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CS Professional · Banking and Insurance - Laws and Practice · Risk Management in Banks and Basel Accords

Bhavani Bank holds a trading portfolio of government securities. Its treasury head says the main worry is that a sudden rise in market yields will reduce the fair value of these securities. Which category of risk does this primarily represent?

This is market risk, specifically interest rate risk in the trading book. Rising yields reduce the value of held securities, and market risk covers losses from movements in interest rates, exchange rates and prices. Credit risk concerns default by a counterparty, which is not described here.

  1. ACredit risk
  2. BMarket risk (interest rate risk in the trading book)Correct
  3. COperational risk
  4. DReputational risk

Explanation

Losses arising from movements in market variables such as interest rates, exchange rates and prices are market risk. A rise in yields lowers bond prices, which is interest rate risk within market risk. Credit risk would arise only from a borrower's or issuer's default, which is not the concern here.

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