Description

SESSION FEBRUARY – MARCH 2024
PROGRAM MASTER OF BUSINESS ADMINISTRATION
(MBA)
SEMESTER IV
COURSE CODE & NAME DBFI401,
ALM AND TREASURY MANAGEMENT
CREDITS 04

Assignment Set – 1ST

Questions
1. A. Summarize major functions of ALM.
Ans:Asset-Liability Management (ALM) is a critical function within financial institutions,
especially banks, aimed at managing the risks that arise due to mismatches between the assets
and liabilities in terms of maturity, interest rates, and liquidity.
Here are the major functions of ALM:
1. Interest Rate Risk Management Gap Analysis: Identifies mismatches between the
maturity and reprising dates of assets and liabilities to understand the institution’s exposure to
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B. Rate Sensitive assets of a Bank as on 31.03.2024 are ₹ 800 cr @ 8% and Rate
sensitive liabilities as on 31.03.24 are ₹ 1000 cr @ 5%.Calculate Gap as on 31.03.2024
and Net Interest Income of the Bank.
Ans:To calculate the Gap as on 31.03.2024 and the Net Interest Income (NII) of the
bank, we need to follow these steps:
1. Calculate the Gap
The Gap is the difference between the rate-sensitive assets (RSA) and the rate-sensitive
liabilities (RSL).
It shows the bank’s exposure to interest rate changes.
Gap
= RSA − RSL Gap
=RSA−RSL
Given:
2. Outline the advantages of Treasury Management System.
Ans:A Treasury Management System (TMS) is a software solution that automates and
streamlines the financial operations and management of a company’s treasury functions. The
system is designed to enhance the efficiency, accuracy, and security of financial transactions
and risk management activities.
Here are the key advantages of implementing a Treasury Management System:
1. Improved Cash and Liquidity Management Real-Time Visibility: Provides real-time
3. Differentiate between Banking Book and Trading Book.
Ans:The terms “Banking Book” and “Trading Book” refer to different segments of a financial
institution’s portfolio, each with distinct characteristics, purposes, and regulatory
requirements.
Here’s a detailed differentiation between the two:
Assignment Set – 2ND
Questions
1. A. Differentiate between Hedger, Speculator and Arbitrager.
Ans:
Hedger Speculator Arbitrager
Objective The primary goal of a
hedger is to reduce or
eliminate the risk
associated with price
fluctuations in an asset.
Hedgers use financial
instruments like futures,
options, and swaps to
protect against adverse
price movements.
The primary goal of
a speculator is to
profit from price
movements in
financial markets.
Speculators take on
risk with the
expectation of
earning returns from
fluctuations in asset
prices.
The primary goal of an
arbitrager is to profit from
price discrepancies
between different markets
or instruments. Arbitragers
seek to exploit these
inefficiencies by
simultaneously buying and
selling related assets.
B. Infosys stock is quoted on National Stock Exchange (INR) at ₹ 800 while on NYSE
(USD) at USD 10.47. Determine if an arbitrage profit is possible. (USD/INR is 83.40).
Ans:To determine if an arbitrage profit is possible between the quoted prices of Infosys stock
on the National Stock Exchange (NSE) in India and the New York Stock Exchange (NYSE)
in the United States, we need to compare the equivalent prices of the stock in the same
currency.
Here, we will convert the price of Infosys stock on the NYSE (quoted in USD) to INR using
5. A. Rate Sensitive assets of a Bank as on 31.03.2024 are ₹ 800 cr @ 8% and Rate
sensitive liabilities as on 31.03.24 are ₹ 1000 cr @ 5%. Calculate Gap as on 31.03.2024
and Net Interest Income of the Bank.
Ans:To calculate the Gap as on 31.03.2024 and the Net Interest Income (NII) of the
bank, we need to follow these steps:
1. Calculate the Gap
The Gap is the difference between the rate-sensitive assets (RSA) and the rate-sensitive
liabilities (RSL).
It shows the bank’s exposure to interest rate changes.
Gap = RSA − RSL Gap=RSA−RSL
Given: Rate Sensitive Assets (RSA)
2. Calculate the Net Interest Income (NII) Net Interest Income (NII) is the difference
between the interest earned on rate-sensitive assets and the interest paid on ratesensitive
liabilities.
Interest Earned on Rate Sensitive Assets
Interest Earned on RSA
= RSA × Interest Rate on RSA
Interest Earned on RSA
= ₹ 800 crore × 8 %
B. If interest rates on assets and liabilities reduce by 100 basis points (1%), calculate the
impact on the NII (Net Interest Income) of the Bank.
Ans:To calculate the Gap as on 31.03.2024 and the Net Interest Income (NII) of the
bank, we need to follow these steps:
1. Calculate the Gap
The Gap is the difference between the rate-sensitive assets (RSA) and the rate-sensitive
liabilities (RSL). It shows the bank’s exposure to interest rate changes.
Gap = RSA − RSL Gap=RSA−RSL
Given: Rate Sensitive Assets (RSA)
C. Comment on the impact on NII if the GAP is positive and interest rates reduces.
Ans:Net Interest Income (NII) is the difference between the interest income generated from
a bank’s assets and the interest expense associated with its liabilities. The Gap (or interest rate
sensitivity gap) is the difference between rate-sensitive assets (RSA) and rate-sensitive
liabilities (RSL).
A positive Gap indicates that the bank has more rate-sensitive assets than rate-sensitive
6. A. Briefly explain liquidity risk for a Bank differentiating between funding liquidity
and market liquidity risk.
Ans:Liquidity risk for a bank refers to the risk that the bank will not be able to meet its shortterm
financial obligations as they come due without incurring unacceptable losses. This risk
is a critical aspect of a bank’s overall risk management strategy.
Liquidity risk can be broadly categorized into two types: funding liquidity risk and
market liquidity risk.
1. Funding Liquidity Risk Definition: Funding liquidity risk is the risk that a bank will not