JAIIB Paper 1 Module D Quiz 4

Integration refers to connectedness across markets, often through arbitrage, common investors, funding links and policy transmission. It can improve efficiency but may also transmit shocks.

Contagion is the transmission of financial stress from one institution, market or country to others. It can operate through direct exposures, funding markets, asset prices and confidence effects.

The ACU is a regional payment and clearing arrangement intended to facilitate eligible transactions among participating members. Its rules define eligible transactions and settlement procedures.

An integrated treasury manages a bank’s liquidity, funding, investments and market risks across connected products. A movement in interest rates, currency values or funding availability may affect multiple positions at once.

Higher market yields generally reduce the prices of existing fixed-coupon bonds. The same rate movement may affect the cost of new funding, reinvestment returns and derivative valuations.

Bond-market stress can raise corporate borrowing costs and make refinancing harder, linking capital-market conditions with credit supply and real economic activity.

A borrower with foreign-currency liabilities and rupee revenues has a currency mismatch. If the foreign currency appreciates, more rupees are needed to service the same foreign-currency obligation.

Forced selling can depress prices, trigger further margin calls and cause additional selling. This feedback loop can amplify volatility and liquidity stress.

Financial markets vary in purpose, participants, instruments, liquidity, settlement and regulation. These differences affect how shocks and trading activity pass between markets.

Arbitrageurs may exploit inconsistent prices by buying in the cheaper market and selling in the more expensive one. Costs, limits, timing and risk mean arbitrage is not always risk-free or complete.

Futures contracts are standardised and traded through an exchange/clearing framework, typically with margining. Forwards are commonly over-the-counter and can be tailored to the parties’ needs.

Margins act as financial resources against potential losses and help manage default risk. They do not eliminate risk, and traders may be required to add margin as prices move.

Daily mark-to-market settlement transfers gains and losses based on the contract’s daily price movement. It helps reduce the accumulation of unpaid losses but can create daily cash-flow requirements.

An FRA is an agreement referencing an interest rate for a future period. It generally settles a calculated amount based on the difference between the contracted rate and the reference rate, subject to contract terms.

A standard interest-rate swap exchanges interest-payment streams, often fixed-rate against floating-rate, calculated on a notional amount. The notional principal is generally not exchanged in a plain-vanilla rupee interest-rate swap.

Currency swaps can exchange principal and/or interest cash flows in different currencies and help manage currency and funding exposures. They introduce counterparty and market risks and do not freeze exchange rates for unrelated transactions.

A call gives its holder the right to buy at the strike. At expiry it has intrinsic value when the market price is above the strike price, before considering the premium paid.

A put option gives its buyer the right to sell the underlying at the strike price, depending on exercise style and contract terms. The buyer normally pays a premium for this right.

Hedging aims to reduce the effect of an existing or anticipated risk exposure. It may not eliminate all risk because of basis, timing, counterparty or imperfect-hedge effects.

OTC derivatives can expose each party to losses if the counterparty defaults when amounts are owed. Collateral, netting, clearing and credit limits can mitigate, but not necessarily eliminate, this risk.