Explanation:
This scenario reflects the agency problem, where an individual (the agent) acts in self-interest, exploiting their position or knowledge at the expense of the firm (the principal). The trader uses insider understanding of risk controls to hide risks rather than manage them transparently — a classic conflict between personal incentives and organizational goals.
Choice A is incorrect. This describes a potential failure in regulatory design rather than an agency problem within a financial institution. While regulators may face their own agency issues, the scenario doesn't illustrate the specific conflicts of interest between those who generate risk and those who oversee it within organizations.
Choice C is incorrect. It involves model risk or oversight failure, not intentional misalignment of incentives.
Choice D is incorrect. It highlights systemic risk and herd behavior, but not a conflict between an agent and a principal.
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Q.37 In the context of financial risk management, which of the following best represents an example of the agency problem?
A
A regulator implementing new market reforms without consulting industry participants.
B
A trader who previously worked in risk management using their knowledge to conceal risky positions from current risk managers.
C
A financial firm failing to adapt its risk models to account for changing market volatility.
D
Multiple financial firms independently developing similar trading strategies that collectively increase systemic risk.
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