Explanation:
The trading book consists of financial instruments that a bank intends to trade actively. These instruments are subject to daily revaluation, also known as 'mark-to-market'. This process involves adjusting the value of the instrument to reflect its current market value. The rationale behind this practice is to provide a more accurate representation of the instrument's value at any given point in time, considering the fluctuations in market prices. This practice is in line with the trading book's nature, which involves frequent buying and selling of instruments, thereby necessitating the need for regular updates on their market values. Therefore, instruments in the trading book are indeed marked-to-market, making choice A the correct answer.
Choice B is incorrect. Instruments in the banking book are not subject to daily revaluation or 'mark-to-market'. These instruments are typically held until maturity and are valued at their historical cost, not their current market value.
Choice C is incorrect. While it might seem logical that all financial instruments would be subject to daily revaluation, this is not the case under FRTB guidelines. Only instruments in the trading book undergo this process.
Choice D is incorrect. As explained above, there are indeed financial instruments that undergo daily revaluation or 'mark-to-market', specifically those in the trading book as per FRTB guidelines.
Things to Remember
Ultimate access to all questions.
Q.2369 The Fundamental Review of Trading Book (FRTB), among other things, defines the type of instruments which should be put either in the trading or the banking book. Which instruments are marked-to-market?
A
Instruments in the trading book
B
Instruments in the banking book
C
Instruments in both the banking and the trading books
D
None of the above
No comments yet.