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Sikkim Manipal University

Subject: Treasury Management
Subject code: MA0042/ MF0016
Book ID B1311
Question Paper Code:
Time: 2 hours Max.Marks:140
Answer all questions. Each question carries 1 mark 50 * 1= 50 Marks
1. Which of the following helps the bank to manage the bank liquidity position [statutory
liquidity ratio]?
a. Rupee treasury
b. Foreign exchange treasury
c. Administrative treasury
d. e-Treasury
2. ___________risk is the probability that the actual return on an investment is lower than
the expected return.
a. Credit
b. Financial
c. Liquidity
d. Corporate
3. The reporting platform for CDs and CPs are operated by ____________.
a. Clearing Corporation of India Limited (CCIL)
b. Life Insurance Corporation of India (LIC)
c. Fixed Income Money Market and Derivatives Association of India (FIMMDA)
d. Negotiated Dealing System (NDS)
4. Which of the following is a bill of exchange which is accepted and sometimes endorsed
without any receipt of monetary aid offered to the person accommodated?
a. Inland bill
b. Foreign bill
c. Accommodation bill
d. Supply bill
5. Which of the following is an agreement that documents a debenture?
a. Bill of exchange
b. Commercial paper
c. Indenture
d. Treasury bill
6. _____________are the autonomous instruments issued by RBI in order to raise funds.
a. Government securities
b. Right shares
c. Certificates of deposits
d. Commercial papers
7. What does spot market deal with?
a. Trading foreign exchange currencies for immediate delivery.
b. Trading foreign exchange currencies at a specified future date.
c. Exchange of streams of payments over a period of time.
d. Amount per share that an option buyer pays to the seller.
8. How is new exchange rate determined?
a. Underlying stocks current price Call strike price
b. Old exchange rate X (Initial currency rate / final currency rate)
c. Put strike price Underlying stocks current price
d. Expected future stock price Expected cost of exercising option
9. Which of the following is an objective of Fuller Capital Account Convertibility (FCAC)?
a. Announce daily and periodical rates to member banks
b. Promoting external trade through foreign exchange
c. Recognising the forex brokers
d. Diversify by allowing foreign investment in the portfolio
10. The _______________ credit refers to credit for imports by overseas supplier for
maturity less than 3 years from the date of shipment.
a. Cash
b. Trade
c. Buyers
d. Revolving
11. According to the RBI annual monetary policy for 2010-11, what is the bank rate and
cash reserve ratio?
a. Bank rate 6.1%, CRR 5.75%
b. Bank rate 6%, CRR 6%
c. Bank rate 5.75%, CRR 6%
d. Bank rate 6.5%, CRR 6.5%
12. Which among the following choices depict the benefit of CMS?
a. Increase in idle funds
b. Easy arrangement of loans from banks
c. Regularity in cash flow
d. Declination in rate of return on investment
13. The __________ risk measures the impact of changes in exchange rate risk on the
organisations cash flows and earnings.
a. Transaction risk
b. Basis risk
c. Translation risk
d. Economic risk
14. The __________process of risk management involves assessing the consequences of
the occurring risks.
a. Identifying risk
b. Evaluating risk
c. Treating risk
d. Quantifying risk
15. __________ occurs due to the need to replace the losses incurred by unexpected
withdrawal/non-renewal of deposits.
a. Time risk
b. Funding risk
c. Call risk
d. Credit risk
16. What is referred to as the difference between the changes of assets and liabilities over
a. Comparative financial statement
b. Asset liability management
c. Maturity ladder
d. Marginal gap
17. Which risk occurs due to the changes in the fixed income term structure?
a. Basis risk
b. Structure risk
c. Options risk
d. Exchange risk
18. Verifying compliance with policies and assessing interest rate forecasts is the function of
a. Risk reviewing process
b. Risk limiting process
c. Risk monitoring process
d. Risk analysing process
19. Which of the following options affects the foreign exchange market value of equity and
net worth of banks economic values?
a. Variation of interest rate
b. Liability sensitivity
c. Low collateral loan rates
d. Current and future expectations of inflation rate
20. Which of the following refers to the risk occurring in the future price of asset?
a. Forex risk
b. Volatility risk
c. Price risk
d. Rate level risk
21. Which of the following options is the most common resource for hedging transactions in
foreign currencies in which both the buyer and seller of foreign currencies are under
obligation to settle the transaction on the settlement date?
a. Currency futures
b. Forward contracts
c. Currency options
d. Currency swaps
22. ___________ is the magnitude of the future cash flows of a bank, arising from domestic
and foreign currency denominated transactions, and generating revenues and expenses
subject to variations in foreign exchange rates.
a. Quotation exposure
b. Transaction exposure
c. Translation exposure
d. Foreign currency exposure
23. Which of the following treasury divisions deal with trade in the market?
a. Front office
b. Middle office
c. Back office
d. Treasury administration
24. Which of the following is a function of treasury management?
a. Market operation activities
b. Centralisation of management control
c. Define resultant organisation models
d. Regular monitoring of collateral value
25. What is the objective of Asset Liability Management (ALM)?
a. To achieve perfect match in assets and liabilities
b. To arrange finance to balance each business features and cash flows to the possible
c. To manage funds
d. To manage the central management which raises finance and financial exposures?
26. Who introduced the GARCH model?
a. Taylor and Schwert
b. Artzner and Delbaen
c. Uryasev and Artzner
d. Taylor and Delbaen
27. Which of the following is included in the risk metrics approach?
a. Stratified sampling and importance sampling
b. Stratified sampling and normal mixture distributions
c. Standard normal and importance sampling
d. Standard normal and normal mixture distributions
28. _____________ is applied in estimating the shock effects on the variance of stock
market returns.
a. GARCH model
b. Extreme value theory
c. ARCH model
d. Improved capital allocations
29. Which among the following is a foreign exchange product?
a. Commercial papers (CPs)
b. Convertible bonds
c. Bill discounting
d. Swaps
30. The treasury departments in banks are responsible to meet the Cash Reserve
Requirement (CRR) and invest the funds in securities under _______________.
a. Capital Adequacy Ratio (CAR)
b. Price-Earnings Ratio (P/E Ratio)
c. Cash Flow To Debt Ratio
d. Statutory Liquid Ratio (SLR)
31. ____________ refers to payment and receipt of funds in foreign currencies in the same
a. Forwards
b. Swaps
c. Spots
d. Futures
32. Which of the following refers to the difference in the amount of money received by
banks from interest on assets and the amount of money paid by banks which is out of
interest on liabilities?
a. Net Interest Income (NII)
b. Net Interest Margin (NIM)
c. Net interest spread
d. Call option intrinsic value
33. Features of Asset and Liability Committee (ALCO) include ____________.
a. Managing liquidity and other market risk.
b. Investigating the budgeting process.
c. Trading risk management.
d. Planning profit and projecting growth.
34. Which of the following is the aim of Asset Liability Management (ALM)?
a. To be responsible for balance sheet planning
b. To monitor the cumulative mismatches
c. To expand Net Interest Margin (NIM)
d. To issue several guidelines for risk management in various divisions of the bank
35. Risk management of treasury assets and liabilities is often done through
a. Controlling volatility
b. Formulating policies
c. Derivative contracts
d. Off-balance sheet contracts
36. Which of the following options concludes the confidence intervals of the method to
estimate VaR and the accuracy of the answer?
a. Acceptance Rejection Monte Carlo
b. Importance sampling
c. Crude Monte Carlo
d. Extreme value theory
37. How is real interest rate determined?
a. Nominal interest rate Rate of inflation
b. Probability of occurring risk x Total loss due to risk
c. Expected future stock price Expected cost of exercising option
d. Option price Intrinsic value
38. The ________ scenario is helpful for banks in establishing a standard for the normal
business behaviour.
a. Going concern
b. Liquidity crisis
c. Bank specific crisis
d. General market crisis
39. The economic value perspective concentrates on the risk factors involved in _________.
a. Net income
b. Interest rate
c. Liquidity
d. Investment
40. Which of the following refers to the relationship between short term and long term
interest rates?
a. Inverted yield curve
b. Hull-White model
c. Short-rate model
d. Yield
41. Identify the true statement from the following
a. Foreign exchange exposure deals with future cash flows arising from domestic and
foreign currencies.
b. According to Teigen Lee E (July 2001), Corporate risk is a redundant activity.
c. The operational risk occur due to certain factors like back office errors, fraud and natural
d. At micro level, the ALM aims at obtaining profits through price matching while ensuring
liquidity by maturity matching.
42. Consider the following statements:
i. Event exposure occurs due to the low profits and adverse fluctuations in foreign exchange
ii. Currency management is the process of managing currencies which are used for overseas
State True or False:
a. (i) False, (ii) True
b. (i) True, (ii) False
c. (i) True, (ii) True
d. (i) False, (ii) False
43. Choose the correct statement from the following:
a. Interbank repos are permitted for eligible instruments and participants.
b. RBI conducts repo operations under the LAF to prevent sudden spurts in call rates.
c. Repo was started to earn additional income on idle cash.
d. RBI conducts reverse repo auctions to provide a channel to manage short-term liquidity
for banks.
44. The commodity market exists in two distinct forms namely ___________ market and
__________ market.
a. Bond, G-sec
b. Bond, stock
c. Over the Counter, exchange based
d. Primary, secondary
45. Identify the true statement.
a. GDRs were developed on the basis of ADRs and are listed on stock exchanges outside US.
b. GDRs are listed on NYSE, AMEX or NASDAQ
c. GDR holders have a voting right and enable investors to gain economic exposure.
d. ADRs and GDRs are excellent means of investment for NGOs and foreign nationals as it
has less exchange risk as compared to foreign currency loan.
46. What are the features of unified market?
a. Business houses, international investors, and multinational corporations.
b. Greater liquidity, less short run exchange rate volatility, increased price discovery,
reliable access to foreign exchange.
c. Lower liquidity, greater short run exchange rate volatility, decreased price discovery,
unreliable access to foreign exchange.
d. Asset liability management, investments and trading.
47. Consider the following statements:
i. Commercial banks operate in market by trading currencies for their clients.
ii. Balance of payments depends upon the purchasing power parity.
State True or False:
a. (i) True, (ii) True
b. (i) False, (ii) True
c. (i) True, (ii) False
d. (i) False, (ii) False
48. FEDAI was setup as a self-regulatory body and is incorporated under __________ of the
a. Section 10, Foreign Exchange Management Act
b. Section 3, Forward Contracts (Regulation) Act
c. Section 45-1A, RBI (amendment) Act
d. Section 25, Companies Act
49. Which of the following factors depict the reason for the expansion of firms into other
1. Seeking new technology
2. Preventing regulatory obstacles
3. Enhancing cash forecasting
4. Reducing agency cost and corporate overflows
a. Choice 1 and 2
b. Choice 1 and 3
c. Choice 2 and 3
d. Choice 3 and 4
50. Identify the true statement.
a. Liquid assets are the negotiable assets that cannot be converted into cash.
b. Adequate liquid net worth never maintains the value of an emergency fund.
c. A proper liquid net preserves the functionality and reliability of a business plan.
d. Liquidity is a safety web which provides an individual with power and relevant options.
Answer all questions. Each question carries 2 marks 25 * 2 = 50 Marks
51. Consider the following statements:
i. Process Decision Program Chart (PDPC) includes identifying the element causing risk.
ii. The volatility analysis includes the process of estimating the critical assumptions of the
effective risks and implement methods to mitigate risk.
State True or False:
a. (i) False, (ii) False
b. (i) False, (ii) True
c. (i) True, (ii) True
d. (i) True, (ii) False
52. Re-arrange the steps of FMEA method in the correct order.
1. Concentrating on the mode of failure.
2. Assessing the probability of the effects of failure.
3. Identifying the elements causing failure.
a. Statements 1, 2, 3
b. Statements 3, 1, 2
c. Statements 2, 3, 1
d. Statements 3, 2, 1
53. The two dimensions for measuring and managing the liquidity risk are _____________
and __________.
a. Maturity ladder, Stock approach
b. Maturity ladder, Crisis
c. Managing market access, Contingency planning
d. RBI guidelines, Stock approach
54. Which of the following options is the correct definition of London Interbank Offered Rate
a. The rate of interest at which a bank is prepared to deposit money with other banks in the
Eurocurrency market and is a reference rate of interest for floating rate loans in
international financial markets.
b. A potentiality or functional tendency, which arranges the quantity of money which the
public will hold when the rate of interest is given.
c. The contractual understanding between two banks under which one bank pays
periodically to the other for a contracted time period based upon an estimated principal
d. The exchange rates that are fixed to some par value though a small degree of flexibility
55. What is cumulative gap analysis?
a. It is the process of analysing the on-going replacements of loan payments and maturities
with new loans.
b. It is a method which evaluates the sensitivity between the net worth market value of
financial instruments to the changes in interest rates.
c. It is a method which evaluates the impact on net interest income due to the changes
occurring in interest rates.
d. It is a method of developing interest rate forecasts such that the sensitivity of asset and
liabilities of an organisation can be measured.
56. Identify which of the following options is a function of financial intermediaries.
a. Production of a balanced and well diversified liability foundation to fund various assets
b. Conducting inspections over the stock brokers; monitoring and inspecting mutual funds
c. Deploying surplus funds in securities which have low risk and earn profits.
d. Acting as a market for the firms assets and playing a key role in restructuring and
liquidation of firms
57. A ____________ is an agreement to buy or sell foreign exchange for an amount
determined in advance, at a specified exchange rate called as ____________.
a. Forward contract, Forward rate
b. Futures contract, Futures
c. Currency option, Option premium
d. Plain vanilla option, Strike price
58. The stop-loss exposure limit should be established with regards to the ____________,
trends of earning and its ______________.
a. Capital structure of a bank, Overall risk profile
b. The range of risk taken, Overall risk profile
c. Capital structure of a bank, Innovations
d. The range of risk taken, Innovations
59. Which of the following statements describe the advantages of risk metrics?
1. Makes variance and covariance method freely available to everyone
2. Minimises the approximation error
3. Provides easy access to compute the VaR logically for a portfolio.
4. It represents the simplest way to evaluate VaR for many portfolios.
a. Statements 1 and 2
b. Statements 2 and 3
c. Statements 1 and 3
d. Statements 2 and 4
60. Which of the following is the purpose of ALM?
a. Reviewing the structure of interest rate and comparing with interest pricing of both asset
and liability.
b. Examining the investment and loan portfolios during the increase of foreign exchange risk
and liquidity risk.
c. Deciding the desired maturity profile of incremental assets and liabilities and assessing
the liquidity risk.
d. Creating a model for the firm which facilitates proper decision making activities at various
levels and depicts the outcome of environmental variations.
61. Match the following:
Set A
1. Hybrid capital instruments
2. Currency exposure
3. Corporate risks
4. Funding management
Set B
A. Deals with future cash flows arising from domestic and foreign currencies.
B. Non-financial organisational risks
C. Planning, and outsourcing the short, medium and long term cash needs in an
D. Convertible preference issued with respect to subsidiary registration of the government.
a. 1-D, 2-A, 3-B, 4-C
b. 1-A, 2-C, 3-D, 4-B
c. 1-B, 2-D, 3-C, 4-A
d. 1-C, 2-B, 3-A, 4-D
62. Match the following:
Set A
A. Treasury bills
B. Commercial papers
C. Scheduled commercial banks
D. Certificate of deposits
Set B
1. Issued by the commercial banks
2. Part of organized sector of money market
3. Issued by the Central Government of India
4. Issued by large corporations
a. A-1, B-3, C-1, D-4
b. A-2, B-2, C-4, D-3
c. A-3, B-4, C-2, D-1
d. A-4, B-1, C-3, D-2
63. Match the following:
Set A
A. Secondary market instrument
B. Listing of securities in stock exchange
C. Equity issues type
D. Primary market feature
Set B
1. The securities are sold for the first time.
2. The shares are issued to the existing members of the company whose names are
registered as on a particular date in rights issue.
3. 49 percent of the securities must be owned by the public and should be equally spread.
4. The receipt is issued by a securitisation company or reconstruction company to any
qualified institutional buyer by following a scheme.
a. A-1, B-2, C-3, D-4
b. A-2, B-1, C-3, D-4
c. A-3, B-2, C-1, D-4
d. A-4, B-3, C-2, D-1
64. Match the following:
Set A
A. Forward Exchange Agreement (FXA)
B. Foreign Exchange Regulation Act (FERA)
C. Treasury products
D. Floating (flexible) exchange rate
Set B
1. Governed the forex transactions.
2. It deals with currency exchange rates determined by free markets.
3. It is based on the difference between forward rate and spot rate.
4. Financial items.
a. A-4, B-3, C-1, D-2
b. A-2, B-4, C-3, D-1
c. A-3, B-1, C-4, D-2
d. A-1, B-2, C-3, D-4
65. Match the following:
Set A
A. Market Stabilisation Scheme (MSS)
B. Forex Market
D. Capital Account Convertibility (CAC)
Set B
1. Currencies of various countries are traded against each other.
2. Under this, RBI issues central government securities on behalf of the central government
when required.
3. Has undergone some changes following the events of emerging market economies.
4. Governs the foreign exchange activities in India.
a. A-1, B-2, C-3, D-4
b. A-2, B-1, C-4, D-3
c. A-3, B-4, C-1, D-2
d. A-4, B-3, C-2, D-1
66. Identify the true statements.
1. The working capital requirements should be met from short-term and long-term sources
of funds.
2. Special working capital is meant for special operations which are financed by the variable
working capital.
3. Extreme level of working capital signifies that the firm has an active fund which produces
significant profits and liquidity.
4. Adequate working capital creates an environment of security, confidence and overall
efficiency in a business.
a. Statement 1, 2 and 3
b. Statement 2, 3 and 4
c. Statement 1, 2 and 4
d. Statement 1, 3 and 4
67. Consider the following statements.
i. Market risk refers to the risk of insufficient cash flow in the organisation during financial
ii. Process Decision Program Chart (PDPC) tool identifies the different levels of risk and the
countermeasure tasks.
iii. Process Decision Program Chart (PDPC) tool calculates the most occurring risks.
iv. Simulation methods like Monte Carlo consist of simple statistics for analysing key
strategic decisions.
State True or False:
a. (i) False, (ii) False, (iii) True, (iv) True
b. (i) False, (ii) True, (iii) False, (iv) True
c. (i) True, (ii) False, (iii) False, (iv) True
d. (i) False, (ii) True, (iii) True, (iv) False
68. Match the following statements:
Set A
A. Liquidity gap
B. Non-Performing Assets (NPA) of high-level
C. Stock approach
D. Flow approach
Set B
1. It does not reveal the essential liquidity profile of a bank.
2. It looks at the liquidity requirements for a minimum of 15 days.
3. It is the factor affecting liquidity.
4. It is the difference between the due balances of assets and liabilities over time.
a. A-4, B-3, C-1, D-2
b. A-1, B-2, C-3, D-4
c. A-4, B-1, C-2, D-3
d. A-3, B-1, C-4, D-2
69. Match the following:
Set A
A. Feature of duration analysis
B. Feature of IRR management process
C. Feature of gap analysis
D. Feature of risk monitoring and reporting process
Set B
1. Verifies compliance with policies and risk limits
2. Unproductive for banks having complex structures or activities
3. Focuses on stress analysis of alternative interest rate scenarios
4. Measures are updated during volatile interest rate conditions
a. A-1, B-2, C-4, D-3
b. A-2, B-1, C-3, D-4
c. A-3, B-2, C-4, D-1
d. A-4, B-3, C-2, D-1
70. Which of the following are the methods to adjust effective rate sensitivity of assets and
liabilities on balance sheet?
1. Increasing asset sensitivity by purchasing short term securities, reducing loan maturities,
and making more loans based on floating rates
2. Reducing asset sensitivity by purchasing long term securities, enlarging loan maturities
and changing floating rate loans to term loans
3. Increasing liability sensitivity by paying premiums in order to attract short term deposit
instruments and borrowing more through non-core purchased liabilities
4. Increasing liability sensitivity by paying premiums to attract long term deposits and
issuing long term subordinated debts
a. Statements 1, 2 and 3
b. Statements 1, 3 and 4
c. Statement 2, 3 and 4
d. Statements 1, 2 and 4
71. Match the following statements:
Set A
A. Transaction exposure
B. Translation exposure
C. Economic exposure
D. Backlog exposure
Set B
1. It requires an understanding of the structure of the markets
2. It is the time taken by transaction risk exposure to fill the order after the contract is
3. It is calculated at the time of converting foreign financial statements for reporting
4. The life span of this risk exposure occurs by selling a product on open account.
a. A-4, B-3, C-1, D-2
b. A-1, B-2, C-3, D-4
c. A-4, B-1, C-2, D-3
d. A-3, B-1, C-4, D-2
72. Match the following:
Set A
1. Functions of treasury department
2. Financial risk
3. Asset liability management
4. Default risk
Set B
A. Are the same irrespective of whether the firm has a separate treasury functions or it is
included in the finance department.
B. Aims to monitor measure and manage the market risk in banking organisations.
C. An additional risk to the shareholders when the company uses debts in addition to equity
D. Companies or individuals are unable to make required payments on their debt
a. 1-A, 2-D, 3-B, 4-C
b. 1-A, 2-C, 3-B, 4-D
c. 1-A, 2-C, 3-D, 4-B
d. 1-A, 2-B, 3-C, 4-D
73. Which of the following factors are neglected by Variance covariance method while
calculating VaR for nonlinear positions?
1. The method of mapping equity positions through beta.
2. The non-linear relationship between the underlying asset price and the potential value of
the component of a portfolio
3. The probability that currency trading systems which provided profitable returns in the
past might not assure the same now.
4. The effect on the price of the components by risk factors like delay in time and the
expected volatility of the underlying assets returns.
a. Statements 1 and 2
b. Statements 2 and 4
c. Statements 1 and 3
d. Statements 3 and 4
74. Match the following:
Set A
A. Spot trades
B. Corporate debt paper
C. Treasury Bills
D. Commercial paper
Set B
1. Promissory note issued by RBI, on behalf of the Government of India, at a discounted
2. A short-term unsecured promissory note issued by large corporations.
3. The settlement operates from the third day that is after two working days from the date
of deal.
4. Debenture issued by the financial institutions and corporations.
a. A-1, B-2, C-3, D-4
b. A-2 ,B-1, C-4, D-3
c. A-3, B-4, C-1, D-2
d. A-4, B-3, C-2, D-1
75. Match the following:
Set A
A. TQM of information system
C. Feature of ALCO
D. Function of ALM support group
Set B
1. Enhances clarity in the policy statement of ALCO for the successful implementation of the
2. Monitoring the risk levels of the organisation, communicating the interest rate position
and fixing the rate on deposits and advances
3. Assures the quality of information through appropriate methodologies
4. Ensures that adequate and necessary software and management information systems are
employed to monitor and report the risks
a. A-4, B-2, C-3, D-4
b. A-3, B-1, C-4, D-2
c. A-2, B-3, C-4, D-1
d. A-1, B-4, C-2, D-3
Answer all the following questions. (Descriptive questions to be answered in not more than
200 words)10Marks x 4 = 40Marks
Sl. No.
Define liquidity planning. Discuss the key features of a liquidity contingency plan.
(10 Marks)
a)What are the functions and benefits of integrated treasury?
b) Define VaR and illustrate its components.
(10 Marks)
Read the following case study thoroughly and answer the following questions:
Interest rate risk management of GBS bank
Various interest rate risk hedging alternatives are available for GBS Mutual Bank to curb
interest rate risk factors.
The interest rate risk hedging tools used by GBS bank are as follows:
Balance sheet positioning instruments The balance sheet positioning instruments rely on
a banks ability to alter its financial assets and liabilities in order to grab benefits of different
interest rate scenarios and repricing frequencies of financial instruments. The balanced
sheet positioning strategies implemented by GBS bank are as follows:
Smoothing of net interest income (NII) It is the current technique which is employed by
GBS. To hedge the interest risk using a NII smoothing strategy, the GBS should retain a
certain percentage of its NII for the periods when interest rate declines.
Volume strategy implementation During a falling interest rate situation, GBS alters the
quantity of financial instruments on its balance sheet to maximise its NII. In order to
accomplish this, GBS lengthens the maturity structure of its assets and shortens the
maturity structure of its liabilities.
Pricing strategy technique GBS used a pricing strategy when the usual interest rate
trend was downward sloping. It effectively hedges the interest rate position by increasing
rates on short-term deposits and increasing rates on long-term loans.
Ideal portfolio This type of portfolio is a balance sheet positioning strategy that perfectly
matches assets and liabilities in term of maturity, fixed rate and floating rate financial
instruments. During an upward sloping yield curve condition, GBS constructs a portfolio with
long dated fixed rate liabilities and short dated floating rate assets. Whereas, in case of a
downward sloping interest rate situation, GBS holds a portfolio
containing short dated floating rate liabilities and long dated fixed rate assets.
Financial derivative instruments GBS had options of derivative instruments for interest
rate risk hedging purposes like securitisation, interest rate forwards, interest rate futures,
interest rate swaps, interest rate options, interest rate caps, interest rate floors, interest
rate collars, hybrid derivatives like options on swaps, options on futures.
Retaining the status quo While retaining the status quo GBS would not alter its interest
rate smoothing strategy.
The function of the GBS ALCO
The functions of the GBS ALCO are to properly measure the banks interest rate risk
exposure, simulate interest rate scenarios and manage the interest rate risk position. GBS
performs all of these tasks sufficiently well with the banks technical skills. GBS incorporated
the use of external and internal sources of information while planning its ALCO structure.
The external sources include macroeconomic indicators i.e fiscal policy, monetary policy
which provides the foundation for the banks internal interest rate forecast. Whereas, the
internal sources include maturity structure, growth forecast which forecasts the balance
a) What were the hedging tools used by GBS?
b) What were the functions of ALCO structure of GBS?
(10 arks)
a) Explain the IRR hedging techniques.
b)What are factors which influence the market interest rates?
(10 Marks)