CAIIB BFM Treasury MCQs: Unit 19 Module C

Correct Answer: C. Maintaining cash balances and ensuring compliance. The traditional role of treasury was primarily focused on managing liquidity by maintaining cash balances and complying with regulations like CRR and SLR.

Correct Answer: C. Functioning as a profit center through investments. The modern treasury role has evolved to include activities like proprietary trading and investments, aiming to generate profit for the organization.

Correct Answer: C. Utilizing interest rate differences for profit. Interest arbitrage, which involves profiting from differences in interest rates across markets, is a driver for an integrated treasury.

Correct Answer: B. Integrated Treasury. Meeting reserve requirements like CRR and SLR is a function of an integrated treasury, which combines traditional and modern roles.

Correct Answer: C. Focusing only on minimizing risks. While risk management is a function, integrated treasury also focuses on profit optimization.

Correct Answer: C. Liquidity Management. Liquidity management involves ensuring the availability of funds for short, medium, and long-term needs.

Correct Answer: B. Trading in markets to generate profit. Proprietary positions refer to the treasury’s own trading activities aimed at making profits.

Correct Answer: C. Risk Management. Risk management in treasury includes addressing mismatches between assets and liabilities managed under ALM.

Correct Answer: C. ALM Book. The ALM book is specifically used to manage the internal risks and liquidity of the financial institution.

Correct Answer: C. Merchant Book. The merchant book handles client-related transactions, particularly in foreign exchange and derivatives.

Correct Answer: C. Trading Book. The trading book holds the proprietary trading positions taken by the treasury for profit.

Correct Answer: C. Deregulation of interest rates. Financial reforms led to the deregulation of interest rates, significantly impacting treasury operations.

Correct Answer: C. It led to greater market integration. Globalization resulted in the integration of domestic markets with global markets, impacting treasury activities.

Correct Answer: C. Derivatives. Derivatives provided treasury with new tools for managing various types of financial risks.

Correct Answer: B. They started having more direct interaction with treasury. Corporate clients began interacting more directly with the treasury for their financial needs.

Correct Answer: C. Integration of domestic markets with global markets. Globalization in this context refers to the merging of a country’s financial markets with the rest of the world.

Correct Answer: C. Free flow of capital between countries. Globalization is characterized by the ease with which capital can move across international borders.

Correct Answer: C. By the central banks of the respective countries. Central banks usually regulate capital flows due to their potential impact on the national economy.

Correct Answer: C. Growth facilitated by the inflow of capital. Globalization allows emerging markets to receive capital from other countries, which can fuel economic growth.

Correct Answer: C. Buying shares of a company listed on a foreign stock exchange. Portfolio investment involves the purchase of financial assets like stocks and bonds.

Correct Answer: B. Loans taken by Indian companies from foreign lenders. ECBs are a way for Indian companies to raise funds from international markets.

Correct Answer: C. To boost the development of capital markets. The post-1990s reforms aimed at strengthening and expanding India’s financial markets.

Correct Answer: C. Foreign Exchange Regulation Act (FERA). FEMA 2000 superseded FERA, bringing changes to the regulation of foreign exchange in India.

Correct Answer: C. Reserve Bank of India (RBI). The RBI is the apex monetary authority and central bank of India.

Correct Answer: B. Securities and Exchange Board of India (SEBI). SEBI is responsible for regulating the stock market and protecting investors in India.

Correct Answer: B. Insurance Regulatory and Development Authority. IRDA regulates and develops the insurance sector in India.

Correct Answer: C. Providing clearing and settlement services for financial transactions. CCIL plays a crucial role in ensuring the smooth and efficient settlement of trades.

Correct Answer: D. National Securities Depository Limited (NSDL). NSDL is one of the main depositories in India for holding and transferring securities electronically.

Correct Answer: B. Current account transactions. India liberalized most current account transactions, making it easier for residents to conduct international trade and payments.

Correct Answer: C. For effective management of financial risks. India maintains partial capital account convertibility to manage potential risks associated with large capital flows.

Correct Answer: C. They can influence the direction and level of domestic rates. In a globalized world, capital flows can link interest rates across countries.

Correct Answer: C. Managed float. The Rupee exchange rate is a managed float, meaning its value is primarily determined by market forces but can be influenced by the central bank.

Correct Answer: C. Currency swap. Currency swaps are agreements to exchange cash flows in one currency for those in another.

Correct Answer: C. 91-Day Treasury Bills. 91-Day Treasury Bills are one of the underlying assets for IRFs traded in India.

Correct Answer: C. Overseas correspondent banks. The RBI permits Indian banks to borrow foreign currency from their correspondent banks located abroad.

Correct Answer: B. Securities and Exchange Board of India (SEBI). SEBI is the primary regulator for transactions on stock exchanges in India.

Correct Answer: C. Increased volatility in exchange rates. Globalization can lead to greater fluctuations in exchange rates due to increased capital flows.

Correct Answer: B. No, it affects all banks and financial institutions. Globalization’s effects are widespread and influence the entire financial system, not just those with direct international presence.

Correct Answer: C. The potential for generating high returns with leverage in inter-bank markets. The possibility of high returns through leveraging funds in inter-bank markets with low credit risk was a key reason for this shift.

Correct Answer: C. Centralized nature of treasury operations. Treasury operations are typically centralized, leading to lower operational costs compared to the widespread network of branches.

Correct Answer: B. Through the difference between the buying and selling rates of currencies (the spread). Banks profit from the margin they charge between the price at which they buy and sell foreign currencies.

Correct Answer: C. To minimize the risk of losses due to exchange rate changes. An open position exposes the bank to potential losses if exchange rates move unfavorably.

Correct Answer: B. By lending surplus funds and borrowing funds as needed. Treasury profits in the money market by earning interest on surplus funds lent and paying interest on borrowed funds.

Correct Answer: C. Transfer Pricing Mechanism. This mechanism allocates the cost of funds to different departments within the bank, including treasury, which is essential for assessing profitability.

Correct Answer: B. To fulfill the Statutory Liquidity Ratio (SLR) requirements. Banks are mandated to invest a certain portion of their deposits in government securities to meet SLR.

Correct Answer: C. Profiting from differences in interest rates or prices across different markets. Arbitrage aims to make risk-free profit by taking advantage of price discrepancies.

Correct Answer: C. Commercial paper. Commercial paper is a short-term, unsecured promissory note issued by corporations.

Correct Answer: C. To generate profit by speculating on anticipated price movements. Trading involves taking positions in various assets with the expectation of favorable price changes.

Correct Answer: C. Government bonds. Government bonds are actively traded in the securities market.

Correct Answer: C. Credit instruments. CDOs are a type of structured credit product.

Correct Answer: C. Forward Rate Agreement (FRA). FRAs are over-the-counter contracts that allow parties to lock in an interest rate for a future period.

Correct Answer: C. The net exposure to a particular foreign currency at the end of the day. This exposure makes the bank vulnerable to exchange rate fluctuations.

Correct Answer: C. To accurately assess the profitability of treasury’s operations. It helps in understanding the true cost of funds used by the treasury.

Correct Answer: B. Making profit by taking advantage of market inefficiencies with minimal risk. Arbitrage involves exploiting price differences for the same asset in different markets simultaneously.

Correct Answer: B. Arbitrage involves simultaneous buying and selling, while trading is based on anticipated price changes. Arbitrage seeks to exploit current price differences, whereas trading anticipates future movements.

Correct Answer: C. Market risk. Market risk encompasses the risk of losses from changes in market factors like interest rates, exchange rates, and equity prices.

Correct Answer: C. Profitability adjusted for the level of risk taken and capital used. RAROC helps in evaluating how efficiently the bank is using its capital relative to the risk it undertakes.

Correct Answer: C. It is a significant contributor to the bank’s gross income. Treasury activities are highlighted as a major source of revenue for the bank.

Correct Answer: C. Facilitating transfer pricing within the bank. Treasury plays a crucial role in allocating the cost of funds across different business units.

Correct Answer: B. By assessing and managing various financial risks. Treasury’s risk assessment functions are vital for effective ALM.

Correct Answer: B. As a bank department or a specialized branch.

Correct Answer: C. Direct authorization for foreign exchange dealing. Specialized branches can have direct authorization for forex dealing.

Correct Answer: C. A senior manager like a General Manager or Chief Treasury Officer (CTO). The treasury is usually led by a senior management professional.

Correct Answer: C. Chief Financial Officer (CFO) or Chief Executive Officer (CEO). The reporting line for the Head of Treasury is typically to the CFO or CEO.

Correct Answer: C. Front Office (Dealing Room). The Front Office, also known as the dealing room, is where trading activities take place.

Correct Answer: C. Foreign exchange, money markets, and securities markets. Front Office dealers typically focus on these market segments.

Correct Answer: C. Primary market corporate debt. The Investment Department usually handles the initial issuance of corporate debt.

Correct Answer: C. Verifying, settling, and accounting for deals. The Back Office ensures the smooth processing of transactions.

Correct Answer: C. Deal verification. This process ensures the accuracy of the executed trades.

Correct Answer: C. Back Office. The Back Office handles the operational aspects of the bank’s relationship with the central bank.

Correct Answer: C. To avoid financial and reputational damage. Delays in settlement can lead to financial losses and harm the bank’s reputation.

Correct Answer: C. Risk monitoring, compliance, and performance reporting. The Mid-Office focuses on oversight and control functions.

Correct Answer: C. Mid-Office. This is a key aspect of risk management performed by the Mid-Office.

Correct Answer: C. Asset Liability Management Committee (ALCO) and Head of Risk Management. This independent reporting line ensures proper oversight of risks.

Correct Answer: B. Handling primary market issues of non-SLR securities. The Investment Department deals with the initial issuance of corporate debt and similar instruments.

Correct Answer: C. Rs. 5 crores.

Correct Answer: C. Accounts department. Accounts is a support function that falls under administrative departments.

Correct Answer: B. Providing guaranteed settlement and managing counterparty risk. CCIL plays a crucial role in ensuring the safety and efficiency of financial transactions.

Correct Answer: C. To oversee the bank’s overall ALM strategy. ALCO is responsible for managing the balance sheet risks of the bank.

Correct Answer: C. Accounts a bank holds in foreign currency with correspondent banks abroad. These accounts are used for international transactions.

Correct Answer: B. SLR securities are mandatory holdings for banks as per regulations, while non-SLR are typically corporate debt. This highlights the regulatory requirement for SLR securities.

Correct Answer: C. The annualized yield is calculated as (Forward Rate – Spot Rate) / Spot Rate * (365 / Number of Days) = (75.06 – 75.00) / 75.00 * (365 / 7) ≈ 0.0417, which is 4.17%.

Correct Answer: D. The total return is the sum of the yield from the swap and the yield from the deposit: 4.17% + 0.15% = 4.32%.

Correct Answer: A. The arbitrage gain is the difference between the return from the Forex Treasury’s strategy and the return from the domestic lending option: 4.32% – 3.50% = 0.82%.