Case Teaching Package
A case teaching package is available for this case. It includes strategies for case presentation, key concepts, solutions to the assignment questions in the case, and suggestions for the most effective ways to work this case into your course.

Length
This case is 12 pages in length and its case teaching package is 8 pages.

Abstract

In early 1995, the State of Wisconsin Investment Board, which manages the retirement fund and other funds for Wisconsin state and local governments, lost $95 million from twelve derivatives transactions in its $6.7 billion portfolio of short-term, interest-bearing securities. The complex and speculative nature of the transactions raised a number of issues. Were the transactions appropriate for the fund? Was the fund manager aware of leverage imbedded in the payoff formula? Were the transactions consistent with the fund's stated objectives? Was the fund manager misled by the derivatives dealer? Were the fund's personnel sufficiently informed about the uses and risks of derivatives? Did the fund have an adequate risk management system?

Linkages to Textbooks or Journal Articles/Fit Within a Course

The case is appropriate for use primarily in courses dealing with derivatives and risk management. Although the swap transactions that produced the losses are complex, the case does not require sophisticated analyses and deals largely with qualitative issues in the operation of a large investment management organization. Consequently, it can be used in graduate as well as undergraduate classes. The case is particularly useful for illustrating how a large sophisticated organization with a policy on the use of derivatives can, nonetheless, get into trouble when the derivatives are either unsuitable, not understood by the appropriate personnel or not monitored in a risk management system.

Textbooks have not yet adequately covered these types of problems. Instructors might wish to use the case to introduce these issues where textbook coverage is inadequate. The case would also be appropriate for investments classes where the instructor wishes to cover the material dealing with the management of risk in a pension fund.

Prereading Materials Students should be familiar with the basic concepts involved in swaps, but this material is adequately covered in most derivatives textbooks. Detailed knowledge of swaps is not necessary, however, and the case provides a brief appendix on swaps.

Study Questions

1. What is the first thing you would do if you were the Executive Director?
2. What action, if any, should be taken in regard to the open positions?
3. What information should be made public in regard to the losses?
4. How were the open positions established without the Executive Director being aware of the transactions or the risks they posed?
5. Did Bankers Trust and possibly other dealers engage in deceptive sales practices in the transactions conducted with SWIB?
6. Should disciplinary action be taken in regard to the portfolio manager who executed the transactions?
7. Were the portfolio managers, executive officers, and trustees sufficiently educated on the proper use of derivatives? Is additional training war-ranted?
8. What changes should be instituted to establish or improve SWIB's risk management system?

Key Words

derivatives, risk management, pension funds, swaps

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