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CMA Final · Risk Management in Banking and Insurance · Introduction to Risk Management

A bank's treasury holds a large portfolio of government securities. Following a sudden rise in market yields, the market value of the portfolio falls although every issuer continues to pay interest and principal on time. Which type of risk has the bank primarily suffered?

The bank has suffered market risk. Market risk is the loss arising from adverse movements in market variables such as interest rates. Securities lost value because yields rose, although issuers kept paying, so this is not credit, operational or liquidity risk.

  1. ACredit risk, because the securities may default
  2. BMarket risk, because adverse market price movements reduce the portfolio valueCorrect
  3. COperational risk, because internal processes failed
  4. DLiquidity risk, because the bank could not meet depositors' withdrawals

Explanation

Market risk is the risk of loss from adverse movements in market variables such as interest rates, exchange rates and prices. Here only yields changed and issuers still pay on time, so there is no credit event. No process failure or funding shortfall is described, so operational and liquidity risk do not apply.

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