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Answer: Management of Barings Bank failed to investigate the high level of reported profits that were associated with supposedly low-risk trading strategies.
**Correct Answer: B** **Explanation:** B is correct. Nick Leeson, the rogue trader at Barings, was supposed to be running a low-risk, limited return arbitrage business out of his Singapore office, but in actuality he was investing in large speculative positions in Japanese stocks and interest rate futures and options. When Leeson fraudulently declared very substantial reported profits on his positions, management did not investigate the stream of large profits even though it was supposed to be associated with a low-risk strategy. A is incorrect. The risk controllers' inquiries to investigate the large stream of profits reported by Nick Leeson were dismissed by Leeson's superiors, citing the bank's unique ability to exploit an arbitrage situation. The superiors did not cite hedging as a reason for wanting to maintain the positions. C and D are incorrect. These scenarios did not occur at Barings Bank.
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A newly hired risk analyst at a bank is studying historical cases of financial disasters and their causes to learn how financial risks can arise in practice. The analyst focuses on the example of Barings Bank. Which of the following statements is correct for the analyst to make regarding the collapse of Barings Bank?
A
A rogue trader at Barings Bank convinced the bank's risk controllers that large unauthorized trades were necessary to hedge the bank's portfolios.
B
Management of Barings Bank failed to investigate the high level of reported profits that were associated with supposedly low-risk trading strategies.
C
Traders at Barings Bank traded primarily in OTC foreign currency swaps that allowed the bank to delay cash payments on losing trades.
D
Management of Barings Bank was not aware of the losses incurred by the bank until clients reported unusual losses on trades that were booked to their accounts.
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