Module: | MODULE B: RISK MANAGEMENT
Q360: Consider the following statements regarding the operational and structural limits applied to treasury front-office operations:
1. Deal Size Limits dictate the maximum notional amount that can be executed in a single transaction, acting as a safeguard against "fat-finger" errors and outsized execution risks.
2. Product Limits restrict dealers from trading unauthorized, non-standard, or highly complex exotic derivatives without specific prior approval from the Board or ALCO.
3. Tenor Restrictions are strictly applied only to the equity portfolio and have no practical relevance for money market lending or foreign exchange forward contracts.
2. Product Limits restrict dealers from trading unauthorized, non-standard, or highly complex exotic derivatives without specific prior approval from the Board or ALCO.
3. Tenor Restrictions are strictly applied only to the equity portfolio and have no practical relevance for money market lending or foreign exchange forward contracts.
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: Deal Size Limits cap the notional size of individual trades.
This prevents massive liquidity crunches from a single order and mitigates operational risks, such as a dealer accidentally adding an extra zero to a trade (a "fat-finger" error). Statement 2 is correct: Product Limits strictly define the permissible universe of instruments a desk can trade.
A desk authorized only for plain-vanilla forwards cannot suddenly trade exotic barrier options without explicit high-level risk authorization.
Statement 3 is incorrect: Tenor Restrictions (limits on the maximum maturity of a trade) are extremely critical for money markets, bond portfolios, and foreign exchange forward contracts to prevent long-term liquidity and gap risks.
Equities, by definition, have infinite maturity, making tenor limits less relevant there compared to fixed-income and forex markets.
This prevents massive liquidity crunches from a single order and mitigates operational risks, such as a dealer accidentally adding an extra zero to a trade (a "fat-finger" error). Statement 2 is correct: Product Limits strictly define the permissible universe of instruments a desk can trade.
A desk authorized only for plain-vanilla forwards cannot suddenly trade exotic barrier options without explicit high-level risk authorization.
Statement 3 is incorrect: Tenor Restrictions (limits on the maximum maturity of a trade) are extremely critical for money markets, bond portfolios, and foreign exchange forward contracts to prevent long-term liquidity and gap risks.
Equities, by definition, have infinite maturity, making tenor limits less relevant there compared to fixed-income and forex markets.