On what grounds can the case be made that the Orange County bankruptcy was not a derivative-related failure? On what grounds can a case be made that it was a derivative-related failure?

What will be an ideal response?

Orange County's misfortune appears to be related more to leverage, bad management, and relatively large holdings of fixed-income securities than it was to derivative instruments. On 1 December 1994, the day Orange County reported its $1.5 billion unrealized loss, OCIP held no forwards, futures, option, or swap contracts. The decline in its portfolio value had three main causes: structured notes ($722.8 million), fixed-income securities ($635.4 million), and reverse repurchase agreements ($67.1 million). Of these three, losses on fixed-income securities and reverse repos were not related to derivatives but rather caused by the rise in market interest rates and the reduction in spreads. Only if you considered repurchase agreements to be a form of forward contract could you classify these losses as derivative-related, and even then, they would account for less than 5% of the total decline in OCIP's portfolio value.
Of the losses on structured notes, inverse floaters accounted for more than three-quarters of the $722.8 million decline in portfolio value. An inverse floater can be replicated by a floating-rate note (with a bullet repayment) and an interest rate swap that has twice the notional principal. Therefore, rising interest rates caused both the value of the floating-rate portion and derivative portion of the structured note to fall. To calculate the pure derivative-related losses from these structured notes, one would have to separate the value of the derivative from the floating rate note.
When he was interviewed in April 1994, Citron revealed that only 20% of the OCIP portfolio was invested in derivative-related assets. If that figure were accurate and if these derivative positions resulted in losses proportional to their share of the portfolio, then at most, $328 million of the total $1.64 billion of losses were derivatives-related.