The correct answer is D.

Mapping should preserve the market value as well as the market risk of the position. The fundamental purpose of mapping is to pinpoint risk factors that account for the current values of the portfolio positions. By preserving the market value, the assumption is enforced that the total value of the position can be attributed to the identified risk factors. Furthermore, by preserving the market risk, the assumption is reinforced that the identified risk factors are a true representative of the total market risk. This means that the risk factors identified should be able to explain both the current market value and the potential changes in the market value due to market risk. Therefore, a good mapping approach should be able to preserve both the market value and the market risk of the position.

Choice A is incorrect. While preserving the market value of the instrument is important, it is not the only aspect to consider when mapping. The risk associated with the position also needs to be preserved in order to accurately reflect its potential impact on the portfolio.

Choice B is incorrect. Preserving both par value and market risk may seem like a comprehensive approach, but it fails to account for other types of risks that could affect the position, such as interest rate risk or credit risk. Therefore, this approach would not provide a complete picture of all potential risks.

Choice C is incorrect. Although preserving both market value and interest rate risk can be beneficial in certain situations, this approach does not take into account other types of market risks that could potentially affect the position's performance.

Things to Remember

• Mapping is a crucial step in risk management that involves aligning portfolio or instrument positions with identified risk factors.
• Mapping helps in understanding how different risk factors contribute to the overall risk profile of the portfolio.