Académique Documents
Professionnel Documents
Culture Documents
Bank
Financial Management
( For CAIIB Examination)
3rd Edition
Sure Success Series- CAIIB- Bank Financial Management -Vaibhav Awasthi
The content of this book has been developed keeping in view courseware for
the Second paper of Bank Financial Management of CAIIB.
An attempt has been made to cover fully the syllabus prescribed for each
module/subject and the presentation of topics may not always be in the same
sequence as given in the syllabus. Candidates are also expected to take note of
all the latest developments relating to the subjects covered in the syllabus by
referring to RBI circulars, financial papers, economic journals, latest books and
publications in the subjects concerned.
Although due care has been taken in publishing this study material, yet the
possibility of errors, omissions and/or discrepancies cannot be ruled out.
We welcome suggestion for improving the book and its contents. You may write
back to us at jaiibcaiibadmission@gmail.com
About the Author:
Vaibhav Awasthi,is a professional banker and has experience of 11 years
in Banking. He has done his graduation from Kanpur University and MBA
(Finance) from Delhi. He also holds the distinction of being part of maiden
batch of Certified Banking Compliance Professional conducted by IIBF
& ICSI.
He has been mentoring students for JAIIB/CAIIB since last 8 years and
presently works as Senior Manager with a leading Public Sector Bank. He
can be reached at Vaibhav.awasthi16@gmail.com
All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by
any means, without permission. Any person who does any unauthorized act in relation to this
publication may be liable to criminal proceedings and civil claim for damages.
This book is meant for educational and learning purpose. The author of this book has taken all reasonable care to ensure that the
contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner
whatsoever.
Page 2
To the thought
We all live under the same sky, but we all don't have the same horizon
Page 3
Preface
Dear Students,
Bank Financial Management is the second paper of CAIIB exam. Typically this is considered
as the toughest paper amongst all the three paper of CAIIB because of the numerical portion
which often occupy as much as 60% of the question paper.
The subject is divided into four module and questions are evenly asked from all the modules.
Thus while preparing students must not ignore any module.
Having said that, Module B, C & D are inter related and having understanding of one module
is necessary for progressing to another.
Aim of BFM subject is to enable student to have high level of understanding of how banks
operate on Macro level, how funds are managed, how capital is arranged and managed and
how treasury operates and helps the bank in making profits.
When students take up this subject, they are worried about the numerical and how they will
solve it. We assure you that numerical asked in BFM are of very basic nature and little
understanding will make sure that you not only crack but enjoy the numerical part.
The book has been written based on our experience about prior year question papers. We
have tried to keep the book concise and most relevant by explaining all the important points
chapter wise along with case studies and numerical.
The aim of our Sure Success Series- is to make sure that students are able to finish the
course in minimum possible time.
To boost their preparation students may stay in touch with us by visiting our website
www.jaiibcaiib.co.in. They can also join us on facebook for regular updates and questions
We wish you all the best for your exams.
Page 4
Module A
International Banking
What to Focus in this module
Module A is based on Foreign exchange. Students are expected to know
various facilities available to NRIs, various kinds of deposits like NRE, NRO,
FCNR along with details of foreign exchange which can be remitted.
Another important area to be focussed is foreign trade and role of LC in it.
Students should understand in deep, concept of LC and various articles
governing it
Foreign trade means export and import. Export requires funds which are
granted in the form of pre shipment and post shipment finance. Students should
understand various financial facilities like PCFC, PSFC, etc. which can be
given. Import involves giving away of valuable foreign exchange. There are
various guidelines on release of funds and how to monitor it. Students should
be aware of it.
Finally Forex numerical. They essentially require calculation of correct rate to
be quoted to export and import customer for various kind of transactionsspot/forward. We have covered various types of numerical calculation to give
student a clear picture of how to calculate the various rates.
Page 5
Page 6
Page 7
Page 8
(iv) Counter party limit: Maximum amount that a bank can expose itself to a particular counter
party.
(v) Country risk: Maximum exposure on a single country.
(vi) Dealer limits: Maximum amount a dealer can keep exposure during the operating hours.
(vii) Stop loss limit: Maximum movement of rates against the position held, so as to trigger
the limit - or say maximum loss limit for adverse movement of rates.
(viii) Settlement risk: Maximum amount of exposure to any entity, maturing on a single day.
(ix) Deal size limit: Highest amount for which a deal can be entered. The limits is fixed to
restrict the operational risk on large deals.
Reimbursing bank: - Third bank which repays, settles or funds the negotiating
bank at the request of its principal, the issuing bank.
g: Confirming bank: - The bank adding confirmation to the credit. Which under
takes the responsibility of payment by the issuing bank and on his failure to pay.
Page 9
Buyer and seller enter into a contract for sale of goods or providing of services.
The transaction is Covered by L.C.
2.
3.
4.
After receiving LC, the beneficiary manufactures the goods and makes
shipments and prepares documents as mentioned in LC.
5.
6.
Opening bank makes payment to negotiating bank and recovers the payment
from applicant.
against DP LCs or Sight LCs is those where the payment is made against
Documents
acceptance
usance
and The Issuing bank can amend or cancel the undertaking if the
beneficiary consents.
A revocable credit is one that can be Cancelled or amended at any
time without the prior knowledge of the seller. If the negotiating bank
makes a payment to the seller prior to receiving notice to cancellation
Page 10
Where the beneficiary holds himself liable to the holder of the bill if
re-course
Restricted LCs
Confirmed Credits
Transferable Credit
Page 11
The expression "on or about" will be interpreted as an event to occur during a period of
5 calendar days before until 5 calendar days after the specified date, both start and
end dates included.
The terms "first half' and "second half' of a month shall be construed respectively as
the 1st to the 15th and the 16th to the last day of the month, all dates inclusive.
The terms "beginning", "middle" and "end" of a month shall be construed respectively
as the 1st to the 1Oth, the 11th to the 20th and the 21st to the last day of the month, all
dates inclusive.
Page 12
Numericals
1. Based on the data given below answer the questions from (i) to (iii)
Following are interbank quotes on certain date Spot USD/INR 45.70/75
1 month 5/7
2 month 8/10
3 month 12/15
Spot GBP/USD 1.8000/8010
1 month 30/25
2 month 50/45
3 month 60/65
Margin of the bank is 3 paise
(i) An exporter presents a sight bill. What rate will be quoted to the exporter.
Ans. Spot USD/INR is 45.70/75. This means bank is willing to buy USD at 45.70 and sell at 45.75.
When an export customer goes to bank he will be selling currency to bank thus bank will be
buying currency from the customer. The basic principle followed by bank is buy low sell high.
Whenever bank buys currency it deducts margin from the spot so that it has to pay lower
Sure Success Series- CAIIB- Bank Financial Management -Vaibhav Awasthi
Page 13
to the customer. In this case bank will buy at Spot Margin ie. 45.70 -0.05 = 45.65. Thus
rate quoted to the customer will be 45.65
(ii) Another exporter submitted 3 month usance bill. What rate will be quoted to the
customer.
Ans: Usance bills mean payment will be made after a specified period. 3 month export usance
bill means foreign exchange will be received by the bank 3 months from now. To arrive at this
forward rate add premium to the spot rate ie 45.70+0.12 = 45.82 from this deduct margin hence
rate given to customer will be 45.79
(iii) Calculate GBP/INR rate
Page 14
and not of customer. 44.80 which is bid rate means bank is willing to buy one dollar for Rs
44.80 from a customer but will sell one dollar for Rs 44.85 to a customer.
Now always remember export customer means a customer who has made exports and
receives foreign exchange. He will go to bank to sell this foreign exchange to the bank which
in other language means bank will buy foreign exchange from the exporter.
So when quoting rates to an exporter buy rate of bank is to be considered which Rs 44.80
in this case. However forward contract for 1month to be booked which means bank will buy
this exchange one month from now and hence one month rate is to be arrived.
The premium for one month is 0234.
We will add this premium to the spot rate to arrive at one month forward rate, thus one month
forward rate at which contract is to be booked is
Spot rate --- ------------ 44.8000
Add- 1M Premium----- 0.0234
------------44.8234
&
to find JPY/INR we need to put =
But here in lies the question USD/JPY is 91.30/34 is given with two rates 91.30 and 91.34
which rate should be used?
To understand this, first under what this rate means. USD/JPY =91.30/34 means bank will
buy USD for 91.30 JPY. This also means bank will sell JPY for 91.30. Since in our case Bank
wants to sell JPY to import customer we will choose 91.30. Now this 91.30 is the bid rate so
we will take sell rated of USD/INR which is 44.55 thus final cross rate is arrived as
44.55
= 91.30 = 0.4879
so answer would be 48.7951. Add margin of 5 paisa and final rate quoted to the customer will
be Rs 48.8451
Page 15
Module B
Risk Management
What to Focus in this module
Module B is based on Risk in banking sector. It tracks the evolution of Basel
and various risks defined as per Basel accord and how they are to be handled
by Banks.
The most important pillar of Basel accord is keeping of minimum capital.
Students must get themselves fully acquainted with various components of
capital and how to calculate eligible capital as numerical are asked from it.
There are three major risks faced by banks (i) Credit risk (ii) Market risk & (iii)
Operational risk. This unit dwells in detail upon all these risks and how they are
calculated.
Numerical from this portion are based on calculation of capital, calculation of
Risk weights, calculating capital charge for market and operational risk.
At the end of this unit student must be fully aware about Basel II accord and
how it affects the banking Industry in terms of risk management. Remember this
unit is precursor to module D so students should be fully conversant with this
unit before they move ahead.
Page 16
1.
2.
3.
4.
1.
2.
3.
4.
5.
6.
I
net 1000
II
III
IV
2000
3000
4000
1100
1900
3100
3500
Variance
100
(100)
100
(500)
As can be seen cash flows in Year I & III is more than expected but cash flow in Year II & IV is
lower than expected. Why cash flows are different from as projected? Because of various
uncertainties, these uncertainties can either be favourable or unfavorable, only the
unfavourable variance in cash flow is known as risk.
Few points need to be understood in this regard:
Risk is not bad.
Risk cannot be completely eliminated
Risk needs to be managed.
Higher the risk, higher the return and thus higher is the capital.
First to understand that risk is not bad. Risk also returns in higher reward and often results in
better and unique methods to do a business. Secondly risk cannot be completely eliminated
while doing a business, risk will always be there, it is for a firm to decide its goal and risk
appetite. Why risk needs to be managed? Reckless risk taking can result into losses which
cannot be afforded and business has to shut down. How risk and capital are related? Capital
represents that amount of fund in the business which is necessary to start and grow the
business and which is assumed to be in the business as long as the business is run. Capital is
necessary to absorb losses. If a business involves high risk, losses could be high and thus
capital needed would be high to cover those losses.
Basic Risk Management Framework:
As already explained earlier, risk cannot be eliminated altogether and thus it has to be
managed based upon the risk appetite of the firm. For this there must be a risk management
framework, the basic spirit of which is common to all organizations. From now, onwards we will
study risk management framework with respect to banks.
A risk management framework basically involves the following 6 steps:
Organization for risk management:
Risk Identification
Risk measurement
Risk pricing
Risk Monitoring and control
Risk Mitigation.
Page 17
Page 18
Risk in Banking
1. Liquidity Risk: It arises because long term assets (loans) are financed by short term
liabilities (deposits). For e.g. a Bank has Rs 1 crore FD for 3 years. Now Bank gives Rs 1 crore
loan for 5 years. After 3 years bank has to repay this FD amount but loan will be repaid only
after 5 years, so how will bank pay back this amount to depositor? This is known as liquidity
risk.
Liquidity risk is of 3 types
(i) Funding risk: Now suppose in the above example bank has given loan for 3 years only, but
depositor withdraws the FD after 1 year then how to fund this is known as funding risk
(ii) Time risk: If loan repayment is not regular, i.e. cash inflows are not regular it is known as
time risk.
(iii) Call risk: If off balance sheet exposures or contingent liabilities crystalize it is known as
call risk. Lets say bank has issued bank guarantee of Rs 1 lakh on behalf of its customer.
Guarantee is issued after obtaining a specific margin for a fee. Now if the guarantee is invoked
by the beneficiary bank will have to make payment of Rs 1 lakh, but how to have money for this
Rs 1 lakh, this is known as call risk.
2. Interest rate risk: If interest rates changes, banks income will change which will affect
profit, this is known as interest rate risk. They can be classified into following 6 categories
(i) Gap or mismatch risk: It arises because of difference in time, amount, etc of assets and
liabilities
(ii) Basis risk. Suppose repo rate is reduced by 1 % now this will mean that loan rates need
to be reduced by lets say 0.5 % but banks may not be able to reduce deposit rate by 0.5 %.
This is called basis risk that same reduction or increase in interest rate will affect price of
deposits and advances differently.
Page 19
= 800+245 = 1145 cr
Page 20
Case 2.Lena Bank has paid up capital of Rs 800 crore and Free reserves of Rs 500 cr. Bank
during the year sold one of its building recording profit of Rs 50 cr which were capitalized. Bank
also had general provision and contingency reserves of Rs 400 cr. RWA for credit and
operational risk for Bank were 7000 cr and RWA for market risk was 2000 cr. Subordinate debt
stood at 250 cr. Calculate Tier I, II and total capital of Bank.
Tier I = Paid up capital+ Free reserve + capital reserve arising out of sale proceeds of assets
= 800 + 500 + 50 = 1350 cr
Tier II = Provisions for Contingency reserves + Subordinated Debt
= 112.50 + 250 = Rs 362.50
Total Capital funds = 1712.50 cr
Page 21
Illustration:
Taking a bond having 2 years maturity, and 10% coupon, and current price of Rs.102, the cash
flows will be (prevailing 2 year yield being 9%):
Total
Inflows (Rs.Cr)
105
PV at an yield of 9%
4.78
4.58
4.38
88.05
101.79
PV*time
4.78
9.16
13.14
352.20
379.28
This is a sample preview. To purchase the complete Sure Success Series log on to our
website www.jaiibcaiib.co.in. You can also call us on 07600273309 for any assistance.
Page 22
Business line
Beta Factor
Corporate finance
18%
18%
Retail banking
12%
Commercial banking
15%
18%
Agency services
15%
Asset management
12%
Retail brokerage
12%
Solution: This is a sample Preview. All pages of the book not displayed.
Page 23
Module C
Treasury Management
What to Focus in this module
Module C is based on Treasury Management. As ordinary bankers working as
desk officers, assistant, we fail to see what role treasury plays in the growth of
Banks.
So did you ever wonder, how profitability of your bank is decided? What
happens to the deposits you have mobilized? How banks never fall short of
cash? How CRR & SLR are maintained?
This module gives a glimpse of that to student. Structure of CAIIB exams is
such that it tends to give sufficient knowledge to students on various topics
without delving much into the deeper nuances.
This module will also introduce students to newer concepts of derivatives.
Various types of derivatives, their payoff, their risks. Students should enjoy
knowing about this new aspects of banking.
Questions in this module are asked for calculation of CRR, SLR, Structural
liquidity statements, Bonds options etc,
Treasury is one area of banking business where risk can be so great that it can
cause collapse of whole banking systems. Students should take out some time
and read about derivative trader Nick Leeson. Nick Leeson, a derivative trader
caused loss of 827 million ($1.3 billion) to 233 year old Barings banks forcing it
to be sold for 1 to ING in 1995
Page 24
Page 25
Page 26
Assets
Liability
Gap
500
400
700
850
1200
550
600
800
950
1100
-50
-200
-100
-100
100
Cumulative
Gap
-50
-250
-350
-450
-350
1500
1700
-200
-550
1600
2000
2100
2000
1800
1700
1800
1850
-200
300
300
150
-750
-450
-150
0
Interest rate: Net interest income (NII) of the bank is the difference between interest earning
and interest payments in a given accounting period. Interest rate risk is defined as the risk of
erosion of NII on account of interest rate movements in the market. Suppose a bank has taken
FD of Rs 100 crore for 1 years @ 6 % and lends the same for loan at 8 % fixed rate for 5
years. Now in the first year bank will have NII of 2 %. In the next year lets say old deposit is
withdrawn and new deposit is taken @ 7 % now NII will be reduced to 1 %. In third year lets
say cost of deposit become 10 % now bank will have negative NII of -2 %. Interest rate
mismatch is also known as repricing risk.
This is a sample preview. To purchase the complete Sure Success Series log on to our
website www.jaiibcaiib.co.in. You can also call us on 07600273309 for any assistance.
Page 27
Wherein;
P-Purchase Price
D Days to maturity
Day Count: For Treasury Bills, D = [actual number of days to maturity/365]
Illustration
Assuming that the price of a 91 day Treasury bill at issue is Rs.98.20, the yield on the same
would be
After say, 41 days, if the same Treasury bill is trading at a price of Rs. 99, the yield would then
be
Page 28
Note that the remaining maturity of the treasury bill is 50 days (91-41).
Illustration 2 : Modern Bank has following repricing assets and liabilities
Call money Rs 300 cr , Cash Credit loans- Rs 800 cr, Cash in Hand- Rs 300 cr , Saving
Bank- 1000 cr , Fixed Deposit Rs 800 cr , Current Deposit- Rs 200 cr.
Page 29
Module-D
Balance Sheet
Management
Page 30
Page 31
Mock Questions I
01. One of the following is not a function of dealing room of treasury
a. Taking a proprietary position in derivatives
b. Booking a forward contract for a customer
c. managing nostro accounts
d. issuing foreign currency draft
02. Mismatch in fund position creates
a. Operational risk
c. credit risk
b. legal risk
d. interest rate risk
d. credit risk
b. 1969
d. none of the above
06. ABC bank Ltd purchased an export bill. The crystallization period for this bill can not exceed
a. 30 days
b. 10 days
c. 7 days
d. 60 days
07. Sight bills drawn under import L/C should be crystallized within
a. 30 days from the date of acceptance
b. 7th day from the expiry of bill
c. 10th day from the date of receipt
d. as per approved policy of bank
08. Cancellation of forward contracts should be done on .
a. 7th day from the date of maturity
b. 30 days from the date of maturity
c. 60 days from the date of maturity
d. 10th day from the date of maturity
09. Cancellation of forward purchase contract should be done at
a. bills buying rate
c. TT buying rate
10. Derivatives are used for
a. Hedging and trading
c. hedging & investment
This is a sample Preview. All pages of the book not displayed. This is a sample
preview. To purchase the complete Sure Success Series log on to our website
www.jaiibcaiib.co.in. You can also call us on 07600273309 for any assistance.
Sure Success Series- CAIIB- Bank Financial Management -Vaibhav Awasthi
Page 32
Mock Questions- II
A bank raises a floating rate corporate deposit of Rs 50 crs for 2 years at a rate 50BPS over 91 days T
bill rates that gets re priced at every calendar quarter. The proceeds of deposits is used to finance
(a) a project of loan of Rs 25 crs for a period of 5 years having moratorium of 2 years. Interest rate is set
at 300 BPS over 5 years GOI bond with reset date at the end of each calendar year
(b) the balance of Rs 25 crs is invested in 5 years GOI bond with remaining period of 2 years.
These transactions stood in the books of the bank as on 01.01.2010
1. The bank may see variation in its net interest income over 1 year in respect of asset a because the
transaction is associated with
a. gap risk
c. basis risk
2. a bank has disbursed 6 months loan at a fixed rate of 12 % and raised the funds through 6 months
CDs of same amount. Bank is exposed to
a. no risk
c. operational risk & call risk
3. a bank funds its loans through composite liabilities. In a scenario where interest rate changes across
the board the bank stands exposed to
a. yield curve risk
b. basis risk
c. both a& b
d. neither a nor b
4. RBI has introduced RTGS to eliminate
a. Herstatt risk
b. counterparty risk
c. systemic risk
d. settlement risk
5. Articulating interest rate view of the bank is responsibility of
a. Board of Directors
b. Risk Management committee
c. ALCO
d. CMD
6. a 5 year 9 % semi annual bond @ market yield of 7.65 has a price of Rs 108.20 which rises to
109.00 when yield falls to 7.35. What is the BPV of the bond
a. Rs 0.26 per Rs 1000 book value
b. Rs 2.6 per Rs 1000 book value
c. Rs 26.67 per Rs 1000 book value
d. none of the above
7. A 8 year, 9 % semi annual bond @ market yield of 7.20 % has 5 years remaining for maturity.
McCaulay duration of the bond is 3.2 years. What is the approximate change in price if market yield
goes upto 7.50 %
a. price increase by 0.93 %
b. price increases by 0.96 %
c. price decreases by 0.93 %
d. price decreases by 0.96 %
This is a sample preview. To purchase the complete Sure Success Series log on to our
website www.jaiibcaiib.co.in. You can also call us on 07600273309 for any assistance.
Page 33
Case Case
Studies
Studies
Most important Part of
BFM
Remains
the
Numerical. Throughout the
book we have incorporate
the numerical module wise
so that students understand
what is expected of them.
Based on feedback of
students and demand for
more and more case
studies, we have decided to
add more than 100 solved
case studies to enable
students to understand the
numerical part and solve
any type of numerical with
ease
We have also covered
numerical and questions
asked in last examination.
Hope it serves your purpose
and enables you to crack all
kind of numerical.
1. Mr. Amit purchases a call option for 100 shares of Deliance Company
with strike price of Rs. 100 having maturity after 03 months at a premium of
Rs. 40. On maturity, shares of A were priced at Rs. 160. Taking interest cost
@ 12% p.a. What is the profit/loss for the individual on the transaction?
a. Gain of Rs. 2000
c. Gain of Rs. 680
Ans - d
Explanation. We need to understand that call option or put option is simply
a financial product which can be purchased by paying its price. The price in
this case is known as premium.
In the above case Amit has purchased 100 call option. Price of each option
is Rs 40. Thus total price paid by Amit for buying these 100 call options is
100* 40 = Rs 4000.
This amount he has taken on a loan of 12%. Thus total interest which needs
to be paid back is 4000*3/12 * 12/100 = Rs 120 after 3 months.
On maturity the stock is priced at Rs 160. Thus gain on each call option is
Rs 60. However since premium of Rs 40 is paid on each option net gain is
Rs 20. Thus Gain of Rs 20 on each option so gain of Rs 2000 on total
transaction.
However, he needs to return back interest of Rs 120 thus his net gain would
be Rs 1880.
Q2. LIC of India buys a specified no of futures at NSE on a stock at strike
price of Rs 100 each when spot price of the stocks is Rs 110. At the
maturity of the contract the FI takes delivery of the shares. During the
period, the spot price of the stock decreases by Rs 3. What is the
acquisition cost to the FI per share?
a. Rs. 107
c. Rs. 100
b. Rs. 103
d. Rs. 97
Ans : c
Explanation: LIC has closed the deal at Rs 100. Now at the time of delivery market price i.e. spot price
is Rs 107 (fall of Rs 3 from current price) but since the strike price is Rs 100, LIC will take the delivery at
Rs 100.
Q3. Ms Neha purchases a put option for 200 shares of Star Company with strike price of Rs. 220 having
maturity after 02 months for Rs. 50 each. On maturity, shares of A were priced at Rs. 230. What is the
profit/loss for the individual on the transaction (without taking the interest cost and exchange
commission into calculation)?
a. Profit of Rs. 6000
c. Loss of Rs. 10,000
Ans - c
Sure Success Series- CAIIB- Bank Financial Management -Vaibhav Awasthi
Page 34
Explanation. Total amount spent by Neha on buying this put option is Rs 10,000. Ie. Rs 50 * 200.
Now on the maturity date Price of the stock is Rs 230. Neha has an option to sell the stock Rs 220,
however market price is Rs 230 which means if she does not uses this option she can sell this stock at
the price of Rs 230. Thus Neha will let this option expire and thus total loss on this transaction would be
the loss of the premium amount which is Rs 10,000.
Q4. Ms Neha purchases a put option for 200 shares of Star Company with strike price of Rs. 220 having
maturity after 02 months for Rs. 50. On maturity, shares of A were priced at Rs. 190. What is the
profit/loss for the individual on the transaction (without taking the interest cost and exchange
commission into calculation)?
a. Profit of Rs. 6000
c. Loss of Rs. 10,000
Ans - d
Explanation. Total amount spent by Neha on buying this put option is Rs 10,000. Ie. Rs 50 * 200.
Now on the maturity date Price of the stock is Rs 190. Neha has an option to sell the stock Rs 220,
when market price is Rs 190 which means she will earn Rs 20 on each option. Thus total gain here
would be Rs 4000. However she has also paid premium of Rs 10,000. Thus overall she would incur a
loss of Rs 6000.
Q5. A bank borrows US $ for 03 months @ 3.0% and swaps the same in to INR for 03 months for
deployment in CPs @ 5%. The 3 months premium on US $ is 0.5%. What is the margin(gain/loss)
generated by the bank in the transaction?
a. 2%
b. 3%
c. 1.5%
d. 2.5%
Ans - c
Explanation : Bank borrow US $ for 3 months @ 3% same will be invested in CP for 3 months @ 5%
So, it gains 2% by interest rate margin here. But when bank repay its borrowing in $, it has to pay 0.5%
extra because US $ will be costly by 0.5% as US $ is at premium. So it will reduce bank gain by 0.5%.
2.0% - 0.5 % == 1.5%
Given below in the first table is the 1 year rating migration probability and in table II number of
accounts at the beginning of the year. Answer the following questions
Page 35
Rating category
No.
Accounts
at
the
beginning of the year
AAA
3200
AA
4500
A
7000
BBB
8400
BB
9300
B
1200
CCC
1400
Default
1000
Q66. Bank has credit exposure of Rs 10,000 crore to CCC rated borrower at the start of the year. What
will be the amount of default at the end of the period?
a. Rs 2194 crore
b. Rs 6396 crore.
c. Rs 10,000 crore.
d. data insufficient
Ans d
Explanation: Data insufficient. Please note that rating migration % is for number of accounts. So lets
say accounts in AAA are 3200 it is assumed that 5.83% of accounts will move to AA ie 187 . Loan
amount given to these accounts will be different and cannot be calculated from the given data.
Q67.What will be the number of accounts in CCC at the end of the year, assuming no new
accounts were added during the year.
a. 1227
b. 765
c. 1054
d. data insufficient
Ans : C
Explanation: Now just go through the table. Understand what it implies. 63.96% of accounts have
retained their rating of CCC. This means out of 1400 accounts at the start 895 (63.96% of 1400) have
remained in CCC and remaining have moved to other categories. But this is not the final answer as
from other ratings also accounts have moved to CCC
Rating category
% Moved to CCC
In number moved to CCC
AAA
0.00
0.00
AA
0.02
1
A
0.01
1
BBB
0.16
13
BB
1.05
98
B
3.87
46
CCC
63.96
895
Default
0.00
0
Total
1054
Thus accounts in CCC category at the end of the year is 1054
Q 98-100 are based upon the information given below for Bank of Mumbai. Based upon this answer the
following
Net Worth
RSA
RSL
DA Weighted Modified duration of asset
DL Weighted modified duration of liability
1280
27650
24570
1.89
1.32
Page 36