GARP Financial Risk and Regulation (FRR) Series 2016-FRR Question # 26 Topic 3 Discussion
2016-FRR Exam Topic 3 Question 26 Discussion:
Question #: 26
Topic #: 3
Unico Bank, concerned with managing the risk of its trading strategies, wants to implement the trading strategy that exposes the bank to the lowest market risk. Which one of the following four strategies should Unico take to limit its risk exposure?
A.
A matched book strategy that allows the trading desk to match all customer positions immediately with an equal and opposite position by trading internally or with another bank.
B.
A covering strategy that manages positions in the product by executing covering deals or hedging deal at the discretion of the trading des.
C.
A passive hedging strategy that allows the traders to price transactions with customers and other banks, at the relevant bid price on the market.
D.
A market-maker strategy that allows the traders to quote a buy and sell price to customers and other banks and to trade at the relevant price on the sell side of the market.
A matched book strategy involves matching every position with an offsetting position, effectively minimizing market risk. This strategy ensures that the bank's exposure to market fluctuations is neutralized, which is ideal for limiting risk exposure.
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