Explanation:
When EME banks increase their holdings of longer-maturity securities, they become more exposed to valuation risk because the market value of these securities is sensitive to changes in interest rates. Rising interest rates can lead to a decrease in the market value of long-term securities, directly impacting the bank’s economic value. This represents a shift from primarily focusing on net interest income (NII) risk, which is tied to the margin between asset and liability repricing, to managing the valuation risk of fixed-income securities.
A is incorrect: While diversification is generally good, the increased maturity specifically increases interest rate risk.
B is incorrect: The increased valuation risk necessitates more complex (not simpler) risk management.
D is incorrect: While the impact of short-term rates might be less direct, they are still exposed to changes in the overall yield curve and the impact of long-term rates on bond valuations.
Ultimate access to all questions.
Q.6356 How does the increasing holding of securities, especially longer-maturity ones, by EME banks affect their interest rate risk exposure?
A
It reduces their overall interest rate risk by diversifying their asset portfolios.
B
It simplifies their interest rate risk management by allowing them to primarily focus on repricing gap management.
C
It shifts their risk exposure from primarily net interest income (NII) risk to also include valuation risk.
D
It makes them less vulnerable to changes in short-term interest rates.
No comments yet.