- 20 Marks
RM – APR 2023 – L4 – Q4 – Market Risk and Liquidity Management
Explain market risk, its manifestations, management principles, and the role of a Liquidity Contingency Plan, with examples.
Question
The recent Debt Exchange Programme of the government has brought to the fore the concept of Market risk and its effect on banks’ balance sheets and profitability. You are being considered for the position of Treasury Front Office Head and have been asked to explain what constitutes Market Risk and how the bank may manage this risk. Explain in detail and with examples:
i) What this risk entails, mentioning operational areas where this risk manifests? (5 marks)
(ii) Mention some market risk management principles applied in dealing with this specific risk. (10 marks)
(iii) Explain the concept of a Liquidity Contingency Plan and how it helps a bank in the management of its liquidity to prevent it from reneging on its contractual obligations to all counterpartries. (5 marks)
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