Risk Management & Treasury Management

8/6/2019 Risk Management & Treasury Management

1/90

INDIAN INSTITUTE OF BANKING &INDIAN INSTITUTE OF BANKING &FINANCEFINANCE

CAIIBCAIIB--Risk ManagementRisk ManagementTreasury ManagementTreasury Management Module CModule C

21/11/2008 621/11/2008 6- -7.30 pm7.30 pm

ByByC.S.BALAKRISHNANC.S.BALAKRISHNAN

[email protected]@rediffmail.com


2/90

SyllabusSyllabusModule C: Treasury ManagementModule C: Treasury Management ::Treasury managementTreasury management ; concepts and functions; instruments in; concepts and functions; instruments in

thethetreasury market; development of new financial products; controltreasury market; development of new financial products; control

and supervision of Treasury management; linkage of domesticand supervision of Treasury management; linkage of domesticoperations with foreign operations.operations with foreign operations.AssetAsset- -liability managementliability management ; Interest rate risk; interest rate futures;; Interest rate risk; interest rate futures;stock options; debt instruments; bond portfolio strategy; riskstock options; debt instruments; bond portfolio strategy; riskcontrol and hedging instruments.control and hedging instruments.InvestmentsInvestments Treasury billsTreasury bills M oney markets instruments suchM oney markets instruments suchas CDs, CPs, IBPs; Securitisation and Forfaiting; Refinance andas CDs, CPs, IBPs; Securitisation and Forfaiting; Refinance andrediscounting facilities.rediscounting facilities.


3/90

Spot TradesSpot Trades- -Settlement takes place twoSettlement takes place twoworking days from the trade date.working days from the trade date.

--TOM TOM Next DayNext Day--All exchange rates are qouted on the screen All exchange rates are qouted on the screenare for spot trade.are for spot trade.

ForwardForward--purchase or sale of currency on apurchase or sale of currency on afuture date.Forward exchange rates arefuture date.Forward exchange rates arearrived at on the basis of interest ratearrived at on the basis of interest rate

differentials of two currencies added or differentials of two currencies added or deducted from spot exchange rate.deducted from spot exchange rate.


4/90

SwapSwap--The spot and forward transactions are theThe spot and forward transactions are theprimary products in foreign exchange market.Aprimary products in foreign exchange market.A

combination of spot and forward transactions iscombination of spot and forward transactions iscalled a swap.called a swap.Investment of Foreign Exchange SurplusesInvestment of Foreign Exchange SurplusesTreasury is responsible for investment of foreignTreasury is responsible for investment of foreign

exchange surpluses of a bank.The surpluses ariseexchange surpluses of a bank.The surpluses ariseout of out of --Profits from treasury operationsProfits from treasury operations--Profits from overseas operationsProfits from overseas operations

--Forex borrowings in overseas domesticForex borrowings in overseas domesticmarketmarket

--Foreign currency and convertible rupee depositsForeign currency and convertible rupee depositswith brancheswith branches


5/90

ExampleExampleWhich of the following about a callable bond istrue?a. Callable bonds always trade at a discount to non-callable bonds.

b. Callable bonds expose issuers to the risk of reducedre-investment return.

c. Callable bonds are actually variable tenor bonds.d. Callable bonds are not as liquid as non-callable

bonds.

Ans: c .


6/90

Treasury ProductsTreasury Products

Products of Foreign Exchange M arket.Products of Foreign Exchange M arket.--M ost LiquidM ost Liquid

--M ost TransparentM ost Transparent--Virtual M arketVirtual M arket

--Its a near perfect market with efficient priceIts a near perfect market with efficient pricediscovery system.discovery system.


7/90

ABC Bank enters into an Interest Rate Swap with XYZ Ltd on thefollowing terms

Principal AmountPrincipal Amount Rs. 100croresRs. 100croresCorporate to PayCorporate to Pay 6.50% Fixed6.50% FixedCorporate to ReceiveCorporate to Receive 3 month NSE M IBOR3 month NSE M IBORStart dateStart date 2525--44--0808

Tenor Tenor 6 months6 monthsTermination dateTermination date 2525--1010--0808Interest Payment DatesInterest Payment Dates 25 25 thth July & 25July & 25 thth OctOctFirst FixingFirst Fixing 6.10%6.10%

In the above case, which of the following is correct in respect of netinterest amount payable/receivable on 25 th July 2008 ?a) XYZ Ltd to pay Rs.986301********b) XYZ Ltd to receive Rs.986301 1000000000*90*.4

-------------------------c)XYZ Ltd to pay Rs. 1972602 36500d) XYZh Ltd to receive Rs.1972602


8/90

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

LiabilitiesRs Assets Rs

Paid up capital 10,000 Building 10000

Current Account180,000

Car 20000

SB

450,000

Cash Credit 1000000

Fixed Deposit 600,000 Term Loan 800000

Interest accrued 10000

M argin on LCs2,000

Suspense Account 10000

TT Payable1,000

Branch Adjustment Account

20000

CBLO(ColaterisedBorrowing & LendingObligations)

600,000

ECGC Claims7,000

18 60


9/90

1)D emand Liabilities in the above caseworks out to

a ) 631000******b ) 638000c) 1238000

d ) None of the above


10/90

2)T ime Liabilities is equal to

a ) 600000********b ) 120000c) 127000d ) None of the above


11/90

3)O ther demandand time

Liabilitiesamounts to

a) 10000 b) 17000c) 18000d) None of the

above


12/90

4)Which of the following is not anexempted category for the

purpose of CRR calculation?a ) Credit Balances in ACU Dollar

Accountsb ) CBLOc) DT L in respect of OBUsd )S taff Security Deposits ********


13/90

Which of the following can be

included for DT L/ NDT Lcomputation

a. Amount received fromDI CGC Claims

b. Amount received fromInsurance company on adhoc settlement of claims

c. Amount received from thecourt receiver

d. Amount held as margin

against LC *********


14/90

ABC IS A CORPOR ATE, WHO SE BANKE R IS XYZ.ABC W ILL IM POR T R AW MATE R IA L WOR T HUSD .500000 .00 IN T H E M O NT H OF J AN UARY &PAYMENT IS T O B E MADE O N 31ST J AN UARY ,2008ABC W ANTS T O BOO K A FORW AR D CO NT R AC T FOR T H IS T R ANSA C TI O N :

SPO T R ATE OF U SD : 39 .32 /33PR EMI UM UP T O 31ST J AN UARY ,2008 :R S.0.15 PAISEBANK W ILL KEE P A MA RG IN OF R S.0 .03 PAISEBASED O N T H E ABOV E, WH AT W ILL B E T H E R ATET O B E QUO TED T O ABC , BY XYZ :(A) R S. 39 .50(B ) R S. 39 .51(C ) R S.39 .44 Answer : B(D) R S.39 .4 8


15/90

T he credit portfolio of ABC Bank has undergonea uniform downgrade as on 31-3- 2008after an economic downturn. T he position prior to the downgrade is given below:. T he minimum capital required after downgrade is ..

Rating Scale Risk Weight (%) ExposureRs. In crores

Extent of downgrade

AAA 20 200 20 %

AA 50 200 20 %

A 50 100 20 %

BBB 100 200 20 %BB& Below 150 100

800

Minimum capitalunder Basel II

Rs.48.60 crores

a)52.38 crores*********** b)58.6 croresc)60.6 croresd)52.6 crores


16/90

W orkingRatingScale

RiskWeight

Exposure

RWABeforedowngrade

Exposur e after Downgrade

RWA AFTERDOWNGRADE

AAA 20% 200 40 160 32

AA 50% 200 100 200 100

A 50% 100 50 120 60

BBB 100% 200 200 180 180

BB &below

150% 100 150 140 210

540 582


17/90

Integrated TreasuryIntegrated Treasury

Integrated Treasury refers to integration of moneyIntegrated Treasury refers to integration of moneymarket, securities market and foreign exchangemarket, securities market and foreign exchangeoperations.operations.

--M eeting reserve requirementsM eeting reserve requirements--Efficient merchant servicesEfficient merchant services--Global cash managementGlobal cash management--Optimizing profit by exploiting marketOptimizing profit by exploiting marketopportunities in forex market, money market andopportunities in forex market, money market andsecurities marketsecurities market--Risk managementRisk management--Assisting bank management in AL M Assisting bank management in AL M


18/90

FRONT OFFICE

BACK OFFICEM ID OFFICE

Dealing

M ISsettlement


19/90

TreasuryTreasury


20/90

M oney M arketM oney M arket

Certificate of Deposit (CD)Certificate of Deposit (CD)Commercial Paper (C.P)Commercial Paper (C.P)

Inter Bank Participation CertificatesInter Bank Participation CertificatesInter Bank term M oneyInter Bank term M oneyTreasury BillsTreasury Bills

Call M oneyCall M oney


21/90

Certificate of DepositCertificate of Deposit

CDs are shortCDs are short- -term borrowings BY BANKSterm borrowings BY BANKSin the form of Usance Promissory Notesin the form of Usance Promissory Notes

having a maturity of not less than 7 days uphaving a maturity of not less than 7 days upto a maximum of one year.to a maximum of one year.CD is subject to payment of Stamp DutyCD is subject to payment of Stamp Dutyunder Indian Stamp Act, 1899 (Central Act)under Indian Stamp Act, 1899 (Central Act)


22/90

Features of CDFeatures of CDIssued by all scheduled commercial banksIssued by all scheduled commercial banksexcept RRBsexcept RRBsM inimum period 7 daysM inimum period 7 daysM aximum period upto 1 year M aximum period upto 1 year M inimum Amount Rs 1 lac and in multiplesM inimum Amount Rs 1 lac and in multiplesof Rs. 1 lacof Rs. 1 lac

CDs are transferable by endorsementCDs are transferable by endorsementCRR & SLR are to be maintainedCRR & SLR are to be maintainedCDs are to be stampedCDs are to be stamped


23/90

Commercial Paper Commercial Paper Commercial Paper (CP) is anCommercial Paper (CP) is anunsecured money marketunsecured money marketinstrument issued in the form of ainstrument issued in the form of apromissory note bypromissory note bycorporates/PDs/FIscorporates/PDs/FIs

Who can issue CommercialWho can issue CommercialPaper (CP)Paper (CP)H ighly rated corporate borrowers,H ighly rated corporate borrowers,primary dealers (PDs) and allprimary dealers (PDs) and all- -


24/90

Eligibility for issue of CPEligibility for issue of CP

a)a) The tangible net worth of the company,The tangible net worth of the company,

as per the latest audited balance sheet,as per the latest audited balance sheet,is not less than Rs. 4 crore;is not less than Rs. 4 crore;b)b) The borrowal account of the company isThe borrowal account of the company is

classified as a Standard Asset by theclassified as a Standard Asset by thefinancing bank/s.financing bank/s.


25/90

Rating RequirementRating Requirement All eligible participants should obtain the credit rating for All eligible participants should obtain the credit rating for issuance of Commercial Paper issuance of Commercial Paper Credit Rating Information Services of India Ltd. (CRISIL)Credit Rating Information Services of India Ltd. (CRISIL)

Investment Information and Credit Rating Agency of IndiaInvestment Information and Credit Rating Agency of IndiaLtd. (ICRA)Ltd. (ICRA)Credit Analysis and Research Ltd. (CARE)Credit Analysis and Research Ltd. (CARE)Duff & Phelps Credit Rating India Pvt. Ltd. (DCR India)Duff & Phelps Credit Rating India Pvt. Ltd. (DCR India)

The minimum credit rating shall be PThe minimum credit rating shall be P- -2 of 2 of CRISIL or such equivalent rating by other CRISIL or such equivalent rating by other agenciesagencies


26/90

To whom issuedTo whom issued

CP is issued to individuals, bankingCP is issued to individuals, bankingcompanies, other corporate bodiescompanies, other corporate bodies

registered or incorporated in India andregistered or incorporated in India andunincorporated bodies, Nonunincorporated bodies, Non- -ResidentResidentIndians (NRIs) and Foreign InstitutionalIndians (NRIs) and Foreign InstitutionalInvestors (FIIs).Investors (FIIs).


27/90

M aturityM aturity

CP can be issued for maturities between aCP can be issued for maturities between aminimum of 7 days and a maximum uptominimum of 7 days and a maximum upto

one year from the date of issue.one year from the date of issue.If the maturity date is a holiday, theIf the maturity date is a holiday, thecompany would be liable to make paymentcompany would be liable to make paymenton the immediate preceding working day.on the immediate preceding working day.


28/90

M eaning of RepoM eaning of Repo

It is a transaction in which two parties agree to sellIt is a transaction in which two parties agree to selland repurchase the same security. Under such anand repurchase the same security. Under such anagreement the seller sells specified securities withagreement the seller sells specified securities with

an agreement to repurchase the same at aan agreement to repurchase the same at amutually decided future date and a pricemutually decided future date and a priceThe Repo/Reverse Repo transaction can only beThe Repo/Reverse Repo transaction can only bedone at M umbai between parties approved by RBIdone at M umbai between parties approved by RBI

and in securities as approved by RBI (Treasuryand in securities as approved by RBI (TreasuryBills, Central/State Govt securities).Bills, Central/State Govt securities).


29/90

RepoRepo

U ses of RepoU ses of RepoIt helps banks to invest surplus cashIt helps banks to invest surplus cashIt helps investor achieve money market returnsIt helps investor achieve money market returnswith sovereign risk.with sovereign risk.It helps borrower to raise funds at better ratesIt helps borrower to raise funds at better rates

An SLR surplus and CRR deficit bank can use the An SLR surplus and CRR deficit bank can use theRepo deals as a convenient way of adjustingRepo deals as a convenient way of adjustingSLR/CRR positions simultaneously.SLR/CRR positions simultaneously.RBI uses Repo and Reverse repo as instrumentsRBI uses Repo and Reverse repo as instrumentsfor liquidity adjustment in the systemfor liquidity adjustment in the system


30/90

Coupon rate and YieldCoupon rate and Yield

The difference between coupon rate andThe difference between coupon rate andyield arises because the market price of ayield arises because the market price of a

security might be different from the facesecurity might be different from the facevalue of the security. Since couponvalue of the security. Since couponpayments are calculated on the face value,payments are calculated on the face value,the coupon rate is different from the impliedthe coupon rate is different from the impliedyield.yield.


31/90

ExampleExample

10% Aug 2015 10 year Govt Bond10% Aug 2015 10 year Govt BondFace Value RS.1000Face Value RS.1000M

arket Value Rs.1200M

arket Value Rs.1200In this case Coupon rate is 10%In this case Coupon rate is 10%Yield is 8.33%Yield is 8.33%1000*101000*10--------------------= 8.33%= 8.33%12001200


32/90

Call M oney M arketCall M oney M arket

The call money market is an integral part of The call money market is an integral part of the Indian M oney M arket, where the daythe Indian M oney M arket, where the day- -toto--

day surplus funds (mostly of banks) areday surplus funds (mostly of banks) aretraded.traded.The money that is lent for one day in thisThe money that is lent for one day in this

market is known as "market is known as " Call Money Call Money ",",if it exceeds one day (but less than 15 days)if it exceeds one day (but less than 15 days)it is referred to as "it is referred to as " Notice Money Notice Money ".".


33/90

Call M oney M arketCall M oney M arket

Banks borrow in this market for theBanks borrow in this market for thefollowing purposefollowing purpose

To fill the gaps or temporary mismatches inTo fill the gaps or temporary mismatches infundsfundsTo meet the CRR & SLR mandatoryTo meet the CRR & SLR mandatoryrequirements as stipulated by the Centralrequirements as stipulated by the CentralbankbankTo meet sudden demand for funds arisingTo meet sudden demand for funds arisingout of large outflows.out of large outflows.


34/90

Factors influencing interest ratesFactors influencing interest rates

The factors which govern the interest rates areThe factors which govern the interest rates aremostly economy related and are commonlymostly economy related and are commonlyreferred to asreferred to as macroeconomic factorsmacroeconomic factors. Some of . Some of

these factors are:these factors are:1)1) Demand for moneyDemand for money2)2) Government borrowingsGovernment borrowings3)3) Supply of moneySupply of money4)4) Inflation rateInflation rate5)5) The Reserve Bank of India and the GovernmentThe Reserve Bank of India and the Government

policies determine some of the variablespolicies determine some of the variablesmentioned above.mentioned above.


35/90

Gilt edged securitiesGilt edged securities

The term government securities encompassThe term government securities encompassall Bonds & Tall Bonds & T--bills issued by the Centralbills issued by the CentralGovernment, and state governments. TheseGovernment, and state governments. Thesesecurities are normally referred to, as "giltsecurities are normally referred to, as "gilt- -edged" as repayments of principal as welledged" as repayments of principal as wellas interest are totally secured by sovereignas interest are totally secured by sovereignguarantee.guarantee.


36/90

Treasury BillsTreasury Bills

Treasury bills, commonly referred to as TTreasury bills, commonly referred to as T- -Bills are issued by Government of IndiaBills are issued by Government of India

against their short term borrowingagainst their short term borrowingrequirements with maturities rangingrequirements with maturities rangingbetween 14 to 364 days.between 14 to 364 days.

All these are issued at a discount All these are issued at a discount- -toto--facefacevalue. For example a Treasury bill of Rs.value. For example a Treasury bill of Rs.100.00 face value issued for Rs. 91.50 gets100.00 face value issued for Rs. 91.50 getsredeemed at the end of it's tenure at Rs.redeemed at the end of it's tenure at Rs.

100.00.100.00.


37/90

Who can invest in TWho can invest in T- -BillBill

Banks, Primary Dealers, State Governments,Banks, Primary Dealers, State Governments,

Provident Funds, Financial Institutions,Provident Funds, Financial Institutions,Insurance Companies, NBFCs, FIIs (as per Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs & OCBs can investprescribed norms), NRIs & OCBs can investin Tin T--Bills.Bills.


38/90

What is auction of SecuritiesWhat is auction of Securities

Auction is a process of calling of bids with Auction is a process of calling of bids withan objective of arriving at the market price. Itan objective of arriving at the market price. It

is basically a price discovery mechanismis basically a price discovery mechanism


39/90

Yield of Treasury BillYield of Treasury Bill

Y= (100Y= (100--P)*365*100P)*365*100----------------------------------------------

P*DP*DY = YieldY = YieldP= PriceP= Price

D =Days to maturityD =Days to maturity


40/90

ExampleExample

91 days treasury bills maturing on 691 days treasury bills maturing on 6- -1212--20082008

Purchased on 12Purchased on 12- -1010--2008 Rate2008 Ratequoted is Rs.99.1489 per Rs100quoted is Rs.99.1489 per Rs100

(100(100--99.1489)*365*100= 31065.1599.1489)*365*100= 31065.15--------------------------------------------------------

(99.1489*55 days) =5453.18(99.1489*55 days) =5453.18

=5.70%=5.70%


41/90

DebentureDebenture

A Debenture is a debt security issued by a A Debenture is a debt security issued by acompany (called the Issuer), which offers tocompany (called the Issuer), which offers topay interest in lieu of the money borrowedpay interest in lieu of the money borrowedfor a certain period.for a certain period.These are longThese are long- -term debt instrumentsterm debt instrumentsissued by private sector companies. Theseissued by private sector companies. These

are issued in denominations as low as Rsare issued in denominations as low as Rs1000 and have maturities ranging between1000 and have maturities ranging betweenone and ten years.one and ten years.


42/90

Difference between debentureDifference between debenture

and bondand bondLongLong--term debt securities issued by theterm debt securities issued by theGovernment of India or any of the StateGovernment of India or any of the State

Governments or undertakings owned byGovernments or undertakings owned bythem or by development financial institutionsthem or by development financial institutionsare called as bonds. Instruments issued byare called as bonds. Instruments issued byother entities are called debentures.other entities are called debentures.


43/90

Current yieldCurrent yield

This is the yield or return derived by theThis is the yield or return derived by theinvestor on purchase of the instrument (yieldinvestor on purchase of the instrument (yield

related to purchase price)related to purchase price)It is calculated by dividing the coupon rateIt is calculated by dividing the coupon rateby the purchase price of the debenture. For by the purchase price of the debenture. For e. g: If an investor buys a 10% Rs 100e. g: If an investor buys a 10% Rs 100debenture of ABC company at Rs 90, hisdebenture of ABC company at Rs 90, hiscurrent Yield on the instrument would becurrent Yield on the instrument would becomputed as:computed as:Current Yield = (10%*100)/90 X 100 , ThatCurrent Yield = (10%*100)/90 X 100 , Thatis 11.11% p.a.is 11.11% p.a.


44/90

Primary DealersPrimary Dealers

Primary Dealers can be referred to asPrimary Dealers can be referred to asM erchant Bankers to Government of M erchant Bankers to Government of India, comprising the first tier of theIndia, comprising the first tier of thegovernment securities market. Thesegovernment securities market. These

were formed during the year 1994were formed during the year 1994- -9696to strengthen the market infrastructureto strengthen the market infrastructure


45/90

What role do Primary Dealers play?What role do Primary Dealers play?

The role of Primary Dealers is to;The role of Primary Dealers is to;(i) commit participation as Principals in(i) commit participation as Principals inGovernment of India issues through biddingGovernment of India issues through biddingin auctionsin auctions(ii) provide underwriting services(ii) provide underwriting services(iii) offer firm buy(iii) offer firm buy -- sell / bid ask quotes for sell / bid ask quotes for TT--Bills & dated securitiesBills & dated securities(v) Development of Secondary Debt M arket(v) Development of Secondary Debt M arket


46/90

OM OOM O

OM O or Open M arket Operations is aOM O or Open M arket Operations is amarket regulating mechanism often resortedmarket regulating mechanism often resortedto by Reserve Bank of India. Under O M Oto by Reserve Bank of India. Under O M OOperations Reserve Bank of India as aOperations Reserve Bank of India as amarket regulator keeps buying or/and sellingmarket regulator keeps buying or/and sellingsecurities through it's open market window.securities through it's open market window.It's decision to sell or/and buy securities isIt's decision to sell or/and buy securities isinfluenced by factors such as overall liquidityinfluenced by factors such as overall liquidityin the system,in the system,


47/90

YIELD CURVEYIELD CURVE

The relationship between time and yield onThe relationship between time and yield ona homogenous risk class of securities isa homogenous risk class of securities iscalled the Yield Curve. The relationshipcalled the Yield Curve. The relationshiprepresents the time value of moneyrepresents the time value of money - -showing that people would demand ashowing that people would demand a

positive rate of return on the money they arepositive rate of return on the money they arewilling to part today for a payback into thewilling to part today for a payback into thefuturefuture


48/90

S H APE OF YIELD CURVES H APE OF YIELD CURVEAA yieldyield curve can be positive, neutral or flat. Acurve can be positive, neutral or flat. Apositive yield curve, which is most natural, ispositive yield curve, which is most natural, iswhen the slope of the curve is positive, i.e. thewhen the slope of the curve is positive, i.e. theyield at the longer end is higher than that at theyield at the longer end is higher than that at the

shorter end of the time axis. This results, asshorter end of the time axis. This results, aspeople demand higher compensation for partingpeople demand higher compensation for partingtheir money for a longer time into the future.their money for a longer time into the future.

A neutral yield curve is that which has a zero slope, A neutral yield curve is that which has a zero slope,i.e. is flat across time. T his occurs when peoplei.e. is flat across time. T his occurs when peopleare willing to accept more or less the sameare willing to accept more or less the samereturns across maturities.returns across maturities.

The negative yield curve (also called an invertedThe negative yield curve (also called an invertedyield curve) is one of which the slope is negative,yield curve) is one of which the slope is negative,i.e. the long term yield is lower than the shorti.e. the long term yield is lower than the short


49/90

Shape of Yield curveShape of Yield curve


50/90

LIBORLIBOR

LIBOR stands for the London InterbankLIBOR stands for the London InterbankOffered Rate and is the rate of interest at whichOffered Rate and is the rate of interest at whichbanks borrow funds from other banks, inbanks borrow funds from other banks, inmarketable size, in the London interbankmarketable size, in the London interbankmarket.market.LIBOR is the most widely used "benchmark" or LIBOR is the most widely used "benchmark" or reference rate for short term interest rates. It isreference rate for short term interest rates. It iscompiled by the British Bankers Associationcompiled by the British Bankers Associationas a free service and released to the market atas a free service and released to the market atabout 11.00[London time] each day.about 11.00[London time] each day.


51/90

CRR & SLRCRR & SLR

CRR is at present prescribed at 5.5% of CRR is at present prescribed at 5.5% of demand and term liabilities (DTL) of the bank,demand and term liabilities (DTL) of the bank,respectively, under Reserve Bank of India Actrespectively, under Reserve Bank of India Actof 1934.of 1934.The minimum and maximum SLR areThe minimum and maximum SLR areprescribed at 25% and 40% of DTLprescribed at 25% and 40% of DTLrespectively, under Banking Regulation Act of respectively, under Banking Regulation Act of 1949.Present SLR is 24%.1949.Present SLR is 24%.The CRR and SLR are to be maintained onThe CRR and SLR are to be maintained onfortnightly basis.fortnightly basis.


52/90

Demand and Time LiabilitiesDemand and Time LiabilitiesM ain components of DTL are:M ain components of DTL are:

Demand deposits (held in current and savingsDemand deposits (held in current and savingsaccounts, margin money for LCs, overdue fixedaccounts, margin money for LCs, overdue fixed

deposits etc.)deposits etc.)Time deposits (in fixed deposits, recurringTime deposits (in fixed deposits, recurringdeposits, reinvestment deposits etc.)deposits, reinvestment deposits etc.)Overseas borrowingsOverseas borrowings

Foreign outward remittances in transit (FCForeign outward remittances in transit (FCliabilities net of FC assets)liabilities net of FC assets)Other demand and time liabilities (accruedOther demand and time liabilities (accruedinterest, credit balances in suspense account etc.interest, credit balances in suspense account etc.))


53/90

SLRSLR

SLR is to be maintained in the form of theSLR is to be maintained in the form of thefollowing assets:following assets:

Cash balances (excluding balancesCash balances (excluding balancesmaintained for CRR)maintained for CRR)Gold (valued at price not exceeding currentGold (valued at price not exceeding currentmarket price)market price)

Approved securities valued as per norms Approved securities valued as per normsprescribed by RBI.prescribed by RBI.


54/90

VaRVaRV alue at Risk ( V aR)V alue at Risk ( V aR) is the most probable loss thatis the most probable loss thatwe may incur in normal market conditions over awe may incur in normal market conditions over agiven period due to the volatility of a factor,given period due to the volatility of a factor,

exchange rates, interest rates or commodityexchange rates, interest rates or commodityprices. The probability of loss is expressed as aprices. The probability of loss is expressed as apercentagepercentage VaR at 95% confidence level,VaR at 95% confidence level,implies a 5% probability of incurring the loss; atimplies a 5% probability of incurring the loss; at99% confidence level the VaR implies 1%99% confidence level the VaR implies 1%probability of the stated loss. The loss is generallyprobability of the stated loss. The loss is generallystated in absolute amounts for a given transactionstated in absolute amounts for a given transactionvalue (or value of a investment portfolio).value (or value of a investment portfolio).


55/90

VaRVaR

A V aR of Rs. 100,000 at 99% confidenceA V aR of Rs. 100,000 at 99% confidencelevel for one week for a investmentlevel for one week for a investmentportfolio of Rs. 10,000,000 similarlyportfolio of Rs. 10,000,000 similarlymeans that the market value of themeans that the market value of theportfolio is most likely to drop byportfolio is most likely to drop bymaximum Rs. 100,000 with 1%maximum Rs. 100,000 with 1%

probability over one week.probability over one week.


56/90

Exchange Rate QuotationExchange Rate QuotationExchange Quotations :Exchange Quotations :There are two methodsThere are two methods

Exchange rate is expressed as the price per unit of foreignExchange rate is expressed as the price per unit of foreigncurrency in terms of the home currency is known as thecurrency in terms of the home currency is known as theH ome currency quotation or Direct QuotationH ome currency quotation or Direct Quotation Exchange rate is expressed as the price per unit of homeExchange rate is expressed as the price per unit of homecurrency in terms of the foreign currency is known as thecurrency in terms of the foreign currency is known as theForeign Currency Quotation or Indirect QuotationForeign Currency Quotation or Indirect Quotation

Direct Quotation is used in New York and other foreignDirect Quotation is used in New York and other foreignexchange markets and Indirect Quotation is used inexchange markets and Indirect Quotation is used inLondon foreign exchange market.London foreign exchange market.


57/90

PrinciplesPrinciplesDirect Quotation: Buy Low, Sell High:Direct Quotation: Buy Low, Sell High:The prime motive of any trader is to make profit.The prime motive of any trader is to make profit.By purchasing the commodity at lower price andBy purchasing the commodity at lower price andselling it at a higher price a trader earns the profit.selling it at a higher price a trader earns the profit.In foreign exchange, the banker buys the foreignIn foreign exchange, the banker buys the foreigncurrency at a lesser price and sells it at a higher currency at a lesser price and sells it at a higher price.price.Indirect Quotation: Buy High, Sell Low:Indirect Quotation: Buy High, Sell Low:

A trader for a fixed amount of investment would A trader for a fixed amount of investment wouldacquire more units of the commodity when heacquire more units of the commodity when hepurchases and for the same amount he would partpurchases and for the same amount he would partwith lesser units of the commodity when he sells.with lesser units of the commodity when he sells.


58/90

Spot and ForwardSpot and Forward

TransactionsTransactions A Bank agrees to buy from B Bank USD A Bank agrees to buy from B Bank USD

100000. The actual exchange of currencies100000. The actual exchange of currenciesi.e. payment of rupees and receipt of USi.e. payment of rupees and receipt of USDollars, under the contract may take place :Dollars, under the contract may take place :on the same day or on the same day or two days later or two days later or some day later, say after a month.some day later, say after a month.


59/90

Interpretation of QuotationInterpretation of Quotation

The market quotation for a currency consistsThe market quotation for a currency consistsof the spot rate and the forward margin.of the spot rate and the forward margin.The outright forward rate has to beThe outright forward rate has to becalculated by loading the forward margincalculated by loading the forward margininto the spot rate. For example US Dollar isinto the spot rate. For example US Dollar isquoted as under in the inter quoted as under in the inter- -bank market onbank market ona given day as under :a given day as under :Spot 1 USD = Rs.44.1000/1300Spot 1 USD = Rs.44.1000/1300Spot/November 0200/0500Spot/November 0200/0500Spot/December 1500/1800Spot/December 1500/1800


60/90

TT Buying RateTT Buying Rate

TT Buying Rate (TT stands for TelegraphicTT Buying Rate (TT stands for TelegraphicTransfer)Transfer)This is the rate applied when the transactionThis is the rate applied when the transactiondoes not involve any delay in realization of thedoes not involve any delay in realization of theforeign exchange by the bank. In other words,foreign exchange by the bank. In other words,the nostro account of the bank would alreadythe nostro account of the bank would alreadyhave been credited. The rate is calculated byhave been credited. The rate is calculated bydeducting from the inter deducting from the inter- -bank buying rate thebank buying rate theexchange margin as determined by the Bank.exchange margin as determined by the Bank.


61/90

Bills Buying RateBills Buying Rate

This is the rate to be applied when a foreignThis is the rate to be applied when a foreignbill is purchased. When a bill is purchased,bill is purchased. When a bill is purchased,the proceeds will be realized by the Bankthe proceeds will be realized by the Bankafter the bill is presented to the drawee atafter the bill is presented to the drawee atthe overseas center. In the case of athe overseas center. In the case of ausance bill the proceeds will be realized onusance bill the proceeds will be realized on

the due date of the bill which includes thethe due date of the bill which includes thetransit period and the usance period of thetransit period and the usance period of thebill.bill.


62/90

ProblemProblem You would like to import machinery from U SA worth You would like to import machinery from U SA worth

U SD 100000U SD 100000to be payable to the overseas supplier on 31st Octto be payable to the overseas supplier on 31st Oct[a] Spot Rate U SD = Rs.45.8500/8600[a] Spot Rate U SD = Rs.45.8500/8600Forward PremiumForward PremiumSeptember 0.2950/3000September 0.2950/3000October 0.5400/5450October 0.5400/5450November 0.7600/7650November 0.7600/7650[b] exchange margin 0.125%[b] exchange margin 0.125%[c] Last two digits in multiples of nearest 25 paise[c] Last two digits in multiples of nearest 25 paise

Calculate the rate to be quoted by the bank ?Calculate the rate to be quoted by the bank ?


63/90

F ind out the CR OSS rate for GBP/AUD 5

Currency pair Bid Ask

GBP/USD 0.9891 0.9894 AUD/USD 1.2287 1.2289Ans : GBP/AUD 0.8049/0.80 52


64/90

SolutionSolutionThis is an example Forward Sale Contract .This is an example Forward Sale Contract .Inter Bank Spot Selling Rate Rs. 45.8600Inter Bank Spot Selling Rate Rs. 45.8600

Add Forward M argin .5450 Add Forward M argin .5450

----------------------------46.405046.4050 Add Exchange M argin .0580 Add Exchange M argin .0580

------------------------------

Forward Rate 46.4630Forward Rate 46.4630Rounded Off to multiple of 25 paiseRounded Off to multiple of 25 paiseRs.46.4625Rs.46.4625

Amount Payable to the bank Amount Payable to the bankRs.46,46,250Rs.46,46,250


65/90

SwapSwap

A swap agreement between two parties A swap agreement between two partiescommits each counterparty to exchange ancommits each counterparty to exchange anamount of funds, determined by a formula,amount of funds, determined by a formula,at regular intervals, until the swap expires.at regular intervals, until the swap expires.In the case of a currency swap, there is anIn the case of a currency swap, there is aninitial exchange of currency and a reverseinitial exchange of currency and a reverseexchange at maturity.exchange at maturity.


66/90

M echanicsM echanics

Firm A needs fixed rate loanFirm A needs fixed rate loan AAA rated AAA ratedFirm B needs floating rateFirm B needs floating rate - -A rated A rated

Firm A enjoys anFirm A enjoys an absolute advantageabsolute advantage ininboth credit markets.both credit markets.

11%9%

L IBOR +0.0%

L IBOR +1%

Firm A Firm B

Fixed-rate

financeFloating-

rate finance


67/90

M echanicsM echanicsSTEP !STEP !Firm A will borrow at Fixed rate 9%Firm A will borrow at Fixed rate 9%Firm B will borrow at floating rate (LIBOR +1)%Firm B will borrow at floating rate (LIBOR +1)%

STEP 2STEP 2Firm A will pay Floating rate [LIBOR] to Firm BFirm A will pay Floating rate [LIBOR] to Firm BFirm B will Pay Fixed rate [9.5%] onlyFirm B will Pay Fixed rate [9.5%] only

GainGainNet interest cost LIBORNet interest cost LIBOR- - .5%.5%Net Interest cost 9+[ 1%+0.5%]=10.5%Net Interest cost 9+[ 1%+0.5%]=10.5%


68/90

M echanicsM echanics

GainGain

A B

Borrows at9.0%fixed

for 7 years

Borrows atL IBOR + 1%

floatingfor 7 years

9.5%

L IBOR

Interest payments to eachother in years t 1 to t 7.


69/90

Which set of the following statements is true in respectof Commercial Paper (CP ):1, Commercial Paper (CP ) is an unsecured money market instrumentissued in the form of a promissory note2. CP can be issued by Corporate, primary dealers (PDs ) and the all-India financial institutions ( F Is) 3. A corporate would be eligible to issue CP provided the tangible net

worth of the company, as per the latest audited balance sheet, is notless than Rs.4 crore;4.. T he minimum credit rating shall be P-1 of CRI SIL or suchequivalent rating by other agencies.5. CP can be issued for maturities between a minimum of 7 days and a

maximum up to six months from the date of issue.6. Amount invested by a single investor should not be less than Rs.1 5 lakh .A.1,2 & 4B.1,2 & 3*****C.1,4 & 5

D.1,4 & 6


70/90

Which of the following is/are true in respect of Certificate of

Deposit?1. CDs can be issued by (i ) scheduled commercial banks excludingRegional Rural Banks (RRBs ) and Local Area Banks (LABs ); and (ii ) select all-India F inancial Institutions .2.. Minimum amount of a CD should be Rs. 5 lakh i.e., the minimumdeposit that could be accepted from a single subscriber should not beless than Rs. 5 lakh and in the multiples of Rs. 1 lakh thereafter.3. CDs can be issued to individuals, corporations, companies, trusts,funds, associations, etc.4.. T he maturity period of CDs issued by banks should be not less than 7days and not more than three years.

A . 1 & 2B. 1 & 3*******C 1 & 4D 2 & 3


71/90

Credit Risk M itigation

Borrower Borrower-- A Ltd A Ltd Borrower Borrower-- B LtdB Ltd

ExposureExposure Rs.100 croreRs.100 crore Rs.100 croreRs.100 croreM aturity of M aturity of exposure(years)exposure(years)

66 22

Nature of exposureNature of exposure CorporateCorporate CorporateCorporate

CurrencyCurrency USDUSD INRINR

Rating of ExposureRating of Exposure BBBBBB UNRATEDUNRATEDH aircut for exposureH aircut for exposure 12%12% 25%25%

Value of collateralValue of collateralafter haircutafter haircut

Rs.88croreRs.88crore Rs75 croreRs75 crore

Risk weightRisk weight 100%100% 100%100%

In the above case, the RWA for the net exposures of A & B under Basel II are ..A)Rs.24 crore and Rs 50 crore respectively********B)Rs.172.50 crore and Rs.53 crore respectivelyC)Rs.18 crore and Rs.12 crore respectivelyD)Rs.150 crore and Rs.75 crore respectively


72/90

A dealer has a $200 million open position. He finds that hisVaR for a one day period with a one percent probability is$1000,000.Which of the following is true?a) This means that the dealer can expect to lose at least $1000,000in any given day about one percent of the time, or in other words,2.5 times in a year (assuming 250 trading days).****

b)This means that the dealer can expect to lose at least $1000,000in any given day about 99 percent of the time, or in other words,247.5 times in a year (assuming 250 trading days).c) This means that the dealer can expect to lose at least $2,000,000in any given day about one percent of the time, or in other words,2.5 times in a year (assuming 250 trading days).d)This means that the dealer can expect to lose at least $ 4000,000in any given day about one percent of the time, or in other words,2.5 times in a year (assuming 250 trading days ).


73/90

Bank A enters into a Overnight Indexed Swap (OIS) with XYZ Ltd wherebyBank agrees to pay 7 days OIS at 6.25% for Rs.25 crores and receiveM IBOR Overnight Rate.

Actual M IBOR rates for 7 days are given below:

Day 1Day 1 6.15%6.15%

Day 2Day 2 6.05%6.05%

Day 3Day 3 6.10%6.10%

Day 4Day 4 6.15%6.15%

Day 5Day 5 6.05%6.05%

Day 6Day 6 6.05%6.05%

Day 7Day 7 6.10%6.10%

In the above case. the difference to be settled between the bank andthe XYZ Ltd amounts to..a)Rs.7671*********b)Rs.7692c)Rs.8035d)Rs.8074


74/90

The following is the NPA status of XYZ Exporters Ltd account inBank A

Asset Classification Asset ClassificationStatusStatus DoubtfulDoubtful --more thanmore than3 years as on 313 years as on 31- -33--20072007

ECGC Cover ECGC Cover 50%50%Realizable Value of Realizable Value of SecuritySecurity

Rs.1.50 lakhsRs.1.50 lakhs

BalanceBalance

OutstandingOutstanding

Rs.4 lakhsRs.4 lakhs

The total provision required in the above case is.a)Rs.1.25 lakh*****b)Rs.2.50 lakhc)Rs.0.50 lakhd)Rs.2.00 Lakh


75/90

ExampleExample

Coupon of a floating rate bond isa. modified whenever there is a change in thebenchmark rate.

b. modified at pre-set intervals with reference to abenchmark rate.c. modified for changes in benchmark rate beyondagreed levels.d. modified within a range, for changes in thebenchmark rate.

A ns: b.


76/90

ExampleExampleWh ic h of t h e following is true about a

uniform price auction?a. a. A n auction in which all successful bids are

made for the same price.b. b. A n auction in which all bidders have bid a

uniform price.c. c. A n auction in which all successful bidders

are allotted bonds at the same price.

d. d.A

n auction in which the cut-off price isderived as the weighted average of all successfulbids.

A nswer: c


77/90

ExampleExample

A treasury bill maturing on 28-Jun-2008 istrading in t h e market on 3-Jul-2007 at aprice of Rs. 92.8918. Wh at is t h e discountrate in t h is price?A nswer:T he yield is computed as:= ((100-price)*365)/(Price * No of days tomaturity)= ((100-92.8918)*365)/(92.8918*360)) =

7.7624%


78/90

ExampleExample

Wh at is t h e price at w h ic h a treasury billmaturing on 23 rd Marc h 2008 would be

valued on July 13, 2007 at a yield of 6.8204%?A nswer:T he price can be computed as

= 100/(1+(yield% * (No of days tomaturity/365))= 100/(1+(6.8204%*(253/365)) =

Rs. 95.4858


79/90

ExampleExampleWh at is t h e day count convention in t h e treasurybill markets?a. 30/360b. A ctual/ A ctualc. A ctual/360d. A ctual/365

A nswer: d


80/90

ExampleExample

Wh ic h of t h e following participants in t h e callmarkets are allowed to lend as well as borrow?a. Mutual Fundsb. Banks and Primary Dealersc. Corporatesd. Financial Institutions

A nswer: b

RepoRepo


81/90

RepoRepoA 3-day repo is entered into on July 10, 2007, on an 11.99%

2009 security, maturing on A pril 7, 2009. T h e face value of t h e transaction is Rs. 3, 00, 00, 000. T h e price of t h e securityis Rs. 116.42. If t h e repo rate is 7%, w h at is t h e settlementamount on July 10, 2007?A nswer : Settlement amount on July 10, 2007 is the transactionvalue for the securities plus accrued interest.

Transaction Value:3, 00, 00, 000 * 116.42/100 = Rs. 3, 49, 26, 000A ccrued Interest:T he number of days is 93.A ccrued interest = 3, 00, 00, 000 * 11.99%* 93/360 = Rs. 9, 29,225.00Th erefore, t h e settlement amount is: Rs. 3,49,26,000 + Rs.9, 29, 225.00 = Rs. 3, 58, 55, 225.00


82/90

ExampleExampleCompute t h e Rupee value of an SGL transaction, wit h t h e following data:Coupon Rate: 11.68%Maturity date: A ugust 6, 2008Settlement Date: July 11, 2007Price: Rs. 105.4025Transaction amount: Rs. 50000000

A nswer:Value of the transaction = number of securities * trade price= (50000000/100) * 105.4025= Rs. 5,27,01,250A ccrued Interest for the period since the last coupon is

= days since the last coupon/360 * coupon rate * face value= (155/360) * 0.1168 * 50000000= Rs. 25,14,444Settlement amount = Value of transaction + A ccrued Interest= Rs. 5,27,01,250 + 25,14,444

= Rs. 5,52,15,694


83/90

1A GOI security wit h coupon of 11.68%, maturing on 6- A ug-2008, is to be settled on1-Feb-07. Wh at are t h e number

of days from th

e previous coupondate?a. 179b. 176c. 178d. 175A nswer: d.

f d l h flf d l h fl


84/90

In a forward contract,actual cash flowsIn a forward contract,actual cash flowshappen on date of happen on date of

a)contract itself b)maturitya)contract itself b)maturityc)delivery d)terminationc)delivery d)terminationM ain source of bank funds is the depositsM ain source of bank funds is the depositswhich consist of(which is not correctwhich consist of(which is not correctexplanation of such deposit)explanation of such deposit)a)Demand deposita)Demand deposit- -current & savingscurrent & savings

b)Term depositsb)Term deposits- -Recurring & fixedRecurring & fixedc)Overdue deposits d)call depositsc)Overdue deposits d)call deposits


85/90

Forward rate isForward rate isa)Derived from spot rates b)spot ratea)Derived from spot rates b)spot rate

adjusted for premium/discountadjusted for premium/discountc)The rate agreed for settlement on anc)The rate agreed for settlement on an

agreed date in futureagreed date in futured)All the aboved)All the above

An FCNR deposit received from an NRI in An FCNR deposit received from an NRI inus$ can be viewed by the bank asus$ can be viewed by the bank asa)Euroa)Euro--rupee deposit b)Petrorupee deposit b)Petro- -dollar dollar

deposit c)Rupeedeposit c)Rupee- -dollar depositdollar deposit

d)Eurod)Euro--dollar depositdollar deposit

Th i lt h i d lli fTh i lt h i d lli f


86/90

The simultaneous purchasing and selling of The simultaneous purchasing and selling of different securities by a person so that thedifferent securities by a person so that the

composition of the portfolio can be changedcomposition of the portfolio can be changedwithout significant cost is calledwithout significant cost is calleda)Arbitrage deal b)Swap deal c)Switcha)Arbitrage deal b)Swap deal c)Switchdeal d)Option dealdeal d)Option dealThe minimum and maximum cash resrveThe minimum and maximum cash resrveratio that RBI can prescribe,falls under ratio that RBI can prescribe,falls under which of the following rangewhich of the following range

a)3%to15% b)3% to 20% c)5% to20%a)3%to15% b)3% to 20% c)5% to20%d)none of the aboved)none of the above


87/90

Which among the following is not a correctWhich among the following is not a correctstatement in the context of treasury billsstatement in the context of treasury billsa)Issued in a demat form (SGL)unless thea)Issued in a demat form (SGL)unless the

investor so desiresinvestor so desiresb)Issued at a discount to face valueb)Issued at a discount to face valuec)Are approved securities and qualify for c)Are approved securities and qualify for

SLR purpose for banksSLR purpose for banks

d)Discount is calculated at front endd)Discount is calculated at front end

A h i d d b fA h i d d b f


88/90

A company has issued debentures for a A company has issued debentures for aperiod of 5 years with the provision thatperiod of 5 years with the provision that

interest for the first year shall be 6.5% andinterest for the first year shall be 6.5% andfor the remaining 4 years it shall befor the remaining 4 years it shall be6%.These can be called6%.These can be called

a)Floating rate debenturesa)Floating rate debenturesb)Step up debenturesb)Step up debenturesc)Flexible debenturesc)Flexible debentures

d)Option debenturesd)Option debentures

Yi ld M i f b d i l ll dYi ld M i f b d i l ll d


89/90

Yield to M aturity of a bond is also called asYield to M aturity of a bond is also called asa)Internal rate of return of the bonda)Internal rate of return of the bondb)coupon of the bondb)coupon of the bondc)discount of the bondc)discount of the bondd)swap rate of the bondd)swap rate of the bond


90/90

T H ANK YOU&

BEST W IS H ES FOR AN OU TSTANDIN G

P E RFOR MAN C E IN T H E E XAM

Date post:	07-Apr-2018
Category:	Documents
Upload:	shilpa-vasudevan-nair
View:	247 times
Download:	0 times

Risk Management & Treasury Management

Documents