MS-494 Risk Management in Banks

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ASSIGNMENT


Course Code                          :                       MS-494
Course Title                           :                     Risk Management in Banks 
Assignment Code                  :                      MS-494/SEM-I/2014
Coverage                                :                      All Blocks


Note : Attempt all the questions and submit this assignment on or before 30th April, 2014 to the coordinator of your study center.



Q. 1.            Discuss the framework of Basel Accord – I and II and explain the changes proposed in the Basel Accord – II for the Basel Accord – III.

Answer:Basel I is the round of deliberations by central bankers from around the world, and in 1988, the Basel Committee on Banking Supervision (BCBS) in Basel, Switzerland, published a set of minimum capital requirements for banks. This is also known as the 1988 Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992. A new set of rules known as Basel II was later developed with the intent to supersede the Basel I accords. However they were criticized by some for allowing banks to take on additional types of risk, which was considered part of the cause of the US subprime financial crisis that started in 2008. In fact, bank regulators in the United States took the position of requiring a bank to follow the set of rules (Basel I or Basel II) giving the more conservative approach for the bank. Because of this it was anticipated that only the few very largest US Banks would operate under the Basel II rules, the others being regulated under the Basel I framework. Basel III was developed in response to the



Q. 2.            What is ‘Credit Risk Derivative’? Explain the various types of Credit Derivatives and discuss their special features.

Answer:In finance, a credit derivative refers to any one of "various instruments and techniques designed to separate and then transfer the credit risk"[1] or the risk of an event of default of a corporate or sovereign borrower, transferring it to an entity other than the lender[2][3] or debtholder.

An unfunded credit derivative is one where credit protection is bought and sold between bilateral counterparties without the protection seller having to put up money upfront or at any given time during the life of the deal unless an event of





Q. 3.            What do you mean by ‘Market Risk’? Discuss the factors that contribute to this risk. How is market risk managed?


Answer:Market risk is the risk that the value of an investment will decrease due to moves in market factors.

Volatility frequently refers to the standard deviation of the change in value of a financial instrument with a specific time horizon. It is often used to quantify the risk of the instrument over that time period. Volatility is typically expressed in annualized terms, and it may either be an absolute number ($5) or a fraction of the initial value (5%).




Q. 4.            Explain the concept of ‘Internet Rate Risk’ and discuss the reasons for a Bank to use Internet Rate Futures.


Answer: Interest rate risk affects the value of bonds more directly than stocks, and it is a major risk to all bondholders. As interest rates rise, bond prices fall and vice versa. The rationale is that as interest rates increase, the opportunity cost of holding a bond decreases since investors are able to realize greater yields by switching to other investments that reflect the higher interest rate. For example, a 5% bond is worth more if interest rates decrease since the bondholder receives a fixed rate of return relative to the market, which is offering a lower rate of return as a result of the decrease in rates. 



Q. 5.            Discuss the need for effective operational risk management and explain the process of operational risk management in Banks.   


Answer:Operational risk is "the risk of a change in value caused by the fact that actual losses, incurred for inadequate or failed internal processes, people and systems, or from external events (including legal risk), differ from the expected losses". This definition from the Basel II regulations was also adopted by the European union Solvency II Directive.". In October 2014, the Basel Committee on Banking Supervision proposed a revision to its operational risk capital framework that sets out a new standardized approach to replace the basic indicator

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