Banking Awareness Based on Economic Survey| Daily Banking Awareness Quiz

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Exp. The trading book line includes all the assets that are marketable, i.e., they can be traded in the market.

Exp Net interest margin (NIM) is a measure of the difference between the interest income generated by banks or other financial institutions and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets. A negative value denotes that the firm has not made an optimal investment decision because interest expenses exceed the amount of returns generated by investments. Net interest margin is expressed a percentage. It is one of the profitability indicators of an organization, showing how much it earns on interest from its credit products—loans, mortgages—compared to the interest it pays out on things like savings accounts and certificates of deposit (CDs).v

Q7. Which of the following is incorrect regarding compliance risk?

(a) Compliance risk is the risk of legal or regulatory sanction, financial loss or reputation loss that a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organization standards, and codes of conduct applicable to its banking activities.

(b) It is also called integrity risk since a bank’s reputation is closely linked to its adherence to principles of integrity and fair dealing.

(c) It is a part of operational risk that bank faces.

(d) None of the above.

Exp. Compliance risk is the risk of legal or regulatory sanction, financial loss or reputation loss that a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organization standards, and codes of conduct applicable to its banking activities.

Exp. Off-balance sheet exposures refer to activities that are effectively assets or liabilities of a company but do not appear on the company’s balance sheet. Off-balance sheet items are detectable as they are appearing in the notes to financial statement of the organization. Off-balance sheet items example – Financial derivatives which include swaps, options, forwards, and futures for interest rates, currencies, stocks, bonds, indexes, and commodities.

Exp. The Board of Directors is responsible for overall management of risk in every organization. Boards of Directors have held the responsibility of risk management oversight, ensuring that risk management processes are clearly defined and appropriately enacted.

Exp. Volatility over a time horizon = Daily Volatility * Square root of T

Daily Volatility – 3

Time – 30 days

Volatility = 3*Square Root of 30

= 3* 5.48

= 16.44

Exp. The definition of diversification is the act of, or the result of, achieving variety. In finance and investment planning, portfolio diversification is the risk management strategy of combining a variety of assets to reduce the overall risk of an investment portfolio.

Exp. Higher risk is associated with greater probability of higher return and lower risk with a greater probability of smaller return. This trade off which an investor faces between risk and return while considering investment decisions is called the risk return trade off.

Exp. Beta is a measure of a stock’s volatility in relation to the market. By definition, the market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock’s beta is less than 1.0. High-beta stocks are supposed to be riskier but provide a potential for higher returns; low-beta stocks pose less risk but also lower returns.

Exp. Beta is a measure of a stock’s volatility in relation to the market. By definition, the market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock’s beta is less than 1.0. High-beta stocks are supposed to be riskier but provide a potential for higher returns; low-beta stocks pose less risk but also lower returns.