Barings Bankruptcy And Financial Derivatives

This is the first systematic source which tries to explain how and why the 233-year old and the World's oldest merchant bank went into bankruptcy in a few days. It includes three parts with 10 chapters. Part I first describes what happened, then traces back the birth and historical glory of the Barings bank and family, and finally describes how it was sold to the Internationale Nederlanden Groep (ING). As many terms of financial derivatives are used in the first part, we try to provide an easy and systematic way to clarify the related financial derivatives products in Part II. This part first gives a general discussion of financial derivatives and a brief review of the historical development, growth, and magnitude of the financial derivatives markets. It then concentrates on futures and options in two chapters. Finally, we explain the hedging and speculating functions of financial derivatives and how they can be used in combination to achieve particular objectives! . Part III provides necessary information on the Japanese financial markets and then analyzes how a single trader could have so much power as to bring about Barings fall. Finally, we try to provide the lessons from this event.

Reviews:

Zhang's Barings Bankruptcy presents a workable, though at times dry treatment of the Barings debacle and financial derivatives. Despite what the web page blurb says, this book only speculates at what caused the Barings bankruptcy. Zhang hints at certain things, but does not give us any real facts beyond what made the headlines throughout the world.At first glance, the book is organized fairly well. Starting with the fall of the bank in early 1995, the first three chapters of the book give some interesting background on the Barings family and merchant bank. We also learn that at one point, the Barings family was considered to be one of the six great powers of Europe. In part two of the book, readers who are unfamiliar with exotic financial instruments received a thorough and comprehensive introduction to options, futures, and other exotic derivatives. Throughout the explanations Zhang employs vivid analogies and clever examples to get his point across. In part three of the book, Zhang makes a weak though well substantiated attempt to implicate the Japanese economy as the real culprit and devotes nearly a whole chapter to explaining the state of the Japanese economy at the time of the bankruptcy. Zhang gives us a brief history lesson of the Japanese political economy and Japanese financial markets, and a snapshot of Japanese economic and financial activity in and around the first two months of 1995. Zhang agrees with such financial scholars as Jorion, author of Big Bets Gone Bad, that the people who wield these exotic derivative products are often more dangerous than the products themselves. Here, just as in the case of Robert L. Citron's key role in the Orange county bankruptcy and the rocket scientists at the helm of Long Term Capital Management's financial collapse, this line of reasoning may very well be true.