A large transfer on the government bond desk of a major bank loses 20 million in a year, in the process reducing the desks overall to 10 million. Senior management, on looking into the problem, determines that the trader repeatedly violated his position limits during this year. They also determine that the bulk of the loss took place in the last two weeks of the year when the trader increased his position dramatically and experienced 80 percent of his negative performance. The bank dismisses both the trader and his desk manager. The bank has an asymmetric incentive compensation contract arrangement with its traders.

1. Discuss the performance netting risk implications of this scenario.

2. Are there any reasons why the timing of the loss is particularly significant?

3. What mistakes did senior management make? Explain how these errors can be corrected.