b. Market risk
Market risk arises on account of exchange rate and interest rate
movements. b.1.Currency Risk: Currency risk arises due to
uncertainty in exchange rates.
It also arises with an appreciation of the domestic currency
reduce the domestic currency value of international reserves.
b.2.Interest Rate Risk: The crucial aspect of
the management of interest rate risk is to protect the value of the investments
as much as possible from the adverse impact of the interest rate movements.
This risk involves the adverse effects of increases in market yields that
reduce the present value of fixed interest investments in the reserve
portfolio.
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