Citibank Case Study

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Citibank’s Forex Losses Case Study

The Belgium Trader was dedicated to speculating the forex despite not paid commissions or bonus. This speculation was aimed at earning the bank high profits in the near future. The Belgium trader had a different view even after the prevailing condition of England struggling with imbalance of payment and their desire to devalue their currency. The currency trader was motivated to speculate the sterling pound- dollar forex by other reasons other than commissions or bonus from the bank if it made or maintained profits.

The Belgium trader was motivated by a desire to make short term profits by trading the Bank’s currency. The currency trader was aiming can making profits when the currency revalues in the near future. According to the previous events, the Bank of England had monitored and controlled the forex ensuring it was within the range of 2.78-2.82. He was speculating that the tripping sterling pound will have the Bank of England intervene and enable stability of the forex. This would have earned the currency trader exchange profits. This gamble to make profits in the forex motivated him to take the risk 

  Second currency trader was motivated by survival of the bank. Survival of the bank during these hard times in England when the company was expanding its operations would be important to the trader’s contract. The bank survival would mean approval of his contribution to the company. The trader would also be recognized for exceptional performance if the speculates got it right. He would stand a chance of future businesses with the bank. Therefore it can be said that the currency trader was motivated by a desire to create a good relationship with the bank that would win him future contracts.

Sitibank case study analysis

Question 2

If the sterling pound did not devalue but maintained at par value, Citibank would have earned profits as speculated by the Belgian trader in the near future. The speculation was long term and would earn profits to the bank. If stability was maintained or currency revalued by the Bank of England the earnings from the exchange rate would increase with time. The bank operations and expansion agenda would fall perfectly with the forecasts of the Belgium trader. This means that the current losses that were experienced would not have occurred rather the bank would have earned profits from scheme. However, the profits would start falling due to other factors in the economy caused by other factors other than foreign exchange rates. Increased balance of payments and inflation would have prevailed leading to slowed operations in the banking sector. Increasing interest rates to increase cash inflows in the economy would be functional in the short run and then have an adverse effect to the banking industry at large that would lead to losses.

The cash flow would be as follows;

Buying price $ 2.72

Sell at $ 2.78

$2.72*$100m= $272M

$2.78*$100m= 278M

Inflow cash= $6M

The cash inflow was expected within 12 Months.

Sitibank performance evaluation case study solution

Question 3

From the CITI bank scenario in 1964, directional trades with large commercial banks should be forbidden. Directional trades are prone to mistakes that lead to high losses to large commercial banks. Directional trades offering speculations to large commercial banks are not appropriate in short term and therefore misleads the company. For instance, the CITI Bank reliance to directional trades from the Belgium trader resulted to a mistake that led to $8 loss. Directional trades do not incorporate market volatility in making speculations. Market volatility highly affects large commercial banks that have large portfolio and make huge investments within a short period of time. Market volatility impacts both the forex and interest rates. Directional trades aren’t accurate in the short run though they might work in the long run. Therefore, it can be said directional trades engagements are not sensitive to issues that have great influence in the large commercial banks and should be forbidden to avoid losses.

Sitibank performance evaluation

 Question 4

Allowing trading rooms to engage in directional trades has to be accompanied by several considerations due to extreme possibilities. Directional trades speculations have high returns and are accompanied by high possibilities of losses. It is with these regards that the following conditions have to be considered.

First is the size of the company’s portfolio. Directional trades speculations requires an organization to have an abundant resources. These resources help the firm to survive in case of major losses in the process of speculations. Second consideration is the duration of speculations projected within a specified period of time. Directional trades are appropriate when making long term speculations. This allows the more time for the company to make profits. Therefore it important to consider the duration of speculation desired since directional trades is biased and gives reliable results to long term period speculations. The third condition is the risk tolerance of the company. Consideration if the company is high or low risk tolerance when deciding on future affairs is crucial when deciding if to use directional trades. Directional trades speculations are only appropriate when the company has a high risk tolerance. This is due to the nature of the directional trades in speculating. Therefore deciding on risk tolerance level will enable engagement of the directional trades. The fourth condition is the stability of the economy. It important to consider the market volatility that leads to instability in the economy. Directional trades accuracy is dependent of the economic stability and any changes can lead to high variations. Therefore, projections of economic stability should be considered first before engaging in directional trades speculations.

Sitibank performance evaluation case study

Question 5

The currency trader fooled Citibank control system by reporting a square position all the time. The Belgium trader purchased a 360 days forward pound sterling at $2.69, thereby creating a sterling pound long/asset position which had to be neutralized by a short/ liability position of matching amount so that is long term asset position would not attract the attention of  bank controllers. 

To satisfy the square position requirement, the trader had to sell short pound sterling to create to create an offsetting liability position (short term). The amount had be matching but forward contract maturity would be mismatched as our trader sold sterling 30 and 60days forward while buying 270 and 360 days forward, thereby reporting a square position all the time.

Also the networking of trading rooms which was used in foreign exchange market enabled the Belgium trader to fool the commercial bank because there no quasi-instantaneous communication and this made it increasingly difficult for the control to discover the trader speculative bet.

Bibliography

Chakravarti, R. & Botek, M., 2015. Dealing with Volatile Markets:Advanced Liquidity and Risk Management Techniques, New York: cirigroup, Inc..

citibank.com, 2015. FOREIGN EXCHANGE MARGIN TRADING. [Online] 

[Accessed 14 Nov 2016].

Levine, M., 2015. Citi Had No Time for Former Goldman Partners' FX Losses, New York: Bloomberg View.

Martens, P. & Martens, R., 2015. Citigroup’s $150 Million in Currency Losses Deserve a Closer Look. [Online] 

[Accessed Nov 2016].

sheldon

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