4 TIRM VQ ASSETS LIABILITIES MANAGEMENT
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What is Assets Liabilities Management (ALM) in the context of treasury operations?
ALM is a comprehensive framework for managing the risks arising from mismatches between a bank's assets and liabilities in terms of maturity, interest rate, and currency, ensuring liquidity and profitability are maintained.
What is the 'repricing gap' and how is it calculated in ALM?
Difference between rate-sensitive assets and liabilities repricing in a given period.
What is the primary purpose of the Asset Liability Committee (ALCO) in a bank?
ALCO is the apex body responsible for overseeing ALM policies, setting interest rate risk and liquidity risk appetite, and approving strategies to manage the bank's balance sheet risks in line with RBI guidelines.
What is the 'Liquidity Adjustment Facility' (LAF) and its relevance to bank ALM?
RBI tool to inject or absorb liquidity via repos and reverse repos daily.
How is the Net Interest Income (NII) of a bank affected by interest rate risk?
Interest rate risk causes NII to fluctuate when interest rates change, because the repricing of assets and liabilities occurs at different times and magnitudes, creating an earnings gap.
What is 'convexity' in the context of interest rate risk measurement in ALM?
Measure of curvature in bond price-yield relationship, correcting duration approximation.
What does the term 'repricing risk' mean in ALM?
Repricing risk arises when assets and liabilities mature or reprice at different times, exposing the bank to potential loss if interest rates move adversely before the mismatch is corrected.
What is the 'Net Interest Margin' (NIM) and how does it relate to ALM?
Difference between interest earned and interest paid as a percentage of earning assets.
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