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Exam IV: Case Studies: Standards: Governance, Best Practices and Ethics - 2015 Edition Question and Answers

Exam IV: Case Studies: Standards: Governance, Best Practices and Ethics - 2015 Edition

Last Update May 18, 2024
Total Questions : 110

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Questions 1

According to the Group of 30 Report, option contracts:

Options:

A.  

Always generate credit risk to both counterparties

B.  

Create credit risk only for the buyer (due to default by the seller) provided the premium is due, and paid, at contract initiation

C.  

Create no credit risk, since the buyer need not exercise the option

D.  

Usually create credit risk only for the seller (to default by the buyer)

Discussion 0
Questions 2

According to the PwC report China Aviation Oil, in order to avoid recording and reporting losses, the company adopted which approach covering up its losses?

Options:

A.  

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

B.  

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

C.  

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

D.  

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

Discussion 0
Questions 3

When considering the performance of Northern Rock within its peer group of banks, which of the following is not correct?

Options:

A.  

Only a few months previously it had reported record profits.

B.  

The quality of its' assets was never in question.

C.  

For many years it was regarded as a star-performer in the financial markets.

D.  

Its' loan loss record was poor by industry standards.

Discussion 0
Questions 4

Unlike the case at Barings Bank, National Australia Bank:

Options:

A.  

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

B.  

Was not dealing in derivatives

C.  

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

D.  

Had a separation of duties between trading and back office

Discussion 0
Questions 5

Which of the following was not received by Northern Rock as official support from the UK banking and government authorities?

Options:

A.  

A covert money market support operation designed to cover up the difficulties Northern Rock was facing

B.  

The Bank of England's role as Lender-Of-Last-resort was activated at a penalty interest rate of 150 basis points above the Bank Rate

C.  

The UK government offered to guarantee all existing and new retail deposits, and to most other creditors

D.  

The Bank of England provided an additional unlimited facility secured on the collateral of all Northern Rock assets

Discussion 0
Questions 6

Which of the following are PRMIA Governance Principles?

I. Independence of Key Parties

II. Disclosure and Transparency

III. Internal Validation

IV. Solvency

Options:

A.  

I and II only

B.  

I, II and III only

C.  

I, II and IV only

D.  

All are PRMIA Governance Principles

Discussion 0
Questions 7

According to the Group of 30 Report, important risks associated with dynamic hedging are:

Options:

A.  

Greater volatility than expected over the life of an option

B.  

Sudden gaps in market prices

C.  

Both A and B

D.  

Neither A nor B

Discussion 0
Questions 8

Select the one correct statement relative to Barings Bank.

Options:

A.  

Proprietary and agency trading were combined and therefore did not increase risk.

B.  

Proprietary and agency trading were separate and therefore did not increase risk.

C.  

Proprietary and agency trading were combined and therefore did increase risk.

D.  

Proprietary and agency trading were separate and did increase risk.

Discussion 0
Questions 9

Which of the following best characterizes the problems that developed at Bankgesellschaft Berlin?

Options:

A.  

Volume growth at the expense of margin.

B.  

Excessive reliance on volatile trading income.

C.  

Banking is a "for-profit" business, not a means of fulfilling political goals.

D.  

A company culture where profits may justify "excesses."

Discussion 0
Questions 10

Boards, including Audit and Risk Committees must:

I. Clearly articulate the corporate risk appetite to senior management

II. Thoroughly review compensation plans of potentially "highly compensated positions" for consistency with corporate risk appetite, competitive market conditions and fiduciary responsibility to shareholders

III. Have a single member formally given responsibility for understanding and reporting the effectiveness of the corporation's risk management infrastructure

IV. Be fully accountable to shareholders and work to the benefit of public good and financial stability

Options:

A.  

I and II only

B.  

I, II and IV only

C.  

I, II and III only

D.  

All of these are responsibilities of Board and Audit Committees

Discussion 0
Questions 11

The early 2003 trading strategy of China Aviation oil was

Options:

A.  

to buy calls and sell puts

B.  

to buy puts and sell calls

C.  

to sell puts and buy calls

D.  

to sell calls and buy puts

Discussion 0
Questions 12

A risk manager is asked to analyze the credit risk of a convertible bond. The risk manager has never analyzed convertible bonds, but does have significant expertise in credit risk. The risk manager accepts the assignment, finds a paper on the subject through the PRMIA web site and copies the method used there. The risk manager completes the assignment and delivers a report to his or her direct supervisor and the supervisor is quite pleased.

According to the PRMIA Standards of Best Practice, Conduct and Ethics (Code of Conduct), this was acceptable behavior if the following conditions were met:

I. The risk manager disclosed the lack of knowledge about convertible bonds

II. The methodology employed is disclosed and explained

III. The report was just to be used for analysis and not in practice

IV. The risk manager was sure of his/her understanding of the paper found on the web

Options:

A.  

I and II

B.  

I, II and IV

C.  

I, II and III

D.  

I only

Discussion 0
Questions 13

According to the Northern Rock Case Study, what is Forced Insolvency?

Options:

A.  

The bank is insolvent in that the current value of its assets (measured at book value) is less than the value of its liabilities; thus even if the bank were to liquidate all of its assets it would not be able to repay all depositors and other creditors

B.  

The bank is legally solvent but if, because it cannot fund its operations, it is forced to liquidate assets it could do so only at less than nominal values (fire sale) and this would make it legally insolvent (value of assets falls below those of liabilities)

C.  

The bank is legally solvent but its current funding costs (which are likely to continue) exceed the average rate of return on its assets and hence it would soon become insolvent as it would be making losses and would eventually exhaust its equity capital

D.  

The bank is solvent in that the current value of its assets (measured at book value) is more than the value of its liabilities; so even if the bank were to liquidate all of its assets it would be able to repay all depositors and other creditors

Discussion 0
Questions 14

The Q4 2003 trading strategy of China Aviation Oil was

Options:

A.  

to buy puts and sell calls

B.  

to buy calls and sell puts

C.  

to sell puts and buy calls

D.  

to sell calls and buy puts

Discussion 0
Questions 15

PRMIA Governance Principles

Options:

A.  

must be adhered to by all PRMIA member organizations

B.  

is a set of recommendations based on research and best practice

C.  

must be adhered to by all PRM charter holders

D.  

must be adhered to by all financial firms that are PRMIA members

Discussion 0
Questions 16

Zheng Zhu wants to open a new PRMIA Chapter in Wuhan, China. He can do this if:

Options:

A.  

At least 100 members live within 50 miles

B.  

A local business sponsors the chapter

C.  

Approved by the Board of Directors

D.  

All of the above

Discussion 0
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