Skip to content

FRM Part I · FRM Exam Part I · Learning From Financial Disasters

A trading firm's risk review of a large loss finds that a single trader could both execute trades and approve the valuation of the positions, so the losses were hidden for months. Which control failure does this most directly illustrate?

The scenario shows inadequate segregation of duties. A trader who both executes trades and approves valuations has no independent oversight, so mispricing and losses can be hidden. Rogue trading disasters repeatedly show that separating front-office and control functions is essential for detecting concealed losses.

  1. AInadequate segregation of duties between front office and control functionsCorrect
  2. BExcessive use of diversification across trading desks
  3. COverreliance on external credit ratings for counterparties
  4. DFailure to hedge interest rate exposure with futures

Explanation

When the same person trades and values or approves positions, no independent check exists, so losses can be concealed. This is a failure of segregation of duties, a recurring lesson from rogue trading cases. The other options describe different issues that are not indicated by the facts.

Did you get it right without looking?

One question tells you little. A timed set on Learning From Financial Disasters shows your real accuracy, how long you take and where you lose marks.

Practise Learning From Financial DisastersFree diagnostic mock

More Learning From Financial Disasters questions