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

Which statement best describes the difference between a bank's trading book and banking book from a risk perspective?

The trading book contains positions marked to market and managed mainly for market risk, while the banking book holds loans and deposits generally held to maturity, where credit risk and interest rate risk dominate.

  1. AThe trading book holds positions marked to market and managed mainly for market risk, while the banking book holds loans and deposits typically held to maturity and exposed mainly to credit and interest rate riskCorrect
  2. BThe trading book holds only loans, and the banking book holds only derivatives
  3. CBoth books are exposed only to operational risk
  4. DThe banking book is marked to market daily, while the trading book is carried at historical cost

Explanation

The trading book contains positions held for trading, valued at market and subject to market risk measures such as VaR. The banking book contains traditional loans and deposits held to maturity, with credit and interest rate risk in the banking book. The reversed statements are incorrect.

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