TREASURY UNPLUGGED

Kamal K Jindal
 Topics to be covered today

 Structure of Treasury

 Treasury Products

 Concept of MTM

 A New Product – Currency Futures

REGULATORY STRUCTURE OF TREASURY

1 2 3
FRONT OFFICE MID OFFICE BACK OFFICE
(Dealing Room) (RISK) (Administration)
Identification,
Money and Fixed Measurement & Settlement
Income Dealings Monitoring of Risk  Reconciliation
 FX & Derivative Counterparty, of Nostros
Treasury Sales Product & Dealer  Accounting
Equities Limits
 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.
 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.
 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.
MONEY MARKET INTRUMENTS
MONEY MARKET INTRUMENTS Contd…
 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.

BACK
 MARKET PARTICIPANTS

HEDGERS

ARBITRAGEURS

SPECULATORS CENTRAL BANK

 Treasury Products

 Merchant Flows (Cash, Tom & Spot)

 Forward Contracts

 Derivatives (Options, Swaps and combinations thereof)

 Treasury Advisory Services

 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.
 SETTLEMENT CYCLE

FORWARDS
TOM
(SPOT + N)
(T + 1)

CASH
(T)
SPOT
(T + 2)

BACK
 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.
 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).
 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 Sell
Call Call
Option option
Buy Sell
Put Put
option Option
 Pay Off Diagrams

Buying a call option

Call Strike

X-axis: Price of the underlying asset, Y-axis: Gain/Loss.

 Pay Off Diagrams

Selling a call option

Call Strike

X-axis: Price of the underlying asset, Y-axis: Gain/Loss.

 Pay Off Diagrams

Buying a Put option

Put Strike

X-axis: Price of the underlying asset, Y-axis: Gain/Loss.

 Pay Off Diagrams

Selling a Put Option

Put Strike

X-axis: Price of the underlying asset, Y-axis: Gain/Loss.

 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
 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
 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
 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.

 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.
 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.
 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.
 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)
 Thank You.

RAJAT AGRAWAL
9911036723
rajat.gt@gmail.com