Practice Quiz

FRM Financial Risk Manager Practice Test

Category - Risk

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A risk has two components: uncertainty and exposure. Interest rate risk is therefore a risk to the earnings or market value of a portfolio due to
  1. Exposure to interest rate fluctuations.
  2. Uncertainty in interests.
  3. Exposure to uncertain current interest rates.
  4. Uncertain future interest rate.
Explanation
Interest rate risk is a risk to the earnings or market value of a portfolio due to uncertain future interest rates. Future interest rates are uncertain and unpredictable. Therefore, an exposure to interest rates leads to a risk.

Key Takeaway: If future interest rates can be forecast and anticipated, then the level of risk can be reduced.
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