Explanation

Correct Answer: A - Liquidity risk

Enron (2001):

• Used complex off-balance sheet entities to hide debt
• When these practices were exposed, they couldn't access funding
• Credit rating downgrades triggered liquidity crisis
• Unable to meet short-term obligations despite appearing solvent

London Whale (JPMorgan Chase, 2012):

• Massive credit derivative positions in the CIO office
• Positions became too large and illiquid to unwind
• When market moved against them, couldn't exit positions without huge losses
• Illiquid positions created massive mark-to-market losses

Common Liquidity Risk Factors:

1. Market liquidity risk: Inability to exit positions without significant price impact
2. Funding liquidity risk: Inability to obtain financing to meet obligations
3. Asset-liability mismatch: Short-term funding for long-term positions

Other risk considerations:

• Both cases involved operational risk (poor controls)
• Market risk (positions moving against them)
• However, the immediate trigger for both failures was liquidity risk

Both organizations suffered from positions that became too large and illiquid, making them vulnerable when market conditions changed.