Topics: Risk, Swap, Sumitomo Corporation Pages: 11 (3903 words) Published: January 20, 2013
Table of Contents

1.Case study on the Sumitomo Corporation on Derivatives Lossess & Lessons Learned 4 1.1.Introduction4
1.2.Background of the Company4
1.3.Sumitomo Copper Scandals5
1.4.Lessons Learned from Sumitomo Case7
2. Case study on the Orange Country on Derivatives Lossess & Lessons Learned8 2.1. Lessons Learned from Orange Country Case9
3. Case study on the Procter & Gamble on Derivatives Lossess & Lessons Learned11 3.1. Lessons Learned from Procter & Gamble Case12
4. Case study on the Showa Shell Sekiyu on Derivatives Lossess & Lessons Learned13 4.1. Lessons Learned from Showa Shell Sekiyu Case14

1.Case Study on Sumitomo Corporation on Derivative Losses and Lesson Learned 1.1Introduction
Sumitomo Corporation was top in market in copper business in the world prior to 1996 in term of trading size and it operations. Copper business is part of their portfolio and it was delegated to Yasuo Hamanaka who was the Head of Copper Trading and he was engaged in illegal copper trading and faced extensive losses and massive cover-up. As the result of this loses, he attempted to avoid losses many times. This was against the rules and regulation of the London Metal Exchange (LME). LME created new regulation to prevent the market domination, as the result of this; he faced losses on his operations. There were two malfunctions recorded; he maintained two types of books, one is to showing big profit, and the second one is to keep secrete account, unauthorized trades over 10 years. No one except Hamanaka was not aware of accumulated loss of $ 1800 million. 1.2Background of the Company

Sumitomo Corporation is one of the subsidiaries of Sumitomo Group which is one of top 5 “Sogo Shosha” general trading in Japan. It has 120 overseas branches in 65 countries, and having diversified business of Metal, Mineral Resources, Energy, Chemical & Electronic and Infrastructure. Copper Department is one of the departments in Copper Corporation which is owned Mineral Resources, Energy, Chemical & Electronic Business unit. In 1800s, Sumitomo Corporation was diversified the business into Sumitomo Bank, Sumitomo Metals, and Sumitomo Corporation. In 1980, they obtained strong position & positive reputation in the Copper market. Competition in Copper industry was very high; Copper was traded on LME listed in London and COMEX in USA. Copper was placed 3rd used Metal after Iron & Aluminum. There were two types of market participants i.e. one is supplier who does physical supply, and the second is speculators who arbitrage deal without delivery. Sumitomo was acted as speculator and after acquiring mines in Philippines in 1984, Sumitomo changed from speculator to supplier. After 1988, they made of $3 to 4 million profit and they followed cost leadership strategy which caused huge loss because of having high inventory while declining demand. LME is popular for providing spot and future markets where clearing systems reduce counter party risks. The delivery would be taken place for the authorized warehouses and storage facility. The specification of copper would be included i.e. quality, trading unit, price quotation, trading month, minimum fluctuation, and tick value. The copper contract would meet the following conditions i.e. counter party information is open, and delivery condition is by the party, not LME. Yasuo Hamanaka was the Chief/Head of Copper Corporation. He was committed wrongful Act during the 1985-1996. He was referred as by many Mr. Five percent/Mr. Copper. He traded 0.5 million metric tons per year which was the 5 % of total world demand and having experience of 23 years in copper trading. 1.3Sumitomo Copper Scandals

From 1985, Hamanaka lost a total of $1800 million. He executed as many as $20 billion worth of unauthorized trades a year. His main strategy was the “short squeeze”. The future market was particularly vulnerable to manipulation since the market volume was relatively small....
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