Module: | MODULE B: RISK MANAGEMENT
Q286: Consider the following statements regarding the components and classification of the Trading Book:
1. Under regulatory guidelines, the Trading Book primarily includes proprietary trading positions, and derivative instruments held for active trading.
2. Securities classified under the Held for Trading (HFT) and Available for Sale (AFS) categories, form the core components of the trading book.
3. Derivative contracts specifically executed to hedge positions in the banking book, must also be strictly classified within the trading book.
Which of the statements given above is/are correct?
2. Securities classified under the Held for Trading (HFT) and Available for Sale (AFS) categories, form the core components of the trading book.
3. Derivative contracts specifically executed to hedge positions in the banking book, must also be strictly classified within the trading book.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: The Trading Book is explicitly designed for active trading intent.
Therefore, proprietary trading positions (trades made with the bank's own capital for direct market gain) and derivatives held for trading are its primary components.
Statement 2 is correct: Securities classified as Held for Trading (HFT) and Available for Sale (AFS) are recorded at Mark-to-Market (MTM) and constitute the core of the trading book.
Statement 3 is incorrect: This is a critical regulatory nuance.
If a derivative is explicitly executed to hedge a specific exposure in the Banking Book (e.g., an interest rate swap to hedge a long-term fixed-rate loan), it is treated as part of the Banking Book for capital and accounting purposes, not the Trading Book.
Therefore, proprietary trading positions (trades made with the bank's own capital for direct market gain) and derivatives held for trading are its primary components.
Statement 2 is correct: Securities classified as Held for Trading (HFT) and Available for Sale (AFS) are recorded at Mark-to-Market (MTM) and constitute the core of the trading book.
Statement 3 is incorrect: This is a critical regulatory nuance.
If a derivative is explicitly executed to hedge a specific exposure in the Banking Book (e.g., an interest rate swap to hedge a long-term fixed-rate loan), it is treated as part of the Banking Book for capital and accounting purposes, not the Trading Book.