Use of Derivatives in Risk Management
Derivatives are financial instruments whose value is derived from an underlying asset, such as a stock, commodity, currency, or interest rate. They are widely used in financial markets for hedging risks and speculating on price movements. In the context of risk management, derivatives serve as powerful tools to mitigate exposure to adverse price changes, manage…
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Value at Risk (VaR) and Duration: Distinct Measures of Financial Risk
Value at Risk (VaR) and Duration are both widely used financial risk measures; however, they assess different dimensions of risk. While VaR provides a general estimate of potential losses in a portfolio over a specified time horizon, Duration specifically measures the sensitivity of bond prices to changes in interest rates. Understanding both is essential for…
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The Liquidity Adjustment Facility (LAF): A Key Tool for Monetary Policy and Liquidity Management
The Liquidity Adjustment Facility (LAF) is a vital monetary policy instrument used by the Reserve Bank of India (RBI) to regulate liquidity in the banking system and influence short-term interest rates. It allows banks to address their daily liquidity requirements by borrowing from or lending to the RBI. Through LAF, the RBI ensures stability in…
Read article Funding and Regulatory Aspects of Reserve Assets
Reserve assets are critical components of a nation’s financial system, playing a central role in maintaining economic stability, supporting international trade, and ensuring confidence in the national currency. Managed primarily by central banks and regulatory authorities such as the Reserve Bank of India (RBI), these assets include foreign currency holdings, gold reserves, Special Drawing Rights…
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Cash Reserve Ratio (CRR) – Meaning and Calculation
Cash reserve ratio (CRR) is a statutory provision in India regulated by RBI under Section 42(1) of the Reserve Bank of India Act 1934. According to the above section, every scheduled bank in India needs to hold on a certain percentage of cash without being allowed to invest or lend it for interest. The Cash…
Meaning of Statutory Liquidity Ratio (SLR)
Under Section 24 and Section 56 of the Banking Regulation Act, 1949, every Scheduled Commercial Banks (Including Regional Rural Banks), Local Area Banks, Small Finance Banks and Payments Banks in India are required to maintain in the form of cash, or gold or unencumbered investment in any of the following instruments (“SLR securities”)], namely:- (i)…
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