DBFI401 ALM AND TREASURY MANAGEMENT

Description

SESSION	FEB-MARCH-2025
PROGRAM	MASTER OF BUSINESS ADMINISTRATION (MBA)
SEMESTER	4
COURSE CODE & NAME	DBFI401  ALM & TREASURY MANAGEMENT

 

 

Assignment Set – 1

 

 

Q1. Explain the practical application of ALM and Treasury Concepts based on the following:-

1. a) Explain the purpose and significance of Asset Liability Management (ALM) in banking. How does it contribute to financial stability?
2. b) Choose any one ALM technique (Gap Analysis / Duration Gap / Simulation / VaR) and apply it on sample data to analyze interest rate or liquidity risk. 5+5

Ans 1.

Practical Application of ALM and Treasury Concepts

a. Purpose and Significance of ALM in Banking

Asset Liability Management (ALM) in banking is a strategic process for managing the financial risks that arise from mismatches between a bank’s assets and liabilities. The primary goal is to ensure that a bank remains solvent, profitable, and stable despite changes in interest rates, liquidity conditions, and market dynamics. ALM helps banks manage interest rate risk, liquidity risk, and

 

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Q2. Explain Operational and Regulatory Framework in Banking through:-

1. a) Outline the core divisions of a bank and explain the role of treasury within them. How do regulations influence these operations?
2. b) Prepare a simplified financial statement for a hypothetical bank and compute two key ratios (e.g., CRAR, ROA). Interpret their significance in assessing bank performance. 5+5

Ans 2.

Operational and Regulatory Framework in Banking

a. Core Divisions of a Bank and Role of Treasury

A typical commercial bank comprises core divisions such as retail banking, corporate banking, investment banking, risk management, and treasury operations. Among these, the treasury division is responsible for managing the bank’s liquidity, funding, investment portfolios, and interest rate exposures. It plays a key role in balancing profitability and risk while maintaining compliance with regulatory norms.

The treasury ensures that the bank has adequate funds to meet its daily obligations and that excess funds are invested

 

Q3. Explain Risk Identification and Mitigation through

1. a) Identify and briefly explain three major risks faced by banks. Choose one and describe how it is commonly measured and monitored.
2. 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 in Banks

1. Major Risks Faced by Banks

Banks are exposed to various types of risks that can impact their profitability, liquidity, and long-term viability. Among these, the three most significant are credit risk, market risk, and operational risk.

Credit risk arises when borrowers or counterparties fail to meet their contractual obligations. It directly affects a bank’s loan portfolio and is a major concern during economic downturns or sector-specific disruptions. Market risk refers to losses due to fluctuations in interest rates, exchange rates, equity prices,

 

Assignment Set – 2

 

Q4. a) Explain how interest rate derivatives (e.g., FRA, IRS, interest rate futures) are used in managing ALM-related risks.

1. 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.

Interest Rate Derivatives and ALM Risk Management

1. Use of Interest Rate Derivatives in ALM

Interest rate derivatives are powerful tools that banks use to manage interest rate risks arising from mismatches in the maturities or re-pricing of assets and liabilities. These financial instruments derive their value from underlying interest rates and are used to hedge, speculate, or arbitrage interest rate movements. Common types of derivatives include Forward Rate Agreements (FRAs), Interest Rate Swaps (IRS), and Interest Rate Futures (IRFs).

A Forward Rate Agreement (FRA

 

 

Q5. a) Discuss the role of Value at Risk (VaR) in assessing a bank’s trading portfolio. How does it influence ALM decisions?

1. b) Design a basic hedging strategy for a bank facing foreign exchange risk, using forward contracts or currency swaps.

Ans 5.

VaR and Foreign Exchange Risk Hedging

1. Role of Value at Risk (VaR) in Bank’s Trading Portfolio

Value at Risk (VaR) is a widely used risk management tool that quantifies the potential loss in value of a portfolio under normal market conditions over a specific time frame and confidence level. In banking, VaR is particularly important in assessing market risk associated with the trading book, which includes investments in bonds, equities, currencies, and derivative

 

 

Q6. a) Evaluate how an integrated ALM strategy supports long-term sustainability in banks. Use real-world examples to strengthen your argument.

1. b) Choose a listed bank and analyze its recent performance using risk-adjusted metrics (e.g., RAROC, Economic Value Added). Explain how ALM contributes to these metrics. 5+5

Ans 6.

Integrated ALM Strategy and Risk-Adjusted Bank Performance

1. Integrated ALM Strategy for Long-Term Sustainability

An integrated Asset Liability Management (ALM) strategy refers to a comprehensive approach that coordinates the management of liquidity, interest rate, foreign exchange, and capital risks across all departments of a bank. Unlike traditional ALM, which may operate in silos, an integrated approach involves aligning risk management, financial planning, and regulatory compliance to support the bank’s long-term goals.

This strategy promotes sustainability by