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The Institute of Bankers, Bangladesh (IBB)

96th Banking Professional Examination, 2023
AIBB
Treasury Management in Financial Institutions (TMFI)
Subject Code: 2 0 5
Time-3 hours
Full Marks-100
Pass marks-45
[N.B. The figures in the right margin indicate full marks. Answer any Five Questions.]
1. (a) What is the meaning of Integrated Treasury? What are the benefits of it? 5
(b) Briefly describe the functions of Integrated Treasury. 10
(c) Distinguish between Money Market and Foreign Exchange Market. 5
2. (a) What is money? Briefly describe the functions of money. 6
(b) Briefly describe money market instruments available in Bangladesh. 7
(c) How do you calculate the liquidity in the money market for a particular month 7
in Bangladesh? What is the money market liquidity condition in Bangladesh?
3. (a) What are the components of demand and time liabilities of a bank? 10
(b) Briefly describe CRR and SLR in the contest of Bangladesh. Why are they 10
maintained?
4. (a) Define foreign exchange rate. What are the reasons for foreign exchange rate 10
fluctuations?
(b) Briefly explain the three types of foreign exchange risk. 6
(c) Company A, based in Canada, reports its financial statements in Canadian 4
Dollar (CAD), but conducts business in the USA in U.S Dollars (USD). The
USD/CAD exchange rate was 1.50, meaning 1.5 CAD could be obtained by 1.00
USD, when the company reported its Q1 financial results. However, the
exchange rate is now 1.25, when the company reports its Q2 financial results.
Is it an example of transaction risk, Economic risk or Translation risk? Explain
briefly.
5. (a) Define Liquidity Management. What is Net Stable Funding Ratio (NSFR)? 5
(b) What is ALCO? What are the major responsibilities of ALCO? 6
(c) Mention the key roles and responsibilities of ALM desk. 5
(d) What are the elements of a typical Contingency Funding Plan (CFP)? 4
6. (a) Define derivatives. Briefly describe the risks associated with derivatives. 6
(b) “Option give the option-holder the right, but create obligation for the option- 8
seller”. Explain in light of call option and put option with example.
(C) What is Interest Rate SWAP? Explain how it works with an example. 6
7. (a) What are the key features of fixed income securities? Briefly describe the types 8
of fixed income securities.
(b) Define Primary Dealers and state their objectives. Discuss the roles and 7
responsibilities of a Primary Dealer.
(c) What considerations must be made before investing in a perpetual bond? 5
8. (a) Discuss the importance of risk management and risk analysis process from the 8
viewpoint of a treasury manager.
(b) Describe the key principles of BASEL III 7
(c) ABCD Bank had posted interest revenues of Tk. 63 million and interest paid to 5
all of its borrowings of Tk. 42 million. If the bank Possess Tk. 700 million in
total earning assets, what is ABCD Bank’s net interest margin.

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9. Write short notes on any five of the following: 4X5= 20

(i) Liquidity Coverage Ratio (LCR)
(ii) Advance to Deposit Ratio (ADR)
(iii) Repo/Reverse Repo
(iv) Chinese Walls
(v) Commodity Derivatives
(vi) Secured overtime Financing Rate (SOFR)
(vii) Percentage in Point (PiP)
(viii) DIBOR
10. Write differences between the following (any four) 5X4= 20
(i) Direct Quotation and Indirect Quotation Method
(ii) Caps and Collars
(iii) TT Clean Rate and BC Rate
(iv) Forward Contract and Futures Contract
(v) Bid rate and Ask rate
(vi) Bear Market and Bull Market
(vii) Duration and Convexity

Comprehensive Books for preparing

The Banking Professional Examination (JAIBB & AIBB)
Written and AIBB Credit Operations and Management
Compiled by Published by Risk Management in Financial Institutions
Trade Finance and Foreign Exchange
S. M. Mahruf Billah Mullick Brothers
Treasury Management in Financial Institutions
Joint Director
Bangladesh Bank JAIBB Monetary and Financial System
Collect your Copy from: www.rokomari.com
Or
Mullick Brothers Book shop located at Banglabazar, New Market & Nilkhet, Dhaka

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1. (a) What is the meaning of Integrated Treasury? What are the benefits of it? 5
Integrated treasury is a holistic approach to funding the balance sheet and deployment of funds
across the domestic as well as global money and forex markets. This approach enables the bank
to optimize its asset-liability management and also capitalize on arbitrage opportunities.
Benefits of an integrated treasury are as follows:
i) Instant cash and risk visibility
ii) Automate treasury processes
iii) Ensure regulatory compliance
iv) Enable best practices
v) Enhance operational quality
vi) Reduce banking costs
vii) Realize on-demand reporting
1. (b) Briefly describe the functions of Integrated Treasury. 10
The functions of Integrated Treasury are described below:
(a) Reserve Management and Investment: It involves:
(i) Meeting CRR/SLR obligations,
(ii) Having an approximate mix of investment portfolio to optimize yield and duration.
Duration analysis is used as a tool to monitor the price sensitivity of an investment instrument
to interest rate changes.
(b) Liquidity and Funds Management: It involves:
(i) Analyzing of major cash flows arising out of asset-liability transactions,
(ii) Providing a balanced and well-diversified liability base to fund the various assets in
the balance sheet of the bank, and
(iii) Providing policy inputs to the strategic planning group of the bank on funding mix
(currency, tenor and cost) and yield expected in credit and investment.
(c) Asset Liability Management: ALM calls for determining the optimal size and growth rate of
the balance sheet and also prices the assets and liabilities in accordance with prescribed
guidelines.
(d) Risk Management: Integrated treasury manages all market risks associated with a bank’s
liabilities and assets. The market risk of liabilities pertains to floating interest rate risks and asset
and liability mismatches. Market risk for assets can arise from:
(i) Unfavorable change in interest rates,
(ii) Increasing levels of disintermediation,
(iii) Securitization of assets, and
(iv) Emergence of credit derivatives, etc.
While the credit risk assessment continues to be in the domain of Credit Department, the
treasury would monitor the cash inflow impact from changes in asset prices due to interest rate
changes by adhering to prudential exposure limits.

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(e) Transfer Pricing: The treasury has to ensure that the funds of the bank are deployed
optimally, without sacrificing yield or liquidity. An integrated treasury unit has an idea of the
bank/s overall funding needs as well as direct access to various markets (like money market,
capital market, forex market, credit market).
Hence, ideally the treasury should provide benchmark rates, after assuming market risk, to
various business groups and product categories about the correct business strategy to adopt.
(f) Derivative Products: The treasury can develop Interest Rate Swap (IRS) and other rupee
based/cross currency derivative products for hedging bank’s own exposures and also sell such
products to customers/other banks.
(g) Arbitrage: Treasury units of banks undertake arbitrage by simultaneous buying and selling of
the same type of assets in two different markets in order to make profit less risky.
(h) Capital Adequacy: This function focuses on quality of assets, with Return on Assets (ROA)
being a key criterion for measuring the efficiency of deployed fund.
An integrated treasury is a major profit center. It has its own P and L measurement. It
undertakes exposures through proprietary trading (deals done to make profits out of
movements in market interest/exchange rates) that may not be required for general banking.
1. (c) Distinguish between Money Market and Foreign Exchange Market. 5
 Money markets are the financial markets where short-term financial assets are bought
and sold. By definition, the financial assets, such as stocks and bonds that are traded in
these markets will mature in one year or less. Over a billion dollars in transactions take
place in these markets on a daily basis. Financial institutions, corporations,
governments, and the central bank are active in the money markets as they adjust their
short-term portfolios.
 Foreign exchange markets facilitate the trade of one foreign currency for another. Most
exchanges are made in bank deposits and involve U.S. dollars. Over a trillion dollars in
foreign exchange trades take place every day; foreign exchange dealers handle most
transactions. Businesses, financial institutions, governments, investors, and individuals
use the foreign exchange markets to adjust their currency holdings.

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2. (a) What is money? Briefly describe the functions of money. 6

Money is a medium of exchange that is centralized, generally accepted, recognized, and facilitates
transactions of goods and services.
Functions of Money:
Money is often defined in terms of the three functions or services that it provides. Money serves as
a medium of exchange, as a store of value, and as a unit of account.
 Medium of exchange: Money's most important function is as a medium of exchange to
facilitate transactions. Without money, all transactions would have to be conducted by
barter, which involves direct exchange of one good or service for another.
 Store of value: In order to be a medium of exchange, money must hold its value over time;
that is, it must be a store of value. If money could not be stored for some period of time and
still remain valuable in exchange, it would not solve the double coincidence of wants
problem and therefore would not be adopted as a medium of exchange. Money is more
liquid than most other stores of value because as a medium of exchange, it is readily
accepted everywhere. Furthermore, money is an easily transported store of value that is
available in a number of convenient denominations.
 Unit of account: Money also functions as a unit of account, providing a common measure of
the value of goods and services being exchanged. Knowing the value or price of a good, in
terms of money, enables both the supplier and the purchaser of the good to make decisions
about how much of the good to supply and how much of the good to purchase.
2. (b) Briefly describe money market instruments available in Bangladesh. 7
The money market in Bangladesh comprises banks and financial institutions as intermediaries,
20 of them are primary dealers in treasury securities. Interbank clean and repo based lending,
BB's repo, reverse repo auctions, BB bills auctions, treasury bills auctions are primary operations
in the money market, there is also active secondary trade in treasury bills (upto 1 year maturity).
1) Bangladesh Government Treasury Bill
Main features:
i) Short term government securities (Up to One year)
ii) Three tenors are available namely 91days, 182 days and 364 days.
iii) Interest rate is determined by auction.
iv) Tradable in the secondary market.
v) Bid can be submitted for TK. 1,00,000/- or any amount of its multiple on auction.
2) Bangladesh Government Treasury Bonds (BGTB)
Main features:
i) Long term government securities (More than One year).
ii) Maturities are available for 2, 5, 10, 15 & 20 years.
iii) Coupon is paid half yearly and the principal is repaid on maturity.
iv) Coupon Rate is determined by auction.
v) Tradable in the secondary market.

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vi) Bid can be submitted for TK. 1,00,000/- or any amount of its multiple on auction.
vii) Tax Rebate Facilities are available for Individual Investors for investing in Treasury
Bond According to Finance Act-2020, (Under Section 51 of Income Tax Ordinance,
1984) .
3) Bangladesh Government Investment Sukuk (BGIS)
Main features:
i) Shariah based government security.
ii) Tenor and mode of investment of Sukuk contact determined on the basis of the project.
iii) Profit can earned after every six months and the principal can be obtained after the end
of tenor.
iv) Bid can be submitted for TK. 10,000/- or any amount of its multiple on auction.
4) Call Money
 Call money is a short-term, interest-paying loan from one to 14 days made by a financial
institution to another financial institution.
 Due to the short term nature of the loan, it does not feature regular principal and
interest payments, which longer-term loans do.
 Average Call money rate at 28 February, 2024 was 9.33 percent as per BB website.
5) Repos and Reverse Repo
 Repo rate is the rate at which the Bangladesh Bank lends money to commercial banks in
the event of any shortfall of funds. Repo rate is used by monetary authorities to control
inflation.
 Reverse repo rate is the rate at which the Bangladesh Bank borrows money from
commercial banks within the country. It is a monetary policy instrument which can be
used to control the money supply in the country.
 Essentially, repos and reverse repos are two sides of the same coin—or rather,
transaction—reflecting the role of each party. A repo is an agreement between parties
where the buyer agrees to temporarily purchase a basket or group of securities for a
specified period. The buyer agrees to sell those same assets back to the original owner
at a slightly higher price.
 Both the repurchase and reverse repurchase portions of the contract are determined
and agreed upon at the outset of the deal.

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2. (c) How do you calculate the liquidity in the money market for a particular month in 7
Bangladesh? What is the money market liquidity condition in Bangladesh?
Some commonly used liquidity measurement and monitoring techniques that may be adopted
by the banks are:
a. Contingency funding plans
b. Maturity ladder
c. Liquidity ratios and limits
To calculate the liquidity in the money market for a particular month we can use Maturity
Ladder techniques.
Maturity Ladder: A maturity ladder estimates a bank’s cash inflows and outflows and thus net
deficit or surplus (GAP) both on a day-to-day basis and over a series of specified time periods.
 Banks need to focus on the maturity of its assets and liabilities in different tenors.
Mismatch is accompanied by liquidity risk and excessive longer tenor lending against
shorter-term borrowing can put a bank’s balance sheet in a very critical and risky
position.
 To address this risk and to make sure a bank does not expose itself in excessive
mismatch, a bucket-wise (e.g. call, 2-7 days, 8 days-1 month, 1-3 months, 3-12 months,
1-5 years, over 5 years) maturity profile of the assets and liabilities to be prepared to
understand mismatch in every bucket.
 A structural maturity ladder has been furnished in the DOS circular no. 02 dated 29
March 2011.
 Banks need to calculate daily gap for the next one or two weeks, monthly gap for next
six months or a year and quarterly thereafter.
Money Market Liquidity Condition in Bangladesh:
 A majority of banks in Bangladesh, including some Shariah-based ones, are facing
difficulties to run their activities due to a liquidity crisis.
 The liquidity crunch deepened further as the central bank recently raised the policy rate
to tackle ongoing inflationary pressure in the country.
 As such, these lenders are now dependent on the call money market, a short-term
money market, and Bangladesh Bank to secure funds for meeting their payment
obligations.
 The average overnight call money rate stood at 9.33 percent yesterday (28 February
2024), the highest in the last several years, as per the latest data of Bangladesh Bank.
3. (a) What are the components of demand and time liabilities of a bank? 10
Demand and Time Liabilities (DTL) and The Net Demand and Time Liabilities (NDTL) are two
terms openly pop up in connection with monetary review policy of Bangladesh Bank and
liquidity in market. Banks are in the business of accepting deposits and deploying these funds by
way of lending and thereby earning profit in the process. The resources mobilized by the bank
for lending are its liabilities. Liabilities of a bank can be classified broadly into three categories;

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demand liabilities, time liabilities and other demand and time liabilities (ODTL). Demand and
time deposits from public form the largest share of bank’s liabilities.
Demand Liabilities (DL): The demand liabilities for a bank include all those liabilities which are
payable on demand. Demand liabilities of a bank include:
1. Current deposits,
2. Demand liabilities portion of savings bank deposits,
3. Margins held against letters of credit/guarantees,
4. Balances in overdue fixed deposits, cash certificates and
cumulative/recurring deposits payable on demand,
5. Outstanding Telegraphic Transfers (TTs), Mail Transfers (MTs), Demand
Drafts (DDs) and unclaimed deposits,
6. Credit balances in the Cash Credit account and
7. Deposits held as security for advances which are payable on demand.
Time Liabilities (TL): Time liabilities of a bank are those liabilities of a bank which are payable
otherwise on demand. Time Liabilities of a bank include:
1. Fixed deposits, cash certificates, cumulative and recurring deposits,
2. Portion of savings bank deposits, staff security deposits, margin held against
letters of credit, if not payable on demand,
3. Deposits held as securities for advances which are not payable on demand and
4. Gold deposits.
3. (b) Briefly describe CRR and SLR in the contest of Bangladesh. Why are they 10
maintained?
Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers,
which commercial banks have to hold as reserves either in cash or as deposits with the central
bank. CRR is set according to the guidelines of the central bank of a country.
According to MPD Circular No-1 of 23 March 2020:
Refer to MPD circular No 01, dated April 03, 2018 in terms of which all scheduled banks in
Bangladesh (including Shariah based banks) are required to maintain 5.5 percent CRR with
Bangladesh Bank on bi-weekly average basis with a provision of minimum 5.0 percent on daily
basis of their average total demand and time liabilities (ATDTL). Now it has been decided to refix
this CRR at 5.0 percent on bi-weekly average basis with a provision of minimum 4.5 percent on
daily basis effective from April 01, 2020.
Here are the major objectives of Cash Reserve ratio:
i) The CRR is maintained with the central bank to ensure that banks have sufficient
liquidity in order to handle any rush of bank withdrawals and is more of a safety
measure. Bangladesh Bank increases the CRR when it wants to suck out liquidity from
the banking system and reduce lending capacity. Thus, CRR is used for credit control.
ii) Another objective of CRR is to keep inflation under control. BB, in a high inflation
scenario, increases the cash reserve ratio to stop banks from lending.

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iii) CRR works as a safety net for depositors. Regardless of the bank’s performance, it
ensures the depositors that a percentage of their cash is secured with the central bank.
iv) This monetary tool is also used as a reference rate for loans, which is termed as the base
rate.
v) It also ensures that banks have a minimum amount of money that can be extended to
customers during massive demand.
vi) Besides ensuring liquidity, CRR has an equal role in regulating interest rates levied by
banks on the loan. By adjusting liquidity, Bangladesh Bank regulates short-term
volatility.
Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a commercial bank
has to maintain in the form of liquid cash, gold or other securities. It is basically the reserve
requirement that banks is expected to keep before offering credit to customers. These are not
reserved with the Central Bank of Bangladesh (BB), but with banks themselves.
According to MPD Circular No-2 of 10 December 2013:
In accordance with Section 33, sub-section (2) of Bank Company Act 1991, amended in 2013, it
has been decided that (ka) the amount of SLR required to be maintained by the conventional
banks on daily basis shall not be less than 13 (thirteen) percent including the excess amount of
Cash Reserve Requirement (CRR) of their average total time and demand liabilities in
Bangladesh, and (kha) for Shariah-based Islamic Banks this amount shall not be less than 5.50
(five and a half) percent.
The purposes for maintaining the Statutory Liquidity Ratio (SLR) are as follows:
i) To prevent the commercial banks from over-liquidating.
ii) To control the inflation i.e., by increasing the SLR percentage, the inflation in the
country can be brought under control.
iii) Similarly, during the recession, the SLR percentage can be decreased in order to increase
the bank credit.
iv) To ensure the solvency of commercial banks.
v) Since the banks mostly prefer to invest in government securities, the necessity to
maintain SLR has created opportunities for the government to sell their debt
instruments and securities.
4. (a) Define foreign exchange rate. What are the reasons for foreign exchange rate 10
fluctuations?
An exchange rate is a rate at which one currency will be exchanged for another currency and
affects trade and the movement of money between countries.
Exchange rates are impacted by both the domestic currency value and the foreign currency
value. In July 2022, the exchange rate from U.S. Dollars to the Euro was 1.02, meaning it takes
$1.02 to buy €1.

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Points to be noted:
 Most exchange rates are defined as floating and will rise or fall based on the supply and
demand in the market.
 Some exchange rates are pegged or fixed to the value of a specific country's currency.
 Exchange rate changes affect businesses by changing the cost of supplies that are
purchased from a different country, and by changing the demand for their products
from overseas customers.
Factors that influence currency exchange rates:
1. Inflation
Inflation is the relative purchasing power of a currency compared to other currencies. For
example, it might cost one unit of currency to buy an apple in one country but cost a thousand
units of a different currency to buy the same apple in a country with higher inflation. Such
differentials in inflation are the foundation of why different currencies have different
purchasing powers and hence different currency rates. As such, countries with low inflation
typically have stronger currencies compared to those with higher inflation rates.
2. Interest Rates
Interest rates are tightly tied to inflation and exchange rates. Different country’s central banks
use interest rates to modulate inflation within the country. For example, establishing higher
interest rates attracts foreign capital, which bolsters the local currency rates. However, if
these rates remain too high for too long, inflation can start to creep up, resulting in a devalued
currency. As such, central bankers must consistently adjust interest rates to balance benefits
and drawbacks.
3. Public Debt
Most countries finance their budgets using large-scale deficit financing. In other words, they
borrow to finance economic growth. If this government debt outpaces economic growth, it
can drive up inflation by deterring foreign investment from entering the country, two factors
that can devalue a currency. In some cases, a government might print money to finance debt,
which can also drive up inflation.
4. Political Stability
A politically stable country attracts more foreign investment, which helps prop up the
currency rate. The opposite is also true – poor political stability devalues a country’s currency
exchange rate. Political stability also affects local economic drivers and financial policies, two
things that can have long term effects on a currency’s exchange rate. Invariably, countries
with more robust political stability like Switzerland have stronger and higher valued
currencies.
5. Economic Health
Economic health or performance is another way exchange rates are determined. For example,
a country with low unemployment rates means its citizens have more money to spend, which
helps establish a more robust economy. With a stronger economy, the country attracts more

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foreign investment, which in turn helps lower inflation and drive up the country’s currency
exchange rate. It is worth noting here that economic health is more of a catch-all term that
encompasses multiple other drivers like interest rates, inflation, and balance of trade.
6. Balance of Trade
Balance of trade, or terms of trade, is the relative difference between a country’s imports and
exports. For example, if a country has a positive balance of trade, it means that its exports
exceed its imports. In such a case, the inflow of foreign currency is higher than the outflow.
When this happens, a country’s foreign exchange reserves grow, helping it lower interest
rates, which stimulates economic growth and bolsters the local currency exchange rate.
7. Current Account Deficit
The current account deficit is closely related to the balance of trade. In this scenario, a
country’s balance of trade is compared to those of its trading partners. If a country’s current
account deficit is higher than that of a trading partner, this can weaken its currency relative to
that country’s currency. As such, countries that have positive or low current account deficits
tend to have stronger currencies than those with high deficits.
8. Confidence/ Speculation
Sometimes, currencies are affected by the confidence (or lack thereof) traders have in a
currency. Currency changes from speculation tend to be irrational, abrupt, and short-lived. For
example, traders may devalue a currency based on an election outcome, especially if the
result is perceived as unfavorable for trade or economic growth. In other cases, traders may
be bullish on a currency because of economic news, which may buoy the currency, even if the
economic news itself did not affect the currency fundamentals.
9. Government Intervention
Governments have a collection of tools at their disposal through which they can manipulate
their local exchange rate. Primarily, central banks are known to adjust interest rates, buy
foreign currency, influence local lending rates, print money, and use other tools to modulate
currency exchange rates. The primary objective of manipulating these factors is to ensure
favorable conditions for a stable currency exchange rate, cheaper credit, more jobs, and high
economic growth.
4. (b) Briefly explain the three types of foreign exchange risk. 6
Foreign exchange risk management can be classified into the following three types of risks:
Transactional, transitional, and economic. Let us discuss each of these types in detail to understand
the concept in detail.
1. Transaction Risk
Where the business transactions are entered in a currency other than the home currency of
the organization, then there is a risk of change in the currency rates in the adverse direction
from the date of entering the transaction to the date of settlement. This type of foreign
exchange risk is known as transaction risk. This risk arises on the actual and probable import
and export transactions.

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2. Translation Risk
Where a business organization has a foreign subsidiary whose reporting currency is other
than the reporting currency of the parent company, then for consolidation purposes, the
subsidiary balance sheet items are converted into the parent company’s reporting currency
based on the prevailing accounting standards. The risk of movement in the consolidated
financial position and earnings resulting from exchange rates is termed as Translation Risk.
The results, in turn, impact the stock prices. It is also termed as Accounting Exposure.
3. Economic Risk
It is the risk of change in the market forecast of the company’s business and future cash
flows resulting from a change in the exchange rates. This, in turn, impacts the market value
of the firm. E.g., a monopoly product of the company starts facing competition when the
lower exchange rate renders the imported product cheaper. This type of foreign exchange
risk is also termed as Forecast Risk.
4. (c) Company A, based in Canada, reports its financial statements in Canadian Dollar (CAD), 4
but conducts business in the USA in U.S Dollars (USD). The USD/CAD exchange rate
was 1.50, meaning 1.5 CAD could be obtained by 1.00 USD, when the company
reported its Q1 financial results. However, the exchange rate is now 1.25, when the
company reports its Q2 financial results.
Is it an example of transaction risk, Economic risk or Translation risk? Explain briefly.
Answer: It is an example of translation risk.
Translation risk occurs when a company’s financial statement reporting is affected by the
exchange rate volatility. A large multinational generally has a presence in many countries, and
each subsidiary reports its financial statements in the currency of the country in which they
operate. The parent company typically reports the consolidated financials, which involves
translating foreign currencies of different subsidiaries to the domestic currency. And this can
have a significant impact on the company’s balance sheet and income statement and can
ultimately affect the stock price of the company.
5. (a) Define Liquidity Management. What is Net Stable Funding Ratio (NSFR)? 5
Simply put, liquidity management is the strategy any organization adopts to optimize, maximize
and safeguard its liquidity.
 Excellent liquidity management is characterized by full visibility into spend, cash,
liabilities, and financial resources — not just the bigger financial picture.
 To make the right decisions at the right time, finance teams also need to see every
transaction and cash flow, every regulation that impacts financial obligations, and every
payment to every supplier.
 Liquidity in banking refers to the ability of a bank to meet its financial obligations as
they come due.

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The NSFR presents the proportion of long term assets funded by stable funding and is calculated
as the amount of Available Stable Funding (ASF) divided by the amount of Required Stable
Funding (RSF) over a one-year horizon.
 The minimum acceptable value of this ratio is 100 percent, indicating that available
stable funding (ASF) should be at least equal to required stable funding (RSF).
 The calculation of the NSFR requires two quantities to be defined:
A. available stable funding (ASF) and
B. required stable funding (RSF).
 NSFR is met if ASF exceeds RSF, that is if ASF/RSF > 1 or 100%.
𝑨𝒗𝒊𝒂𝒍𝒂𝒃𝒍𝒆 𝒂𝒎𝒐𝒖𝒏𝒕 𝒐𝒇 𝒔𝒕𝒂𝒃𝒍𝒆 𝒇𝒖𝒏𝒅𝒊𝒏𝒈 (𝑨𝑺𝑭)
𝑵𝑺𝑭𝑹 = > 𝟏𝟎𝟎%
𝑹𝒆𝒒𝒖𝒊𝒓𝒆𝒅 𝒂𝒎𝒐𝒖𝒏𝒕 𝒐𝒇 𝒔𝒕𝒂𝒃𝒍𝒆 𝒇𝒖𝒏𝒅𝒊𝒏𝒈 (𝑹𝑺𝑭)
Here, Available amount of stable funding (ASF) = A and
Required amount of stable funding (RSF) = B.
5. (b) What is ALCO? What are the major responsibilities of ALCO? 6
 An Asset-Liability Committee (ALCO) is a supervisory group that checks the management of
liabilities and assets and liabilities to ensure that the bank is earning adequate returns.
 The Asset and Liability Management Committee (ALCO) is responsible for balance sheet risk
management. Managing the assets and liabilities to ensure maximum level of structural balance
sheet stability and optimum profitability is an important responsibility of the ALCO.
According to the Risk Management Guidelines issued in February 2012 by Bangladesh Bank,
the major responsibilities of ALCO are defined as follows:
 Ensure that bank’s measurement and reporting systems accurately convey the degrees
of liquidity and market risk
 Monitor the structure and composition of bank’s assets and liabilities and identify
balance sheet management issues that are leading to underperformance
 Decide on the major aspects of balance sheet structure, such as maturity and currency
mix of assets and liabilities, mix of wholesale versus retail funding, deposit mix etc.
 Decide on how to respond to significant, actual and expected increases and decreases in
required funding
 Review maturity profile and mix of assets and liabilities
 Articulate interest rate view of the bank and decide on balance sheet strategy
 Approve and periodically review the transfer pricing policy of the bank
 Evaluate market risk involved in launching of new products
 Review deposit-pricing strategy, and
 Review contingency funding plan for the bank.
Balance sheet risk management is not limited to collection of data only. ALCO is required to
understand the implications of the numbers generated from analyses and formulate appropriate
responses and strategies for the bank.

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5. (c) Mention the key roles and responsibilities of ALM desk. 5

The ALM desk is responsible for day to day management of the market risk and liquidity risk of
the bank. The broad responsibilities of the ALM desk are as follows:
1. To oversee the growth and sustainability of assets and the liabilities.
2. To manage and oversee the overall activities of Money Market.
3. To manage liquidity and market risk of the bank.
4. To understand the market dynamics i.e. competition, potential target markets etc.
for expansion of the business.
5. To Provide inputs regarding market views and to suggest proper balance sheet
movement (expand or shrink) to cope with the changing situation in the market or
in the economy.
6. To keep records of ALCO meetings, to monitor the implementation status of the
action taken in ALCO meetings etc.
5. (d) What are the elements of a typical Contingency Funding Plan (CFP)? 4
A CFP is a projection of future cash flows and funding sources of a bank under market scenarios
including aggressive asset growth or rapid liability erosion. To be effective it is important that a
CFP should represent management’s best estimate of balance sheet changes that may result
from a liquidity or credit event. The sophistication of a CFP depends upon the size, nature, and
complexity of business, risk exposure, and organizational structure. To begin, the CFP should
anticipate all of the bank's funding and liquidity needs by:
a. Analyzing and making quantitative projections of all significant on- and off balance-
sheet;
b. Funds flows and their related effects;
c. Matching potential cash flow sources and uses of funds; and
d. Establishing indicators that alert management to a predetermined level of potential
risks.
The CFP should project on the bank's funding position during both temporary and long-term
liquidity changes, including those caused by liability erosion. The CFP should explicitly identify,
quantify, and rank all sources of funding by preference, such as:
i) Reducing assets;
ii) Modification or increasing liability structure;
iii) Using other alternatives for controlling balance sheet changes.
From the above discussion, we can identify the major elements of a CFP framework, such as:
a) Governance and oversight.
b) Scenarios and liquidity gap analysis.
c) Contingent actions.
d) Monitoring and escalation.
e) Data and reporting.

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Comprehensive Books for preparing

The Banking Professional Examination (JAIBB & AIBB)
Written and Published by Credit Operations and Management
Compiled by AIBB Risk Management in Financial Institutions
S. M. Mahruf Billah Mullick Brothers Trade Finance and Foreign Exchange
Joint Director Treasury Management in Financial Institutions
Bangladesh Bank JAIBB Monetary and Financial System
Collect your Copy from: www.rokomari.com
Or
Mullick Brothers Book Shop located at Banglabazar, New Market & Nilkhet, Dhaka

6. (a) Define derivatives. Briefly describe the risks associated with derivatives. 6
A derivative is a contract between two parties which derives its value/price from an
underlying asset. The most common types of derivatives are futures, options, forwards and
swaps.
Types of Risks Associated with Derivatives:
In general, the risks associated with derivatives can be classified as credit risk, market risk, price
risk, liquidity risk, operations risk, legal or compliance risk, foreign exchange rate risk, interest
rate risk, and transaction risk. These categories are not mutually exclusive.
i) Credit Risk: Derivatives are subject to credit risk or the risk to earnings or capital due to
obligor’s failure to meet the terms of a contract. Credit risk arises from all activities that
can only be accomplished on counterparty, issuer or borrower’s performance. Credit
risk in derivative products comes in the form of pre-settlement risk and settlement risk.
ii) Market Risk: Derivatives are also subject to Market risk or risk due to unfavorable
movements in the level or volatility of market prices. Market risk results from exposures
to changes in the price of the underlying cash instrument and to changes in interest
rates.
iii) Price Risk: Price risk is an extension of the market risk. Price risk is the risk to earnings or
capital arising from changes in the value of portfolios of financial instruments. The
degree of price risk of derivatives depends on the price sensitivity of the derivative
instrument and the time it takes to liquidate or offset the position.
iv) Liquidity Risk: All organizations involved in derivatives face liquidity risks. Liquidity risk is
the risk to earnings or capital from an organization’s inability to meet its obligations
when they are due, without incurring unacceptable losses. This risk includes the inability
to manage unplanned decreases or changes in funding sources. An organization
involved in derivatives faces two types of liquidity risk in its derivatives activities:
 one related to specific products or markets
 or market liquidity risk and the other related to the general funding of the
institution’s derivatives activities or funding risk.
v) Operations Risk: Like other financial instruments, derivatives are also subject to
operations risk or risks due to deficiencies in information systems or internal controls.

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The risk is associated with human error, system failures and inadequate procedures and
controls.
vi) Foreign Exchange Rates Risk: Derivatives traded in the international markets are also
exposed to risk of adverse changes in foreign exchange rates. Foreign exchange rates
are very volatile. Foreign exchange risk is also known as translation risk. Foreign
exchange rates risk in derivatives is the risk to earnings arising from movement of
foreign exchange rates.
vii) Interest Rate Risk: Interest rate risk is the risk to earnings or capital arising from
movements in interest rates. The magnitude of interest rate risk faced by derivatives
from an adverse change in interest rates depends on the sensitivity of the derivative to
changes in interest rates as well as the absolute change in interest rates.
6. (b) “Option give the option-holder the right, but create obligation for the option- 8
seller”. Explain in light of call option and put option with example.
 An Option is a contract sold (written) by one person to the other.
 The contract gives the buyer the right — but not the obligation — to buy (in the case
of a Call Option) or to sell (in the case of a Put Option) a particular asset, at a
particular price (strike price/exercise price) in the future.
 In return for the Option, the seller collects a payment (the premium) from the buyer.
 Exchange-traded options form an important class of options that have standardized
contract features and trade on public exchanges, facilitating trading among a large
number of investors.
Let’s take an example. The call owner is bullish (expects the stock price to rise) on the
movement of the underlying assets. It gives the owner the right to buy an underlying asset at a
strike price at the expiration date. Consider an investor who buys the call option with a strike of
$7820. The current price is $7600, the expiration date is in 4 months, and the price of the option
to purchase one share is $50.
Long Call Payoff Per-Share = [MAX (Stock Price – Strike Price, 0) – Upfront Premium per Share]
 Case 1: if the stock price at expiration is $7920, the option will be exercised, and the
holder will buy it @ $7820 and sell it immediately in the market for $7920, realizing a
gain of $100 considering the upfront premium paid of $50, the net profit is $50.
 Case 2: if the stock price at expiration is $7700, the option holder will choose not to
exercise as there is no point in buying it at $7820 when the stock market price is $7700.
Considering the upfront premium of $50, the net loss is $50.
Put options gives the owner the right to sell an underlying asset at the strike price at the
expiration date. Consider an investor who buys the put option with a strike of $7550. The
current price is $7600, the expiration date is in 3 months, and the price of the option to
purchase one share is $50. The put owner is bearish (expects the stock price to fall) on the stock
price movement.
Long Put Payoff Per-Share = [MAX (Strike Price – Stock Price, 0) – Upfront premium Per Share]

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 Case 1: if the stock price at expiration is $7300, the investor will buy the asset in the
market at $7300 and sell it under the terms of put option @7550 to realize a gain of
$250. Considering the upfront premium of $50, the net profit is $200.
 Case 2: if the stock price at expiration is $7700, the put option expires worthless, and
the investor loses $50, which is the upfront premium.

6. (C) What is Interest Rate SWAP? Explain how it works with an example. 6
An interest rate swap is an over-the-counter derivative contract involving the exchange of a strip
of payments linked to a floating rate for payments linked to another floating rate or, more
commonly, a fixed rate.
These swaps are commonly used to hedge interest rate risk on assets and liabilities. For
example, a non-financial corporation may use an interest rate swap to lock in an interest rate on
a loan, by receiving a floating rate and paying fixed.

 In the example above, Company A (Co A) has the choice of borrowing at either a 7%
fixed interest rate, or SOFR, on $5 million. Company B (Co B) has the choice of
borrowing at a 10% fixed interest rate, or SOFR+1%, on $5 million. Co A chooses the 7%
fixed interest rate and Co B chooses the SOFR+1%.
 In some cases, Co A and Co B may decide they want to swap into floating or fixed. A
swap bank would love to have the pleasure of helping! Co A and Co B approach the
bank, and then the bank arranges the terms of the IRS with each counterparty.
Specifically:
 Swap bank pays fixed at 8%, and Co A pays the swap bank SOFR.
 Co A is paying only 7% on the fixed rate loan, therefore is making a gain of 1%.
 This can subsidize the SOFR leg, so that Co A is effectively paying SOFR minus 1% on a
floating rate loan. These are better terms than the original terms offered (SOFR flat).
 And what about the other side?

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 The swap bank approached Co B and agreed to receive fixed at 8.5% versus SOFR flat.
 The swap bank makes a healthy 0.5% margin, with the floating SOFR legs offset in each
swap.
 Co B is now effectively paying a fixed interest rate of 9.5%, a whole 50bp lower than the
10% fixed interest rate originally offered on the loan.
7. (a) What are the key features of fixed income securities? Briefly describe the types 8
of fixed income securities.
A fixed-income security is an investment that provides a return through fixed periodic interest
payments and the eventual return of principal at maturity. The Key features of a fixed income
security include:
 Bonds are the most common type of fixed-income security.
 Fixed income instruments generate regular or fixed returns through interest payments.
 These instruments involve lower risk. Hence they are ideal for investors with a low-risk
tolerance level.
 The predictability of returns makes fixed income instruments safer than equity because
of the rate of interest and payment structure, which the investors know in advance.
 They offer higher rates of interest in comparison to saving accounts.
 The taxation of fixed income instruments is similar to debt funds. The short term capital
gains are taxable as per your income tax rate.
Different types of fixed income securities are traded in the fixed income market:
1. Bonds
Bonds are issued by the corporate and government to finance the business for
expansion. If an investor invests in a bond, they will receive a regular fixed income,
called “Coupon Payment,” and will get the principal amount on the bond’s maturity.
2. Treasury Bills
It is also a fixed-income security issued by the government with a maturity period of 1-
12 months. This security does not offer any interest or coupon regularly but a discount
at the time of the issue.
7. (b) Define Primary Dealers and state their objectives. Discuss the roles and 7
responsibilities of a Primary Dealer.
A primary dealer is a bank or other financial institution that has been approved to trade
securities with a national government. In many countries, primary dealers are the only entities
who can make a bid for newly-issued government securities.
 Primary government securities dealers sell the Treasury securities that they buy from
the central bank to their clients, creating the initial market.
 A firm must meet specific capital requirements before it can become a primary dealer.
 So far 24 banks have been recognized as primary dealers by Bangladesh Bank.
Roles and responsibilities of a Primary Dealer:
 A primary dealer serves as a counterparty to the central bank in open market operations
as part of implementing monetary policy. When the central bank issues new bonds, bills,

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and notes, these government securities must be sold, and primary dealers handle the
purchases on behalf of the central bank, which acts as seller.
 A primary dealer also provides market information and analysis that’s helpful in guiding
monetary policy to the central bank. When it participates in all auctions, a primary
dealer provides reasonable bids, and it serves as a market maker when it acts on behalf
of foreign official accountholders.
7. (c) What considerations must be made before investing in a perpetual bond? 5
A perpetual bond, also known as a "consol bond" or "perp," is a fixed income security with no
maturity date. This type of bond is often considered a type of equity, rather than debt. One
major drawback to these types of bonds is that they are not redeemable. However, the major
benefit of them is that they pay a steady stream of interest payments forever.
 With perpetual bonds, the agreed-upon period of time over which interest will be paid is
forever.
 Perpetual bonds are recognized as a viable money-raising solution during troubled
economic times.
 Perpetual bonds have carry-on credit risk, where bond issuers can experience financial
trouble or shut down.
There are risks associated with perpetual bonds that must be considered before investing in
perpetual bonds:
 Notably, they subject investors to perpetual credit risk exposure, because as time
progresses, both governmental and corporate bond issuers can encounter financial
troubles, and theoretically even shut down.
 Perpetual bonds may also be subject to call risk, which means that issuers can recall
them.
 Finally, there is the ever-present risk of the general interest rates rising over time. In
such cases where the perpetual bond’s locked in interest is significantly lower than the
current interest rate, investors could earn more money by holding a different bond.
 However, to swap out an old perpetual bond for a newer, higher interest bond, the
investor must sell their existing bond on the open market, at which time it may be worth
less than the purchase price because investors discount their offers based on the
interest rate differential.

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8. (a) Discuss the importance of risk management and risk analysis process from the 8
viewpoint of a treasury manager.
Risk management is one of the key jobs of any treasurer. By taking steps to understand and
mitigate treasury risks, treasurers can protect their organization’s continuity and ensure its
future success. The management of risk and reward is central to successful delivery of the
treasury’s core function of sourcing and delivering money to finance a business, while avoiding
making material mistakes.
Treasury is typically responsible for financial risk, related to, for example, foreign exchange,
commodity price, interest rate, and liquidity risk. To manage financial risk effectively, treasury
and the business should work in close partnership to ensure that treasury’s activity in financial
markets properly supports the business’ aims. Consequently, treasury often has a key
interaction with the professional accountants in their organization.
Risk analysis is crucial in every organization for several reasons:
a) Informed Decision Making: Risk analysis clearly explains the uncertainty of different
choices. It allows management to make informed decisions about mitigating or handling
those risks. This leads to better project outcomes and business decisions.
b) Resource Optimization: Since resources are often limited, it is essential to allocate them
effectively. Risk analysis identifies the most significant threats and allows businesses to
prioritize risk response strategies. It ensures that resources are spent where they can
provide the most significant benefit, leading to optimized costs and improved efficiency.
c) Proactive Approach: Risk analysis enables organizations to identify and mitigate
potential threats before they become problematic. This proactive approach can prevent
or reduce financial losses, operational downtime, reputational damage, and other
negative impacts.
d) Regulatory Compliance: Many industries are subject to regulations that require risk
analysis. Performing thorough risk analysis can ensure an organization stays compliant,
thus avoiding potential legal consequences, fines, and damage to the company’s
reputation.
e) Improved Planning: Organizations can develop contingency plans and risk response
strategies by understanding the potential risks that could disrupt operations or project
plans. This improves preparedness and increases resilience.
f) Enhanced Stakeholder Confidence: A thorough risk analysis can improve stakeholder
confidence in the organization. It demonstrates that the organization is diligent in
understanding its risk landscape and has plans to deal with potential disruptions.
g) Business Growth: With an accurate understanding of potential risks, organizations can
pursue opportunities more confidently. Risk analysis allows companies to factor in
potential downsides and thus manage the inherent risks in pursuing new business
initiatives, making it an integral part of strategic planning and business growth.

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Comprehensive Books for preparing

The Banking Professional Examination (JAIBB & AIBB)
Written and Published by Credit Operations and Management
Compiled by AIBB Risk Management in Financial Institutions
Mullick Brothers Trade Finance and Foreign Exchange
S. M. Mahruf Billah Treasury Management in Financial Institutions
Joint Director
Bangladesh Bank JAIBB Monetary and Financial System
Collect your Copy from: www.rokomari.com
Or
Mullick Brothers Book Shop located at Banglabazar, New Market & Nilkhet, Dhaka

8. (b) Describe the key principles of BASEL III 7

Basel III is a set of international banking regulations developed by the Bank for International
Settlements in order to promote stability in the international financial system. Basel III
regulation is designed to decrease damage done to the economy by banks that take on too
much risk.
Basel III was introduced following the 2008 Global Financial Crisis to improve the banks’ ability
to handle any shocks from financial stress and strengthen both their transparency and their
disclosure. Basel III builds on the previous accords, Basel I and Basel II, and is part of a process to
improve regulation in the banking industry.
The Key Principles of Basel III: There are a few key principles, according to the Basel III
summary:
1. Minimum Capital Requirements
The Basel III accord increased the minimum Basel III capital requirements for banks from
2% in Basel II to 4.5% of common equity, as a percentage of the bank’s risk-weighted
assets. There is also an extra 2.5% buffer capital requirement that brings the total
minimum requirement to 7% in order to be Basel compliant. Banks can use the buffer
when they face financial stress, but using the buffer can lead to even more financial
constraints when paying dividends.
2. Countercyclical Measures
In 2015, the Tier I capital requirement increased from 4% in Basel II to 6% in Basel III.
The 6% includes 4.5% of Common Equity Tier 1 and an additional 1.5% of additional Tier
1 capital. The requirements were originally meant to be implemented starting in 2013,
but banks now have until January 1, 2022, to implement the changes.
3. Leverage Ratio
Basel III introduced a non-risk-based leverage ratio as a backstop to the risk-based
capital requirements. Banks are required to hold a leverage ratio in excess of 3%, and
the non-risk-based leverage ratio is calculated by dividing Tier 1 capital by the average
total consolidated assets of a bank. The Federal Reserve Bank of the United States fixed
the leverage ratio at 5% for insured bank holding companies, and at 6% for

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Systematically Important Financial Institutions (SIFI), in order to conform to the

requirement.
4. Liquidity Requirements
Basel III introduced the use of two liquidity ratios, including the Liquidity Coverage Ratio
and the Net Stable Funding Ratio. The Liquidity Coverage Ratio mandates that banks
hold sufficient highly liquid assets that can withstand a 30-day stressed funding
scenario, specified by the supervisors.
The mandate was introduced in 2015 at only 60% of its stated requirements and is
expected to increase by 10% each year until 2019, when it takes full effect. The Net
Stable Funding Ratio, also known as NSFR, mandates that banks maintain stable funding
above the required amount of stable funding for a period of one year of extended
stress.
8. (c) ABCD Bank had posted interest revenues of Tk. 63 million and interest paid to all 5
of its borrowings of Tk. 42 million. If the bank Possess Tk. 700 million in total
earning assets, what is ABCD Bank’s net interest margin.
Net Interest Margin: The difference between a financial firm’s interest income and interest
expenses, expressed as a percentage of income generating assets.

𝑵𝒆𝒕 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑴𝒂𝒓𝒈𝒊𝒏

𝑰𝒏𝒕𝒆𝒓𝒔𝒕 𝒆𝒂𝒓𝒏𝒆𝒅 𝒇𝒓𝒐𝒎 𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕𝒔 − 𝑰𝒏𝒕𝒆𝒓𝒔𝒕 𝒑𝒂𝒊𝒅 𝒐𝒏 𝒃𝒐𝒓𝒓𝒐𝒘𝒊𝒏𝒈𝒔
=
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑬𝒂𝒓𝒏𝒊𝒏𝒈 𝑨𝒔𝒔𝒆𝒕𝒔
Here,
Interest Earned= 63 Million
Interest Paid = 42 Million
Average Earning Assets = 700 Million
So,
63−42 21
NIM = 700
= 700 = 0.03 or 3%

9. Write short notes on any five of the following: 4X5= 20

i) Liquidity Coverage Ratio (LCR)
The liquidity coverage ratio is a term that refers to the proportion of highly liquid assets held by
financial institutions to ensure that they maintain an ongoing ability to meet their short-term
obligations (i.e., cash outflows for 30 days).
 30 days was selected because, in a financial crisis, a response from governments and central
banks would typically take around 30 days.
 The minimum acceptable value of this ratio is 100 percent.

𝑺𝒕𝒐𝒄𝒌 𝒐𝒇 𝒉𝒊𝒈𝒉 𝒒𝒖𝒂𝒍𝒊𝒕𝒚 𝒍𝒊𝒒𝒖𝒊𝒅 𝒂𝒔𝒔𝒆𝒕𝒔

𝑳𝑪𝑹 = = ≥ 𝟏𝟎𝟎%
𝑻𝒐𝒕𝒂𝒍 𝒏𝒆𝒕 𝒄𝒂𝒔𝒉 𝒐𝒖𝒕 𝒇𝒍𝒐𝒘𝒔 𝒐𝒗𝒆𝒓 𝒕𝒉𝒆 𝒏𝒆𝒙𝒕 𝟑𝟎 𝒄𝒂𝒍𝒆𝒏𝒅𝒆𝒓 𝒅𝒂𝒚𝒔
 The LCR measures a bank’s liquidity risk profile, banks have an adequate stock of
unencumbered high-quality liquid assets that can be easily and immediately converted in
financial markets, at no or little loss of value.

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ii) Advance to Deposit Ratio (ADR)

The advances to deposits ratio measures loans (advances) as a percentage of deposits. Although
commonly known as Advance to Deposit Ratio, actually the ratio is determined by putting
Advance in numerator and Liabilities (excluding capital) in denominator. The ratio should be
fixed in such a manner so that there will be no unnecessary liquidity pressure on the bank in any
point of time. The formula for calculating AD ratio is as follows-
𝑇𝑜𝑡𝑎𝑙 𝐿𝑜𝑎𝑛𝑠 𝑎𝑛𝑑 𝐴𝑑𝑣𝑎𝑛𝑐𝑒𝑠 𝑜𝑟 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 (𝑓𝑜𝑟 𝑆ℎ𝑎𝑟𝑖𝑎ℎ 𝑏𝑎𝑠𝑒𝑑 𝑏𝑎𝑛𝑘𝑠)
𝐴𝐷𝑅 =
𝑇𝑜𝑡𝑎𝑙 𝑇𝑖𝑚𝑒 𝑎𝑛𝑑 𝐷𝑒𝑚𝑎𝑛𝑑 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝐼𝑛𝑡𝑒𝑟𝑏𝑎𝑛𝑘 𝑑𝑒𝑝𝑜𝑠𝑖𝑡 𝑠𝑢𝑟𝑝𝑙𝑢𝑠
𝐼𝑛𝑡𝑒𝑟𝑏𝑎𝑛𝑘 𝑑𝑒𝑝𝑜𝑠𝑖𝑡 𝑠𝑢𝑟𝑝𝑙𝑢𝑠
= 𝐷𝑒𝑝𝑜𝑠𝑖𝑡 𝑓𝑟𝑜𝑚 𝑜𝑡ℎ𝑒𝑟 𝑏𝑎𝑛𝑘𝑠 − 𝐷𝑒𝑝𝑜𝑠𝑖𝑡 𝑤𝑖𝑡ℎ 𝑜𝑡ℎ𝑒𝑟 𝑏𝑎𝑛𝑘𝑠 (𝑖𝑓
− 𝑣𝑒 𝑡ℎ𝑒𝑛 0)
iii) Repo/Reverse Repo
The repurchase agreement (repo or RP) and the reverse repo agreement (RRP) are two key tools
used by many large financial institutions, banks, and some businesses. These short-term
agreements provide temporary lending opportunities that help to fund ongoing operations.
 Essentially, repos and reverse repos are two sides of the same coin—or rather,
transaction—reflecting the role of each party.
 A repo is an agreement between parties where the buyer agrees to temporarily
purchase a basket or group of securities for a specified period.
 The buyer agrees to sell those same assets back to the original owner at a slightly higher
price.
 Both the repurchase and reverse repurchase portions of the contract are determined
and agreed upon at the outset of the deal.
iv) Chinese Walls
Chinese walls are policies and procedures intended to prevent the misuse of inside information
in securities trading by limiting the availability of material, nonpublic information to
departments of the firm that might misuse such information.
v) Commodity Derivatives
Commodity derivatives are investment vehicles allowing investors to reap profits by investing in
commodities without owning them. A commodity is any item that can be exchanged or traded.
On the other hand, its derivative comprises the value of the underlying assets.
Derivatives are available as forwards, options, futures, and swaps, with the commodities like
gold, copper, cotton, and crude oil, as underlying assets. These commodity derivatives help
manage price risks that are likely to affect the producers, manufacturers, etc.
 Commodity derivatives are the financial tools that help investors spend on commodities
and profit from them without exercising any ownership rights.
 These derivatives can be traded over the market or used as exchange-traded
derivatives.

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 The commodity derivative contracts used in the market are forwards, options, futures,
and swaps.
 These investment tools help assess market sentiments, investors’ interest, and market
confidence via the rise and fall of commodity prices.
vi) Secured overtime Financing Rate (SOFR)
The Secured Overnight Financing Rate (SOFR) is a benchmark interest rate for dollar-
denominated derivatives and loans that replaced the London Interbank Offered Rate (LIBOR).
SOFR took the place of LIBOR in June 2023, offering fewer opportunities for market
manipulation and current rates rather than forward-looking rates and terms.
vii) Percentage in Point (PiP)
The difference between two percentages is termed as percentage point. Percentage point is
used to show the changes in an indicator with respect to its previous standings.
 Percentage point is used extensively in macro-economic indicators like inflation. One
percentage point is also equal to 100 basis points.
 For example, inflation in India in November 2012 was 7.24% and inflation in December
2012 was 7.18%. Thus, we can say that there was a change of 0.06 percentage points in
inflation.
viii) DIBOR
Dhaka Interbank Offered Rate (DIBOR) saw its inauguration in January of 2010 by Dr. Atiur
Rahman, then governor of the Bangladesh Bank. At present, the administration of DIBOR is
undertaken by the Bangladesh Foreign Exchange Dealers' Association (BAFEDA), and this
includes the duty to calculate the weighted average of the rates submitted by member banks.
DIBOR sets the benchmark interest rate at which banks borrow or lend to each other providing a
determinative figure on how much short-term loans and floating rate notes would be valued at
a specified maturity date.
10. Write differences between the following (any four) 5X4= 20
i) Direct Quotation and Indirect Quotation Method
The quotation of the currency conversion rate can be presented in two methods. One is the
direct quote exchange rate, and the other is the indirect method. Although the purpose of both
methods is the same, the conceptuality behind them is different:
 The rate of conversion of foreign currency is considered direct when the value or price of
one unit of foreign currency is presented in the value or price of the domestic currency.
However, the quote will be considered indirect when the value or price of one unit of
domestic currency is presented in the value or price of the foreign currency.
 The quotation of the currency exchange rate depends on the geographical area or location
of the person concerned or the location of the transaction concerned. In the case of a direct
quote, how many domestic currencies are needed to buy 1 unit of any other foreign

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currency is expressed. However, in the case of indirect quotations, how many foreign
currencies are needed to exchange 1 unit of domestic currency is expressed.
 In the case of direct quote exchange rate, if the rate declines, that means that the domestic
currency’s value increases. Whereas, in the case of indirect quotation, if the rate decreases,
then that means that the value of the domestic currency decreases.
ii) Caps and Collars
Caps and Collars is a term used in connection with interest rates. A Cap is an upper limit, or
maximum interest rate that will apply, while a Collar is the minimum interest rate. As such, the
interest rate may vary between these two points.
 A capped interest rate is useful in uncertain economic environments as it can reduce the
risk of interest rates increasing beyond affordability.
 The actual interest rate charged can vary between the Cap and the Collar, but will never
exceed the Cap, or fall below the Collar.
 This type of interest rate mechanism gives a borrower more certainty than a fully
variable interest rate.
iii) TT Clean Rate and BC Rate
 TT (Selling) rates are used for remittance from one country to another by telegraphic
transfer and payment involves no loss of interest profit.
 BC (selling) rate is applied against the import, which requires some extra work. Therefore
the rate represents the bank’s basic TT selling rate plus the costs involved in the handling of
documents.
iv) Forward Contract and Futures Contract
SL Forward Contract Futures Contract
1. A forward contract is signed Whereas in a futures contract there is an
between party A and party B intermediary between the two parties. This
face to face (or over the intermediary is often called a clearance house,
counter). which is a part of a stock exchange. The two
parties do not work directly with their
counterpart; rather, each party works with the
clearance house that is monitoring the
transaction. This implies that the default risk that
may appear problematic in a forward contract is
significantly reduced in a futures contract.
2. A forward contract is signed However, in a futures contract, the transaction is
based on the agreement standardized in terms of quantity, quality, and
between the two parties delivery date.
regarding the price, the
quality and the quantity, as
well as the delivery date of
the underlying asset. They
are not standardized.

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3. A forward contract usually Whereas there is a range of delivery dates in a

only has one specified futures contract.
delivery date.
4. A forward contract can However, in the futures market, the transaction is
normally be settled on the settled on a daily basis, which is called mark-to-
delivery date, either by market.
delivering the underlying But in the futures market, the investor has to put
asset or by making a financial some initial deposit into her trading account,
settlement. which is known as the initial margin requirement.
If this deposit reaches the minimum level (known
In addition, there is no as the maintenance margin), the clearance house
deposit required for signing a will ask the investor to add further deposits to
forwards contract. sustain her trading. The margin requirement in the
futures market implies that trading in the futures
market is highly leveraged.
5. A forward contract is not Whereas a futures contract is regulated by the
formally regulated. stock exchange where the clearance house is
situated.
v) Bid rate and Ask rate
 The bid price is the price a forex trader is willing to sell a currency pair for. Ask price is
the price a trader will buy a currency pair at. Both of these prices are given in real-time
and are constantly updating.
 For example, the British pound against the US dollar has a bid price of 1.20720, that’s
the price a trader wants to sell the GBPUSD. A seller who thinks a currency will decline,
might sell at the bid price to take advantage of the fall.
 If the British pound against the US dollar has an ask price of 1.20740, that’s the price a
trader wants to pay to buy the currency pair.
 The difference between the ask and the bid price is the spread.
vi) Bear Market and Bull Market
 A bull market refers to major upswing in the markets, while a bear market is a
pronounced market downturn.
 Bull markets often correspond to periods of economic and job growth; bear markets are
often tied to periods of economic decline and a shrinking economy.
vii) Duration and Convexity
 Duration is a measure of a bond’s sensitivity to changes in interest rates, which takes
into consideration all cash flows of a bond— both principal and interest payments. All
cash flows are discounted to their present value.
 Convexity is apparent in the relationship between bond prices and bond yields.
Convexity is the curvature in the relationship between bond prices and interest rates. It
reflects the rate at which the duration of a bond changes as interest rates change.
Convexity demonstrates how the duration of a bond changes as the interest rate
changes.

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