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Answer: Management failed to investigate high levels of reported profits even though they were associated with a low-risk trading strategy.
The correct answer is B. Management failed to investigate high levels of reported profits even though they were associated with a low-risk trading strategy. This is because Nick Leeson, a trader at Barings Bank, was supposed to be running a low-risk arbitrage business, but instead, he was investing in large speculative positions in Japanese stocks and interest rate futures and options. When he fraudulently reported substantial profits on these high-risk positions, the bank's management did not investigate the unusually high profits, which should have been a red flag given the supposed low-risk nature of the trading strategy. This lack of oversight and failure to question the reported profits allowed Leeson's unauthorized trading to continue unchecked, ultimately leading to the collapse of Barings Bank after incurring over USD 1 billion in losses.
Author: LeetQuiz Editorial Team
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Consider the following scenario: Barings Bank, a distinguished financial institution, experienced a catastrophic collapse, leading to its bankruptcy. This downfall was triggered by Nick Leeson, a rogue trader within the bank, who accumulated over USD 1 billion in unauthorized trading losses. Which of the following statements accurately describes this situation?
A
Leeson avoided reporting the unauthorized trades by convincing the head of his back office that they did not need to be reported.
B
Management failed to investigate high levels of reported profits even though they were associated with a low-risk trading strategy.
C
Leeson traded primarily in OTC foreign currency swaps that allowed Barings Bank to delay cash payments on losing trades until the first payment was due.
D
The loss at Barings Bank was detected when several customers complained of losses on trades that were booked to their accounts.
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