FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management
A regional bank's treasurer is reviewing the role of the investment portfolio (securities held outside the trading book). Which statement best describes the primary purposes the investment function serves for a typical financial institution?
The investment function mainly provides liquidity, earns income on surplus funds, helps manage interest rate risk and supplies securities for collateral pledging, all while balancing risk and return. It is not primarily a speculative trading vehicle and cannot remove balance sheet risk.
- AMaximizing short-term trading profits through active speculation on rate movements
- BProviding liquidity, generating income, managing interest rate risk and supporting pledging needs while balancing risk and returnCorrect
- CReplacing the loan portfolio as the main source of earnings in all rate environments
- DEliminating all credit and market risk on the balance sheet
Explanation
The investment portfolio is used to supply liquidity, earn income on funds not placed in loans, help manage interest rate risk, and provide assets for pledging. It is not a speculative trading book, does not replace lending, and cannot eliminate risk. The first option confuses it with trading activity.
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