Online 2016-FRR Questions Video

Position mapping is used in risk management to simplify the assessment of risks associated with various positions. The objectives of position mapping are:

For VaR (Value at Risk) calculations, it converts positions based on their deltas to underlying factor risks. This means mapping the positions to their underlying risk factors to make the complex position simpler to manage and evaluate.

Position mapping models risk factors affecting the value of a position as a combination of core risk factors used in the VaR calculations. This involves breaking down the complex risk factors into more manageable and fundamental risk components that can be easily analyzed.

By focusing on these two objectives, position mapping helps in both simplifying the risk assessment process and in ensuring that the primary risk factors are correctly identified and managed.

The modified duration of a bond can be estimated using the following formula: Modified Duration=Δ????/????Δ????Modified Duration=ΔyΔP/P​ where Δ????ΔP is the change in the bond's price, ????P is the initial price, and Δ????Δy is the change in yield.

Given:

Initial price (P) = $87,000

New price after yield change (P') = $84,500

Change in price (ΔP) = $87,000 - $84,500 = $2,500

Change in yield (Δy) = 5.7% - 4.7% = 1% = 0.01

Modified Duration = 2,500/87,0000.01=0.0287350.01=2.8735≈2.880.012,500/87,000​=0.010.028735​=2.8735≈2.88

Asset and liability management (ALM) in banks is concerned with several key activities:

Maintaining the desired liquidity structure of the bank (I): Ensuring that the bank has enough liquid assets to meet its short-term obligations.

Managing the factors affecting the structure and composition of a bank's balance sheet (II): This includes managing the mix of assets and liabilities to optimize returns and minimize risks.

Focusing on the circumstances impacting the stability of income the bank generates over time (IV): Ensuring that the bank's income is stable and sustainable by managing interest rate risk, credit risk, and other factors that could affect profitability.

References: No specific reference found in the document for this question. The provided answer is based on standard ALM practices in banking.

The key difference between customer loans and interbank loans is related to creditworthiness and yield. Customers are generally less credit-worthy than banks, leading to higher yields on customer loans compared to interbank loans. This higher yield compensates lenders for the increased risk associated with lending to less credit-worthy borrowers.