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A customer asks a broker employed by AlphaBank to buy Eureka Corporation bonds for her account. While this trade was executed correctly and the bonds were bought, the trade was mistakenly accounted for as a sell order. If the price of Eureka Corporation bonds goes up, this trade would result in a significantly larger loss than if the market had remained stable. However, if the market drops, the customer will benefit from the incorrect accounting and gain from this trade. This trading scenario can serve as an example that
Correct Answer: A
In this scenario, the trade was mistakenly accounted for as a sell order instead of a buy order. If the price of Eureka Corporation bonds goes up, this mistake would result in a larger loss than if the market remained stable. Conversely, if the market drops, the customer would benefit from the incorrect accounting. This example illustrates how market risk (the change in the price of the bonds) can magnify operational risk (the error in accounting for the trade incorrectly).