What is the primary distinction between market risk in the trading book versus the banking book?

Question

BlackTom AI · Accepted Answer

The question asks: What is the primary distinction between market risk in the trading book versus the banking book?

Since the provided data does not include any answer options to evaluate, I will base the analysis on the commonly accepted distinction described in the given correct answer text.

First, consider the trading book: assets in this book are typically held for short-term trading or to exploit market movements. They are marked-to-market, meaning their value is updated to current market prices on a frequent basis, and they have short holding periods. This setup makes market risk measurement highly responsive to fluctuations in market prices and volatility, often using models like value-at-risk (VaR) over short horizons to quantify potential losses.

Next, consider the banking book: assets are generally held with longer-term objectives, such as funding or cash-flow management, and they tend to be less liquid. Their prices are not marked-to-market as frequently, and holding periods are longer to match the asset’s cash flows and interest-rate risk profile. Market risk in the banking book is typically less about instantaneous price moves and more about changes in interest rates, liquidity risk, and other long-horizon risk factors, with different risk management and capital treatment compared to the trading book.

Putting it together, the primary distinction highlighted by the statement is that trading-book assets are marked-to-market with short holding periods to capture frequent market-price fluctuations, whereas banking-book assets are relatively illiquid with longer holding periods, making their risk assessment and measurement focused more on longer-term cash flows and interest-rate exposure rather than frequent mark-to-market swings.

A reader should keep in mind that, in practice, banks separate risk measurement and capital requirements for these two books to align with their distinct risk profiles: volatile, short-term market risk in the trading book versus longer-term, sometimes less liquid risk in the banking book.

BU.231.710.51.FA25 PoP Quiz - 1 (Week 4)

What is the primary distinction between market risk in the trading book versus the banking book?

View Explanation

Log in for full answers

Similar Questions

An unexpected post on social media caused the prices of 22 different companies’ stocks to immediately increase by 10 to 15 percent. This occurrence is best described as an example of ________ risk.

Which type of risk involves financial loss due to market fluctuations?

Inflation, recession, and high interest rates are economic events that are best characterized as being

In the context of the Capital Asset Pricing Model (CAPM), the relevant risk is

Market risk tends to rise when recent news has been more surprising than before.

Market risk tends to rise when the market anticipates important but uncertain news events.

Market risk tends to rise when recent news has been more surprising than before.

Market risk tends to rise when the market anticipates important but uncertain news events.

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler