1. What is the primary purpose of derivatives in treasury management?
A. To increase the bank’s deposit base
B. To eliminate all operational risks
C. To hedge financial risks like interest rate and currency fluctuations
D. To avoid compliance with regulatory requirements
Derivatives are used in treasury management primarily to hedge against financial risks, including interest rate, currency, and credit risks, rather than eliminating operational risks or bypassing regulations.
2. Which of the following is a common derivative instrument used in banking treasury?
A. Savings account
B. Interest rate swap
C. Term deposit
D. Current account
Interest rate swaps, along with forwards, futures, and options, are common derivative instruments used in treasury management for hedging financial risks.
3. In the context of treasury, derivatives help a bank primarily to:
A. Manage market and credit risk exposures efficiently
B. Increase customer loan disbursement
C. Reduce operational staff requirements
D. Avoid statutory reporting
Derivatives allow the bank to hedge market and credit risks, providing risk management tools rather than operational or compliance shortcuts.
4. Which of the following best describes a derivative?
A. A traditional deposit product
B. A type of loan issued to corporates
C. A bank’s internal accounting entry
D. A financial contract whose value is derived from an underlying asset
A derivative is a financial instrument whose value depends on the price of an underlying asset such as interest rates, currency, equities, or commodities.
5. Which treasury function is most directly supported by derivative products?
A. Customer onboarding
B. Risk management and hedging
C. Cash counting operations
D. Regulatory audit preparation
Derivative products in treasury primarily help the bank manage and hedge market and credit risks, enhancing the efficiency of risk management.
6. Which of the following is a characteristic of an OTC derivative?
A. Traded on a formal exchange
B. Standardized contract terms
C. Customized contract terms negotiated between parties
D. Settled only monthly
OTC (Over-the-Counter) derivatives are privately negotiated contracts with customized terms to suit the specific needs of counterparties, unlike exchange-traded derivatives which are standardized.
7. Which of the following is an example of an exchange-traded derivative?
A. Interest rate swap
B. Stock futures traded on NSE
C. Forward currency contract negotiated with a bank
D. Customized option between two corporates
Exchange-traded derivatives, like stock futures and options listed on NSE or BSE, are standardized contracts with transparent pricing, unlike OTC derivatives which are negotiated privately.
8. One major advantage of exchange-traded derivatives over OTC derivatives is:
A. Higher liquidity and transparent pricing
B. Fully customized contract terms
C. No regulatory oversight
D. Settlement only through bilateral negotiation
Exchange-traded derivatives provide standardized contracts with higher liquidity and transparent pricing, whereas OTC derivatives are customized and may have lower liquidity.
9. Which of the following is a risk specific to OTC derivatives?
A. Market risk only
B. Settlement risk in clearinghouse
C. Interest rate risk standardized by exchanges
D. Counterparty credit risk
OTC derivatives carry counterparty credit risk because they are privately negotiated and not guaranteed by an exchange, unlike exchange-traded derivatives which are cleared through a central counterparty.
10. Which statement correctly differentiates OTC and exchange-traded derivatives?
A. OTC derivatives are always more liquid than exchange-traded derivatives
B. Exchange-traded derivatives are standardized and cleared through exchanges, while OTC derivatives are customized and bilateral
C. Both OTC and exchange-traded derivatives are unregulated
D. Exchange-traded derivatives carry more counterparty risk than OTC derivatives
Exchange-traded derivatives are standardized and traded via clearinghouses, reducing counterparty risk, while OTC derivatives are customized agreements between two parties and carry bilateral credit risk.
11. What is a forward contract?
A. A standardized contract traded on an exchange
B. A contract that gives the buyer the right, but not obligation, to buy an asset
C. A customized agreement to buy or sell an asset at a specified future date and price
D. A deposit product with fixed maturity
A forward contract is a private agreement between two parties to buy or sell an asset at a predetermined future date and price. It is customized and not traded on exchanges.
12. Which of the following is a key difference between forwards and futures?
A. Forwards are standardized and traded on exchanges, futures are customized
B. Futures are standardized and exchange-traded, forwards are customized OTC contracts
C. Futures carry no market risk, forwards carry unlimited market risk
D. Forwards have daily settlement, futures settle at maturity only
Futures are standardized contracts traded on exchanges with daily marked-to-market settlement. Forwards are customized OTC agreements settled at contract maturity.
13. Which of the following statements about options is correct?
A. An option obliges the buyer to buy or sell the asset
B. Options are only used for deposit products
C. Options cannot be used for hedging
D. An option gives the buyer the right, but not the obligation, to buy or sell an asset
Options provide the buyer with the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined price before or on a specified date.
14. Which of the following best describes a call option?
A. Gives the holder the right to buy an asset at a specified price within a specified time
B. Obligates the holder to sell an asset immediately
C. Is a type of deposit product
D. Requires daily margin payments like a futures contract
A call option gives the holder the right to buy an underlying asset at a specified strike price within a specified period, without the obligation to do so.
15. Which risk is a bank primarily managing when using options in treasury?
A. Operational risk
B. Market risk including interest rate and currency fluctuations
C. Regulatory reporting risk
D. Branch staffing risk
Options are widely used in treasury to hedge market risks such as fluctuations in interest rates, foreign exchange rates, and equity prices.
16. What is a futures contract?
A. A private agreement between two parties
B. A standardized contract traded on an exchange to buy or sell an asset at a future date
C. A type of bank deposit with fixed maturity
D. An insurance policy against market fluctuations
Futures are standardized contracts traded on exchanges, obligating the buyer or seller to transact an asset at a predetermined future date and price, with daily settlement through a clearinghouse.
17. Which of the following is a key advantage of futures over forwards?
A. Higher liquidity and reduced counterparty risk due to clearinghouse settlement
B. Fully customized contract terms
C. No margin requirements
D. Settled only at contract maturity
Futures are standardized and cleared through exchanges, which provides higher liquidity and reduces counterparty credit risk compared to OTC forward contracts.
18. Which of the following best describes an interest rate swap?
A. Buying and selling futures contracts daily
B. An option to buy a currency at a future date
C. An agreement between two parties to exchange interest payment streams, usually fixed for floating
D. A deposit product with variable interest rate
An interest rate swap is a derivative where two parties exchange interest payments, typically swapping fixed-rate payments for floating-rate payments, to manage interest rate risk.
19. Which of the following is the main objective of a currency swap?
A. To buy foreign currency for speculative purposes only
B. To hedge operational risks of a branch
C. To avoid regulatory reporting
D. To exchange principal and interest payments in different currencies to manage currency risk
Currency swaps involve exchanging principal and interest payments in different currencies, helping banks hedge foreign exchange risk on cross-currency borrowings or investments.
20. Which of the following statements is true regarding swaps in treasury management?
A. Swaps are standardized contracts traded on stock exchanges only
B. Swaps are OTC contracts used to manage interest rate or currency risk
C. Swaps do not involve any cash flow exchange between parties
D. Swaps are primarily used for operational staffing management
Swaps are over-the-counter agreements used by banks to exchange cash flows, typically to hedge interest rate or currency risk, and are customized to meet the needs of the counterparties.
21. What is the main purpose of an interest rate swap for a bank?
A. To manage interest rate risk by exchanging fixed and floating rate payments
B. To hedge currency risk between two currencies
C. To speculate on stock price movements
D. To increase regulatory capital
Interest rate swaps allow banks to exchange fixed and floating interest payments, helping manage exposure to interest rate fluctuations.
22. In a currency swap, what do the two parties typically exchange?
A. Only interest payments in the same currency
B. Only principal amounts without interest
C. Principal and interest payments in different currencies
D. Equity shares of the two institutions
Currency swaps involve exchanging both principal and interest payments in different currencies, allowing banks and corporates to hedge foreign exchange and interest rate risk simultaneously.
23. Which of the following best describes a fixed-for-floating interest rate swap?
A. Both parties pay floating rates
B. One party pays a fixed interest rate while the other pays a floating rate
C. Both parties pay fixed interest rates
D. One party pays principal only while the other pays interest only
In a fixed-for-floating interest rate swap, one party agrees to pay a fixed interest rate while receiving a floating rate, and the other does the opposite, allowing risk management of interest rate movements.
24. Which risk is a bank mainly hedging using a currency swap?
A. Operational risk
B. Credit risk
C. Liquidity risk
D. Foreign exchange and interest rate risk
Currency swaps are used to hedge foreign exchange and associated interest rate risk, particularly for cross-currency borrowings or investments.
25. Which of the following statements about interest rate and currency swaps is correct?
A. Both are exchange-traded standardized contracts
B. Both are OTC contracts customized to meet the hedging needs of the counterparties
C. Both carry no counterparty risk
D. Both are only used for speculative purposes by banks
Interest rate and currency swaps are over-the-counter (OTC) agreements, customized to the specific needs of the counterparties, and can be used for hedging or risk management rather than just speculation.
26. Which of the following is a primary objective of RBI’s guidelines on risk exposure?
A. To maximize bank profits through speculative trading
B. To ensure banks maintain prudent risk management practices
C. To eliminate the need for capital adequacy requirements
D. To allow unlimited exposure to derivatives
RBI guidelines on risk exposure aim to ensure that banks adopt prudent risk management practices, limiting exposure to individual and group borrowers, and market risks.
27. Which of the following limits is set by RBI for banks’ exposure to a single borrower or group?
A. 10% of total assets
B. 20% of capital plus reserves
C. 15% of capital funds (for large borrowers)
D. No specific limit, left to bank discretion
RBI prescribes prudential exposure limits for single borrowers and borrower groups, typically 15% of a bank’s capital funds for large borrowers, to limit concentration risk.
28. What is the purpose of RBI’s guidelines on derivatives trading by banks?
A. To encourage speculation in foreign exchange
B. To eliminate all market risk for banks
C. To remove capital adequacy requirements
D. To ensure banks use derivatives prudently for hedging and risk management
RBI mandates that banks use derivatives for hedging and risk management purposes, not for speculative trading, ensuring sound risk management and capital adequacy.
29. Which of the following developments in Indian markets has influenced RBI’s derivative guidelines?
A. Increased volatility in foreign exchange and interest rate markets
B. Decline in retail banking
C. Decrease in government securities issuance
D. Reduction in bank branch networks
Volatility in currency and interest rate markets in India has prompted RBI to issue detailed guidelines on derivatives trading, ensuring banks manage market risk prudently.
30. Under RBI guidelines, banks must calculate risk exposure for derivatives using which of the following?
A. Historical cost of deposits only
B. Current mark-to-market value of positions
C. Total branch-level cash balances
D. Capital adequacy of only subsidiary companies
RBI requires banks to calculate derivative exposures at current mark-to-market value to assess potential risk and ensure proper capital provisioning.
31. A bank enters into a forward contract to buy USD 1,00,000 in 3 months at a forward rate of ₹83.50/USD. If the spot rate at maturity is ₹84/USD, what is the bank’s gain/loss?
A. Gain ₹50,000
B. Loss ₹50,000
C. Loss ₹50,000
D. Gain ₹50,000
Bank has agreed to buy USD 1,00,000 at ₹83.50/USD. Spot rate at maturity is ₹84/USD. Loss = (Spot rate - Forward rate) × USD = (84-83.50) × 1,00,000 = ₹50,000.
32. A bank sells a call option on 10,000 shares at a strike price of ₹200/share. Premium received is ₹5/share. If the market price at expiry is ₹210/share, what is the net profit/loss?
A. ₹50,000 profit
B. ₹50,000 loss
C. ₹100,000 loss
D. ₹0
Call option sold at strike ₹200, market price ₹210. Loss per share = 210-200-5 = ₹5 loss × 10,000 shares = ₹50,000.
33. A bank enters into a 6-month interest rate swap to pay fixed 7% and receive floating 6-month LIBOR. Notional principal is ₹10 crore. Floating rate at first period is 6.5%. What is the net cash flow for the bank?
A. ₹50 lakh paid
B. ₹50 lakh received
C. ₹0
D. ₹50 lakh paid (Fixed - Floating) × Notional × Time = (7%-6.5%) × 10cr × 0.5 = ₹25 lakh
Net cash flow = (Fixed - Floating) × Notional × Time fraction = (7%-6.5%) × 10cr × 0.5 = 0.5% × 10cr × 0.5 = ₹25 lakh paid by the bank.
34. A bank enters into a futures contract to sell 50,000 barrels of crude oil at $70/barrel. Spot price at maturity is $68/barrel. What is the gain/loss?
A. Gain $100,000
B. Loss $100,000
C. Loss $200,000
D. Gain $50,000
Bank sold futures at $70/barrel, spot price $68. Gain = (Sell price - Spot price) × Quantity = (70-68) × 50,000 = $100,000.
35. A bank has an exposure of ₹5 crore to a single corporate. RBI single borrower limit is 15% of capital funds of ₹20 crore. Is the bank within the limit?
A. No, exceeds limit by ₹1 crore
B. No, exceeds limit by ₹2 crore
C. Yes, within the limit (15% of 20cr = 3cr; exposure 5cr → exceeds)
D. Yes, fully compliant
RBI single borrower limit = 15% × 20cr = ₹3 crore. Bank exposure = ₹5 crore → Exceeds limit. Bank is not compliant.
36. A bank has a forward contract to sell EUR 1 million at ₹90/EUR. If the current spot rate is ₹88/EUR, what is the MTM (mark-to-market) loss?
A. ₹1 crore gain
B. ₹2 lakh loss
C. ₹2 crore loss
D. ₹1.5 crore loss
Bank agreed to sell EUR at ₹90, spot ₹88. Loss = (Forward rate - Spot rate) × Amount = (90-88) × 1,00,0000 = ₹20 lakh. Corrected: ₹20 lakh loss.
37. A bank enters into a 1-year interest rate swap of ₹50 crore, paying fixed at 6.5% and receiving floating at 7%. What is the net annual cash flow for the bank?
39. A company hedges interest rate risk by entering into a 2-year swap on ₹100 crore notional. Pays floating (6M MCLR) and receives fixed 6%. If 6M MCLR averages 7%, what is the annual net result for the company?
A. Break-even
B. ₹1 crore gain per year
C. ₹1 crore loss per year
D. ₹1 crore loss per year
Company pays floating (7%) and receives fixed (6%). Net = (6 – 7)% × 100 crore = –1% × 100 crore = ₹1 crore annual loss.
40. A bank enters into a forward contract to sell GBP 2 million at ₹104/GBP. Spot rate on maturity is ₹106/GBP. What is the MTM result?
A. ₹2 crore gain
B. ₹4 crore loss
C. ₹2 crore loss
D. ₹4 crore gain
Bank sells at ₹104, spot ₹106 → must deliver cheaper than market. Loss = (106 – 104) × 2,000,000 = ₹4 crore loss.
41. A bank sells a put option on 5,000 shares at strike ₹150. Premium received = ₹6/share. Market price at expiry = ₹140. What is the net outcome?
A. ₹20,000 loss
B. ₹30,000 profit
C. ₹20,000 profit
D. ₹0
Loss = (Strike – Market) – Premium = (150 – 140) – 6 = ₹4/share.
Net loss = 4 × 5,000 = ₹20,000.
42. RBI exposure norms: Bank capital funds = ₹100 crore. Max exposure to a single borrower allowed = 15%. What is the maximum permissible exposure?
A. ₹10 crore
B. ₹12 crore
C. ₹15 crore
D. ₹20 crore
Single borrower limit = 15% of capital funds = 15% of 100 crore = ₹15 crore.
43. A bank enters into a currency swap: Pays USD interest @4% on $10m and receives INR interest @7% on ₹75 crore (USD/INR=75). What is the annual net result (ignoring exchange fluctuations)?
45. A bank holds a derivative exposure with MTM value of ₹8 crore. Capital funds = ₹100 crore. Exposure limit for single counterparty is 15%. Is the exposure within limit?
A. Yes, within limit
B. No, exceeds by ₹2 crore
C. No, exceeds by ₹5 crore
D. No, exceeds by ₹8 crore
Limit = 15% of 100 crore = ₹15 crore.
Exposure = ₹8 crore → well within limit.
