Introduction
A trading book is a collection of several fiscal instruments that are held by a broking firm or a bank. Financial instruments constituting a trading book are bought or sold for various reasons.
For instance, instruments can be traded in order to support trade activities for clients or to gain from trading on spreads between the ask and bid prices.
Furthermore, they are also traded to create a hedge against various risks involved. The trading books have no fixed size, and they can range from a few hundred rupees to thousands of rupees put together, depending on the size of the organisation.
Breaking Down Trading Book
Most financial institutions make use of a complex risk metric in order to handle and minimise the risk pertaining to their trading books. Trading books act as a kind of accounting ledger, and they track the securities being held by the financial organisation which are actively traded.
Furthermore, trading history is always reviewed inside the trading book by finding a more straightforward way of reviewing the organisation’s past activities of the securities associated. This varies across banking books as securities contained in trading books are not meant to be held until they mature, whereas the securities constituting a banking book will be held over a long period of time.
Implications of Losses in Trading Books
Trading books can prove to a source of severe losses inside a financial institution. Losses may happen on the back of a higher degree of leverages being made use of by a financial institution in order to construct a trading book.
Apart from that, another source of losses in trading books is disproportionate and extremely concentrated third parties on particular securities or sectors by reckless traders.
