Fatih Kansoy

Derivatives case studies

Forty-two episodes taught in Risk Management and Derivatives at Shanghai Jiao Tong University. Each one tells what happened, gives the data and draws the lesson. Most also work through the mechanics and the mathematics in the language of the course.

The 1980s

1980

Silver Thursday and the Hunt brothers

Two brothers tried to corner the silver market with borrowed money, and an emergency rule change to stop the squeeze crashed the price and their fortune.

1987

Black Monday and portfolio insurance

A dynamic hedging strategy that sold futures automatically as prices fell is widely blamed for amplifying the largest one-day stock market crash on record.

The 1990s

1993

Metallgesellschaft's rolling-hedge collapse

A firm hedged long-dated fixed-price oil supply contracts by rolling short-dated futures, and a price fall drained cash faster than the hedge could prove its worth.

1994

Orange County, California and Robert Citron

A county treasurer borrowed short and invested long to bet on falling rates, and a sharp rate rise triggered the largest municipal bankruptcy in US history at the time.

1995

Barings Bank and Nick Leeson

A single trader's hidden Nikkei futures and short-straddle positions bankrupted Britain's oldest merchant bank in weeks.

1995

The '327' China government bond futures incident

A broker dumped a massive last-minute sell order on a government bond futures contract to avoid a squeeze, and regulators shut the whole market down for 18 years.

1998

Long-Term Capital Management

A hedge fund used huge leverage to bet on small pricing gaps closing, and a shock in an unrelated market widened every spread at once.

The 2000s

2000

Palm and 3Com's negative stub

A parent company's stake in its own spun-off subsidiary implied a negative value for the rest of the business, and short-sale constraints stopped arbitrage from closing the gap.

2005

State Reserve Bureau copper short (Liu Qibing)

A Chinese state trader built a large short position on LME copper betting prices would fall, and got caught in a squeeze as prices kept rising.

2007

Goldman Sachs Abacus 2007-AC1

A bank let a hedge fund that was secretly betting against a synthetic mortgage-bond deal help pick what went into it, then sold the deal to other investors.

2007–08

Hong Kong accumulators, 'I kill you later'

Banks sold retail and corporate clients in Hong Kong a leveraged structure that bought cheap stock in a rising market but forced double purchases in a falling one.

2007

Northern Rock

A UK bank funded long mortgages with short-term wholesale borrowing, and when that funding dried up it suffered Britain's first bank run in a century.

2008

CITIC Pacific's Australian-dollar accumulators

A Chinese conglomerate sold FX accumulator contracts to hedge an Australian project, and the currency moved the wrong way at leveraged scale.

2008–2011

Jefferson County sewer swaps

A county used swaps to make variable-rate sewer bonds behave like fixed-rate debt, and basis risk plus corruption charges ended in the largest US municipal bankruptcy of its time.

2008

Societe Generale and Jerome Kerviel

A junior trader hid a huge directional bet on European equity index futures behind fake offsetting trades until the unwind cost billions.

2008

Southwest Airlines fuel hedging

A disciplined multi-year fuel hedging programme saved billions, but even a well-run hedge produced a mark-to-market loss when oil crashed.

2008

The 2008 US short-sale ban

A temporary ban on short-selling financial stocks after Lehman's collapse pushed apparent put-call parity violations that were really the priced cost of the ban.

The 2010s

2012–2024

LIBOR manipulation, its death, and SOFR

Banks were caught manipulating the benchmark rate underlying trillions of dollars of contracts, and regulators spent a decade replacing it with SOFR.

Recurring

CNY and CNH: one currency, two markets

China's managed onshore yuan and free-floating offshore yuan trade at different rates, and the gap widens whenever capital controls are under stress.

The 2020s

2020

Bank of China's Crude Oil Treasure

A retail product tracking WTI rolled into the contract that went negative, and thousands of retail investors ended up owing the bank money.

2020

Gold's London-COMEX EFP dislocation

Grounded flights and shut refineries jammed the physical delivery chain for gold, blowing out the normal cash-and-carry spread between London and New York.

2020

Negative WTI and floating storage

Storage at the delivery point ran out of room, and traders holding expiring oil futures paid buyers to take the contracts off their hands.

2020

The Treasury basis trade and March 2020

Leveraged funds bet on a tiny gap between Treasury bonds and Treasury futures, and a dash for cash forced a rapid, disorderly unwind.

2022

European utilities' 2022 margin calls

Utilities that had correctly hedged future power output ran short of cash when margin calls on their winning futures hedges doubled.

2022

LME nickel squeeze and Tsingshan

A huge short position in nickel was squeezed as prices doubled in hours, and the exchange cancelled trades to stop the clearing house failing.

2022–2024

Snowball autocallables and the CSI 500/1000 knock-ins

A popular retail product paid steady income unless the index fell through a barrier, and a market slide triggered mass knock-ins at the same time.

2022

The UK LDI gilt crisis

Pension funds used leveraged interest-rate hedges that were working exactly as designed, until a budget shock triggered a collateral spiral that forced the central bank to step in.

2023

Silicon Valley Bank collapse

A bank funded long-dated bonds with short-term deposits, and rising rates plus a bank run turned an unrealised loss into a failure within days.

2023

Swap Connect and the Shanghai Clearing House

China opened its interest-rate swap market to overseas investors through a cross-border link, deliberately designed to avoid past clearing failures.

2025

The Loto-Quebec lottery choice

A real lottery winner's choice between a lump sum and payments for life is used to teach compounding, the zero curve and duration.