Financial Risk Manager Part 1
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In the early 1990s, Orange County treasurer Robert Citron had managed to borrow $12.9 million through the repo market. The borrowed funds were then used to purchase complex inverse floating-rate notes, whose coupon payments decline when interest rates rise. However, as the Federal Reserve raised interest rates over the course of 1994, the market value of Robert Citron's positions dropped substantially. Eventually, the Orange County was forced to file for bankruptcy. There are several lessons that we have drawn from the Orange County. Which of the following statements is not one of those lessons?
In the early 1990s, Orange County treasurer Robert Citron had managed to borrow $12.9 million through the repo market. The borrowed funds were then used to purchase complex inverse floating-rate notes, whose coupon payments decline when interest rates rise. However, as the Federal Reserve raised interest rates over the course of 1994, the market value of Robert Citron's positions dropped substantially. Eventually, the Orange County was forced to file for bankruptcy. There are several lessons that we have drawn from the Orange County. Which of the following statements is not one of those lessons?
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A
Beware the unconstrained star performer, even when he or she has a long track record. Where there is excess reward, there is risk though it might take time to surface.
B
Risk-averse investors must tie investment objectives to investment actions by means of a strict framework of investment policies, guidelines, risk reporting and independent and expert oversight.
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