capital markets and financial institutional risk. You are required to research and report on the Nick Leeson story and provide explanations for related issues such as the importance of institutional capital and risk management and the fundamentals of futures contracts.
1.Central to the story are futures contracts. Define a futures contract and describe the basic principles behind the use of futures contracts to manage risk exposures.
2.For investors and borrowers considering setting up a risk management strategy using futures contracts, there is a basic rule that determines the timing of the various buy/sell transactions.
a.Explain this rule [examples from the Nick Leeson story will be highly regarded].
b.Outline the procedure involved in buying a futures contract.
c.Indicate the implications of being long or short in a futures contract.
d.What are the procedures for closing out these positions prior to delivery?
3.Describe how the Barings management failed in their duty.
4.Explain why risk management is important to the long-term survival of a corporation including:
a.Define and explain the nature of risk and the purpose of risk management.
b.Discuss who is responsible for the establishment of risk management objectives, policies, procedures and strategies in a corporation.
5.In light of the Nick Leeson case:
a.Comment on the logic and reasons why risk must be identified, measured and managed.
b.Briefly explain the main functions of capital.
c.Provide an overview of the Basel II capital accord framework of three pillars which established the minimum capital required by a bank and incorporates risk components: credit risk, operational risk and market risk (i.e. define credit risk and explain how a bank calculates its minimum capital requirement.
d.Briefly describe / compare the different types of acceptable capital under the Basel II and Basel III capital accords.