CA Sumat Singhal (B,Com, ACA, ACS, CAIIB,CWA(F) Manager (Credit) Punjab National Bank, New Delhi

1. 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. 2. Asset-liability management; Interest rate risk; interest rate futures;stock options; debt instruments; bond portfolio strategy; risk control and hedging instruments. 3. Investments – Treasury bills – Money markets instruments such as CDs, CPs, IBPs; Securitisation and Forfaiting; Refinance and rediscounting facilities.

 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.  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.

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

FRONT OFFICE BACK OFFICE MID OFFICE Dealing MIS settlement

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

 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)  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

 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).  Eligibility: a) The tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; b) The borrowal account of the company is classified as a Standard Asset by the financing bank/s.

 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

 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.

 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).

 Uses of Repo It helps banks to invest surplus cash It helps investor achieve money market returns with sovereign risk. It helps borrower to raise funds at better rates An 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

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. Example:  10% Aug 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

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". 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.

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.

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 face value issued for Rs gets redeemed at the end of it's tenure at Rs

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

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

 Y= (100-P)*365*100   P*D  Y = Yield  P= Price  D =Days to maturity

 91 days treasury bills maturing on  Purchased on Rate quoted is Rs per Rs100 ( )*365*100= ( *55 days) = =5.70%

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.

 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

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

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,

 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.

SLR is to be maintained in the form of the following assets:  Cash balances (excluding balances maintained for CRR)  Gold (valued at price not exceeding current market price)  Approved securities valued as per norms prescribed by RBI.

Value at Risk (VaR) is the most probable loss that we may incur in normal market conditions over a given period due to the volatility of a factor, exchange rates, interest rates or commodity prices. The probability of loss is expressed as a percentage – VaR at 95% confidence level, implies a 5% probability of incurring the loss; at 99% confidence level the VaR implies 1% probability of the stated loss. The loss is generally stated in absolute amounts for a given transaction value (or value of a investment portfolio). A VaR of Rs. 100,000 at 99% confidence level for one week for a investment portfolio of Rs. 10,000,000 similarly means that the market value of the portfolio is most likely to drop by maximum Rs. 100,000 with 1% probability over one week.

Exchange Quotations : There are two methods  Exchange rate is expressed as the price per unit of foreign currency in terms of the home currency is known as the “Home currency quotation” or “Direct Quotation”  Exchange rate is expressed as the price per unit of home currency in terms of the foreign currency is known as the “Foreign Currency Quotation” or “Indirect Quotation”  Direct Quotation is used in New York and other foreign exchange markets and Indirect Quotation is used in London foreign exchange market.

 Direct Quotation: Buy Low, Sell High:  The prime motive of any trader is to make profit. By purchasing the commodity at lower price and selling it at a higher price a trader earns the profit. In foreign exchange, the banker buys the foreign currency at a lesser price and sells it at a higher price.  Indirect Quotation: Buy High, Sell Low:  A trader for a fixed amount of investment would acquire more units of the commodity when he purchases and for the same amount he would part with lesser units of the commodity when he sells.

 ‘A’ Bank agrees to buy from ‘B’ Bank USD The actual exchange of currencies i.e. payment of rupees and receipt of US Dollars, under the contract may take place :  on the same day or  two days later or  some day later, say after a month.

 The market quotation for a currency consists of the spot rate and the forward margin. The outright forward rate has to be calculated by loading the forward margin into the spot rate. For example US Dollar is quoted as under in the inter-bank market on a given day as under :  Spot 1 USD = Rs /1300  Spot/November 0200/0500  Spot/December 1500/1800

 TT Buying Rate (TT stands for Telegraphic Transfer).  This is the rate applied when the transaction does not involve any delay in realization of the foreign exchange by the bank. In other words, the nostro account of the bank would already have been credited. The rate is calculated by deducting from the inter-bank buying rate the exchange margin as determined by the Bank.

 This is the rate to be applied when a foreign bill is purchased. When a bill is purchased, the proceeds will be realized by the Bank after the bill is presented to the drawee at the overseas center. In the case of a usance bill the proceeds will be realized on the due date of the bill which includes the transit period and the usance period of the bill.

You would like to import machinery from USA worth USD to be payable to the overseas supplier on 31st Oct [a] Spot Rate USD = Rs /8600 Forward Premium September /3000 October /5450 November /7650 [b] exchange margin 0.125% [c] Last two digits in multiples of nearest 25 paise  Calculate the rate to be quoted by the bank ?

This is an example Forward Sale Contract. Inter Bank Spot Selling Rate Rs Add Forward Margin Add Exchange Margin Forward Rate Rounded Off to multiple of 25 paise Rs Amount Payable to the bank Rs.46,46,250

 A swap agreement between two parties commits each counterparty to exchange an amount of funds, determined by a formula, at regular intervals, until the swap expires.  In the case of a currency swap, there is an initial exchange of currency and a reverse exchange at maturity.

 Firm A needs fixed rate loan –AAA rated  Firm B needs floating rate -A rated  Firm A enjoys an absolute advantage in both credit markets. 11%9% LIBOR +0.0% LIBOR +1% Firm AFirm B Fixed- rate finance Floating- rate finance

STEP ! Firm A will borrow at Fixed rate 9% Firm B will borrow at floating rate (LIBOR +1)% STEP 2 Firm A will pay Floating rate [LIBOR] to Firm B Firm B will Pay Fixed rate [9.5%] only Gain Net interest cost LIBOR-.5% Net Interest cost 9+[ 1%+0.5%]=10.5%

Gain AB Borrows at 9.0% fixed for 7 years Borrows at LIBOR + 1% floating for 7 years 9.5% LIBOR Interest payments to each other in years t 1 to t 7.

What is the price at which a treasury bill maturing on 23 rd March 2008 would be valued on July 13, 2007 at a yield of %? Answer: The price can be computed as = 100/(1+(yield% * (No of days to maturity/365)) = 100/(1+(6.8204%*(253/365)) = Rs

CA Sumat Singhal (B,Com, ACA, ACS, CAIIB,CWA(F) Manager (Credit) Punjab National Bank, New Delhi Wish U All the Very Best! Har Manzil, Karo Hasil