05 Jul Case Study: JPMorgan and The London Whale
Question Description
I attached the case below, please read and answer these questions:
1. How did JPMorgan find itself in this position? Develop a timeline of events from 2011 to the summer of 2012.
2. Consider standard market risk management practices for financial institutions, such as VaR, which have been in place since the mid-1990s and are well understood.
a. Why was the risk management of the SCP not sufficient to prevent such an extraordinary loss?
b. Within the context of the case, which risk metric do you consider most appropriate: CS01, VaR, total MV exposure (and why)? Should liquidity of an asset be considered as well (why or why not)?
c. With the benefit of hindsight, which approach to “marking-to-market” this particular position would have been the correct one — which policy should have been implemented? (Refer to pages 14 to 15 in the case.)
d. Consider risk-weighted assets (RWA): Should they include net exposure or gross exposure? Should derivatives of all types be regarded as the same type of RWA?
3. On a higher level: Is it appropriate to employ deriviatives in a cash management function (why or why not)?
4. Consider the organizational structure and processes at JPMorgan in early 2011:
a. How active should/can risk management be in terms of enforcing limits or breaches?
b. Would it help to change the organizational structure of JPMorgan (why or why not)?
c. If you were to redesign the risk management policy for the CIO, what would be your top 3 changes?
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