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Answer: The data capture system of Firm W fails to capture the correct market rates causing derivative trades to be transacted at incorrect prices, resulting in significant losses.
The correct answer is B. In option B, the data capture system of Firm W fails to capture the correct market rates, leading to derivative trades being executed at incorrect prices and resulting in significant losses. This scenario directly illustrates a loss caused by an operational risk, which is the focus of the question. Operational risk arises from inadequate or failed internal processes, people, systems, or from external events. In contrast, options A and C describe losses resulting from market risk exposure, where changes in market variables such as interest rates or commodity prices impact financial instruments. Option D describes a credit risk exposure, where a counterparty fails to fulfill a legal obligation to settle a debt. The explanation provided in the file content clearly distinguishes operational risk from market and credit risks, emphasizing the importance of identifying and assessing operational risks through appropriate tools and processes as outlined in the "principles for the Sound Management of Operational Risk" by the Basel Committee on Banking Supervision.
Author: LeetQuiz Editorial Team
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In the context of a training seminar at Firm W, the supervisor is addressing different types of operational risks that the firm could face, both in the short-term and long-term. Can you provide an example of a loss that may arise from such an operational risk for Firm W?
A
After a surprise announcement by the central bank that interest rates would increase, bond prices fall and Firm W incurs a significant loss on its bond portfolio.
B
The data capture system of Firm W fails to capture the correct market rates causing derivative trades to be transacted at incorrect prices, resulting in significant losses.
C
As a result of an increase in commodity prices, the share price of a company that Firm W invested in falls significantly, causing major investment losses.
D
A counterparty of Firm W fails to settle its debt to Firm W, and in doing this, it is in breach of a legal agreement to pay for services rendered.
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