Ultimate access to all questions.
Explanation:
Longer-maturity government bonds are more sensitive to changes in interest rates because their market value fluctuates significantly with rate changes. By increasing its holdings of these bonds, Emergingland is more exposed to valuation risk, which refers to the risk of a decline in the market value of these assets as interest rates rise. This is distinct from interest rate risk impacting net interest income (NII) through repricing mismatches.
B is incorrect: Longer-maturity bonds are more sensitive to rate changes. C is incorrect: Increased valuation risk necessitates more hedging. D is incorrect: The primary risk associated with longer-maturity government bonds is valuation risk due to interest rate changes, not credit risk, as government bonds typically have low credit risk.
Q.6376 Following the 2022 inflationary peak, a hypothetical EME, "Emergingland," experienced a significant increase in its holdings of longer-maturity government bonds. According to the BIS report, which of the following is a most likely consequence of this shift in Emergingland's asset portfolio?
A
Increased exposure to valuation risk.
B
Reduced exposure to interest rate risk.
C
Decreased need for hedging strategies.
D
Shift from managing NII to managing credit risk.
No comments yet.