INDIAN INSTITUTE OF BANKING & FINANCE

1. INDIAN INSTITUTE OF BANKING & FINANCE Risk Management –Module C Treasury Management 26-04-2008 6-7.30 pm By C.S.BALAKRISHNAN chitturb@rediffmail.com

2. Syllabus Module C: Treasury Management: Treasury management; concepts and functions; instruments in the treasury market; development of new financial products; control and supervision of Treasury management; linkage of domestic operations with foreign operations. Asset-liability management; Interest rate risk; interest rate futures; stock options; debt instruments; bond portfolio strategy; risk control and hedging instruments. Investments – Treasury bills – Money markets instruments such as CDs, CPs, IBPs; Securitisation and Forfaiting; Refinance and rediscounting facilities.

3. Spot Trades-Settlement takes place two working days from the trade date. -TOM –Next Day -All exchange rates are qouted on the screen are for spot trade. • Forward-purchase or sale of currency on a future date.Forward exchange rates are arrived at on the basis of interest rate differentials of two currencies added or deducted from spot exchange rate.

4. Swap-The spot and forward transactions are the primary products in foreign exchange market.A combination of spot and forward transactions is called a swap. • Investment of Foreign Exchange Surpluses Treasury is responsible for investment of foreign exchange surpluses of a bank.The surpluses arise out of -Profits from treasury operations -Profits from overseas operations -Forex borrowings in overseas domestic market -Foreign currency and convertible rupee deposits with branches

5. Example Which of the following about a callable bond is true? a. Callable bonds always trade at a discount to non-callable bonds. b. Callable bonds expose issuers to the risk of reduced re-investment return. c. Callable bonds are actually variable tenor bonds. d. Callable bonds are not as liquid as non-callable bonds. Ans: c.

6. Treasury Products • Products of Foreign Exchange Market. -Most Liquid -Most Transparent -Virtual Market -It’s a near perfect market with efficient price discovery system.

7. ABC Bank enters into an Interest Rate Swap with XYZ Ltd on the following terms • In the above case, which of the following is correct in respect of net interest amount payable/receivable on 25th July 2008? • XYZ Ltd to pay Rs.986301******** • XYZ Ltd to receive Rs.986301 1000000000*90*.4 • ------------------------- • c)XYZ Ltd to pay Rs. 1972602 36500 • d) XYZh Ltd to receive Rs.1972602

8. General Ledger Balance of ABC Bank as on 12-10-2008 Rs. In 000’s

9. 1)Demand Liabilities in the above case works out to …………… • 631000****** • 638000 • 1238000 • None of the above

10. 2)Time Liabilities is equal to ……………………….. • 600000******** • 120000 • 127000 • None of the above

11. 3)Other demand and time Liabilities amounts to …………………… • 10000 • 17000 • 18000 • None of the above

12. 4)Which of the following is not an exempted category for the purpose of CRR calculation? • Credit Balances in ACU Dollar Accounts • CBLO • DTL in respect of OBUs • Staff Security Deposits ********

13. Which of the following can be included for DTL/NDTL computation • Amount received from DICGC Claims • Amount received from Insurance company on ad hoc settlement of claims • Amount received from the court receiver • Amount held as margin against LC*********

14. ABC IS A CORPORATE, WHOSE BANKER IS XYZ. ABC WILL IMPORT RAW MATERIAL WORTH USD.500000.00 IN THE MONTH OF JANUARY & PAYMENT IS TO BE MADE ON 31ST JANUARY,2008 ABC WANTS TO BOOK A FORWARD CONTRACT FOR THIS TRANSACTION : SPOT RATE OF USD : 39.32/33 PREMIUM UPTO 31ST JANUARY,2008 :RS.0.15 PAISE BANK WILL KEEP A MARGIN OF RS.0.03 PAISE BASED ON THE ABOVE, WHAT WILL BE THE RATE TO BE QUOTED TO ABC, BY XYZ : (A) RS. 39.50 (B) RS. 39.51 (C) RS.39.44 Answer : B (D) RS.39.48

15. The credit portfolio of ABC Bank has undergone a uniform downgrade as on 31-3- 2008 after an economic downturn. The position prior to the downgrade is given below:.The minimum capital required after downgrade is ………….. • 57.6 crores*********** • 58.6 crores • 60.6 crores • 52.6 crores

16. Working

17. Integrated Treasury • Integrated Treasury refers to integration of money market, securities market and foreign exchange operations. -Meeting reserve requirements -Efficient merchant services -Global cash management -Optimizing profit by exploiting market opportunities in forex market, money market and securities market -Risk management -Assisting bank management in ALM

18. Dealing settlement MIS

19. Treasury

20. Money Market • Certificate of Deposit (CD) • Commercial Paper (C.P) • Inter Bank Participation Certificates • Inter Bank term Money • Treasury Bills • Call Money

21. Certificate of Deposit • CDs are short-term borrowings BY BANKS in the form of Usance Promissory Notes having a maturity of not less than 7 days up to a maximum of one year. • CD is subject to payment of Stamp Duty under Indian Stamp Act, 1899 (Central Act)

22. Issued by all scheduled commercial banks except RRBs Minimum period 7 days Maximum period upto 1 year Minimum Amount Rs 1 lac and in multiples of Rs. 1 lac CDs are transferable by endorsement CRR & SLR are to be maintained CDs are to be stamped Features of CD

23. Commercial Paper • Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note by corporates/PDs/FIs • Who can issue Commercial Paper (CP) Highly rated corporate borrowers, primary dealers (PDs) and all-India financial institutions (FIs)

24. Eligibility for issue of CP • The tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; • The borrowal account of the company is classified as a Standard Asset by the financing bank/s.

25. Rating Requirement • All eligible participants should obtain the credit rating for issuance of Commercial Paper • Credit Rating Information Services of India Ltd. (CRISIL) • Investment Information and Credit Rating Agency of India Ltd. (ICRA) • Credit Analysis and Research Ltd. (CARE) • Duff & Phelps Credit Rating India Pvt. Ltd. (DCR India) • The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies

26. To whom issued CP is issued to individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs).

27. Maturity • CP can be issued for maturities between a minimum of 7 days and a maximum upto one year from the date of issue. • If the maturity date is a holiday, the company would be liable to make payment on the immediate preceding working day.

28. Meaning of Repo • It is a transaction in which two parties agree to sell and repurchase the same security. Under such an agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a price • The Repo/Reverse Repo transaction can only be done at Mumbai between parties approved by RBI and in securities as approved by RBI (Treasury Bills, Central/State Govt securities).

29. Repo • Uses of RepoIt helps banks to invest surplus cashIt helps investor achieve money market returns with sovereign risk. It helps borrower to raise funds at better ratesAn SLR surplus and CRR deficit bank can use the Repo deals as a convenient way of adjusting SLR/CRR positions simultaneously. RBI uses Repo and Reverse repo as instruments for liquidity adjustment in the system

30. Coupon rate and Yield The difference between coupon rate and yield arises because the market price of a security might be different from the face value of the security. Since coupon payments are calculated on the face value, the coupon rate is different from the implied yield.

31. Example • 10% Aug 2015 10 year Govt Bond • Face Value RS.1000 • Market Value Rs.1200 • In this case Coupon rate is 10% • Yield is 8.33% • 1000*10 • ----------= 8.33% • 1200

32. Call Money Market The call money market is an integral part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. The money that is lent for one day in this market is known as "Call Money", if it exceeds one day (but less than 15 days) it is referred to as "Notice Money".

33. Call Money Market Banks borrow in this market for the following purpose • To fill the gaps or temporary mismatches in funds • To meet the CRR & SLR mandatory requirements as stipulated by the Central bank • To meet sudden demand for funds arising out of large outflows.

34. Factors influencing interest rates The factors which govern the interest rates are mostly economy related and are commonly referred to as macroeconomic factors. Some of these factors are: 1) Demand for money 2) Government borrowings 3) Supply of money 4) Inflation rate 5) The Reserve Bank of India and the Government policies determine some of the variables mentioned above.

35. Gilt edged securities The term government securities encompass all Bonds & T-bills issued by the Central Government, and state governments. These securities are normally referred to, as "gilt-edged" as repayments of principal as well as interest are totally secured by sovereign guarantee.

36. Treasury Bills Treasury bills, commonly referred to as T-Bills are issued by Government of India against their short term borrowing requirements with maturities ranging between 14 to 364 days. All these are issued at a discount-to-face value. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of it's tenure at Rs. 100.00.

37. Who can invest in T-Bill Banks, Primary Dealers, State Governments, Provident Funds, Financial Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs & OCBs can invest in T-Bills.

38. What is auction of Securities Auction is a process of calling of bids with an objective of arriving at the market price. It is basically a price discovery mechanism

39. Yield of Treasury Bill • Y= (100-P)*365*100 • ----------------------- • P*D • Y = Yield • P= Price • D =Days to maturity

40. Example • 91 days treasury bills maturing on 6-12-2008 • Purchased on 12-10-2008 Rate quoted is Rs.99.1489 per Rs100 (100-99.1489)*365*100= 31065.15 ---------------------------- (99.1489*55 days) =5453.18 =5.70%

41. Debenture • A Debenture is a debt security issued by a company (called the Issuer), which offers to pay interest in lieu of the money borrowed for a certain period. • These are long-term debt instruments issued by private sector companies. These are issued in denominations as low as Rs 1000 and have maturities ranging between one and ten years.

42. Difference between debenture and bond Long-term debt securities issued by the Government of India or any of the State Government’s or undertakings owned by them or by development financial institutions are called as bonds. Instruments issued by other entities are called debentures.

43. Current yield This is the yield or return derived by the investor on purchase of the instrument (yield related to purchase price) It is calculated by dividing the coupon rate by the purchase price of the debenture. For e. g: If an investor buys a 10% Rs 100 debenture of ABC company at Rs 90, his current Yield on the instrument would be computed as: Current Yield = (10%*100)/90 X 100 , That is 11.11% p.a.

44. Primary Dealers Primary Dealers can be referred to as Merchant Bankers to Government of India, comprising the first tier of the government securities market. These were formed during the year 1994-96 to strengthen the market infrastructure

45. What role do Primary Dealers play? The role of Primary Dealers is to; (i) commit participation as Principals in Government of India issues through bidding in auctions (ii) provide underwriting services (iii) offer firm buy - sell / bid ask quotes for T-Bills & dated securities (v) Development of Secondary Debt Market

46. OMO OMO or Open Market Operations is a market regulating mechanism often resorted to by Reserve Bank of India. Under OMO Operations Reserve Bank of India as a market regulator keeps buying or/and selling securities through it's open market window. It's decision to sell or/and buy securities is influenced by factors such as overall liquidity in the system,

47. YIELD CURVE • The relationship between time and yield on a homogenous risk class of securities is called the Yield Curve. The relationship represents the time value of money - showing that people would demand a positive rate of return on the money they are willing to part today for a payback into the future

48. SHAPE OF YIELD CURVE A yield curve can be positive, neutral or flat. A positive yield curve, which is most natural, is when the slope of the curve is positive, i.e. the yield at the longer end is higher than that at the shorter end of the time axis. This results, as people demand higher compensation for parting their money for a longer time into the future. A neutral yield curve is that which has a zero slope, i.e. is flat across time. T his occurs when people are willing to accept more or less the same returns across maturities. The negative yield curve (also called an inverted yield curve) is one of which the slope is negative, i.e. the long term yield is lower than the short term yield

49. Shape of Yield curve

50. LIBOR • LIBOR stands for the London Interbank Offered Rate and is the rate of interest at which banks borrow funds from other banks, in marketable size, in the London interbank market. • LIBOR is the most widely used "benchmark" or reference rate for short term interest rates. It is compiled by the British Bankers Association as a free service and released to the market at about 11.00[London time] each day.