TEST 4

TREASURY RISK
PAVITRA NADARAJA (259037)

Q1.       What risks would a local bank be exposed to if the bank invests in:

i. Malaysian ringgit bonds issued by a Maxis Berhad?

Price risk, market risk and Counterparty risk.

ii. Indonesian rupiah denominated bonds issued by PT Telkom of Indonesia?

Liquidity risk, market risk and legal risk.

iii. negotiable instruments of deposits (NIDs) issued by another bank?

Credit risk, liquidity risk and Market risk.
                       

Q2.       Explain and illustrate with an example, the following principal techniques for
managing exchange rate risks:
 
i. Leading and lagging                                                                                  

  Alter the timing of receivables and payables in your favour.

For example, if importer expects to depreciate the currency it is due to pay, it will
seek to postpone payment. It may be done by agreement or by violating the terms
of credit. If an exporter expects that the currency it is due to receive to depreciate
over the next three months it may attempt to get immediate payment. It may be
accomplished by providing an instant payment discount.

ii. Cross currency matching                                                                            

 Using one foreign currency receivables to hedge another foreign currency payable
if all currency movement are strongly correlated for example SGD and USD.
 For example, if trader buys SGD with USD (USD/SGD) and sell again to buy the
Canadian dollars, the trader now has same trade as CAD/SGD position, and can off
set it bey selling CAD/SGD pair.

iii.  Foreign exchange risk shifting                                                         

 Avoidance of exposure in receivables and payables by paying all in home currency.

Shift the currency risk to counterparty. For example, a business with significant
debt can take part in foreign exchange risk shifting as a means to protect buyers
from the effect of potential losses. When the business takes too many risks to stay
profitable, the share of the company’s bondholders increases.

Q3.       Examine why banks impose the following:

 
i. Daily dealing loss limits for interbank forex dealers.                                     
 
 It is because during the currency of daytime, total access to foreign exchange
position during business hours is regulated. Total foreign exchange exposure
outside business hours is monitored during the overnight limits.

 
ii. Foreign exchange dealing and money market lending limits for other banks – both
local and overseas.

It is strict adherence to all domestic, internal and international laws, legislation

standards and conventions. It is also to ensure that the documentation about FX is
accurate and revised.

 
 
Q4.       As head of treasury operations of a large financial institution in Malaysia,
 
i.  identify FOUR (4) possible actions you may take to control your money
market trading exposure.

 
 - Set the total Money Market Gap Position for the banking institution and assign the
maximum size and minimum tolerable loss amount for the dealing room and
management position.
- separate Money Market Gap Position for each currency portfolio within the dealing
room, specifying the maximum sum to be gapped at each maturity(tenor), along with
the estimated loss rates.
- Create a revaluation (mark-to market) framework for total gap exposure, on-line basis
and the ability to stress check exposure under different market conditions
- Establish a maturity ladder for gapped currencies, normally up to 1 year for most
Money Market dealers.

 
 
ii.  identify FOUR (4) possible actions you may take to control your foreign
exchange trading exposure.        

- Set exposure limits for each desk and trader to maturity.

- Impose limits on deals that are made outside authorized business hours and outside
the banking institutions’ premise.
- Set the banking institution’s overall FX position and assign the maximum size and
maximum tolerable amount of loss for the dealing room and management position.
- Set traders “Daylight” and “Overnight” positions including Limits on Net Open
Positions and “Stop-loss” order procedures.