Proctor and Gamble Derivative Mishap

7/25/2019 Proctor and Gamble Derivative Mishap

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A TALE OF DERIVATIVES WO



CASEBACKGROU

ND



1990

…Outstandin

g !ng t"#$d"%t !& '(B…

N!)"$%"# 199*+

,-G "nt"#"dint! a ( ."a#

s/a /itBan2"#s T#ust



3L")"#ag"D"#i)ati)"4

…5ig"# int"#"st#at"s tan t"

usua ain)ania s/a

…

Fi6"dF!ating…

,-G7s g!a !&#"du8ingint"#"st

"6"ns" %.'100 $ii!n

…

S/a /as%as"d !n

!ating US#at" d!a#s

andD"uts8"

$a#2s

'…

E6!sing ,-G t!g#"at"# ":"8ts

!& $a#2"t



,-G

assu$"dtat

G"#$anand USint"#"st

#at"s /i&a

…F"%#ua#. ;+

199; FEDann!un8"dan in8#"as"in int"#"st

#at"s a&t"#t#"" ."a#s!&

8!ntinu!usd"8in"

…Causing t"

s/a t!in8#"as" %. ;<(

%asis !ints=,-G aid

'19(<( > $!#"tan "6"8t"d



,ROBLE>SIDENTIFIED



T" t"#$s /"#" &a# &#!$ t"usua ain )ania s/a usuat"#$sBan2"#s T#ust #"s"nt"d a

di:"#"nt &!#$ua ?d!"sn7t us"t" LIBOR #at"@C!ntains a )!ati" 8!$!n"nt t"s#"ad ?s!u#8" !& ")"#ag"@ $agni&.ing

an. gain !# !ss



,-G did n!t a. att"nti!n t! t" n"/s8i#8uating a%!ut t" u8!$ing in8#"as"in int"#"st #at"s

,-G7s %"a)i!# /as a &!#$ !&

s"8uati!n+ 8!nt#a#. t! t"i#8ai$<In t"i# %!!2s+ t" s/a /as a &!#$ !&"dging du" t! its &a)!#a%"

a88!unting t#"at$"nt<



N! 8"a# ")auati!n !& t" t"#$s !& t"s/a in ,-G7s sid" ?t"$t"d %. t"!ssi%" gain@

Fai"d t! $a2" t"i# !/n

8!$utati!ns #st and t! $a2"a s"nsiti)it. ana.sis,"!" in 8a#g" a82"d t" a#!#iat"")" !& "6"#tis" /it /"a2 su"#)isi!n

&#!$ $anag"$"nt



ROOT CAUSE

,-G7s &aiu#" t! &u.

und"#stand t" s/at"#$s and t"i# a82 !&

att"nti!n #"ga#ding"6t"#na &a8t!#s<



ALTERNATIVECOURSES OFACTION



C!ns"#)ati)"a#!a8

Usua Vania S/aT"#$s

Using LIBOR Rat"s

S"nsiti)it. Ana.sis

1

*

;



C!ns"#)ati)"a#!a8

1Ris2 a)"#s" tan #is2

s""2ing

Ent"#ing int! si$"#d"#i)ati)" 8!nt#a8ts su8

us &!#/a#ds

5"dg" inst"ad !&s"8uating

…………………………………

…………………………………………

………



Usua Vania S/aT"#$s

*

Fa$iia#it. /it t" t"#$s

,#!)iding 6"d int"#"st#at"s "6!sing t"$ t!

"ss"# #is2s

L"ss #is2. and un")"#ag"d

…………………………………

…………………………………………

………



Using LIBOR #at"s

,-G /!ud a)" su:"# t"sa$" d"$is" %"8aus" !&

t" in8#"asing t#"nd inLIBOR #at"s

NOT EFFECTIVE

…………………………………

………

…………………………………

………



Usua Vania S/aT"#$s

*

Find "n!ug in&!#$ati!n#"ga#ding t" 8ang" in s#"ad as

int"#"st #at"s 8ang"

,-G 8!ud a)" a %"tt"# id"a !&/at t". /"#" g!ing int!

A:"8ting t"i# d"8isi!n t! a88"tt" s/a !# n!t

…………………………………

…………………………………………

………



,RO,OSEDSOLUTION



,-G s!ud 8!ndu8t s"nsiti)it. ana.sis%"&!#" "nt"#ing int! t" s/a ag#""$"nt<

Wit tis+ t". s!ud a)" s""n t"!ssi%" !ut8!$"s and anti8iat"d!ssi%" u8tuati!ns in t" $a#2"t<

,-G 8!ud 8!nsid"# $!#" #is2 a)"#s"d"#i)ati)"s

Tis /!ud a)" sa)"d ,-G &#!$ itsd"#i)ati)" $isa+ an a&t"#ta6 !ss !&

'10* $ii!n d!a#s<

Proctor and Gamble Derivative Mishap

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