Question

A bank funds its assets from a pool of composite liabilities. Apart from credit and operational risks, it faces select one: a. Liquidity risk b. Basis risk c. Mismatch risk d. Market risk

Answer 1

Answer:

a.liquidity risk

Explanation:

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Answer 2

A ‘bank funds’ its assets from a ‘pool of composite liabilities’. Apart from credit and operational risks, it faces Basis risk.  

Option: (b)

Explanation:

• The basis risk is the risk that a supplier or trader takes while trading the assets by taking on a contrary position for future contracts.  

• It is a risk taken by them which entails that the risk of the future prices may not be steady or normal with the correlation of the prices which are put as the assets and this fluctuation can affect the traders.  

• This fluctuation can lead to negating the effectivity of strategic techniques which is used to reduce the trader’s exposure to loss.