Online 2016-FRR Questions Video

Treasury Functions:

Management of Assets and Liabilities: Treasury functions include managing the bank's balance sheet, which involves optimizing the mix of assets and liabilities.

Management of Liquidity: Ensuring the bank has sufficient liquidity to meet its obligations.

Management of Capital: Overseeing the capital adequacy to meet regulatory requirements and support the bank's operations and growth.

Performance Estimates:

Estimating and managing the bank’s performance involves various departments, not typically the treasury function. Performance estimates would be more related to financial planning and analysis functions.

ReferencesSource: How Finance Works​

Profit and loss (P&L) calculations in trading are typically made by comparing the current market value to the purchase price or the previous day's closing price, not the intrinsic value. Here are the correct statements:

Cash settled instruments: The final market value is used to settle the transaction with the counterparty.

Margin calls: Futures exchanges base margin calls on the current market value.

Credit risk calculations: Analyzing the current values of all deals with the same counterparty is crucial for assessing counterparty credit risk.

The incorrect statement is that P&L calculations are made by comparing current values to intrinsic values, which are theoretical and not always reflective of market conditions.

ReferencesSource: How Finance Works​

Commodity derivative risks encompass a variety of factors, and among the main risks are:

Basis Risk: This arises from the difference between the spot price of the commodity and the futures price of the commodity.

Term Risk: This refers to the risk associated with the time to maturity of the derivative contract.

Correlation Risk: This involves the risk that the price of the commodity does not move in correlation with the derivative being used to hedge.

Seasonality Risk: This arises from the predictable fluctuations in commodity prices due to seasonal patterns.

All these risks are essential in understanding the complete risk profile associated with commodity derivatives.

ReferencesInformation verified based on the financial risk and regulation context provided in the book "How Finance Works"​​.

Market-making involves providing liquidity by being ready to buy and sell securities at any time. The profitability and functioning of a market-making strategy depend on several factors, including:

Profit from the Spread:

Market makers profit from the difference between the buy (bid) price and the sell (ask) price.

Market Information:

Market makers can benefit from the information they obtain through the trades they execute.

Liquidity and Competition:

The success of a market maker is highly dependent on the market's liquidity and the number of other market makers. More liquidity and less competition typically enhance the profitability of market makers.

Risk of Holding Positions:

Market makers may incur losses if they hold positions that quickly move against them.

Therefore, the incorrect statement is that the market-making strategy is independent of market liquidity and the number of other market makers.

ReferencesSource: How Finance Works​