Answer-first summary for fast verification
Answer: The Orange County case emphasizes the importance of fully understanding complex derivative contracts before entering into them.
**A is correct.** Orange County imploded when Robert Citron made a large bet on inverse floating swaps, which was not fully understood by the county's board of directors, and blew up when interest rates rose. Citron later admitted that he did not understand either the position that he took or the risk exposure of the fund. **B is incorrect.** Poor correlation modeling was more a central theme of the subprime crisis or Long Term Capital Management (although the LTCM incident did not occur during a crisis.) The London Whale case took place in 2012, well after the end of the crisis, and its main themes were poor corporate governance with respect to risk concentration limits, position limits and VaR models. **C is incorrect.** This refers to the SWIFT case. The Northern Rock case was a run on the bank which occurred partly due to an overreliance on repurchase agreements and liquidity risk when repo financing dried up. **D is incorrect.** The LTCM case was a case of incorrect correlation modeling and inadequate stress testing. As a hedge fund, LTCM was not covered by regulatory capital requirements at the time.
Author: LeetQuiz .
Ultimate access to all questions.
No comments yet.
A risk consultant is presenting to a group of junior risk managers on how risk management failures contributed to financial disasters. The consultant focuses on the lessons learned from examining historical financial disasters in the US and around the world. Which of the following correctly describes a lesson learned from the given case?
A
The Orange County case emphasizes the importance of fully understanding complex derivative contracts before entering into them.
B
The London Whale case emphasizes the importance of recognizing that correlations can increase sharply during a global financial crisis.
C
The Northern Rock case emphasizes the importance of having a strong cybersecurity framework.
D
The LTCM case emphasizes the importance of meeting regulatory capital requirements.