1.   The organizational controls refer to the checks and balanced within system.

2.  In Treasury business front office is called Dealing Room.

3.  Exposure limits protect the bank from Credit Risk.

4.  The Counter party Risk is bankruptcy or inability of counter party to complete the transaction at their end.

5.  The exposure limits are fixed on the basis of the counter party’s net worth, market reputation and track record.

6.  RBI has imposed a ceiling of 5% of total business in a year with individual branches.

7.  Limits imposed are preventive measures to avoid or contain losses in adverse market conditions.

8.  Trading limits are of three kinds, they are 1) Limits on deal size 2) Limits on open positions and 3) Stop loss limits.

9.  Open position refers to the trading positions, where the buy / sell positions are not matched.

10.  All the forward contracts are revalued periodically ( Every month )

11.  The stop loss limits prevent the dealer from waiting indefinitely and limit the losses to a level which is acceptable to the management.

12.  The Stop loss limits are prescribed per deal, per day, per month as also an aggregate loss limit per year.

13.  Two main components of market risk are Liquidity risk and Interest rate risk.

14.  Liquidity risk implies cash flow gaps which could not be bridged.

15.  Liquidity risk and Interest rate risk are like two sides of a coin.

16.  The Interest rate risk refers to rise in interest costs eroding the business profits or resulting in fall in assets prices.

17.  The interest rate risk is present where ever there is mismatch in assets and liabilities.

18.  If the currency is convertible, the exchange rate and interest rate changes play greater role in attracting foreign investment inflows into the secondary market.

19.  Marker Risk is a confluence of liquidity risk, interest rate risk, Exchange rate risk, Equity risk and Commodity risk.

20.  BIS defines Market Risk as, “ The Risk that the value of on- or – off Balance Sheet positions will be adversely affected by movements in equity and interest rate markets, Currency exchange rates and Commodity prices”

21.  The Market Risk is closely connected with ALM.

22.  The Market Risk is also known as Price Risk.

23.  Two important measures of risk are Value at Risk and Duration method.

24.  Value at Risk (VAR) at 95% confidence level implies a 5% probability of incurring the loss.

25.  VAR is an estimate of potential loss always for a given period at a confidence level.

26.  There are three approaches to calculate the AVR i.e. Parametric Approach, Monte Carlo Approach and Historical Data.

27.  VAR is derived from a statistical formulae based on volatility of the market.

28.  Parametric Approach is based on sensitivity of various Risk components.

29.  Under Monte Carlo model a number of scenarios are generated at random and their impact on the subject is studied.

30. Duration is widely used in investment business.

31.  The rate at which the present value equals the market price of a bond is known as YTM.

32.  Yield & price of a bond moves in inverse proportion.

33.  Duration is weighted average measure of life of a bond, where the time of receipt of a cash flow is weighted by the present value of the cash flow.

34.  Duration method is also known as Mecalay Duration, its originator is Frederic Mecalay.

35.  Longer the duration, greater is the sensitivity of bond price to changes in interest rate.

36.  A proportionate change in prices corresponding to the change in yields is possible, only when the yield curve is linear.

37.  Derivatives are used to protect treasury transactions from Market Risk.

38.  Derivatives are also useful in managing Balance Sheet risk in ALM.

39.  Treasury transactions are of high value & relatively need low capital.

40.  Market movements are mainly due speculation.

41.  VAR is the maximum loss that may take place with in a time horizon at a given confidence level.

42.  Leverage is Capital Adequacy Ratio incase of companies it is expressed as Debt / Equity Ratio.

 

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1. Treasury Risk is sensitive because 1) The Risk of loosing capital is much higher than the risk in the credit business 2) Large size of transactions done at the discretion of treasurer 3) Losses in treasury business materialize in very short term and the transactions once confirmed are irrevocable.

2. The conventional control and supervisory measures of treasury can be divided in to three parts 1) Organizational controls 2) Exposure ceiling and 3) Limits on trading portions and stop loss limits.