Market Risk and Credit Risk in Treasury

Market Risk and Credit Risk are two types of risk that treasury departments need to manage.

  • Market Risk: Market Risk is the risk that the value of an investment will change due to changes in market prices. For example, if the price of a stock falls, the treasury department will lose money on its investment.
  • Credit Risk: Credit Risk is the risk that a borrower will default on a loan. For example, if a company that the treasury department has lent money to goes bankrupt, the treasury department will not be repaid.

MCQs on Market Risk and Credit Risk in Treasury:

  1. Which of the following is not an example of Market Risk?
    • The price of a stock falls
    • The interest rate on a bond rises
    • The exchange rate between two currencies changes
    • The credit rating of a company falls
    • Answer: The credit rating of a company falls
  2. Which of the following is not an example of Credit Risk?
    • A company that the treasury department has lent money to goes bankrupt
    • A government that the treasury department has lent money to defaults on its loan
    • A borrower fails to make a payment on a loan
    • The price of a stock falls
    • Answer: The price of a stock falls
  3. Market Risk and Credit Risk can both have a significant impact on the treasury department’s profits. It is important to manage these risks effectively to protect the company’s financial health.
    • True
    • False
    • Answer: True
  4. There are a number of things that treasury departments can do to manage Market Risk and Credit Risk. These include:
    • Diversifying investments
  • Hedging
  • Setting limits on risk exposure
  • Monitoring market conditions
  • Conducting credit risk assessments
    • All of the above
    • Answer: All of the above
  1. Treasury departments should regularly review their Market Risk and Credit Risk management strategies to ensure that they are still effective. They should also be prepared to respond to changes in the market environment.
    • True
    • False
    • Answer: True

Conclusion

Market Risk and Credit Risk are two important risks that treasury departments need to manage. By understanding these risks and taking steps to mitigate them, treasury departments can help to protect the company’s financial health.

Here are some additional points to keep in mind about Market Risk and Credit Risk in Treasury:

  • Market Risk and Credit Risk are not mutually exclusive. A treasury department can be exposed to both Market Risk and Credit Risk at the same time.
  • Market Risk and Credit Risk can be managed using a variety of techniques, such as diversification, hedging, and setting limits on risk exposure.
  • Treasury departments should regularly review their Market Risk and Credit Risk management strategies to ensure that they are still effective. They should also be prepared to respond to changes in the market environment.