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Risk Management and Derivatives

In: JPMorgan’s Fall and Revival

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  • Nicholas P. Sargen

    (Nicholas Sargen Advisory LLC)

Abstract

One area in which Morgan had considerable expertise was the application of risk management procedures. Weatherstone’s goal was to understand how vulnerable Morgan’s positions were to market fluctuations and how much capital the bank should hold. In 1989, a novel practice was introduced known as the “4:15” report that quantified the amount of risk the bank was running in its business lines at the end of each day. In 1992, Morgan launched a methodology called RiskMetrics to the marketplace. Morgan was also involved in the creation of financial derivatives that could be used to hedge against adverse price movements or to speculate on price swings. In 1994, the derivatives unit headed by Peter Hancock pioneered the development of credit default swaps, tradable instruments that financial institutions could deploy to reduce credit risks on loans. During the 2008 Financial Crisis, critics claimed this practice exacerbated the crisis. However, Morgan understood the risks and emerged in better shape than its rivals.

Suggested Citation

  • Nicholas P. Sargen, 2020. "Risk Management and Derivatives," Springer Books, in: JPMorgan’s Fall and Revival, chapter 14, pages 137-149, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-47058-6_14
    DOI: 10.1007/978-3-030-47058-6_14
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