Volatility risk is not considered a market variable according to the Fundamental Review of the Trading Book (FRTB). The FRTB, issued by the Basel Committee on Banking Supervision, outlines several categories of market variables that are used in the banking sector to assess and manage various types of risks associated with trading activities. These categories include interest rate risk, equity risk, foreign exchange risk, commodity risk, and credit risk. However, volatility risk is not included in these categories. Volatility risk refers to the risk of a change in the value of a financial instrument, portfolio, or entire market due to fluctuations in volatility. While volatility is a significant factor in assessing market risk, it is not considered a separate category of market variables under the FRTB. Instead, volatility is often considered as part of other risk categories, such as equity risk and foreign exchange risk, where it plays a crucial role in determining the riskiness of different financial instruments.

Choice A is incorrect. Equity risk is considered a market variable according to the FRTB. It refers to the risk of loss due to changes in the prices of stocks and other equity instruments.

Choice B is incorrect. Commodity risk, which pertains to potential losses due to changes in commodity prices, such as oil or gold, is also recognized as a market variable by the FRTB.

Choice D is incorrect. Foreign exchange risk, which arises from fluctuations in currency exchange rates impacting an institution's financial position, is included among the market variables outlined by FRTB.

Things to Remember

• Market risk refers to the risk of losses in on and off-balance sheet positions arising from adverse movements in market prices.
• Interest rate risk is the risk of loss due to changes in interest rates affecting the value of financial instruments.
• Credit risk is the risk of loss due to the failure of a borrower or counterparty to meet their financial obligations.