Financial Risk Manager Part 1
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Victor Niederhoffer was a star trader who ran a very successful and well-established hedge fund. One strategy of the fund involved writing large quantities of uncovered (i.e., 'naked') deep out-of-the-money put options on the S&P 500 index and collecting the option premium. However, the strategy was undone in October 1997, and the fund's positions are liquidated by brokers. Which of the following statements correctly describe the reason for the failure of Niederhoffer's hedge fund?
A
Niederhoffer is lack of understanding of either the complex instruments he took nor the risk exposure of the fund.
B
Significant increase in interest rates pushed up the funding costs of the fund, so that the fund's profit margin became negative.
C
A combination of model risk, operational risk, and poor risk culture eventually led to the failure of Niederhoffer's hedge fund.
D
Assumptions underlying the strategy did not adequately account for the extreme tail risk that is potential in the market.