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Description
| SESSION | JULY-AUG-2025 |
| PROGRAM | MASTER OF BUSINESS ADMINISTRATION (MBA) |
| SEMESTER | 4 |
| COURSE CODE & NAME | DBFI401 ALM TREASURY MANAGEMENT |
Assignment Set – 1
Q1. List out major functions of Asset Liability Management in Banks. Elaborate on maturity Gap Analysis Method (Residual Maturity Statement) to quantify Liquidity Risk by giving an example. 2+8
Ans 1.
Major Functions of Asset Liability Management in Banks & Maturity Gap Analysis Method
Asset Liability Management (ALM) is a strategic framework used by banks to manage risks arising from mismatches between assets and liabilities. Since banks borrow short-term and lend long-term, they face liquidity risk, interest rate risk, and funding uncertainty. ALM ensures stability, protects profitability, and maintains regulatory compliance.
Major Functions of ALM
The first major function of ALM is managing liquidity risk. Banks must ensure they have sufficient cash or liquid assets to meet withdrawal demands, loan disbursements, and regulatory
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Q2. Being Treasury Head of your company, your department assumes a strategic role and undertake profit-making activities within the stipulated risk framework so as to reduce the cost of funds. Briefly explain major activities a treasury department will be engaged in achieving above objectives. 10
Ans 2.
Major Activities of a Treasury Department in Achieving Strategic Profit and Reducing
Cost of Funds
The treasury department plays a central role in managing liquidity, investments, borrowing, and financial risk. As Treasury Head, the mission is not only to ensure liquidity but also to generate profits while staying within risk guidelines.
- Liquidity Management
The primary activity is ensuring adequate liquidity for operational needs. Treasury monitors cash inflows and outflows, manages call money positions, and invests surplus funds in short-term instruments
Q3. Explain Risk Identification and Mitigation through
- a) Identify and briefly explain three major risks faced by banks. Choose one and describe how it is commonly measured and monitored.
- b) Propose a realistic risk management strategy a mid-sized bank can implement to manage the identified risk, using current industry practices or regulatory guidelines. 5+5
Ans 3.
Risk Identification and Mitigation
(a) Three Major Risks Faced by Banks and Measurement & Monitoring
Banks face several risks, but the three most critical are credit risk, market risk, and operational risk.
Credit Risk
This is the risk that a borrower may fail to repay. Banks measure credit risk through credit scoring models, probability of default (PD), loss given default (LGD), and exposure at default (EAD). Monitoring tools include credit audits, portfolio reviews, early-warning signals, and stress testing.
Assignment Set – 2
Q4. a) Explain how interest rate derivatives (e.g., FRA, IRS, interest rate futures) are used in managing ALM-related risks.
- b) Illustrate with an example how a bank can use a derivative instrument to hedge interest rate exposure in its investment portfolio. 5+5
Ans 4.
Asset Liability Management (ALM) requires banks to manage interest rate risk arising from mismatches between the repricing of assets and liabilities. Interest rate derivatives such as Forward Rate Agreements (FRAs), Interest Rate Swaps (IRS), and Interest Rate Futures (IRFs) are essential tools for hedging and stabilising Net Interest Income.
(a) Use of Interest Rate Derivatives in ALM
Forward Rate Agreements (FRAs)
FRAs allow banks to lock in future borrowing or lending rates. By entering into an FRA, a bank protects itself against adverse interest rate movements. FRA settlements ensure that the bank receives or pays the difference between the contracted rate and market rate. This reduces
Q5. Making use of different variables, develop Investment management strategies for an individual investor. 5+5
Ans 5.
Investment Management Strategies for an Individual Investor
Investment management strategies help individuals allocate assets, reduce risk, and maximise long-term returns. A suitable strategy depends on income, age, goals, risk tolerance, time horizon, and market expectations. Using different variables, the following strategies guide effective decision-making.
- Risk Tolerance as a Variable
Risk tolerance
Q6. Briefly explain Major Categories of Interest Rate Risk. 10
Ans 6.
Major Categories of Interest Rate Risk
Interest rate risk refers to the potential impact of interest rate movements on a bank’s earnings or economic value. It arises when asset and liability repricing patterns differ. Banks must identify and monitor different categories of interest rate risk to protect margins and comply with RBI ALM guidelines.
- Repricing Risk
Repricing risk