CAIIB Paper 2 Module C Quiz 6

Correct answer: Linked to the reference rate plus or minus a spread. A floating-rate note periodically resets its coupon according to a reference rate plus or minus a contractual spread. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.

Correct answer: Short-term credit for imports from a supplier or financial institution under applicable rules. Trade credit is a financing arrangement associated with imports, commonly supplier‘s credit or buyer‘s credit, governed by the applicable regulatory framework. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.

Correct answer: They serve as collateral supporting the liquidity transaction. Eligible collateral secures the repo exposure; eligibility, valuation, haircuts and operational conditions are governed by the facility or market rules. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.

Correct answer: Investigate the exception, validate data/model assumptions and follow escalation rules. VaR exceptions should be investigated and escalated. Repeated or severe breaches may signal model weakness, unusual market conditions or control issues. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.

Correct answer: Risk that EUR becomes more expensive in domestic currency. Buying the foreign currency forward fixes the domestic-currency cost of a known payable, reducing uncertainty from adverse exchange-rate movements. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.

Correct answer: The seller may have an obligation if the buyer exercises the option. The option seller receives premium but assumes the contractual obligation to perform if the buyer exercises, and may face substantial market risk. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.

Correct answer: Funding liquidity risk event. Concentrated and unexpected withdrawals can create funding liquidity pressure, requiring contingency funding actions and concentration monitoring. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.

Correct answer: Model behavioural repricing and deposit betas using validated assumptions. Deposit betas and behavioural maturity assumptions influence interest-rate sensitivity; they should be validated, monitored and stress-tested. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.

Correct answer: Risk control/middle office or an independent valuation function. Independent valuation checks help detect stale or biased marks and ensure positions are measured consistently under approved valuation policy. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.

Correct answer: Repo. Repo is a collateralised transaction involving sale and repurchase of securities, commonly used for secured funding. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.

Correct answer: Reduce effective duration or hedge the interest-rate exposure. Reducing duration or using a suitable hedge can reduce first-order sensitivity to yield changes, subject to basis and hedge effectiveness. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.

Correct answer: Reflect the funding value provided by that business line. FTP can allocate a funding credit to businesses that provide stable funding, improving product-level profitability measurement and incentives. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.

Correct answer: Escalate promptly and document the breach. Breaches require prompt escalation and documentation under delegated authority; profit does not override risk controls. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.

Correct answer: Repo. Repo provides secured short-term funding against securities, subject to collateral and settlement terms. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.

Correct answer: Arrange a suitable currency hedge. A properly matched forward, swap or other permitted hedge can reduce FX uncertainty; suitability and regulatory requirements must be assessed. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.

Correct answer: CRR/SLR are reserve requirements; LAF is a liquidity-management framework. CRR and SLR are reserve requirements; LAF operations are used for liquidity management and monetary-policy implementation. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.

Correct answer: Scenario or stress testing across relevant curve tenors. Yield-curve scenarios test non-parallel movements that a single parallel-shift duration estimate may not capture. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.

Correct answer: An OTC derivative. OTC derivatives are typically bilaterally negotiated and can be tailored, creating documentation, valuation and counterparty considerations. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.

Correct answer: Repricing gap. Gap analysis compares rate-sensitive assets and liabilities in defined time buckets to assess potential net interest income sensitivity. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.

Correct answer: Escalate promptly and document the breach. Breaches require prompt escalation and documentation under delegated authority; profit does not override risk controls. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.