TheNational Australia Bank (NAB) FX Options Case Studyis a well-known example ofoperational risk, fraud, and governance failure.

What Happened?

Traders engaged inunauthorized foreign exchange (FX) options trading, usingdeep-in-the-money optionsand other complex instruments.

They manipulated profits and losses tosmooth earningsand mislead risk managers and auditors.

Why Answer C is Correct

The traderssmoothed both profits and lossesto avoid detection and ensure continued trading bonuses.

This aligns with PRMIA’sOperational Risk Management Guidelines, which highlight thathidden trading losses and smoothing techniques increase financial crime risk.

Why Other Answers Are Incorrect

Option

Explanation

A. Complex structured transactions aided in the smoothing of losses.

Incorrect– Smoothing occurred with bothprofits and losses, not just losses.

B. Deep-in-the-money options and other complex structured transactions aided in the smoothing of losses.

Incorrect– Profits were also manipulated, making this answer incomplete.

D. Deep-in-the-money options aided in the smoothing of losses.

Incorrect– This focuses only on deep-in-the-money options and ignores other structured transactions involved in the fraud.

PRMIA Fraud and Risk Management Case Studies

Basel Principles on Market Risk and Internal Control Failures

PRMIA References for Verification