FIN
Topic 6 Financial Disasters - Answers.pdf

Investigating large profits from unknown trading

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investigating large profits from unknown trading strategies. developing more accurate methods for computing collateral when borrowing bonds. incorporating liquidity risk into risk models. Explanation The actions at Banker's Trust led to tighter controls for dealing with clients at other firms. This case demonstrated the importance of matching trades with a client's needs and providing price quotes that are independent from the front office. It also demonstrated the importance of exercising caution with any form of communication that could eventually be made public, as it could damage a firm's reputation if unethical practices are present.
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Question #8 of 15 Question ID: 438686 A) B) C) D) Question #9 of 15 Question ID: 438688 A) B) C) D) References Question From: Topic Area 1 > Topic 6 > LO 1 Related Material: Key Concepts by LO All of the following are reasons that Nick Leeson engaged in aggressive speculative trading in the Barings Bank collapse except: his authority over settlement operations allowed him to hide trading losses. Barings' risk management models were flawed. he was attempting to recover previous trading losses. Barings' lack of risk management oversight. Explanation The collapse of Barings Bank was not an instance of flawed hedging models, but one of poor operational control. Leeson had previously incurred huge trading losses that, if revealed, would have cost him his job. In an effort to recover those losses, he abandoned his hedging strategies and speculated to recoup these losses. His influence and authority in back office operations allowed him to hide his speculative losses and report phantom profits. Leeson ignored and exceeded risk control limits, and senior management's lack of understanding about Leeson's role and oversight allowed his schemes to go undetected. References Question From: Topic Area 1 > Topic 6 > LO 1 Related Material: Key Concepts by LO Which of the following choices is an example of operational risk in the collapse of Barings? Failure to supervise the actions of its trader. Much of a company's assets were in illiquid derivative products. The Nikkei collapsed due to an earthquake. The default of Japanese industrial firms. Explanation The failure to supervise the actions of its trader is an example of operational risk.
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Question #10 of 15 Question ID: 438679 A) B) C) D) Question #11 of 15 Question ID: 438676 A) B) C) D) References Question From: Topic Area 1 > Topic 6 > LO 1 Related Material: Key Concepts by LO Between 1997 and 2002, a currency trader for Allied Irish Bank (AIB), John Rusnak, hid $691 million in losses from management. Rusnak used a number of deceptive means to hide these losses including: I. bullying back-office workers into not following-up on trade confirmations for imaginary trades.
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  • Fall '18
  • Derivative, Nick Leeson, Barings Bank, Rogue Trader

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