The main components of market risk are liquidity risk, interest rate risk, and currency risk. Which option correctly reflects this statement?

Introduction / Context:
In risk management, market risk refers to the possibility of losses due to movements in market variables such as interest rates, foreign exchange rates, and liquidity conditions. Banks and financial institutions classify risk into various components to monitor and control exposures. This question checks whether you recognise liquidity risk, interest rate risk, and currency risk as important elements of overall market risk.

Given Data / Assumptions:

• The statement lists three items: liquidity risk, interest rate risk, and currency risk.
• We must decide whether one, two, or all of these are considered components of market risk.
• The focus is on typical exam oriented classifications rather than deep theoretical debates.
• All three risks relate to changes in market conditions that can affect asset values and funding costs.

Concept / Approach:
Market risk broadly covers the risk of losses due to movements in market prices and rates. Interest rate risk arises when changes in rates affect the value of assets and liabilities. Currency or foreign exchange risk arises from movements in exchange rates. Liquidity risk, while sometimes discussed as a separate category, is closely linked to market conditions that affect the ability to buy or sell assets and to obtain funding. Many exam frameworks treat all three as important aspects when analysing market related exposures.

Step-by-Step Solution:
Step 1: Recognise that interest rate risk clearly falls under market risk because it is driven by changes in market interest rates. Step 2: Acknowledge that currency risk is also a classic form of market risk, as profits and asset values can change with exchange rates. Step 3: Consider liquidity risk, which reflects the difficulty in selling assets or obtaining funding at a reasonable cost in stressed market conditions. Step 4: Note that exam oriented classification often groups these into the broader discussion of market risk affecting banks and financial institutions. Step 5: Therefore, the option that includes all three risks best matches the question statement.

Verification / Alternative Check:
In many risk management study materials, the list of market risks for banks includes interest rate risk, foreign exchange risk, equity price risk, commodity price risk, and sometimes liquidity risk. Although some frameworks treat liquidity risk separately, exam questions like this one are usually designed so that candidates recognise liquidity risk as a major element in the discussion of market related risks. Hence, choosing all three is consistent with common exam expectations.

Why Other Options Are Wrong:
Selecting only liquidity risk ignores the role of interest rates and currencies in market exposures. Choosing both liquidity and interest rate risk leaves out currency risk, which is a core part of market risk. Selecting only currency risk omits the importance of interest rate and liquidity conditions.

Common Pitfalls:
Some candidates may overthink the classification and argue that liquidity risk should be separate, which can lead them to eliminate it incorrectly. Others may misread the question and assume it is asking which single risk is the most important. It is important to answer based on the wording provided and typical exam patterns.

Final Answer:
The correct interpretation is that all three, that is liquidity risk, interest rate risk, and currency risk, are main components of market risk in the context of this question.