Module: | MODULE B: RISK MANAGEMENT
Q285: Consider the following statements regarding the characteristics and accounting principles of the Trading Book:
1. The trading book strictly consists of financial instruments and commodities held either for active trading intent or to hedge other trading book exposures.
2. All positions in the trading book are accounted for on an accrual basis, similar to the banking book, to ensure stability in the daily profit and loss account.
3. The daily valuation of trading book assets through Mark-to-Market (MTM) directly reflects the current market prices in the bank's daily earnings.
Which of the statements given above is/are correct?
2. All positions in the trading book are accounted for on an accrual basis, similar to the banking book, to ensure stability in the daily profit and loss account.
3. The daily valuation of trading book assets through Mark-to-Market (MTM) directly reflects the current market prices in the bank's daily earnings.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is correct: The primary definition of the Trading Book is that it contains positions in financial instruments and commodities held with trading intent (e.g., to profit from short-term price movements) or positions explicitly held to hedge other elements of the trading book.
Statement 2 is incorrect: Trading book positions are strictly NOT accounted for on an accrual basis.
They are subject to Mark-to-Market (MTM) or Mark-to-Model accounting, meaning their values fluctuate daily based on market conditions.
Statement 3 is correct: Because of the MTM accounting standard, any daily change in the market price of a trading book asset is immediately recognized in the bank's daily Profit and Loss (P&L) account, creating volatility in earnings.
Statement 2 is incorrect: Trading book positions are strictly NOT accounted for on an accrual basis.
They are subject to Mark-to-Market (MTM) or Mark-to-Model accounting, meaning their values fluctuate daily based on market conditions.
Statement 3 is correct: Because of the MTM accounting standard, any daily change in the market price of a trading book asset is immediately recognized in the bank's daily Profit and Loss (P&L) account, creating volatility in earnings.