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managers. Sumitomo was able to overcome the losses since it had a net worth of
$6 bn and another $8 bn in hidden reserves. The losses estimated to be $2.6 bn
amounted to only 10 per cent of Sumitomo's annual sales.
Conclusion & lessons learnt from derivatives
Derivatives are complex bank creations that are very hard to understand, but
the basic idea is that you can insure an investment you want to go upby betting
it will go down. The simplest form of derivative is a short sale: you can place a
bet that some asset you own will go down, so that you are covered whichever
way the asset moves.
Particularly, the Sumitomo case resulted in tighter internal supervision and
control procedures by trading firms and financial institutions the world over.
Disclosure must lead to a serious introspection among various financial
regulators and trading firms to improve the existing regulation and supervision
procedures.
Regulators have now become more aware and proactive than ever before as the
possibilities to manipulate the markets have become more practical with the
advent of complex and high leveraged instruments like derivatives. Prevention
here is always better than prosecution. Companies should also restrain
themselves from vesting too much power on a single employee and follow a job
rotation policy. By entering into fictitious trades and manipulating accounts,
Hamanaka successfully misled the management to believe that he was making
huge profits. Sound operational and monitoring system need to be in place to
keep track of activities of traders. Successful traders might require more, not
less, scrutiny.