Answer-first summary for fast verification
Answer: Management failed to investigate high levels of reported profits even though they were associated with a low-risk trading strategy.
## Explanation **Correct Answer: B** **Historical Context of Barings Bank Collapse:** - Nick Leeson was trading futures and options on the Singapore International Monetary Exchange (SIMEX), not OTC foreign currency swaps - He exploited a weakness in the bank's internal controls where he was both the head trader and responsible for back-office operations in Singapore - Leeson created a secret error account (account 88888) to hide his mounting losses - Management failed to question the unusually high profits from what was supposed to be a low-risk arbitrage strategy - The collapse was triggered when Leeson's massive positions in Nikkei 225 futures went wrong during the Kobe earthquake **Analysis of Options:** - **A**: Incorrect - Leeson didn't need to convince anyone as he controlled both trading and settlement functions - **B**: **CORRECT** - Management failed to investigate the suspiciously high profits from what should have been low-risk arbitrage - **C**: Incorrect - Leeson traded primarily in exchange-traded futures and options, not OTC swaps - **D**: Incorrect - The losses were discovered through internal investigations, not customer complaints **Key Risk Management Lessons:** - Separation of front and back office functions is critical - Management must investigate unusually high profits from low-risk strategies - Proper risk monitoring and limits are essential - Concentration risk in single traders must be controlled
Author: LeetQuiz .
Ultimate access to all questions.
No comments yet.
Barings was forced to declare bankruptcy after reporting over USD 1 billion in unauthorized trading losses by a single trader, Nick Leeson. Which of the following statements concerning the collapse of Barings is correct?
A
Leeson avoided reporting the unauthorized trades by convincing the head of his back office that they did not need to be reported.
B
Management failed to investigate high levels of reported profits even though they were associated with a low-risk trading strategy.
C
Leeson traded primarily in OTC foreign currency swaps which allowed Barings to delay cash payments on losing trades until the first payment was due.
D
The loss at Barings was detected when several customers complained of losses on trades that were booked to their accounts.