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Case Study Specifics


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Does GARP tend to ask case study specifics regarding constituents names and products used in misuse of financial products? For example the question relating to Financial disasters of Foundations.

David Harper CFA FRM

David Harper CFA FRM
Staff member
Hi @Kangaroo79 As a tendency, I am going to say they do not great emphasize specific names and products (although some of this disasters are basically synonymous with the "villians;" e.g., Barings ~= Leeson. The names of rogue traders do seem to live on in memory). Below I copied two recent practice paper questions. (I don't like the correct 5.d, I think that could be better given the actual text in Allen, it's a good answer primarily by elimination IMO). I think GARP uses the names as references and is genuinely concerned to query the causes and lessons of the each debacle for their instructive elements. I hope that's helpful,

2015 Sample Part 1 Question #25:
"Barings was forced to declare bankruptcy after reporting over USD 1 billion in unauthorized trading losses by a single trader, Nick Leeson. Which of the following statements concerning the collapse of Barings is correct?
a. Leeson avoided reporting the unauthorized trades by convincing the head of his back office that they did not need to be reported.
b. Management failed to investigate high levels of reported profits even though they were associated with a low-risk trading strategy.
c. Leeson traded primarily in OTC foreign currency swaps which allowed Barings to delay cash payments on losing trades until the first payment was due.
d. The loss at Barings was detected when several customers complained of losses on trades that were booked to their accounts.

Correct Answer: b
Rationale: Leeson was supposed to be running a low-risk, limited return arbitrage business out of his Singapore office, but in actuality he was investing in large speculative positions in Japanese stocks and interest rate futures and options. When Leeson fraudulently declared very substantial reported profits on his positions, management did not investigate the stream of large profits even thought it was supposed to be associated with a low-risk strategy. Section: Foundations of Risk Management"
2014 Sample Part 1 Question #5:
"5. In October 1994, General Electric sold Kidder Peabody to Paine Webber, which eventually dismantled the firm. Which of the following led up to the sale?
a. Kidder Peabody had its primary dealer status revoked by the Federal Reserve after it was found to have submitted fraudulent bids at US Treasury auctions.
b. Kidder Peabody reported a large quarterly loss from highly leveraged positions, which left the company insolvent and on the verge of bankruptcy.
c. Kidder Peabody suffered a large loss when counterparties to its CDS portfolio could not honor their contracts, which left the company with little equity.
d. Kidder Peabody reported a sudden large accounting loss to correct an error in the firm's accounting system, which called into question the management team's competence.

Correct answer: d
Explanation: Kidder Peabody’s accounting system failed to account for the present value of forward trades, which allowed trader Joseph Jett to book an instant, but fraudulent, accounting profit by purchasing cash bonds to be delivered at a later date. These profits would dissipate as the bonds approached their delivery date, but Jett covered this up by rolling the positions forward with increasingly greater positions and longer lengths to delivery, which created a higher stream of hypothetical profits due to the accounting flaw. Finally this stream of large profits was investigated and Kidder Peabody was forced to take a USD 350 million accounting loss to reverse the reported gains, which resulted in a loss of confidence in the firm and General Electric’s subsequent sale."