Introduction to treasury in banking
- 1. Introduction to Treasury in Banking by : Albertina Dwita Harliani
- 2. ❖Introduction to Treasury ❖Treasury Business ❖Treasury Products ❖Market Analysis ❖Code of Conduct ❖Bourse Games ❖Risks in Treasury ❖Closing Training Agenda
- 3. Balance Sheet Management Liquidity Management Currency & Interest Rate Risk Management Regulatory & Legal Compliance Market Risk, Credit Risk, OperationalRisk Intro to Treasury
- 5. Perfect Market ¥ Not a physical market where buyer and sellers meet ¥ Interconnected by 2 way real-time network (RMDS, Phone, Telex) ¥ Real-time Information (Reuters, Dow Jones, Bloomberg, etc) ¥ 24hr international trading continuously except Sat-Sun and holidays
- 7. Types of Financial Markets ❖ Foreign Exchange Market (>US$ 4T/day) ❖ Money Market (>US$ 2T/day) ❖ Capital Market (>US$ 0.12B/Qtr)
- 8. Treasury Equipment ❖ Tempus Calendar ❖ Thomson Reuters Dealing Terminal ❖ Bloomberg News Terminal ❖ World Time
- 10. 1970s ……..2000s Dealers & Money Brokers
- 11. ALM FI MM Deriv- atives FX Treasury Products Spot, Forward, Swap Bonds / IOU Borrow / Lend Option, IRS,CCS
- 12. Currency Market Developments ❖The Gold Standard ❖Development after World War I ❖Bretton Woods Agreement - 1944 ❖Fixed Parity Systems & 1960 Developments ❖1971 Smithsonian Agreement - Wider bands ❖1972 Free-floating Currencies ❖European Monetary System - EMS ❖Introduction to EMU – 1999 ❖Indonesia free-floating IDR – 1997….
- 13. Foreign Exchange MARKETS PARTICIPANTS $ Central Banks $ Commercial Banks $ Portfolio/Fund Managers $ Exchanges $ Speculators $ Corporation $ Individuals $ Other Financial Institutions FX DEMAND € Commercial € Funding € Hedging € Investment € Individual € Market Making € OTHER ……….?
- 14. Factors to influence FX Market OFFICIAL FX Policies Restrictions TECHNICAL FACTORS Charts Historical Movements MARKET SENTIMENTS POLITICAL FACTORS Political Stability Political Statements FOREIGN EXCHANGE RATE
- 15. Value Dates in Treasury TRADE DATE - The day the transaction is agreed VALUE DATE - The day the settlement of currencies takes place SPOT VALUE - Two Working days after trade date FORWARD VALUE - Value Date beyond Spot Value Date DATE 23/7 24/7 25/7 26/7 1/8 25/10 VALUE TOD TOM SPOT FORWARD 1 WEEK/ SP 3 MONTH / SP SWAPO/N T/N S/N SWAP
- 16. Value Dates Chart ❖Spot ❖Forward Outright ❖Swap ❖Overnight ❖Tom Next ❖Spot Next ❖Forward Forward
- 17. Trading Terminology •Two-way Quotation : Quoter & Asker SQUARE = FLAT Bullish market Asker Offer/ Ask Yours/ Give/ Sell/ Lend Short/ Oversold Bearish Quoter Bid Mine/ Take/ Buy/ Borrow Long/ Overbought Bullish
- 18. Two way Quotation BIG FIGURE POINTS / PIPS 1 USD/JPY 103.55 103.6 BID ASK QUOTER + BUY USD - SELL USD - SELL JPY + BUY JPY ASKER - SELL USD + BUY USD + BUY JPY - SELL JPY Quote for USD/JPY = 103.55 1 week IDR BID ASK Quoter 5% 6% Borrow IDR 1wk @ 5% p.a Lend IDR 1wk @ 6% p.a Asker Lend IDR 1wk @ 5%p.a Borrow IDR 1wk @ 6% p.a
- 19. FX Quotation - Spot Deal • IDR 10 ? • Mine • Agree, please my USD to HSBC NY • Cfm thx n bibi • 13150/80 • Done, cfm at 13180 u buy USD 10 mio agst IDR val 21 July 2017 • My IDR through BI • Tx n bi Bank B BI Bank A
- 20. FX Cross Rates • Direct Quotation : 1unit USD as Base currency = X unit of Foreign currency. Example : 1 USD = … IDR 1 USD = … JPY 1 USD = … SGD 1 USD = … HKD • Indirect Quotation : 1 unit Foreign currency = X unit USD. Example : 1 EUR = … USD 1 GBP = … USD 1 AUD = … USD 1 NZD = … USD • Direct vs Direct Quotation : JPY = …..IDR ? • Indirect vs Direct Quotation : GBP = …. IDR ? • Indirect vs Indirect Quotation : AUD = …. EUR?
- 21. Forward Outright How’s Forward in MM ?
- 22. Forward FX Formula Forward FX Premium or Discount Formula : SPOT RATE x Interest Rate Differential x Days 360 x 100 What is the benefit of using Forward for business ? X & M
- 23. Swap – MM in FX • A swap is essentially two money market operations involving a borrowing in one currency and an investment in another. • However, it is booked as two foreign exchange transactions in which one currency is bought and sold simultaneously, but where the delivery dates for the two transactions are different SPOT DATE Borrow USD + Lend IDR - FORWARD DATE Return USD + Get Back IDR -
- 24. FX Swap SPOT DATE : + Buy USD - Sell IDR FORWARD DATE : - Sell USD + Buy IDR + •BID •OFFER •Sell USD Spot •Buy USD Spot •Buy USD Spot •Sell USD Spot Buy USD Forward •ASKER Buy USD Forward Sell USD Forward Sell USD Forward •QUOTER Characteristics of a Swap : 1. Buy or Sell one currency against a second currency value spot 2. Sell or Buy same currency against the other currency value forward 3. Amount of one of the currencies must be the same for both spot and forward 4. Transacted with the same counter party 5. Booked at the same time •BID
- 25. Foreign Exchange Analysis • Fundamentals : Leading and Lagging Indicators • Technical Analysis : Charts (Bar/line, Candle stick, Support, Resistance, MACD, RSI, Stochastics, Fibonacci, Ichimoku cloud, D- Mark Indicator)
- 26. Currency Analysis 1. Fundamental Analysis ❖Studies cause of market movements ❖Based on financial, economic, and political factors ❖Effective for medium to long term analysis (> 1 year) 2. Technical Analysis ❖ Studies on effect of market movements ❖ Base on historical price, volume and open interest ❖ Effective for short- term analysis (0-90 days)
- 27. Factors in Fundamental Analysis ❖ Inflation : GDP, CPI, PPI ❖ Unemployment Rate ❖ Money in Circulation ❖ FX Reserves ❖ Balance of Trade ❖ Non Farm Payroll ❖ Housing Starts ❖ Current Account (X – M) ❖ Durable Orders ❖ FOMC Minutes ❖ Initial Jobless Claims, etc
- 28. Technical Analysis • Line Chart • Bar Chart • Candle stick Chart • Point & Figure Chart
- 29. Bar Chart • The high, low, and last price for the specified time period are the basic inputs for a classical bar chartist. Open Close High Low BAR CHART :
- 30. Candle Chart : Type of chart which is not only depicts the high and low of the daily range, but also vividly portrays the relationship of the close with respect to the open.
- 31. Point & Figure Chart
- 32. Support & Resistance The ‘low’ and ‘high’ price level in charts Useful in : • Setting entry points for new positions, • Placing protective stop orders, • Determining if a price trend is present, and • Locating where the prevailing trend (if any) would change to neutral.
- 33. Code of Conduct in Dealing • My word is my bond • Out of premise dealing • Out of hours dealing • Gratuity, bribery • Forgery • Over limit policy • Rogue trading
- 34. • Excess Assets Covered by Deposit Creation • Inter bank borrowing • Foreign Exchange Swap – to create borrowing to meet current need(arbitrage) • Excess Liabilities Covered by Loan Creation • Inter bank Placement • Foreign Exchange Swaps – to create lending to meet current need(arbitrage) • Securities Purchase (currently only SBI) • Primary Responsibility To Manage The Balance Sheet • Excess Assets (Loans) compared to Liabilities (Deposits) = Liquidity Deficient • Excess Liabilities (Deposits) compared to Assets (Loans) = Liquidity Surplus Role of Money Market in a Bank
- 35. Role of MM – cont’d • Transfer Pricing is calculated daily • Based on onshore swap prices and MM rates for IDR, FOR USD based on offshore prices • Example: Assume USD spread 0.25% (25 bps), IDR 1.30% (130 bps) between bid and offer • IDR Time deposit for 1 month is 13%, Loan rate for IDR 1 month is 14.9842% • Derive from : (13% + cost reserve 0.6842% + spread 1.3%) • Purpose – To Define an equitable pricing method for lending and borrowing • End Result – Asset / Liabilities priced efficiently.
- 36. Arbitraging in Money Market & Forex Market • Example: 3 month swap USD/IDR : 168 - 180 points USD int rates 3.0% – 3.5% IDR int rates 7% - 8% Spot USD/IDR 13,200. ACTION: Sell Swap at 168 (B/S USD/IDR) COVER BY: Borrow IDR 3 mos at 8% Lend USD 3 mos at 3% Swap operation: B/S at 168, buy USD 1 mio at 13200 , sell 3 mos fwd USD 1 mio at 13368= ( 13200 + 168 ). GAIN : USD 1,000,000 * 168 pts = IDR 168 MIO
- 37. FX Dealing Simulation • Bourse Game Practice • Profit and Loss Calculation • Marked to Market Revaluation • Leave Order
- 38. Interest Rate Swap An IRS (Vanilla Swap) is an agreement between two parties under which each agrees to make periodic interest payments to the other for an agreed period of time, based upon a notional amount. Typically one party pays a fixed interest rate, while the other party pays a floating interest rate based on a published index (e.g. USD LIBOR, IDR TD3m, JIBOR, SBI, etc )and both fixed and floating rate payments are in the same currency.
- 39. IRS FLOW Corp Bkg Floating Rate US$ Loan PT ABC Treasury LIBOR 3M LIBOR 3M Fixed $ Rate
- 40. IRS ❖In this example, customer uses an IRS to manage its interest rate exposure on a floating rate borrowing. The borrowing cost is swapped from 3month LIBOR rate at 0.3% to 0.2854% fixed. ❖Although initially the borrowers face positive carry since LIBOR 3m is higher than the fixed interest cost. However, this positive carry may turn negative over time as floating rates change. The client must then compare the fixed rate and the floating rate expectations and their need against rising interest rates.
- 41. CROSS-CURRENCY SWAP A cross-currency swap is an agreement between two parties to exchange both principal and interest cash flows denominated in different currencies. In its most common form, the CCS is based on fixed rate flows in one (non-USD) currency against floating rate in payments in USD , but many other structures and currencies are possible. Usually, the principal amounts in each currency are exchanged at the start and end of the transaction.
- 42. CROSS-CURRENCY SWAP Corp Bkg LOAN $ LIBOR 3m+x% PT ABC $ LIBOR 3m+x% Treasury IDR JIBOR 3m + x% IDR JIBOR 3m+ x%
- 43. IRS USD 1-10yrs More volatile market since 2008, why ? Subprime Mortgage crisis and its effect to IRS market
- 44. Option ❖ A currency option is a contract that grants the buyer the right, but not the obligation, to buy or sell a specified currency at a specified exchange rate on or before a specified date. ❖ For this right, a premium is paid to the seller. ❖ Exercise rate ❖ Strike price ❖ Expiry Date
- 45. Option Payoff
- 46. Option Payoff
- 48. Fixed Income ❖SBN ❖SUN ❖ORI ❖Low Corporate Bonds post 1998 crises
- 49. Risk in Treasury • Market Risk • Credit Risk • Operational Risk • Reputational Risk Other Risks in Banking : • Strategic • Business • Systemic • Legal
- 50. BI & OJK Regulation • IDR as NDF Currency (other NDF currency: MYR, KRW, INR, NTD, etc) • Underlying required for FX Transaction >USD 100K per month for customer • No overdraft USD & IDR for non-resident • KYC, AML • GWM • NOP • Basel 1,2,3 in Risk Management
- 51. Other Countries Regulation on FX deal • HKMA (Hong Kong Monetary Authority) • BNM (Bank Negara Malaysia) • MAS (Monetary Authority of Singapore) • Fed (The Federal Reserve) • ECB (European Central Bank) • BOJ, SNB, MAS, BOE, RBA
- 52. Trading failures – Case study • Bank Century • ING Baring • Bank Duta • Subprime Mortgage 2008 • Asian 1997 financial crisis • Bank EXIM to B.Mandiri