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BFM Special Notes PDF
BFM Special Notes PDF
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INTERNATIONAL BANKING
Example:
One US Dollar (USD) can be exchanged for approximately 44.8 Indian Rupees
(INR) as of June 2011. Hence, the exchange rate is denoted as 1USD= 47.6 INR.
Similarly, 1 EUR = 1.4364 USD.
Forex Participants
There are various participants that trade foreign currencies.
Participants Activity
Exporting Companies Convert foreign revenues into domestic revenues
Importing Companies Convert foreign costs into domestic costs
Commercial Banks Help customers in need of forex
Investment Funds / Banks Transfer funds for investments in or out of foreign
countries.
Central Banks Manage reserves and FX Rates. The central bank in India
is the Reserve Bank of India (RBI)
Individuals Make investments and participate in trade.
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Delivery Time:
As FX trade is generally conducted across different time zones, the settlement
time is an important factor in determining a contract.
There are various ways in which the delivery of FX can be settled.
Spot Basis:
This is when the currencies are delivered on the second day following the day of
the deal / contract. The exchange rate used for this purpose is called the spot exchange
rate.
Example:
If the date of the deal is on September 12, 2011 (Monday), the settlement date
will be on September 14, 2011 (Wednessday, provided all the markets involved are
working on the 12, 13 and 14).
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Ready / Cash Basis:
This is when the settlements takes place on the same day of the deal.
Example:
If the date of the deal is on September 12, 2011 (Monday), the settlement date
will also be on September 12, 2011 (Monday).
Tom Basis:
This is when the settlement takes place the day after the deal is made.
Example:
If the date of the deal is on September 12, 2011 (Monday), the settlement date
will be on September 13, 2011. (Tuesday, provided it is a working day for all the markets
involved).
If it so happens that Tuesday is a holiday in either of the two countries, then the
settlement date will be the next working day in both the countries involved.
Forward Basis:
This is when settlement takes place on a future date determined on the day the
deal is made. The exchange rate used for this purpose is called forward rate.
Example:
If the date of the forward deal is September 12, 2011 (Monday), for settlement
date September 28, 2011, it is termed as a forward deal.
Example:
Usually the forward rate is quoted as premium or a discount to the spot rate of the
foreign exchange. The premium or discount can be easily calculated from the market
forward rate and market spot rate.
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For Example:
Scenario1:
USD is trading at a bid of INR 45.4 and an offer of INR 45.6 in the spot market.
The mid-rate is INR45.5. The three month forward USD is trading at a bid of INR 45.95
and an offer of 46.05. The mid-forward rate is INR 46. The forward premium is Rs.0.5
(46-45.5) for three months. This situation happens when interest rate in India are more
than interest rates in the US.
Scenario 2:
USD is trading a bid of INR 45.2 and an offer of INR 45.3 in the spot market. The
mid-rate is INR 45.25. The three month forward USD is trading at a bid of INR 44.95 and
an offer of 45.05. The mid-forward rate is INR45. the forward discount is Rs.0.25 (45-
45.25) for three months. This situation happens when interest rates in India are more than
interest rates in the US.
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(Ans : B 80INR)
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(Ans: C 1.14)
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2. Correspondent Banking and NRI Accounts
Introduction:
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SWIFT
CHIPS
FEDWIRE
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CHAPS
TARGET
Overview:
Example:
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(Ans: A)
(Ans: B Bank C will call Bank A’s account with Bank B as a LORO account, as
LORO means ‘his account with them’)
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(Ans: B)
(Ans: B)
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(Ans: B RTGS is a real time gross settlement system in the UK for settling
transactions denominated in GBP)
(Ans: A True)
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3. Documentary Letters of Credit
Introduction:
A Letter of Credit (LC) is a useful instrument for corporate involved in trading.
An LC is made up of several components and various parties could be involved in an LC
transaction.
The LC Process:
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Types of Letters of Credit:
There are different types of LCs that are in use in the international market.
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4. Facilities for Exporters and Importers
Introduction:
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Pre-Sanction:
Post-Sanction:
Special Cases:
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Post- Shipment Finance:
Post shipment finance is an advance against receivables, which is in the form of
export documents. It involves handling of export documents and sending it to the foreign
bank or buyer. The following are the different types of post-shipment finances.
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Services
Factoring Mechanism:
Factoring System:
Advantages of Factoring:
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Features of Forfaiting:
Forfaiting Mechanism:
Costs:
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Advantages of Forfaiting:
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Import Finance:
Importers can have access to certain facilities from banks like the import letter of
credit and import loans.
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(Ans: C)
(Ans: A)
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(Ans: A True)
(Ans: B)
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5. Risks in Foreign Trade – Role of ECGC
Introduction:
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Transfer Guarantee:
Maturity Factoring:
(Ans: C)
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(Ans: B)
(Ans: C)
(Ans:A)
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6. Role of EXIM Bank, Reserve Bank of India, Exchange Control in
India – FEMA, FEDAI and Others
Introduction:
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Financing Programs: Loans to Foreign Governments, Companies and Financial
Institutions:
The lending activities of the EXIM bank to foreign governments, companies and
financial institutions are as follows:
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Functions of EXIM Bank: Other Services and Programs
The other special services and programs offered by the EXIM Bank are as follows:
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(Ans: A True)
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(Ans: C)
(Ans: A)
(Ans: B)
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(Ans: A True)
(Ans: C, Accredited)
(Ans: A True)
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RISK MANAGEMENT
7. Risk and Basic Risk Management Framework
Introduction:
Uncertainty:
The lack of certainty or predictability of future outcomes can be termed as
uncertainty. Usually, uncertainty is measured by a set of probabilities assigned to a set of
possibilities.
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Risk:
Returns Expected:
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(Ans: A)
(Ans: C)
(Ans: D)
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(Ans: A, C & D)
(Ans: C)
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8. Risks in Banking Business
Introduction:
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Banking Risks:
The major risks that occur in the banking business or in the financial services are
liquidity risk, interest rate risk, market risk, default or credit risk and operational risk.
Liquidity Risk:
Market Risk:
Credit Risk:
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Operational Risk:
Funding Risk:
Funding risk arises when net outflows have to be replaced due to unanticipated
withdrawal / non-renewal of deposits.
Time Risk:
A bank may not receive funds on its assets as per expectations, that is, performing
assets can turn into non-performing assets. Time risk arises from the need to compensate
for this non-receipt of expected funds.
Call Risk:
Call risk arises due to the crystallization of contingent liabilities. This risk may
also arise when a bank is not able to undertake a profitable business opportunity when it
arises.
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(Ans: D)
(Ans: A)
(Ans: C)
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9. Risk Regulations in Banking Industry
Introduction:
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(Ans: D)
(Ans: B)
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10. Market Risk
Introduction:
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Calculation of VaR:
The methods for calculating VaR are described as follows:
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(Ans: B)
(Ans:D)
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(Ans: C)
(Ans: A&B)
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11. Credit Risk
Introduction:
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Transaction Level:
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Portfolio Level:
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Total Return Swap:
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(Ans: B)
(Ans: B)
(Ans: C)
(Ans: A) (Credit linked notes help reduce credit risks because they take the risk off
the balance sheet of the originator and transfer it to a risk taker)
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12. Operational Risk and Integrated Risk Management
Introduction:
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Operational Risk Classification:
Operational risks can be of the following types:
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Real-Time Concern:
Business Challenges:
Cultural Issues:
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(Ans: A,B,C)
(Ans: C)
(Ans: B)
(Ans: A)
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TREASURY MANAGEMENT
13. Introduction to Treasury Management
Introduction:
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(Ans: A)
(Ans: B)
(Ans: A)
(Ans: C)
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Products of the Foreign Exchange Market:
Some of the products of the forex market are as follows:
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Debentures:
Bonds:
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(Ans: B)
(Ans: A)
(Ans: B) (Notice money is the money loaned by a bank that must be repaid within a
period of 14 days)
(Ans: B)
(Ans: A)
( Ans: B)
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15. Funding and Regulatory Aspects
Introduction:
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Liabilities:
Liabilities can be of the following types:
Demand Liabilities:
Time Liabilities:
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RTGS:
NDS:
FX Clear:
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Depository Institutions:
(Ans: B)
(Ans: B)
(Ans: A)
(Ans: A)
(Ans: B)
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16. Treasury Risk Management
Introduction:
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Market Risk:
Three main components of Market risk are liquidity risk, interest risk and
currency risk.
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(Ans: B)
(Ans: A)
(Ans: A)
(Ans: B)
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(Ans: B)
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Introduction:
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(Ans: A)
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(Ans: C)
(Ans: A)
(Ans: B)
(Ans: A)
(Ans: B)
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(Ans: A)
(Ans: B)
(Ans: B)
(Ans: A)
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18. Treasury and Asset Liability Management
Introduction:
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(Ans: C)
(Ans: B)
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(Ans: D)
(Ans: C)
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BALANCE SHEET MANAGEMENT
19. Managing Assets and Liabilities
Introduction:
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Liabilities of a Bank:
The following components constitute a bank’s liabilities.
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Assets of a Bank:
Typical components of a Bank’s assets are listed below:
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Profit and Loss Account of a Bank:
A bank’s profit and loss account consists of income and expenses.
Income:
Expenses:
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(Ans: A)
(Ans: A & C)
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20. Liquidity and Interest Rate Risk Management
Introduction:
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Liquidity Risk Measurement:
Liquidity risk is usually measured using the concept of stock approach of liquidity
or the flow approach of liquidity.
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Sources of Interest Rate Risk:
The various sources of IRR are as follows. There could be other forms of risk
sources but they would mostly be covered in one of the categories detailed below:
Gap Risk:
Basis Risk:
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Curve Risk:
Option Risk:
Maturity Ladder:
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Interest Rate Duration Gap:
Value at Risk:
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(Ans: A)
(Ans: B)
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(Ans: B)
(Ans: A & C)
(Ans: A)
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21. Banking Regulation and Capital
Introduction:
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Tier-I Capital
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Tier-II Capital:
Deductions:
(Ans: C)
(Ans: A, C & D)
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22. Basel II – Capital Adequacy, Supervisory Review and Market
Discipline
Introduction:
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(Ans: B)
(Ans: C)
(Ans: B)
(Ans: D)
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(Ans: B)
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23. Asset Classification and Provisioning Norms
Introduction:
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Loss Assets and Doubtful Assets:
Substandard Assets:
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(Ans: C)
(Ans: C)
(Ans: B)
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24. RAROC and Profit Planning
Introduction:
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Sources of Income – Services and Trading:
In addition to interest derived form lending and investments, fees charged for
services provided and the income form trading form other sources of income for banks.
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(Ans: B)
(Ans: A)
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(Ans: A & B)
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