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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.
B is correct. In B, systems failure or incorrect systems caused the problem. The losses are directly due to an operational risk exposure. In A and C, an increase in interest rates and the fall in the value of an investment, respectively, are both examples of market risk exposure. In D, failure to repay debt is an example of credit risk exposure.
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In a training seminar focused on understanding and managing operational risks, a supervisor from Firm W discusses various potential risks that could impact the firm's operations, both in the short-term and the long-term. Can you provide an example of a loss that Firm W might suffer as a result of an operational risk?
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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