1-Identify the type of derivative instrument that led to the incurring of massive losses by the organization featured.

2- Explain the nature of the unhedged position held by the organization in the above-identified derivative instrument as a loss-making generator.

-Please read what is in the picture to answer the questions.

specially size but I'm always trying to be as careful as I Canby same time I can find it on Irving professionals I don't think I bring this up because it can also be unnerving to watch the weather financial professionals work out risk management tools have ended up damage the market and the economy risk management risk short exaggeration to say the value management at the same time occasions VER starts with a JP Morgan in New York bank actually went to act as a broker dealer executing trades on behalf of its customers late 1980s trading trading trading on the front rather than executing trades for clients the company on money managers were struggling with how to say haters and they realize the problem was one of the measurement it was really difficult to come up with a good way to measure taking on Bing can't manage it thousands of different kinds of financial assets to summarize the different financial exposures understand proprietary trading operations 15 report because it was due by 4:15 PM 15 minutes after the New York market closed in their search for an accurate positions what do you eventually came up with basic statistical Siri to estimate risk let's start by making clear what the source of that risk yes Standard & Poor's 500 index let's say $100 million worth of the S&P 500 is it on any given day but has likely is it that will make a loss and moreover really like to know an approximate and a little bit of statistical theory data on the daily returns to the S&P 500 index points to estimate the distribution of daily returns to get into the details and then make a drawing of it this picture of the daily return on the S&P 500 index distribution is just above zero in other words and expect to make a little bit of money portfolio that's good because we really shouldn't be trading this picture is under the curve statistical distribution to represent probabilities say something like -4% distribution to the left of -40% probability of having a daily return less distribution gives us the probabilities asses idea does the percentiles of a distribution are the values of the random variable parts for example the 1st percentile of a distribution is the value of the random variable 1% of the area is the value of the random variable such that 50% of the area under the distribution of that number is representing the frequency percentile for example one day out of every 10 markets are only open on weekdays similarly if we identify the 5th percentile 5% of the time or once every 20 trading days does it's fine distribution 1st percentile traders an idea of what a really bad day in the market look like trading days a year financial Brown distributions have the same general shape and rely on 500 trading days of data because the 500 trading days in 2005 and 2006 or losses the distribution of May is significantly shifted to the right from distribution a in other words even when the distributions have the identical shape the 1st percentile from distribution be with me much higher and closer to zero in the 1st percentile from distribution a stated otherwise get the markets are trending up also trained up that is toward a smaller and smaller loss however if the market suck my changes in the distribution of jumps back to a distribution a reserves on the VR implied the distribution beef will be shocked by how much I lost an anticipated and this is basically what happened in Lake County eight the distribution of returns on mini asset jump Toyota left possible that traders often form very complicated portfolios with hundreds of different assets in order to estimate a single day returned on a complicated portfolio distribution of returns on many assets jumped toward the left and traders lost more than they thought possible but there's more more to it than that traders awesome very complicated portfolios with dozens or even hundreds of different assets in order to estimate a single distribution of returns on a complicated portfolio and tomorrow the correlations of the returns across portfolio in other words this correlation estimate are important input into the VA or analysis relations are staying overtime get the correlations change however this country medical change the estimated the AR in particular DAR estimates reflect the games from diversification are less than perfectly correlated Kaleo should have a VAR undiversified portfolio of the same size as long as the acid or a risk any returns aren't perfectly correlated what is the correlations increase 21 then the benefits of diversification go away and the AR of the supposedly diversified thoughtful can rise significantly and again this is exactly what happened thousand eight and highly correlated suddenly start a timer together as virtually all acids declined in value at the same time correlation zone for positive one increasing the size of the true value at risk this was another reason why the VR estimates from early 2008 vastly underestimated the actual risks the traders encountered tween the shift and the distribution of returns and the increase in correlations traders were absolutely shocked by the sudden failure of the VA are models thev the sudden failure of the VA are models they reacted by rushing for the exit which drink liquids different markets in the price is called that much faster confidence in models including value at risk as lead traders to set them selves up for massive losses they were unprepared to deal with the story of value crisis is one in which people didn't fully understand models notations and witnesses but there's another case of VOR related losses in which traders intentionally manipulated their own value at risk model and the risk management procedures built around it quite ironic because the company involved was J.P. Morgan Chase the successor after year 2000 merger of the bank at invented value at risk. I'm referring to now took place in 2011 2012 known as the London whale affair whale makes very large birds in command a lot of attention in the casinos in London whale what is a London trader anonymous at first accumulated change quotient in credit default swap to draw attention to his activities a credit default swap is a contract to provide insurance against the default of a company or government that has issued bonds bonds is called the reference entity the buying of the credit default swap pay the premium to the seller every six months so long as a reference and it doesn't affect what is the reference Saturday defaults then the seller promises to pay the difference between a par value of the reference entities bonds in the market value of the bones by the way the market value of the bonds doesn't fall to zero in case of default because the reference ID he will still be able to pay most of the money back towards our one of the most actively traded rid of insurance today in the center of trading is in London part of the traction is a credit the fat swap the ability to purchase insurance against a fat what is very useful put an even bigger attraction is that they give traders the ability to make bets related to short-term fluctuations in perceived credit risks the premiums and credit default swap some very day today as well as comes out if a company in ounces of bad quarter for example the premiums on credit default swap said ensure its debt will rise so a traitor who purchased a credit to fat swap on a companies debt before the announcement of a bad quarter turn around and sell it at a higher price earning a nice profit basically the game the traders in JP Morgan structured credit portfolio or SAP we're playing they try to identify credit default swap contracts that they thought we're under priced and purchase them a credit default swap over priced on that thou could call them for Marnan Chaca purchase them a credit default swap over priced so that they could sell them for Morgan Chase been trading credit default swap set at least the mid to thousands what really was organized into the structured credit portfolio in 2008 a couple of very successful years especially 2009 when JP Morgan traders made big purchases of credit default swap on General Motors which declare bankruptcy that year after that Morgan tried to reduce the risk that the traders and instructor credit petroleum for taking management set daily value at risk for the SAP of $15 million by the end of 2010 the traders had scale better positions to cover the equivalent of about $4 billion worth of bonds 11 the SCP traders began to think that credit default swap especially on European companies were under priced stated otherwise they certain most companies default risk with greater than what was reflected in the premiums quoted in the market so they began to buy a contracts by the end of 2011 swap positions head increase by a factor of 10 ensuring the equivalent of $50 billion in bonds in particular one JP Morgan trader XL who is based in London and likely find again to buy a particular type of credit default swap is at once and paid out if it means contractor farted pixel art premiums on his contract with far too low and he premiums on his contract with far too low and he kept buying them more than a bill in dollars worth called XL a caveman for being so stubborn about this trade they expected him to lose big on it three weeks before the contract expired American airlines unexpectedly declare bankruptcy November 2011 trade for a big loser to a $400 million winner I can probably guess that wasn't like it was still right his position even more his strategy relatively short maturities and sell relatively long maturities there's one obstacle though P Morgan Chase is upper management folio had already been expand to $95 million a day by the end of 2011 but by January 2012 the actual value portfolio was larger than the VR limit for the entire company and it still wasn't high enough for axle so he had a stack build a new value at risk model for the structure credit portfolio people complaining that the portfolio so he asked the analyst come up with a better model that produce lower value at risk estimate it wasn't place by the end of January 2012 much lower than the old ones are more than $130 million under the third model to $66 million with the new model well under the daily limit to surprise everyone involved including the animal is responsible for putting it together another model had been rushed and a lot of it by hand in the resulting wanted so the model was pressed into service and it was first name ahead go to Mandan well formation wasn't actually discovered until well after the problems emerged it's unclear whether the top managers at JP Morgan Chase CAR model if they've known hope they would've asked a few sensible questions such as the animal is lower the VA our estimate so much for the new equations that went into the correlation in probability calculations correct and why was the new model D ready to go and hadn't gone through the months of checking in testing model head to adoption of the new VR model set a red flags for the traders and managers of JP Morgan chase people started to ask those questions finally after the incident when they did they discovered that incorrect equations new model head indeed underestimated but correlations and the probabilities are making losses I've seen but they were certainly avoidable or model allowed for the size of a sport credit default swap under his daily be our limit by mid March on equivalent of $150 billion in bonds large market prices start it to me for to an anonymous London well of course the other two Raiders try to decipher what the weather will was up to speed positions were unsustainable as a result excellent got locked in unsustainable as a result excellent got locked in the battle of wills she was buying try to push up the price of credit for swaps well much are the rest of the market was selling trying to push the price down using battle for JP Morgan Marcus cinema about credit risk thousand 12 worked out a deal ticket Greece alliance the outlook for other European companies companies sell pushing down the premiums on credit default swap post on the riskiest companies are exactly the ones at its always buying to offset the prophecy made on Spotify song $600 million by the end of March 2012 over half of that occurred on single day March 23 the head of the division and actually order the traders to put put the phone down but they didn't think they should because they believe they would surely mean even more if they stopped cold so they continue to trade and Iraq up warm losses trying to climb in April including a $415 million loss on April 10 by the end of May the structured credit portfolio and lost more than $2 billion with no wind in sight Wale all over the business media on earth financial analyst J.P. Morgan Chase CEO Jamie Dimon Mr. losses as a complete all I can say is it this was one heck of a tea pot and it continue to boil over a portfolio was transferred to Morgan's investment banking division in July 2012 with a boil over a portfolio was transferred to Morgan's investment banking division in July 2012 with instructions to unwind the portfolio the process took several months and lead to even more losses by the end of 2012 wedding heads or past $6 billion in Morgan chase his size and financial strength the company was able to enjoy the masses form larger than those associated with any other Road trading incident is fellow traders fired for a while persecuted but in the summer of 2017 the US government announced that it had dropped all criminal and civil charges saying that it could not rely on the testimony of criminal XL been investigated by the British authorities but they took no action against him