Question

    A bank borrows Rs.50 crore from call money market on a

    daily basis. It invests in 5-year Government of India bonds with YTM of 7.10% having market value of Rs.40 crore. The bank plans to sell these bonds within 20 days. The bank faces the following risk in this case?
    A Market risk Correct Answer Incorrect Answer
    B Gap risk Correct Answer Incorrect Answer
    C Operational risk Correct Answer Incorrect Answer
    D Funding risk Correct Answer Incorrect Answer
    E Credit Risk Correct Answer Incorrect Answer

    Solution

    Market risk is the risk of loss arising from movements in market prices or rates away from the rates or prices set out in a transaction or agreement. The investment in government bond is for 20 days during which the bank faces the risk of change in the market value of the bond thereby exposing it to the market risk.

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