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FRM Part I · FRM Exam Part I · The Building Blocks of Risk Management

A bank's treasury desk holds a large portfolio of fixed-rate government bonds funded by short-term wholesale borrowing. Losses arise when market interest rates rise sharply, reducing bond values while funding costs reset higher. Which risk type is the primary source of this exposure?

The primary exposure is market risk, specifically interest rate risk, because the losses come from rising market rates lowering bond values and raising funding costs. No internal process failure, legal dispute or fall in client demand is involved in the described loss.

  1. AMarket risk, specifically interest rate riskCorrect
  2. BOperational risk arising from process failure
  3. CLegal risk arising from contract enforceability
  4. DBusiness risk arising from lower client demand

Explanation

Losses driven by changes in interest rates affecting the value of traded or held securities are market risk, specifically interest rate risk. The funding mismatch adds liquidity considerations, but the described loss driver is rate movement, not process failure, legal issues or demand.

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