MCQ’S

Treasury Risk
Management

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Qn1. . Which of the following statement in respect
of treasury risks is not correct?
a) Bank management is highly sensitive to treasury
risk on account of high leverage of treasury
business.
b) The losses on treasury business materializing
very short term
c) Risk of losing capital is relatively less than export
credit business
d) Transactions done in treasury operations are
large in the sole discretion of the treasury.

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Ans - C

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Qn2.Treasury activities are a matter of concern to
banks because of
(a) Highly leveraged transactions
(b) Large transaction size
(c) Market volatility
(d) All of these

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Ans -d

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Qn3.Volatility of exchange rate in case of currency
means:
(a) large increase in selling price
(b) large increase in buying price
(c) variability of price, upward or downward
(d) large variation in price, selling or buying

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Ans - c

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Qn4. The treasury risks are primarily managed in
the nature of preventive steps that include
(1) Organizational controls
(2) Exposure ceiling
(3) Limits on trading positions and stop-loss limits.
(a) 1 to 3 all
(b) 1 and 2 only
(c) 1 and 3 only
(d) 2 and 3 only

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A

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Qn5.The treasury may enter into forward contracts
with:
a) importers who expect to make payments in
foreign currency
b) exporters who expect receipt of foreign currency
c) with banks in the inter-bank market
d) all the above

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D

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Qn6.Who is the head of front office in a Treasury?
a) Chief Risk Officer
b) Chief Dealer
c) Chief of Treasury
d) Chief Front Officer

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B

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Qn7.Which are not responsible for the compliance
with risk limits imposed by the management.
1)front office
2)middle office
3)back office

A)1 and 2
B) 1 and 3
C)2 and 3
D) 1,2 and 3

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Answer b

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Qn8.In treasury risk management, the mid-office,
conventionally takes the following actions
(1) Monitoring compliance with risk limits
(2) Ensuring compliance with regulatory requirement
(3) Daily mark to market valuation of treasury position
(4) Verification of pricing of treasury products.
(a) 1 to 4 all
(b) 1 to3only
(c) 2, 3 and 4
(d) only 4 only

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A

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Qn9.........…...monitors exposure limits and stop loss
limits of Treasury

(Select the most appropriate option)

a) Front-office
b) Mid-office
c) Back-office
d) Investment department

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B

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Qn10.Exposure Ceiling Limits are imposed on
trading transactions of the treasury to protect the
bank from.....
a) Market and operational risk
b) Default risk and settlement risk
c) Liquidity risk and interest rate risk
d) Currency Risk and Volatility Risk

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C

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Qn11.The following limits in treasury are meant for
controlling market risk

A. Counter party interbank exposure limits

B. Settlement and pre-settlement limits
C. Intraday, overnight open position limit and stop
loss limits.
D. Overseas borrowing limit prescribed by RBI

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C

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Qn12.Which of the following is not a trading limit in
the context of foreign exchange?

A. deal size
B. exposure ceiling
C. stop loss
D. open position

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B

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Qn13.Highest amount of deal that dealer can make
is called
a) Dealer limit
b) Deal Size limit
c) Day light limit
d) counter party limit

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A

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Qn14.Maximum amount of exposure to any entity,
maturity on a single day called

A. Deal size limit

B. Settlement risk
C. Gap limit
D. Dealer limit

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A

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Qn15.The credit risk in treasury can be split into
(1) Default risk
(2) Legal risk
(3) Settlement risk
(a) 1 to 3 all
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1 and 3 only

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D

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Qn16.Failure of the counter party during the course
of the settlement (due to time zone differences
between the two currencies to be exchnaged) is
the __ risk.

a) Operational
b) Market
c) Settlement
d) Legal

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C

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Qn17.RBI has imposed a ceiling of ____ of total
business in a year for individual brokers in treasury
operations:
(a) 10%
(b) 5%
(c) 2%
(d) 1%

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B

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Qn18.The market risk in treasury operations, is a
confluence of
(1) Liquidity risk
(2) Settlement risk
(3) Interest rate risk
(4) Exchange risk
(5) Equity or commodity risk
(a) 1 to 5 all
(b) 1, 2 and 5 only
(c) 1, 3, 4 and 5 only
(d) 2, 3, 4 and 5 only

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C

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Qn19.
___risk is the risk of failure of the counter party, due
to bankruptcy, closure or any other reason, before
maturity of the contract.
a) Pre - settlement
b) Settlement
c) Counter party

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B

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Qn20.
which of the following is not resposible to ensure
that the treasury complies with the exposure limits
meticulously..?

a) Front office
b) Middle office
c) Back office
d) both mid and back office

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Ans -d

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Qn21.Verification and settlement of the deals
concluded by the dealers is performed by ......

A. front office
B. Treasury administration
C. Risk management
D. none of these

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B

front office is also called dealing room, back ofice s

treasry admntn, mid office is risk management

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Qn22.Which of the following is correct regarding
position limits for treasury risk management:
(a) position limits are fixed currency-wise aggregate
position is expressed in Rupees
(b) for aggregation purpose, the currency-wise net
position is first calculated in $ and then converted
into Rupee
(C) The overnight limits are to be pre-approved by
RBI, who also prescribe the method of arriving at
the aggregate position
D) all are correct

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Ans -D

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Qn23.
Which of the following limits require capital requirements as
prescribed by RBI
(1) Gap limit
(2) Position limit
(3) Carry limit
(4) stop-loss limit
(a) 1 to 4 all
(b) 1 to 3 only
(c) 1 and 2 only
(d) 2 and 3 only
(d) all these are correct statements

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Ans - c

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Qn24.Derivatives are used to protect treasury
transactions from
A. Exchange rate risk
B. Managing balance sheet risk
C. Market risk
D. All the Above

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D

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Qn25.Duration is expressed in terms of:
a) no. of days
b) no. of weeks
c) no. of months
d) no. of years

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D

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Qn26. The longer the duration of a security (which
of the following is a correct statement)

A)The shorter will be the price sensitivity to yield change

and higher would be risk associated with the bond.
B)The greater will be the price sensitivity to yield change and
higher would be risk associated with the bond.
C)The greater will be the price sensitivity to yield change and
lower would be risk associated with the bond.
D)The shorter will be the price sensitivity to yield change
and lower would be risk associated with the bond.

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B

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Qn27.Which of the following two bonds is more price
sensitive to changes in interest rates?
1) A par value bond, D, with a 2-year-to-maturity and a
8% coupon rate.
2) 2) A zero-coupon bond, E, with a 2-year-to-maturity
and a 8% yield-to-maturity.
A. Bond D because of the higher yield to maturity.
B. Bond E because of the longer duration.
C. Bond D because of the longer time to maturity.
D. Both have the same sensitivity because both have
the same yield to maturity.
E. None of these is correct
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C
Duration is the best measure of bond price
sensitivity; the longer the duration the higher the
price sensitivity.

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Qn28.. The duration of a 20-year zero-coupon bond
is
A. equal to 20.
B. larger than 20.
C. smaller than 20.
D. equal to that of a 20-year 10% coupon bond.
E. None of these is correct.

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A
Duration of a zero-coupon bond equals the bond's
maturity.

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Qn29.Given the time to maturity, the duration of a
zero-coupon bond is higher when the discount rate
is
A. higher.
B. lower.
C. equal to the risk free rate.
D. The bond duration is independent of the discount
rate.
E. None of these is correct.

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D

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Qn30
Which statement is true for the Macaulay duration
of a zero-coupon bond?

a. it is equal to the bond’s maturity in years

b. it is equal to one-half the bond’s maturity in years
c. it is equal to the bond’s maturity in years divided
by its yield to maturity
d. it cannot be calculated because of the lack of
coupons

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A

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Qn31.Which of the following is true?
A. Holding other things constant, the duration of a bond
decreases with time to maturity.
B. Given time to maturity, the duration of a zero-coupon
increases with yield to maturity.
C. Given time to maturity and yield to maturity, the duration
of a bond is higher when the coupon rate is lower.
D. Duration is a better measure of price sensitivity to interest
rate changes than is time to maturity.
E. Given time to maturity and yield to maturity, the duration
of a bond is higher when the coupon rate is lower, and
duration is a better measure of price sensitivity to interest
rate changes than is time to maturity.

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E
The duration of a zero-coupon bond is equal to time
to maturity, and is independent of yield to maturity.

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Qn32.A zero-coupon bond with a maturity of 10
years has an annual effective yield of 10%.What is
the closest value for its modified duration?
a. 9
b. 10
c. 100
d. Insufficient Information

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Answer: a
You must first recall that the Macauley duration of a
zero-coupon bond is equal to its maturity. Then, the
modified duration of a zero-coupon bond is: Macauley
duration / 1+ i = 10 / 1.10 = 9.09.
a. Correct. The above formula was used correctly, Dmod
= Macauley duration / 1+ i.
b. Incorrect. It corresponds to the Macauley duration,
not the Modified duration.
c. Incorrect. The denominator used in the formula was i
instead of 1+i.
d. Incorrect. All the necessary information is in there.

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Qn33.
A bond with remaining maturity of 5 years is
presently yielding 6%. Its modified duration is 5
years.
What is its McCauley's duration?
a. 5.05%
b. 3.77%
c. 5.30%
d. 6.00%

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Modified duration= McCulay duration/(1+r)
5=mcd /1.06
Mcd= 5*1.06
Mcd= 5.30 year

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QN34. The duration of a bond normally increases
with an increase in
A. term to maturity.
B. yield to maturity.
C. coupon rate.
D. All of these are correct.
E. None of these is correct.

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A
The relationship between duration and term to
maturity is a direct one; the relationship between
duration and yield to maturity and to coupon rate is
negative

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QN35.
Which of the following two bonds is more price
sensitive to changes in interest rates?
1) A par value bond, A, with a 12-year-to-maturity
and a 12% coupon rate.
2) A zero-coupon bond, B, with a 12-year-to-maturity
and a 12% yield-to-maturity.
A. Bond A because of the higher yield to maturity.
B. Bond A because of the longer time to maturity.
C. Bond B because of the longer duration.
D. Both have the same sensitivity because both
have the same yield to maturity.
E. None of these is correct

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C. Bond B because of the longer duration
Duration is the best measure of bond price
sensitivity; the longer the duration the higher the
price sensitivity.

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QN36. A bond having duration 8 years is yielding
10% at present. If yield increase by 0.60%, what will
be impact on price of bond?
a. Bond price would go up by 4.36%
b. Bond price would fall by 4.36%
c. Bond price would go up by 2.82%
d. Bond price would fall by 2.82%

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Ans - b
Modified duration is McCauley's duration discounted by
one period yield to maturity
Here we are talking McCauley's duration is 8 years.
Modified duration =McCauley's duration / ( 1 + yield )
= 8 /(1 + 10%)
= 8/(1 +0.1)
= 8/(1.1)
= 7.2727
% change in price =- modified duration × yield change
= - 7.2727× (0.60%)
= (-)4.3636 %
= (-) 4.36%
( - )means decrease in price
4.36 % decrease in price.
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QN37. Mr.Y purchased 8%, 3 years bond of Rs. 10
lac, with annual interest payment and face value
payable on maturity. The YTM is assumed@ 6%.
Calculate the duration and modified duration.
a. 2.36
b. 2.79
c. 2.63
d. 2.97

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QN38. If current price of a bond is Rs 98.50, its
Duration is 2.7613 and yield is likely to change from
6.00% to 5.80%, then the likely price of the bond is
computed as under:

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Solution
% change in Price = D*(percentage change in Yield)
= 2.7513 * (6.00 - 5.80)
= 0.55226%
Absolute change in Price = 98.50 * 0.55226%
= 0.54398.
As Yield has come down, price will increase and
therefore, expected bond price will be Rs 99.04398

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QN39. The overnight VaR of 2 year govt. security
yield is 0.25% with a current yield of 8%. A
prospective buyer of the security may expect the
yield to be _______ on next day.
(a) 8%
(b) 8.25%
(c) 7.75%
(d) Inadequate information.

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C
In worst case scenario prospective seller of security
may expect rise in the yield so ans is
7.50+0.20=7.70......
Same case will be different for prospective buyer as
he expect the yield to fall so 7.70-.20=7.30

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QN40. The overnight VaR of 1 year govt, security
yield is 0.20% with a current yield of 7.50%. A
prospective seller of the security, may expect the
yield to be on next day
a) 7.50%
b) 7.70%
c) 7.30%
d) inadequate information to make the calculation.

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B

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QN41. The overnight VaR of 1 year govt. security
yield is 0.20% with a current yield of 7.50%. At 99%
confidence level, there is possibility of loss being
higher than VaR:
(a) 0.20%
(b) 0.75%
(c) 0.95%
(d) 1%

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D

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QN42. For longer periods, VaR can be calculated as
_____, where 'n' is the period for which VaR is
required.
a. overnight VaR + n
b. overnight VaR * n
c. overnight VaR + vn
d. overnight VaR * vn (square root)

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d

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QN43. VaR is most commonly used to measure risk
over _____ periods.
a. short
b. medium
c. long
d. none of these

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A

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QN44. When a financial institution hedges the
interest-rate risk for a specific asset, the hedge is
called a
A. Macro Hedge
B. Micro Hedge
C. Nano Hedge
D. Singular Hedge

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B

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QN45, Select the incorrect statement:
a. The rate of discount at which the present value
equals the market price of a bond is known as YTM
(Yield To Maturity).
b. Duration is a weighted average measure of life of
a bond. where the time of receipt of a cash flow is
weighted by the future value of the cash flow.
c. MD (Modified Duration) indicates price sensitivity
of a bond per unit of change in the yield levels.
d. Difference in the duration of assets and duration
of liabilities is expressed as duration gap and is
useful for macro-hedging of balance sheet risk.

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B

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QN46. Which of the following are false about the interest-
rate sensitivity of bonds?
I) Bond prices and yields are inversely related.
II) Prices of long-term bonds tend to be more sensitive to
interest rate changes than prices of short-term bonds.
III) Interest-rate risk is directly related to the bond's coupon
rate.
IV) The sensitivity of a bond's price to a change in its yield to
maturity is inversely related to the yield to maturity at which
the bond is currently selling.
A. I
B. III
C. I, II, and IV
D. II, III, and IV
E. I, II, III, and IV

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Number III is incorrect because interest-rate risk is
inversely related to the bond's coupon rate.

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