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Treasury Risk Management
Define a derivative and state its core characteristic.
Financial contract whose value derives from underlying (currency, rate, bond, equity, commodity, index); has no independent value.
List three objectives of bank treasuries using derivatives.
Manage on-balance-sheet and ALM risk; meet customer hedging requirements; take proprietary trading/speculative positions within RBI limits.
What is the primary counterparty risk in OTC derivatives?
Direct bilateral exposure: if counterparty defaults, other party suffers direct loss; no central clearing house intermediation.
How do exchange-traded derivatives eliminate counterparty risk?
Central counterparty (clearing corporation) guarantees all trades; exchange acts as buyer to seller and seller to buyer.
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