InvestorQ : I have heard of the Barings case. How did such a big loss happen?
Moii Chavate made post

I have heard of the Barings case. How did such a big loss happen?

Priyanka N answered.
3 years ago

When we talk of taking positions bigger than you can afford, one name that immediately comes to mind is Barings. The story of Barings highlights two of the fundamental errors of trading viz. unfettered risk taking and very weak risk management systems. Nick Leeson who was trading Asia out of their Singapore office had sold straddles on the Nikkei expecting the Nikkei to be in a range. The idea was that the Nikkei would expire worthless and the entire premium would be their income. The only problem was that Leeson had been manipulating the books by showing the premium income as earnings and reducing the margin requirement. To hide the margin requirement Leeson started to write strangles more aggressively and more at the money strangles. Unfortunately, disaster struck when there was a Kobe earthquake and the Nikkei crashed the next day. The full extent of the losses became clear only when the margin call was made and Barings defaulted leading to its entire capital being wiped. The big lesson is to not trade what you cannot afford.