FIN
Topic 6 Financial Disasters - Answers.pdf

Ii reporting substantial fake gains from small

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II. reporting substantial fake gains from small currency arbitrage positions. I only. Both I and II. II only. Neither I nor II. Explanation Management believed that Rusnak was running a small currency arbitrage trading strategy. However, the strategy actually being implemented involved very large currency positions. Rusnak made a point of only reporting modest gains as to not raise any red flags. References Question From: Topic Area 1 > Topic 6 > LO 1 Related Material: Key Concepts by LO Which of the following are examples of model risk illustrated in the Long-Term Capital Management (LTCM) case? I. Poor management oversight. II. Financial reporting standards. II only. Neither I nor II. I only. Both I and II. Explanation
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Question #12 of 15 Question ID: 438677 A) B) C) D) Question #13 of 15 Question ID: 438691 A) B) C) D) LTCM's models underestimated the extent to which securities prices would move together in times of economic crisis. The models also failed to anticipate that multiple economic shocks might occur in clusters through time (i.e., be positively autocorrelated) as economic history suggests. Poor management oversight and financial reporting standards are not issues in the LTCM case. References Question From: Topic Area 1 > Topic 6 > LO 1 Related Material: Key Concepts by LO Which of the following factors contributed to the collapse of Barings Bank? Basis risk. A trader having authority in the settlement process. Japanese financial reporting requirements. A maturity mismatch between the hedging instrument and the risk being hedged. Explanation In an effort to recover trading losses, Nick Leeson abandoned hedged arbitrage strategies on the Nikkei 225 in favor of extremely speculative strategies that exposed the firm to enormous risk in the event of a market downfall. His activities went undetected because his influence on the settlement process and back-office operations allowed him to report phony gains to management. Reporting requirements, basis risk, and maturity mismatch were not factors in the collapse. References Question From: Topic Area 1 > Topic 6 > LO 1 Related Material: Key Concepts by LO In general, the bankruptcy of Barings Bank might have been avoided with: a more moderate use of leverage. maturity matching between the hedging instrument and the asset being hedged. pricing models less vulnerable to model risk. stronger reporting and control systems.
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Question #14 of 15 Question ID: 438687 A) B) C) D) Question #15 of 15 Question ID: 438683 Explanation In general, the Barings Bank collapse was the result of poor operational controls characterized by poor reporting systems, weak management oversight, and poor organizational structure. Leeson's dual responsibility for trading and settlement enabled him to hide trading losses in accounts that were not reported to management.
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  • Fall '18
  • Derivative, Nick Leeson, Barings Bank, Rogue Trader

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