GARP Financial Risk and Regulation (FRR) Series 2016-FRR Question # 14 Topic 2 Discussion
2016-FRR Exam Topic 2 Question 14 Discussion:
Question #: 14
Topic #: 2
A large number of traders decide to follow the same trading strategy and sell a substantial portion of their physical gold holdings on the markets. The positions held by the traders are an example of what?
Crowded trades occur when many market participants adopt the same trading strategy, leading to concentrated positions in a specific asset (e.g., selling physical gold). This increases systemic risk, as a sudden reversal or liquidity crunch can amplify losses. GARP’s FRR materials discuss crowded trades in the context of market risk and systemic vulnerabilities, noting their potential to destabilize markets. Basis trades involve exploiting price differences between related instruments, disappearance trades and break trades are not standard terms in this context, making "crowded trades" the correct answer.
[Reference:GARP FRR Study Notes, Market Risk Section; BCBS, "Basel III: A Global Regulatory Framework," para. 701., ]
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