Explanation:
The following are the main lessons learned from the Barings case:
Option A is incorrect: This lesson relates to the Continental Illinois where a large number of depositors were local and international institutional investors. A run on these deposits led to Continental Illinois's failure
Option B is incorrect: This lesson relates to the Orange County case which illustrates how complex financial products characterized by large amounts of leverage can create significant losses. The main cause of the Orange Country downfall was a highly risky interest rate bet that did not take into account the Federal Reserve's possible changes in monetary policy
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Q.95 The Barings case revolves around Nick Leeson, a British trader, who was later appointed as the general manager and head trader of Barings Futures Singapore. He could place orders on his own. He was also in charge of accounting and settlements, and there was no direct oversight over his trading book. This allowed him to create a dummy account where he would dump all losing trades. As far as the London office was concerned, Leeson was reporting profits after profits on his trades. By the time his dealings came to light, Barings had lost approximately $1.25 billion. Which of the following is a lesson learned from the Barings downfall?
A
Reliance on the so-called hot money (short-term loans from the money market) is perilous.
B
Management, and boards, should endeavor to establish areas of the business where risks may hide and also seek to establish the circumstances which can result in a loss.
C
Outsize or strangely consistent profits should be independently investigated and rigorously monitored to verify that they are real.
D
All of the above.