Financial Risk and Regulation 2016-FRR Dumps PDF

A fully hedged portfolio is designed to minimize or eliminate the impact of market price changes on the portfolio’s value. Here are the correct and incorrect statements about hedging:

Correct Statements:

Traders can hedge their risks by taking an appropriate position in the underlying instrument.

Traders can hedge their portfolio risks by taking a position in a different instrument.

A large number of hedge positions is generally required to match the underlying transaction completely.

Incorrect Statement:

For a fully hedged portfolio, any changes in market prices will typically produce significant changes in the market value of the portfolio.

This statement is incorrect because the purpose of hedging is to protect the portfolio from market price changes, hence reducing the impact of such changes on the portfolio's value.

References

Source: How Finance Works​

A $10,000,000 loan to IBM worth $9,800,000 would most likely not be included in the trading book. Loans held to maturity are generally part of the banking book rather than the trading book, which typically includes assets intended for trading and short-term profit.

Entering into interest rate swaps can help a risk analyst reduce the bank's exposure to rising interest rates. Interest rate swaps can be used to convert variable-rate liabilities into fixed-rate liabilities, thereby reducing the risk associated with rising interest rates.

The Chief Risk Officer (CRO) should report to the CEO or the Board of Directors. This ensures that the CRO maintains independence from the business units whose activities they are monitoring and managing, which is critical for unbiased risk assessment and management.