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Answer: Make the Treasury Department a profit center, so capital is not wasted
**Correct answer: D** Hull's lessons for avoiding derivatives misuse include: - **Supplement VaR with scenario analysis and stress tests** to capture extreme outcomes. - **Separate the front, middle, and back office** so trading, risk control, and settlement are independent. - **Do not ignore liquidity risk**, because positions may be impossible to unwind or hedge in stressed markets. Making the **Treasury Department a profit center** is the opposite of good risk management. It can create incentives to take excessive risk, so it is **not** a recommended lesson.
Author: Manit Arora
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Question 140.3 According to Hull, EACH of the following is a lesson in regard to avoiding the mis-use of derivatives EXCEPT:
A
Supplement VaR with scenario analysis and stress tests
B
Separate the front, middle, and back office
C
Do not ignore liquidity risk
D
Make the Treasury Department a profit center, so capital is not wasted
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