Module: | MODULE B: RISK MANAGEMENT
Q287: Consider the following statements regarding Market Risk within the Trading Book:
1. Market risk is the primary risk in the trading book, which arises from adverse movements in interest rates, equity prices, and foreign exchange rates.
2. General market risk captures the potential financial loss, caused by broad macroeconomic movements that affect all instruments equally.
3. Specific risk is a sub-component of market risk, which exclusively measures the risk of a counterparty defaulting on a derivative contract.
Which of the statements given above is/are correct?
2. General market risk captures the potential financial loss, caused by broad macroeconomic movements that affect all instruments equally.
3. Specific risk is a sub-component of market risk, which exclusively measures the risk of a counterparty defaulting on a derivative contract.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: Market Risk is the defining risk of the Trading Book.
It is officially defined as the risk of losses arising from movements in market prices, specifically covering interest rate risk, equity position risk, foreign exchange risk, and commodity risk.
Statement 2 is correct: General Market Risk covers broad market movements.
For example, if the RBI raises benchmark interest rates, the prices of all fixed-income bonds in the market will generally fall.
Statement 3 is incorrect: Specific Risk measures the risk that the price of a *specific* security will drop due to factors related to its issuer (like a corporate bond's credit rating being downgraded). It does NOT measure the risk of a counterparty defaulting on a derivative trade; counterparty default is strictly classified under Counterparty Credit Risk (CCR), not market risk.
It is officially defined as the risk of losses arising from movements in market prices, specifically covering interest rate risk, equity position risk, foreign exchange risk, and commodity risk.
Statement 2 is correct: General Market Risk covers broad market movements.
For example, if the RBI raises benchmark interest rates, the prices of all fixed-income bonds in the market will generally fall.
Statement 3 is incorrect: Specific Risk measures the risk that the price of a *specific* security will drop due to factors related to its issuer (like a corporate bond's credit rating being downgraded). It does NOT measure the risk of a counterparty defaulting on a derivative trade; counterparty default is strictly classified under Counterparty Credit Risk (CCR), not market risk.