CAIIB Bank Finance Management Short Notes Part 2 (CAIIB BFM )
CAIIB Exams are conducted by IIBF. CAIIB is one of many the flagship courses offered by IIBF, twice a year. It is conducted in the months of June & December every year. This course of CAIIB has a total of 3 subjects out of which 2 are compulsory and BFM or Bank Finance Management is one of the two & the 3rd one is elective.
Quick Link: Check out the CAIIB BFM Notes here.
Bank Finance Management (CAIIB BFM Notes) has 4 modules which are further divided into several units.
|CAIIB – Bank Finance Management (BFM notes)||
To check out the detailed syllabus of CAIIB- ABM, BFM & electives click here.
Below are the notes on CAIIB BFM continuing from part-1’s end. You can access Part-1 of Bank Financial Management CAIIB Notes Pdf here.
CAIIB BFM NOTES:
MODULE – A: INTERNATIONAL BANKING
UNIT – 1: Exchange Rates And Forex Business
Arbitrage in Exchange: Arbitrage consists of simultaneous buying and selling of a commodity in 2 or more markets to take advantage of temporary price discrepancies.
Simple or Direct Arbitrage: When a transaction is conducted b/w 2 centers only, it is known as simple or direct arbitrage.
Compound or Three (or More) Point Arbitrage: Where additional centers are involved in a transaction, the operation is known as compound or 3 (or more) point arbitrage.
Forex Operations are divided into 3:
- Forex Dealer
- Back Office
- Mid Office
Important Topic:- CAIIB BFM (BANK FINANCIAL MANAGEMENT) SYLLABUS PRIORITY
The Forex dealing room operation functions are:
- Running a service branch to meet the customer’s requirement of other branches/divisions to buy or sell foreign currency,
- Manage the foreign currency assets and liabilities,
- Fund and manage Nostro Accounts and also undertake proprietary trading in currencies.
- It is a separate profit center for the Bank or Financial Institutions.
Forex Dealer: He/she is required to maintain 2 positions
- Funds position: This position reflects the inflow and outflow of funds.
- Currency Position
Back office: It takes care of the processing of deals, accounts and their reconciliation, etc. It does both, provides support as well as a have a check over the dealers.
Mid Office: It deals with risk management & parameterization of risks for forex dealing operations. Mid Office is also required to look after the compliances of various guidelines or instructions which is basically an independent function.
The major risks associated with the dealing operations are:
- Operational Risk
- Exchange Risk
- Credit Risk
- Country Risk
- Liquidity Risk
- Gap or Interest Rate Risk
- Settlement Risk
- Market Risk
- Systemic Risk
- Legal Risk
- Sovereign Risk
Operation Risk: It arises on account of human errors, technical faults, infrastructure breakdown, faulty systems & procedures, or lack of internal controls.
Read Also:- CAIIB BFM SYLLABUS PRIORITY
Exchange Risk: The most common & obvious risk in foreign exchange dealing operations arise mainly on account of fluctuations in exchange rates and/or when mismatches occur in assets or liabilities and receivables or payables.
Credit risk: This risk arises due to the inability or unwillingness of the counterpart to meet the obligations at underlying transactions maturity.
It can be classified into:
- Pre-Settlement Risk
- Settlement Risk
Pre-Settlement Risk: The risk of default by the counter-party before the maturity of the contract thereby exposing the other party to cover the transaction at the ongoing market rates.
Settlement Risk: The risk that the counter-party will fail during the course of settlement, because of the time zone differences between the 2 currencies to be exchanged.
Liquidity Risk: The potential risk that the liabilities will drain from the bank at a faster rate than assets. The mismatches in the maturity patterns of assets & liabilities give rise to liquidity risk.
Gap Risk or Interest Rate Risk: The risk that arises out of the adverse movements in implied interest rates or actual interest rate differentials is known as Gap or Interest Rate Risk.
Important Topic:- CAIIB BFM MOCK TEST
Market Risk: This arises out of the adverse movement of market variables when the players are not able to exit their positions quickly.
Legal Risk: It arises on account of the non-enforceability of a contract against a counterparty.
Systemic Risk: The possibility that a major bank will fail and the resultant losses to counterparties will reverberate into a banking crisis.
Country Risk: The risk that a counterparty situated in a different country will be unable to perform its part of the contractual obligations despite its willingness to do so due to local government regularizations or political or economic instability in that country is known as country risk.
Sovereign Risk: The possibility of a national government’s treasury or central bank defaulting on their sovereign debt, or else implementing foreign exchange rules or restrictions that will significantly reduce the worth of its forex contracts.
RBI’s Guidelines: RBI has issued prescribed guidelines for authorized dealers to deal in foreign exchange and handle foreign currency transactions.
FEMA, 1999 also prescribes rules for persons and corporates, etc in foreign currencies handling, as also transactions denominated therein.
Licensing: In India, RBI issues licenses to Authorized Dealers to undertake foreign exchange transactions. It also issues Money Changer License to a large no. of established firms, hotels, companies, shops, etc. to deal in foreign currency notes, coins, and Travelers Cheques (TCs).
FFMC – Full Fledged Money Changers: These are the entities authorized to buy and sell foreign currency notes, coins, and Travelers Cheques.
RMC – Restricted Money Changers: These are the entities that are authorized to buy foreign currency.
Important Topic:- Pass Bank Financial Management (BFM) in 1 Attempt
Categories of Authorized Dealers: In 2005, the categorization of dealers authorized to deal in foreign exchange was changed:
|I||Banks, FIs, and other entities allowed to handle all types of Forex|
|II||Money Changers (FFMCs)|
|III||Money Changers (RMCs)|
Foreign Exchange Dealers Association of India (FEDAI): FEDAI was established in 1958. Its function is to prescribe guidelines and rules for market operations, delivery dates, holidays, merchant rates, quotations, interest on defaults, Handling of Export-Import Bills, Transit-period, crystallization of Bills, and other issues related to it.
Export Bills: Bills that are drawn in foreign currency whether purchased, discounted, or negotiated, must be crystallized into rupee liability. The same would be done at TT (Telegraphic Transfer) selling rate. The period of crystallization can vary from bank to bank, (For Export Bills Generally, it’s on the 30th Day) from customer to customer but it cannot exceed 60 days.
Sight Bills: The bills that are drawn under Inland Letter of Credit (ILC) would be crystallized on the 10th day after the due date of receipt if not yet paid.
Important Topic:- CAIIB: BFM ABM in one Attempt
Forward Contracts: These contracts are for a specified amount with specified delivery dates.
Automatic Cancellation of Contracts: All contracts, that have matured & haven’t been picked up, shall be automatically canceled on the 7th working day after the maturity date. All the cancellations shall be at Bank’s opposite Telegraphic Transfer rates. The usage of the TT rates is as follows:
TT Selling = purchase contracts
TT buying = Sale contracts.
All currencies to be quoted: Per unit Foreign Currency = `, JPY (Japanese Yen), Indonesian Rupiah while Kenyan Schilling quoted as 100 Units of Foreign currency.
CAIIB Bank Financial Management Notes pdf
The above CAIIB BFM notes cover the unit-1 of CAIIB Bank Financial Management Syllabus. Hopefully, they will help you in getting an overview of the first unit of BFM.
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