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Recollected - Feb 2017

Question related to Treasury Management & Forex.....

Interest Rate Swap- 5 Questions
Modified Duration Gap (DGAP) - 5 Questions
Basel 3 Capital Calculation - 5 Questions
Call Risk
ECGC features
Forward & future Contract Features
Forex EXPORT BILL Questions with commission & interest based for 120 day
Probability of occurance & Impact


On 3.10.09, your exporter customer tenders an export bill for USD 500,000.00, drawn 120 days from the date of shipment, (shipment date 3.10.2009) due date 1.2.2010. Compute applicable rate, presuming (a) exchange margin of 0.15%, (b) Spot Rupee 48.14/15 and premium Spot - Jan.45/46 paise, (c) Rate to be quoted to nearest 0.25 paise, and rupee amount to be rounded off, and (d) Applicable interest at 8.50% for Post shipment export finance upto 180 days and Commission on bills purchased 0.0625 % to be charged upfront .

(i) Calculation of bill buying rate
Spot rate - Rs. 48.1400
Less: 0.15% margin - Rs. 0.0722
- Rs. 48.0678
. say 48.0675
Add: Premium - Rs. 0.4500
Rate for the transaction - Rs. 48.5175
{Bill Buying Rate)

(ii) Calculation of amount payable to the customer:

USD 500,000.00 at 48.5175 = Rs 2,42,58,750.00
Interest 120 days @8.50 % = 677916.00
Commission @0.0625% = 15162.00
Amount payable to exporter customer: 2,35,65,672.00


Methodology for Computing Modified Duration Gaps

The step-by-step approach for computing modified duration gap is as follows:

1. Identify variables such as principal amount, maturity date/re-pricing date, coupon rate, yield, frequency and basis of interest calculation for each item/category of asset/liability.
2. Generate the bucket-wise cash flows for each item/category of asset/Iiability/off-balance sheet item.
3. Determine the yield curve for arriving at the yields based on current market yields/current replacement cost for each item/category of asset/liability/off-balance sheet item as proposed in the framework above.
4. The mid-point of each time bucket may be taken as a proxy for the maturity of all assets and liabilities in that time bucket.
5. Calculate the Modified Duration of each category of asset/liability/off balance sheet item using the maturity date, yield, coupon rate, frequency, yield, basis for interest calculation for each category of asset/liability/off balance sheet item.
6. Determine the weighted average Modified Duration of all the assets (DA) and similarly for all the liabilities (DL), including off balance sheet items.
7. The Modified Duration Gap is derived by the equation:
DGAP = Modified DA - W x Modified DL
W= RSL/RSA (Rate Sensidve Liabilities/Rate Sensitive Assets).
DA = Weighted average Modified Duration of assets and
DL = Weighted average Modified Duration of liabilities.

Calculation of Modified Duration of Equity
Along with Modified Duration Gap, banks may also compute Modified Duration of Equity to enable easier comparison of IRR amongst banks. The same may be computed as per the framework given below:
(Note: Equity in this example refers to capital funds)

Modified Duration of Equity = DGAP x Leverage
Leverage = RSA/Equity (which indicates extent to which equity has been leveraged to create assets)


Economic Value of Equity Amount (Rs. in crore)
Net worth 1350.00
RSA 18251.00
RSL 18590.00
Modified Duration of Gap
DA (Weighted Modified Duration of Assets) 1.96
DL (Weighted Modified Duration of Liabilities) 1.25
Weight = RSL/RSA 1.02
DGAP = DA-WxDL 0.69
Leverage Ratio = RSA/(Tier 1 + Tier 2) 13.52
Modified Duration of Equity = DGAP x Leverage Ratio 9.34
For a 200 bp 18.68% (9.34x2)


Measuring and Managing Liquidity Risk

Measuring and managing funding requirement can be done through two approaches.

(i) Stock approach
(ii) Flow approach

(i) Stock Approach (to Measuring and Managing Liquidity)
Stock approach is based on the level of assets and liabilities as well as off-balance sheet exposures on a particular date. The following ratios are calculated to assess the liquidity position of a bank.

(a) Ratio of Core Deposit toTotal Assets - Core Deposit/Total Assets: More the ratio, better it is because core deposits are treated to be the stable source of liquidity. Core deposit will constitute deposits from the public in the normal course of business.

(b) Net Loans to Totals Deposits Ratio - Net Loans/Total Deposits: It reflects the ratio of loans to public deposits or core deposits. Total loans in this ratio represent net advances after deduction of provision for loan losses and interest suspense account. Loan is treated to be less liquid asset and therefore lower the ratio, better it is.

(c) Ratio of Time Deposits to Total Deposits - Time Deposits/Total Deposits: Time deposits provide stable level of liquidity and negligible volatility. Therefore, higher the ratio better it is.

(d) Ratio of Volatile Liabilities to Total Assets - Volatile Liabilities/Total Assets: Volatile liabilities like market borrowings are to be assessed and compared with the total assets. Higher portion of volatile assets will pause higher problems of liquidity. Therefore, lower the ratio better it is.

(e) Ratio of Short-Term Liabilities to Liquid Assets - Short-term Liabilities/Liquid Assets: Short-term liabilities are required to be redeemed at the earliest. Therefore, they will require ready liquid assets to meet the liability. It is expected to be lower in the interest of liquidity.

(f) Ratio of Liquid Assets to Total Assets - Liquid Assets/Total Assets: Higher level of liquid assets in total assets will ensure better liquidity. Therefore, higher the ratio, better it is. Liquid assets may include bank balances, money at call and short notice, inter bank placements due within one month, securities held for trading and available for sale having ready market.

(g) Ratio of Short-Term Liabilities to Total Assets - Short-term Liabilities/Total Assets: Shortterm liabilities may include balances in current account, volatile portion of savings accounts leaving behind core portion of saving which is constantly maintained. Maturing deposits within a short period of one month. A lower ratio is desirable.

(h) Ratio of Prime Asset to Total Asset - Prime Asset/Total Assets: Prime assets may include cash balances with the bank and balances with banks including central bank which can be withdrawn at any time without any notice. More or higher the, ratio better it is.

(i) Ratio of Market Liabilities to Total Assets - Market Liabilities/Total Assets: Market liabilities may include money market borrowings, inter-bank liabilities repayable within a short period. Lower the ratio, better it is.

(ii) Flow Approach (to Measuring and Managing Liquidity)

The framework for assessing and managing bank liquidity through flow approach has three major dimensions:

(a) Measuring and managing net funding requirements
(b) Managing market access
(c) Contingency planning


An export bill USD 200000 submitted to banker with Usance of 120 days due date is given 21.04.2017. Spot rate is given premium for march, april given.
Exchange margin 0.15%
Commision 0.0665℅
Interest is given 9.50%
Calculation of exchange rate
Calculation of interest and commission
Amt to be paid to exporter


Probability of occurrence=6
Potential financial impact =8
Impact of internal control =40%
What is estimate level of operational risk.?



Calculation of Hl provision for 500lakh each of 30lakh Ltv 30%, 50lakh with ltv of 30-75% and 75lakhs with ltv ratio above 75%

Ans : Hint upto 30lakhs risk is 50% , 30-50lakh risk is 50%, above 75lakh risk is 75% of amt


Case study on RFC account 5 marks
Case study on forex exchange buying commission etc 5marks
Case study on mkdified duration gap 5marks



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