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    Question

    Match the following:

    A) Credit Risk                       P) Risk of price movements

    B) Operational Risk            Q) Long-term asset short-term liabilities

    C) Liquidity Risk                  R) Risk of default

    D) Market Risk                    S) Risk due to failure of systems and process

    A A-P, B-S, C-R, D-Q Correct Answer Incorrect Answer
    B A-R, B-P, C-S, D-Q Correct Answer Incorrect Answer
    C A-R, B-S, C-Q, D-P Correct Answer Incorrect Answer
    D A-Q, B-R, C-P, D-S Correct Answer Incorrect Answer
    E None of these Correct Answer Incorrect Answer

    Solution

    Credit Risk - This is the risk of non recovery of loan or the risk of reduction in the value of asset.    The credit risk also includes the pre-payment risk resulting in loss of opportunity to the bank to earn higher interest interest income. Credit Risk also arises due excess exposure to a single borrower, industry or a geographical area. Operational risk is the prospect of loss resulting from inadequate or failed procedures, systems or policies. Employee errors. Systems failures. Fraud or other criminal activity. Any event that disrupts business processes. Liquidity Risk - The liquidity risk of banks arises from funding of long-term assets by short-term liabilities, thereby making the liabilities subject to rollover or refinancing risk. Market Risk/ Price Risk - The risk of adverse deviations of the mark-to-market value of the trading portfolio, due to market movements, during the period required to liquidate the transactions is termed as Market Risk. This risk results from adverse movements in the level or volatility of the market prices of interest rate instruments, equities, commodities, and currencies. It is also referred to as Price Risk.

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