Please answer question 5 only 5.1 Banco Mercantil Internacional\'s Forex Losses
ID: 2799134 • Letter: P
Question
Please answer question 5 only
5.1 Banco Mercantil Internacional's Forex Losses This case study accompanies Chapter 5 of International Corporate Finance A speculator is a man who observes the future and acts before it occurs. Bernard Baruch ROGUE TRADER On March 19, 2001, in the heyday of the Argentine currency board of fixed ex change rates, Banco Mercantil Internacional (BMI) the second-largest Mexican commercial bank with 177 offices in 11 Latin American loss of US$80 million. The loss was attributed to unauthorized forward speculation on the Argentine peso (ARS) by a Chilean trader in the bank's Buenos Aires branch. The amount of the underlying transactions was rumored to be close to USS1.8 bi lion, and initial reports indicated that the losses could be traced to short sales of the U.S. dollar for the Argentine peso. Preliminary accounts indicated that the trader was betting the Argentine peso would not devalue and that the fiscal situation would stabilize. Accordingly, the trader had purchased Argentine pesos for six and nine months' delivery at respective forward rates of ARS 1.15 and ARS 1.25 US$1, fully expecting that as Argentina restored economic growth, the forward discounts on the peso would narrow.1 Banco Mercantil's officials stated that the trader involved had violated corporate guidelines when he persisted in maintaining an uncovered position in his trading accounts. ForExplanation / Answer
The control system that Banco Mercantil should implement in order to prevent the recurrence of such a speculative scheme are:
a) It should have a computer programme or code that prevents the traders to cross a certain limit. In other words, as soon as the trader enters a value that is beyond the trade limit the computer will not accept it and will display an error message. This is necessary to prevent the traders from crossing the trade limit.
b) Banco Mercantil is keeping a track of the foreign exchange transactions on a net basis. But this will not be effective to control the excessive trading. Thus, an automated system has to be developed that will track each and every transaction and prevent the crossing of trade limits.
c) The whole process of tracking financial transactions has to be computerized and automated. Human tracking will definitely have loopholes.
d) The tracking has to be live tracking i.e. tracking has to be carried out as and when the trade is being done. It should not be a end of the day activity. In this way any transaction that is beyond limits can be stopped and such speculative schemes can be controlled.