Explanation:
The main lesson learned from the Orange County case has much to do with the need for firms to have a deep/detailed basic understanding of the inherent risks in their business models. Robert Citron, Orange County’s treasurer, used complex structured products in an attempt to generate a higher than average return. Citron later admitted he understood neither the position he took nor the risk exposure of the fund with respect to these products. Choices B, C, and D are all lessons under the Barings case study that revolves around Nick Leeson, a trader.
Things to Remember
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Q.4328 Which of the following lessons is most relevant to the Orange County case?
A
Every firm needs to have more than a basic understanding of the risks that are inherent in its business models.
B
Reporting and monitoring of positions and risks (i.e., back-office operations) must be separated from trading (i.e., front-office operations).
C
Risk managers have a responsibility to analyze reported business profits and determine if they seem logical in light of the positions held.
D
Outsize or strangely consistent profits should be independently investigated and rigorously monitored in order to verify that they are real, generated in accordance with the firm’s policies and procedures.