Module: | MODULE A: INTERNATIONAL BANKING
Q11: Consider the following statements regarding the specific trading limits established to control operational and market risks in foreign exchange operations. Identify the correct combination.
Statement 1. A deal size limit dictates the maximum quantum of foreign exchange a dealer is authorized to buy or sell in a single, individual transaction with a counterparty.
Statement 2. A stop-loss limit is an automated or strictly enforced risk threshold that forces a dealer to immediately liquidate an open position once the market moves against them by a predetermined amount, thereby capping total losses.
Statement 3. The Reserve Bank of India standardizes and directly assigns identical stop-loss and deal size limits to every authorized commercial bank in the country, regardless of the bank individual net worth.
Statement 2. A stop-loss limit is an automated or strictly enforced risk threshold that forces a dealer to immediately liquidate an open position once the market moves against them by a predetermined amount, thereby capping total losses.
Statement 3. The Reserve Bank of India standardizes and directly assigns identical stop-loss and deal size limits to every authorized commercial bank in the country, regardless of the bank individual net worth.
✅ Correct Answer: A
🎯 Quick Answer:
Option A is correct because Statement III misrepresents how trading limits are determined.Structural Breakdown: Statement I is correct.
Deal size limits prevent a junior trader from accidentally or intentionally executing a multi million dollar transaction that could disrupt the bank liquidity.
Statement II is correct.
A stop-loss is the ultimate safety net.
If a dealer expects the US Dollar to rise and buys it, but the market unexpectedly crashes, the stop-loss rule forces the dealer to sell and take a small loss before it becomes a devastating one.
Statement III is incorrect.
The Reserve Bank of India does not assign identical limits to all banks.
Instead, the central bank mandates that each individual bank Board of Directors must draft their own risk management policy.
The limits are custom tailored based on the specific bank capital base, risk appetite, and the experience level of its dealers.