Module: | MODULE B: RISK MANAGEMENT
Q449: Consider the following statements regarding the management of liquidity risk across different currencies by commercial banks:
1. Banks engaged in foreign exchange operations must establish strict daily limits on their Net Open Position to control their exposure to adverse exchange rate movements.
2. A bank's Forward Mismatch Limit is designed exclusively to monitor the liquidity risk arising from maturity mismatches in its Rupee-denominated domestic loan portfolio.
3. The Reserve Bank of India mandates that banks must track and manage liquidity gaps for each significant foreign currency individually, rather than just relying on a single aggregated multi-currency statement.
Which of the statements given above is/are correct?
2. A bank's Forward Mismatch Limit is designed exclusively to monitor the liquidity risk arising from maturity mismatches in its Rupee-denominated domestic loan portfolio.
3. The Reserve Bank of India mandates that banks must track and manage liquidity gaps for each significant foreign currency individually, rather than just relying on a single aggregated multi-currency statement.
Which of the statements given above is/are correct?
✅ Correct Answer: C
The correct answer is C. Statement 1 is correct: Banks active in the foreign exchange market face significant cross-currency liquidity and market risk.
To mitigate this, they are mandated to establish and strictly adhere to daily internal and regulatory limits on their Net Open Position (NOOP), capping their maximum exposure to adverse currency fluctuations.
Statement 2 is incorrect: The Forward Mismatch Limit (AGL - Aggregate Gap Limit) is an explicit foreign exchange risk management tool.
It is utilized exclusively to monitor maturity mismatches in cross-currency forward contracts and swaps, not for assessing the liquidity risk of the domestic Rupee-denominated loan portfolio.
Statement 3 is correct: Aggregating all currencies into one single pool masks underlying structural risks.
Therefore, the Reserve Bank of India mandates that banks must measure, monitor, and manage their liquidity gaps for each significant individual foreign currency separately, ensuring standalone resilience in every major currency they operate in.
To mitigate this, they are mandated to establish and strictly adhere to daily internal and regulatory limits on their Net Open Position (NOOP), capping their maximum exposure to adverse currency fluctuations.
Statement 2 is incorrect: The Forward Mismatch Limit (AGL - Aggregate Gap Limit) is an explicit foreign exchange risk management tool.
It is utilized exclusively to monitor maturity mismatches in cross-currency forward contracts and swaps, not for assessing the liquidity risk of the domestic Rupee-denominated loan portfolio.
Statement 3 is correct: Aggregating all currencies into one single pool masks underlying structural risks.
Therefore, the Reserve Bank of India mandates that banks must measure, monitor, and manage their liquidity gaps for each significant individual foreign currency separately, ensuring standalone resilience in every major currency they operate in.