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Answer: 1: operational risk. 2: equity price risk. 3: basis risk. 4: legal risk.
## Explanation The correct matching is **Option C**: 1. **A rogue trader within an institution** → **Operational Risk** - Rogue trading involves internal fraud and unauthorized activities, which fall under operational risk 2. **Stock XYZ decreases in price due to a market crisis** → **Equity Price Risk** - This is a specific type of market risk related to equity price movements 3. **Using a put option to hedge an equity exposure** → **Basis Risk** - Hedging with derivatives creates basis risk when the hedge doesn't perfectly offset the underlying exposure 4. **Counterparty sues bank to avoid meeting its obligations** → **Legal Risk** - Legal disputes and litigation represent legal risk ### Why other options are incorrect: - **Option A**: Incorrectly classifies rogue trader as business risk and hedging as strategic risk - **Option B**: Incorrectly classifies rogue trader as business risk - **Option D**: Incorrectly classifies stock price decrease as basis risk and hedging as credit risk This classification follows standard risk categorization in financial institutions.
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Match the following events to the corresponding risk type.
A rogue trader within an institution.
Stock XYZ decreases in price due to a market crisis.
Using a put option to hedge an equity exposure.
Counterparty sues bank to avoid meeting its obligations.
A
1: business risk. 2: basis risk. 3: strategic risk. 4: credit risk.
B
1: business risk. 2: market risk. 3: basis risk. 4: credit risk.
C
1: operational risk. 2: equity price risk. 3: basis risk. 4: legal risk.
D
1: operational risk, 2: basis risk. 3: credit risk. 4: legal risk.
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