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Case Study of JP Morgan and the london whale

Case Study of JP Morgan and the london whale

I attached the case below, please read and answer these questions:

  1. How did JPMorgan find itself in this position? Develop a timeline of events from 2011 to the summer of 2012.
  2. Consider standard market risk management practices for financial institutions, such as VaR, which have been in place since the mid-1990s and are well understood.
  3. Why was the risk management of the SCP not sufficient to prevent such an extraordinary loss?
  4. Within the context of the case, which risk metric do you consider most appropriate: CS01, VaR, total MV exposure (and why)? Should liquidity of an asset be considered as well (why or why not)?
  5. With the benefit of hindsight, which approach to “marking-to-market” this particular position would have been the correct one — which policy should have been implemented? (Refer to pages 14 to 15 in the case.)
  6. Consider risk-weighted assets (RWA): Should they include net exposure or gross exposure? Should derivatives of all types be regarded as the same type of RWA?
  7. On a higher level: Is it appropriate to employ deriviatives in a cash management function (why or why not)?
  8. Consider the organizational structure and processes at JPMorgan in early 2011:
  9. How active should/can risk management be in terms of enforcing limits or breaches?
  10. Would it help to change the organizational structure of JPMorgan (why or why not)?
  11. If you were to redesign the risk management policy for the CIO, what would be your top 3 changes?

Answer preview for the paper on “Case Study of JP Morgan and the london whale”

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Question #1: How did JP Morgan find itself in this position? Develop a timeline of events from 2011 to the summer of 2012.

In the year 2011, JP Morgan improved its Synthetic Credit Portfolio SCP from $4 billion to about $51 billion. The SCP made a $1 billion credit derivative bet for a gain of $400 billion in November 2011 and in December the same year, Bank and Chief Investment Office (Cavanagh et al., 2012). CIO Administrators choose that improving economy would lessen the necessity for credit protection and thus CEO Jamie Dimon instructed CIO head Ina Drew to reduce the CIO’s Risk Weighted Assets (RWA). On December 22nd, CIO proposed to decrease RWA by manipulating models; it was quickly followed by the organization’s quantitative head Patt Hagan developing models that lowered SCP risk results (Bloomberg, 2013). On January 6th, 2012, the SCP trading breaches CS01 risk limit that is spread over up to May the same year when metrics are entirely overhauled. Later between the 16th and 20th of January, SCP trading caused a four-day breach in the bank-wide VAR. On 23rd the same month, Dimon and the Chief Risk Officer John Hogan take up measures by approving a temporary bank-wide VAR limit increase to end breach. It reduced the CIO’s VAR by 44%………..

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