BFM-_Ch-15_-_Module_C

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Prepared By: Jagat Nagar (M : 9909792440)- [email protected]

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Treasury Products

CAIIB

Bank Financial Management

Module C

Risk Management

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Treasury Products

There are 3 main markets for Treasury for Risk

Management.

1. Products of Foreign Exchange Market2. Products of Money Market3. Products of Securities Market

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1. Products of Foreign Exchange Market -

Foreign exchange (Forex) market is the most liquid market asfree currencies (Major currencies which are fully convertible eg.USD, GBP, JPY etc.

a. Spot Trades: Spot means currency bought and sold, withsettelement on the same day i.e. Today.

b.Forward Rates:Forwards refer to purchase or sale of a currency ona future date.

Forward exchange rates are arrived at on the basis ofinterestrate differentials of two currencies, added or deducted fromspot exchange rate.

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c. Swaps: A combination of spot and forward transactions, or acombination of two forward transactions is called a swap.

- A swap transaction is also described as an exchange ofcashflows.

Ex:Buying USD (with Rupees) in spot market and selling same amountof USD in forward market or vice versa, constitutes a USD/INR swap.

If there is purchase and sale of currency on two forward dates(Forward to Forward) is also a swap.

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d. Investment of foreign exchange surpluses: Banks are permitted toinvest foreign exchange surpluses in globle money markets/in short-term securities. These can be done by

1. Inter-bank Loans: Short-term deposits with domestic and

globle banks.

2. Short-term investments: Banks are premitted to investoverseas in short-term instruments of high credit quality.

3. Nastro Accounts: Nastro accounts are current accountdenominated in foreign currency, maintained by the banks withtheir correspondent banks in the home country of the currency.

Balance in Nastro account not earn any interest.

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e. Loans and advances: Banks give loan by means of FCNRloans, PCFC and discount of foreign currency bills to select

customers.

f. Rediscounting of foreign bills: Banks are purchased /negotiated foreign currency bills by another banks.

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2. Money Market ProductsCall money:The money that is lent for one day in this market isknown as Call Money.The call money market is an integral part of the Indian MoneyMarket,where the day- to-day surplus funds (mostly of banks) aretraded.

Notice Money:If it exceeds one day but less than 15 days, it iscalled "Notice Money

Term Money: It is exceed of 14 days, but not exceeding 1 year.

Participants of call money market: RBI , Banks can borrow aswell as lend in this market.LIC, UTI, IDBI, NABARD, ICICI and mutual funds etc. canonly lend in this market.

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Banks borrow in this market for the following purpose

1. To fill the gaps or temporary mismatches in funds.2. To meet the CRR & SLR mandatory requirements as

stipulated by the Central bank3. To meet sudden demand for funds arising out of large

outflows.

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Treasury Bills:

Bills are issued by Government of India against their short termborrowing requirements with maturities ranging between 14 to364 days.Presently RBI is Issuing 91 days , 182 days & 364 days T-bill

All these are issued at a discount-to-face value.For example a Treasury bill of Rs. 100.00 face value issued forRs. 91.50 gets redeemed at the end of it's tenure at Rs. 100.00.Who can invest in T-Bill

Banks, Primary Dealers, State Governments, Provident Funds,Financial Institutions, Insurance Companies, NBFCs, FIIs (asper prescribed norms), NRIs can invest in T-Bills.

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Commercial Paper (CP):

CP is a short term usance money market instrument, issued bycorporate , Primary Dealers and Financial Institute (FI) to raiseshort term resources.

1. The eligible company shall obtain credit rating minimum P2.2. Net worth as per last balance sheet must not be below Rs.4 cr.3. Any advances from bank must be under standard asset clasification ofthe bank.

Maturities period between a minimum of 7 days and a maximumof up to one year.CP can be issued in denominations of Rs.5 lakh or multiples.

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Certificates of Deposits (CD):

CDs are against funds deposited at a bank or other eligible financial

institution for a specified time period either in Fixed or Floating rate.

CDs can be issued by all scheduled commercial banks except RRBs

Minimum period 15 days

Maximum period 1 yearMinimum Amount Rs 1 lac and in multiples of Rs. 1 lac

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Repo:

Repo is used for lending and borrowing for 1 day to1 year.Repos being short term (overnight) money market instrumentsare necessarily being used for smoothening volatility in money

market rates by RBI through injection of short term liquidity intothe market as well as absorbing excess liquidity from the system

when RBI absorbs liquidity it is termed as Reverse Repoandthe RBI injecting liquidity is the repo operation

Reserve Bank gradually extended repos facility to all Centralgovt. dated securities, Treasury Bills and State govt. securities

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Collateralized borrowing and lending obligation (CBLO)

There is fixed term ranging from 1 day to1 year.CBLO is a RBI approved money market instrument.

- Members can contribute securities and / or cash towards their

collateral / margin for operating in the CBLO segment- The minimum cash collateral of Rs.1 lacs needs to be maintained by amember at all time- The securities eligible as collateral are central government

securities including Treasury bills as specified by CCIL from time to

time- Banks are permitted to invest in equity subject to capital market

exposure

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Bills rediscounting:

Treasury will discount bills of exchange of short-term nature (3 to 6months).

The benefit to the lending bank is that their funds are invested atterm money rates and the credit risk is low as they have recourse

to the discounting bank.

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(3) Securities market products:

-Government Securities:To satisfy SLR requirement, banks can invest in Governmentsecurities.G-sec yeild set benchmark rates for corporate bonds, RBI has

issued bonds for various maturities ranging from 1 years to 30years, so as to establish a market determined yield curve.

- Corporate debt paper:

Corporate debt paper refers to medium and long-term bonds and

debentures issued by corporates and financial institutions, whichare tradables.They are non-SLR securitites.Banks are allowed to invest only in demat securities.

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- Debenture and bonds:These are issued by corporate bodies, literally with a charge onspecific assets.The literal meaning has been lost in practice and debentures andbonds may be issued with or without securities.Debentures are governed by company lawand are transferableonly by registrationBondsare negotiable instruments governed by law of contracts.

- Convertible Bonds:

Bond-holders are given an option to convert the debt into equity.Coupon on convertible bond is generally lower than the

coupon on non-convertible bond.

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Equities:

Banks are permitted to invest in equities subject to a limit on capitalmarket exposure, set by RBI.

Equity are highly risky so bank treasuries are generally cautious ininvesting surplus funds in stock market.

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Domestic and global markets:Funds can be swapped freelyfrom one currency to another currency or transfer easily from onemarket to another market. These can be done by options like:

a. FII investment: Foreign investment flow in india by way of foreigndirect investment (long project related investment ) and portfolioinvestment (In stock market or debt market).

In FII investors investment banks and hedge funds are included.

b. ADR / GDR issued by indian companies: Issue equity in globalmarket by ADR/GDR. Holder of ADR/GDR have a option to sell theirholding in domestic market and received proceeds in foreign currency.

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c. External Commercial Borrowings: (ECB): Indian companies canborrow in global market from banks or issue debt paper with guldelineissued by RBI to fund their project.

d. Foreign currency funds of banks: Banks can use their FCNR depositfunds for investment in overseas markets as well as for domestic lendingin foreign currency. It is used for short term loans.

e. Special facility to exporters: Banks can allowed pre-shipment andpost-shipment facilities to exporters in foreign currency.

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f. Overseas Direct Investment (ODI):RBI allows corporates to investin joint ventures / subsidiary units overseas, from their Rupee resourcessubject to a cap based on their networth (currently 3 times their networth).

This has allowed leading Indian business groups to expand globally by

establishing companies or by acquiring other companies.

g. Free remittance: Individuals are now permitted to remit overseasfreely, without RBI approval, up to USD 2,00,000 a year, for any purpose( with a few exceptions like gambling and margin trading). The may

choose to invest the funds in global debt, equity or simply spend themoney for consumption purposes.

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Thank You

BFM-_Ch-15_-_Module_C

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