10. Market risk

Question 1

What is Market risk?

Answer 1

Risk of losses in on- and offbalance sheet risk positions arising from
movements in market prices

Question 2

Describe banking book?

Answer 2

• Assets on balance sheet expected to be held to maturity. Expect earn but not a significant turnover.
  -IR ris in banking book (IRRBB): to meassure impact.
  -Held under Pillar2: prescriptions under ICAAP process
• Any intrument not meeting “trading book requirements” musc be assigned to banking book.

Question 3

Describe Trading book

Answer 3

• Assets available for sale and hence regularly traded.
• IR risk in trading book asses imapct and hold capital against potencial loss.
• Held under Pillar 1: chapital changes for market risks

Question 4

What is FRTB methodology?

Answer 4

• Involved with exposures to interest rates regardless of the type of instrumen.
• Also concenred with exposure to other risks (for ex, FX: foreign exchange)
• Portfolio approach to calculate capital charges.
• FRTB demands a clear segregation of banking book and trading book instruments

Question 5

Trading book Instruments?

Answer 5

*Thet should:
-Be manages in a trading desk
- Be part of correlation trading portfolio
- Give rise to net short credit or equity position in the banking book
* Equity investment ina fund with chance of daily look - through
*Listed equity Instruments held as accounting trading assets or
liabilities
*Market-making activities
*Trading-related repo-style transactions

Question 6

Banking Book Instruments?

Answer 6

*Unlisted Equity
*Securitisation warehousing
* Real state holdings
*Retail and SME credit
*Derivative instruments with some other instument type as underlying asset
* Any other instrument has to be assigned to the banking book that
is not a trading book position

Question 7

front office, middle office and back office?

Answer 7

*Front office: Trading function within a financial institution
*Middle office: Capital Planning, Risks Management and Regulatory Compliance
the
* Back office: The record keeping function

Question 8

What are the two levels of trading risk?

Answer 8

1) Front offcie risk: exposure to individual market variables
2) Middle office: exposure of all traders to determine whether the risk is acceptable.

Question 9

FRTB Traiding desk requirements:

Answer 9

1) Group of traders
2) Well define buisness strategy
3) Clear risk mng structure
4) Approval by supervisor