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Q1. Analyse the significance and objectives of asset liability management.Ans: Asset Liability Management (ALM)
Asset liability management refers to the strategic balance involving risk caused due to thechanges in interest rate, exchange rates and liquidity position in the organisation. The creditrisk and contingency risk are the roots of ALM. During the post liberalisation period, Indiawitnessed rapid industrial growth which has further inspired the growth of fund raisingactivities. The changes in the sources and features of funds were remarkable due to rise in
demand for funds. Hence this reflected in the organisation’s profil
e and exposure limits ininterest rate structure for deposits and advances etc.
Q2. What are the features of a capital market?Ans: Capital Market
A financial market is an organisation which permits the employees to trade financialsecurities like stocks, bonds, commodities and so on to raise its net capital in economy. Afinancial market includes parties like brokers, dealers, investment bankers and financialmediators.
Q3. Describe the approaches of CAC.Ans: Approaches to Capital Account Convertibility (CAC)
Capital Account Convertibility (CAC) refers to relaxing controls on capital accounttransactions. It means freedom of currency conversion in terms of inflow and outflows withrespect to capital account transaction. Most of the countries have liberalised their capitalaccount by having an open account, but they do retain some regulations for influencinginward and outward capital flow. Due to global integration, both in trade and finance, CACenhances growth and welfare of country.
Q4. Explain the IRR hedging techniques.Ans: IRR Hedging Techniques
Bank uses a number of derivative instruments like interest rate futures, interest rateoptions, interest rate caps, collars and interest rate swaps to hedge against interest raterisk. The following are the IRR hedging techniques:
Q5. Define VaR and illustrate its components