CAIIB Paper 2 Module C Quiz 2

Correct answer: Masala bond. Masala bonds are rupee-denominated bonds issued outside India. Currency risk allocation and eligibility are governed by applicable regulations. 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: Whether borrower, lender, purpose and terms meet the current ECB framework. ECB eligibility depends on the prevailing regulatory framework, including borrower/lender eligibility, permitted end-use, maturity, all-in-cost and reporting. 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: A GDR is a depositary receipt representing underlying shares and is traded under an international issuance arrangement. A GDR is a negotiable receipt issued by a depositary representing underlying shares held through a custodian; it is not itself a bank deposit or bond. 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: Potential foreign-exchange mismatch and debt-servicing risk. If debt service is in foreign currency but revenues are in rupees, depreciation can raise the rupee cost of repayment unless the exposure is naturally or financially hedged. 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: Cash balance with the Reserve Bank of India as prescribed. Cash Reserve Ratio requires banks to maintain a prescribed proportion of their relevant net demand and time liabilities as cash balance with RBI. 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: Net demand and time liabilities. SLR is a prescribed proportion of NDTL held in eligible liquid assets, as defined by applicable RBI directions. 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: Liquidity Adjustment Facility (LAF). The LAF framework allows RBI to manage system liquidity through specified repo and standing facilities, under current operational 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: Liquidity against eligible securities, subject to the facility‘s terms. Under repo operations, eligible counterparties obtain liquidity against securities, with repurchase obligations and applicable rates/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: RTGS. RTGS settles funds individually in real time on a gross basis, reducing settlement risk for eligible transactions. 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: Manage clearing and settlement processes and help mitigate counterparty risk under its rules. A clearing corporation interposes or manages obligations under its rules, calculates settlement obligations and applies risk controls; it does not eliminate all investment 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: They are distinct regulatory requirements with different eligible forms of maintenance. CRR is maintained as cash balance with RBI; SLR is maintained in specified liquid assets. Their applicable rates and operational details can change by RBI action. 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: Operational terms, rates and eligible collateral can change over time. Facility rates, counterparties, collateral and operating procedures are time-sensitive and should be checked against the latest RBI notifications and directions. 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: A loss threshold over a specified horizon and confidence level under model assumptions. VaR estimates a loss quantile for a specified holding period and confidence level. It does not measure all tail losses and depends on model assumptions. 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: Under the model, losses are expected to exceed ₹5 crore on about 1% of days. A 99% one-day VaR of ₹5 crore indicates a modelled 1% probability of losses exceeding that amount over one day, subject to assumptions and data limitations. 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: Sensitivity of price to changes in yield. Modified duration approximates the percentage price change for a small change in yield; greater duration generally means greater interest-rate 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: Falls. Fixed cash flows are discounted at a higher yield when market rates rise, lowering present value and usually the bond price. 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: Credit/counterparty risk. Counterparty risk is the possibility that the other party defaults before or at settlement, creating replacement-cost or settlement exposure. 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: Comparing model forecasts with actual or hypothetical trading outcomes. Back testing assesses whether observed outcomes are consistent with VaR forecasts and helps identify model weakness or underestimation. 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: Examines portfolio resilience under severe but plausible scenarios beyond ordinary model assumptions. Stress tests explore extreme but plausible changes in rates, spreads, FX or liquidity and complement VaR, which may not capture tail events well. 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: Pre-approved limits, independent monitoring and timely exception escalation. Defined limits and independent monitoring constrain risk-taking; breaches need documented escalation and resolution rather than concealment. Exam takeaway: understand the underlying treasury principle and verify changeable regulatory rates, eligibility criteria and operating rules against the latest RBI/IIBF instructions.