CAIIB · Bank Financial Management · Module C — Treasury Management
CAIIB BFM Unit 25 — Treasury and Asset-Liability Management: Free MCQs with Explanations
By Swarnakshi Jha (ex-banker) · Updated 29 October 2026 · Paper II of the December 2026 cycle (Saturday 12 December 2026)
This is the free practice page for CAIIB BFM Unit 25 — Treasury and Asset-Liability Management (Module C — Treasury Management). The CAIIB Mock Centre holds 268 questions on this unit alone, every one with a why-right / why-wrong explanation; below are the facts examiners keep returning to, five practice questions with explanations, and the traps that cost marks.
BFM · Module C268 MCQs in the Mock Centre5 free belowPaper on 12 December
Key facts examiners test from this unit
Why banks need ALM — ALM manages the liquidity and interest rate risks that come from lending longer, or on a different rate basis, than you borrow, so that net worth is protected.
Liquidity risk and the maturity ladder — count what falls due in each band, keep a running total, and keep the running shortfall within 5–20% of running outflows.
Interest rate risk and repricing gaps — slot by when the rate can change, compare RSA with RSL, and the sign of the gap tells you which rate move hurts.
Changed since the textbook
How fast loans reprice (30 Jun 2026; data for Mar 2026). 67.6% of SCBs' outstanding floating-rate rupee loans were linked to an external benchmark at end-March 2026 (65.5% at end-December 2025). MCLR-linked loans were 30.2%. Source: Report of RBI data (Tribune/ANI)
Credit Derivatives Directions, 2026 (25 Jun 2026). Replace the Directions of 10 Feb 2022. They cover OTC credit default swaps (single-name and credit-index) and total return swaps on corporate bonds, and exchange-traded CDS and credit-index futures. Market-makers: scheduled commercial banks other than small finance banks, payments banks, local area banks and RRBs; standalone primary dealers; Upper- and Middle-Layer NBFCs, including housing finance companies; and EXIM Bank, NABARD, NHB, SIDBI and NaBFID. One party to every deal must be a market-maker or an RBI-authorised central counterparty. Source: RBI Directions
5 free practice questions — tap an option
Five practice questions from this unit. Answers lock on the first tap, exactly as in the exam, and an explanation opens underneath. The Mock Centre has all 268 questions on this unit, from easy to tough, with caselets and key-in numericals, why every other option is wrong and the exam tip — and tracks your score and revision dates.
Question 1 of 5
A bank's ALCO proposes to fund every loan with a deposit of the same maturity and repricing date, so that no mismatch remains. What is the main drawback of this plan?
Why (b): Banks earn part of their margin from mismatches, typically lending for longer than they borrow, so ALM keeps mismatches within limits that protect net worth rather than removing them. A fully matched book would reduce liquidity and interest rate risk, not raise them, and breaches no RBI limit. (a) is wrong: A matched book creates no gaps, so no gap limit is breached. (c) is wrong: Matching repricing dates reduces interest rate risk. (d) is wrong: Matching maturities makes liquidity easier to manage.
Question 2 of 5
A bank's maturity ladder shows expected inflows of ₹600 crore and outflows of ₹750 crore in the 8–14 day bucket. What does the ₹150 crore negative gap represent?
Why (b): Liquidity risk shows up as a maturity mismatch: when outflows exceed inflows in a bucket, the bank must find the ₹150 crore by borrowing, rolling over deposits or drawing on liquid assets, and the risk is that it cannot, or only at an unacceptable cost. A gap is a cash shortfall, not a loss. (a) is wrong: A gap is a cash shortfall, not a loss. (c) is wrong: That would be a repricing gap; this is a cash flow gap. (d) is wrong: Outflows exceed inflows, so it is a shortfall, not a surplus.
Question 3 of 5
The interest rate mismatch between floating deposits and fixed loans (or vice versa) is also known as:
Why (b): "The interest rate mismatch is therefore also known as repricing risk." It exists where, in a time bucket, the assets and liabilities due for repricing are not equal. (a) is wrong: Settlement risk concerns failure to deliver at settlement. (c) is wrong: Country risk concerns cross-border exposure. (d) is wrong: Model risk concerns errors in models.
Question 4 of 5
A bank hedges its balance-sheet duration gap with interest rate swaps. Six months later, a wave of home-loan prepayments shortens the duration of its assets. What follows for the hedge?
Why (b): A balance-sheet hedge is sized for the mismatch when it is placed, but prepayments, new loans and new deposits keep changing the mix, so the hedge must be managed dynamically; left unchanged, swaps sized for the old, longer asset duration now over-hedge. (a) is wrong: The hedge no longer fits the smaller mismatch, so it over-hedges. (c) is wrong: The swaps were sized for a balance sheet that has since changed. (d) is wrong: Hedges of aggregate gaps are adjusted as the balance sheet changes.
Question 5 of 5
In a credit default swap, who pays the periodic premium?
Why (c): The buyer pays a premium ("akin to a guarantee fee") to the seller. The seller pays only if a credit event occurs. (a) is wrong: The seller receives the premium for providing protection. (b) is wrong: The issuer is not a party to the CDS. (d) is wrong: RBI is not a party to the contract.
0 of 5 answered.
Traps in this unit
A positive repricing gap (more rate-sensitive assets than liabilities) gains from a rate rise and loses from a fall; a negative gap is the reverse.
Practise all 268 questions on Unit 25. The free CAIIB demo opens Units 1–2 of every paper with full explanations; the BFM Online Mock Centre unlocks all 7,600+ BFM questions, the full-length papers with caselets and key-ins, module mocks and Smart Revision for 18 months (₹1,499).
Independent study aid — not affiliated with, endorsed by, or sponsored by the Indian Institute of Banking & Finance (IIBF). Exam pattern, dates, fees and passing criteria are set by IIBF — always confirm the current rules at iibf.org.in. CAIIB content follows rules and developments up to IIBF's cut-off of 30 June 2026 (where a rule changed later, the update box says so); verify from official sources before relying on them in practice.