(a) State and describe three justifications for why firms should devote careful attention to the management of financial risks facing them. [6 Marks]

(b) What risks are included by regulators in their definition of operational risks? What risks are not included? Discuss. [4 Marks]

(c) Discuss whether or not moral hazard and adverse selection have an impact on life insurance contracts and motor vehicle insurance. [5 Marks]

(d) Give two examples of key risk indicators that might be monitored by a central operational risk management group within a bank. [4 Marks]

(e) Consider the two scenarios:

a bank suffers a loss of $2 million from unanticipated actions taken by a legal entity relating to its transactions,

an insurance company makes a loss of $2 million as an impact of unanticipated tropical cyclone in California.

Suppose that an investor own shares in both the bank and the insurance company. Discuss the losses by which the investor is affected. [6 Marks]