Treasury and Asset- Liability Management MCQ: CAIIB BFM Unit 25 Module C

Treasury and Asset- Liability Management MCQ: CAIIB BFM Unit 25 Module C. In these 79 MCQs tailored for CAIIB BFM Unit 25 Module C, we will explore fundamental concepts such as the primary focus and goals of ALM, the management of liquidity and interest rate risks, and the role of the treasury department. Furthermore, these questions delve into the intricacies of financial instruments like derivatives, their application in hedging, the concept of transfer pricing, and the significance of integrated risk management policies within a banking framework.

Treasury and Asset- Liability Management MCQ: CAIIB BFM Unit 25 Module C – Attempt Mock Test Now!

Question 1: What does Asset Liability Management (ALM) primarily focus on managing for a bank?

A. Operational risks and credit risks
B. Liquidity risks and interest rate risks
C. Market risks and compliance risks
D. Strategic risks and reputational risks

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Correct Answer: B. Liquidity risks and interest rate risks. ALM is specifically concerned with managing the risks related to a bank’s ability to meet its short-term obligations (liquidity) and the impact of interest rate changes on its profitability.

Question 2: What is the main goal of Asset Liability Management (ALM) for a bank?

A. To maximize the number of customers
B. To increase the number of branches
C. To protect the bank’s net worth by managing balance sheet risks
D. To offer the lowest interest rates on loans

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Correct Answer: C. To protect the bank’s net worth by managing balance sheet risks. The core objective of ALM is to safeguard the financial health of the bank by effectively managing the risks arising from its assets and liabilities.

Question 3: What are the two main types of intermediation performed by banks, according to the context of ALM?

A. Primary and secondary intermediation
B. Direct and indirect intermediation
C. Maturity intermediation and risk intermediation
D. Domestic and international intermediation

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Correct Answer: C. Maturity intermediation and risk intermediation. Banks take short-term deposits and provide long-term loans (maturity intermediation) and also manage various types of risks like market and credit risk (risk intermediation).

Question 4: What is Liquidity Risk for a bank?

A. The risk of borrowers not repaying their loans
B. The risk of a sudden decrease in the value of investments
C. The risk of not having enough cash to meet obligations when they are due
D. The risk of changes in market interest rates affecting profitability

Show Explanation

Correct Answer: C. The risk of not having enough cash to meet obligations when they are due. Liquidity risk refers to the possibility that a bank will be unable to pay its liabilities when they come due.

Question 5: What is a primary cause of liquidity risk in banks?

A. High levels of non-performing assets
B. Large fluctuations in the stock market
C. Maturity mismatches between assets and liabilities
D. Changes in government regulations

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Correct Answer: C. Maturity mismatches between assets and liabilities. When a bank has more short-term liabilities than short-term assets, it can face liquidity issues.

Question 6: How are Liquidity Gaps measured by banks?

A. By calculating the difference between total assets and total liabilities
B. By calculating the difference between interest earned and interest paid
C. By calculating the difference between cash inflows and cash outflows within specific time periods
D. By calculating the ratio of liquid assets to total assets

Show Explanation

Correct Answer: C. By calculating the difference between cash inflows and cash outflows within specific time periods. Liquidity gaps analyze the timing of cash coming into the bank versus cash going out.

Question 7: What are the specified time buckets mentioned for measuring Liquidity Gaps?

A. Daily, weekly, monthly, quarterly
B. Next day, 2-7 days, 8-14 days, and other specific periods
C. Short-term, medium-term, long-term
D. First week, second week, third week, fourth week of a month

Show Explanation

Correct Answer: B. Next day, 2-7 days, 8-14 days, and other specific periods. These are examples of the timeframes used to assess short-term liquidity mismatches.

Question 8: According to the Reserve Bank of India (RBI), what is the limit for net cumulative negative mismatches in the ‘Next day’ time bucket as a percentage of cumulative cash outflows?

A. 20%
B. 15%
C. 10%
D. 5%

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Correct Answer: D. 5%. The RBI sets limits on negative mismatches in different time buckets to ensure banks maintain sufficient liquidity.

Question 9: Which of the following is a method used by banks to manage liquidity risk?

A. Increasing the interest rates on loans
B. Reducing the number of branches
C. Holding adequate liquid assets
D. Investing in long-term illiquid assets

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Correct Answer: C. Holding adequate liquid assets. Maintaining a sufficient amount of readily convertible assets helps banks meet unexpected cash demands.

Question 10: What is the purpose of stand-by credit lines in managing liquidity risk?

A. To increase the bank’s profitability
B. To provide a source of funds in case of a liquidity shortfall
C. To reduce the bank’s regulatory requirements
D. To invest in the stock market

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Correct Answer: B. To provide a source of funds in case of a liquidity shortfall. Stand-by credit lines act as a backup source of funding when needed.

Question 11: What is the Liquidity Adjustment Facility (LAF) provided by the RBI used for?

A. To regulate the stock market
B. To help banks manage their short-term liquidity mismatches
C. To provide long-term loans to industries
D. To control inflation in the economy

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Correct Answer: B. To help banks manage their short-term liquidity mismatches. The LAF allows banks to borrow or lend funds to the RBI on an overnight basis.

Question 12: What does TREPS stand for in the context of liquidity management?

A. Treasury Repo Exchange and Payment System
B. Tri-party Repo Dealing and Settlement
C. Treasury Reserve and Exchange Pooling System
D. Tri-lateral Repo and Exchange Platform System

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Correct Answer: B. Tri-party Repo Dealing and Settlement. TREPS is a platform for collateralized lending and borrowing of funds.

Question 13: Why is ensuring security marketability important for managing liquidity risk?

A. To increase the value of the securities
B. To easily convert securities into cash when needed
C. To earn higher interest income from securities
D. To comply with government regulations

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Correct Answer: B. To easily convert securities into cash when needed. Marketable securities can be quickly sold to generate liquidity.

Question 14: What is Interest Rate Risk for a bank?

A. The risk of borrowers defaulting on their loan payments
B. The risk of a decrease in the bank’s deposits
C. The risk of Net Interest Income (NII) declining due to changes in market interest rates
D. The risk of fraud and other operational losses

Show Explanation

Correct Answer: C. The risk of Net Interest Income (NII) declining due to changes in market interest rates. Interest rate risk affects a bank’s profitability through changes in its earnings from interest-bearing assets and liabilities.

Question 15: What is a primary cause of interest rate risk for banks?

A. High competition from other banks
B. Changes in the demand for loans
C. Repricing mismatches between Rate-Sensitive Assets (RSAs) and Rate-Sensitive Liabilities (RSLs)
D. Economic recession leading to lower business activity

Show Explanation

Correct Answer: C. Repricing mismatches between Rate-Sensitive Assets (RSAs) and Rate-Sensitive Liabilities (RSLs). When the timing of interest rate changes for assets and liabilities differs, it creates interest rate risk.

Question 16: What is the formula for calculating Net Interest Income (NII)?

A. NII = Total Income – Total Expenses
B. NII = Interest Earnings + Interest Payments
C. NII = Interest Earnings – Interest Payments
D. NII = Total Assets – Total Liabilities

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Correct Answer: C. NII = Interest Earnings – Interest Payments. NII represents the difference between the income a bank earns from its interest-bearing assets and the interest it pays on its interest-bearing liabilities.

Question 17: How are Repricing Gaps measured by banks?

A. By calculating the difference between total assets and total liabilities
B. By calculating the difference between Rate-Sensitive Assets (RSAs) and Rate-Sensitive Liabilities (RSLs) in specific time periods
C. By calculating the difference between fixed-rate assets and fixed-rate liabilities
D. By calculating the ratio of RSAs to RSLs

Show Explanation

Correct Answer: B. By calculating the difference between Rate-Sensitive Assets (RSAs) and Rate-Sensitive Liabilities (RSLs) in specific time periods. Repricing gaps help banks understand their exposure to interest rate changes within different timeframes.

Question 18: Which of the following is a method used by banks to manage interest rate risk?

A. Increasing the number of fixed-rate loans
B. Reducing the number of floating-rate deposits
C. Gap management and using derivative instruments
D. Investing in government bonds only

Show Explanation

Correct Answer: C. Gap management and using derivative instruments. Banks can adjust the repricing of their assets and liabilities and use tools like interest rate swaps to hedge against interest rate fluctuations.

Question 19: What is an example of a derivative instrument used for managing interest rate risk?

A. Equity shares
B. Gold bonds
C. Interest rate swaps
D. Real estate

Show Explanation

Correct Answer: C. Interest rate swaps. These are contracts between two parties to exchange interest rate payments over a specified period.

Question 20: What does the RBI mandate for banks to address market risk, including interest rate risk?

A. Higher deposit insurance coverage
B. Capital adequacy
C. Lower lending rates
D. Increased branch network

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Correct Answer: B. Capital adequacy. RBI requires banks to maintain a certain level of capital to absorb potential losses from market risks.

Question 21: According to the Indian context, what type of deposits do depositors typically prefer?

A. Floating-rate deposits
B. Fixed-rate deposits
C. Demand deposits
D. Current account deposits

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Correct Answer: B. Fixed-rate deposits. This preference shifts the interest rate risk from depositors to the banks.

Question 22: What is the full form of MCLR, a system created by the RBI?

A. Maximum Cost of Lending Rate
B. Minimum Credit Lending Rate
C. Marginal Cost of Funds Based Lending Rate
D. Market Cost of Funds Rate

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Correct Answer: C. Marginal Cost of Funds Based Lending Rate. MCLR is a benchmark for pricing floating rate loans in India.

Question 23: Why is hedging interest rate risk challenging in the Indian context?

A. Because there are very few banks in India
B. Because most market participants might need the same type of hedge
C. Because the RBI does not allow hedging of interest rate risk
D. Because Indian banks have very high capital adequacy ratios

Show Explanation

Correct Answer: B. Because most market participants might need the same type of hedge. This can lead to a lack of counterparties for certain hedging strategies.

Question 24: What is the difference between the maturity dates of assets and liabilities called?

A. Repricing mismatch
B. Interest rate gap
C. Maturity mismatch
D. Liquidity gap

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Correct Answer: C. Maturity mismatch. This difference in timing can lead to both liquidity and interest rate risks.

Question 25: What are assets whose interest rates change with changes in market interest rates called?

A. Fixed-Rate Assets
B. Non-Performing Assets
C. Rate-Sensitive Assets (RSAs)
D. Liquid Assets

Show Explanation

Correct Answer: C. Rate-Sensitive Assets (RSAs). The interest income from these assets will fluctuate with market rate changes.

Question 26: What is the primary responsibility of the Treasury department in a bank concerning Asset Liability Management (ALM)?

A. Managing customer relationships
B. Managing the bank’s funds, particularly liquidity and interest rate risks
C. Overseeing the bank’s branch operations
D. Ensuring compliance with all regulatory requirements

Show Explanation

Correct Answer: B. Managing the bank’s funds, particularly liquidity and interest rate risks. The Treasury is the central unit responsible for managing the bank’s financial resources and the risks associated with them.

Question 27: What role does the Treasury play in connecting the bank’s core banking activities with financial markets?

A. It acts as a regulator of these activities.
B. It serves as the intermediary or link between deposit/loan operations and market transactions.
C. It primarily focuses on marketing the bank’s products to customers.
D. It handles the bank’s internal audits and compliance checks.

Show Explanation

Correct Answer: B. It serves as the intermediary or link between deposit/loan operations and market transactions. Treasury bridges the gap between traditional banking and the broader financial markets.

Question 28: Which unit within a bank is primarily responsible for identifying and monitoring market risk?

A. The Credit Department
B. The Treasury Department
C. The Human Resources Department
D. The Compliance Department

Show Explanation

Correct Answer: B. The Treasury Department. Treasury’s involvement in financial markets makes it the key unit for tracking and managing market-related risks.

Question 29: According to the text, are asset-liability mismatches always undesirable for a bank?

A. Yes, they should always be completely eliminated.
B. No, they are inherent to banking and can be a source of profit.
C. Yes, they always lead to significant financial losses.
D. It depends on the size of the bank.

Show Explanation

Correct Answer: B. No, they are inherent to banking and can be a source of profit. Banks often profit from these mismatches, although they need to be managed carefully.

Question 30: What financial instruments does the Treasury utilize to manage liquidity and interest rate sensitivity gaps?

A. Only traditional banking products like loans and deposits
B. Primarily equity shares and bonds
C. Derivatives such as futures and swaps
D. Only government-issued securities

Show Explanation

Correct Answer: C. Derivatives such as futures and swaps. Treasury uses these sophisticated instruments to hedge against potential losses from mismatches.

Question 31: What is a potential outcome of the Treasury’s trading activities in foreign exchange and securities?

A. It always reduces the overall risk of the bank.
B. It can generate market risk, which might offset risks from core banking.
C. It only focuses on increasing the bank’s fee income.
D. It has no impact on the bank’s overall risk profile.

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Correct Answer: B. It can generate market risk, which might offset risks from core banking. Treasury’s trading can create new risks but might also balance out existing ones.

Question 32: After internal risk offsetting, what is the Treasury’s main focus regarding remaining risk?

A. Ignoring it as it is minimal
B. Transferring it to other departments
C. Hedging the residual risk
D. Taking on more risk for higher potential returns

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Correct Answer: C. Hedging the residual risk. Treasury aims to protect the bank from remaining risks after internal adjustments.

Question 33: What is an example of a market-based Treasury product that is increasingly replacing traditional credit?

A. Savings accounts
B. Fixed deposits
C. Commercial paper
D. Term loans

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Correct Answer: C. Commercial paper. These short-term debt instruments offer marketability and can serve as an alternative to traditional lending.

Question 34: What does the Treasury monitor to support the bank’s risk management efforts?

A. Only the bank’s internal financial performance
B. Exchange rate and interest rate movements
C. Political developments in the country
D. The performance of the bank’s competitors

Show Explanation

Correct Answer: B. Exchange rate and interest rate movements. These market indicators are crucial for managing various financial risks.

Question 35: Where is the Asset Liability Management (ALM) desk commonly located within a bank?

A. In the customer service area
B. Within the dealing room
C. In the loan processing department
D. In the human resources department

Show Explanation

Correct Answer: B. Within the dealing room. This proximity allows for close coordination between ALM and market operations.

Question 36: Which committee does the Head of Treasury significantly contribute to regarding risk management and policy decisions?

A. The Audit Committee
B. The Credit Committee
C. The Asset Liability Committee (ALCO)
D. The Nomination and Remuneration Committee

Show Explanation

Correct Answer: C. The Asset Liability Committee (ALCO). The Head of Treasury’s expertise is vital for ALCO’s strategic decisions.

Question 37: What is the primary objective of using derivatives in Asset Liability Management (ALM)?

A. To increase the bank’s trading profits
B. To manage liquidity and interest rate risks
C. To speculate on market movements
D. To avoid regulatory scrutiny

Show Explanation

Correct Answer: B. To manage liquidity and interest rate risks. Derivatives are primarily used as tools for hedging and risk mitigation in ALM.

Question 38: How do derivatives generally function as hedges in financial markets?

A. By increasing the volatility of asset prices
B. By moving in the opposite direction of the underlying asset’s price, thus offsetting potential losses
C. By guaranteeing a fixed profit margin
D. By attracting more investors to the market

Show Explanation

Correct Answer: B. By moving in the opposite direction of the underlying asset’s price, thus offsetting potential losses. Derivatives help to reduce exposure to adverse market movements.

Question 39: What is generally the capital requirement for using derivatives?

A. Very high, similar to investing in physical assets
B. Generally low, except for margins on exchange-traded derivatives
C. It depends on the size of the bank
D. There are no capital requirements for using derivatives

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Correct Answer: B. Generally low, except for margins on exchange-traded derivatives. This makes them a capital-efficient tool for hedging.

Question 40: Can derivatives be used to hedge specific transactions or broader ALM mismatches?

A. Only for specific transactions
B. Only for aggregate ALM mismatches
C. Yes, they can be used for both specific transactions and aggregate ALM mismatches
D. Neither specific transactions nor aggregate mismatches can be hedged with derivatives

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Correct Answer: C. Yes, they can be used for both specific transactions and aggregate ALM mismatches. Derivatives offer flexibility in their application for hedging.

Question 41: Why does hedge management using derivatives require dynamic adjustments?

A. Because the prices of derivatives are constantly changing
B. Due to the changing nature of a bank’s assets and liabilities
C. Because regulatory requirements for derivatives are frequently updated
D. Because the bank’s trading strategies need to be adjusted daily

Show Explanation

Correct Answer: B. Due to the changing nature of a bank’s assets and liabilities. As the bank’s balance sheet evolves, the hedging strategies need to be adapted.

Question 42: What is the primary use of Interest Rate Swaps (IRS) in ALM?

A. To speculate on future interest rate movements
B. To convert floating interest rates to fixed rates or vice-versa
C. To increase the bank’s fee income from trading
D. To comply with international accounting standards

Show Explanation

Correct Answer: B. To convert floating interest rates to fixed rates or vice-versa. IRS helps in managing mismatches in the repricing of assets and liabilities.

Question 43: When would a bank typically use Currency Forward Contracts in ALM?

A. When it wants to invest in foreign stock markets
B. When it is borrowing in one currency and lending in another
C. When it needs to convert domestic currency to foreign currency for operational expenses
D. When it wants to hedge against domestic inflation

Show Explanation

Correct Answer: B. When it is borrowing in one currency and lending in another. These contracts help in hedging against fluctuations in exchange rates.

Question 44: How do derivatives facilitate the creation of new financial products?

A. By making it easier to manipulate market prices
B. By allowing banks to embed complex features and manage associated risks
C. By reducing the regulatory oversight on new products
D. By guaranteeing higher returns for investors

Show Explanation

Correct Answer: B. By allowing banks to embed complex features and manage associated risks. Derivatives enable the structuring of innovative products tailored to specific needs.

Question 45: What is a key assumption for the effectiveness of derivatives in ALM?

A. That all market participants are irrational
B. That product pricing is rational relative to benchmark rates
C. That derivative markets are always perfectly liquid
D. That there is no regulatory intervention in the market

Show Explanation

Correct Answer: B. That product pricing is rational relative to benchmark rates. If derivatives are mispriced, their hedging effectiveness can be compromised.

Question 46: What is Basis Risk in the context of using derivatives for ALM?

A. The risk of the derivative contract defaulting
B. The risk arising from the broader time bands used in ALM compared to the specific timing of derivative hedges
C. The risk of the bank not having enough capital to support its derivative positions
D. The risk of changes in the benchmark interest rates

Show Explanation

Correct Answer: B. The risk arising from the broader time bands used in ALM compared to the specific timing of derivative hedges. This mismatch in timing can lead to imperfect hedging.

Question 47: Why are embedded options in assets/liabilities challenging to hedge with standard derivatives?

A. Because standard derivatives are too complex for this purpose
B. Because the exercise of embedded options depends on the behavior of the option holder, which is uncertain
C. Because there are no regulations governing the hedging of embedded options
D. Because embedded options are always very expensive

Show Explanation

Correct Answer: B. Because the exercise of embedded options depends on the behavior of the option holder, which is uncertain. This makes it difficult to predict and hedge effectively.

Question 48: What are the prerequisites for the effective use of derivatives in ALM?

A. Only a large balance sheet size for the bank
B. Developed derivative markets and skilled treasury personnel
C. Strict government control over derivative trading
D. Only the availability of sophisticated software

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Correct Answer: B. Developed derivative markets and skilled treasury personnel. These are essential for understanding, pricing, and managing derivatives effectively.

Question 49: How does the Treasury engage with credit risk?

A. Primarily by lending money to risky borrowers
B. Through debt market instruments like commercial paper and bonds, which act as credit substitutes
C. By ignoring credit risk and focusing only on market risk
D. By offering credit cards to customers

Show Explanation

Correct Answer: B. Through debt market instruments like commercial paper and bonds, which act as credit substitutes. These instruments involve assessing the creditworthiness of the issuer.

Question 50: What is securitization, in which the Treasury is involved?

A. The process of converting illiquid assets into cash
B. The process of converting credit receivables into tradable securities like Pass-Through Certificates (PTCs)
C. The process of investing in government securities
D. The process of writing off bad debts

Show Explanation

Correct Answer: B. The process of converting credit receivables into tradable securities like Pass-Through Certificates (PTCs). This allows banks to transfer credit risk and improve liquidity.

Question 51: What are Credit Derivatives designed to do?

A. To increase the overall risk in the financial system
B. To isolate and transfer credit risk from underlying assets
C. To guarantee profits for investors in debt instruments
D. To eliminate the possibility of default

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Correct Answer: B. To isolate and transfer credit risk from underlying assets. These instruments allow for the management and trading of credit risk.

Question 52: What is a Credit Default Swap (CDS)?

A. An agreement to exchange interest rate payments
B. An agreement where a protection buyer pays a premium to a protection seller for compensation against the default of a reference asset
C. A contract to buy or sell a currency at a future date
D. An option to buy or sell an asset at a specific price

Show Explanation

Correct Answer: B. An agreement where a protection buyer pays a premium to a protection seller for compensation against the default of a reference asset. CDS is a key tool for hedging credit risk.

Question 53: Which organization’s Master Agreement typically governs Credit Default Swap (CDS) contracts?

A. The World Bank
B. The International Monetary Fund (IMF)
C. The International Swaps and Derivatives Association (ISDA)
D. The Bank for International Settlements (BIS)

Show Explanation

Correct Answer: C. The International Swaps and Derivatives Association (ISDA). ISDA provides standardized documentation for over-the-counter derivatives transactions.

Question 54: Which of the following was NOT identified as a key factor in the 2008-2009 financial crisis linked to credit derivatives?

A. Poor credit assessment driven by securitization/CDS use
B. Counterparty risk (CDS sellers failing)
C. High leverage inherent in CDS
D. Strict regulation of credit derivatives by central banks

Show Explanation

Correct Answer: D. Strict regulation of credit derivatives by central banks. In fact, inadequate regulation was a contributing factor to the crisis.

Question 55: What is the Reserve Bank of India’s (RBI) current stance on credit derivatives?

A. It encourages the use of all types of credit derivatives.
B. It adopts a cautious approach, currently permitting single-name CDS on corporate bonds.
C. It has completely banned the use of credit derivatives in India.
D. It allows only foreign banks to trade in credit derivatives.

Show Explanation

Correct Answer: B. It adopts a cautious approach, currently permitting single-name CDS on corporate bonds. The RBI has taken a measured approach to the introduction of these complex instruments.

Question 56: Which entities are authorized as CDS Market Makers in India, subject to RBI approval?

A. Only foreign banks operating in India
B. Commercial Banks, Primary Dealers (PDs), and specific Non-Banking Financial Companies (NBFCs)
C. Only government-owned financial institutions
D. All financial institutions registered with the RBI

Show Explanation

Correct Answer: B. Commercial Banks, Primary Dealers (PDs), and specific Non-Banking Financial Companies (NBFCs). These entities are authorized to provide liquidity in the CDS market.

Question 57: Which of the following entities is permitted to be a CDS User in India, provided they meet RBI’s criteria?

A. Any individual with a demat account
B. Banks, Primary Dealers (PDs), NBFCs, Mutual Funds, and Insurance Companies
C. Only large corporations with high credit ratings
D. Only government departments and agencies

Show Explanation

Correct Answer: B. Banks, Primary Dealers (PDs), NBFCs, Mutual Funds, and Insurance Companies. These entities are allowed to use CDS for hedging and other permitted purposes.

Question 58: What is Transfer Pricing in the context of banking?

A. The price at which a bank sells its services to customers.
B. The internal mechanism for setting the cost of funds and the return on assets within a bank.
C. The price at which a bank transfers money to its overseas branches.
D. The method used by banks to calculate their tax liability.

Show Explanation

Correct Answer: B. The internal mechanism for setting the cost of funds and the return on assets within a bank. Transfer pricing is an internal accounting method used to allocate costs and revenues.

Question 59: What is one of the main purposes of Transfer Pricing in banks?

A. To increase the overall revenue of the bank.
B. To accurately assess the profitability of different banking activities.
C. To reduce the bank’s operational expenses.
D. To comply with international trade regulations.

Show Explanation

Correct Answer: B. To accurately assess the profitability of different banking activities. It helps in understanding which departments or activities are contributing most to the bank’s profit.

Question 60: How does Transfer Pricing help in managing risks within a bank?

A. It helps in reducing the credit risk associated with lending.
B. It isolates liquidity risk and interest rate risk management within the Treasury function.
C. It helps in preventing fraud and other operational risks.
D. It ensures compliance with all regulatory requirements.

Show Explanation

Correct Answer: B. It isolates liquidity risk and interest rate risk management within the Treasury function. This allows the Treasury to centrally manage these market-related risks.

Question 61: How does Transfer Pricing facilitate the evaluation of branch profitability in banks with multiple branches?

A. By standardizing the customer service procedures across all branches.
B. By allocating a cost for the funds used and a return for the funds generated by each branch.
C. By comparing the number of customers served by each branch.
D. By assessing the total deposits mobilized by each branch.

Show Explanation

Correct Answer: B. By allocating a cost for the funds used and a return for the funds generated by each branch. This provides a clearer picture of each branch’s financial performance.

Question 62: How does the Treasury determine the internal buy/sell prices for funds under Transfer Pricing?

A. Based solely on the historical performance of the bank.
B. Based on external market interest rates, hedging costs, and the cost of maintaining regulatory reserves.
C. Based on negotiations with other departments within the bank.
D. Based on the prices offered by competitor banks.

Show Explanation

Correct Answer: B. Based on external market interest rates, hedging costs, and the cost of maintaining regulatory reserves. This ensures that internal pricing reflects the actual market conditions and costs.

Question 63: What is the primary focus of the originating department’s profit (e.g., the credit department) after the implementation of Transfer Pricing?

A. Managing liquidity risk.
B. Managing interest rate risk.
C. Managing credit risk.
D. Managing operational risk.

Show Explanation

Correct Answer: C. Managing credit risk. Transfer pricing separates out the impact of funding costs and interest rate risk, allowing the originating department’s profit to reflect its core function of managing credit risk.

Question 64: What is crucial for the accurate allocation of risk and measurement of performance through Transfer Pricing?

A. Having a large number of branches.
B. Implementing a clear and conscious transfer pricing policy.
C. Using the most sophisticated software for calculations.
D. Having a very high volume of transactions.

Show Explanation

Correct Answer: B. Implementing a clear and conscious transfer pricing policy. A well-defined policy ensures consistency and transparency in the process.

Question 65: What is an Integrated Risk Management Policy environment in a bank?

A. A set of rules for managing only one type of risk.
B. A bank-wide comprehensive policy framework for coordinating the management of various risks across departments.
C. A policy that is only applicable to the Treasury department.
D. A temporary set of guidelines used during times of financial crisis.

Show Explanation

Correct Answer: B. A bank-wide comprehensive policy framework for coordinating the management of various risks across departments. It aims to provide a holistic approach to risk management.

Question 66: Which of the following is a component of the Integrated Risk Management Policy?

A. Customer Relationship Management Policy.
B. Human Resources Policy.
C. ALM Policy.
D. Marketing Policy.

Show Explanation

Correct Answer: C. ALM Policy. The Asset Liability Management Policy is a key part of the overall risk management framework.

Question 67: What does the ALM Policy define?

A. The process for hiring new employees.
B. The structure and functions of the Asset Liability Management Committee (ALCO) and procedures for various operational aspects of ALM.
C. The guidelines for marketing the bank’s products.
D. The rules for maintaining the bank’s infrastructure.

Show Explanation

Correct Answer: B. The structure and functions of the Asset Liability Management Committee (ALCO) and procedures for various operational aspects of ALM. It outlines how ALM activities are to be conducted.

Question 68: What does the Liquidity Policy of a bank typically establish?

A. The interest rates to be charged on loans.
B. Minimum liquidity requirements and plans for contingent funding needs.
C. The procedures for opening new bank accounts.
D. The salary structure for bank employees.

Show Explanation

Correct Answer: B. Minimum liquidity requirements and plans for contingent funding needs. This policy ensures the bank has enough liquid assets to meet its obligations.

Question 69: What does a bank’s Derivatives Policy govern?

A. The process of issuing new shares to the public.
B. The use of derivative instruments, including rules for capital allocation and trading restrictions.
C. The guidelines for investing in real estate.
D. The procedures for handling customer complaints.

Show Explanation

Correct Answer: B. The use of derivative instruments, including rules for capital allocation and trading restrictions. This policy sets the framework for how the bank can use derivatives.

Question 70: What does the Investment Policy of a bank detail?

A. The criteria for lending to different types of borrowers.
B. Permissible investments in securities, including criteria for credit ratings and trading protocols.
C. The rules for managing the bank’s branch network.
D. The procedures for internal audits.

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Correct Answer: B. Permissible investments in securities, including criteria for credit ratings and trading protocols. This policy guides the bank’s investment decisions.

Question 71: What does the Composite Risk Policy (Foreign Exchange & Treasury) primarily focus on?

A. Managing the risks associated with lending to small businesses.
B. Managing foreign exchange merchant and trading positions and setting various limits.
C. Ensuring the security of the bank’s IT systems.
D. Handling the bank’s public relations activities.

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Correct Answer: B. Managing foreign exchange merchant and trading positions and setting various limits. This policy specifically addresses the risks arising from foreign exchange operations.

Question 72: What does the Transfer Pricing Policy formally define?

A. The interest rates offered on different deposit products.
B. The methodology used for internal transfer pricing, including spread determination and cost allocation.
C. The fees charged for various banking services.
D. The process for transferring employees between different branches.

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Correct Answer: B. The methodology used for internal transfer pricing, including spread determination and cost allocation. This policy provides the detailed rules for internal fund transfers.

Question 73: Which of the following is often included as a Supplementary Policy in a bank’s Integrated Risk Management framework?

A. Employee Training Policy.
B. Prevention of Money Laundering (PML) Policy.
C. Branch Expansion Policy.
D. Product Development Policy.

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Correct Answer: B. Prevention of Money Laundering (PML) Policy. These policies address specific regulatory or risk areas.

Question 74: Who is typically the highest authority for approving all risk policies within a bank?

A. The Branch Manager of the largest branch.
B. The Head of the Treasury Department.
C. The Bank’s Board of Directors or a designated Board committee.
D. The Chief Executive Officer (CEO).

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Correct Answer: C. The Bank’s Board of Directors or a designated Board committee. This ensures that risk management policies have the highest level of oversight.

Question 75: What is a key requirement for all risk policies in a bank?

A. They must be reviewed and updated every month.
B. They must ensure compliance with regulations set by the Reserve Bank of India (RBI) and other relevant bodies like SEBI.
C. They must be publicly disclosed on the bank’s website.
D. They must be approved by all employees of the bank.

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Correct Answer: B. They must ensure compliance with regulations set by the Reserve Bank of India (RBI) and other relevant bodies like SEBI. Adherence to regulatory guidelines is mandatory.

Question 76: What is expected from banks regarding market best practices and codes set by Self-Regulatory Organizations (SROs) like FIMMDA and FEDAI?

A. They are legally bound to follow all recommendations.
B. Adherence is expected.
C. They can choose to ignore them if they conflict with internal policies.
D. They are only applicable to foreign banks operating in India.

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Correct Answer: B. Adherence is expected. Following these best practices helps in maintaining market standards and reducing risks.

Question 77: What are some of the Self-Regulatory Organizations (SROs) mentioned in the context of risk policies for banks in India?

A. The Indian Medical Association (IMA) and the Bar Council of India (BCI).
B. The Fixed Income Money Market and Derivatives Association of India (FIMMDA) and the Foreign Exchange Dealers’ Association of India (FEDAI).
C. The Confederation of Indian Industry (CII) and the Federation of Indian Chambers of Commerce & Industry (FICCI).
D. The National Association of Software and Service Companies (NASSCOM) and the Telecom Regulatory Authority of India (TRAI).

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Correct Answer: B. The Fixed Income Money Market and Derivatives Association of India (FIMMDA) and the Foreign Exchange Dealers’ Association of India (FEDAI). These organizations set standards for specific financial markets.

Question 78: What are the requirements for monitoring compliance and reviewing risk policies in a bank?

A. Compliance should be monitored by external auditors, and policies need review every five years.
B. A dedicated committee should monitor compliance, and policies require at least an annual review.
C. Each department is responsible for monitoring its own compliance, and policies are reviewed as needeD.
D. The RBI directly monitors compliance, and policy reviews are conducted at the RBI’s discretion.

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Correct Answer: B. A dedicated committee should monitor compliance, and policies require at least an annual review. Regular monitoring and review ensure policies remain relevant and effective.

Question 79: Which types of risk policies typically fall outside the direct scope and purview of the ALCO?

A. Liquidity Policy and Interest Rate Risk Policy.
B. Credit Risk Policy and Operational Risk Policy.
C. Investment Policy and Derivatives Policy.
D. Foreign Exchange Policy and Transfer Pricing Policy.

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Correct Answer: B. Credit Risk Policy and Operational Risk Policy. While ALCO oversees market-related risks, credit and operational risks are usually managed by separate committees or departments.