Treasury Management in Banking – Company decides to use Forwards & Options for hedging

04 May

Company decides to use Forwards & Options for hedging.

Company decides to use Forwards & Options for hedging.

Treasury Management in Banking

1. Explain the various approaches to measure risks. As a treasury manager of a bank, which approach will you follow to evaluate stress events of liquidity position of your bank.

2. Explain duration GAP analysis in banks. Calculate the duration Gap of the following excerpts from the balance sheet of a bank. Also calculate the impact on the equity of the bank in the different interest rates scenarios.

Balance Sheet for Hypothetical Bank

Particulars       Assets              Duration          Liabilities                                            Duration

Current Assets 1000               7 years             Current Liabilities 700                        5 Years

Fixed Assets     300                                        Other Liab.               300

  1300                                      Equity          300


Scenarios for Impact analysis:

1. Interest rates increased by 1%

2. Interest rates decreased by 1%

3. Maruti Suzuki Ltd. has imported machinery worth 1 million USD and the invoice is payable in 90 days. Current Spot rate in the market is USD/INR 75 while 90 Days forward is quoted at USD/INR 76. The prominent economists predict the spot rate after 90 days at USD/INR 76.5. Cost of Borrowing for Maruti in India is 10% and USD Interest Rate = 2%. A 90 days Call option with exercise price of USD/INR 75 for 100,000 USD is available at premium of INR 2.

You are required to calculate impact on transaction exposure under following scenarios:

a. Company decides to use Forwards & Options for hedging.

b. Company decides to use Money Market hedging.




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