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Answer: Management of Barings Bank failed to investigate the high level of reported profits that were associated with supposedly low-risk trading strategies.
B is correct. Nick Leeson, the rogue trader at Barings, was supposed to be running a low-risk, limited return arbitrage business out of his Singapore office, but in actuality he was investing in large speculative positions in Japanese stocks and interest rate futures and options. When Leeson fraudulently declared very substantial reported profits on his positions, management did not investigate the stream of large profits even though it was supposed to be associated with a low-risk strategy.
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A newly employed risk analyst at a financial institution is tasked with examining historical economic crises and identifying their root causes to better understand how financial risks manifest in practical situations. When focusing on the specific case of Barings Bank, which among the following statements is correct for the analyst to assert regarding the collapse of Barings Bank?
A
A rogue trader at Barings Bank convinced the bank's risk controllers that large unauthorized trades were necessary to hedge the bank's portfolios.
B
Management of Barings Bank failed to investigate the high level of reported profits that were associated with supposedly low-risk trading strategies.
C
Traders at Barings Bank traded primarily in OTC foreign currency swaps that allowed the bank to delay cash payments on losing trades.
D
Management of Barings Bank was not aware of the losses incurred by the bank until clients reported unusual losses on trades that were booked to their accounts.