8004 PRM Certification - Exam IV: Case Studies; Standards: Governance, Best Practices and Ethics Questions and Answers

The resulting loss rate for Washington Mutual was more than 3 times higher than other mortgage lenders tracked by the FDIC

the two banks were focussed in different markets

Long Beach Financial had losses which it hadn't realized at the time of the takeover

Of a general deterioration of credit quality generally

Had a risk management infrastructure that was credited with doing its' job well, despite the losses

Was not dealing in derivatives

Had a Board of Directors that was unaware of the true nature of trading activities

Had a separation of duties between trading and back office

Access to the Federal Reserve discount window

Removing the prohibition on the Treasury Department to buy both companies stock

Restricting the sale of new Fannie Mae and Freddie Mac securities only to US citizens

Reiterating their belief that both companies played a central role in the US housing finance system

Money due to unfavourable market moves

Loss of its' reputation due to actions seen as detrimental to their clients

Loss of market share due to their licenses being revoked

Time spent on legal proceedings in courts

Trying to borrow more money from major money centre banks

Issuing Subordinated Debt

Returning capital to the general partners before others

Unwinding its' more liquid trades thereby creating more liquidity risk overall

selling short-term options with extremely low-risk profiles to generate premiums to cover the cost of closing out loss-making option positions

selling long-term options with extremely low-risk profiles to generate premiums to cover the cost of closing out loss-making option positions

selling short-term options with extremely high-risk profiles to generate premiums to cover the cost of closing out loss-making option positions

selling long-term options with extremely high-risk profiles to generate premiums to cover the cost of closing out loss-making option positions

only regarded the intrinsic value (i.e. the difference between the strike price and the forward price of the underlying commodity) as the fair value of its options

took into account both the intrinsic value and the time value

only took into account the time value of the option (which includes recognizing the time left to maturity of the option, the volatility of the spot price of the underlying commodity, interest rates and other factors)

used neither the intrinsic value nor the time value

credit risk caused by overexposure to the property market

credit risk caused by a diversified portfolio of poor-quality loans

both A and B

none of the above

Leeson ran the front office

The London office did not ask for any reports

Leeson hid his trades in a suspense account

The margin report sent to London did not show the true margin needs

Failed corporate governance

Accounting abuses

Unfair pricing to customers

Over stating actual sales

Provided investors and analysts with insight into the dynamics of value changes, and the sensitivity of fair value to the underlying drivers of interest rates, exchange rates, and commodity prices

Only provided the intrinsic value of its outstanding option positions

Only provided the time value of its outstanding option position

None of the above

Basis Risk

Currency Settlement

Interest Rate

Inflation

I and II only

I, II and IV only

I, II and III only

All of these are responsibilities of Board and Audit Committees