Module: | MODULE B: RISK MANAGEMENT
Q450: A bank's foreign exchange treasury executes multiple forward contracts. In the 1-month maturity bucket, the total expected USD cash inflows representing long positions are 300 million USD, and the total expected USD cash outflows representing short positions are 350 million USD.
Calculate the net forward mismatch gap for this specific time bucket and identify the resulting risk position.
✅ Correct Answer: A
The correct answer is A. To evaluate the liquidity risk in foreign exchange operations, banks calculate the net forward mismatch gap for each specific maturity bucket.
The mathematical formula is simple: Total Expected Cash Inflows (Long Positions) - Total Expected Cash Outflows (Short Positions). In this scenario, the inflows are 300 million USD and the outflows are 350 million USD.
Subtracting the outflows from the inflows (300 - 350) results in a -50 million USD net gap.
Because the gap is negative (outflows exceed inflows), it strictly creates a "short position risk," meaning the bank is structurally short of 50 million USD in that specific 1-month bucket and must arrange funding to cover the deficit.
This rules out all other options.
The mathematical formula is simple: Total Expected Cash Inflows (Long Positions) - Total Expected Cash Outflows (Short Positions). In this scenario, the inflows are 300 million USD and the outflows are 350 million USD.
Subtracting the outflows from the inflows (300 - 350) results in a -50 million USD net gap.
Because the gap is negative (outflows exceed inflows), it strictly creates a "short position risk," meaning the bank is structurally short of 50 million USD in that specific 1-month bucket and must arrange funding to cover the deficit.
This rules out all other options.