Deck 16: Managing Risk in an Organization

Question 1

Which of the following organizations recommends best practices for the investment management industry?

A)PRMIA
B)Risk Standards Working Group
C)GARP
D)G-30
E)Financial Accounting Standards Board

Answer 1

B

Question 2

FAS 133 defines effective hedging as

A)a hedge with no basis risk
B)a correctly priced hedge
C)a perfect hedge
D)a hedge that reduces 80 to 125 percent of the risk
E)none of the above

Answer 2

E

Question 3

Which of the following best describes a company that practices enterprise risk management?

A)interest rate risk and currency risk would be managed in unison
B)a single department to manage risk
C)it would manage insurance-related risks along with financial risk
D)credit risk would be managed the same way as market risk
E)operational risk would be managed

Answer 3

C

Question 4

Hedge accounting is which of the following?

A)describing all hedges in footnotes to accounting statements
B)deferring all recording of hedge profits and losses until the hedge is over
C)associating the derivative profit or loss with the instrument being hedged
D)all of the above
E)none of the above

Question 5

The primary distinction between FAS 133 and IAS 39 is

A)IAS 39 does not permit hedge accounting
B)IAS 39 was adopted earlier than FAS 133
C)IAS 39 applies only to publicly traded corporations
D)IAS 39 applies to all financial assets and liabilities,not just derivatives
E)none of the above

Question 6

"Independent risk management" means which of the following?

A)that risk management of a firm is independent of its overall corporate policy decisions
B)that the risk management function is provided by an outside consulting firm
C)that the risk manager cannot be influenced by the traders
D)that the risk manager is independent of the firm's senior managers
E)none of the above

Question 7

Which of the following activities does senior management not do?

A)ensure that personnel are qualified
B)ensure that controls are in place
C)execute hedge transactions
D)establish policies
E)define roles and responsibilities

Question 8

Which of the following methods is not permitted to satisfy the SEC's requirements for disclosure of derivatives activity?

A)an explanation in the chairman's letter
B)a Value-at-Risk figure
C)a sensitivity analysis
D)a table of market values and related terms
E)none of the above

Question 9

Prior to FAS 133,where on the financial statements were derivatives reported?

A)as contingent liabilities
B)as goodwill
C)as intangible assets
D)nowhere because they were off-balance sheet items
E)in Other Comprehensive Income

Question 10

The front office refers to

A)the compliance office
B)the traders who engage in derivatives transactions
C)legal counsel
D)the risk management function
E)senior management

Question 11

Derivatives dealers primarily conduct derivatives transactions for which of the following reasons?
A)none of the above

A)to enhance the returns on their other investment transactions
B)to profit off of their ability to execute trades at the right time
C)to profit off of their market making services
D)to provide services to enhance the overall attractiveness of their product line

Question 12

Derivatives activities in end users are primarily conducted by

A)the human resources group
B)the sales staff
C)the chief financial officer
D)the board of directors
E)the treasury group

Question 13

Metalgesellschaft lost about $1.3 billion doing what?

A)hedging short-term commitments with long-term options
B)using crude oil futures options to hedge crude oil futures
C)trading futures spreads on crude oil
D)hedging fixed rate oil price commitments with swaptions
E)none of the above

Question 14

Which of the following methods is not acceptable for disclosure under the SEC's rules?

A)the CEO's letter to the shareholders
B)tabular information
C)sensitivity analysis
D)VAR
E)none of the above

Question 15

Orange County lost $1.6 billion doing what?

A)betting that interest rates would remain stable
B)buying Treasury bond futures
C)selling Eurodollar futures
D)buying short- and intermediate-term bonds on margin
E)trading money market options

Question 16

What is the primary activity of a firm's front office?

A)risk management
B)trading
C)pricing derivative products
D)auditing
E)none of the above

Question 17

Ultimate authority for risk management lies with

A)legal counsel
B)the head trader
C)senior management
D)the internal auditors
E)the external auditors

Question 18

In which of the following activities is hedge accounting prohibited?

A)hedging an overall portfolio as opposed to an individual transaction
B)using short calls to protect a long asset
C)using long puts to protect an asset
D)hedging a long position with a short futures
E)hedging a swapt with a swaption

Question 19

Risk managers should report to

A)the chief trader
B)legal counsel
C)the executive in charge of the front office
D)the executive in charge of the back office
E)none of the above

Question 20

End users are all of the following types of organizations except?

A)investment funds
B)non-financial corporations
C)governments
D)financial institutions
E)none of the above

Question 21

In a derivatives operations,back office personnel are in charge of front office personnel.

Question 22

The United States government does not use derivatives.

Question 23

By speculating in derivatives,Procter and Gamble used its treasury department as a profit center.

Question 24

The purpose of IAS 39 is to prescribe standards for derivatives accounting for foreign currency transactions.

Question 25

Procter and Gamble lost $157 million doing what?

A)speculating on a worldwide recession
B)failure to hedge their borrowing cost on a bond issue
C)speculating on foreign interest and exchange rates
D)speculating on a decrease in the federal budget deficit
E)mismanagement of a hedge fund in their pension fund

Question 26

Risk management in which risks such as financial market risk and insurance risk are managed jointly is called enterprise risk management.

Question 27

A risk management system that controls risk within a single department is considered to be centralized.

Question 28

Which of the following statements is not true about fair value hedges?

A)it requires a method of determining the fair value of the derivative
B)it defers recognition of all profits and losses until the hedge is terminated
C)it will cause earnings to fluctuate if hedges are not effective
D)it requires proper documentation
E)none of the above

Question 29

A corporate risk management function is typically carried out by the treasury department.

Question 30

Which of the following statements is not true about fair value hedges?

A)it requires identification of the effective and ineffective parts
B)derivatives profits and losses are temporarily carried in an equity account
C)it requires proper documentation
D)only dealer firms are eligible to use it
E)none of the above

Question 31

Cash flow accounting must be used for all hedges involving cash outlays.

Question 32

Dealers typically have more sophisticated risk management operations than end users.

Question 33

End users typically invest more resources in their derivatives operations than do dealers.

Question 34

An effective risk management system requires that the risk manager be independent of the derivatives traders.

Question 35

Barings Bank failed due to excessive government regulation of their derivatives activities.

Question 36

Legal support for derivatives dealers is done by a compliance officer.

Question 37

Under SEC rules,derivatives activities must be disclosed in one of three ways.

Question 38

Barings lost $1.2 billion because of what?

A)a failure of risk controls in one of its foreign offices
B)model risk in their VAR models
C)fraudulent transactions
D)regulators shut it down because of poor risk management
E)speculating on German interest rates

Question 39

End users differ from dealers in that the latter engage in risk management transactions for the purpose of earning a profit off the spread between their buying and selling prices,while the former enter into transactions to manage specific risks.

Question 40

Which of the following would not be included among typical derivatives end users in the U.S.?

A)pension funds
B)corporations
C)state and local governments
D)the federal government
E)hedge funds

Question 41

Senior management should be involved in the setting of policies and procedures of a firm's risk management operations.

Question 42

18.Transactions that do not qualify as hedges must be accounting for as speculation and marked to market each period.

Question 43

The basic premise behind FAS 133 is that derivatives transactions must be marked to market and recorded somewhere in the financial statements.

Question 44

A company's auditors are not typically trained to serve in a risk management capacity.

Question 45

A fair value hedge is a transaction designed to protect the market value of an asset held.

Question 46

SEC disclosure requirements force companies to reveal how they manage all risks.

Question 47

Senior management should evaluate trading performance on a risk-adjusted basis.

Question 48

Prior to FAS 133,derivatives were accounted for in Other Comprehensive Income.

Question 49

Under FAS 133 executive stock options must be accounted for as short call options.

Question 50

The G-30 report recommends how institutional investors should manage risk.