Price Dislocations and Risk Management: Lessons from a Large Options Trading Loss

35 Pages Posted: 21 Jun 2016

See all articles by Bengt Pramborg

Bengt Pramborg

Swedish Export Credit Corporation

Anders Stenkrona

Stenkrona Investment AB

Date Written: June 19, 2016

Abstract

On May 8, 2007, the largest trading loss thus far reported in Sweden was announced by Carnegie Investment Bank, caused by a revaluation of the bank’s options portfolio. Among consequences, the bank’s CEO was forced to resign, the bank was fined a maximum penalty from the Swedish FSA, and three option traders were accused of market price manipulations and exploitation of inefficient internal procedures. Using unique data from the Swedish Economic Crimes Bureau, this paper provides a hands-on account of how market price were dislocated and shows the actual trading patterns behind the dislocations. Internal procedures at the bank failed and the paper provides some important lessons regarding operational risk management practices.

Keywords: Pricing Dislocation, Illiquid Markets, Risk Management, Operational Risk, Rogue Trading, Trading Loss, Clinical Case

JEL Classification: G24, G32

Suggested Citation

Pramborg, Bengt and Stenkrona, Anders, Price Dislocations and Risk Management: Lessons from a Large Options Trading Loss (June 19, 2016). Available at SSRN: https://ssrn.com/abstract=2797870 or http://dx.doi.org/10.2139/ssrn.2797870

Bengt Pramborg (Contact Author)

Swedish Export Credit Corporation

Box 194
Stockholm, 101 23
Sweden

Anders Stenkrona

Stenkrona Investment AB ( email )

Nantesvägen 55
Åkersberga, Stockholm 184 94
Sweden

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