Baring’s money at risk based on that belief. However, a rise in interest rates would hurt him and, accordingly, he took short positions in Japanese Government Bonds futures contracts that would pay off if interest rates rose.
Lesson’s options positions were founded on his belief that volatility would be low. In face, he had traded enough contracts by the time of the collapse that he was causing volatility to remain low. Increasingly, he had to write a larger volume of options in order to get the same amount of premiums. When it became increasingly difficult for the options’ premiums to cover the margin calls on the futures, Leeson requested money from London. By February 23, 1995, BSLL had sent approximately $600 million to BFS. BSLL funded his request with little information, and with the understanding that a portion of the money was “loans to clients,” as portrayed on the BFS balance sheet.
The Losses
Lesson began trading futures in July 1992, and by the end of the month, he had bought and sold 2,051 Nikkei futures, suffering an immediate loss of approximately $64,000. By the end of the year, his losses in account 88888 were more than $3.2 million. The numbers turned somewhat in his favor by mid-1993 when the losses amounted to only $40,000. Unfortunately, Leeson intended to keep trading until his numbers were positive. By the end of 1993, the losses were approximately $30 million. At this point, Leeson wrote options for approximately $35 million to offset the futures losses and to avoid suspicion from London and the auditors. Throughout this time period, Leeson was reporting record profits, and was being heralded as a superstar.
By the end of 1994, the Nikkei had fallen to just under 20,000 and Leeson’s losses approached $330 million. Meanwhile, Barings executives were expecting an estimated $20 million in profits from BFS for 1994.