Explanation:
The remaining value is allocated to cash, which is not a risk factor. In the context of financial risk management, cash is considered a ‘risk-free’ asset. This is because cash does not fluctuate in value due to market risk.
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Q.1513 As we know, mapping is the simple process of analyzing the market instruments on primitive risk factors. Considering this concept, let’s take a single instrument that has a market value of . It is allocated to specific risk exposures namely , , and . Suppose not all of the current market value is allocated to these risk factors, and there are no omitted factors. What does that imply with regard to the remaining value?
A
The remainder value is not exposed to any risk.
B
The remainder value is allocated to cash which is not a risk factor.
C
The remainder value is allocated to a separate set of risk factors.
D
The remainder value’s risk exposure is very difficult to measure.