Treasury functions in banks.ppt
- 2. Topics covered Structure of Treasury Treasury Products Concept of MTM A New Product – Currency Futures
- 3. REGULATORY STRUCTURE OF TREASURY 1 FRONT OFFICE (Dealing Room) Money and Fixed Income Dealings FX & Derivative Treasury Sales Equities 2 MID OFFICE (RISK) Identification, Measurement & Monitoring of Risk Counterparty, Product & Dealer Limits 3 BACK OFFICE (Administration) Settlement Reconciliation of Nostros Accounting
- 4. Structure of Treasury Treasury Front Office Front Office is responsible for deal execution in the market. Different dealers for different desks of treasury i.e. fixed income, forex and derivatives. Most Banks have main dealing room in Mumbai, however for forex and derivative sales , most Banks are coming up with regional dealing rooms.
- 5. Structure of Treasury Treasury Back Office Back office is responsible for settling the deal executed by the front office. Once a deal is executed by the dealers, back office of both the counterparties confirm the transactions to each other. On the settlement day, the transaction is settled by exchange of funds or securities.
- 6. Structure of Treasury Treasury Mid Office Mid office is responsible for ensuring adherence to the various tolerance limits specified by the Bank’s Management. These limits include VaR, stop loss limits, currency limits, broker limits etc. Mid office is also responsible for proper valuation of the entire portfolio. Considering its role, the mid office does not report to Head Treasury rather to Head of Risk Department.
- 7. TREASURY BILLS (T-Bill) Short-term instruments of GOI’s borrowing issued in the auctions at discount maturing in – 91, 182 and 364 day. CALL/NOTICE MONEY MARKET Primarily inter-bank market where banks borrow or lend to meet CRR requirement as well as other liquidity needs. Call Money is for 24 hours or one day and Notice Money is for 2 to 14 days. REPOS: It is a money market instrument. Repos involve sale of securities with an undertaking to repurchase after a specified period. It can be done only in securities as approved by RBI (TBs, Central/ State Govt. Dated secs.) COMMERCIAL PAPER (CP) CPs are issued by non-bank entities like manufacturing companies, NBFCs and primary dealers etc. in the form of promissory note. It is short term debt instrument for the minimum period of 7 days and maximum period of 1 year. The minimum size of CP must be Rs. 5 lakh and it may be issued in the multiples of Rs. 5 lakh. MONEY MARKET INTRUMENTS
- 8. CERTIFICATE OF DEPOSIT (CD) CDs are issued by Scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (Labs). They are allowed to issue CDs for a maturity period of 7 days to 1 year. The minimum size of CD is Rs. 1 lakh and in multiples of Rs. 1 lakh. COLLATERALISED BORROWING & LENDING OBLIGATIONS (CBLO) It is an obligation by the borrower to return the money borrowed at a specified future date. The underlying charge on securities held in custody (with CCIL) for the amount borrowed/lent. Features: Settlement of CBLO transactions fully guaranteed by CCIL. CBLO in electronic demat form not subjected to stamp duty. Traded at discount to face value. MONEY MARKET INTRUMENTS Contd… BACK
- 9. MARKET PARTICIPANTS ARBITRAGEURS SPECULATORS CENTRAL BANK HEDGERS
- 10. Treasury Products Merchant Flows (Cash, Tom & Spot) Forward Contracts Derivatives (Options, Swaps and combinations thereof) Treasury Advisory Services
- 11. Merchant Flows Simple Transactions involving inflow or outflow of foreign currency. Here income arises on account of conversion of rupee to any other currency or vice-versa. No limits required. Easy and fast income.
- 12. CASH (T) TOM (T + 1) SPOT (T + 2) FORWARDS (SPOT + N) SETTLEMENT CYCLE BACK
- 13. Forward Contracts Locking the exchange rate today for a future date. Forward rate = Spot rate (+/-) Premium/Discount. Simplest hedging tool. Forwards can be booked on the basis of genuine underlying only. Limits are required under FC node. Forward market is generally liquid up to one year. Here also we get easy and fast income.
- 14. Options An option is a financial contract in which the buyer of the option has the right, but not the obligation, to buy or sell an asset, at a fixed price, on / before a specified date. Buyer of the option always pays the premia. Seller of the option always receives the premia. Buyer of the option has limited loss (premia) but unlimited gains. Seller of the option has unlimited loss but limited gains (premia).
- 15. Option Types Call option An option to buy the underlying asset at a fixed rate on / before a specified future date Put option An option to sell the underlying asset at a fixed rate on / before a specified future date. Buy Call Option Sell Call option Buy Put option Sell Put Option
- 16. Pay Off Diagrams Buying a call option Call Strike X-axis: Price of the underlying asset, Y-axis: Gain/Loss.
- 17. Pay Off Diagrams Selling a call option Call Strike X-axis: Price of the underlying asset, Y-axis: Gain/Loss.
- 18. Pay Off Diagrams Buying a Put option Put Strike X-axis: Price of the underlying asset, Y-axis: Gain/Loss.
- 19. Pay Off Diagrams Selling a Put Option Put Strike X-axis: Price of the underlying asset, Y-axis: Gain/Loss.
- 20. Indicative option pricing Notional USD 1 million Spot reference 46.20 Maturity Date 03.11.10 Settlement date 08.11.10 Case I Client to buy USD Call INR Put at a strike of 47.50 Cost: INR 6,00,000
- 21. Indicative option pricing Case II Client to buy USD Call INR Put at a strike of 47.50 Client to sell USD Call INR Put at a strike of 50.00 Cost: INR 4,00,000 Case III Client to buy USD Call INR Put at a strike of 47.50 Client to sell USD Call INR Put at a strike of 50.00 Client to sell USD Put INR Call at a strike of 44.00 Cost: INR 3,50,000
- 22. Swaps Swap is a derivative instrument used to hedge certain risks or to speculate on the basis of some expectations. Most swaps are OTC products and are tailor made as per requirements of the counterparties. Swaps can broadly be classified into following types: Interest Rate Swaps Currency Swaps
- 23. Swaps Swaps we generally enter into: USD IRS: Swapping the floating USD interest rates to fixed. POS: Principal only swap COS: Coupon only swap CCS: Cross currency swap IRS: Interest rate swap on rupee. (Mibor swap) and others as per the requirement of the customer.
- 24. Interest Rate Swap Suppose a Corporate is having a Dollar loan of USD 10 mio having repayment of 2 mio every year end. Cost of Loan : 6 months Libor + 110 bps, LIBOR reset every 6 months at the beginning of the interest period. (Interest to be paid on outstanding USD notional.) We can convert this fixed rate loan into floating rate @ 2.7% (say) Its just similar to converting a floating rate Housing loan into a fixed rate Housing Loan.
- 25. USDINR POS A POS is an exchange of principal in two currencies on specific dates with an exchange of fixed interest payments in the two currencies on specific dates.
- 26. Derivatives : Classic case Trade Date March 27 , 2008. Delivery Date March 31, 2010. Notional : USD 8 mio Imports , Spot Ref : 99 ABC to Sell USD Put JPY Call option for USD 8 mio at strike of 130, European KI @ 90 and American KO @ 112 ABC to Buy USD Call JPY Put Option for USD 4 mio at strike of 130. American KI @ 90 ABC to Buy double one touch on USDJPY @ 98.5 & 99.5, with a payout of USD 1 mio to be paid to ABC on hit.
- 27. PCFC Pricing PCFC is given out of EEFC and FCNR deposits. One can resort to INR/USD swap to make USD funds available in the form of PCFC. Availability of funds has to be checked with Treasury. RBI rate ceilings: Upto 6 months : 6 months LIBOR + 200 bps On Rollover : 6 months LIBOR + 400 bps (upto 12 months)
- 28. Thank You.