AIM 1: Identify and discuss the factors that led to the financial crisis at Metallgesellschaft, huge losses at Sumitomo, the collapse of Long-Term Capital Management, and the bankruptcy of Barings Bank.
1、Metallgesellschaft’s mismanagement in its long-term fixed contract strategy was evidenced by which of the following?
I. Refunding payments to customers who willingly paid to cancel their long-term obligations.
II. Canceling the program too soon while the positive legs of the contracts could have been sold at a profit or used to secure additional financing.
III. Not considering the sale of the program to another firm.
A) I only.
B) I and III.
C) II and III.
D) I, II, and III.
The correct answer is D
Metallgesellschaft committed all three errors in its handling of its liquidity crisis.
2、Which of the following increases the cost of rolling a long hedge (i.e., using long futures contracts to hedge a pre-existing short position)? I. A market shift from normal backwardation to contango. II. A market shift from contango to normal backwardation. III. Futures prices rising above the spot price. IV. Futures prices falling below the spot price.
A) I and IV.
B) II and III.
C) II and IV.
D) I and III.
The correct answer is D
Normal backwardation exists when futures prices are generally less than spot prices, with the difference being larger for longer-term contracts. Contango exists when futures prices are greater than spot prices. As a market shifts from normal backwardation to contango, futures prices rise above the spot price, and rolling a long hedge involves selling relatively cheap short-term contracts and buying relatively expensive long-term contracts, thereby increasing the cost of rolling the hedge.
3、Metallgesellschaft could have addressed the cash flow crisis created by their stack-and-roll hedge strategy by:
I. Buying puts.
II. Selling puts.
III. Selling calls.
IV. Requiring periodic cash settlements from customers.
A) I and IV only.
B) I only.
C) IV only.
D) II and IV.
The correct answer is A
Metallgesellschaft’s long stack-and-roll hedge strategy created interim cash outflows that triggered a liquidity crisis for the firm because petroleum prices dropped dramatically and because the market shifted from backwardation to contango. Requiring periodic cash settlements from its customers on the fixed rate contracts would have mitigated this cash flow crunch. Another solution would have been to purchase put options, which would have generated cash to offset marked-to-market losses and margin calls as spot prices declined. Selling puts would have further exposed the firm to declining petroleum prices. Selling calls would have offer only limited protection against small movements, not the large price drops that triggered the liquidity crisis.
4、All of the following affect the role of operational risk management in preventing large trading losses EXCEPT:
A) the breadth of responsibilities and power given to traders.
B) marked-to-market losses.
C) the degree of supervision and oversight.
D) multiple approvals for large trades by senior management.
The correct answer is B
Using the Sumitomo case as an example, Yasuo Hamanaka, a trader, attempted to corner the copper market. His fraudulent activities were possible because of weak operational controls. He was given broad powers, including granting power of attorney to brokerage houses, to create a financing scheme to fund his copper purchases in the spot market. Because of weak management oversight, he was able to keep two sets of books and execute large transactions without approval from senior management that would have been aware of and understood the trading strategies.
5、The high degree of operational risk in the Sumitomo case was illustrated by which of the following?
I. Model risk.
II. Lack of informed supervisors to approve large trades.
III. High degree of autonomy, allowing the trader to execute highly levered positions.
IV. The trader’s ability to keep two sets of books trading books and hide trading losses.
A) I only.
B) II, III, and IV.
C) I and IV only.
D) II and III only.
The correct answer is B
The lack of operational oversight gave Sumitomo’s copper trader the autonomy to execute large highly-levered transactions in the spot market. The large trades in the both the spot and futures market should have required the approval of a supervisor who was informed about the trader’s strategies and competent to understand them. The trader’s broad authority allowed him to manipulate the reporting system and thereby hide his huge losses. Model risk is the risk that a hedging or pricing model is flawed, which is not pertinent in this case.
6、Which of the following are examples of model risk illustrated in the Long-Term Capital Management case?
I. Poor management oversight.
II. Financial reporting standards.
III. Ignoring autocorrelation of economic shocks.
IV. Underestimating correlations among asset classes during economic crises.
A) II, III, and IV only.
B) III and IV only.
C) I, II, III, and IV.
D) I only.
The correct answer is B
LTCM’s models underestimated the extent to which securities prices would move together in times of economic crisis. The models also failed to anticipate that multiple economic shocks might occur in clusters through time (i.e., be positively autocorrelated) as economic history suggests. Poor management oversight and financial reporting standards are not issues in the LTCM case.
7、Balance sheet leverage measures the:
A) value of a portfolio’s equity in relation to the value of the assets.
B) amount of borrowing by firms whose debt or equity held in a portfolio.
C) total leverage faced by a hedge fund investing in derivative securities.
D) sensitivity of a portfolio’s derivative positions to price changes in the underlying assets.
The correct answer is A
Balance sheet leverage is created when a hedge fund, for example, borrows money to establish investment positions. It is measured by relating the value of the fund’s assets to its equity. If the hedge fund has not balance sheet leverage, the assets are equal to the equity. However, a fund with no balance sheet leverage can still be exposed to leverage via the investments in the portfolio. For example, a forward contract has instrument or economic leverage because small changes in the underlying asset create large changes in the value of the contract. Total leverage is the combined effect of balance sheet leverage and economic, or instrument, leverage.
8、Which of the following factors contributed to the collapse of Barings Bank?
A) A maturity mismatch between the hedging instrument and the risk being hedged.
B) Basis risk.
C) Japanese financial reporting requirements.
D) A trader having authority in the settlement process.
The correct answer is D
In an effort to recover trading losses, Nick Leeson abandoned hedged arbitrage strategies on the Nikkei 225 in favor of extremely speculative strategies that exposed the firm to enormous risk in the event of a market downfall. His activities went undetected because his influence on the settlement process and back-office operations allowed him to report phony gains to management. Reporting requirements, basis risk, and maturity mismatch were not factors in the collapse.
9、In general, the bankruptcy of Barings Bank might have been avoided with:
A) pricing models less vulnerable to model risk.
B) a more moderate use of leverage.
C) stronger reporting and control systems.
D) maturity matching between the hedging instrument and the asset being hedged.
The correct answer is C
In general, the Barings Bank collapse was the result of poor operational controls characterized by poor reporting systems, weak management oversight, and poor organizational structure. Leeson’s dual responsibility for trading and settlement enabled him to hide trading losses in accounts that were not reported to management. Although a history of legal problems would have precluded him from trading on the LIFE, he was permitted to trade in Singapore. Model risk and leverage were issues in LTCM. Using short-term instruments to hedge long-term risk exposure was an issue in Metallgesellschaft.
10、Nicholas Leeson is identified with which of the following?
A) Nikkei stock index futures.
B) Commodity Futures Trading Commission.
C) Sumitomo.
D) Metallgesellschaft AG.
The correct answer is A
Nicholas Leeson was a trader for Barings PLC and was speculating in Nikkei options and futures.
[此贴子已经被作者于2009-7-2 13:09:02编辑过]
11、In the context of operational risk, management oversight responsibility for the line managers is primarily:
A) to develop clear lines of authority, responsibility and acceptable limits on operational risk.
B) reporting on operational risk management procedures.
C) oversight of their specific business units.
D) establishing the person in charge of risk management.
The correct answer is C
The line managers should have primary oversight responsibility for their specific business units.
12、All of the following are reasons that Nick Leeson engaged in aggressive speculative trading in the Barings Bank collapse EXCEPT:
A) he was attempting to recover previous trading losses.
B) Barings’ lack of risk management oversight.
C) his authority over settlement operations allowed him to hide trading losses.
D) Barings’ risk management models were flawed.
The correct answer is D
The collapse of Barings Bank was not an instance of flawed hedging models, but one of poor operational control. Leeson had previously incurred huge trading losses that, if revealed, would have cost him his job. In an effort to recover those losses, he abandoned his hedging strategies and speculated to recoup these losses. His influence and authority in back office operations allowed him to hide his speculative losses and report phantom profits. Leeson ignored and exceeded risk control limits, and senior management’s lack of understanding about Leeson’s role and oversight allowed his schemes to go undetected.
13、Information systems at Barings Bank were deficient for all of the following reasons EXCEPT:
A) technological limitations that hindered accurate financial reporting.
B) management’s failure to audit reporting quality.
C) incomplete account information on gains and losses.
D) management’s inability to detect the inconsistency of Leeson’s trading strategy and profits.
The correct answer is A
The Barings collapse did not result from technological limitations. Management is responsible for auditing and ensuring the quality of the information it receives. Barings management failed to do so and received information without questioning it. Reports contained incomplete account information on gains and losses. Management also failed to detect a signal that something might be wrong in that the size of Leeson’s reported profits were inconsistent with and out of proportion to the trading strategy he was supposedly using. Technological limitations were not an issue in the Barings case.
14、Which of the following choices is an example of operational risk in the collapse of Barings?
A) The Nikkei collapsed due to an earthquake.
B) Failure to supervise the actions of its trader.
C) Much of a company’s assets were in illiquid derivative products.
D) The default of Japanese industrial firms.
The correct answer is B
The failure to supervise the actions of its trader is an example of operational risk.
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