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    Question

    Which of the following is NOT a correctly matched

    strategy to mitigate the given risk?
    A Credit risk – Credit appraisal and underwriting Correct Answer Incorrect Answer
    B Operational risk – Business continuity plan Correct Answer Incorrect Answer
    C Liquidity risk – Asset liability management Correct Answer Incorrect Answer
    D Market risk – Hedging Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    Credit risk can be mitigated by proper credit appraisal and underwriting systems, proper and regular monitoring Business Continuity planning is a key pre-requisite for minimising the adverse effects of one of the important areas of operational risk – business disruption and system failures. It would include steps like identifying critical businesses, having a crisis management team and plan, incident management teams, work area recovery, disaster recovery, etc. Asset liability management is a tool to mitigate liquidity risk ; proper bucketing of all the assets and liabilities into the RBI defined time periods helps to analyse the time difference in inflows and outflows related to a bank, which helps it to accordingly take decisions to manage the liquidity risk. Market risk can be mitigated by hedging which helps in reducing the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract, so that the impact of the price movement is nullified (or reduced) on the overall trade.

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