Financial Risk Manager Part 1

Explanation

The correct answer is A because:

• The main lesson from the Orange County case centers on the need for firms to have a deep/detailed understanding of the inherent risks in their business models
• Robert Citron, Orange County's treasurer, used complex structured products to generate higher returns but later admitted he did not understand the positions he took or the risk exposure of the fund
• This case highlights the danger of using sophisticated financial instruments without proper risk comprehension

Why other options are incorrect:

• B, C, and D are lessons from the Barings case study involving Nick Leeson
• These options focus on operational controls, profit analysis, and investigation procedures, which were key issues in the Barings collapse but not the primary lesson from Orange County

Key Takeaway: The Orange County case demonstrates that even basic risk understanding can be insufficient when dealing with complex financial products, and firms need comprehensive risk awareness of their business models.