Certified Treasury Proffessional

IIBF & NISM Adda
Certificate Examination in
Certified Treasury Professionals

( IIBF & Other Exams)
2019
Compiled by
Srinivas Kante B.Tech, CAIIB
Compiled by Srinivas Kante Email: srinivaskante4u@gmail.com https://iibfadda.blogspot.com/

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About certified treasury professional exam
Introduction :
Currently, the dealers are provided with hands on training within the organization followed by bourse programmes conducted by
training bodies. It is also noticed that in the absence of an appropriate course, the competence level of the dealers vary significantly
which at times impact the overall dealing functioning in the financial sector. The Institute has therefore launched a blended
certificate programme in this area which will address the issues related to dealing comprehensively and help to bring about
standardization and uniformity among the market players.
Objectives :
- To create a cadre of well trained dealers to handle the front office operations in the integrated dealing rooms in banks / financial
institutions
Coverage :
The course will cover the dealing functions in detail under seven modules, as annexed.
Target group :
- Newly posted officers in the dealing room
- Persons identified for posting in the dealing room
- People aspiring to become dealers in future
Methodology :
Course has two components viz.,
a) Online examination for 100 marks based on a specially designed courseware on
Treasury Dealer
b) Classroom Training for 3 days at pre-announced centres.
For details of Classroom Training, Course Structure & Delivery, refer page 4.
Eligibility :
1. Members and Non-Members of the Institute
2. Candidates must have passed the 12th standard examination in any discipline or its equivalent.
Subject of Online Examination :

Treasury Operations
Examinatio Particulars Examinatio Training Total
n / Training n
Fees : Sr.
No. Fee Fee** Examination
+ Training Fee
1. Physical Rs.6,000/- Rs.5,000/- Rs.11,000/-
classroom
training
mode
at Mumbai, plus GST plus GST plus GST
Delhi, Chennai
and
Kolkata centres**
2. Physical Rs.6,000/- Rs.9,000/- Rs.15,000/-
classroom
training
mode
at other centres plus GST plus GST plus GST

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The fee once paid will NOT be refunded or adjusted on any account.
** Training fees are to be paid after the candidate clears the online examination conducted by the Institute.
- Candidates, who do not pass the online examination in their first attempt, need to enrol for the second attempt by paying a nominal
fee of Rs.200.
- Candidates who do not pass the online examination in their second attempt, need to enrol again by paying a fee of Rs.6,000/-.
- If a candidate fails in the classroom training, he/she need to enrol for the subsequent attempt by paying the training fees again.
Medium of Examination :
Examination will be conducted in English only
Pattern of Examination :
(i) Question Paper will contain 100 objective type multiple choice questions for
100 marks.
(ii) The examination will be held in Online Mode only
(iii) There will NOT be negative marking for wrong answers.
PASSING CRITERIA :
- 50 or more marks out of 100 marks in the online examination.
- 25 or more marks out of 50 marks in the Classroom Training.
COURSE STRUCTURE & DELIVERY

Certified Treasury Dealer Course has two parts viz. written examination and class room learning. To be declared successful, a
candidate has to secure a minimum of
50% marks in the online examination and 50% in class room training. The steps in completing the course are as under :
1. Study :
A minimum 3 months study of the stipulated courseware is envisaged. Institute will accept application for examination up to a certain
date before the dates of announced exams so as to ensure that the study period is adhered to.
2. Examination :
Candidates will have to appear first for the online examination conducted by IIBF (Multiple Choice Questions mode) and pass the
examination.
3. Classroom Training :
Candidates passing the written examination has to undergo class room training. For this purpose, he/she needs to log on to IIBF
website - www.iibf.org.in and select his/her convenient slot for class room training (3 days) from the dates and venue at select
centres announced by the Institute by paying prescribed fees.
Classroom training will include mock dealing sessions covering forex and Fixed Income bonds. It will also cover exercises, case
studies to evaluate the understanding and application of concepts covered in the written examinations. Inputs on various trading
techniques, Technical analysis by industry experts, Interpretation of market / economic data, Fundamental Analysis and Technical
Analysis.
During the class room training, candidates will be assessed (Internal assessment) for class room performance for a total of 50
marks. Marks for class room training will be awarded by faculty based on classroom participation, analytical skills, case discussions,
dealing ability etc. Candidates who obtain 25 or more marks will be declared as successful.
4. Time Limit for Classroom Training :
Classroom training is required to be completed within 15 months from the date of declaration of the online examination results in
which the candidate passes.
In case a candidate fails to complete the Class Room Training either on account of not able to successfully complete the Class
Room Training or by not attending the training for Class Room Training within the stipulated period of 15 months, the candidate
would be required to RE-ENROLL himself for the Online examination foregoing credit for the subject/s passed in the Online
examination earlier in case he wants to complete the course.
Award of Certificate :
Certificate will be issued to candidates by IIBF jointly with FIMMDA within 2 months on successful completion of both online
examination and classroom training. No certificate will be issued for passing only the online examination.
Code of Conduct :
All the successful candidates will be encouraged to adhere to a code of conduct which will be issued along with the Certificate.

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Syllabus
Module - I : Financial Markets and Role of Treasury
Financial markets, participants and Instruments, operating environment, regulations and practices. Need
for treasury and centralization Treasury management, Treasury organization - Front Office, Back Office
and Mid Office.
Dealing systems and treasury operations, Treasury as Profit Centre.
Module - II : Money Market Operations

Fund management, CRR maintenance, liquidity management, money market operations, need for
centralized funding operations, managing banks' surplus funds, bank level ALM and maturity gap analysis.
Market quotes in money market products, trading opportunities in Money market, Repo trading. Arbitrage
by running maturity mismatches - role of Treasury in resource mobilizations - Overnight call money
market. Repos and Reverse repos, CBLOs, Marginal Standing Facilities,
Certificate of Deposits, Inter-Bank Participation Certificate, Refinance as source of funding, export
refinance, NABARD refinance, SIDBI refinance.
Module - III : Investments

Objectives of investments, Types of investments, Coupon and YTM concepts, Bond market basics, bond
pricing and yield calculation, accrued interest, clean and dirty price, interest rate risk measures like
Duration, PV01 and Convexity and hedging products. Trading strategies and portfolio management.
Dealing platforms and settlement systems .Regulatory guidelines, maintenance of SLR, investment
classifications, valuations and provisioning.
Module - IV : Forex Dealings

Exchange rates and linkage to macroeconomic factors like Balance of Payment, Current Account Deficit,
Inflation, Interest Rate etc. Foreign exchange market participants, market quotes - direct and indirect
quotations, One way quote and both way quotes, Dealing terminologies, Cash, Spot and forward rates,
Concept of premium and discount in currency forward market, handling merchant transaction, cover
operations, open positions, gap limits. Arbitrage through currency swaps operations. Dealing platforms
and settlement procedures. Currency trading strategies, fundamental analysis, interpretation of market
data, technical analysis.
Role of brokers. Valuation of forex positions and gaps. Risk management in forex operations observance
of NOOP limits, Gap limits, limits on overseas investments / borrowings, funding rupee gaps through
currency swaps, central bank intervention in Forex market.
Module - V : Derivatives
Derivative: Nature, types, fundamentals, forwards, currency futures and options, interest rate swaps and
futures, concept of margins, Interest rate swaps and
FRAs. Basic understanding of duration, PV01 of swaps, Option Greeks. Use of derivatives to hedge
currency and interest rate risks. Valuation of derivative products, Hedge accounting and Trading position
in Derivatives. Credit derivatives - basic concepts and products. Risk managements of Derivative product,
current exposure, potential future exposures, hedge effectiveness, RBI / FIMMDAguidelines.
Module - VI : Model Code and Dealing Ethics

Dealer's code of conduct, dealing through brokers, model market practices, dealing ethics. Customer
suitability and appropriateness. Code of conduct for contribution to financial benchmarks, Code of
Conduct for dealing on NDS-OM and the role of FEDAI and FIMMDA.
Module - VII : Time Value of Money and Interest Rate Calculations

Calculation of present value, future value, discounting, compounding, simple interest, day count
conventions, money market and bond market basis, Forward rates, yield curves - YTM, par yield curve.

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Certified Treasury professionals Recollected questions on November 24th 2018
Some of the recollected questions of certified treasury professional exam held on

24/11/2018 3 pm
TT buy/ TT sell bill /buy Bill sell/ TC buy TC /sell Forex card rates of dollar and
pound given.
Various forex transaction based questions (5 marks)
∆Y= change in the yield of a bond in decimal

V+ = the estimated value of the bond if yield is increased by ∆Y
V- = the estimated value of the bond if yield is decreased by ∆Y
Vo = Initial price of the bond
All these values given
Questions asked: percentage change in price per basis point Change for an increase in
yield of delta y etc.
Average percentage price change per basis point change in yield

(5 marks)
cash inflow and outflow of the repo borrower in a repo transaction

Accured interest for first leg second leg etc (5 marks)
Present value of all coupons 10 years bond coupons payed semi annually.
Apart from black scholes model another famous option pricing model name.
How options Greek measures the sensitivity of an options price
A decrease in interest rates raises bond prices by more than a corresponding increase
in rates lowers price
Money market refers to the market for short term maturities upto 1 year.
Yield and price of 364 and 91 days treasury bill.
Given CTP Exam today (24/11/18) 10.00 Slot. Next heading toward FRM &
Certified Bank trainer. In today CTP exam, Case Study Questions (5Q ) were from
Repo Transaction, T Bills, TT Buying & Bills Buying rates, option price
calculations, Bond yield & price calculations, option greeks & duration.
Then individual questions (1 - 2Q) from CP, SI,CI, option pricing models, forex
valuation, dealers code of conduct, etc.
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Financial systems
The financial system in a country refers to the institutional framework existing to enable financial
transactions to be carried out in a smooth manner
Any Financial System has three main segments
1) Financial institutions -banks, mutual funds, insurance companies etc

2) Financial markets -money market, debt market, capital market, forex market, derivative markets
3) Financial products -loans, deposits, bonds, equities , different types of financial derivatives etc
MARKETS & REGULATORS
CAPITAL MARKET MONEY MARKET MUTUAL FUNDS INSURANCE
SEBI RBI AMFI IRDA
The Structure of Financial Market of India

A 'financial market' is a market in which people trade financial securities and derivatives such as futures
and options at low transaction costs. Securities include stocks and bonds, and precious metals.
The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate
the trade in financial securities, e.g., a stock exchange or commodity exchange. This may be a physical
location (like the NYSE, BSE, LSE, JSE) or an electronic system (like NASDAQ). Much trading of stocks
takes place on an exchange; still, corporate actions (merger, spinoff) are outside an exchange, while any
two companies or people, for whatever reason, may agree to sell stock from the one to the other without
using an exchange.
Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a stock
exchange, and people are building electronic systems for these as well, similar to stock exchanges.
The structure of financial markets can be studied from different angles, namely, functional, institutional, or
sectoral. Accordingly, financial markets, institutions, and instruments can be classified in any one or more
of these ways. The functional classification is based on the term of credit, whether the credit supplied is
short-term or long-term. Accordingly, markets are called money markets or capital markets.

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The institutional classification tells us whether the financial institutions are organized on commercial or
cooperative principles and whether they belong to the organized or unorganized sector. The sectoral
classification identifies credit arrangements for various sectors of the economy: agriculture, manufacturing
industry, trade and others.
Various classifications are not intended to be water-tight or mutually exclusive. Their aim is to give a
broad idea of the scope of financial markets, their several dimensions and functions. Combining the first
two bases of study, we give a single functional- cum-institutional classification in Figure
Functionally, financial markets are broadly sub-divided under two heads money markets and capital
markets. The former are markets in short-term funds; the latter in long-term funds. We have interpreted
the term money market more broadly to include within its folds also the notional money market of
monetary theory.
This market is co-terminus with the entire economy. The asset it deals in is money; the demanders are
the holders of money (the public) and the suppliers are the government, the RBI and banks. Money itself
is acquired in the normal process of selling goods, services, and assets in all markets, as money is the
common medium of exchange (in all monetised transactions).
There is no special or separate market for money like the ones we have for bills, bonds, or equity shares.
In academic discussions of monetary theory and policy whenever the term money market is used, we
mean the market for money as explained above. But in business parlance the term money market is
almost always used in the sense of short-term credit market.
Structurally, the short-term credit market is divisible under two sectors: organized and unorganized. The
organized market com-prises the RBI and banks. It is called organized because its parts are
systematically coordinated by the RBI
Non-bank financial institu-tions such as the LIC, the GIC and subsidiaries, the UTI also operate in this
market, but only indirectly through banks and not directly. Quasi-government bodies and large companies
may also make their short-term surplus funds available to the market through banks.
Besides commercial banks that dominate the organized money market, there are co-operative banks.
They are a part of co-operative credit institutes that have a three-tier structure. At the top there are state
co-operative banks (co-operation being a state subject). At the district level there are central co-operative
banks. At local level there are primary credit societies and urban co-operative banks.

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The whole co-operative credit system is linked with the RBI and is dependent on it for funds. The RBI
deals directly with only state co-operative banks. For reasons of size, methods of operation and dealings
with the RBI and commercial banks, only state and central co-operative banks need be counted into the
organized money market; the rest (co-operative credit societies at local level) are only loosely linked with
it.
The unorganized market is largely made up of indigenous bankers and moneylenders, professional and
non-professional. It is unorganized because the activities of its parts are not systematically coordinated by
the RBI or any other authority.
Private moneylenders operate throughout the length and breadth of the country, but without any link
among themselves. Indigenous bankers are better organized on local basis, as in Bombay and
Ahmedabad. But this kind of organization is also only a loose association.
For the success of monetary and credit policy, the character of the money market is important. The
unorganized sector of the market is practically insulated from monetary and credit controls. It is neither
subject to reserve requirements, nor capital or investment require-ments. Its dependence on the RBI or
banks for funds is very limited.
Therefore, it is not affected directly by (say) the policy of monetary restraint of the economy. The RBI has
no control over the quality and composition of credit in this market either. This works as an important
limitation to the working of monetary policy in India. But since 1947 the situation is rapidly changing with
the fast expansion of banking in the country and the relative shrinkage of the unorganized sector of the
money market. There are three main components of the organized sector of the money markets.
They are:
(i) Inter-bank call money market
(ii) Bill market, and

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(iii) Bank loan market.
The unorganized sector also has its comparable markets. But its call money market is very small and
restricted only to the Gujarati shroffs (one component of indigenous bankers). The other two markets are
quite important. The indigenous bills are called hundis, and the hundi market is quite active. The
indigenous bankers and moneylenders are still the major source of short-term loans for the small
borrower.
The main function of the money market is to provide short-term funds to deficit spenders, whether the
government or others. It does this mainly by mobilising short-term surpluses of both financial and non-
financial units, including state governments, local governments, and quasi-government bodies.
Banks do it by ‘selling’ deposits of various kinds, participation Certificates and bills discounted. Then,
there are treasury bills sold ‘on tap’ by the RBI. The RBI itself serves as the lender of last resort to the
market. Funds have also to be moved between regions and from one place to another according to
demand. An efficient and well- developed system does it fast and at low cost.
Also, it does not allow regional or sectoral scarcities of funds to emerge. The surpluses in some centres
or sectors get immediately transferred to others in short supply. Thereby an even supply of funds and
liquidity is maintained throughout the economy. For this, banks and other constituents of money market
must have an inter-connected network of branches and offices, rapid communication and remittance-of-
funds system, and well-trained staff.
The real economy may also nave a seasonal pattern, giving rise to seasonal ups and downs in the
demand for funds. In the Indian economy this kind of seasonality mainly arises from the seasonal
character of agriculture and some agro based industries (such as sugar) and their large weight in the
overall economy. Thus, traditionally, the Indian money market has been facing two seasons’ busy season
from October to April and slack season from May to September.
During the busy season the main (Kharif) crops are harvested and marketed and sugarcane is crushed.
So, the demand for bank credit to traders and sugar manufacturers goes up. During the slack season this
demand for funds goes down. The RBI has been following a pro seasonal monetary policy so that any
special stringency of funds does not arise during the busy season which may hurt legitimate economic
activity.
For some time past, with increased double cropping of cultivated land, hefty increases in the output of
wheat (a major rabi crop) and autumn rice, growth of perennial industries, and a higher proportion of bank
credit going to manufacturing industries, the previous seasonal ups and downs in the demand for funds
have largely lost their importance. This trend is likely to gain in strength over time.
The capital market deals in medium-term and long-term funds. Like money market, the capital market
also is divisible into two sectors organized and unorganized. The organized sector comprises the stock
market, the RBI, banks, development banks (such as the Industrial Develop-ment Bank of India), LIC,
GIC and subsidiaries, and the UTI.
The unorganized sector is mainly made up of indigenous bankers and money-lenders chit funds, nidhis
and similar other financial institu-tions; investment companies, finance companies and hire purchase
companies; and company deposits. The role of the unorganized sector in the capital market is of very
limited importance.

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Types of financial markets
Within the financial sector, the term "financial markets" is often used to refer just to the markets that are
used to raise finance: for long term finance, the Capital markets; for short term finance, the Money
markets. Another common use of the term is as a catchall for all the markets in the financial sector, as per
examples in the breakdown below.
Capital markets which consist of:
1.Stock markets, which provide financing through the issuance of shares or common stock, and enable
the subsequent trading thereof.
2. Bond markets, which provide financing through the issuance of bonds, and enable the subsequent
trading thereof.
Commodity markets, which facilitate the trading of commodities.
Money markets, which provide short term debt financing and investment.
Derivatives markets, which provide instruments for the management of financial risk.
Futures markets, which provide standardized forward contracts for trading products at some future date;
see also forward market.
Foreign exchange markets, which facilitate the trading of foreign exchange.
Spot market
Interbank lending market
The capital markets may also be divided into primary markets and secondary markets. Newly formed
(issued) securities are bought or sold in primary markets, such as during initial public offerings.
Secondary markets allow investors to buy and sell existing securities. The transactions in primary markets
exist between issuers and investors, while secondary market transactions exist among investors.
Liquidity is a crucial aspect of securities that are traded in secondary markets. Liquidity refers to the ease
with which a security can be sold without a loss of value. Securities with an active secondary market
mean that there are many buyers and sellers at a given point in time. Investors benefit from liquid
securities because they can sell their assets whenever they want; an illiquid security may force the seller
to get rid of their asset at a large discount.

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Raising capital
Financial markets attract funds from investors and channel them to corporations—they thus allow
corporations to finance their operations and achieve growth. Money markets allow firms to borrow funds
on a short term basis, while capital markets allow corporations to gain long-term funding to support
expansion (known as maturity transformation).
Without financial markets, borrowers would have difficulty finding lenders themselves. Intermediaries such
as banks, Investment Banks, and Boutique Investment Banks can help in this process. Banks take
deposits from those who have money to save. They can then lend money from this pool of deposited
money to those who seek to borrow. Banks popularly lend money in the form of loans and mortgages.
More complex transactions than a simple bank deposit require markets where lenders and their agents
can meet borrowers and their agents, and where existing borrowing or lending commitments can be sold
on to other parties. A good example of a financial market is a stock exchange. A company can raise
money by selling shares to investors and its existing shares can be bought or sold.
The following table illustrates where financial markets fit in the relationship between lenders and
borrowers:
Lenders
The lender temporarily gives money to somebody else, on the condition of getting back the principal
amount together with some interest or profit or charge.
Individuals and doubles

Many individuals are not aware that they are lenders, but almost everybody does lend money in many
ways. A person lends money when he or she:
Puts money in a savings account at a bank

Contributes to a pension plan
Pays premiums to an insurance company
Invests in government bonds
Companies
Companies tend to be lenders of capital. When companies have surplus cash that is not needed for a
short period of time, they may seek to make money from their cash surplus by lending it via short term

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markets called money markets. Alternatively, such companies may decide to return the cash surplus to
their shareholders (e.g. via a share repurchase or dividend payment).
Borrowers
Individuals borrow money via bankers' loans for short term needs or longer term mortgages to help
finance a house purchase.
Companies borrow money to aid short term or long term cash flows. They also borrow to fund
modernization or future business expansion.
Governments often find their spending requirements exceed their tax revenues. To make up this
difference, they need to borrow. Governments also borrow on behalf of nationalized industries,
municipalities, local authorities and other public sector bodies. In the UK, the total borrowing requirement
is often referred to as the Public sector net cash requirement (PSNCR).
Governments borrow by issuing bonds. In the UK, the government also borrows from individuals by
offering bank accounts and Premium Bonds. Government debt seems to be permanent. Indeed, the debt
seemingly expands rather than being paid off. One strategy used by governments to reduce the value of
the debt is to influence inflation.
Municipalities and local authorities may borrow in their own name as well as receiving funding from
national governments. In the UK, this would cover an authority like Hampshire County Council.
Public Corporations typically include nationalized industries. These may include the postal services,
railway companies and utility companies.
Many borrowers have difficulty raising money locally. They need to borrow internationally with the aid of
Foreign exchange markets.
Borrowers having similar needs can form into a group of borrowers. They can also take an organizational
form like Mutual Funds. They can provide mortgage on weight basis. The main advantage is that this
lowers the cost of their borrowings
Some of the important functions of financial market are as follows:
Financial market is a link between the savers and borrowers. This market transfers the money or capital
from those who have surplus money to those who are in need of investment.
Generally the investors are called surplus units and business enterprises are called deficit units. So
financial market transfers money supply from surplus units to deficit units. Financial market acts as a link
between surplus and deficit units and brings together the borrowers and lenders.
There are mainly two ways through which funds can be allocated, (a) Via bank (b) Financial markets. The
households who are the surplus units may keep their savings in banks; they may buy securities from
capital market. The banks and financial market both in turn lend the funds to business firm which is called
deficit unit.
Bank and financial market are competitor of each other. Financial market is a market for the creation and
exchange of financial assets.

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Functions of Financial Markets:
Financial markets perform following four important functions:
1. Mobilization of Savings and channelizing them into Most Productive Use:
Financial markets act as a link between savers and investors. Financial markets transfer savings of
savers to most appropriate investment opportunities.
2. Facilitate Price Discovery:
Price of anything depends upon the demand and supply factors. Demand and supply of financial assets
and securities in financial markets help in deciding the prices of various financial securities.
3. Provide Liquidity to Financial Assets:
In financial markets financial securities can be bought and sold easily so financial market provides a
platform to convert securities in cash.
4. Reduce the Cost of Transaction:
Financial market provides complete information regarding price, availability and cost of various financial
securities. So investors and companies do not have to spend much on getting this information as it is
readily available in financial markets

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Money Market
The money market is a segment of the financial market in which financial instruments with high liquidity
and very short maturities are traded. The money market is used by participants as a means for borrowing
and lending in the short term, from several days to just under a year. Money market securities consist of
negotiable certificates of deposit (CDs), banker's acceptances, U.S. Treasury bills, commercial paper,
municipal notes, euro dollars, federal funds and repurchase agreements (repos). Money market
investments are also called cash investments because of their short maturitieThe money market refers to
the market for short-term, high quality debt securities issued by government and corporate borrowers.
Maturities can range from overnight to up to a year.
The money market creates liquidity for these borrowers to fund their short-term cash flow needs.
Common money market instruments include Treasury bills (T-bills), certificates of deposit (CDs),
commercial paper, banker’s acceptances, eurodollars and repurchase agreements (repos) among others.
The money market is best known as a place for large institutions and governments to manage their short-
term cash needs. However, individual investors have access to the market through a variety of different
securities. In this tutorial, we'll cover various types of money market securities and how they can work in
your portfolio
Money market securities are short-term IOUs issued by governments, financial institutions and large
corporations. These instruments are very liquid and considered extremely safe. Defaults on money
market instruments have been extremely rare. Because of this relative safety, money market securities
offer significantly lower returns than most other securities.
There is no formal money market, rather it is an informal network of banks, brokers, dealer and financial
institutions that are linked electronically.

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One of the most important functions of the money market is providing an outlet for large companies with
temporary excess cash to invest that cash in short-term money market instruments.
Corporations with short-term cash needs can sell securities such as commercial paper, or borrow funds
on a short-term basis.
Larger corporations will generally participate directly via their dealer, while smaller companies with excess
cash might just park it in a money market mutual fund, a professionally managed fund that invests in
various money market instruments. The best way for individual investors to access the money market is
also via a money market mutual fund, or a money market account with a bank. These funds pool together
the assets of thousands of investors in order to buy the money market securities on their behalf. However,
some money market instruments, like Treasury bills, may be purchased directly from the Treasury.
Money market funds seek to maintain a stable $1 net asset value while paying a yield. Although these
funds have traditionally held their price at $1 per share, some recent regulations allow certain funds to
“break the buck” when needed.
Other than T-Bills, money market instruments are not riskless, but the risks are low. There have been
defaults over the years, but they are not common.
The money market is used by a wide array of participants, from a company raising money by selling
commercial paper into the market to an investor purchasing CDs as a safe place to park money in the
short term. The money market is typically seen as a safe place to put money due the highly liquid nature
of the securities and short maturities. Because they are extremely conservative, money market securities
offer significantly lower returns than most other securities. However, there are risks in the money market
that any investor needs to be aware of, including the risk of default on securities such as commercial
paper

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Treasury Bills (T-Bills)
Treasury bills, or T-bills, are short-term debt instruments issued by the U.S Treasury. T-bills are issued for
a term of one year of less. T-bills are considered the world’s safest debt as they are backed by the full
faith and credit of the United States government.
A key indicator
The T-bill rate is a key barometer of short-term interest rates. Treasury bills are sold with maturities of four,
thirteen, twenty-six and fifty-two weeks. They do not pay interest, but rather are sold a discount to their
face value. The full-face value is paid at maturity, and the difference between the discounted purchase
price and the full-face value equates to the interest rate.
Purchasing T-Bills
There are three ways to purchase T-bills and all other Treasury securities:
· Non-competitive bid auctions allow investors to submit a bid to purchase a set dollar amount of the
Bills at the next auction. The yield they receive is based upon the average auction price from all bidders.
This is a good method for individual investors and can be done via the TreasuryDirect site. The maximum
amount that can be purchased through a non-competitive bid is $5 million.
Competitive bidding auctions are geared for those who only want to buy the bills at a specific or desired
yield. These bids must be made via a bank or a broker. A buyer can purchase up to 35% of the amount of
the initial offering for the bill being auctioned.

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· You can purchase them on the secondary market or via mutual funds and ETFs. T-bills, like all
Treasury securities, can be bought and sold on the secondary market. Additionally, there are a number of
mutual funds and ETFs that purchase T-bills.
The secondary market
There is an active secondary market for T-bills, but in order to buy or sell bills here you will need to use a
broker as a middle-man. T-bills are very liquid and short-term, but the price will fluctuate based on
movements in the rate on newly issued T-bills.
Who are the major buyers?
Although T-bills can be bought by individual investors, primary dealers, such as banks and broker-
dealers, are the biggest purchasers of T-bills at the various auctions.
Other major auction participants include investment funds, pension plans and retirement funds, insurance
companies and other large institutional managers.
Certificate of deposits::
A certificate of deposit (CD) is a time deposit with a bank. CDs are generally issued directly by
commercial banks, but they can be purchased via brokerage firms. CDs have a specific maturity date
(from three months to five years), a stated interest rate, and can be issued in any denomination, much
like bonds. Most CDs assess a penalty for early withdrawal prior to the CD’s date of maturity.
Insured account
Certificates of deposits are offered by banks and as such are covered by FDIC insurance just like a
savings or checking account. As long as the value of the CD is under the FDIC limits of $250,000 per
depositor per bank, your CD will be covered.
Fixed rate and term
Most CDs have a fixed interest rate and a fixed time until maturity. Upon maturity account holders receive
the face amount of the CD plus any unpaid interest.
Here is an example of how a CD works:

An investor purchases a $10,000 CD with an interest rate of 2% compounded annually and a term of two
years. The CD comes with an early withdrawal penalty of three months of interest. At the end of the first
year, the CD will have grown to $10,200 ($10,000 * 1.02). At the end of the second year, the CD will have
grown to $10,404 ($10,200 * 1.02). If the CD is liquidated before the maturity date, an early withdrawal
penalty of 3 months would equate to about $50. Assuming the CD is held to maturity, the holder would
receive the full value of $10,404.

Page 17
Most, but not all, CDs require you to hold the CD until the end of the term. If you cash out early there is
generally a penalty, typically three month’s worth of interest.
Interest payments
CD rates are quoted as an annual percentage yield (APY). There are a number of sites that list top CD
rates nationally and by region/location so consumers can shop to find a CD with the best rates and terms
for their needs.
The frequency of interest payments will vary and banks can choose daily, monthly, quarterly or annual
compounding. The frequency of compounding will impact the annual percentage rate (APR,) a measure
of the actual return when compound interest is taken into account.
Types of CDs
Beyond the plain-vanilla CDs, there are a number of varieties that include:
• Variable rate CDs where the interest is tied to the prime rate, the T-Bill rate or some other indicator.
In a rising rate environment, account holders can benefit from increased rates, though the opposite can
happen as well.
• Liquid CDs that allow for early withdrawal. In exchange for this liquidity feature the interest rate
may be a bit lower.
• Callable CDs allow the bank to call in or redeem the CD if paying the interest rate becomes a bad
deal for them. This might occur in a period of decreasing interest rates. To compensate customers, the
interest rate will be a bit higher than for similar CDs without this feature.
• Jumbo CDs have a higher minimum deposit ($100,000 or more is common) and in exchange they
pay higher rates of interest.
• Brokered CDs are issued by banks but bought and sold through brokerage firms. The CD holder
receives full principal and any interest due if the CD is held to maturity, but can sell the CD through the
broker if desired without penalty.
Commercial paper::
Commercial paper is an unsecured, short-term loan used by a corporation, typically for financing
accounts receivable and inventories. It is usually issued at a discount, reflecting current market interest
rates. Maturities on commercial paper are usually no longer than nine months, with maturities of between
one and two months being the average.
Commercial paper is considered a very safe investment. Typically, only companies with high credit ratings
and credit-worthiness issue commercial paper. Over the past 40 years, there have only been a handful of
cases where corporations have defaulted on their commercial paper repayment.
Commercial paper is usually issued in denominations of $100,000 or more. Therefore, smaller investors
can only invest in commercial paper indirectly through money market funds.

Page 18
Commercial paper is sold at a discount, with the difference between that price and the face value at
maturity comprising the return to the investor.
Benefits of commercial paper
Commercial paper does not have to be registered with the SEC if the term to maturity is nine months or
less. The average maturity is around 30 days, so the elimination of the need to comply with SEC rules
brings down the compliance costs of issuing these instruments.
Maturities and the amount of commercial paper can be adjusted to fit the needs of the borrower.
The financial crises
During the financial crises of 2008, the Federal Reserve had to step in and create the Commercial Paper
Funding Facility to provide liquidity for this critical component of the money market. This helped to ensure
that major corporate borrowers could continue to tap this market to fund their short-term cash needs.
Defaults in commercial paper have been rare over the years, with an average default rate around 3%.
Perhaps the most significant default was in 1970 when Penn Central declared bankruptcy and defaulted
on all of its outstanding commercial paper. All holders of these securities lost their investment, driving the
commercial paper market down about 10%
Bankers' acceptance (BA)::
A bankers' acceptance (BA) is a short-term credit investment created by a non-financial firm and
guaranteed by a bank to make payment. Acceptances are traded at discounts from face value in the
secondary market. Bankers acceptances are considered very safe instruments and are used extensively
in foreign trade.
Banker’s acceptances often arise from a business needing to make a major purchase overseas. BAs are
time drafts that a business can order from the bank. The financial institution promises to pay the exporting
firm a specific amount on a specific date, at which time it recoups its money by debiting the importer’s
account. The BA works much like a post-dated check, which is simply an order for a bank to pay a
specified party at a later date. The holder may also choose to sell the BA for a discounted price on a
secondary market, giving investors a relatively safe, short-term investment.
BAs are frequently used in international trade because of advantages for both sides. Exporters often feel
safer relying on payment from a reputable bank than a business with which it has little if any history. Once
the bank verifies, or “accepts”, a time draft, it becomes an obligation of that institution.

Page 19
Most banker’s acceptances are back by invoices, bills of lading or the physical goods being financed. The
issuing bank stamps “accepted” on the document, hence the name.
The importer may turn to a banker’s acceptance when it has trouble obtaining other forms of financing, or
when a BA is the least expensive option. The advantage of borrowing is that it receives the goods and
has the opportunity to resell them before making payment to the bank.
Banks typically charge a 2% fee so if the face value is $1 million then the importer will receive $980,000
net.
Banker’s acceptances can be bought and sold on the secondary market creating liquidity. There is an
active market for BAs.
REPOs:
A repurchase agreement involves the sale of a security with an agreement to repurchase the same
security back at a higher price at a later date.
Repo is short for repurchase agreement. Those who deal in government securities use repos as a form of
overnight borrowing. A dealer or other holder of government securities (usually T-bills) sells the securities
to a lender and agrees to repurchase them at an agreed future date at an agreed price. They are usually
very short-term, from overnight to 30 days or more. This short-term maturity and government backing
means repos provide lenders with extremely low risk.
The sale of the securities is not truly a sale, but rather a loan secured by the underlying security.
Variations
Two main variations on the standard repo include:
· Reverse Repo - The reverse repo is the opposite of a repo. In this case, a dealer buys government
securities from an investor and then sells them back at a later date for a higher price
· Term Repo - Exactly the same as a repo except the term of the loan is greater than 30 days.

Page 20
The repo market
The repo market is significant portion of the money market. The Fed is a major purchaser of repos
providing needed liquidity for traders of short-term money market instruments. The repo market is also an
important outlet for mutual fund managers of both money market funds and short-term bonds dealing in
Treasury securities.
Conclusion
Money market transactions involve short-term instruments with a maturity of one year or less. Money
market securities are very liquid, and are considered very safe. As a result, they offer a lower return than
other securities.
The easiest way for individuals to gain access to the money market is through a money market mutual
fund which are sold through a stable NAV, usually $1 per share.
· T-bills are short-term government securities that mature in one year or less from their issue date.
· T-bills are considered to be one of the safest investments, and are often referred to as “riskless.”
· A certificate of deposit (CD) is a time deposit with a bank. CDs are safe, but the returns aren't great,
and your money is tied up for the length of the CD.
· Commercial paper is an unsecured, short-term loan issued by a corporation. Returns are higher
than T-bills because of the higher default risk.
· Banker's acceptances are negotiable time drafts for financing transactions in goods. BAs are used
frequently in international trade and are generally only available to individuals through money market
funds.
· Eurodollars are U.S. dollar-denominated deposit at banks outside of the United States. The
average Eurodollar deposit is very large. The only way for individuals to invest in this market is indirectly
through a money market fund.
· Repurchase agreements (repos) are a form of overnight borrowing backed by government

securities.

Page 21
Money Market Products: Money market products relate to raising and deploying short term
resources with maturity Maximum 1 year. The money market products are:
1. Call Money: It refers to Overnight placement. It needs to be repaid on Next Working Day.
O/N MIBOR Rate is the indicative rate. Non bank players (FIs/MFs) are not eligible to
participate.
2. Notice Money: It is placement of funds beyond overnight up to maximum period of 14 days.
3. Term Money: It deals with placement of funds in excess of 14 days up to 1 year. 1 to 6
month products are very common.
Other Money Market Products:
1. Treasury Bills:
These are issued by Govt. of India through RBI.
Tenure is 91Days, 182 Days and 364 Days.
These are issued at Discount in auction.
Banks and PDs participate in the auction.
The auction is also available to all financial players (FIs/MFs/Corporate).
Auction takes place on Wednesday every week in case of 91 days bills.
It takes place on Wednesday every Fortnight in case of 182 D and 364 D bills.
2. Commercial Papers & 3. Certificates of Deposits
CP and CD Commercial Papers – CP:

CP is issued by Corporate with Net Worth minimum 4
Crore, Rating min.P2 (now A2) and availing WC limit from
any bank.
CP is issued with tenure 7 Days to 1 year.
CP is issued in multiples of Rs. 5.00 lac.
CP is Promissory Note and is Negotiable and also attracts
Stamp Duty.
It is fairly active in Secondary market.
It is in Demat form and the price is less than Face Value.
Certificate of Deposit – CD
CD is issued by banks
CD is issued with tenure 7 Days to 1 year.
CD is issued in multiples of Rs. 1.00 lac
CD is Promissory Note and is Negotiable and also attracts
Stamp Duty.
CD is not very active in Secondary market
.
3. LAF – Repo and Reverse Repo
It is Lending and Borrowing money for short term period (1 day to 1 year)
Under Repo, RBI purchases securities with commitment to sell at a later date in order to Inject
Liquidity. Presently, Govt. securities are dealt with. All Repo transactions are routed through
CCIL. RBI has permitted Repo in Corporate securities for only ―AA‖ rated companies. But the
market is yet to be activated.
Under Reverse Repo, RBI sells securities with a commitment to buy at a later date in order to
Contain Liquidity.

Page 22
Repo and Reverse Repo transactions are generally conducted for Overnight period through Auction
Twice Daily. The minimum Bid is Rs. 5.00 crore and its multiples. Margin is normally 5%.
(Total available funds to a bank under LAF will be capped at 0.5% of NDTL w.e.f. 24.7.2013)
Latest Repo Guidelines as per Monetary policy dt. 3.6.2014
Cap of Overnight Repo reduced from 0.5 % to 0.25% of NDTL

Continuation of Term Repo up to 0.75% (cap) of NDTL under 7 days to 14 days term
repos.
4. CBLO : Collateralized Borrowings and Lending Obligations:

It is money market instrument launched by CCIL. Borrower can deposit G-sec with CCIL and borrow
funds from others who have surplus funds subject to re-purchase of securities. The tenure is 1 day
to 1 year.
Bills Rediscounting:
Treasury re-discounts bills which are already discounted by other banks. The tenure is 3-6 months.
Capital Markets
A capital market is one in which individuals and institutions trade financial securities. Organizations and
institutions in the public and private sectors also often sell securities on the capital markets in order to raise
funds. Thus, this type of market is composed of both the primary and secondary markets.
Any government or corporation requires capital (funds) to finance its operations and to engage in its own
long-term investments. To do this, a company raises money through the sale of securities - stocks and
bonds in the company's name. These are bought and sold in the capital markets.
Stock Markets
Stock markets allow investors to buy and sell shares in publicly traded companies. They are one of the most
vital areas of a market economy as they provide companies with access to capital and investors with a slice
of ownership in the company and the potential of gains based on the company's future performance.
This market can be split into two main sections: the primary market and the secondary market. The primary
market is where new issues are first offered, with any subsequent trading going on in the secondary market.
Bond Markets
A bond is a debt investment in which an investor loans money to an entity (corporate or governmental),
which borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies,
municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. Bonds
can be bought and sold by investors on credit markets around the world. This market is alternatively referred
to as the debt, credit or fixed-income market. It is much larger in nominal terms that the world's stock
markets. The main categories of bonds are corporate bonds, municipal bonds, and U.S. Treasury bonds,
notes and bills, which are collectively referred to as simply "Treasuries.

Page 23
Foreign Exchange (FX ) Markets
FEDAI – Foreign Foreign Exchange association of India is a non-profit body established in

Exchange 1958 by RBI. All public sector banks, Private Banks, Foreign Banks and
Dealers Cooperative banks are its members. The functions of FEDAI are:
Association of  Forming uniform rules
India  Providing training to bankers; and
 Providing guidance and information from time to time.
The important rules are:
1. Export TransactionsForex liability must be crystallized into Indian
rupees on 30th day after expiry of NTP at TT selling rate(Notional
Transit Period) in case of Sight bills and on 30th day after notional
due date in case of Usance bills. The rule has since been relaxed
and bank can frame its own rule for nos. of days for
crystallization.
2. Concessional rate of interest is applied up to Notional due date or
up to value date of realization of export dues (whichever is earlier)
3. Import Transactions: For retirement of Import bills whether under LC
or otherwise, Bill selling rate or Contracted selling rate
whichever is higher, will be applied.
 DP Bills (sight) are retired after crystallization on 10th day
after receipt.
 DA Bills are retired (crystallized) on Due Date.
4. All Foreign Currency bills under LC, if not retired on receipt, shall be
crystallized into Rupee liability on 10th day after date of receipt of
documents atBill Selling Rate or contracted rate whichever is
higher.
Normal Transit Period is:
- 25 days for export bills,
- 3 days for Rupee bills drawn under LC and payable locally
- 7 days for rupee bills drawn under LC and payable at other centers
- 20 days for Rupee bills not drawn under LC.
- For exports to Iraq, normal transit period is 60 days.
Compensation on Delayed payment:
All Foreign Inward remittances up to Rs.1.00 lac should be converted into
Indian Rupees immediately
The proceeds of any Inward remittance should be credited to the account
within 10 days and advice of receipt is to be sent within 3 days, failing
which, compensation @2% above SB rate will be paid to the beneficiary.
Forward Contracts
 Exchange contracts will be for definite amount and period.
 Contracts must state first and last date of contracts e.g. from 1-31
Page 24
Jan or from 17th Jan to 16th Feb.
 For contracts up to 1 month, option period for delivery may be
specified.
 In case of extension of contract, previous contract will be cancelled

at TT Buying rate or TT selling rate as the case may be.
 Overdue contracts are liable to be cancelled on 7th working day
after maturity date if no instructions are received. The contracts
must state first and last date of the contract.
 Banks are now free to fix their own rates of commission and margin
etc.
AP may be imposed penalty up to 3 times of contravention amount. If
amount is not quantifiable, up to 2.00 lac and up to 5000/- per day is
imposed, if the contravention continues.
ECBs – External External Commercial Borrowings are medium and long term loans as
Commercial permitted by RBI for the purpose of :
Borrowings  Fresh investments
 Expansion of existing facilities
 Trade Credit (Buyers‟ Credit and Sellers‟ Credit) for 3 years or
more.
Automatic Rout
 ECB for investment in Real Estate sector , Industrial sector and
Infrastructure do not require RBI approval
 It can be availed by Companies registered under Indian Company
Act.
 Funds to be raised from Internationally recognized sources such as
banks, Capital markets etc.
 Maximum amount per transaction is USD 20 million with minimum
average maturity of 3 years
 Maximum amount per transaction is USD 750 million with
minimum average maturity of 5 years
.
All in cost ceiling is :
ECB up to 5 years : 6M LIBOR+350 bps.
ECBs above 5 years: 6M LIBOR+500 bps.
Approval Route
Under this route, funds are borrowed after seeking approval from RBI.
 The ECBs not falling under Automatic route are covered under
Approval Route.
 Under this route, Issuance of guarantees and Standby LC are not
allowed.
 Funds are to be raised from recognized lenders with similar caps of
all-in-cost ceiling.
ADRs – American Depository Receipts are Receipts or Certificates issued by US
American Bank representing specified number of shares of non-US Companies.
Depository Defined as under:
Receipts  These are issued in capital market of USA alone.
 These represent securities of companies of other countries.

Page 25
 These securities are traded in US market.
 The US Bank is depository in this case.
 ADR is the evidence of ownership of the underlying shares.
Unsponsored ADRs
It is the arrangement initiated by US brokers. US Depository banks create
such ADRs. The depository has to Register ADRs with SEC (Security
Exchange Commission).
Sponsored ADRs
Issuing Company initiates the process. It promotes the company‟s ADRs in
the USA. It chooses single Depository bank. Registration with SEC is not
compulsory. However, unregistered ADRs are not listed in US exchanges.
GDRs – Global Global Depository Receipt is a Dollar denominated instrument with
Depository following features:
Receipts 1. Traded in Stock exchanges of Europe.
2. Represents shares of other countries.
3. Depository bank in Europe acquires these shares and issues
“Receipts” to investors.
4. GDRs do-not carry voting rights.
5. Dividend is paid in local currency and there is no exchange risk for
the issuing company.
6. Issuing Co. collects proceeds in foreign currency which can be used
locally for meeting Foreign exchange requirements of Import.
7. GDRS are normally listed on “Luxembourg Exchange “ and traded
in OTC market London and private placement in USA.
8. It can be converted in underlying shares.
IDRs – Indian Indian Depository Receipts are traded in local exchanges and represent
Deposits security of Overseas Companies.
Receipts
CDF (Currency CDF is required to be submitted by the person on his arrival to India at the
Declaration Airport to the custom Authorities in the following cases:
Form) 1. If aggregate of Foreign Exchange including foreign currency/TCs
exceeds USD 10000 or its equivalent.
2. If aggregate value of currency notes (cash portion) exceeds USD
5000 or its equivalent.
Form A1 and Form A1 is meant for remittance abroad to settle imports obligations. It is
Form A2 not required if value of imports is up to USD 5000.
Form A2 is meant for remittance abroad on account of any purpose other

than Imports. It is not required if remittance is up to USD 25000.
LIBOR Rate London Interbank Offering rate is the rate fixed at 11 am (London time) at
which top 16 banks in London offer to lend funds in interbank markets.
Interest RBI vide notification no. DBOD.Dir.BC.No.43/04.02.001/2013-14 dated

Subvention 26.08.2013 has informed that Government has decided to increase the rate of
on Export interest subvention on the existing sectors from the present 2% to 3% with
Credit effect from August 1, 2013 on the same terms and conditions.

Page 26
(i) Accordingly, the interest rate chargeable to the exporters will be
reduced as per Base Rate system in the existing sectors eligible for export
credit subvention by the amount of subvention available, subject to a floor rate
of 7%. It should be ensured that the benefit of 3% interest subvention is

passed on completely to the eligible exporters.
Foreign It has been decided to liberalize this facility further. Accordingly, AD Category
Currency - I banks may henceforth borrow funds from their Head Office, overseas
Borrowings branches and correspondents and overdrafts in Nostro accounts up to a limit
by ADs from of 100 per cent of their unimpaired Tier I capital as at the close of the
Overseas previous quarter or USD 10 million (or its equivalent), whichever is higher,
as against the existing limit of 50 per cent (excluding borrowings for financing
of export credit in foreign currency and capital instruments).
Trade Credit – Banks may approve availing of trade credit not exceeding USD 20 million up
Revised RBI to a maximum period of five years (from the date of shipment) for companies
guidelines in the infrastructure sector, subject to certain terms and conditions stipulated
therein.
On a review, it has been decided to allow companies in all sectors to avail of

trade credit not exceeding USD 20 million up to a maximum period of five
years for import of capital goods as classified by Director General of
Foreign Trade (DGFT).
Crystallization RBI has advised that AD will crystallize i.e. convert foreign currency deposit
of Inoperative (with fixed maturity date) into INR, if remains in-operative for 3 years from
Foreign date of maturity.
Currency
Deposits If a deposit account has not been operated for 10 years, the amount will be
transferred to DEAF.

Page 27
Foreign It includes all Currency, deposits, Credits and Balances payable in Foreign
Exchange currency. It also includes Drafts/TCs, LCs and Bills of Exchange payable in
Foreign currency. In nut shell, all claims payable abroad is Foreign
Exchange.
On the other hand, Foreign Currency is narrow term which includes hard
currency say Pounds, Dollars etc.
Forex Market It comprises of individuals and entities including banks across the globe
without geographical boundaries. Forex market is dynamic and it operates
round the clock. Exchange rate of major currencies change after about
every 4 seconds. It opens from Monday to Friday except in Middle east
countries where it is closed on Friday and opens on Saturday and Sunday.
Exchange Rate When settlement of funds and exchange
mechanism of currency takes place_________
TOD rate or Cash Rate Same day (it is also called ready rate)
TOM Rate Next working day
Spot Rate 2nd working day (48 hours)
Forward Rate After few days/months
 If Next day or 2nd day is holiday in either of the two countries, the
settlement will take place on next day. For example Spot deal is
stuck on 23rd Dec. 25th is Christmas Day and 26th is Sunday. Under
such circumstances, value date will be 27th i.e. Monday.
 There are two types of rates- Fixed and Floating. Floating rates are
determined by market forces of Demand and Supply. India
switched to Floating exchange rates regime in 1993.
Buy and Sell

Maxim Buy Low Sell High (Direct Quotations)
Buy rate is also called Bid Rate and Sell Rate is called Offer Rate.
Buy High Sell Low (Indirect Quotations)

 When Local Currency is fixed, bank will like to have more foreign
currency while buying and give less foreign currency while selling.
Forward Rates It is required when currency is exchanged after few months/days.

Buy Transactions :
(Premium is Spot Rate (+ ) premium OR ( - ) Discount
always added and ( Lower premium is added OR Higher discount is deducted )
Discount is Sale Transactions:
always deducted Spot Rate (+ )Higher premium OR (-) Lower discount
from Spot Rate to
arrive at Forward (So that currency may become cheaper while buying and dearer while
Rate) selling
In India, Forward Contracts are available for Maximum period

of 12 Months.

Page 28
Examples of Euro 1 = USD$1.3180/3190
Forward rates Forward differentials:
1M = 15/18, 2M= 30/37,3M=41/49
Calculate 2M Bid rate and 3M Offer rate
2M Bid rate = 1.3180+.0030 = 1.3210

3M Offer rate = 1.3190+.0049=1.3239
Exchange
Margin Exchange margin is deducted while buying and added while selling.
Direct, Indirect Direct Rates

and Cross Rates Foreign Currency is fixed ---say 1USD = INR 55.70
Indirect Rates
Local currency remains fixed---say Rs. 100 = 1.93 USD
At present, following 4 currencies are quoted in Indirect mode:

EURO, GBP, AUD and NZ$
Cross Rates
Cross rate is price of currency pair which is not directly quoted. It is arrived
at from price of two other currency equations.
1. Suppose bank hasto Quote GBP against INR, but in India, GBP is
not quoted directly. In India,
1USD =48.10 and GBP/USD is quoted as 1GBP= USD1.6000.
Therefore 1 GBP = 48.10X1.6 = 76.96
2. An Import bill of GBP 100000 has to be retired. Rates are:

1 GBP=1.5975/85 USD
1USD = 48.14/15 INR
TT margin =.20%
Here Cross selling rate of both currencies will apply.
Bank has to remit GBP. GBP/USD Quote (Indirect) will be available in

International market whereas USD/Rupee Quote (Direct) is available in
local market. Bank will sell USD to buy GBP.
While buying GBP, bank would like to quote higher rate as Buy high Sell
Low maxim will apply. 1GBP = 1.5985
While selling USD, bank will opt to quote higher rate as Buy Low Sell High
maxim will apply.
1GBP=1.5985*48.15 = 76.9675 + Margin@.20% = 77.1214 (say

77.1225)

Page 29
Per Unit and 100 All currencies are quoted as per unit of currency whereas the following
Unit Quotes currencies are quoted as 100 units of Foreign currency:
1. Japanese Yen
2. Indonesian Rupiahs
3. Kenyan Schilling.
4. Belgian Francs
5. Spanish Peseta
Intervening Currencies in India

1. US Dollar
2. British Pond
Cross Rates Suppose, In India, 1USD=42.8450/545 and in UK, 1USD=.7587/.7590

where two EURO. The customer intends to remit Euro and he desires to know 1 Euro
markets are = ? INR. We will buy Euro against sale of USD. (One is domestic market
involved and and other is International market)
one of them is Calculation
international Sell rate of 1USD = .42.8545 and Buy Rate of Euro is 1USD=.7587
market .7587Euro = 1USD = INR 42.8545
1 EURO = 42.8545/.7587 = 56.48
In India, there is Full Convertibility of Current Account transactions.
Example Where one currency is bought and another currency is sold
A wants to remit JPY 100.00 million at TT spot with margin @.15%. Given
USD/INR at 48.2500/2600 and in Japan USD/JPY = 90.50/60
Solution:
We will buy Japanese Yen and sell USD and the rate to be applied is:
48.2600/90.50 = .533260 per JPY
Rate per 100 JPY = 53.3260 + Margin @.15%(.0799) = 53.4059 (say
53.4050)
TT Rates and Bill Rates
Following 4 types of buying and selling rates are important:

10. TT Buying rate
11. Bill Buying rate
12. TT Selling rate
13. Bill Selling rate
In Interbank market, exchange rate is quoted up to 4 decimals in multiples of 0.0025. e.g.

1USD=53.5625/5650
For customers the exchange rate is quoted in two decimal places i.e. Rupees and paisa. e.g.
1 USD =Rs. 55.54.

Page 30
Amount being paid or received will be rounded off to nearest Rupee.
TT Buying Rate
It is required to calculate when our Nostro account is already credited or
being credited without delay e.g. Receipt of DD, MT, TT or collection of
Foreign bills. This rate is used for cancellation of Forward Sales Contract.
Calculation
Spot Rate – Exchange Margin
Bill Buying Rate Bill Buying rate is applied when bank gives INR to the customer before
receipt of Foreign Exchange in the Nostro account i.e. Nostro account is
credited after the purchase transaction. In such cases.
Examples are:
Export Bills Purchased/Discounted/Negotiated.
Cheques/DDs purchased by the bank.
Calculation
Spot Rate + Forward Premium (or deduct forward discount) –
Exchange margin.
(b) Selling RateAny sale transaction where no delay is involved is quoted at TT selling rate. It is
desired in issue of TT, MT or Draft. It is also desired in crystallization of
Export bills and Cancellation of Forward purchase contract.
Calculation
Spot Rate + Exchange Margin
Bill Selling Rate It is applied where handling of documents is involved e.g. Payment against
Import transactions:
Calculation
Spot Rate + Exchange Margin for TT selling + Exchange margin for
Bill Selling
Examples
Q. 1
Bank received MT of USD 5000 on 15th Sep. The Nostro account was already credited. What
amount will be paid to the customer: Spot Rate 34.25/30. Oct Forward Differential is 22/24.
Exchange margin is .80%
Solution
(i) buying Rate will be applied
34.25 - .274 = 33.976 Ans.
Q. 2
On 15th July, Customer presented a sight bill for USD 100000 for Purchase under LC. How
much amount will be credited to the account of the Exporter. Transit period is 20 days and
Exchange margin is 0.15%. The spot rate is 34.75/85. Forward differentials:
Aug: .60/.57 Sep:1.00/.97 Oct: 1.40/1.37
Solution
Bill Buying rate of August will be applied.
Spot Rate----34.75 Less discount .60 = 34.15

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Less Exchange Margin O.15% i.e. .0512 =34.0988 Ans.
( Transit period is rounded to next month since currency will be cheaper as it is buy transaction)
Q. 3
Issue of DD on New York for USD 25000. The spot Rate is IUSD = 34.3575/3825 IM forward
rate is 34.7825/8250
Exchange margin: 0.15%
Solution:
TT Selling Rate will Apply
Spot Rate = 34.3825 Add Exchange margin (.15%) i.e. 0.0516
TT Selling Rate = Spot Rate + Exchange Margin = 34.4341 Ans.
Q. 4
On 12th Feb, received Import Bill of USD-10000. The bill has to retired to debit the account of
the customer. Inter-bank spot rate =34.6500/7200. The spot rate for March is 5000/4500. The
exchange margin for TT selling is .15% and Exchange margin for Bill selling is .20%. Quote
rate to be applied.
Solution
Bill Selling Rate will be applied.
Spot Rate + Exchange margin for TT Selling + Exchange margin for Bill selling =
34.7200+.0520+.0695 = 34.8415 Ans.
Forward Contract – Due date and Transit

period (Bill Buying Rates and Bill Selling
Rates)
If due date after adding transit period and forward period falls in a particular month
Buy Transactions
Quote rates applicable to lower month (if currency is at premium) and same month (if
currency is at discount) due to the reason that currency becomes cheaper and Buy low
and Sell High
Sale Transactions
Quote rates applicable to Same month (if currency is at premium) and lower month (if
currency is at discount) due to the reason that currency becomes dearer and Buy low and
Sell High Forward contracts can be booked by Resident Individuals up to USD1lac.
Buy Spot Rate on 16.07.2012 is 1 USD = 34.6850/7275

Transactions- Spot August = 4000/4200, Spot Sep = 7500/7700, Spot Oct = 1.05/1.07
Currency at Spot Nov =1.40/1.42
Premium Transit Period = 25 days , Exchange Margin = 0.15%
Transit Period is Calculate Forward Buying Rate of 3 M Usance bill.

rounded off to
lower month in Due date of realization of Bill = 16.7.2012 + 3M + 25 days = 9.11.2012
which due date By Rounding Transit period to lower month, Oct Rate will be as under:
falls 34.6850+1.05 - .0536 (exchange margin) = 35.6814

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Buy On 22.7.2013,
Transactions- Spot Rate is 35.6000/6500 Forward 1M=3500/3000 2M=5500/5000
Currency at 3M=8500/8000
Discount Transit Period ----20 days Exchange Margin = 0.15%.
Find Bill Buying Rate & 2 M Forward Buying Rate
Transit Period is
rounded off to Solution
same month in Bill Buying Rate (Ready) : Bill Date +20 days = 11.8.2013
which due date Spot Rate = 35.6000 Less Forward Discount 1M (0.3500) Less Exchange
falls Margin 0.15% (0.529)
i.e. 35.6000-.3500-.0529(0.15% of 35.2500) = 35.1971
2 M Forward Buying Rate: = Transaction date +2M +20 days =11.10.13

3 Month Forward Buying Rate will be applied.
Spot Rate = 35.6000 Less Forward Discount of 3M (.8500) Less
Exchange Margin (.0521)
i.e. 35.6000-.8500-.0521(0.15% of 34.7500) = 34.6979 Ans.
Cancellation of
Deal Cancellation of Buy contract is done at TT selling rate and cancellation of
Sale contract is done at TT buying rate.
Example
A bank purchased export bill of USD 50000 at Rs. 42.66, which was dishonored for non-
payment. How much amount will be recovered from exporter, if Spot rate is 42.2000/3000.
Exchange margin is 0.15%.
Solution
(iv) selling rate will be applied to recover the
amount TT Selling rate= Spot rate +Exchange
margin
=42.3000+0.06345 = 42.36345= 42.3625 (Rounding off to nearest .0025)
Amount to be debited to customers‟ account =50000*42.3625=2118125 --------------Ans.
Value Date It is date on which payment of funds or entry to an account becomes

effective. Under TT transaction, value date is same. In other spot and
forward contracts, Value Date is the date when Nostro Account is actually
credited.
Arbitrage It consists of purchase of one currency in one center accompanied by

immediate resale against same currency at other center.
Per Cent and Per 1% is on part of 100 whereas per mille is 1 part of thousand
Mille
Authorized
Dealers Authorized dealers are called Authorized Persons. The categories are as
under:
AP category 1 -----AD banks, FIs dealing in Forex transactions.
AP category 2-----Money changers authorized to sell and purchase
Foreign currency notes, TCs and Handle remittances.

Page 33
AP category 3----Only purchase of Foreign currency and Travelers
Cheques. These were earlier called “Restricted Money Changers.”
Forward Point Spot Rate

Calculation Euro 1 = US$1.3180
3 Month Forward Rate
Euro 1 = US$1.3330
Forward Point = 1.3330 – 1.3180 = 150 points
Arbitrage & It consists of purchase of one currency in one center accompanied by

Forward Point immediate resale against same currency at other center.
Calculation Example:
Let us borrow from one center and lend at other center at higher rate. In
USA, rate of interest is 6% whereas in Germany, rate of interest is 3% for

EURO. We will borrow from Germany and lend in USA where 1EURO =1.5
USD
Forward Point Calculation for 3 Months
Spot Rate x Interest rate difference x Forward

Period 100 x Nos. of days in a year
(c) 1.5 x 3 x 90
100*360
=0.01125
3 month swap rate = 1.5 + 0.01125 = 1.5112

Calculation of Interest Differential
Forward Points x Nos. of Days x 100

Forward Period x Spot Rate
= 0.01125 x 360 x 100 =3%

1.5 x 90
Some additional examples

Ex.1
Calculate TT selling rate for GBP/INR, if USD/INR is 43.85/87 & GBP/USD is 1.9345/49. A
margin of 0.15% is to be loaded.
Solution ; TT selling rate of GBP/INR
1 GBP = 1.9349 USD
= (1.9349 *43.87)+Margin 0.15%
=84.8841+.1273=85.0114 INR 85.0114-------------------------Ans.
Ex.2

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A foreign correspondent intends to fund his Vostro Account maintained with Mumbai branch of
SBI. What rate will be quoted if 1 USD = 44.23/27 and margin is 0.08% Solution : TT buying
rate will quoted
44.23-.035 = 44.195 ---------------------------------------Ans.
Ex.3
If Swiss Franc is quoted as USD = CHF 1.2550/54 and in India, USD =INR43.50/52, how much
INR will exporter get for his export bill of CHF 50000.
Solution :
Swiss Franc will be sold for USD in overseas market and USD will be bought in local market i.e.
Sell Rate of CHF and Buy rate of USD.(Buy Low Sell High in both quotations)
1 USD = 1.2554 CHF and 1USD=INR 43.50
1CHF=43.50/1.2554 = 34.6503
Amount as paid to exporter = 34.6503*50000=17,32,515/- ----------------Ans.
(Both are direct quotations and Maxim Buy Low Sell High will apply in both)
Ex.4
If Swiss Franc is quoted as USD = CHF 1.2550/54 and USD =INR43.50/52, how much INR will
Importer pay for his import bill of CHF 50000.
Solution :
Swiss Franc will be bought against USD in overseas market and USD will be sold in local
market i.e. Buy rate of CHF and Sell rate of USD.
1 USD = 1.2550 CHF and 1USD=INR 43.52
1CHF=43.52/1.2550 = 34.6773
Amount to be received from Importer =
34.6773*50000 =17,33,865/- ----Ans.
Q. 5
Exporter received Advance remittance by way of TT French Franc 100000.
The spot rates are in India IUSD = 35.85/35.92 1M forward =.50/.60
The spot rates in Singapore are 1USD = 6.0220/6.0340 1M forward
=.0040/.0045 Exchange margin = 0.8%
Solution
Cross Rate will apply
USD will be bought in the local market at TT Buying rate and sold at Spot Selling Rates in
Singapore for French Francs:
(i) Buying Rates USD/INR = Spot rate – Exchange margin = 35.8500-.0287 =
35.8213 Spot Selling Rate for USD/Francs = 6.0340
Inference:
6.0340 Franc = 1USD
= INR 35.8213
1 franc = 35.8213/6.0340 = INR 5.9366 Ans.

Page 35
Q.6 What rate will be quoted for repatriation of FCNR deposit (spot rate or TT rate)
Ans. No rate as the amount is to be paid in Foreign currency itself.
Forex Dealing It is a service branch which deals Buying and Selling Operations of the
Room bank. It manages Foreign currency Assets and Liabilities and also
operations manages Nostro accounts.
A dealer has to maintain two positions:

(a) Funds position
(b) Currency Position
Currency position can be Overbought or Oversold.It is called Open
position. Hedging is done to square off the open position.
Mid Office deals with Risk Management.
Back Office takes care of settlement and Reconciliation.
FOREX RISKS AND DERIVATIVES
Foreign  Exchange Risk (Transaction Exposure, Translation Exposure and

Exchange Risks Operational Exposure)
 Settlement Risk
 Liquidity Risk
 Country Risk or Sovereign Risk
 Interest Rate Risk or Gap risk
 Operational Risk
 Legal Risk
 Buyer Risk, Seller Risk and Shipping Risk.
ICG (Internal Overnight Limit Maximum exposure a bank can keep overnight
control Day Light Limit : Maximum exposure a bank can expose at any time during
guidelines of a day.
RBI Gap Limit: Maximum inter-period say a month exposure which a bank can
keep.
Counter party limit
Country limit
Dealer limit
Stop Loss limit
Settlement limit
Deal Size limit
 Net Overnight Open Position (NOOPL) – for calculation of capital
charge on foreign exchange risk may be fixed by Board. Such limit
should not exceed 25% of total capital.
 Aggregate Gap limit (AGL) should not exceed 6% of total capital.
CCIL Clearing Corporation of India Limited is the institution created for clearing
and settlement of Forex deals amongst Primary dealers. It mitigates
settlement Risks.. Both counter parties should be members of CCIL. It

Page 36
handles USD/INR deal settlements with netted amounts.
Derivatives Instruments which reduce risk to an accepted level by future coverings are
called derivatives. Popular derivatives are:
1. Forward Contracts
2. Futures
3. Options
4. Swaps
Forward It is a derivative product in which seller agrees to deliver goods on some
Contract future date at fix price. The Quantity and delivery date is fixed as per
requirements suited to the party. These are OTC products.
Forward differentials are calculated on the basis of difference in interest

rates of countries of currency.
Currency with lower interest would be at a premium and currency with
higher interest will be at a discount in future.
Futures It is a derivative product that is based on agreement to buy or sell an asset
at certain price in Future.
Futures are standardized contracts with regard to quantity and Delivery
date only. The delivery is not must. Margin is kept each day and it is
adjusted. These Futures are traded in Exchanges,
Difference between Futures and Forward Contracts

Forward Contract Futures
It is OTC (Over the Counter) Product It is Exchange traded product
It can be for any odd amount It is always for Standard amount
It can be for any Odd period It is always for Standard period
Delivery is essential Delivery is not must
Margin is not essential It is based on Margin requirement and
Marked to market
Options Option is Right to buy or sell an agreed quantity of currency or commodity
without obligation to do so. The buyer will exercise the option if market
price is in favor or otherwise option may be allowed to lapse.
Call Option
Right to buy at fixed price on or before fixed date.
Put Option
Right to sell at fixed price on or before fixed date.
 Final day on which it expires is called maturity.
CALL OPTION;
 If Strike price is below the spot price, the option is In the money.
 If Strike price is equal to the spot price, the option is At the money.
 If Strike price is above the spot price, the option is Out of money.
PUT OPTION
 If Strike price is more the spot price, the option is In the money.
 If Strike price is equal to the spot price, the option is At the money.
 If Strike price is less than spot price, the option is Out of the money.
American Option
Option can be exercised on any day before expiry.

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European Option
Option can be exercised on maturity only.
Swap Foreign Exchange transactions where one currency is sold and purchased
Transactions - for another simultaneously.
Swap Deal may involve:
(a) Simultaneous purchase of spot and sale of forward or vice versa.
(b) Simultaneous sale and purchase, both forward but for different
maturities. It is called “Forward to Forward Swap”.
 There should be simultaneous buying and selling of same foreign

currency of same value for different maturities.
 The deal should be concluded with the understanding between
the banks that it is Swap Deal.
 Buying and Selling is done at same rate. Only Forward margin
enters into the deal as a Swap difference.
Example:
PNB approaches UCO bank to quote its Swap rate for spot to 3months.
UCO bank has to sell spot and buy forward. Swap deal is at forward
differential of Rs. 1.40/1.35. UCO bank will sell spot and buy forward at a
discount of Rs.1.40 (Higher discount at purchase). Swap Difference will
be at Discount of Rs.1.40.
CORRESPONDENT BANKING
Correspondent It is a relationship between two banks which have mutual accounts with
Banking each other:
Nostro accounts “ Our account with you “
E.g. SBI Mumbai maintaining USD account with City Bank, New York
Vostro accounts “Your account with us”
E.g.. City Bank New York maintains Rupee account with SBI Ludhiana.
Loro account“His account with them”
E.g. City bank referring to Rupee account of Bank of America with SBI
Mumbai.
Mirror account---- It is replica ofNostro account to reconcile.
What is Swift?
Society for Worldwide Interbank Financial Telecommunications. There are
8300 members of the society. Financial messages are sent through Swift.
The messages are automatically authenticated through BKE (Bilateral Key
Exchange). It is operational 24 hours and 365 days. Swift has now
introduced new system of authentication system wherein banks are
required to have authentication key exchanged between them through a set
format by use of RMA (Relationship Management Application). This is
called BIC or Bank Identifier Code).
CHIPS – New York
Clearing House Inter Bank Payment System.
CHIPS is major payment system in USA with 48 members. The participants
use the system throughout the day for sending and receiving electronic

Page 38
payment instructions. These are netted at end of the day and net position is
debited or credited to Nostro account of Federal Reserve.
It is used for Foreign Exchange Inter bank settlements and Euro Dollar
Settlements.
FEDWIRE -USA
It is US payment system being operated by Federal Reserve Bank. It
handles majority of domestic payments. All US banks maintain account with
Federal Reserve Bank and are allotted ABA numbers to identify senders
and receivers of payments.
CHAPS – London
Clearing House Automated Payment System
It is UK based Settlement System. It handles receipts and Payments in UK.
It has 16 member banks and 400 Indirect members.
TARGET
The full form of TARGET is Trans-European Automated Real-Time Gross
Settlement Express Transfer System. It is Euro Payment System which
comprises of 15 national RTGS systems working in EUROPE. It process
high value payments from 30000 participating institutions across Europe.
RTGS-plus
RTGS plus has over 60 participants. It is a German Hybrid clearing system
and operating as a European oriented RTGS and Payment system.
RTGS & NEFT in India

Real Time Gross Settlement is a payment system for Interbank transfer
with minimum Rs. 2.00 lac. This system is managed by IDRBT, Hyderabad,
which connects all banks to Central server maintained by RBI. The network
is INFINET (Indian Financial Network)
Timings are:
8:00AM to 8:00PM (Saturday: 8:00 to 3:30 PM)
NEFT (National Electronic Fund Transfer) is mainly used for low amount
transactions. However, there is no minimum and maximum limit. The
timings are: 8:00AM to 7:00PM (Saturday 8:00 to 1:00 PM). There are 12
batches daily except Saturday with 6 batches. The time period is B+2.
Who is Resident A person who resides in India for more than 182 days during preceding
Indian? Who is financial year is Resident Indian. A person who is not resident is Non-
Non- Resident Resident.
Who is NRI? A person who is citizen of India but resides outside India owing to:
 Employment, Business, vocation-------indicating indefinite period of
stay outside.
 Work abroad on assignment with Foreign Govt., UNO, and IMF etc.
 Deputation officially.
 Study abroad.
PIO - Persons of PIO is a person who is citizen of any other country, but he at any time:
Indian Origin  Held Indian Passport
 He or his grand-parents or grand grand parents were Indian citizens
by virtue of constitution of India or under Indian Citizenship Act.
 The person is spouse of Indian Citizen.

Page 39
OCB – Overseas OCBs are firms, Cos, Society owned directly or indirectly to the extent of at-
Corporate least 60% by NRIs.
Bodies It also includes overseas trusts where at-least 60% irrevocable beneficial
interest is held by non-residents directly or indirectly.
NRE Deposit Only non-resident Indians can open following NRE accounts with banks:
Accounts  Fixed Deposits & Recurring Deposits
 SB and CA Deposits
The other features are:

 Deposits are held in Indian currency.
 The Principal and Interest both can be repatriated.
 Account holder bears the risk of fluctuations in currency rates.
 Account will be opened with proceeds from abroad.
 Funds originating in India cannot be deposited.
 Interest rates Have since been deregulated by RBI..
 No lien is permitted to be marked against SB deposits.
 Joint account with Indians can be opened as Former or
Survivor.
 Cheque book and IBS allowed.
 Nomination in favor of NRI/Resident Indian allowed.
 Interest Income is exempt from Income Tax, Gift Tax or Wealth
Tax.
 TOD allowed up to Rs. 50000/- for maximum 2 weeks.
 Account can be operated in India through mandate also.
 Loans against FDR to 3rd parties allowed provided NRI is
personally present for documentation.
FCNR- B FCNRB accounts can also be opened by NRIs. The conditions of NRE
accounts deposits as explained above are also applicable on FCNR-B deposits with
the following additional features:
 Only FD 1-5 years tenure can be opened.
 The amount is kept in Foreign Currency and repaid in the Foreign
Currency.
 6 currencies i.e. GBP, USD, Euro, JPY, CAD. AUD are eligible
currencies for opening the account.
 No exchange risk for the customer. The bank bears the risk.
 Interest on the basis of 360 days in a year
 Half yearly intervals of 180 days
 Interest exemptions from I.T.
 Operating by P/A not permitted.
 The amount of Principle and Interest is freely repatriable
 Interest Rate on 1-3 years FD is LIBOR + 200 bps and that of 3-5
years FD is LIBOR + 400 bps.(Previously, it was LIBOR + 300 bps)
Rupee Loans Demand Loan or Overdraft is allowed against FDR. There is no maximum
against limitof loan against pledge of FDR (Which was100 lac earlier). The loan
NRE/FCNRB can be availed for :
FDRs  Personal purpose.
 Investment.
 Purchase of property.

Page 40
The loan can be repaid :
 From proceeds of abroad
 From NRE/FCNR account
 From local resources through NRO account.
NRO accounts Non-Resident accounts can be opened:
 By any person resident outside India (other than a person resident
in Nepal and Bhutan) can open NRO account, maintain it for 6M
and can convert it into foreign currency after completion of stay
provided no local funds are credited to the account.
 Deposit may be held jointly with residents
 Currency of Deposit is Indian Rupees
 Not Repatriable except for the following in the account - 1) Current
income 2) Up-to USD 1 Million per financial year.
 Type of Deposit may be Savings, Current, Recurring, Fixed Deposit.
 Existing accounts of residents are converted to NRO category
consequent upon their becoming NRIs.
 TDS called withholding Tax is applicable at 30% + Service Tax
+Education Cess.
 Prior permission of RBI is required to open NRO account of
Pakistani national. However permission is not required for
opening NRO account of Bangladeshi citizen.
Resident It has been decided that AD banks may include an NRI close relative
Accounts – (relatives as defined in Section 6 of the Companies Act, 1956) in existing /
Operation Either new resident bank accounts as joint holder with the resident account holder
or Survivor with on “Either or Survivor” basis subject to the following conditions:
non- resident
 Such account will be treated as resident bank account

 Cheques, instruments, remittances, cash, card belonging to the NRI
close relative shall not be eligible for credit to this account
 The NRI close relative shall operate such account only for and on
behalf of the resident for domestic payment
Where due to any eventuality, the non-resident account holder becomes
the survivor, it shall be categorized as NRO account
Investments by NRIs are allowed to invest in India on Repatriation basis as well as on Non-
NRIs in India Repatriation basis. NRI can purchase Equity Shares, Preference shares
and Convertible Debentures in Indian companies subject to conditions
under following categories:
1. Foreign Direct Investments.
2. Portfolio Investment
3. Purchase and Sale of Shares on Non-Repatriation basis.
4. Purchase of other securities of Indian Companies.
5. Exchange Traded Derivatives.
Besides above, NRIs are permitted to invest in:
 Units of UTI and Mutual Funds
 Company Deposits – Minimum 3 years‟ period.
 Share in Proprietorship firm/partnership firm provided the firm is not

Page 41
engaged in Agriculture and Plantation activity or Property business.
 Acquiring of Immovable property not being Agriculture, Plantation or
Farm House.
NRI can acquire IP by way of :
 Purchase out of funds received in India
 By way of gift from resident in India or outside India.
 By way of Inheritance from a person resident outside India.
The Income from the property or sale proceeds of the property can be
repatriated outside India up to monetary limit of USD1 Million per financial
year provided all the applicable taxes are paid.
NRIs can invest in Govt. securities, treasury bills on non- repatriation
basis. However, NRI cannot invest in Small saving Schemes including
PPF.
Loans to NRIs NRI can avail the following loans:
1. Rupee Loans in India
- Up to up to any limit subject to prescribed margin.
- For personal purpose, contribution to Capital in Indian
Companies or for acquisition of property.
- Repayment of loan will be either from inward remittances or
from local resources through NRO accounts.
2. Foreign Currency Loans in India
- Against security of funds in FCNR-B deposits.
- Maturity of loan should not exceed due date of deposits.
- Repayment from Fresh remittances or from maturity proceeds of
deposits.
3. Loans to 3rd Parties provided
- There is no direct or indirect consideration for NRE depositor
agreeing to pledge his FD.
- Margin, rate of Interest and Purpose of loan shall be as per RBI
guidelines.
- The loan will be utilized for personal purpose or business

purpose and not for re-lending or carrying out
Agriculture/Plantation/Real estate activities.
- Loan documents will be executed personally by the depositor
and Power of attorney is not allowed.
4. Housing Loans to NRIs : HL can be sanctioned to NRIs subject to
following conditions:
- Quantum of loan, Margin and period of Repayment shall be
same as applicable to Indian resident.
- The loan shall not be credited to NRE/FCNR account of the
customer.
- EM of IP is must and lien on assets.
- Repayment from remittance abroad or by debit to NRE/FCNR
account or from rental income derived from property.
Portfolio RBI has permitted NRIs to invest in PIS subject to following conditions:
Investment  Investment on repatriation as well as non-repatriation basis.
Scheme for NRIs  Purchase/Sale of shares and debentures

Page 42
 Through Regd. Brokers
 Amount is routed through designated branch.
 Only delivery based transactions
 Investment on Repatriation basis can be made out of inward
remittances or out of NRE/FCNR deposits.
 Investment on Non-Repatriation basis can be made out of NRO
deposits besides NRE/FCNR deposits.
Ceiling PER Investor

5% of paid up capital of Indian Company or 5% of Value of each issue of
convertible debentures.
Ceiling PER Investor Company
10% of paid up capital of Indian Company or 10% of Value of each issue of
convertible debentures.

Page 43
Gist of Important FEDAI Rules
Rule 1: Hours of Business

1.1 The exchange trading hours for Inter-bank forex market in India would be from
9.00 a.m. to 5.00 p.m. No customer transaction should be undertaken by the
Authorised Dealers after 4.30 p.m. on any working day.
1.2 Cut-off time limit of 05.00 p.m. is not applicable for cross- currency transactions.
In terms of paragraph 7.1 of Internal Control Guidelines over Foreign Exchange
Business of Reserve Bank of India (February 2011), Authorised Dealers are
permitted to undertake cross-currency transactions during extended hours, provided
the Managements lay down the extended dealing hours.
1.3 For the purpose of Foreign Exchange business, Saturday will not be treated as
a working day.
1.4 “Known holiday” is one which is known at least 4 working days before the date.
A holiday that is not a “known holiday” is defined as a “suddenly declared holiday”.
Rule 2: Export Transactions

2.1. Post-shipment Credit in Rupees
(c) Application of exchange rate: Foreign Currency bills will be
purchased/discounted/ negotiated at the Authorised Dealer’s current bill buying rate
or contracted rate. Interest for the normal transit period and/or usance period shall
be recovered upfront simultaneously.
(d) Crystallization and Recovery:
(ii) Authorized Dealers should formulate own policy for crystallization of foreign
currency liability into rupee liability, in case of non-payment of bills on the due
date.
(iii) The policy in this regard should be transparently available to the customers.
(iv) For crystallization into Rupee liability, the Authorised Dealer shall apply its TT
selling rate of exchange. The amount recoverable, thereafter, shall be the
crystallized Rupee amount along with interest and charges, if any.

Page 44
(v) Interest shall be recovered on the date of crystallization for the overdue period
at the appropriate rate; and thereafter till the date of recovery of the
crystallized amount.
(vi) Export bills payable in countries with externalization issues shall also be
crystallized as per the policy of the authorised dealer, notwithstanding receipt
of advice of payment in local currency.
(d) Realization of Bills after crystallization: After receipt of advice of realization,
the authorised dealer will apply TT buying rate or contracted rate (if any) to convert
foreign currency proceeds.
(e) Dishonor of bills: In case of dishonor of a bill before crystallization, the bank
shall recover:
(ii) Rupee equivalent amount of the bill and foreign currency charges at TT selling rate.
(iii) Appropriate interest and rupee denominated charges.
2.2. Application of Interest
(c) Rate of interest applicable to all export transactions shall be as per the
guidelines of Reserve Bank of India from time to time.
(d) Overdue interest shall be recovered from the customer, if payment is not
received within normal transit period in case of demand bills and on/or before
notional due date/actual due date in case of usance bills, as per RBI directive.
(e) Early Realization: In case of early realization, interest for the unexpired period
shall be refunded to the customer. The bank shall also pay or recover notional swap
cost as in the case of early delivery under a forward contract.
2.3. Normal Transit Period:
Concepts of normal transit period and notional due date are linked to concessional
interest rate on export bills. Normal transit period comprises the average period
normally reckoned from the date of negotiation/purchase/discount till the receipt of
bill proceeds.
It is not to be confused with the time taken for the arrival of the goods at the destination.
Normal transit period for different categories of export business are laid down as below:
(c) Fixed Due Date: In the case of export usance bills, where due dates are fixed,
or are reckoned from date of shipment or date of bill of exchange etc, the actual due
date is known. Therefore, in such cases, normal transit period is not applicable.
(d) Bills in Foreign Currencies – 25 days
(e) Exports to Iraq under United Nations Guidelines – Max. 120 days

Page 45
(g) Bills drawn in Rupees under Letters of Credit (L/C)
(i) Reimbursement provided at centre of negotiation - 3 days
(ii) Reimbursement provided in India at centre different from centre of
negotiation - 7 days
(iii) Reimbursement provided by banks outside India - 20 days
(iv) Exports to Russia under L/C where reimbursement is provided by RBI - 20 days.
(h) Bills in Rupees not under Letter of Credit - 20 days
(i) TT reimbursement under Letters of Credit (L/C)
(i) Where L/C provides for reimbursement by electronic means - 5 days
(ii) Where L/C provides reimbursement claim after certain number of days
from the date of negotiation - 5 days + this additional period.
2.4. Substitution/Change in Tenor:
(o) In case of change in the usance of a bill, interest on post-shipment credit shall
be charged to the customer, as per RBI guidelines. In addition, the bank shall
charge or pay notional swap difference. Interest on outlay of funds for such
swaps shall also be recovered from the customer at rate not below base rate
of the bank concerned.
(p) It is optional for banks to accept delivery of bills under a contract made for
purchase of a clean TT. In such cases, the bank shall recover/pay notional
swap difference for the relative cover. Interest at the rate not below base rate
of the bank would be charged on the outlay of funds.
2.5. Export Bills sent for collection:
(a) Application of exchange rates: The conversion of foreign currency proceeds of
export bills sent for collection or of goods sent on consignment basis shall be
done at prevailing TT buying rate or the forward contract rate, as the case
may be. The conversion to Rupee equivalent shall be made only after the
foreign currency amount is credited to the nostro account of the bank.
(b) On receipt of credit advice/statement of nostro account and compliances of
guidelines, requirements of the Bank and FEMA, the Bank shall transfer funds
for the credit of exporter’s account within two working days.
(c) If the above stipulated time limit is not observed, the Bank shall pay
compensation for the delayed period at the minimum interest rate charged on
export credit. Compensation for adverse movement of exchange rate, if any,
shall also be paid as per the compensation policy of the bank.

Page 46
Rule 3: Import Transactions
3.1 Application of exchange rate:
(a) Retirement of import bills - Exchange rate as per forward sale contract, if
forward contract is in place. Prevailing Bills selling rate, in case there is no
forward contract.
(b) Crystallization of Import - same as above bill (vide para 3.3 below)
(c) For determination of stamp - As per exchange rate provided by the duty on
import bills authority concerned.
3.2. Application of Interest:
(a) Bills negotiated under import letters of credit shall carry commercial rate of
interest as applicable to banks’ domestic advances from time to time.
(b) Interest remittable on interest bearing bills shall be subject to the directive of
Reserve Bank of India in this regard.
3.3. Crystallization of Import Bill under Letters of Credit.
Unpaid foreign currency import bills drawn under letters of credit shall be
crystallized as per the stated policy of the bank in this respect.
Rule 4 Clean Instruments:
4.1. Outward Remittance: Outward remittance shall be effected at TT selling rate of
the bank ruling on that date or at the forward contract rate.
4.2. Encashment of foreign currency notes and instruments, Foreign currency
travelers’ cheques, currency notes, foreign currency in prepaid card, debit/credit
card will be encashed at Authorised Dealer’s option at the appropriate buying rate
ruling on the date of encashment.
4. 3. Payment of foreign inward remittance, Foreign currency remittance up to an
equivalent of USD 10,000/- shall be immediately converted into Indian Rupees.
Remittance in excess of equivalent of USD 10,000 shall be executed in foreign
currency. The beneficiary has the option of presenting the related instrument for
payment to the executing bank within the period prescribed under FEMA.
4.4. The applicable exchange rate for conversion of the foreign currency inward
remittance shall be TT buying rate or the contracted rate as the case may be.
4.5. Compensation for delayed payment: Authorised Dealers shall pay or send
intimation, as the case may be, to the beneficiary in two working days from the date
of receipt of credit advice / nostro statement. In case of delay, the bank shall pay
the beneficiary interest @ 2 % over its savings bank interest rate. The bank shall
also pay compensation for adverse movement of exchange rate, if any, as per its
compensation policy.

Page 47
Rule 5 Foreign Exchange Contracts:
5.1. Contract amounts: Exchange contracts shall be for definite amounts and
periods. When a bill contract mentions more than one rate for bills of different
deliveries, the contract must state the amount and delivery against each such rate.
5.2. Option period of delivery: Unless the date of delivery is fixed and indicated in
the contract, the option period may be specified at the discretion of the customer
subject to the condition that such option period of delivery shall not extend beyond
one month. If the fixed date of delivery or the last date of delivery option is a known
holiday, the last date for delivery shall be the preceding working day. In case of
suddenly declared holidays, the contract shall be deliverable on the next working
day. Contracts permitting option of delivery must state the first and last dates of
delivery. For Example: 18th January to 17th February, 31st January to 29th Feb.
2012. “Ready” or “Cash” merchant contract shall be deliverable on the same day.
“Value next day” contract shall be deliverable on the working day immediately
succeeding the contract date. A spot contract shall be deliverable on second
succeeding working day following the contract date. A forward contract is a contract
deliverable at a future date, duration of the contract being computed from spot value
date at the time of transaction”.
5. 3. Place of delivery: All contracts shall be understood to read “to be delivered or
paid for at the Bank” and “at the named place”.
5.4. Date of delivery: Date of delivery under forward contracts shall be:
(i) In case of bills/documents negotiated, purchased or discounted - the date of
negotiation/purchase/ discount and payment of Rupees to the customer.
However, in case the documents are submitted earlier than, or later than the
original delivery date, or for a different usance, the bank may treat it as proper
delivery, provided there is no change in the expected date of realization of
foreign currency calculated at the time of booking of the contract. No early
realization or late delivery charges shall be recovered in such cases.
(ii) In case of export bills/documents sent for collection - Date of payment of

Rupees to the customer on realization of the bills.
(iii) In case of retirement/crystallization of import bills/documents - the date of
retirement/ crystallization of liability, whichever is earlier?
5.5. Option of delivery: In all forward merchant contracts, the merchant, whether a
buyer or a seller will have the option of delivery.
5.6. Option of usance: The merchant purchase contract should state the tenor of
the bills/documents. Acceptance of delivery of bills/documents drawn for a different
tenor will be at the discretion of the bank.

Page 48
5.7. Merchant quotations: The exchange rate shall be quoted in direct terms i.e.
so many Rupees and Paise for 1 unit or 100 units of foreign currency.
5.8. Rounding off: Rupee equivalent of the foreign currency Settlement of all
merchant transactions shall be effected on the principle of rounding off the Rupee
amounts to the nearest whole Rupee i.e. without paise.
RULE 6 Early Delivery, Extension and Cancellation of Foreign Exchange
Contracts
6.1. General
(i) At the request of a customer, unless stated to the contrary in the provisions of
FEMA, 1999, it is optional for a bank to: (a). Accept or give early delivery; or
(b). Extend the contract.
(ii) It is the responsibility of a customer to effect delivery or request the bank for
extension / cancellation as the case may be, on or before the maturity date of
the contract.
6.2. Early delivery: If a bank accepts or gives early delivery, the bank shall
recover/pay swap difference, if any.
6.3. Extension: Foreign exchange contracts where extension is sought by the
customers shall be cancelled (at an appropriate selling or buying rate as on the date
of cancellation) and rebooked simultaneously only at the current rate of exchange.
The difference between the contracted rate, and the rate at which the contract is
cancelled, shall be recovered from/paid to the customer at the time of extension.
Such request for extension shall be made on or before the maturity date of the
contract.
6.4. Cancellation
(i) In case of cancellation of a contract at the request of a customer, (the request
shall be made on or before the maturity date) the Authorised Dealer shall
recover/ pay, as the case may be, the difference between the contracted rate
and the rate at which the cancellation is effected. The recovery/payment of
exchange difference on cancellation of forward contracts before the maturity
date may be either upfront or back-ended at the discretion of banks.
(ii) Rate at which cancellation is to be effected:
(a) Purchase contracts shall be cancelled at T.T. selling rate of the
contracting Authorised Dealer
(b) Sale contracts shall be cancelled at T.T. buying rate of the contracting
Authorised Dealer

Page 49
(c) Where the contract is cancelled before maturity, the appropriate forward
T.T. rate shall be applied.
(bi) Notwithstanding the fact that the exchange contract between the customer
and the bank becomes impossible of performance, for whatever reason,
including Government prohibitory orders, the exchange contract shall not be
deemed to have become void and the customer shall forthwith apply to the
Authorised Dealer for cancellation, as per the provisions of paragraph 6.4.(i)
and (ii) above.
(iv)
(d) In the absence of any instructions from the customer, vide para 6.1(ii), a
contract which has matured shall be cancelled by the bank on the 7th working
day after the maturity date.
(e) Swap cost, if any, shall be recovered from the customer under advice to him.
© When a contract is cancelled after the maturity date, the customer shall not be entitled
to the exchange difference, if any, in his favour, since the contract is cancelled on
account of his default. He shall, however, be liable to pay the exchange difference
against him.
6.5. Swap cost/gain:
(ii) In all cases of early delivery of a contract, swap cost shall be recovered from
the customer, irrespective of whether an actual swap is made or not. Such
recoveries should be made either back-ended or upfront at discretion of the
bank.
(iii) Payment of swap gain to a customer shall be made at the end of the swap period.
6.6. Outlay and Inflow of funds:
Authorised Dealer shall recover interest on outlay of funds for the purpose of
arranging the swap, in addition to the swap cost in case of early delivery of a
contract.
If such a swap leads to inflow of funds, interest shall be paid to the customer. Funds
outlay / inflow shall be arrived at by taking the difference between the original
contract rate and the rate at which the swap could be arranged. The rate of interest
to be recovered / paid should be determined by banks as per their policy in this
regard.

Page 50
A Few Repeated Terms in FX Markets
A Few repeated terms in FX markets are furnished below:

Exchange Rate refers to the price of one currency against another currency.
Spot transaction refers to the transaction wherein the settlement takes place
two working days after the date of transaction. This is the standard basis on
which majority of FX transactions are concluded.
Where the transaction and the settlement take place on the same day of the
date of the transaction itself, then such transaction is said to have taken place
on Cash or Today value basis.
TOM transaction refers to the transaction wherein the settlement takes place
one working day after the date of the transaction. The term TOM stands for
Value Tomorrow.
Any transaction in respect of which the settlement takes place beyond the
spot date is a Forward transaction.
An outright transaction is one in which a particular currency is bought against
another currency that is being sold for a given value date at a mutually agreed
exchange rate.
Swap transaction refers to purchase and sale of a given pair of currencies
against each other for different maturity / value dates. In effect, it is a
combination of two outright deals of varying maturity dates.
Cross rate is the process of arriving at a value of a given currency through the
medium of two different pairs of currencies in which there is a common
currency in both the pairs.
For instance, in order to arrive at EUR / INR price, market uses EUR / USD
price and USD / INR Price.
Direct Quotations refer to the quoting of a price wherein a given unit of
Foreign Currency is kept constant and the home currency is expressed as a
variable. Direct quotations are regarded as easy to understand, user-friendly
and more transparent.
Indirect quotations refer to the quoting of a price wherein the home currency is
kept constant for a given unit and the foreign currency is expressed as
variable.

Page 51
Since FX is akin to a commodity, there would be invariably a price differential
between the buying and selling price which is called the bid / offer spread.
When the forward price of a currency is higher than the spot price of the
currency, the currency is said to be at a premium.
When the forward price of a currency is lower than the spot price of that
currency, the currency is said to be at a discount.
Proprietary trading refers to the trading in FX markets on the Bank’s own account.
Merchant trading refers to the entering of a particular transaction in the books
of the Bank on behalf of a client. The Banks normally undertake immediate
cover operations in respect of such deals so that they are insulated from any
risks arising out of adverse exchange rate movements against the quotes
already offered to the client.

Page 52
The Difference between a Forward Contract and a
Futures Contracts
The Difference between a Forward Contract and a Futures Contract can be

summarized as follows:
A Futures Contract is an agreement to Buy or Sell a Standard Quantity and Quality
of a given underlying
Sr. Forwards Futures
No.
Essentially, OTC contracts A contract is traded through an
1. involve exchange.
Buyer, Seller and Exchange are
only the buyer and the seller. involved.
Both the parties have to perform
2. the The Contract need not necessarily
contract. culminate in the delivery of underlying.
There is no payment of any
3. initial To Trade in futures contract, one has to
become a member of the exchange
margins. by
paying the initial margin, and
maintain a
variable margin account too with the
Futures Exchange.
The maturity and size of the The maturity and Size of contracts
4. contract are
may be customized. standardized.
Settlement takes place only on Settlement is done on a daily basis, on
5. the all
date of maturity. the outstanding contracts (Marking to
Market on a daily basis).
Credit or Counter Party Risk is The Futures Exchange takes care of
6. High. Credit
or counterparty risk.
Markets for forward contracts are Futures contracts are highly liquid and
7. not can
very liquid. be closed out easily.
8. Physical delivery takes place on the Hardly 2% of the total contracts are
maturity date. delivered and takes delivery of.

Page 53
Foreign Exchange Problems for Practice
PROBLEM 1
On 26th August, M/s ABC Exporter tenders for purchase a Bill payable 60 Days
from Sight and Drawn on New York for USD 25,650. The Dollar / Rupee rates in the
interbank exchange market were as under:
USD 1 = ` 48.6525 /
Spot 6850
Spot / September 1500/1400
Spot / October 2800/2700
Spot / November 4200/4100
Spot / December 5600/5500
Exchange Margin of 0.10% is to be loaded.
Rate of Interest is 10% p.a.
Out-of-pocket expenses ` 500 to be recovered.
What will be the Exchange Rate to be quoted to the customer and Rupee Amount
payable to him?
SOLUTION:
The notional due date is (60 + 25) days from 26th August, i.e., 19th November.
(Note that transit period of 25 days is to be taken even if the question is silent) .
Since the dollar is at discount (forward margin is in descending order), this period
will be rounded off to higher month, i.e., end November, and the rate quoted will be
based on Spot / November rate for US dollar in the interbank market.
Dollar / Rupee market spot buying rate = ` 48.65250
Less: Discount for Spot / November – ` 0.42000
____________
= ` 48.23250
Less: Exchange margin at 0.10% on ` 48.2325 = ` 0.04823
____________
= ` 48.18427
____________

Page 54
Module-III : Theory and Practice of Forex and Treasury Management
Rounded off to the nearest multiple of 0.0025, the rate quoted would be ` 48.1850 per dollar.
Rupee amount payable on the bill for USD 25,650
At ` 48.1850 per dollar = ` 12,35,935
28,78
Less: Interest for 85 days at 10% on ` 12,35,945 -` 2
Out-of-pocket expenses ` 500 - ` 500
____________
` 12,06,663
____________
PROBLEM 2
From the following information you are required to calculate
(a) Ready Bill Buying Rate
(b) 2 Months Forward Buying Rate for Demand Bill
(c) Ready Rate for 60 Days Usance Bill and
(d) 2 Months Forward Buying Rate for 60 Days
Usance Bill Interbank rate US Dollar
USD 1 = `
Spot 48.6000/6075
1 Month 3500/3600
2 Months 5500/5600
3 Months 8500/8600
4 Months 1.1500/1.1600
5 Months 1.3500/1.3600
6 Months 1.5500/1.6600
Transit period is 25 Days. All forward Rates are for Fixed Delivery Exchange Margin is 0.10%.
SOLUTION:
(a) Ready Bill buying Rate
Dollar / Rupee market spot buying rate = ` 48.60000
Less: Exchange margin at 0.10%
On ` 48.6000 - ` 0.04860
____________
= ` 48.55140
____________

Page 55
Rounded off to nearest multiple of 0.0025, rate quoted for ready bill buying
the is
` 48.5525.
(b) 2 Months Forward Buying Rate

Dollar / Rupee (market) spot buying rate = ` 48.60000
Add: Forward premium for 2 months
(Transit period 25 days and
Forward period 2 months,
Rounded off to lower month) + ` 0.55000
____________
= ` 49.15000
On ` 49.1500 - ` 0.04915
____________
= ` 49.10085
____________
Rounded off, the rate quoted for 2 months forward purchase of dollar bill is `
49.1000.
(c) Ready Rate for 60 Days Usance Bill
Add: Forward premium for
2 months (Transit period 25 days
And forward period 2 months,
Rounded off to lower month) + ` 0.55000
____________
= ` 49.15000
____________
Less: Exchange margin at 0.10% on `
49.1500 – ` 0.04915
____________
= ` 49.10085
____________
Rounded off, the rate quoted for ready purchase of 60 days' usance dollar bill
is `
40.1000.
(d) 2 Months forward rate for 60 days bill
Add: Forward premium for 4 months
(Transit period 25 days and

Page 56
Forward period 2 months, rounded
Off to lower month) + ` 1.15000
____________
= ` 49.75000
On ` 49.7500 - ` 0.04975
____________
= ` 49.700025
____________
Rounded off, the rate quoted for 2 months’ forward purchase of 60 days’ usance
dollar bill is ` 49.7000.
Note: Compare (b), (c) and (d) to understand clearly the difference between ready
and forward rates.
PROBLEM 3
M/s ABC Export Customer requests the Bank on 15th July to book a Foreign
Exchange Contract Delivery September covering 30 Days’ Sight Bill on New York
under an irrevocable Letter of Credit for USD 65,000.
Assuming US Dollars are quoted in the Local Interbank market as under:
USD 1 = ` 49.5675 /
Spot 5750
Spot / July 800/900
Spot / August 1700/1800
Spot / September 2250/2325
Spot / October 3200/3300
Spot / November 4100/4200
Spot / December 5150/5250
What rates will the Bank quote to its customer bearing in mind the following factors?
Exchange Margin: 0.10%,
Transit Period? 25 Days?
SOLUTION:
Dollar is at premium. The rule is to take the earliest delivery. The option to the
customer is over September. Taking earliest delivery, the date of delivery will be
taken as 1st September. The usance of the bill will be 30 days and transit period of
25 days will work out to 24th

Page 57
October as the probable date of the bank acquiring foreign exchange. This will be
rounded off to the lower month, and the rate to the customer will be based on Spot /
September buying rate in the interbank market.
Dollar / Rupee spot interbank buying

rate = ` 49.56750
Add: Premium for September + ` 0.22500
___________
_
= ` 49.79250
on ` 49.7925 – ` 0.04979
___________
_
= ` 49.74271
____________
Rounded off, the rate quoted to the customer would be `
49.7425 PROBLEM 4
Your Import Customer of M/s XYZ has requested you to book a forward exchange
contract for Swedish Kroners 35,000 for Fixed Delivery 6th Month.
Assuming Swedish Kroners are quoted in Singapore Foreign Exchange Market
against US Dollars as under:
USD 1 = SEK 6.0700 /
Spot 0750
3 Months Forward 950/1050
And the US Dollars are quoted in the Local Interbank Exchange Market as under:
` 48.7000 /
Spot USD 1 = 8500
3 Months Forward 1.8000/1.6000
6 Months Forward 3.7000/3.5000
What Rate will you quote to your customer bearing in mind that your exchange
margin is 0.15% for TT Selling and 0.20% for Bill Selling?
SOLUTION
Dollar / Rupee spot selling rate = ` 48.8500
Less: Discount for 6 months – ` 3.5000
____________
= ` 45.3500
Add:

Page 58
Exchange margin at 0.15% for
TT selling on ` 45.3500 + ` 0.0680
____________
= ` 45.4180
Add:
Exchange margin at 0.20% for
Bill Selling on ` 45.4180 + ` 0.0908
____________
Forward bill selling rate for dollar = ` 45.5088
____________
Dollar / Kroner spot buying rate= SEK6.0700
Add: Premium for six months – SEK0.2300
____________
. = SEK6.3000
____________
Forward bills selling rate for Kroner (45.5008 / 6.300) = `
7.2236 Rounded off, the rate quoted is ` 7.2225 per
Kroner. PROBLEM 05
M/s ABC Customer requests on 8th May to book a forward Contract to cover an
Export Bill for Singapore Dollars 1,00,000 drawn on Singapore and payable 30
Days after sight with option to him over the month of July.
The following Rates prevail in the interbank market for US Dollars:
Spot USD 1 = ` 49.4875/4925
Spot / May 1600/1700
June 3100/3200
July 4600/4700
August 6100/6200
September 7600/7700
October 9100/9200
At Singapore Market, Singapore Dollar is quoted at:
Spot USD 1 = SGD 1.4004/4078
1 Month Forward 70/75
.2 Months Forward 110/115

Page 59
Transit period is 25 Days. Exchange Margin required is
0.10%. What Rate will you quote to your Customer?
SOLUTION:
US Dollar is at premium against rupee. Earliest delivery under the forward contract
is on 1st July. Usance period of 30 days and transit period of 25 days, add up to 55
days making 25th August the due date of the bill. This will be rounded off to the
lower month and the exchange rate to the customer will be based on Spot / July
rate for US dollar in the interbank market.
US Dollar / Rupee spot buying rate = ` 49.4875
Add: Premium for July + ` 0.4600
____________
Less: = ` 49.9475
Exchange margin at 0.10% on `
49.9475 – ` 0.0499
____________
Forward buying rate for US Dollar = ` 49.8976
____________
US dollar is at premium against Singapore dollar. Since selling rate is to be
considered, taking latest delivery of 31st July, the bill is expected to realize on 20th
September, which falls in the fifth month from 5th May. The forward rate to the
customer will be calculated based on 5 months’ forward US dollar / Singapore dollar
rate.
US Dollar / Singapore dollar spot selling rate = SGD 1.4078
Add: Premium for 5 months + SGD 0.0235
____________
= SGD 1.4313
____________
Forward buying rate for Sing. Dollar (49.8976 / 1.4313) = `
34.8617 The rate quoted to the customer is ` 34.8625 per
Singapore dollar.
PROBLEM 6
M/s Reddy & Company, Export customer has booked with you a Swiss Francs
1,00,000 forward Sale (i.e. your purchase) exchange contract delivery 31st August
at ` 32.5200. However, on 30th August he informed you that it has not been
possible to deliver the Swiss Francs as anticipated payment had not come from
Zurich. You were therefore requested to extend the Contract for delivery to 30th
September.

Page 60
Assuming that Swiss Francs were quoted in Singapore market as under:
Spot USD 1 = Sw. Fcs. 1.5315/5330
One Month Forward 140/130
Two Months Forward 287/270
Three Months Forward 415/405
And US Dollars were Quoted in the Local Interbank Market as under:
Spot USD 1 = ` 49.4225/4375
One Month 1200/1100
Two Months 2700/2500
Three Months 4500/4300
What will the extension Charges, if any, payable by the
customer? Exchange Margin 0.10% on buying as well as
Selling. SOLUTION:
First, the contract will be cancelled at the TT selling rate.

Dollar / Rupee spot = ` 49.4375
Add: Exchange margin at 0.010% = ` 0.0494
__________
__
T.T. Selling rate for dollar = ` 49.4869
__________
__
= CHF
Dollar / Franc spot buying rate 1.5315
Franc / Rupee Cross Rate
(49.4869/1.5315) = ` 32.3127
Rounded off, the rate is ` 32.3125.
Bank buys Franc under original
contract at ` 32.5200
It sells Franc under cancellation
contract at ` 32.3125
__________
__
Exchange difference per
France payable by customer ` 0.2075
__________
__
Exchange difference for CHF 1,00,000 is ` 20,750 payable by customer as
cancellation charges.
Rebooking:
Fresh purchase contract will be booked for delivery 30th September.
Dollar / Rupee spot buying rate = ` 49.4225

Page 61
Less: Discount for one month – ` 0.1200
____________

Page 62
= ` 49.3025
Less: Exchange margin at 0.10% - ` 0.0493
____________
= ` 49.2532
____________
Dollar / Franc spot selling rate = ` 1.5330
Less: Discount for one month – ` 0.0130
____________
= ` 1.5200
____________
Franc / Rupee Cross rate (` 49.2532 / 1.5200) = ` 32.4034
The rate quoted would be ` 32.4025
The forward contract would be extended at ` 32.4025 per Franc, after recovering
cancellation charges of ` 20,750.
PROBLEM 7
M/s XYZ & Company, import customer booked a forward Contract with the bank on
10th April for USD 20,000 due 10th June at ` 49.4000. The bank covered its position
in the market at ` 49.2800.
The exchange rates for dollar in the interbank market on 10th June and 20th June were:
10th June 20th June
Spot USD 1 = ` 48.8000/8200 48.6800/7200
Spot / June 48.9200/9500 48.8000/8500
July 49.0500/0900 48.9300/9900
August 49.3000/3500 49.1800/2500
September 49.6000/6600 49.4800/5600
Exchange Margin 0.10%
Interest on outlay of funds 12%
How will the Bank react if the Customer requests on 20th June:
(i) To cancel the Contract
(ii) To Execute the Contract, or
(iii) To Extend the Contract with due date to fall on 10th August.
SOLUTION:
(a) Exchange Difference: The forward sale contracts will be cancelled at the
spot TT purchase rate of the bank for dollar prevailing on the date of cancellation.
Dollar / Rupee market spot buying rate = ` 48,6800

Page 63
Less: Exchange margin at 0.10% = ` 0.0487
____________
` 48.6313
____________
Rounded off, the rate applicable is ` 48.6325
Bank sells dollar under the original contract at ` 49.4000
It buys dollar under the cancellation contract at ` 48.6325
____________
Exchange difference per dollar payable by
customer ` 0.7675
____________
Exchange difference for USD 20,000 is ` 15,300.
(b) Swap On 10th June, the bank does a swap of spot sale of dollar at the
Loss: market 48.8000 and forward purchase for June at the market
buying rate of ` selling rate of
` 48.9500.
Bank buys at ` 48.9500
It sells at ` 48.8000
____________
` 0.1500
____________
(c) Interest on Outlay of Funds: On 10th April, the bank receives delivery under
the cover contract at ` 49.2800 and sells spot at ` 48.8000.
Bank buys at ` 49.2800
It sells at ` 48.8000
____________
Outlay per dollar ` 0.4800
____________
Outlay for USD 20,000 is ` 9,600
Interest on ` 9,600 at 12% for 10 days is ` 32.
(d) Charges for Cancellation:
Exchange difference ` 15,300
Swap loss ` 3,000
Interest on outlay of funds ` 32
____________
Total Charges ` 18,332
____________

Page 64
(e) Execution of Contract: Cancellation charges of ` 18,332 as computed above
will be recovered. The contract will be executed at the spot TT selling rate
calculated as follows:
Dollar / Rupee interbank spot selling
rate = ` 48.7200
Add: Exchange margin at 0.10% +` 0.0487
____________
= ` 48.7687
Rounding off, the rate applicable is ` 48.7675.
(f) Extension of Contract: Cancellation charges of ` 18.332 as computed above
will be recovered.
The contract will be extended at the current rate.
Dollar / Rupee market forward selling rate for August =` 49.2500
Add: Exchange margin at 0.10% +` 0.0492
____________
=` 49.2992
____________
The exchange rate applied for the extended contract is ` 49.3000.
PROBLEM 8
You, as a Foreign Exchange Dealer of your bank, are informed that your Bank has
sold a T.T. on Copenhagen for Danish Kroner 10,00,000 at the Rate of Danish
Kroner 1 = ` 6.5150. You are required to cover the transaction through London or
New York, whichever course offers you a more profitable rate. The rates on that
date are as under:
Mumbai-London ` 74.3000 74.3200
Mumbai-New York ` 49.2500 49.2625
London-Copenhagen DKK 11.4200 11.4350
New York-Copenhagen DKK 7.5670 7.5840
Will you cover the transaction through London or New York and what will be the
Exchange Profit on the transaction? Ignore brokerage at all Centres.
SOLUTION:
Amount realized on selling Danish Kroner 10,00,000 at ` 6.5150 per Kroner = ` 65,15,000.
Cover at London:
Bank buys Danish Kroner at London at the market selling rate. Pound sterling
required for the purchase (10,00,000 / 11.42000) = GBP 87,565.67.

Page 65
Bank buys locally GBP 87,565.67 for the above purchase at the market selling rate
of ` 74.3200. The rupee cost = ` 65,07,881.
Profit (` 65,15,000 – ` 65,07,881) = ` 7,119.
Cover at New York:
Bank buys Kroners at New York at the market selling rate. Dollars required for the
purchase (10,00,000 / 7.5670) = USD 1,32,152.77.
Bank buys locally USD 1,32,152.77 for the above purchase at the market selling
rate of ` 49.2625. The rupee cost = ` 65,10,176.
Profit (` 65,15,000 – ` 65,10,176) = ` 4,824.
The transaction would be covered through London which gets the maximum profit of ` 7,119.
PROBLEM 9
Your bank’s London Office has surplus funds to the extent of USD 5,00,000 for a
period of 3 Months. The cost of the funds to the Bank is 4% p.a. It proposes to
invest these funds in London, New York or Frankfurt and obtain the best Yield,
without any exchange risk to the bank. The following rates of interest are available
at the three centres for investment of domestic funds thereat for a period of 3
months:
London 5% p.a.
New York 8% p.a.
Frankfurt 3% p.a.
The market rates in London for US Dollars and Euro are as under:
London on New York

Spot 1.5350/90
1Month 15/18
2Months 30/35
3Months 80/85
London on Frankfurt
Spot 1.8260/90
1Month 60/55
2Months 95/90
3Months 145/140
At which Centre will the investment be made and what will be the net gain (to the
nearest pound) to the bank on the funds?

Page 66
SOLUTION:
Particulars Currency Amount

Cost of funds at 4% p.a. for 3 months (on GBP
5,00,000) GBP 5,000
Amount invested GBP 5,00,000
GBP 5,05,000
(a)Investment in London
Interest earned on GBP 5,00,000 at 5% p.a. for 3
months GBP 6,250
Less: Cost of funds GBP 5,000
Net Yield on investment GBP 1,250
(b)Investment in New York
The bank buys US dollars at the spot rate and invests the funds in New York. It also
enters into a three months forward contract selling this amount together with
Interest thereon.
The bank buys US dollars for GBP 5,00,000 at the market selling rate of USD 1.5350.
Amount realized in US Dollars USD 7,67,500
Interest earned on USD 7,67,500 at 8% for 3
months USD 15,350
Total amount available at the end of three months USD 7,82,850
This amount the bank sells to the market at the market three months forward buying
rate of USD 1.5475 (USD 1.5390 + 0.0085)
Amount realized in pound sterling (7,82,850 /
1.5475) GBP 5,05,880
Less: Amount to be repaid GBP 5,05,000
Net Yield GBP 880
(c)Investment in Frankfurt
The bank buys Euro for GBP 5,00,000 at the market spot selling rate of
EUR 1.8260.
Amount realized in Euro EUR 9,13,000
Interest at 3% p.a. for 3 months on EUR 9,13,000 6,847
Total Amount available at the end of 3 months EUR 9,19,847
This amount the bank sells to the market at the market 3 months forward buying
rate of EUR 1.8150 (1.8290 – 0.0140)
Amount realized in pound sterling (9,19,847 /
1.8150) GBP 5,06,803
Amount to be repaid GBP 5,05,000
Net Yield GBP 1,803
Investment will be made in Frankfurt where highest net yield of GBP 1,803 is obtained.

Page 67
PROBLEM 10
You are a dealer for your bank and find that when you open your books on the 20th
November, your combined position in US Dollars is overbought USD 70,000 while
your dollar account in New York, as at 19th November is overdrawn USD 1,30,000.
During the day, you receive advices from your branches in respect of the following
transactions undertaken by them:
USD
Documentary DDs purchased on 19th November 25,000
TTs issued on 20th November (of which USD 20,000 is a
USD
Delivery under a forward contract booked on 1st Sept.) 50,000
TT dated 15th November from New York paid on 19th USD
November 10,000
Forward Contracts booked on 19th November
USD
Bills selling for delivery – 6 months (Import Bills under LC) 37,000
USD
TT Purchase – Delivery 1 month 12,000
USD
Purchase of 30 days sight bill – Delivery 3 month 10,000
Forward Contracts Cancelled on 20th November
USD
TT purchase due on that day 15,000
In addition you have to effect deliveries under the
following
Interbank contracts due on 20th November
USD
TT Sale 50,000
USD
TT Purchase 20,000
(a) What would be your combined dollar position after talking the above
transactions into account? And,
(b) What steps would you take to square your position while, at the same time,
ensuring that your dollar account in New York is kept in sufficient funds to
meet your immediate cash commitments and leave a credit balance of USD
10,000 ? (It is not, otherwise, necessary to match your cover purchase / sales
with the actual delivery period of any of the transactions give above).

Page 68
SOLUTION:
(A) Exchange Position (combined dollar position)
Purchases(USD
Particulars ) Sales (USD)
Balance b/d (Overbought) 70,000
Documentary DDs purchased 25,000
TTs issued (excluding USD 20,000 under
forward 30,000
contract)
TT paid 10,000
Forward sale-delivery 6 months 37,000
Forward Purchase-delivery 1 month 12,000
Forward Purchase-delivery 3 months 10,000
Forward Purchases contract cancelled 15,000
1,27,000 82,000
Balance c/d (Overbought) 45,000
1,27,000
(B) Cash Position
Particulars Cr. USD Dr. USD

Balance b/d (Overdrawn) 1,30,000
TT Issued 50,000
TT Sale 50,000
TT Purchase 20,000
20,000 2,30,000
Balance c/d (Overdrawn) 2,10,000
2,30,000
Thus, to meet the immediate requirements at New York and leave a balance of
USD 10,000 the bank will buy TT on New York for USD 2,20,000. This will increase
the already overbought position of USD 45,000 to USD 2,65,000. This amount will
be sold forward by the bank to square its position.

Page 69
PROBLEM 11
For a futures contract in Canadian dollar, the initial margin and maintenance margin
prescribed by the Exchange are USD 4,000 and USD 3,000 respectively. A
Contract is concluded at a price of USD 0.75. The settlement prices in the exchange
at the end of four subsequent days are as follows:
USD
Day 1 0.745
USD
Day 2 0.730
USD
Day 3 0.740
USD
Day 4 0.755
At the end of each day, the margin accounts of both the buyer and the seller will be
adjusted based on the settlement price for the day. Where the margin goes below
the maintenance level, the buyer / seller will be required to reimburse to bring the
balance to the initial level. If the margin is more than the initial level, the member
concerned is free to withdraw the excess.
SOLUTION:
The adjustments to be made in the margin money of buyer and seller are tabulated below:
Contract Value: USD
Opening Price: USD 0.750 75,000
Particulars Day1 Day2 Day3 Day4

USD USD USD USD
Settlement Price 0.745 0.730 0.740 0.755
Contact Value 74,500 73,000 74,000 75,500
Margin Money Account of Buyer:
1.Opening Balance 4,000 3,500 4,000 4,000
2.Amount adjusted for change in value
of -500 -1,500 1,000 1,500
Contract
3.Adjusted balance 3,500 2,000 5,000 5,500
4.Amount deposited / withdrawn - 2,000 -1,000 -1,500
Closing Balance 3,500 4,000 4,000 4,000
Margin Money Account of Seller:
1.Opening Balance 4,000 4,000 4,000 3,000
2.Amount adjusted for change in value
of 500 1,500 -1,000 -1,500
contract
3.Adjusted balance 4,500 5,500 3,000 1,500
4.Amount deposited / withdrawn -500 -1,500 - 2,500
Closing Balance 4,000 4,000 3,000 4,000

Page 70
The buyer of futures contracts gains by an increase in the value of the contract. His
margin account is increased by this value. Correspondingly, the seller loses and his
margin account is reduced by the value. This is only a notional gain/loss because
the contract has to be settled at the ruling price for the contract.
PROBLEM 12
Given the following information, compute the price for call option using Black-Scholes model:
Spot Rate ` 46.50
Strike Rate ` 47.00
Option to mature in 90 Days
Standard deviation of Exchange rate 0.3
Risk free interest rate in India 6%
Risk free interest rate in USA 4%
SOLUTION:
Call price as per Black-Scholes model is given by the formula:
C=e-r *t [F. N (d1) – K. N (d2)]
t= 90/365 = 0.2466 years
Interest differential = 6 – 4 = 2%.
F = Sert = ` 46.50 e(0.02 x 0.2466)= ` 46.73
d1= (In (46.73 / 47.00) / 0.3 Root 0.2466)+0.5 x 0.3 x Root 0.2466 = 0.0358
d2= 0.0358 – 0.1490 = - 0.1132
N(d1) = 0.5143 (from Table)
N(d2) = 0.3216 (from Table)
Substituting the values in the formula:
C = e-0.06 x 0.2466[(46.73 x 0.5143) – (47.00
x 0.3216)] = ` 2.07
PROBLEM 13
The closing price of a future is ` 99.80. The following securities are available for
delivery under the contract. Select the cheapest to deliver security for the seller.
Conversion
Security Market Price Factor
8.24% 2018 ` 99.80 1.0750
5.69% 2018 ` 87.65 0.9171

Page 71
SOLUTION:
Security 8.24% : ` 99.80 – (` 98.00 x 1.0750) = ` – 5.55
Security 5.69% : ` 87.65 – (` 98.00 x 0.9171) = ` – 2.2258
The result is lowest for 8.24% security. It is the cheapest to delivery security.
PROBLEM 14
Government of India security with coupon of 8.24% is maturing on 22nd April 2018.
Compute the conversion factor for the purpose of March 2010 interest rate futures.
SOLUTION:
From 1st March 2010 till 22nd April 2018, there are 8 years, one month and 21 days.
This period will be rounded off to 8 years. The security will earn interest of ` 4.12
every half year for 16 half years. At the end of the sixteenth half year, the principal
of ` 100 is repaid. These cash flows will be discounted at the rate of 3.5% per half
year to arrive at the present value of the security as on 1st March 2010.
PV of Security = 16 Sigma i=1 (4.12/1.305t + 100/1.30516
= 49.8278 + 57.6708
= 107.4984
Conversion factor = PV of the Security / Face value of the Security.
= 107.4984 / 100 = 1.07984 or 1.0750
PROBLEM 15
Government of India Security with coupon of 6.05% is maturing on 12th June, 2018.
Compute its conversion factor for the purpose of March 2010 interest rate futures.
SOLUTION
The security has a residual life of 9 years, 3 months and 11 days. Half yearly
interest payable is ` 3.025. As a first step, it is assumed that one installment of
interest is paid on 1st June 2010. The present value of the security as on this date
is:
= 3.025 + 18 Sigma i=1 (3.025/1.305t) + (100 /
1.30518) =3.0250 + 39.8987 + 53.8361
=96.7598
To bring the present value of the security as on 1st June 2010 to the present value as on 1st
March 2010, it is discounted for a period of 3 months (or half the period of 6 months):
= 96.7598 / 1.0351/2 = 95.1143

Page 72
The interest of ` 3.025 paid on 1st June includes interest for 3 months previous to 1st March.
Deducting this, the present value of the bond security is (95.1143 – 1.5125) = 93.6018.
Conversion factor is 93.6018 / 100 = 0.936018 or 0.9360.
PROBLEM 16
In April, M/s Indsoft Ltd., Singapore, concludes a contract under which it is
expecting to receive USD 1.5 million in October. The Spot rate for US Dollar is SGD
1.7200.
The following quotations are available in the market:
(a) Forward contract due six months SGD 1.7350
(b) Futures due September SGD 1.7300, due December SGD 1.7200
(c) Option due October: Strike Price SGB 1.7425, Premium SGD 0.01
The standard deviation of the Exchange rate between US Dollar and Singapore
dollar in the past one year has been 2%. In the recent months, US dollar has been
appreciating.
Discuss the choice of hedging best suited, if the management estimates that by October:
(a) The trend in the exchange rate will continue till October;
(b) The US dollar is most likely to depreciate by 5% p.a. and
(c) The US dollar is most likely to appreciate by 5% p.a.
SOLUTION
The first decision the management has to take is whether to hedge the position or
not. This depends on the expectation of the management about the spot rate for US
dollar likely to prevail in October. If the firm strongly believes that US dollar will
appreciate, it may decide to keep the position open. A conservative management
may decide not to take any view on the exchange rate and cover entirely by a
forward contract. A via media approach would be to cover a portion with a hedging
instrument and leave the balance uncovered. The idea is to balance the effect of
exchange rate movements.
When it is decided to cover the position by a financial instrument, the choice has to
be made among forward, futures and option.
A. When the exchange rate fluctuates between +/- 2% p.a., the exchange rate
will be between SGD 1.7028 and SGD 1.7372. The choice of the cover would
be forward contract. There is a possibility of foregoing opportunity of gain of
SGD 0.0022 per US dollar, but the protection obtained against fall in the value
of September or December and the number of futures may be either one or
two. The difference between the forward price and future price is not sufficient
to encourage taking the additional risk of different maturity periods and
different sizes of cover. Option is also not a good choice.

Page 73
The premium payable is SGD 0.01. If the spot rate happens to be SGD 1.7372,
the option will be exercised and the net rate obtained per US dollar will be
SGD 1.7325, which is worse than the rate under forward.
B. If the US dollar is most likely to depreciate by 5% p.a., the spot rate in October
is expected to be SGD 1.6770. Any of the hedging instruments is better than
keeping the position open. Between forward and option, forward would be
preferred because of higher net realization as we discussed in the previous
situation.
C. If the US dollar is expected to appreciate by 5% p.a. the likely spot rate in
October is SGD 1.7630. If the firm strongly believes this rate would prevail, it
may not go for hedging its position. It will not be advisable to book forward
contract or futures which will spoil the prospect of earning higher realization
per US dollar. However, there is always a contingency that the estimate may
go wrong. To provide for such an eventuality, and also share in the
appreciation of the US dollar, it would be advisable to hedge the exposure
using currency option. For a premium of SGD 0.01 per US dollar, the firm can
participate in the appreciation of US dollar.
PROBLEM 17
Marico Marines Limited has to pay USD 500,000 at the end of six months from
today. It is considering the following alternatives to manage the exposure:
(1) Use forwards
(2) Use Money market hedge
(3) Use Options and
(4) Remain un-hedged.
It has collected the following information to take a decision:
(a) Spot rate for US Dollar ` 44.80

(b) Six months forward rate for US Dollar ` 44.95
(c) Interest rates:
Rupee 7.15 / 7.25
Dollar 6.30 / 6.40
(d) Call option due 6 months – Strike Price ` 44.98, Premium ` 0.05.
(e) Forecast spot rate for 6 months:
Probabilit
` / Dollar y
` 44.90 60%
` 45.00 30%
` 45.10 10%
Examine the alternatives and suggest the method that Marico Marines may adopt.

Page 74
SOLUTION:
(A) Forward Contract:
The firm can book forward contract at ` 44.95 per dollar. The rupee cost is : `
44.95 x 5,00,000 = ` 2,24,75,000.
(B) Money market hedge:
The firm can buy dollars in the spot market and invest them for 6 months.
This requires borrowing in rupees for 6 months to fund the transaction.
The number of dollars purchased is such that along with interest at 6.3% p.a.
it amounts to USD 500,000.
Dollars borrowed = 5,00,000 / (1.0315) = USD
484,731
Rupees required to buy USD 484,731 at ` 44.80 ` 2,17,15,949
Interest at 7.25% for 6 months ` 7,87,203
____________
` 2,25,03,152
____________
(C) Call option: In the market, there will be more than one quotation for call
option, each with a set of strike price and premium. Before comparing option
with other instruments, the firm will first choose the best among the quotes for
options. We assume the present quote to be the best.
For forwards and money market hedge, the outcome is certain. For call option,
the outcome depends on the spot rate that will prevail on the due date. Since
this is uncertain, there are only probable outcomes depending on the
estimated spot rates and the strength of probability associated with them. For
each anticipated spot rate to prevail on the due date, the outcome for the call
option is calculated as under:
Expected Option Rupee Cost Total Rupee Probability
Spot Rate Executed per Dollar Cost
Including
Premium
` 44.90 No ` 44.95 ` 2,24,75,000 60%
` 45.00 Yes ` 45.03 ` 2,25,15,000 30%
` 45.10 Yes ` 45.03 ` 2,25,15,000 10%

Page 75
(D) Open position: When the exposure remains unhedged, the rupee cost is
dependent on the spot rate prevailing on the due date.
Expected Spot Rate Rupee Cost Probability

` 44.90 ` 2,24,50,000 60%
` 45.00 ` 2,25,00,000 30%
` 45.10 ` 2,25,50,000 10%
Analysis: As between forward contract and money market hedge, forward contract
is preferable because the rupee cost is lower under forward contract.
Between forward contract and call option, the outcome is the same in both cases
with 60% probability. In the balance 40% probability, the rupee cost is higher under
call option. Therefore, forward contract is preferred against call option also.
The open position proves to be the least-cost alternative with a probability of 60%.
It may be advisable for the firm to keep its position open. However, the position
should be reviewed at least at monthly intervals, to examine the situation under
current cost conditions. For instance, in the next review, the forward rate for 5
months, call option for 5 months, expected spot rate due 5 months, etc. should be
considered. Where the study reveals hedging as a better choice, the position should
be covered using the best alternative.

Page 76
Case Study -1
Calculation of bills buying rate, when exchange margin and interest is also to be taken into account:
On July 5, an exporter in India, submits aUSD50000, 2months usance bill drawn under a letter of credit,
on animporter inUS. The normal
transit period is 25 days. The inter-bank currency rates are as under:
Spot rate : 1 USD = Rs.65.0000 5000
July forwardmargin = 0.3500 / 0.4000
August forwardmargin = 0.6000 / 0.7000
September forwardmargin = 0.8500 / 0.9000
October forwardmargin = 0.9500 / 0.9900
The exchangemargin is 0.15%. Customer wants to retain 20% of the amount in a current account opened
in USA. Rate of interest is
10% p.a. Calculate tl-e following:
1. Rate to be quoted to the customer ,
2. Gross amount to be credited to customer account.
3. Amount of interest to be'deducted.
Solution : The bill dated Jul 05, has 25 transit period + 2months'Usance (Aug and Sep).Hence the
payment shall fall due on Sept 30. The
exporterwill be allowed the benefit of Sept forwardmargin sincethe payment is due on last day of Sept.
Further, interest will be recovered from the customer from the date of discount to date of realization on
the amount to be credited to his
account (i.e. 80%of the bill amount, as the balance is to be retained in USA).
Spot rate = 65.0000
AddSeppremium=65.0000 +0.8500= 65.85
Deductmargin@0.15% = 65.8500—0.09878 = 65.75122
Final rate = 65.7500 (rounded)
Gross amount due to customer = 65.7500 x 40000* = 2630000
*(20%to be retained inUSA out of 50000)
Less interest@10%for 86 days = Rs.62308.53
(2630000x10x86) / (365x 100)
Net amount payable to exporter =Rs.2567691.46
Case Study -2
Calculationof TT selling ratewhenexchangemarginis given:On July 5, a savingbank customer in India,
requests for issue aUSD10000. The
inter-bank currency rates areas under:
Spot rate : 1 USD = Rs.65.0000 / 5000
Bank requires an exchangemarginof 0.15%.
What ratewillbe quoted and howmuch amountwillbedebited to customer's account.
Solution : In this case, no handling of documents is required.Hence TT selling rate shall be used.
Exchangemarginwill be added, since for the
bank, it is a sale transaction.
Spot rate selling rate = 65.5000
Addmargin@0.15% = 65.5000 + 0.098775 = 65.598775
Final rate = 65.6000 (rounded)
Gross amountduefromcustomer= 65.6000 x10000=656000
Case Study 3
Calculation for dishonour of export bill purchased by the bank, when exchange margin is given
An export bill of USD 10000 was purchased from an exporter at the then bills buying rate of Rs.65.80. But
on due date it was not
paid. Now the bank has to recover the amount from the exporter.
The inter-bank currency rates are as under:

Page 77
Spot rate : 1 USD = Rs.65.0000 / 5000
July forward margin = 0.3500 / 0.4000
August forward margin = 0.6000 / 0.7000
Bank requires an exchange margin of 0.20% for TT selling rate and 0.15% for bills selling rate.
What rate will be quoted and how much amount will be debited to customer's account.
What gain has been made by the customer in the transaction.
Solution : In this case, handling of import documents is not required. For recovering the amount from
export customer, the
TT selling rate shall be used. Exchange margin for TT selling will be added, since for the bank, it is a sale
transaction.
Inter-bank spot selling rate = 65.5000
Add TT sellingmargin@0.20%= 65.5000 + 0.1310 = 65.6310
TT selling rate = 65.6310, Amount to be debited = 65.6310 x 10000 = Rs.656310
Profit to the exporter = 658000—656310 = Rs.1690 (amount creditedwhen purchased less amount
recovered)
Case Study 4
Calculation of rate and amount for credit of proceeds of bill sent for collection.
An export bill ofUSD 10000was sent for collectionwhichwas submitted by an exporter.On July 10, the
correspondent bank creditedUSD9860,
the proceeds of the bills, toNOSTROaccount of thecollecting bank, after recovering its own charges.
The inter-bank currency rates on July 10, are as under:
Spot rate : 1 USD = Rs.65.0000 / 5000
August forwardmargin = 0.6000 / 0.7000
Bank requires an exchange margin of 0.10% for TT buying rate and 0.15% for bills buying rate.
What ratewillbe quoted and howmuch amountwillbecreditedtocustomer's account.
Solution : In this case, the billwas sent for collection.On theamount realized, the TT buying rateshallbe
used since the amount has already
beencredited toNOSTROaccountof the bank. There isno need to take any forwardmarginin to account.
Exchange margin for U buying will be deducted, since for the bank, it is a purchase transaction.
Inter-bank spot selling rate
Less TT buyingmargin@0.10%TT
buying rate
Amount to be credited
====
65.0000
65.0000+0.0650
65.0650
65.0650x9860=
=65.0650
Rs.641541
CaseStudy5
Calculationofrateandamountforcreditofproceedsofbillpurchasedfromexporter
AnexportbillhasbeensubmittedbyanexporterforUSD40000forpurchaseonSept15.Theotherinformationisprov
idedasunder:
1. Inter-bankexchangerateis66.5400/6000
2. Octoberforwardpoints=0.5000/0.4500
3. Transitperiodis15days
4. Rateof interestis10%
5. Exchangemarginis0.10%
6. FinenessofratesshouldbeasperFEDAIRulesi.e.0.0025
Whatratewillbequotedandhowmuchamountwillbecreditedtocustomer'saccount.
Solution:ExchangemarginforTTbuyingwillbededucted,sinceforthebank,itisapurchasetransaction.Furtherint
erestat10%for15dayswillbe

Page 78
recovered.Octoberforwarddiscountshallbereduced.
Inter-bankspotbuyingrate = Rs.66.5400
Lessmargin@0.15% = 66.5400-0.06654=66.47346
Ratetobequoted = 66.4725(0.0025fineness)
Dueamount = 66.4725x40000=Rs.2658900
LessInterest@10%for15days = Rs.10926.99
Amounttobecredited = Rs.2647973
Case Study 6
Purchaseof export bill byusing cross rate
An exporter tenders an export bill of Singapore Dollars 20000. At that time:
1. Inter-bankUSDratewasRs.65.5045/6070
2. Forwardrate:Onemonth,0.2000/1500,2months 0.4500/3500, 3month: 0.7000/6000
3. USD/SGDratewasUSD1=1.3205/3225.
4. Forwardrate:Onemonth,0.0200/0300,2months 0.0400/0500, 3month: 0.0600/0700
5. Exchangemarginis0.10%.
6. Transitperiodis25days.
7. Interestrateis10%
What rate will be quoted by the bank and how much amount in Indian currency, shall be credited to
exporter's current account?
Solution : This involves calculation of cross rate since at the time of cancellation, the Singapore dollar /
rupee rate is not available. Since it is a
purchase transaction andUSDforward is at a discount, onemonth forward discountwill be taken into
account.
As regards,USD/SGD, theUSDis at a premium, onemonthforwardwillbe taken into account, as it isa sale
transactionfor thebank.
Inter-bank USD rate =

Less onemonthforwarddiscount =
Rate after forward discount =
Less exchangemargin@0.1% =
Rate after exchange margin =
Rounded (to 0.0025) =
USD/SGD selling rate =
Add one month premium =
USD/SGD one month =
SGD/Rupee rate =
Rs.65.5045
Rs.00.2000
Rs.65.3045
Rs.00.0653
Rs.65.2392
Rs.65.2400
1.3225
0.0300
1.3525
65.2400/1.3525= 48.20
Amount to be creditedto customer account = 48.20 x 20000=Rs.964000 Less interest for 25days@10%=
6602.74
Net amount = Rs.957397.26
CASE STUDIES ON EXCHANGE RATES

Basic Concepts
Negotiationof,ExportBillsisapurchasetransactionandRetirementofImportBillsisasaletransactionforthe
AuthorisedDealer.
InpurchaselowerratewillbeappliedandinSalehigherratewillbeapplied.Samewillbethecaseforforward
premium
In sale transaction exchangemarginwill be added but in purchase transaction exchangemarginwill be
Page 79
deducted.
Case 1
OnJan10,2012,theMumbaibranchofpopularbankenteredintofollowingforeigncurrencysaleandpurchase
transactions:
(1) WithMr.AforsaleofUSD2000tobedeliveredontheJan10.
(2) WithMr.BforpurchaseofUSD2000tobedeliveredonJan11.
(3) WithMr.CforpurchaseofUSD2000tobedeliveredonJan14(Jan12and13beingbankholidays)
(4) WithMr.DforsaleofUSD2000tobedeliveredonFeb11.
Theinter-
bankforeigncurrencyratesonJan10,2012areasunder:CashrateorreadyrateUSD=Rs.45.50/60,TomrateRs.4
5.55/65,SpotrateRs.45.60/70
andonemonthforwardrateRs.45.80185.
Onthebasisofabove,answerthefollowingquestions.
01 WhatratewillbeusedforthetransactionwithAandwhatamountinRupeeswillbeinvolved:
a) Rs.45.50,Rs.91000
b) Rs.45.55, Rs.91100
c) Rs.45.60, Rs.91200
d) Rs.45.65,Rs.91300
02 WhatratewillbeusedforthetransactionwithBandwhatamountinRupeeswillbeinvolved:
a) Rs.45.50, Rs:91000 --
b) Rs.45.55, Rs.91100
c) Rs.45.60, Rs.91200
d) Rs.45.65,Rs.91300
03What ratewillbeusedfor thetransactionwithCandwhatamountinRupeeswillbeinvolved:

a) Rs.45.50, Rs.91000
b) Rs.45.55, Rs.91100
c) Rs.45.60, Rs.91200
d) Rs.45.65,Rs.91300
02What ratewillbeusedfor thetransactionwithAandwhatamountinRupeeswillbeinvolved:
a) Rs.45.50, Rs.91000
b) Rs.45.55, Rs.91100
c) Rs.45.60, R-6:91200
d) Rs.45.65,Rs.91300
Ans.1-c 2-b 3-c 4-d
Explanations:
1. Itisasaletransaction.Hence,samedayratei.e.cashrateofRs.45.60willbeused.Theamount=-
45.60x2000=Rs.91200
2. It is a purchase transaction. Hence, next day rate (TOM Rate) of Rs.45.55 will be used. The amount =
45.55 x 2000 = Rs.91100
3.
Itisapurchasetransaction.Hence,3ffidayrate(SpotRate)ofRs.45.60willbeused.Theholidaysperiodwillbeexclu
dedfromcounting.Theamount=
45.60x2000=Rs.91200
4.
Itisaforwardsaletransaction.HenceforwardsalerateorRs.45.85willbeused.Theamount=45.85x2000=Rs.917
00
Case 2
AnexportersubmittedanexportbillofUSD100000drawnon120daysusancebasisfromdateofshipment,whichto
okplaceonAug03,2012.The
followingfurtherinformationisprovided:

Page 80
(1) TheduedateisDec01,2012.
(2) Theexchangemarginis0.20%.
(3) Spotinter-bankUSDrateisRs.45.00/05.
(4) PremiumspotNov0.40/45
(5) Rateisquotedtonearest0.25paiseandrupeeamounttoberoundedoff
(6) Interestrateis8%forperiodupto180days.
(7) Commissiononbillpurchaseis0.50%
Answerthefollowingquestions.
01Whatistherateatwhichthebillwill-
bepurchasedifitisademandbillafteradjustmentofbankmargin,withouttakingintoaccount,thepremium?
a) Rs.44.91 b) Rs.45.09 c) Rs.45.31 d) Rs.45.51
02 What is the rate at which the bill will-be purchased if it is a demand bill after adjustment of bank margin
and the premium? -
a) Rs.44.91 b) Rs.45.09 c) Rs.45.31 d) Rs.45.51
03What is thegross amountbeforeapplicationof interest andcommission:
a) R5.4531000 b) Rs.4410174 c) Rs.4407908.50 d) Rs.4507909
04What istheamountofthebillwithoutbankcommission
a) Rs.4531000 b) Rs.4410174 c) Rs.4407908.50 d) Rs.4407909
05Whatamountwillbecreditedtoexporter'saccount:
a) Rs.4531000 b) Rs.4410174 c) Rs.4407922.50 d) Rs.4407909
Ans. 1-a 2-c 3-a 4-b 5-d Explanation :
1. Calculationofbuyingratewillbeasunder:
Spot rate Rs.45.00(buying ratewillbeappliedas it ispurchase)
Less 0.20% margin Rs.00.09 Rate Rs.44.91
2. Calculationofratewillbeasunder:
Spot rate Rs.45.00(buying ratewillbeappliedas it ispurchase)
Less 0.20% margin Rs.00.09 Rate Rs.44.91
Addpremium Rs.00.40(premiumwillbeaddedas thatbenefitwillbeof thecustomer) Rate Rs.45.31-
Spot rate Rs.45.00(buying ratewillbeappliedas it ispurchase) Less 0.20% margin Rs.00.09
Rate Rs.44.91 AddpremiumRs.00.40(premiumwillbeaddedas thatbenefitwillbeof thecustomer)
Rate Rs.45.31 Amount inRs.45.31 x100000 =4531000
Spot rate Rs.45.00 Less 0.20% margin Rs.00.09 Rate Rs.44.91
Add premium Rs.00.40 RateRs.45.31-- GrossAmountinRs.45.31x100000=4531000
Interest120days@8%Rs.120826 Amount 4531000—120826=4410174
Spot rate Rs.45.00 Less 0.20% margin Rs.00.09
Rate Rs.44.91 Add premium Rs.00.40
Rate Rs.45.31 Amount inRs. 45.31x100000 = 4531000

Interest120days@8%Rs.120826 Commissionat0.05%Rs.2265.50—
Amounttobecredited4531000-120826-2265.50=4407908.50(roundedtoRs.4407909).
Case 3
Yourexport
customerhasreceivedanadvanceofUS10000againstexporttoUK,whichtheimporterinUKhasgotcreditedtoNO
STROaccountofthe
bankinLondon.Thecurrent inter-
bankmarketrateUSD=45.10/15.Bankretainsamarginof0.15%onpurchaseand0.16%onsale.Whatamountwill
becreditedtocustomersaccount:
a. Rs.451676.50 b. Rs.450323.50 c. Rs.451721.60 d.Rs.450278.40 Ans.1-b
Explanations:

Page 81
1: It is a purchase transaction for the bank.Hence inter-bank purchase rate of Rs.45.10will be used.
Bankwill
deduct the purchasemargin of 0.15%. Grossamount=45.10x10000=451000:
Net amountwhichwillbe creditedto customer's account = 451000- 676.50(0.15%margin) = 450323.50
Case 4
Acustomerwants to book the following forward contracts:
(1) Forward purchase ofUSD50000fordelivery 31.dmonth(2) Forwardsale ofUSD50000 for delivery
2ndmonth.
Givenspot rate=45.1000/45.1200. Premium=1m- 0800/0900,2m- 1700/1900and3m-
2800/2900.Exchangemargin=forpurchase- 0.20%and
for sale- 0.25%.
01What is the rate for forward purchase transaction:
a) 45.4233 b) 45.2705 c) 45.1795 d) 45.1700
02What is the rate for forward sale transaction:
a) 45.4233 b) 45.3243 c) 45.4882 d) 45.3456
Ans. 1-c 2-a Explanations:
1. For purchase the spot rate = 45.1000
Add2mpremium =00.1700(premiumfor2monthsonlytobeaddedinpurchaseasbillmaybe
givenonanydayof3'dmonthincludingon13tday) Total =45.2700
Lessmargin of 0.20% = 00.0905 Rate =45.1795
2. For sale the spot rate = 45.1200 Add 2mpremium = 00.1900 (premiumfor full period of 2months only to
be added in
sale) Total=45.3100 Addmargin of 0.25%= 00.1133 Rate =45.4233
Case 5
Following are the Inter bank quotes on a certain date: Spot USD 1NR 44.60/65
1month8/10 2month18/20 3month28/30
SpotGBPUSD1.7500/7510 1month30/20 2-month50/40 3month70/60
Alltheabovedifferencesareforthemonthandfixeddatesandthebankmarginis3paise.
01Anexporterhaspresentedanexportdemandbill(sightdocument)forUSD300000underirrevocableletterofcre
dit.Whatwillbetherateatwhichthe
documentswillbenegotiated?
a) 44.5700 b) 44.6000 c) 44.6500 d) 44.6800
02- An Exporter has submitted 60 days usance bill for USD 25000 for purchase. At what rate the
document will be purchased?
a) 44.7500 b) 44.7800 c) 44.8400 ' d) 44.8700
03 Your bank has opened a letter of credit for import at the end of 2 months for GBP 30000. At what rate,
the forward exchange
will be booked?
a) 78,4700 b) 78,4725 c) 78,6300 d) 78,6325
04 If the exchange margin is 3 Paise for buying as well as selling, what is the bank's spread in % on
customer transaction?
a) 0.2465 b) 0.3000 c) 0.6000 d) 0.6275
05Acustomer tenders exportbillforGBP10,00,000payable45days fromsight. Thetransitperiodis
15dayshewants toretain10%ofbill valueinthe
foreigncurrency.Bank'smarginis 10paise.Whatwillbecreditedto customer'saccount?
a) 71310030 b) 70317630 c) 70110270 d) 70018510
Ans.1-a 2-a 3-b 4-a 5-b
Explanations:
1. It is a demand bill which means the payment is immediate upon negotiation. So, spot rate will be
applied, which is USD/INR
SPOT 44.60/44.65.
Being an export bill, frombank's pointof view, it is a buying transaction.HenceBuying (Bid)Rateof
44.60(andan inter-bank rate)willbe

Page 82
applied. To arrive at the customer rate, themarginwillbededucted.
inter Bank Rate 44.6000 Less : Margin 00.0300 Customer Rate 44.5700
2. The payment terms in this case are 60 days usance. Hence, 2 months forward rate will be applied,
which will be calculated as
under:
Spot USDIINR 44.6000/44.6500 Forward 2Months 00.1800100.2000 (small/Big> Premium>Add)

Total 2Months 44.7800/44.8500 Being an export bill, from bank's point of view, it is buying of FC. Hence
Buying (Bid) Rate
will be applied, which is 44.78. To arrive.at the customer rate, exchange margin will be deducted. Inter
Bank Rate 44.7800
Less:Margin 00.0300
Customer Rate 44.7500
3. The fetter of credit is for 2months.Hence, 2months forwardratewill bea appliedwhichwillbe calculated
onthebasisof 2MonthsGBP/INR
rate througha cross rate (GBP/USDandUSD/INR rates).
USD/INR SPOT 44.6000/44.6500 Forward 2Months 00.1800/00.2000 (Small/Big-> Premium->Add)
Total 2Months 44.7800/44.8500 GBP/USDSPOT1.7500/1.7510
Forward-2Months 0.0030/0.0020(Big/Small->Discount ->Less) Total 2Months 1.7470/1.7490
It is an import transaction and frombank's point of view, it is selling. Hence selling (offer) Ratewill be
applied.
GBP/INR = GBPIUSD x USD /INR =44.8500X1.7490 =78.44265
This is an inter-bank rate. To arrive at the customer rate, exchangemarginwill be added.
Inter Bank Rate 78.4427 Add:Margin 00.0300 Customer Rate 78.4727 rounded to 78.4725
4. USDANIR Spot 44.6000/44.6500 inter Bank Buying Rate 44.6000
Less: ExchangeMargin 00.0300 Merchant Buying Rate 44.5700
Inter bank Selling Rate 44.6500 Add: ExchangeMargin 00.0300
Merchant Selling Rate 44.6800
%Spread=((SellingRate-BuyingRate) X100)1/{(SellingRate+BuyingRate)/2}
=((44.68-44.57)X100))/{44.68+44.57)/21 =00.11X100/44.625 =0.2465%
5. TheBill period is 45Days. The transit period is 15Days.
Total period is 2 months. Hence, 2 months forward rate will be applied. 2Months GBP/INIR rate is
required for which cross-rate
will be calculated.
USD/INR SPOT 44.6000/44.6500 Forward Points 2Months 00.1800/00.2000 (Small/Big->Premium-
>Add)
Spot 2Months 44.7800/44.8500 GBP/USD SPOT 1.7500/1.7510
Swap Points 2months 0.0030/0.0020 (Big/Small-> Discount->Less) Outright 2Months 1.7470/1.7490
Being an export frombank's point of view, it is Buying. Hence Buying (Bid) Ratewill be applied).
GBP/INRBID = GBP/USDBID X USD/INRSID =44.7800X1.7470 =78.2307
This is an inter-bank rate. To arrive at the Customer Rate, Exchangemarginwill be deducted.
Inter Bank Rate 78.2307 Less: Margin 00.1000 Customer Rate 78.1307
The bill is for 10,00,000 GBP. Of this, the customer wants to retain 10% in EEFC account. Hence he
would be converting 9,00,000
GBP.For 9,00,000GBP, his accountwould be creditwith = 78.1307 X 900000 = Rs.70317630
Case 6
An importer customer,wants to retire an import bill of Pound Sterling 100000 drawn under letter of credit
opened by you, and payable on
demand onOct, 12.2012. The TTmargin is 0.10%. The inter-bank rates areGBP/USD= 1.5975/1.6000
andUSD/1NR = Rs.44.90/45.00.On the
basis of given information, answer the following questions.
01 What rate will be quoted by the bank for this transaction in terms of GBP/INR without taking into
account the TT margin:
a) Rs.71.7276 b) Rs.71.9085 c) Rs.72.0000 d) Rs.72.0720

Page 83
02 What rate will be-quoted by the bank for this transaction in terms of GBP/1NR after taking into account
the TT margin:
a) Rs.71.7276 b) Rs.71.9085 c) Rs.72.0000 d) Rs.72.0720
03 What amount will be debited to cash credit or overdraft or current account of the customer for
retirement of this bill:
a) Rs.7000000 b) Rs.7207200 c) Rs.7218300 d) Rs.7222070
04 If this bill is not retired by the importer customer, the crystallization of this import bill will be on which of
the following dates:
a) Oct 12, 2012 b) Oct 21, 2012 c) Oct 22, 2012 d) Nov 12, 2012
Ans. 1-c 2-d 3-b 4-c
Explanations:
1. This is a sale transactionfor thebank.Bankwillpurchase pounds (GBP) atmarket selling rate andwill sell
theUSDtothecustomer to purchase
pounds. The rate takenwill be 1.6000 and 45.00.Hence theGBP/INR = 1.6000 x45.00 = 72.00. Further
bankwill addmarginof 0.10%which
will be0.0720. Thetotal rate = 72.00 + 0.720. The customerwouldpay = 72.072 x 100000 =Rs.7207200
2.
Thisisasaletransactionforthebank.Bankwillpurchasepounds(GBP)atmarketsellingrateandwillselltheUSDtot
hecustomertopurchasepounds.
Theratetakenwillbe1.6000and45.00.HencetheGBP/INR=1.6000x45.00=72.00.Furtherbankwilladdmarginof
0.10%whichwillbe0.0720.The
totalrate=72.00+0.720=72.072.
3.
Thisisasaletransactionforthebank.Bankwillpurchasepounds(GBP)atmarketsellingrateandwillselltheUSDtot
hecustomertopurchasepounds.
Theratetakenwillbe1.6000and45.00.HencetheGBP/1NR=1.6000x45.00=72.00.Furtherbankwilladdmargino
f0.10%whichwillbe0.0720.The
totalrate=72.00+0.720.Thecustomerwouldpay=72.072x100000=Rs.7207200
4. Thebill is to be paidon demand Le.Oct 12, 2012.As per FEDAI rule,wherethedemandimport
billsdrawnunder LCarenot retiredon
demand, these arerequired to be crystallizedwithin10 days fromthedateof demand.Hence the latest date
bywhichit shouldbe crystallized
isOct 22, 2012. (Forusanceimport bills the crystallisationwillbe doneon duedate.
Case 7
OnApr15,2012,XYZLtdexpectstoreceiveUSD20000withinJuly2012.Thecompanywantstobookaforwardcont
ractforJuly2012. TheUSD/1NR
inter-bankspot rateisRs.45.10/20.Theforwardpremiumis18/20paiseforMay,31/33forJuneand45/47for
July.Themargintoberetainedbythe
bankis0.10paiseperUSD.
01What istheFCrateatwhichtheforwardcontractwillbebookedifthemarginisnottakenintoaccount:
a) Rs.45.31 b) Rs45.41 c) Rs.45.55 d) Rs.45.57
02What is theFCrateatwhichtheforwardcontractwillbebookedifthemarginis takenintoaccount
a) Rs.45.31 b) Rs45.41 c) Rs.45.55 d) Rs.45.57
Ans.1-b 2-a
Explanations:
1. Forcalculatingtheforward,thebankwilltakeintoaccount theforwardpremiumforJuneasamountcanbe
receivedonanydayinJulyincludingft
July.Thusthepremiumamount is31paise.Theratewouldbe:
Spot rate = 45.10 Forwardpremiumfor June =00.31(premiumfor Julywillnot be paid as delivery isduring
July) Total =45.41
2. Forcalculatingtheforward, thebankwilltakeintoaccounttheforwardpremiumforJuneasamountcanbe
received on any day in July including 1st July. Thus the premiumamount is 31 paise. The rate would be:
Spot rate = 45,10
Forward premiu=mfo0r0.J3u1n

Page 84
Total = 45.41
LessMargin = 00.10
Rate to be
quoted
= 45.31
Case 8
Theimporter requests on Sep 01, 2012 to book a forward contract forpayment of an import
billofUSD50000 duefor Dec 15, 2012. Spot rate
USD/INR = 45.10/20. Forward premiumfor Sep10/14 paise,Oct 22/24 paise,Nov 33/35 paise,Nov toDec
15-12/14 paise.Bank is to chargemargin
of 0.20%.
01 Without taking into account themargin, the ratethatwill bequoted by thebank is :
a) Rs.45.2000 b) Rs.45.5500
c) Rs.45.6900 d) Rs.45.7814
01 By taking into account themargin, the ratethatwillbe quoted by the bank is :
a) Rs.45.2000 b) Rs.45.5500
c) Rs.45.6900 d) Rs.45.7814-
Ans. 1-c 2-d
Explanations:
1. Thisis FCsaletransaction.HencebankwillusetheSpot rate=45.20.andpremiumupto
Dec15,willbeadded.Theratewouldbe:45.20marginof 0.20%i.e.0.09138isadded, the
ratewouldbe=45.7814.
2. Thisis FCsafetransaction.HencebankwillusetheSpot rate=45.20.andpremiumupto
Dec15,willbeadded.Theratewouldbe:45.20marginof 0.20%i.e.0.09138isadded, the
ratewouldbe=45.7814.
To calculate the rate Nov premium+ 0.35
+ 0.14 = 45.69.When the
To calculate the rate Nov premium+ 0.35
+ 0.14 = 45.69.When the
Case 9
Your correspondent bank inUKwants to credit Rs.50million in itsNOSTROaccountmaintained by you in
NewDelhi. The bank is ready to credit
the equivalentUSDin you NOSTROaccount in London. The inter-bank rate is USDrate is Rs.45.10/15. If
exchangemargin is ignored, howmuch
amount, the correspondent bankwill credit to the NOSTROaccount in London and atwhat rate.
a 1108647.45 b. 1107419.71 c 1107022.13 d. inadequate information tomakethecalculation.
Ans. 1-a
Explanations:
For the bank, it is a purchase transaction as bank is purchasing dollar and giving rupee.Hence the rate
thatwill
be applicable is Rs.45.10. The FC value of Rs.50million = 50000000/45.10 = 1108647.45.
Case 10
M/s XYZ imported goods worth Japanese Yen (JPY) 50 million. They request to remit the amount. The
USDANR rate is
Rs.45.1500/1700 and USD/JPU is 91.30/50. The bank will load a margin of 0.20%.
01What ratewill be quoted (per 100 yen)?
a) Rs.49.0456 b) Rs.49.4743 c) Rs.49.5730 d) Rs.49.8712
02What amount theimporter has to pay in Indian currency?

a) Rs.2472100 b) Rs.2478500 c) Rs.2428400 d) Rs.2408300

Page 85
Ans. 1-c 2-b Explanations:
1. JPY is to be sold against rupees forwhich no direct rate is available. Itwill be calculated as a cross rate.
Bank need to buy JPY againstUSD
andUSDagainst rupees. Hence the following ratewill be used forUSD/INR 45.1700 (themarket selling rate)
and forUSD/JPY 91.30 (the
market selling rate being lower in this case).
Rate = 45.1700/91.30 = 0.494743 and for JPY 100 the same will be Rs 49.4743 (As per FEDAI Rules,
JPY is quoted as per 100
yen)
2. JPY is to be sold against rupees for which no direct rate is available. It will be calculated as a cross
rate. Bank need to buy JPY
against USD and USD against rupees. Hence the following rate will be used for USD/INR 45.1700 (the
market selling rate) and
for USD/JPY 91.30 (the market selling rate being lower in this case).
Rate = 45.1700/91.30 = 0.494743 and for JPY 100 the same will be Rs 49.4743 (As per FEDAI Rulet,
JPY is quoted as per 100
yen).
Tothismarginof 0.20%will beaddedwhichworksout to0.0989.
Hencetheratewillbe49.4743+.0989=49.5732roundedof to49.5730
TotalRupeepayment=5,00,00,000x49.573/100= 24786500
Case 11
Bank had booked a forward purchase contract 3months back at Rs.45.60, for delivery 3 days later
forUSD 10000. Due to delay in realization of
export bill, the customer has requested-for cancellation of the contract and re-book it for onemonth fixed
date or option contract beginning
onemonth fromspot date. The inter-bank spot rate is 45.2000/2200.Onemonth forward premiumis
0800/1000 paise. The TT selling and
buyingmargin 0.20%
01Whatwill be the rate atwhich the contractwill be cancelled:
a) 45.2200 b) 45.2000 c) 45.3104 d) 45.3908
02What amountwill be debited or credited to customer account being difference:
a) Rs.3202 debited b) Rs.3202 credited c) Rs.2996 credited d) Rs.2996 debited
03Atwhat rate, the contractwould be re-booked:
a) 45.2200 b) 45.2000 c) 45.3104 d) 45.3908
Ans. 1-c 2-c 3-c Explanations:
1. The contractwillbe cancelledat TT selling ratei.e. 45.2200+0.20%margini.e0.0904 = 45.3104
Theamount at contracted rate of 45.60 = 45.60x 10000= 456000 The amount at cancelled
rate of 45.3104=453104
Difference =Rs.2996,whichwould be credited to customer account.
2. The contractwillbe cancelledat TT selling ratei.e. 45.2200+0.20%margin = 0.0904 = 45.3104
Theamount at contracted rate of 45.60 = 45.60x10000 = 456000 Theamount at cancelledrate
of 45.3104=453104
Difference =Rs.2996,whichwould be credited to customer account.
3. Forbookingof contract, thespot rate=45.2000
Add one month premium = 00.0800
Total =45.2800
Less inter-bankmarginat0.20%=00.0905
Rate = 45.1895
Case- 12
international Bank successfully contracted an FCNR (B) deposit of 10million USD for a period of 5 years.
Out of these funds, the bank retains
USD 4million as depositwith a high rated US bank in its NOSTROaccount and converts the remaining
amount to Indian currency at prevailing
USD rate = Rs.46. On the basis of the given information, answer the following questions:
01 f the foreign currency ratemoves to Rs.46.50:

Page 86
a) the bank.will gainRs. 3mio(million)b) the bankwill lose Rs. 3mio(million)
c) thebankwill gainRs.6mio(million)d) the bankwill lose Rs.6mio(million)
02What typeofpositionthebank ishavingpresently after this transaction?
a) anoversoldpositionofUSD4million b) anoversoldpositionofUSD6million
c)anoverboughtpositionofUSD6million d) anoverboughtposition
ofUSD6million
03IftheforeigncurrencyratemovestoRs.45.00:
a) thebankwillgainRs.3mio(million) b)thebankwilllossRs.3mio(million) c)thebankwillgainRs.6mio(million)
d)thebankwilllooseRs.6mio(million)
04Thesquareitsposition,thebankwillhavetoundertakewhichofthefollowingtransaction?
a) AcquireUSDassetsofatleastUSD6million b)AcquireUSDassetsofat leastUSD4million
c)AcquireUSDliabilitiesofat leastUSD4million d)AcquireUSDliabilitiesof at leastUSD6million
05 If the bank decides to invest the amount received as FCNR deposit in a 3-year US govt. security at 6
months LIBOR related rate
of interest, the bank faces the following type of risk?
a) foreign exchange risk b) liquidity risk c) basis risk d) no risk
Ans.1-b2-b3-c4-a5-c
Treasury management
Treasury management (or treasury operations) includes management of an enterprise's holdings, with the
ultimate goal of managing the firm's liquidity and mitigating its operational, financial and reputational risk.
Treasury Management includes a firm's collections, disbursements, concentration, investment and
funding activities. In larger firms, it may also include trading in bonds, currencies, financial derivatives and
the associated financial risk management.
Most banks have whole departments devoted to treasury management and supporting their clients' needs
in this area. Until recently, large banks had the stronghold on the provision of treasury management
products and services. However, smaller banks are increasingly launching and/or expanding their
treasury management functions and offerings, because of the market opportunity afforded by the recent
economic environment (with banks of all sizes focusing on the clients they serve best), availability of
(recently displaced) highly seasoned treasury management professionals, access to industry standard,
third-party technology providers' products and services tiered according to the needs of smaller clients,
and investment in education and other best practices. A number of independent treasury management
systems (TMS) are available, allowing enterprises to conduct treasury management internally.
For non-banking entities, the terms Treasury Management and Cash Management are sometimes used
interchangeably, while, in fact, the scope of treasury management is larger (and includes funding and
investment activities mentioned above). In general, a company's treasury operations comes under the
control of the CFO, Vice-President / Director of Finance or Treasurer, and is handled on a day-to-day
basis by the organization's treasury staff, controller, or comptroller.
Bank Treasuries may have the following departments:
A Fixed Income or Money Market desk that is devoted to buying and selling interest bearing securities

Page 87
A Foreign exchange or "FX" desk that buys and sells currencies
A Capital Markets or Equities desk that deals in shares listed on the stock market.
In addition the Treasury function may also have a Proprietary Trading desk that conducts trading activities
for the bank's own account and capital, an Asset liability management (ALM) desk that manages the risk
of interest rate mismatch and liquidity; and a Transfer pricing or Pooling function that prices liquidity for
business lines (the liability and asset sales teams) within the bank.
Banks may or may not disclose the prices they charge for Treasury Management products, however the
Phoenix Hecht Blue Book of Pricing may be a useful source of regional pricing information by product or
service.
Functions::
The significant core functions of a corporate treasury department include:
Cash and Liquidity Management

Cash and liquidity management is often described as treasury's 'primary duty.' Essentially, a company
needs to be able to meet its financial obligations as they fall due, i.e. to pay employees, suppliers, lenders
and shareholders. This can also be described as the need to maintain liquidity, or solvency of the
company: a company needs to have the funds available that will enable it to stay in business.[1] In
addition to dealing with payment transactions; cash management also includes planning, account
organisation, cash flow monitoring, managing bank accounts, electronic banking, pooling and netting as
well as the functions of in-house banks.[2]
Risk Management
Risk management is the discipline of managing financial risks to allow the company to meet its financial
obligations and ensure predictable business performance. The aim of Risk Management is to identify,
measure, and manage risks that could have a significant impact on the business. It is important to note
that the objective is not to eliminate all risk. Taking risk is a critical part of any business – no risk no gain.
It is important, however, to take risks only in areas that the business has competitive advantage. For
example, an automotive company will want to take risks in design and engineering but will want to avoid
risks in currencies and interest rates. On the other hand, a bank will be in a position to take risks in
currencies and interest rates but will avoid operational and regulatory risks.[3]
Treasurers are typically responsible for managing:
Liquidity Risk is the risk that the company is unable to fund itself or is unable to meet its obligations;
Market Risk (or price risk) is the risk that changes in market prices (typically foreign exchange, interest
rates, commodities) cause losses to the business;

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Credit Risk is the risk that a counter party default causes loss to the business;
Operational Risk is the risk that fraud or error cause losses to the business.
Corporate Finance
Looking after contacts with banks and rating agencies, as well as discussions with credit insurers and, if
applicable, suppliers concerning periods allowed for payment, in conjunction with the procurement of
finance, also form part of the treasurer’s core business.
Regulation
Concerns about systemic risks in Over The Counter (OTC) derivatives markets, led to G20 leaders
agreeing to new reforms being rolled out in 2015. This new regulation, states that largely standardized
OTC derivative contracts should be traded on electronic exchanges, and cleared centrally by Central
Counterparty/Clearing House trades. Trades and their daily valuation should also be reported to
authorized Trade Repositories and initial and variation margins should be collected and maintained
Treasury : Treasury deals with short term funds flows (with a maturity less than one year) of a bank
(except
SLR investments (that are of long maturity also).
Treasury Functions of a bank, as a conventional concept, is considered to be a service centre that takes
care of funds management for the bank, such as:
to maintain adequate cash balances to meet day to day liquidity requirement,
to deploy surplus funds generated in banking operations
to source funds to bridge the occasional gaps in cash flows.
to meet reserve requirements such as SLR and CRR
Treasury as a profit centre: With deregulation and liberalization of financial markets, the scope of
treasury function has been expanded and it has now become a profit centre having trading activities
i.e. trading in securities and forex products.
Integrated treasury : It refers to integration of (I) money market operations, (2) securities market
operations
and (3) foreign exchange operations of a bank_
The integration is the result of opportunities available to the banks in the post-reforms era due to (a)
deregulation of interest rates (b) full convertibility on current account (c) partial convertibility in
capital account leading to flow of large quantity of foreign funds as FII and FDI. (d) funds availability
in the form of NRI deposits, EEFC funds, float funds in ECB of corporate customers.
Funds can be easily transferred due to improvement in payment and settlement system (RTGS etc.)
(a) from long term investments to short term investments (b) from securities market to money market
and (c) from money market to currency market_
Functions of integrated treasury :
to meet the reserve requirements
to provide efficient merchant banking services to customers
global cash management
to optimize profit by exploiting market opportunities in forex market, money Market and security
market
risk management
to provide support for asset-liability management_
Integrated Treasury and customers Due to integration of market activities, the treasury is in direct contact
with the customer which is called merchant business where it undertakes the treasury operations for the
customers in addition to bank's own treasury operations_ These operations relate to (a) hedging export
receivables (b) raising foreign currency loans (c) making overseas investments_
Process of Globalization
Globalization refers to interaction between domestic and global markets. In other words it is process of
integrating domestic market with global markets that characterizes free flow of capital and minimum
regulatory intervention.
The flow of foreign exchange includes not only for trade transactions (i.e. import and export) and
corporate

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and individual borrowing or remittances for different purposes, but also the FDI and FII (i.e. transfer of
wealth).
Role of RBI: Enactment of Foreign Exchange Management Act 1999 (FEMA), to replace Foreign
Exchange Regulation Act (FERA) has facilitated flow of foreign exchange. RBI has renamed the
Exchange Control Deptt as Foreign Exchange Department wef January 2004 RBI now permits large
movement of capital, to and from India (i.e. inflows and outflows) either by automatic route or by
delegation of powers to ADs. RBI's permission to banks to borrow and invest through their overseas
correspondence in foreign currency, has placed with banks, sizable funds at their command.
Impact of globalization : Immediate impact of globalization is 3-fold.
Interest rates are influenced by global interest rate trends that also impact exchange rates. A change in
rate of interest by Federal Reserve, USA impacts the trading at BSE or NSE.
2. Emergence of new institutional structure (on the lines of the one available in developed markets)
i.e. creation of Clearing Corporation of India, National Securities Depository Corporation, concept
of primary dealers, investment institutions
3. Widening of range of products such as rupee derivatives including swaps, forwards, options to hedge
currency and interest rate risk and generate trading profits in a dynamic market situation:
Evolving role of Treasury as a profit centre
The treasury operations have the following special features i.e.:

I . Treasury operations are in a market which if free from credit risk, due to which little capital allocation is
required unlike credit operations which requires lot of capital support.
2. Treasury operations are highly leveraged as return on capital is very high. (i.e. low capital high
volume)
3. Operational cost of treasury operations is very low unlike a branch banking.
4. Treasury operates in narrow spreads but with huge volumes that generates profits.
Sources of treasury profits: Treasury generates profits from two types of sources i.e.
(a) conventional and
(b) contemporary.
(a) Conventional sources:
Foreign exchange business : Sale and purchase of forex to customers (importers and exporters)
generates profits being the difference between selling rate and buying rate, called 'spread'. In order
to manage their risk, the banks
do not maintain open positions in forex and try to square through inter-bank operations.
Money market deals : Banks lend short term surplus funds to other banks in call money and earn
interest.
Investment activity: Banks make investment in Govt. securities as SLR and other non-SLR
securities to earn — regular income. Strategic investment is also made in subsidiaries and associate
companies by banks to venture into other business lines.
(b) contemporary sources: Treasury income is being earned by banks from market operations that
involve buying and selling or borrowing and lending or investing in tradable assets.
Interest and currency arbitrages : Treasury due to its operations in various markets is in a position
to identify the interest differentials in its favour in various markets and accordingly it borrows from
one market and lends in
another market to make profits. Similarly it purchase foreign currency in market and sells in another
market to take advantage of price difference.
Trading: Treasury purchases securities and also foreign exchange with a view to retain for some time
and then sell
it to make profits. However, in this process it faces market risk, foreign exchange risk etc. However,
they are able to make profits out of such activities..
Treasury products : Treasury sells various types of risk management products and structured loans
to corporates such as forward rate contract, currency swap.
Webster defines treasury as "a place where stores of treasures are kept; the place of deposit, care,
and disbursement of collected funds." Moreover, if one considers the treasury functions in ones
own organization; this definition would most likely broadly describe it. Treasury and its
responsibilities fall under the scope of the Chief Financial Officer. In many organizations, the

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Treasurer will be responsible for the treasury function and also holds the position of Chief Financial
Officer. The CFO's responsibilities usually include capital management, risk management, strategic
planning, investor relations and financial reporting. In larger organizations, these responsibilities
are usually separated between accounting and treasury, with the controller and the treasurer each
leading a functional area. Generally accepted accounting principles and generally accepted
auditing standards recommend the division of responsibilities in areas of cash control and
processing.
The specific tasks of a typical treasury function include cash management, risk management,
hedging and insurance management, accounts receivable management, accounts payable
management, bank relations and investor relations.
A successful treasury function has the same attributes as any other function within the organization
that is considered successful. These qualities are:
* Teamwork * Respect for Organization * Forward Thinking
* Global Thinking * Technological Advancement * Customer Focused
* Finance/Accounting Knowledge * Legal Knowledge * Reliability
The treasury function must work with all operations within the organization. The operational functions
they are working with should consider treasury to be an internal consultant, with expertise in risk and
finance.
Treasury is an exciting and interesting function of the organization that gets involved in many diverse
areas of the business that most other positions in the company do not get the opportunity to be
involved in. It is a natural progression in the career of many who start out in credit management.
2 FUNCTIONS OF TREASURY DEPARTMENT IN BANKS
Since 1990s, the prime movers of financial intermediaries and services have been the policies of
globalization and reforms. All players and regulators had been actively participating, only with variation
of the degree of participation, to globalize the economy. With burgeoning forex reserves, Indian banks
and Financial Institutions have no alternative but to be directly affected by global happenings and
trades. This is where; integrated treasury operations have emerged as a basic tool for key financial
performance.
A treasury department of a bank is concerned with the following functions:
(a) Reserve Management & Investment: It involves (i) meeting CRR/SLR obligations, (ii) having an
appropriate mix of investment portfolio to optimise yield and duration. Duration is the weighted
average ‘life’ of a debt instrument over which investment in that instrument is recouped. Duration
Analysis is used as a tool to monitor the price sensitivity of an investment instrument to interest
rate charges.
(b) Liquidity & Funds Management: It involves (i) analysis of major cash flows arising out of asset-
liability transactions (ii) providing a balanced and well-diversified liability base to fund the various
assets in the balance sheet of the bank (iii) providing policy inputs to strategic planning

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group of the bank on funding mix (currency, tenor & cost) and yield expected in credit and
investment.
(c) Asset Liability Management & Term Money: ALM calls for determining the optimal size and growth
rate of the balance sheet and also prices the Assets and liabilities in accordance with prescribed
guidelines. Successive reduction in CRR rates and ALM practices by banks increase the demand
for funds for tenor of above 15 days (Term Money) to match duration of their assets.
(d) Risk Management: integrated treasury manages all market risks associated with a bank’s liabilities
and assets. The market risk of liabilities pertains to floating interest rate risk for assets & liability
mismatches. The market risk for assets can arise from (i) unfavorable change in interest rates (ii)
increasing levels of disintermediation (iii) securitization of assets (iv) emergence of credit derivates
etc. while the credit risk assessment continues to rest with Credit Department, the Treasury would
monitor the cash inflow impact from changes in assets prices due to interest rate changes by
adhering to prudential exposure limits.
(e) Transfer Pricing: Treasury is to ensure that the funds of the bank are deployed optimally, without
sacrificing yield or liquidity. An integrated Treasury unit has as idea of the bank’s overall funding
needs as well as direct access to various market ( like money market, capital market, forex market,
credit market). Hence, ideally treasury should provide benchmark rates, after assuming market risk,
to various business groups and product categories about the correct business strategy to adopt.
(f) Derivative Products: Treasury can develop Interest Rate Swap (IRS) and other Rupee based/
cross- currency derivative products for hedging Bank’s own exposures and also sell such products
to customers/other banks.
(g) Arbitrage : Treasury units of banks undertake this by simultaneous buying and selling of the same
type of assets in two different markets to make risk-less profits.
(h) Capital Adequacy: This function focuses on quality of assets, with Return on Assets (ROA) being a
key criterion for measuring the efficiency of deployed funds. An integrated treasury is a major profit
centre. It has its own P&L measurement. It undertakes exposures through proprietary trading
(deals done to make profits out of movements in market interest/ exchange rates) that may not be
required for general banking.
(i) Coordination: Banks do operate at more than one money market centers. All the centers undertake
similar transactions with differing volumes. There is a need to coordinate the activities of these
centers so that aberrations are avoided (situations where one center is lending and the other one is
borrowing at the same time). The task of coordination of foreign exchanges positions is no different.
(j) Control and Development: Treasury operates as the focal point of dealing operations. Dealing
operations could include cash/spot, forward, futures, options, interest and currency liability swaps,
forward rate agreements and the like. Treasury is the sole owner and performer of these
transactions.
(k) Fraud Protection: The decade of nineties has witnessed more frauds in trading than banking books.
The amount and variety of such embezzlements have been directly relatable to the operational
level. The ground level task of this kind is to be undertaken at the treasury. All the aforesaid
activities are funds management functions in a banking environment.
3 ORGANISATIONAL STRUCTURE OF TREASURY
There is no standard structure for treasury department of a bank. Depending on the responsibilities
assigned and power delegated, it can be aptly structured. Typically, banks maintain three independent
tiers at the functional/operational level-
Tier I – Dealing Desk (Front Office): The dealers and traders in different markets - money, stock, debt,
commodity, derivatives and forex- operate in their respective areas. They are the first point if interface
with other participants in the market. The number of dealers depends on the size and frequency of the
operations. In case of larger in each bank, operations would be carried out by separate and
independent set of dealers in each market. But, for a relatively smaller treasury, operations would be
done by one or more dealers jointly in all the markets.

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Tier II – Settlement Desk (Back Office): Once the deals are concluded, it is for the back office to
process and settle the deals. Indeed, the back office undertakes settlement and reconciliation
operations.
Tier III – Accounting, Monitoring and Reporting Office (Audit group): This department looks after the
activities relating to accounting, auditing and reporting. Accountants’ record all deals in the books of
accounts, while auditors and inspectors closely monitor all deals and transactions done by the front
and the back office, and send regular reports to authorities concerned. This department independently
inspects daily operations in the treasury department to ensure internal/regulatory system and
procedures.
Head of Treasury
Chief Dealer Research and Monitoring

analysis Settlements and
Reporting
Funds/Reserve Settlements toring g

Settlements
M.Mkt. Currency/I Merchant/Service

dept. nvest
.
The three departments should be compartmentalized and they act independently. The heads of each
section reports directly to the Head of the Treasury. A treasury can have more functional desk
depending on the size and structure of the bank, and activities undertaken by the bank. For example,
the treasury may have separate individuals/managers for monitoring funds movement, for monitoring of
risks, developing and marketing innovative instruments/products.
4 OBJECTIVES OF THE TREASURY MANAGEMENT
Treasury of a commercial bank undertakes various operations in fulfillment of the following objectives:
To take advantage of the attractive trading and arbitrage opportunities in the bond and forex
markets.
To deploy and invest the deposit liabilities, internal generation and cash flows from maturing
assets for maximum return on a current and forward basis consistent with the bank’s risk
policies/appetite.
To fund the balance sheet on current and forward basis as cheaply as possible taking into
account the marginal impact of these actions.
To effectively manage the forex assets and liabilities of the bank.

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To manage and contain the treasury risks of the bank within the approved and prudential
norms of the bank and regulatory authorities.
To assess, advise and manage the financial risks associated with the non-treasury assets and
liabilities of the bank
To adopt the best practices in dealing, clearing, settlement and risk management in treasury
operations.
To maintain statutory reserves- CRR and SLR- as mandated by the RBI on current and forward
planning basis.
To deploy profitably and without compromising liquidity the clearing surpluses of the bank To
identify and borrow on the best terms from the market to meet the clearing deficits of the bank
To offer comprehensive value-added treasury and related services to the bank’s customers To
act as profit center for the bank.
5. NATURE OF TREASURY ASSETS AND LIABILITIES
Bank’s balance sheet consists of treasury assets and liabilities on the one hand and non- treasury
assets and liabilities on the other. There is a clear distinction between the two groups. In general, if a
specific assets or liability is created through a transaction in the interbank market and/or can be
assigned or negotiated, it becomes a part of the treasury portfolio of the bank.
Treasury assets are marketable or tradable subject to meeting legal obligations such as payment of
applicable stamp duty, etc. another characteristic of treasury assets is that they can (and often are
required to be marked to market. An example of treasury asset/liability which is created by
corporate/treasury actions/decisions on funding/deployment but is not tradable, is the Inter-bank
Participation Certificate.
Loans and advances are specific contractual agreements between the bank and its borrowers, and do
not form a part of the treasury assets, although these are obligations to bank. (They can however, be
securitized and sold in the market. If a bank were to take a position in such securitized debts, it would
become part of treasury activity). On the other hand, an investment in G-Secs can be traded in the
market. It is, therefore, a treasury asset.
Treasury liabilities are distinguished from other liabilities by the fact that they are borrowings from the
money (or bond) market. Deposits (current and savings accounts and fixed deposits) are not treasury
liabilities, as they are not created by market borrowing.
6. ELEMENTS OF TREASURY MANAGEMENT
1. Cash Reserve Ratio/Statutory Liquidity Ratio Management: CRR, or cash reserve ratio, refers to the
portion of deposits that banks have to maintain with RBI. This serves two purposes. First, it ensures
that a portion of bank deposits is totally risk-free. Second, it enables RBI control liquidity in the
system, and thereby, inflation. Besides CRR, banks are required to invest a portion (8.25 per cent
now) of their deposits in government securities as a part of their statutory liquidity ratio (SLR)
requirements. The government securities (also known as gilt-edged securities or gilts) are bonds
issued by the Central government to meet its revenue requirements. Although the bonds are long-
term in nature, they are liquid as they have a ready secondary market.
2. Dated Government Securities: The Government securities comprise dated securities issued by the
Government of India and state governments. The date of maturity is specified in the securities
therefore it is known as dated government securities.
a) The Government borrows funds through the issue of long term-dated securities, the lowest risk
category instruments in the economy. These securities are issued through auctions conducted by
RBI, where the central bank decides the coupon or discount rate based on the response received.
Most of these securities are issued as fixed interest bearing securities, though the government
sometimes issues zero coupon instruments and floating rate securities also. In one of its first moves
to deregulate interest rates in the economy, RBI adopted the market driven auction method in FY
1991-92. Since then, the interest in government securities has gone up tremendously and trading in
these securities has been quite active. They are not

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generally in the form of securities but in the form of entries in RBI's Subsidiary General Ledger
(SGL).
b) The investors in government securities are mainly banks, FIs, insurance companies, provident
funds and trusts. These investors are required to hold a certain part of their investments or liabilities
in government paper. Foreign institutional investors can also invest in these securities up to 100%
of funds-in case of dedicated debt funds and 49% in case of equity funds.
c) Till recently, a few of the domestic players used to trade in these securities with a majority
investing in these instruments for the full term. This has been changing of late, with a good number
of banks setting up active treasuries to trade in these securities. Perhaps the most liquid of the long
term instruments, liquidity in gilts is also aided by the primary dealer network set up by RBI and
RBI's own open market operations.
1. Money Market Operations: The bank engages into a number of instruments that are available in the
Indian money market for the purpose of enhancing liquidity as well as profitability. Some of these
instruments are as follows:
A. Call Money Market
Call/Notice money is an amount borrowed or lent on demand for a very short period. If the period
is more than one day and up to 14 days it is called 'Notice money' otherwise the amount is
known as Call money'. Intervening holidays and/or Sundays are excluded for this purpose. No
collateral security is required to cover these transactions.
B. Treasury Bills Market
In the short term, the lowest risk category instruments are the treasury bills. RBI issues these at
a prefixed day and a fixed amount.
There are four types of treasury bills:-
14-day T-bill - maturity is in 14 days. Its auction is on every Friday of every week. The
notified amount for this auction is Rs. 100 cr.
91-day T-bill - maturity is in 91 days. Its auction is on every Friday of every week. The
notified amount for this auction is Rs. 100 cr.
182-day T-bill - maturity is in 182 days. Its auction is on every alternate Wednesday (which is
not a reporting week). The notified amount for this auction is Rs. 100 cr. 364-Day T-bill -
maturity is in 364 days. Its auction is on every alternate Wednesday (which is a reporting
week) . The notified amount for this auction is Rs. 500 cr.
C. Inter-Bank Term Money

Inter bank market for deposits of maturity beyond 14 days and up to three months is referred
to as the term money market. The specified entities are not allowed to lend beyond 14 days.
The market in this segment is presently not very deep. The declining spread in lending
operations, the volatility in the call money market with accompanying risks in running
asset/liability mismatches, the growing desire for fixed interest rate borrowing by corporate,
the move towards fuller integration between forex and money markets, etc. are all the driving
forces for the development of the term money market. These, coupled with the proposals for
Nationalization of reserve requirements and stringent guidelines by regulators/managements
of institutions, in the asset/liability and interest rate risk management, should stimulate the
evolution of term money market sooner than later. The DFHI, as a major player in the market,
is putting in all efforts to activate this market.
The development of the term money market is inevitable due to the following reasons
Declining spread in lending operations
Volatility in the call money market
Growing desire for fixed interest rates borrowing by corporate

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D. Certificates of Deposits
The scheduled commercial banks have been permitted to issue certificate of deposit without any
regulation on interest rates. This is also a money market instrument and unlike a fixed deposit
receipt, it is a negotiable instrument and hence it offers maximum liquidity. As such, it has
secondary market too. Since the denomination is very high, it is suitable to mainly institutional
investors and companies.
E. Commercial Paper (CP)
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a
promissory note. CP was introduced in India in 1990 with a view to enabling highly rated
corporate borrowers to diversify their sources of short-term borrowings and to provide an
additional instrument to investors.
Highly rated corporate borrowers, primary dealers (PDs) and satellite dealers (SDs) and all-India
financial institutions (FIs) which have been permitted to raise resources through money market
instruments under the umbrella limit fixed by Reserve Bank of India are eligible to issue CP.
A company shall be eligible to issue CP provided - (a) the tangible net worth of the company, as
per the latest audited balance sheet, is not less than Rs. 4 crore; (b) the working capital (fund-
based) limit of the company from the banking system is not less than Rs.4 crore and (c) the
borrower account of the company is classified as a Standard Asset by the financing bank/s.
F. Ready Forward Contracts
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. Similarly, the buyer purchases the securities
with an agreement to resell the same to the seller on an agreed date in future at a predetermined
price. Such a transaction is called a Repo when viewed from the prospective of the seller of
securities (the party acquiring fund) and Reverse Repo when described from the point of view of
the supplier of funds. Thus, whether a given agreement is termed as Repo or a Reverse Repo
depends on which party initiated the transaction.
G. Commercial Bills
Bills of exchange are negotiable instruments drawn by the seller (drawer) of the goods on the
buyer (drawee) of the goods for the value of the goods delivered. These bills are called trade
bills. These trade bills are called commercial bills when they are accepted by commercial banks.
If the bill is payable at a future date and the seller needs money during the currency of the bill
then he may approach his bank for discounting the bill. The maturity proceeds or face value of
discounted bill, from the drawee, will be received by the bank. If the bank needs fund during the
currency of the bill then it can rediscount the bill already discounted by it in the commercial bill
rediscount market at the market related discount rate.
8. TREASURY PRODUCTS & SERVICES
(C) Forward Contract: It is a contract between the bank and its customers in which the
exchange/conversion of currencies would take place at future date at a rate of exchange in advance
under the contract. The essential idea of entering into a forward contract is to peg the price and
thereby avoid the pricerisk.
Forward Rates = Spot rate +/ Premium/Discount
(D) Forward Rate Agreement (FRA): An FRA is an agreement between the Bank and a Customer to
pay or receive the difference (called settlement money) between an agreed fixed rate (FRA rate) and
the interest rate prevailing on stipulated future date (the fixing date) based on a notional amount for an
agreed period (the contract period). In short, this is a contract whereby interest rate is fixed now for a
future period. The basic purpose of the FRA is to hedge the interest rate risk.

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For example, if a borrower is going to borrow FC loan for 6 months at LIBOR rate after 3 months, he
can buy an FRA whereby he can fix interest rate for the loan.
3. Interest Rate Swap(IRS) : What is an interest rate swap?

An interest rate swap is an over-the-counter (OTC) derivative instrument available in the currency
market where counter parties can exchange a floating payment for a fixed payment and vice-versa
related to an interest rate.
Interest rate swaps are also used speculatively by hedge funds or other investors who expect a
change in interest rates or the relationships between them. Traditionally, fixed income investors
who expected rates to fall would purchase cash bonds, whose value increased as rates fell.
Today, investors with a similar view could enter a floating-for-fixed interest rate swap; as rates fall,
investors would pay a lower floating rate in exchange for the same fixed rate.
How does it work?
In an interest rate swap, each counter party agrees to pay either a fixed or floating rate denominated in
a particular currency to the other counter party. The fixed or floating rate is multiplied by a notional
principal amount (say, $1 million).
This notional amount is generally not exchanged between counter parties, but is used only for
calculating the size of cash flows to be exchanged.
The most common interest rate swap is one where one counter party A pays a fixed rate (the swap
rate) to counter party B while receiving a floating rate (usually pegged to a reference rate such as
LIBOR — London Inter Bank Offered Rate).
A pays fixed rate to B (A receives floating rate)
B pays floating rate to A (B receives fixed rate).
Consider the following swap in which Party A agrees to pay Party B periodic fixed interest rate
payments of 3.784%, in exchange for periodic floating interest rate payments of LIBOR + 70 bps
(0.70%). There is no exchange of the principal amount and that the interest rates are on a notional
principal amount.
The interest payments are settled in net. The fixed rate (3.784% in this example) is referred to as
the swap rate.
By convention, a fixed-rate payer is designated as the buyer of the swap, while the floating-rate
payer is the seller of the swap.
In most cases an interest rate swap is structured so that both the fixed and floating payments are not
actually paid. Rather, the difference between the two amounts is paid by the counterparty who faces
the net shortfall at each payment date.
Users and Uses of Interest Rate Swaps
Interest rate swaps are used by a wide range of commercial banks, investment banks, non-financial
operating companies, insurance companies, mortgage companies, investment vehicles and trusts,
government agencies and sovereign states for one or more of the following reasons:
1. To obtain lower cost funding
2. To hedge interest rate exposure
3. To obtain higher yielding investment assets
4. To create types of investment asset not otherwise obtainable
5. To implement overall asset or liability management strategies
6. To take speculative positions in relation to future movements in interest rates.
The advantages of interest rate swaps include the following:

1. A floating-to-fixed swap increases the certainty of an issuer's future obligations.
2. Swapping from fixed-to-floating rate may save the issuer money if interest rates decline.
3. Swapping allows issuers to revise their debt profile to take advantage of current or expected future
market conditions.

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(E) Interest rate swaps are a financial tool that potentially can help issuers lower the amount of debt
service.
Swap Example:-
Consider XYZ corp a manufacturing firm which wants to raise 5 year fixed rate dollar funding for this
expansion programme. It finds that will have to pay 2% over 5 year TBill which are currently yielding
9%. In floating rate market it can issue 5 year FRNs at a margin of 0.75% over the prime rate. On the
other hand, ABC Inc. a large bank looking for floating rate fundings finds that it will have to pay prime
rate while in the fixed rate market it can raise 5-year funs at 50bp(0.50%) above T-bills due to its AAA
ratings.
Requirement Fixed rate Floating rate
Cost (fixed) 11% 9.5%
Cost (floating) Prime +0.75% Prime
ABC has an absolute advantage over the XYZ in both the markets but XYZ has a comparative
advantage in the floating rate market. Both can achieve cost savings by each borrowing in the market
where it has a comparative advantage and then doing a fixed-to-floating interest rate swap.
9.50% fixed
9.75% fixed
Prime = 25bps Prime
Inco.
Prime + 75bp 9.50

To Floating rate Lenders To fixed rate lenders
ABC borrows at 9.5% fixed. XYZ borrows at Prime +0.75 floating rate. ABC pays the swap bank
(prime – 0.25T) and swap bank passes this on to ZYZ. XYZ pays the swap bank 9.75% and swap
bank pays ABC 9.5%. The key result is that both the parties have achieved their objectives with
some cost savings.
XYZ Corp: 9.75% + [prime +0.75 – (prime – 0.25)] % = 10.75% fixed 25bps below its own cost of fixed
rate funds.
ABC Inc: 9.5% – 9.5% + prime – 0.25% = prime – 0.25%, 25bps below its own cot of floating rate.
The swap bank earns a margin of 25bps.
ILLUSTRATION:-
Company A can borrow at 8% in USD markets and at 9% in AUD markets. Company B can borrow at
9% in USD markets and at 9.5% in AUD markets. Company A wants to borrow in AUD and company B
wants to borrow in USD markets. If these companies enter a swap in which a dealer gets 10 basis
points, what is the net cost of borrowing to Company B?
a. 9% in USD.
b. 8.8% in AUD.
c. 8.75% in USD.

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8.8% in USD.
e. None of the above.
Currency Swap: It is an agreement between two parties to exchange obligations in different

currencies at the beginning, during the tenure and at the end of the transaction. At the start, initial
principal is exchanged, though not obligatory. Periodic interest payments (either fixed or floating) are
exchanged through out the life of the contract. The principal is exchanged invariably on termination at
the exchange rate decided at the start of the transaction. By means of currency swap, the
counterparties can reduce the cost of funding.
ILLUSTRATION:-
Current spot exchange rate is 1.6237 CAD/Euro. Assume that risk-free rates are 4% and 7% in
Canada and Europe, respectively. The Euro is selling for 1.6300 CAD/Euro forward in a three-month
contract.
a. Is there arbitrage?
b. If yes, briefly describe the strategy to exploit it.
Answer:
a. F0 = 1.6237e(.04 - .07).25 = 1.6116 CAD/Euro < 1.6300 => Arbitrage.
b. Today sell the forward, buy the Euros with borrowed CADs at 4% and invest the Euros at 7% in
Europe.
a. Forward rate for 1-year horizon is F1 = 1.7000 * 1.03 1.66762$ / £.
1.03 2
b.Forward rate for 2-year horizon is F2 = 1.7000 * 1.05 1.63585$ / £.
The swap for the institution is equivalent to two exchanges: paying $0.85mil and receiving £ 0.4 mil
in one year and paying $17.85mil and receiving £10.4 mil in two years. The swap value to the
financial institution is the sum of the values of the one- and two-year forward exchanges.
(0.4 *1.66762 0.85) (10.4 *1.63585 17.85)
Value of swap = 2 $0.96673 mil
CASE LET on Currency Swaps:

A UK firm is to advance a 3 years loan of £ 1,00,000 to its Japanese subsidiary. A Japanese firm is to
advance a 3 years loan of ¥ 2,00,00,000 to its UK subsidiary. Both the firms are brought to a
negotiation table by a finance corporation and a deal is negotiated. Under the deal, the UK firm will
advance £ 1,00,000 to UK Subsidiary of the Japanese firm at interest of 8 % p.a. compounded
annually payable on maturity, the Japanese firm will advance a loan of ¥ 2,00,00,000 to Japanese
subsidiary of UK firm at interest of 7 % p.a. compounded annually payable on maturity. The current
exchange rate is 1£ = 200 Yens. However, the £ is expected to decline by 4 Yens per £ over 3 next
years. Compare the £ value of receivables of each of the two firms at the end of 3 years.
Answer:
• UK firm will get £ 1,25,971 from UK subsidiary of the Japanese firm.
1st year: £ 1,00,000 x 8% p.a = £8,000 2nd year: £ 1,08,000 x 8% p.a =
£8,640 3rd year: £ 1,16,640 x 8% p.a = £9,331
That means total will be £ 1,00,000 + Intt £ 25971
• The Japanese firm will get Yens 2,66,20,000 from the Japanese subsidiary of the UK firm:
the £ value of this receivable is expected to be 2,45,00,860 / 188 i.e. £ 1,30,323.
1st year: ¥ 2,00,00,000 x 7% p.a = ¥ 14,00,000
2nd year: ¥ 2,14,00,000 x 7% p.a = ¥ 14,98,000

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3rd year: ¥ 2,28,98,000 x 7% p.a = ¥ 16,02,860
That means total will be ¥ 2,00,00,000 + Intt.¥ 45,00,860
5. Currency Derivatives:- Already seen in Chapter 1 of Module A

There are two types of currency derivatives to hedge the risk on currency rates fluctuations:
1. Forward
2. Futures & options
CASE LET on Interest Swaps:

Case 1: ABC Company just entered into an interest rate swap agreement with another company. ABC
has agreed to make semi-annual payments at a fixed rate of 7.6% per year. The counterparty, on the
other hand, has agreed to make variable payments at a rate of LIBOR + 1. With a notional principal of
$15 million, which of the following statements would hold true for the first payment in six months if
LIBOR were 6.1% today and 6.9% in six months?
A) ABC would receive a net payment of $37,500.
B) ABC would receive a net payment of $22,500.
C) ABC would have to make a net payment of $22,500.
D) ABC would have to make a net payment of $37,500
Explanation:
(7.6% / 2 ) of 15m = 5,70,000

Fixed payer: Float payer:
ABC Counterparty
( 6.1% + 1%) of 15m = 5,32,500
2 Net = 37,500
Note 1:- Since the fixed payer owes more than the float payer, only the fixed payer would make one
net payment of $37,500.
2:- We use semi annual rates by dividing the annual rate by 2.
3:- To determine the float payment we use the LIBOR rate at the beginning of the period, even
though the payment is made at the end of the period
Case 2: Two parties enter into a three-year interest rate swap, which involves the exchange of
LIBOR+1 for a fixed rate of 12% on a $100 million notional amount. The LIBOR rate today is 11%, but
is expected to increase to 15% in one year and fall back down to 8% in the following year. Which of the
following statements accurately depicts the flow of net cash flows between the two counterparties?
(a) The fixed rate payer would receive a payment of $4 million at the end of year two, while the
variable rate payer would receive $3 million at the end of year three.
(b) The fixed rate payer will have to pay $4 million at the end of the second year and $3 million at the
end of the third year.
(c) The fixed rate payer will have to pay $1 million at the end of the first year.
(d) The variable rate payer would receive a payment of $4 million at the end of year two, while the
fixed rate payer would receive $3 million at the end of year three.
Explanation:-
End of Yr 1:- Fixed 12
pays ( $ 100 million x 12% ) million $ 12
Variable pays (100 million x 12%) million
= Net cash flow received by fixed payer NIL
End of Yr 2:- Fixed pays ( $ 100 million x 12% ) 12

Variable pays (100 million x 16%)
= Net cash flow received by fixed payer million $ 16
million $ 4
million

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End of Yr 2:- Fixed pays ( $ 100 million x 12% ) 12
Variable pays (100 million x 9 %)
million $ 9
= Net cash flow paid by fixed payer
million $ 3
million
Problems on T- Bill:-
1. Assume an investor purchased a six- month T-bill with a Rs.10,000 par value for Rs.9,000 and
sold it ninety days later for Rs.9,100. What is the yield?
ANSWER:
Par PP 365
YD
PP n
10, 000 9 7 00 365
9, 700 90
%
2. Newly issued three-month T-bills with a par value of Rs.10,000 sold for Rs.9,700. Compute the
T-bill discount.
ANSWER:
Par PP 360
YD
Par n
10, 000 9 7 00 360
10, 000 90
%
Assume an investor purchased six-month commercial paper with a face value of Rs.1,000,000 for
Rs.940,000. What is the yield?
ANSWER:
Y
940 000 180
12.94%
(i) The Treasury is selling 91-day T-bills with a face value of Rs.10,000 for Rs.8,800. If the investor
holds them until maturity, calculate the yield.
ANSWER:
YT = (SP – PP/ PP) (365 / n)
YT = (10,000 – 8,800 / 8,800) (365 / 91) = 54.69%
REPO & Reverse REPO Transactions:

Repo rate or repurchase rate is the rate at which banks borrow money from the central bank (read RBI
for India) for short period by selling excess Non SLR securities (mostly government bonds or treasury
bills) to the central bank with an agreement to repurchase it at a future date at predetermined price. It
is similar to borrowing money from anybody by selling him something with a promise to buying it back
later at a pre-fixed price ( fixed at the time of borrowing itself). E.g, A bank is having Non SLR
securities of Rs.300 cr. They don’t have much of the liquidity due to asset mismatch and hence they
will sell these securities to RBI with promise to purchase it within next 15 days. For 15 days they need

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pay interest prevailing at that time, currently rate is 7.25%. Hence the calculations are Rs.300cr X
7.25% = Rs.21.75 cr p.a. and for 15 days it comes to 89 lakhs.

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This amount will be adjusted in repurchase price, that mean while repurchasing the securities bank will
pay 300 cr + 89 lakhs = 389 cr.
Illustration:
Security offered under Repo 11.43% 2026

Coupon payment dates 7 August and 7 February
Market Price of the security offered under Rs.113.00
Repo
(i.e. price of the security in the first leg)
Date of the Repo 19 January, 2014
Repo interest rate 7.75%
Tenor of the repo 3 days
Broken period interest for the first leg* 11.43% x162/360 x100 = 5.1435
Repo interest** 118.1435 x 7.75% x 3/365 =0.0753

Broken period interest for the second leg 11.43% x 165/360x100=5.2388
Price for the second leg (3)+(4)-(5) = 118.1435 + 0.0753-5.2388 = 112.98
Cash consideration for the second leg = 112.98 + 5.2388 = 118.2188
(5)+(6)
* Computation of days based on 30/360 day count convention

** Computation of days based on Actual/365 day count convention applicable to money market
instruments
Reverse Repo Rate
Reverse repo transaction is exactly the opposite of Repo transaction. Here RBI is selling the securities
to Banks with a promise to purchase it back at predetermined rate. It the rate of interest at which the
RBI borrows funds from other banks for a short duration (by means of selling the securities to banks).
The banks deposit their short term excess funds with the central bank and earn interest on it. Reverse
Repo Rate is used by the central bank to absorb liquidity from the economy. When it feels that there is
too much money floating in the market, it increases the reverse repo rate, meaning that the central
bank will pay a higher rate of interest to the banks for depositing money with it.
Both these rates are determined by the RBI based on the demand and supply of money in the
economy.
Bank Rate:
Bank rate is the rate at which banks borrow money from the RBI without any sale of securities. It is
generally for a longer period of time. This is similar to borrowing money from anybody and paying
interest on that amount.

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Concept of Treasury
It deals with short term fund flow (i.e. Securities with Less than 1 year maturity) except part of SLR
requirement. Previously, Liquidity Management was main function of Treasury. But now, it includes all
Trading and Investment activities in financial markets.
Treasury has become profit center for all the banks

It also plays important role in ALM (Asset Liability Management)
Functions of Integrated Treasury
Integrated Treasury refers to integration of the following:
Money Market
Security Market
Forex Market
Why Treasury has become so important
1. Rupee is freely convertible on account of Current Account transactions. In Capital account

transactions, it is convertible to a larger extent. Therefore, banks are free to operate in FDI, ECB
and ODI.
2. Banks source funds from Global markets and invest in Domestic currency or vice versa.
3. Banks invest in Equity and Debt Market.
4. Use of Derivatives with reference to forex market as per requirement of our corporate customers.
Role of Treasury
7. Liquidity Management : Managing short term funds besides maintaining CRR and SLR
8. Proprietary Positions: Trading in Currencies, Securities and other financial instruments including
Derivatives.
9. Risk Management: Bridging Asset Liability mismatches and managing Risks through Derivative
tools.
Treasury Manages 3 books:
ALM Book

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Merchant Book
Trading Book
ALM book deals with Internal Risk Management. Merchant Book deals with Client related Derivatives.
Trading Book deals sales and purchase of financial instruments for bank itself.
Globalization and Growth :Rapid Economic growth is not possible without free capital flows i.e.
Overseas Companies invest in India and Domestic Companies invest outside India. Exchange of
technology and human resources has been made possible only after liberalization after 1990.
Overseas operations of a bank include Portfolio investment,
Direct Investment,
ECB
Issue of Equity and Debt Capital in Global market
Mergers and Acquisitions
Payment of technology, and
Receipt of Interest, fees and dividend etc.
RBI has permitted large movement of capital though
1. Automatic route
2. Approval Route
Impact of Globalization
5. Interest rates are influenced by global trends

6. Exchange rates become volatile and affect GDP as well as Markets of Stock and Commodity.
7. Institutional Structure has changed. SEBI, IRDA, CCIL, NSDL and CIBIL have come up.
8. There is widespread use of Swaps, Forwards and Options.
9. Rupee Derivatives are also available in the market.
Banks can Borrow and Invest Outside India through Overseas Correspondents in Foreign Currency
up to 100% of Tier–1 Capital or USD 10 Million (whichever is higher)
Treasury as Profit Centre Due to following:
10. Inter- bank market is free from Credit risk and requires little capital allocation.
11. Treasury activity is highly leveraged. The risk ranges from 2% to 5%.
12. Operational costs are low.
Sources of Treasury Profit
15. Forex Business

(a) Buy Low and Sell High
(b) Position is generally squared on daily basis.
(c) Stock of currency is not generally kept.
(d) Overbought and Oversold is called ―Open Position‖
16. Money Market

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Banks lend surplus funds in Money Market and borrow the same when required. Interest is
earned.
20. Investment in Govt. Securities and Other Securities
Treasury profit is earned by investment in G-sec and other securities in Debt and Equity Market.
21. Interest Arbitrage
If interest rates are in favour, banks borrow from centers having low rate of interest and lend at
other centers where rate of interest is high. This is called Arbitrage.
22. Trading in market
It is speculative activity. Banks trade in securities and currencies. Swap transactions are also
done to increase profits of the bank.
Organization Structure
In every bank, General Manager is CTO (Chief Transaction Officer) who reports direct to CEO.
There are four sections at HO:
25. Dealing Room : Chief Dealer is Head. There are separate dealers for Forex Operations, Money
market operations and Security Operations. For corporate, separate dealer is appointed who
deals with securities in Secondary as well as Primary market.
26. Mid-Office: It provides MIS, implements Risk Management system and monitors exposure limits
and Stop Loss Limit.
27. Back Office: This office is responsible for verification and settlement of deals, confirmation of
deals with counterparts, book-keeping of all deals and Maintaining Nostro accounts.
28. Investment Office: This office deals with Primary Issues of Shares
Treasury Products
Treasury Products are of 3 types:
30. Products of Forex Market

31. Products of Money Market
32. Products of Security Market
Forex Market Products: It is virtual market without boundaries, highly volatile and liquid and most
transparent. It includes the following products.
35. Spot Trades: Currencies are generally bought and sold at spot rates when payment and
settlement takes place on 2nd working day. Cash and Tom rates are quoted at discount from Spot
rate.
36. Forward Trades : Purchase or sale of currency at future rates. Exchange takes place after few
days/months. Importers and Exporters cover risks by Forward trades. Forward rates are arrived
at on the basis of interest rate differentials of two currencies.
37. Swaps: Foreign Exchange transactions where one currency is sold and purchased for another
simultaneously is called Swap. Swap Deal may involve:Simultaneous purchase of spot and sale

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of forward or vice versa. It may also involve Simultaneous sale and purchase, both forward but for
different maturities. It is called ―Forward to Forward Swap‖.
38. Investment in Foreign Currencies: If forex is surplus with bank, it makes investment. Surplus
arises from profits of treasury business, overseas operations, forex borrowings, NRE, FCNR and
EEFC deposits. Investment can be of following 3 types:
(a) Interbank loans- normally not more than 1 year
(b) Short term investments in T-bills and CPs issued by multinational agencies
(c) Some Correspondent banks offer automatic investment facility in Nostro Accounts
subject to minimum balance.
39. Foreign Currency Loans: Banks extend WC loans in foreign currency and for this purpose,
clearance of Treasury is required.
40. Rediscounting of Foreign Bills :Treasury refinances the Foreign currency bills
purchased/negotiated by another bank. The advance covers Usance period 15-360 days.
Money Market Products: Money market products relate to raising and deploying short term
resources with maturity Maximum 1 year. The money market products are:
4. Call Money: It refers to Overnight placement. It needs to be repaid on Next Working Day.
O/N MIBOR Rate is the indicative rate. Non bank players (FIs/MFs) are not eligible to
participate.

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2. Notice Money: It is placement of funds beyond overnight up to maximum period of 14 days.
3. Term Money: It deals with placement of funds in excess of 14 days up to 1 year. 1 to 6
month products are very common.
Other Money Market Products:
3. Treasury Bills:
These are issued by Govt. of India through RBI.
Tenure is 91Days, 182 Days and 364 Days.
These are issued at Discount in auction.
Banks and PDs participate in the auction.
The auction is also available to all financial players (FIs/MFs/Corporate).
Auction takes place on Wednesday every week in case of 91 days bills.
It takes place on Wednesday every Fortnight in case of 182 D and 364 D bills.
4. Commercial Papers & 3. Certificates of Deposits
CP and CD Commercial Papers – CP:

CP is issued by Corporate with Net Worth minimum 4
Crore, Rating min.P2 (now A2) and availing WC limit from
any bank.
CP is issued with tenure 7 Days to 1 year.
CP is issued in multiples of Rs. 5.00 lac.
CP is Promissory Note and is Negotiable and also attracts
Stamp Duty.
It is fairly active in Secondary market.
It is in Demat form and the price is less than Face Value.
Certificate of Deposit – CD
CD is issued by banks
CD is issued with tenure 7 Days to 1 year.
CD is issued in multiples of Rs. 1.00 lac
CD is Promissory Note and is Negotiable and also attracts
Stamp Duty.
CD is not very active in Secondary market

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.
4. LAF – Repo and Reverse Repo
It is Lending and Borrowing money for short term period (1 day to 1 year)
Under Repo, RBI purchases securities with commitment to sell at a later date in order to Inject
Liquidity. Presently, Govt. securities are dealt with. All Repo transactions are routed through
CCIL. RBI has permitted Repo in Corporate securities for only ―AA‖ rated companies. But the
market is yet to be activated.
Under Reverse Repo, RBI sells securities with a commitment to buy at a later date in order to
Contain Liquidity.
Repo and Reverse Repo transactions are generally conducted for Overnight period through
Auction Twice Daily. The minimum Bid is Rs. 5.00 crore and its multiples. Margin is normally 5%.
(Total available funds to a bank under LAF will be capped at 0.5% of NDTL w.e.f. 24.7.2013)
Latest Repo Guidelines as per Monetary policy dt. 3.6.2014
Cap of Overnight Repo reduced from 0.5 % to 0.25% of NDTL

Continuation of Term Repo up to 0.75% (cap) of NDTL under 7 days to 14 days term
repos.
5. CBLO : Collateralized Borrowings and Lending Obligations:

It is money market instrument launched by CCIL. Borrower can deposit G-sec with CCIL and
borrow funds from others who have surplus funds subject to re-purchase of securities. The tenure
is 1 day to 1 year.
Bills Rediscounting:
Treasury re-discounts bills which are already discounted by other banks. The tenure is 3-6
months.
Security Market Products: Securities constitute Shares, Debentures, Bonds, and Govt Securities etc.
The various types of securities are:
1 Govt. Securities
(c) These are issued by PDO (Public Debt Office) of RBI.
(d) Price is determined in auction
(e) There is active trading in Secondary market.
(f) If Yield rate is more than coupon rate, these are issued at a discount.
(g) Open Market Operations are conducted by GOI to maintain liquidity position.
(h) SLR requirements are met by banks by investing in HTM securities.
2 Corporate Debt Papers
(c) These are medium and long term Bonds and Debentures issued by Corporate and FIs.
(d) These are non-SLR securities.
(e) These form part of Tier –II Capital.

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(f) Yield is more than that of Govt. Securities.
3 Debentures and Bonds: Both are Debt instruments and form part of Tier-II Capital. SEBI has
control over issuance and redemption.
Debenture Bond
Issued by Corporate in Private sector Issued by institutions in Public sector
It is Secured by Floating charge It is not secured
Provisions of Company Law applies It is governed by Indian Contract Act
It can be transferred through registration It is negotiable instrument
It can be convertible or non-convertible Bond, if given option can be
convertible into equity shares.
It can be
Zero Coupon Bond
Perpetual Bond
Floating Bond
Deep Discount
57. Equities: It is Share Capital issued by both Private sector and Public sector Companies to raise
funds from public. The people who invest are called Shareholders:
(a) Bank can invest subject to limit exposure set by RBI for Capital Market
(b) SEBI has full control and these are traded in Stock Exchanges.
(c) Derivative products are also available.
(d) If offered by Company, it is called Primary Market. If purchased through Stock
Exchanges, it is called Secondary market.
Equity Share Preference Share

It is permanent capital and is not It may be redeemable or non-redeemable.
redeemed. It forms part of Tier-I Capital. If redeemable, forms part of Tier-II Capital
Dividend is paid out of profits after making Preference is given while paying
payment to Preference Share-holders. dividend.Unpaid dividend can be carried
forward. This is why these are called
Cumulative Preference shares.
The Company, if liquidated, pays to Equity Preference Shares are given preference
Shares at last. for payment at the time of liquidation.
These carry Voting Rights. These don’t carry Voting rights.
Generally Preference Shares are
Cumulative and Redeemable.
Domestic and Global Markets
Rupee is fully convertible on account of Current Account transactions and partially on account of Capital
Account transactions.Interaction between Domestic and Global markets takes place in respect of
following:

Page 110
62. FII Investments: These are made by way of FDI (Foreign Direct Investments) and Portfolio
Investments. FDI is for Long term Project related investment whereas Portfolio Investment
related to Investment in Equity and Debt Market. In some areas, FDI is 100% whereas it is up to
74% in other areas.
1. ADR/GDR
American Depository Receipts are Receipts or Certificates issued by US Banks representing
specified number of shares of non-US Companies.
Global Depository Receipt is a Dollar denominated instrument which is traded in

European Markets but represents Securities of non-European Companies.
2. ECB (External Commercial Borrowings

External Commercial Borrowings are medium and long term loans as permitted by RBI for the
purpose of :
(a) Fresh investments
(b) Expansion of existing facilities
(c) Trade Credit (Buyers’ Credit and Sellers’ Credit) for 3 years ar more.
Automatic Rout
1 ECB for investment in Real Estate sector , Industrial sector and Infrastructure do not
require RBI approval
2 It can be availed by Companies registered under Indian Company Act.
3 Funds to be raised from International recognized sources such as banks, Capital markets
etc.
Maximum amount is USD 20 million with minimum average maturity of 3
years and USD 750 million with average maturity of 5 years.
All in cost ceiling is :
ECB up to 5 years : 6M LIBOR+350 bps.
Under this route, funds are borrowed after seeking approval from RBI.
The ECBs not falling under Automatic route are covered under Approval Route.
Under this route, Issuance of guarantees and Standby LC are not allowed. Funds are
to be raised from recognized lenders with similar caps of all-in-cost ceiling.
7. Foreign Currency Funds of Banks

Banks can use FCNR deposits for the purpose of Investing outside India as well as for
domestic lending in foreign currency. They are also permitted to borrow/invest in overseas
market within a ceiling of 100% of Unimpaired Tier – Capital with minimum USD10 million.
8. ODI (Overseas Direct Investment)
Corporate can invest in Joint Venture/Subsidiary units outside India from Rupee
resources subject to cap of 4 times of Net worth i.e. 400% of Networth.
This way, Indian Companies can have global presence.
Any financial committee exceeding 1 billion USD in a financial year would require prior
permission of RBI even within overall limit of 400% of Net Worth.
It has been decided that Proprietorship concerns and Unregistered Partnership firms can also
participate in ODI up to 10% of average export realization of previous 3 years or
200% of Net Owned funds of the firm provided:
(a) It is Status Holder Exporter and KYC compliant
(b) It has proven track record i.e. exports outstanding does not exceed 10% of average export
realization of previous 3 years.
There is no adverse notice of any govt. agency.

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LRS (Liberalized Remittance Scheme)
The scheme is meant for Resident Indians individuals. They can freely remit up to USD 125000
per financial year in respect of any current or capital account transaction without prior approval of
RBI. The precondition is that the remitter should have been a customer of the bank for the last 1
year. PAN is mandatory.
Not Applicable
13. The scheme is not applicable for remittance to Nepal, Bhutan, Pak, Mauritius or other
counties identified by FATF.
14. The scheme is not meant for remittance by Corporate.
Latest Guidelines
1 The scheme should not be used for making remittances for any prohibited or illegal
activities such as margin trading, lottery etc., as hitherto.
2 Resident individuals have now been allowed to set up Joint Ventures (JV) / Wholly
Owned Subsidiaries (WOS) outside India for bonafide business activities outside India
within the limit of USD 125000.
3 The limit for gift in Rupees by Resident Individuals to NRI close relatives and
loans in Rupees by resident individuals to NRI close relatives shall accordingly stand
modified to USD 125000 per financial year.
RBI has clarified that Scheme can now be used for acquisition of IP outside India.
MSF – Marginal Standing Facility
The banks will use Marginal Standing Facility to borrow overnight money from RBI only when
they have exhausted all other existing channels like Collateralized Borrowing and Lending
Obligations (CBLO) and Liquidity Adjustment Facility (LAF). The features of the scheme are as
under:
18. The eligible entities can avail overnight, up to 2% of their respective
nd
NDTL outstanding at the end of the 2 preceding fortnight.
A For the intervening holidays, the MSF facility will be for one day except on
Fridays when the facility will be for 3 days or more, maturing on the following
working day.
B The facility is available on all working days in Mumbai, excluding Saturdays
between 3.30 P.M. and 4.30 P.M.
C Interest on amount availed will be 100 bps above Repo i.e. 9.00%.
D Requests will be received for a minimum amount of Rs.One Crore and in multiple
of Rs. One Crore thereafter.
E MSF will be undertaken in all SLR-eligible transferable Government of India
dated Securities/Treasury Bills and State Development Loans
(SDL).
A margin of 5% will be applied in respect of GOI dated securities and Treasury Bills. In respect of
SDLs, a margin of 10 per cent will be applied
FDI (Foreign Direct Investment)

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Foreign direct investment (FDI) is a direct investment into production or business in a country
by an individual or company in another country, either by buying a company in the target
country or by expanding operations of an existing business in that country. Foreign direct
investment is in contrast to portfolio investment which is a passive investment in the securities
of another country such as stocksand bonds.
FDI Limits in different sectors are as under:

%age of Net Owned
Capital
Defense Sector 49%
Insurance Sector 49%
Power Exchanges 49%
Civil Aviation 49%
Credit Information Companies 74%
Railways, Construction Dev. Sector 100%
Retail- Multi brand 51%
Retail Single brand 100%
Courier Service 100%
Foreign Banks in wholly owned 100%
subsidiary
Telecom Sector 100%
Private Sector banks 74%
Public sector Banks 20%
A A citizen/Entity of Pakistan may participate in FDI with prior approval of Government.
ODI It has now been decided:
(Overseas
Direct a) To restore ODI up to 400% of Net Worth. Any financial
Investment ) commitment exceeding 1 billion USD in a financial Year would
require prior approval of RBI even within overall limit of 400% of
Net worth.
a Any ODI in excess of 400% of the net worth shall be considered under the
Approval Route by the Reserve Bank of India.
FPIs FPIs are now allowed access to :
(Foreign Currency futures
Portfolio Exchange traded currency options
Investors For the purpose of hedging currency risk arising out of market value of
their exposure to Indian Debt and Security market.
UP TO USD 10 MILLION or equivalent without having to establish

existence of any underlying exposure.
Beyond USD 10 million, FPI will have to establish underlying exposure.

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Funding and Regulatory Aspects
Broad Money (M3) includes currency in circulation, Demand and Time Liabilities of Banks and Post Office
SB accounts. Narrow money (M1) includes Currency in circulation, Demand Liabilities of Banks and other
deposits with RBI. M3 is 3-4 times than M1.
U/s 22 of RBI Act 1934, RBI is the sole authority in India to issue bank notes. RBI's Issue Deposits is
responsible for issue of fresh
notes against security which consists of gold coins, bullion, rupee coins foreign securities, eligible
promissory notes and other
approved securities (aggregate value of gold and foreign exchange reserves should not be less than
Rs.200 crore out of which, gold
(coins and bullion) should not be less than Rs.115 crore) (Sec 33).
Currency in circulation is controlled by RBI and it is the only cash components of the money in circulation
and forms small part
of the total money_ Cash deposited with banks is lent by banks that increases the money supply. Thus,
there is chain of relending
and re-deposit. The multiplier effect reduces the importance of currency in circulation and the note issuing
role of RBI
becomes a utility function.
The money in circulation is broadly covered under M3 also called 'Broad Money'.
Liquidity refers to surplus funds available with bank and the Monetary policy of RBI focuses on regulating
the liquidity to
control the rate of price rise (inflation) and ensure stability of financial markets.
What are reserve assets : Reserve assets refer to the cash deposit (CRR) by banks with RBI to comply
the requirement of
Section: 42 of RBI Act 1934 and also the statutory liquidity ratio (SLR) requirement u/s 24 of Banking
Regulation Act 1949
Maintenance of CRR and SLR provides cushion to the banking operations_ If need be, RBI would come
to the rescue of the
bank.

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Impact of increase and decrease of CRR: Increase in CRR leads to impounding of bank funds for specific
purpose and amounts to
absorption of liquidity. On the hand, decrease in CRR leads to release of impounded funds which amount
to injecting liquidity in
the inter-bank market. For example 0.5% reduction in CRR for a net demand and time liabilities base of
say Rs.30,00,000 cr,
amounts to release of liquidity of Rs.15000 cr in the inter-bank system_
CASHRESERVE RATIO
CRR refers to the ratio of bank's cash reserve balances with RBI with reference to the bank's net demand
and time liabilities to
ensure the liquidity and solvency of the scheduled banks.
Extent of CRR : Under RBI Act 1934 (Section 42(1) all scheduled banks are required to keep certain
minimum cash reserves
with RBI.
Important features are:
Wef June 22, 2006 (as per RBI Amendment Act 2006), RBI has been empowered to fix CRR (without
any floor or ceiling) at
its discretion {instead of earlier 3 to 20% range by notification) of the net demand and time liabilities.
It is to be maintained at fortnightly average basis (Saturday to following Friday- 19 days) on reporting
Friday (advised by RBI
to banks at the commence of the year).
On a daily basis it should be minimum 70% of the average balance wef Dec 28, 2002_
Non-scheduled banks maintain CRR (Sec 18 of Banking Regulation Act) by maintaining 3% of NDTLs
as cash balances with
themselves).
Wef January 12, 2002, RRBs also to maintain same CRR as applicable for SCBs.
Demand liabilities: Demand liabilities mean Current deposits, Demand liabilities portion of saving fund
deposits, margins
held against LC/LG, Balances in overdue FD, cash certificate and RD, Outstanding TTs, MTs and DDs,
Unclaimed deposits,
Credit balances in CC accounts and Deposits held as security for advances which are payable on
demand.
Time liabilities: Time Liabilities mean FDs, cash certificate, cumulative and RDs, time liabilities portion of
saving bank deposits,
staff security deposits, margins against LC not payable on demand, deposit held as securities for
advances and India Dev
Bonds.
Other demand and time liabilities: include interest accrued on deposits, bills payable, unpaid dividends,
sundries account
balances, participation certificates issued to other banks, net credit balance in branch adjustment account,
margin held on bills
purchased or discounted.
Liabilities not to be included for DTL/NDTL computation
a.Paid up capital, reserves, any credit balance in the Profit & Loss Account , amount availed of as
refinance from RBI, and apex
institutions like Exim Bank, IDBI, NABARD, NUB, SIDBI etc.
b. Provision for income tax in excess of actual estimated liabilities.
c. Amount received from D1CGC pending adjustments.
d. Amount received from ECGC by invoking the guarantee.
e. Amount received from insurance company on ad-hoc settlement of claims pending Judgment of the
Court.
Amount received from the Court Receiver Exempted Categories
Wef June 22, 2006, RBI has exempted the following liabilities from the CRR requirement of 5%:,
(I) Liabilities to the banking system in India as computed under Clause (d) of the Explanation to Section-
42(1) of the RBI Act, 1934;
(ii) Credit balances in ACU (US $) Accounts;

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(iii) Transactions in Collateralized Borrowing and Lending Obligation (CBLO) with Clearing Corporation of
India Ltd. (CCIL); and
(iv) Demand and Time Liabilities in respect of their Offshore Banking Units (OBUs).
Interest payment : WEF Mar 31, 2007, no interest is payable by RBI on CRR balances (earlier 3.5% p.a.
wef 18.09.04 on a monthly
basis wef 01.04.2003).
Penalties: With effect from the fortnight beginning June 24, 2006 penal interest will be charged as under :
(i) in cases of default in maintenance of CRR on a daily basis (presently 70% of the total cash reserve
ratio
requirement), penal interest will be recovered for that day at the rate of 3% per annum above the bank
rate on the
amount by which the amount actually maintained falls short of the prescribed minimum on that day and if
the shortfall continues
on the next succeeding day/s, penal interest will be recovered at a rate of 5% per annum above the bank
rate.
(ii) in cases of default in maintenance of CRR on average basis during a fortnight, penal interest will be
recovered as envisaged
in sub-section (3) of section 42 of Reserve Bank Of India Ad, 1934.
Fortnightly return in Form 'A': Under section 42 (2) of RBI Act, 1934, SCEs are to submit to RBI a
provisional return in Form
'A' within 7 days and final Form 'A' within 20 days from expiry of the relevant fortnight.
STATUTORY LIQUIDITY RATIO
Section 24 (2A) of Banking Regulation Act 1949 requires every banking company-to maintain in India
equivalent to an amount
which shall not at the close the business on any day be less than 25% of the total of its demand and time
liabilities (to be
computed as in case of CRR) in India, which is known as SLR.RBI powers - RBI can change SLR with
minimum at its discretion and
maximum 40%. Presently it is 21.5% wef 07.02.2015
Components of SLR:
a cash in hand
b gold owned by the bank
c balance with RBI in excess of the ones u/s 42 of 8131 Act.
d Net balance in current account SBI, SBI associates or Nationalised Bank.
e investment in unencumbered approved govt. securities.
Classification of demand/time liabilities: Demand and time liabilities for SLR purpose are same as in case
of CRR. When it
is to be maintained ? SLR is to be maintained as at the close of business on every day i.e. on daily basis
based on the
DTLs as obtaining on the last Friday of the 2nd preceding Fortnight.
Penalties: Penal interest for that day at the rate of 3% per annum above the bank rate on the shortfall and
if the default continues
on the next succeeding working day, the penal interest may be increased to a rate of 5 percent per
annum above Bank Rate for
concerned days of default on shortfall.
Return in Form VIII: A return in form VIII showing the amounts of SLR held on alternate Fridays during
immediate preceding
month with particulars of their DTL in India held on such Fridays is to be submitted to RBI before 20th day
of every month_
In addition, a statement as annexure to form VIII giving daily position of (a) value of securities held for the
purpose of
compliance with SLR and (b) the excess cash balances maintained by them with RBI is to be submitted.
LAF is tending of funds by RBI to banks through REPO to meet their liquidity needs. While banks can
also sell or buy Govt. securities
amongst themselves, the LAF refers exclusively to Repo transactions by RBI to banks. In case of excess
liquidity with banks, they
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can lend to RBI under Reverse Repo and get interest.
Objective : The funds are used by the banks for their day-to-day mismatches in liquidity_
Tenor : Reverse Repo auctions (for absorption of liquidity) and Repo auctions (for injection of liquidity) are
conducted on a daily
basis (except Saturdays). 7-days and 14-days Repo operations discontinued wef Nov 01, 2004.
Eligibility : All commercial banks (except RRBs) and PDs having current account and SGL account with
RBI. Minimum bid
Size : Rs. 5 cr and in multiple of Rs.5 cr
Eligible securities: Repos and Reverse Repos in transferable Central Govt. dated securities and treasury
bills.
Rate of Interest : The reverse repo rate will be fixed by R13I from time to time. The repo rate will continue
to be linked to the
reverse repo rate_ Repo rate is the upper band under LAF, while the reverse repo is the floor rate. 2nd
Liquidity Adjustment Facility
: RBI had also introduced 2nd LAF with effective from Nov 28, 2005. But later on the scheme was
discontinued from Aug 2007_
PAYMENT AND SETTLEMENT SYSTEM
Payment Systems are the key component of any financial system as they facilitate the movement of
money in the economy and
provide a conduit, for effective transmission of monetary policy. World over, the payment systems have
witnessed rapid changes
due to developments in information and communication technologies. In India, the RBI has taken number
of steps during the last
few years to build a robust payments system that include building the necessary payments infrastructure
and develop a strong
institutional framework for the payment and settlement systems in the country.
NEGOTIATEDDEALING SYSTEM
The system which became operational during Feb 2002, facilitates the submission of bids/applications for
auctions/floatation of
govt securities through pooled terminal facility located at Regional Offices of Public Debt Offices and
through member terminals.
The system can be used for daily Repo and Reverse Repo auctions under Liquidity Adjustment Facility_
Members : Banks, Primary Dealers and Financial Institutions having Subsidiary General Ledger and
Current Accounts with RBI are
eligible to become members.
Instruments ; Govt. dated securities, Treasury Bills, Re-purchase Agreements (Repos), call/notice/term
money, commercial paper,
certificate of deposit, forward rate agreements/interest rate swaps, etc. will be eligible instruments.
Benefits : It provides an
electronic dealing platform for primary and secondary market participants in govt. securities and also
facilitate reporting of trades
executed through exchanges for information dissemination and settlement, in addition to deals done
through the system.
LIQUIDITY ADJUSTMENT FACILITY

Liquidity Adjustment Facility (LAF) was introduced by RBI during June, 2000 in phases, to ensure smooth
transition and keeping pace
with technological upgradation. On recommendations of an RBI's Internal Group RBI revised the LAP
scheme on March 25, 2004.
Further revision has been carried wef Oct 29, 2004. The revised LAF scheme has the following features:
Money is impounded by RBI to reduce multiplier effect by means of CRR and SLR.
Cash Reserve Ratio (Presently 4% of DTL)

Banks have to maintain cash balance equal to 4% of DTL with RBI.
1. There is No minimum and No ceiling limit.
2. No interest is paid by RBI.

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3. Non-maintenance of CRR attracts penalty @ 3% above Bank rate on 1st day and 5% above
bank rate on 2nd day.
4. It is calculated as fortnightly average.
5. However daily cash balance should not fall below 95% (Previously 70%) of the amount required.
Statutory Liquidity Ratio (Presently 19.50% of DTL)
Banks have to maintain liquid funds in the form of cash, gold and un-encumbered Govt.
securities @19.50.0% of DTL.
+ There is no floor limit. However, ceiling limit is 40%.
+ Non-compliance attracts penalty @ 3% above Bank rate on Ist day and 5% above bank rate on
2nd day.
+ It is computed as on last Friday of 2nd preceding fortnight every month.
What Constitutes DTL?
+
Demand deposits (CA, SB, Margin money for LC and Overdue FDs)
+
Time Deposits (FD and RD).
+
Overseas borrowings
+
Foreign outward remittances in transit.
+
Accrued Interest and credit balance of Suspense account.
Exemptions
Capital, Reserves and Surplus
Net Interbank borrowings, Credit balance in ACU Dollar accounts, Transactions in CBLO and
CCIL
Refinance from NABARD, SIDBI, NHB and RBI.
DTL in respect of Off-shore banking units.
Payment and Settlement System

RTGS & NEFT in India
(a) RTGS (Real Time Gross Settlement) is a payment system for Interbank transfer with minimum
Rs. 2.00 lac. This system is managed by IDBRT, Hyderabad, which connects all banks to Central
server maintained by RBI. The network is INFINET (Indian Financial Network)
Timings are:
R-41 transactions 8:00AM to 8:00PM (Saturday: 8:00 to 3:30 PM)
BS NEFT (National Electronic Fund Transfer) is mainly used for low amount transactions.
However, there is no minimum and maximum limit. The timings are: 8:00AM to 7:00PM (Saturday
8:00 to 1:00 PM). There are 12 batches daily except Saturday with 6 batches. The time period is
B+2.
BT Negotiated Dealing System (NDS): It is an electronic platformwhich facilitates sale and

purchase of Govt. securities. Auctions are made and trading is done electronically. Banks, PDs,
Insurance Cos., MFs and FIs are members. Improved version of NDS called OM (Anonymous
Order matching system) takes care that identity of counter party is not disclosed till offer is
accepted.
BU FX Clear: It is Forex Dealing system developed by CCIL. CCIL provides straight through
processing(STP) between banks for USD/INR transactions and settlement in made in Indian
Rupees.
BV NSDL and CDSL: National Securities Depository Ltd. (NSDL) and Central Depository Services
India Ltd.(CDSL) provide a settlement platform for shares and other securities in the Secondary
market. These institutions also maintain Demat accounts.

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NEW RTGSSYSTEM EFFECTIVE FROM 14.7.2014
Two new features have been added:
1. Hybrid System
Offsetting after every 5 minutes.
The transactions with normal priority would be settled in off-setting mechanism within
maximum 2 attempts.
Maximum time a transaction would be in normal queue is 10 minutes.
If transaction with normal priority is unable to be settled on offsetting mode within 10
minutes, it would be automatically converted to Urgent.
2. Future Value Transactions
Value Dated transactions would enable the customers/participants to initiate RTGS
transactions 3 working daysin advance for setting in RTGS on Value Date.
Treasury Risk Management
Treasury risk management is important for following reasons:

Bank managements are very sensitive to treasury risk.
Treasury profits are earned from market opportunities. Hence, bank is exposed to market risk
Treasury is responsible for balance sheet management. It has to take care of market risk from other
activities also.
Tr e a s ur y o p e ra t io ns d o n o t r eq u i r e mu c h c a p i t a l i . e . i t i s h ig h l y le ve r a g ed .
To me e t t r e as u r y lo s s e s , b a nk d oe s no t ha ve muc h ca p i ta l . l i t h e t r e a su r er
( d e a le r ) c ommi t s an e r r or of j u dg emen t , t h e c o n s eq u en t lo s s e s wo u ld b e
h u g e.
Losses in treasury business materialize very quickly and confirmed transactions cannot be revoked.
Management of Treasury Risk : Following steps can be taken for management of treasury risk:
A. Organisational controls
B. Exposure ceilings
C. Limits on trading positions and stop loss limits.
(A) Organizational controls: It refers to internal checks and balances. For example, the deals (sales
and purchases) are generated by the Front Office.
The Back Office settles the deals only after verification of compliances with internal regulations.
It obtains independent confirmation of each deal from each counterparty and settles the deal within
the exposure limits. The verification of rates & prices is done by comparing to screen based
(Reuter/Bloomberg) information about rates. The banks having larger operations, have also Middle
Office that is responsible for overall risk management.
It maintains profile of treasury and monitors the liquidity and interest rate risk.
(B) Exposure ceiling limits : These limits are fixed for protecting the bank from credit risk (default and
counterparty risk) that arises in treasury operations when the Treasury lends in money market to
other banks. Though .the risk in lend in to other banks is low but it is not zero. Ceilings are also
prescribed on inter-bank liabilities by RBI.
The counter-party risk arises due to failure of the counterparty (another bank) to deliver the securities
or complete the settlement. The counterparty risk can be bankruptcy or inability of the counterparty for
any reason to complete the transaction. By fixing the limits on inter-bank exposure and limits on
counterparties, the banks are able to limit their losses. The ceilings can be with reference to time
duration also say for overnight, I month, 3 months etc_ The ceilings are reviewed at least once in a
year, by the banks.
(C) Internal controls: These are the position limits and stop loss limits which are imposed on the
Dealers who trade in forex or securities. The trading limits are of 3 types (a) limits on deal size (b)
limits on open positions (c) stop-loss limits.
(a) Limits on deal size: The limit fixes the maximum value of the buy or sell transaction and
corresponds to the marketable size of the transactions.
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Limits on open positions: The limits are also fixed on open positions i.e. balance payable or receivable
position. For example, the Treasury buys forex 1 million USD with a view to sell it when rate appreciates.
If
the rate declines, the bank is faced with potential loss in addition to carry cost, as it will have to pay
interest
|Page
on funds, involved in carrying on with the balance.
-The limits are higher for Day-light position.
The limits are lower for over-night position.
There are currency-wise position limits. For the purpose of aggregation, the positions are
converted into US D and then to rupee.
All forward transactions are revalued periodically and the outstanding positions in each time
bucket are subjected to gap limit, which are approved by the management.
(c) Stop loss limits : It represents the final stage of the controlling a trading operation if adverse
position emerges (for example, the rates are declining while the bank had purchased the forex at a
higher rate). The stop loss limits prevent the dealer from waiting indefinitely and limits the loss level
which is acceptable to the management. The loss limits are prescribed (a) per deal (b) per day (c) per
month (d) aggregate loss limit per year.
Market Risk and Credit Risk
Treasury operations face both the credit risk and market risk.
Credit risk arises on account of default by the counter-party in which the bank may lose the principal
and interest. Market risk arises on account of movements in the price of the security, interest rates or
exchange rates in such a way
Liquidity risk : This risk arises on account of mismatch that the Treasury could not cover. For
example, Treasury purchases a 1-year Govt. security by borrowing in the call market, with a view to sell
the security next day when there is increase in its value. If on the 214 day the value declines, the bank
will face a liquidity position. To manage liquidity risk, the Treasury need to have a contingency plan.
Interest rate risk : This risk exists in a transaction where there is mismatch_ In the above example, to
square the call money transaction of the previous day, the Treasury have to borrow from alternate
sources and pay interest. The total interest cost in this manner may be higher than the profits anticipated
from the sale of Govt. security.
The Treasury may also
A. face exchange risk in case of forex transactions.
B. may be affected by equity risk (when the prices of shares decline and lead to liquidity problem) and
C. face commodity risk (if the Treasury has taken exposure in commodity futures).
Risk Measures : VaR & Duration
The uncertainty associated with the price movement of securities or foreign exchange (which cannot be
predicted accurately), exposes the Treasury to Price Risk. To have some idea of the inherent risks and
their effect on the position maintained by the Treasury, VaR and duration can be used.
Value at Risk (VaR): VaR is used to make assessment of possible loss or the worst case scenario,
during the period, when a position in securities or forex is held by the Treasury. Hence, VaR refers to
the most probable loss that the Treasury may incur in normal market conditions due to volatility of
exchange rates, commodity prices or security prices, over a given period, at a given confidence level. It
is expressed as a %age (say VaR at 98% confidence level, means a 2% probability of incurring loss).
The loss is expressed in absolute amount for a given transaction value.
For example if there is confidence level of 95% (which means a VaR of 5%) for 30 days period, the
rupee is likely to lose 5p in exchange value within 30 days, with 5% probability. Hence rupee is likely
to depreciate maximum Sp on 1.5 days of the period (30 days x 5% = 1.5 days ). Similarly, a VaR of
Rs.l lac at 99% confidence level for one week, for a portfolio of Rs.100 lac means, that the value of
the portfolio may drop by maximum Rs.1 lac with 1% probability over one week.
Calculation of VaR : It is derived from the statistical formula that are based on volatility of the market.
Volatility is the standard deviation from the mean observed over a period. There are 3 approaches to
calculate VaR. i.e.
(a) Parametric approach which is based on sensitivity of various risk components (price of the a
particular stock depends on its sensitivity to index change).
(b) Monte Carlo Model, where the no. of scenario are generated at random and their impact on the
variable (stock price or exchange rate) is observed.
(c) Use of Historical data, where the historical data is used' to arrive at
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probable loss.
(d) Duration : It is used in all asset and liability positions where interest rate risk is prevalent
Duration is weighted average measure of life of a bond, where the time of receipt of a cash flow is
weighted by the present value of the cash flow.
Duration is expressed in no. of years. For a longer duration, the sensitivity of price change is greater
to change in interest rate.
Example : If the first cash flow (receipt of interest on bond) is after 6 months from date of investment, the
period of 6 months is multiplied by the present value of the cash flow. If the 2' cash flow is after 12
months, it is multiplied by the present value of the cash flow. In this way, all the present value of all future
cash flows is multiplied with the period of receipt of cash flows. The aggregate of these is divided by the
total of weights, to work out the Duration. This is based on the formula given by Frederick Mecaulay and
is called Mecaulay Duration.
Modified duration : It is arrived by dividing the duration with the interest rate (which is actually the
principal + interest for 1 year expressed at Y+1, where the Y is yield). If the duration of bond yielding
5% is 2.5%, the MD = 2.5 / (1+0.5) or 1.66..
Any change in the yield multiplied by MD will give the likely percentage change in the price of the bond_
If the yield rises by 1%, the change in price of the above bond will be 1.66% ( 1.66 x 1%). The increase
in yield of 1% give cause decline in price of bond by 1.66%, because the yield and price have inverse
relationship.
YTM : To understand duration better, the understanding of the concept of Yield to Maturity (YTM) is
essential. For example, the current price of a bond may be different from its face value and the value at
which the bond was originally purchased, (due to current interest rate which is expected during the
residual
maturity of the bond). Hence, rn, the current price of bond, there may be premium (if the current interest
rates are lower than the coupon rate) or discount (if the current interest rates are higher than the coupon),
to face value.
YTM The effective return on a bond (based on coupon rate, current market price and residual maturity) is
called Y ield. It should be noted that the yield is different from interest rate, which is a fixed amount. Yield
depends upon the amount of investment made in the bond, its residual period and its coupon rate. The
rate at which the the present value of a bowl equals the market price of the bond, is called YTM. The yield
and price of bond, move in opposite direction, i.e. if yield rises, the price of the bond declines.
YTM can be calculated from bond tables or bond calculator. For example a bond carrying 5% coupon with
balance maturity of 2 years is traded at a discount of 2% i.e. at Rs.98. Interest at 5% on a price of Rs.98
will work out to 5.1% which turns out to be YTM of 6.08%.
Why Treasury is risky?
Treasury is risky because of the following:
1. High Leverage- Value of transaction is very high say 100 crore and 1% adverse movement may
result into loss of 1.00 crore.
2. There is sole discretion of Treasury Department to sell, buy or keep open position.
3. Transactions are confirmed and irrevocable.
Risks involved in the Treasury are mainly:
Market Risk – It consists of Liquidity risk, Exchange rate risk, Interest rate risk, Equity risk and
Commodity risk
Take an example:
We borrow from Money market and invest in 5 year G-securities. If Bond prices come down, we
are not willing to sell the bond, but loan has to be repaid. This may lead to shortage of funds
which is called Liquidity Risk.

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Liquidity Risk is translated into Interest Rate Risk when funds have to be arranged at higher rate.
Mismatch between Assets and Liabilities also lead to Interest Rate Risk.
Fluctuation of exchange rates due to many domestic and international factors can lead to
Currency Risk.
Risk of fluctuation in market price of Shares and Bonds is called Equity Risk whereas Risk of
Fluctuation in market price of Commodities such as Gold, Silver etc. lead to Commodity Risk.
Credit Risk – It is risk of default by counter party due to various reasons such as Buyer Risk,
Seller Risk, Country Risk and Sovereign Risk.
Types of Control are:
1. Organizational Control
Segregation of Front, Back and Mid office for effective monitoring and control.
2. Internal Control
Setting up of limits like Deal Size limit, Open Position limit, Stop loss limit, Day light limit and
Overnight limit
3. Exposure Ceiling Limit

Exposure limit of counterparty is fixed on the basis of Credit Rating. Ideally all deals should take
place DVP – Delivery Vs Payment and there is no risk. But ideal position is not there always.
RBI has imposed a ceiling of 5% of Total Business in a year for Individual broker
Measurement of Risk
There are two methods to measure Risk:
1. Value At Risk (VaR)

2. Duration Approach
1.VaR (Value at Risk) It is statistical measure indicating worse movement of market rate over given
period of time under normal market conditions.
For example: Overnight VaR of 45 bps for USD/INR at 95% confidence level. If spot rate is 46.00, there
are only 5% chances that the rate will be worse than 45.55 (46.00-0.45).
Another Example is: If Overnight VaR of 1 year G-Sec is 0.35%, the current yield of 7.75% is expected to
fall/rise not more than 0.35% by tomorrow.
VaR is based on Volatility.

Volatility is sd calculated from mean observations over a period of time.
VaR is suggested for shorter period.
2.Duration or Macaulay Duration
Duration is the period during which Present Value of Outflows become equal to the Present Value of
Inflows.

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Bonds carry coupon rate. If rate of return is higher than coupon rate, Value of Bond falls.
Effective rate of Bond is called Yield.
Duration is Weighted Average measure of life of Bond where time of receipt of cash is weighted
by Present Value of Cash Flow.
It is expressed in number of years during which PV of the bond equals the market price.
Formula is :
Duration (Macaulay Duration) = ∗
Modified Duration = Duration

1+ Yield
Derivative Products
Derivatives don’t have independent value. Their value is derived from the underlying market. The market
may be financial market dealing in forex, bonds and equities as well as commodity market dealing with
underlying commodities like Gold, Silver etc.
Derivatives refer to Future Price based on Spot Market. Two types of Products are as under:
1. OTC Products
These are Over The Counter products which include Forward Contracts and Options. These
are offered by FIs. These derivatives offer contracts with date, amount of terms fixed as per
requirement of the client. Price is quoted by banks/FIs after adding margin. Settlement is made
by physical delivery. Counterparty Risk is always present.
2. Exchange Traded products
These include Futures traded on organized exchanges. Size of the contract is standardized.
Price is transparent. The exchanges collect margin based on Mark to Market price. Physical
delivery is not must. There is no counter party risk.
Types of Derivatives
1. Forward Contracts
2. Futures
3. Options
4. Interest Rate Swaps
5. Currency Swaps
Forward Contracts
It is a deal to buy or sell Shares, Commodity or Foreign Exchange at a contracted rate with desired
maturity. Forward rate is the interest rate differentiation of two currencies. If Interest rate is high in a
country, its currency will be cheaper.
Futures
It is Exchange traded product. The seller agrees to deliver a specified security, currency or commodity
on specified date at a fixed price. Currency Futures are traded in EURO, GBP, JPY, CHF, AUD& CAD.
Forward Contract Futures

It is OTC (Over the Counter) Product It is Exchange traded product
It can be for any odd amount It is always for Standard amount
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It can be for any Odd period It is always for Standard period
Delivery is essential Delivery is not must
Margin is not essential It is based on Margin requirement and
Marked to market
Contract size of USD/INR is USD 1000. The settlement takes place in INR.
EURO/INR/GBP is traded in cross currency rates.
Future of INR is allowed with Contract size minimum Rs. 2.00 lac based on 7% synthetic 10
year G-Sec.
OPTIONS
Option is a contract to buy or sell currency, bonds or Equity on future date. The party has right to exercise
option but there is no obligation.
Option is Right to buy or sell an agreed quantity of currency or commodity without obligation to do so. The
buyer will exercise the option if market price is in favor or otherwise option may be allowed to lapse.
There are two types of Option: 1. Call Option 2. Put Option
Call Option
Right to buy at fixed price on or before fixed date.
Put Option
Right to sell at fixed price on or before fixed date.
Final day on which it expires is called maturity. The pre-fixed rate is called Strike Rate.
CALL OPTION;
If Strike price is below the spot price, the option is In the money(ITM)
If Strike price is equal to the spot price, the option is At the money.(ATM)
If Strike price is above the spot price, the option is Out of money.(OTM)
PUT OPTION
If Strike price is more the spot price, the option is In the money.
If Strike price is equal to the spot price, the option is At the money.
If Strike price is less than spot price, the option is Out of the money.
American Option
Option can be exercised on any day before expiry.
European Option
Option can be exercised on maturity only.
Plain Vanilla Option
It is an option without any conditions. It is ideal for Hedging.
Zero Cost Option
It does not attract any premium. There is risk of holder i.e. importer to pay higher rate if market rises
beyond certain level.
Embedded Option
The bond holder is given option to convert its debt into equity.
Other features of an Option Contract

Option is based on Notional amount as only exchange difference is settled.
Price of Option is much smaller than the Notional Value.
The premium depends upon Volatility of the underlying product.
Longer the maturity, costlier will be the option.
Interest Rate Swaps (IRS)

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It is OTC product. It deals with exchange of Interest flows on an underlying assets and liability. For
Example: A company is paying interest on 5 years Debentures @7%. In market, rate of interest is
declining; the company will be benefitted if Interest rate is linked to market rate of interest. The Company
enters into Interest rate swap with bank with the terms that Fixed rate of
interest on Debentures will Swap 3M T-bills @5%. The fixed rate of 7 % on Debentures will be swapped
with T+2%. After every 3 months, bank will pay the company @ T-bills+2%.
Assuming that in the next quarter, 90 days T-bill rate is 4%, the Company will pay to bank@6%(4+2%)
and will receive from bank 7% thereby saving of 1%. This will neutralize the loss of interest @1%
(notional) on account of fall in the market interest rate.
On the other hand, if T-bill rate is increased to 5%, the company will lose by 1% which will neutralize the
gain of interest @1% (notional) on account of increase in the market interest rate.
FRA (Forward Rate Agreement)
It is Forward Interest rate which is an over-the-counter contract between parties that determines the rate
of interest to be paid or received on an obligation beginning at a future start date. The contract will
determine the rates to be used along with the termination date and notional value. On this type of
agreement, it is only the differential that is paid on the notional amount of the contract.
For a basic example, assume Company A enters into an FRA with Company B in which Company A will
receive a fixed rate of 5% for one year on a principal of $1 million in three years. In return, Company B
will receive the one-year LIBOR rate, determined in three years' time, on the principal amount. The
agreement will be settled in cash in three years.
If, after three years' time, the LIBOR is at 5.5%, the settlement to the agreement will require that
Company A pay Company B. This is because the LIBOR is higher than the fixed rate. Mathematically, $1
million at 5% generates $50,000 of interest for Company A while $1 million at 5.5% generates $55,000 in
interest for Company B. Ignoring present values, the net difference between the two amounts is $5,000,
which is paid to Company B.
Currency Swaps
It is exchange of cash flow in one currency with that of another currency. Two types of currency swaps
are there: Currency Only Swap & Principal Only Swap. Currency Swaps are used to mitigate exchange
risks for meeting Principal or Interest obligations.
Example: An investor in Germany needs INR to Invest in India. On the other hand, Reliance in India
needs Euro to acquire a Co. in France. German Investor will raise Euro funds at low rates and Reliance
India will raise Rupee loans at low rates from India. Two parties will Swap Loans with Bank as financial
intermediary.
Principal Only Swap allows the borrower to pay interest in USD. But payment of Principal is
made in home currency. As such risk fluctuations in respect of Principal are eliminated.
Coupon Only Swap allows the borrower to pay interest in INR. Whereas Principal amount is
hedged by using some other derivative.
P+I Swap is there when borrower eliminates Currency risks as well as Interest Risk. The risk is
zero. Borrower will pay Principal + Interest in Domestic currency to settle Foreign Currency
borrowings. The swap cost is included in rupee interest rates.
RBI Guidelines on Risk Exposure

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1. Banks and Counter parties will sign agreement known as ISDA (International Swap Derivative
Association) – Master Agreement which is standardized by SDA (Swap Derivative Association).
The agreement is cleared by FIMMDA(Fixed Income Money Market and Derivatives Association)
and FEDAI.
2. RBI allowed MIFOR (combination of LIBOR and Forward Premium) for Inter-bank dealings only.
3. RBI permitted banks under ISDA agreement to opt for dual jurisdiction.
4. Ceiling for Forward Contract for Designated Importers and Exporters is 100% of previous year’s
exports or average of 3 years exports (whichever is higher). The ceiling is 50% for other
Importers and Exporters.

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Treasury and ALM
Treasury and Asset-Liability Management
Banks accept deposits from customer the maturity of which ranges from 7 days to 10 years. The banks
return these deposits on maturity for which the depositors have the comfort that banks will not default in
repayment on time. These funds are partly invested in cash to meet CRR requirement, in Govt_ securities
to meet the SLR requirements, and in loans and advances of various maturities. Banks however, do not
have similar type of comfort for receiving these funds back, particularly from the borrowers.
For example, a bank raised a term deposit of 3-years at 7% and lends the amount repeatedly for a 3-
months bills discounting at 9%. After every 3 months the bank will face the liquidity problem besides other
risk. Similarly, if by that time there is decline in the interest rate (say it comes down from 9% to 8%), the
bank will also face interest rate risk. Hence, the risk arises out of mismatch of assets and liabilities of the
bank and the ALM manages such balance sheet risk.
Liquidity Risk vs Interest Rate Sensitivity Risk
Liquidity and interest rate risks: Banks are sensitive to liquidity risk because they cannot afford to default
on their payment obligation towards the depositors as that may lead to a run on the bank. Banks have to
roll over the deposits and advances on market determined terms. Any mismatch in the maturity profile will
not only lead to liquidity risk but to interest rate risk. Liquidity : Liquidity refers to a positive cash flow in the
form of cash or cash like assets. The available cash resources are compared with the immediately due
liabilities or liabilities in a given time range (called bucket). The difference between these sources and
uses of funds in specific time buckets is the liquidity gap which may be negative or positive_ Hence the
liquidity gap arises out of mismatch of assets and liabilities. RBI has prescribed 11 maturity time bands
(called buckets) beginning from next day to more than 5 years for measuring and monitoring the liquidity
gap.
Interest rate: Interest rate risk is measured by the gap between the interest rate sensitive assets and
liabilities in a given time band. Rate sensitive assets and liabilities: Assets and liabilities are called to be
rate sensitive when their value changes in the reverse direction corresponding to a change in the market
rate of interest. For example, if a bank has invested in a bond having 8% coupon and later on the market
interest rate increases to 9%, the value of the bond would decline. The difference between rate sensitive
assets-and liabilities in each time band, either in absolute amount or as sensitivity ratio, is indicative of the
risk arising out of interest rate mismatch.
Role of Treasury in ALM
Treasury maintains the pool of funds of the bank and its core function is funds management. Hence its
activities expose the bank to liquidity and interest rate risk. Treasury Head in a bank is normally an
important member of ALCO. Risk management has become integral part of Treasury, due to the following
reasons:
Treasury operates in financial market directly by establishing a link between the core banking functions
(of
collecting deposits 4: lending) and the market operations. Hence, the market risk is identified and
monitored through Treasury.
Treasury makes use of derivative instruments and other means to bridge the liquidity and rate sensitive
gaps which arise due to mismatch in the residual rnattuity of various assets and liabilities in different time
buckets.

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Treasury itself is exposed to market risk due to its trading positions in forex and securities market.
With development of financial markets, certain credit products are being substituted by treasury products
(in place of cash credit, the emergence of commercial paper by large companies). Treasury products are
marketable and help in infusion of liquidity in times of need.
Use of Derivatives in ALM
Derivative instruments are used to reduce the liquidity and interest risk or in structuring new product to
mitigate market risk. These are used due to following reasons:
1_ Derivatives replicate the market movements and can be used to counter the risks inherent in regular
transactions. For example, if stocks that are highly sensitive to market movement are purchased, the
Treasury can sell the index futures as a hedge against fall in stock prices.
2. Derivatives require small capital as there is no funds deployment, except margin requirement.
3. Derivatives can be used to hedge high value individual transactions or aggregate risks as reflected in
the assets liability mismatch. For example, if a bank is funding a term loan of 3 years (having higher rate
of interest),
with a deposit of 3-months duration (having very low rate of interest) by rolling over the deposit, it has to
be rolled over 12 times and every time the bank is exposed to interest rate risk. To take care of this, the
bank may swap the 3--month interest rate into a fixed rate of 3 years, so that interest cost is fixed and the
spread on the loan is protected.
Treasury can also protect the foreign currency obligations of the bank from exchange risk by buying call
options where it has to deliver foreign exchange and by buying put option where it has to receive the
foreign currency payment The options help the bank to protect rupee value of the foreign currency
receipts and payments.
Treasury helps the bank in structuring new products to reduce the mismatch in the balance sheet, such
as floating rate deposits and loans, where the interest rate is linked to a bench mark rate. similarly, the
corporate debt paper can be issued with call and put option. The option improves the liquidity of the
investment. (A 5-year bond issued with a put option at the end of 3"1 year is as good as a 3-year
investment).
Treasury and Credit risk & Credit derivatives
Credit risk in Treasury business is largely contained in exposure limits and risk management norms.
Treasury gets exposed to credit risk in the following ways:
Investment in treasury products such as corporate commercial paper and bonds (instead of lending,
investing through these debt instruments). But, the credit risk in a commercial paper being similar to a
cash credit advance, the commercial paper is tradable due to which it is a liquid asset. Hence bank has
an easy exit route. Hence the non-SLR portfolio supplements the credit portfolio and at the same time is
more flexible from ALM point of view.
The products like securitization convert the traditional credit into tradable treasury products. For example,
the housing loans secured by mortgage, can be converted into pass through certificates (PTCs) and sold
in the market (which amounts to sale of loan assets).
Credit derivative instruments such as credit default swaps cr credit linked notes transfer the credit risk of
the lending bank to the bank (called protection seller) which is able to absorb the credit risk, for a fee.
Credit derivatives are transferable instruments due to which the bank can diversify the credit risk.

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Treasury and Transfer Pricing
Transfer pricing refers to fixing the cost of resources and return on -assets of the bank in a rational
manner. Treasury buys and sells the deposits and loans of the bank, notionally, at a price which becomes
the basis of assessing the profitability of the banking activity. The price is fixed by Treasury on the basis
of :
market interest rate,
cost of hedging market risk and
cost of maintaining the reserve assets.
After implementation of transfer pricing, the Treasury takes care of the liquidity and interest rate risk of the
bank.
Policy environment
For the ALM to be effective, the bank should have an appropriate policy in place.
It should be approved by Board of Directors.
.2 .It should comply with RBI & SEBI regulations
.3 .It should comply with current market practices and code of conduct evolved by FIMMDA or FEDAI.
.4 . It should be subject to periodical review.
Components of integrated Risk rated Risk management ::
ALM Policy ::: Composition of ALCO, operational aspect of ALM 'Such as risk measures, risk monitoring,
risk
neutralization, product pricing, MIS etc.
Liquidity policy::: Minimum liquidity level, -funding of reserve assets, limits on money market exposure,
contingent
funding, inter-bank credit lines.
Derivative policy::: Norms for use of derivatives, capital allocation, restrictions on derivative trading,
valuation norms,
exposure
Investment policy::: Permissible investments, norms relating to credit rating, SLR and non-SLR
investment, private placement,
trading in securities and repos, accounting policy.
Transfer pricing:::: Methodology, spreads to be retained by Treasury, segregation of administrative cost
and hedging cost, allocation of cost to branches etc.
ALM refers to risk management to avoid mismanagement between Assets and Liabilities. The risk of
Liquidity and Interest rates, if not controlled may result into negative spread and can cause loss to bank.
Therefore ALM manages two risks : 1. Liquidity Risk & 2. Interest Rate Risk.
Liquidity Risk and Interest Rate Risk

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We borrow from Money market and invest in 5 year G-securities. If Bond prices come down, we are not
willing to sell the bond, but loan has to be repaid. This may lead to shortage of funds which is called
Liquidity Risk.
Liquidity Risk is translated into Interest Rate Risk when funds have to be arranged at higher rate.
Mismatch between Assets and Liabilities also lead to Interest Rate Risk.
Role of ALM to mitigate Liquidity Risk

Liquidity Gap arises when there is difference between souses and uses of funds. RBI has prescribed
Time bands to measure Liquidity Gaps. These are
1-14 days.
14-29 days
1M – 3M
ALM measures the gap between Uses and Sources between above said Time bands.
RBI has also prescribed limits of maximum negative mismatch as under:
Next Day ------- 5%

2-7 Days------ 10%
8-14 Days—-15%
15-28 Days-- 20%
ALM takes steps to meet shortfall as a contingent measure at a reasonable rate.
Interest rate Gap leads to erosion of NII (Net Interest Income) due to difference between earnings and
payments.
ALM has the following role to play:

Treasury establishes a link between Core banking and market operations to manage risks.
Treasury earns profits by managing funds out of mismatches.
Treasury hedges residual risk in Forex market.
Treasury monitors exchange rates and interest rate movements in the market.
Derivatives are used to hedge high value individual transactions.

For Example: Medium Term Loan of 3 Years is funded by Deposit of 3M because 3M deposit is cheaper
and NII is increased.
Bank may swap 3M interest rate into fixed rate into Fixed rate for 3 years.Bank may also swap
Fixed interest rate on loan into floating rate linked to T-bill rate. If 3M deposit rate is T+1% and
3Year interest rate on loan is T+3%, there will be NII@2%.
Bank may arbitrage Forex. It can buy USD funds at cheaper rate (say 3%) and invest in rupee
loan at 6.5%. The spread can be 3.5%
Risks of Derivatives: Derivatives are not free from risks. Tworisks involved in Derivatives are:
1. Residual risk i.e. basis risk.
2. Embedded Option Risk :There are embedded options in certain bank products. E.g. FD is paid
premature or TL is pre-paid. It affects the ALM policy if pre-mature payments are large.
Treasury and Credit Risk

There are chances of failure on the part of counter party to meet its obligations especially when
Treasury deals in:

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1. Debt Market products such as CPs, Bonds, Debentures etc.
2. Securitization of Credit Receivables – when credit receivables are converted into Units or Bonds
which are called PTCs ( Pass-through certificate).
3. SPV –Special Purpose Vehicle enables the banks to securitize the Mortgage loans
Credit Derivatives
1. Credit Default Swaps
2. Total Returns Swap
3. Credit Linked Notes
Transfer Pricing
It is important function of ALM. It relates to:
Fixing cost of recourses and return on Assets.
ALM notionally buys and sells deposits and loans of the bank.
Price is paid for buying deposits and price is received for selling loans. This is called
Transfer Pricing.
The prices vary according to the tenure or maturity of deposits and loans.
Deposits are bought by Treasury at a rate arrived at by adjusting hedging cost from rate of
deposit. If bank accepts deposits%7% and cost of hedging is 1%, the deposits will be bought by
Treasury @6%.
Loans are sold to Treasury at transfer cost. For example, 10% loan may be notionally sold to
Treasury @7%. The balance is denoted as Risk premium.
Treasury Division, after implementing the Transfer Pricing takes care of Liquidity Risk and
Interest rate risk.
Fixed Income Securities Salient Points

Money has Time Value. Ready possession of money is preferable.
People prefer ready possession of money, because money earns interest, its
value may be eroded due to inflation, and present consumption will have to be
postponed if one were to receive the money due to it today at a future date.
Interest is paid on a simple basis or on a compounded basis.
The factor used to find the present value of a future cash flow is called a
discount factor, and the factor which is used to find the future value of a
present investment is called a compounding factor.
Cash flows can be either single or multiple.
Fixed income securities are debt instruments which pay a periodic interest
rate (coupon) on the investment for a given maturity.
A coupon payment structure of fixed income security is similar to an annuity.
The value of a fixed income security is arrived at by computing the present
value of all its promised cash flows in future.
The price of fixed income security is inversely related to the market interest rate.
The appreciation in price, when interest rate goes down is greater than the
depreciation in price when the interest rate rises higher by the same degree.
The longer the maturity, the more volatile will be the price of a bond.

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Bonds with lower coupon will be more volatile in their price movements when
interest rate changes in the market.
Between two bonds of same maturity and coupon rates, the bond with higher
frequency of coupon payments will be less volatile in its price changes when
interest rate changes in the market.
Duration is a neutral point of time in the life of a fixed income security when
the reinvestment risk is compensated by the price risk.
Duration is in essence, the effective maturity of the bond.
Duration is directly related to the maturity of a bond.
Duration is inversely related to coupon and market interest rates.
Duration of a coupon paying bond is less than its maturity.
Duration of a floating rate bond is equal to the interest resetting period, or the
period remaining to the next resetting.
Duration of a zero coupon bond is equal to its maturity.
Duration of a portfolio of bonds is additive.
Modified duration is refinement over Duration, as the latter does not capture
price changes accurately when market interest rate changes.
Modified Duration too captures price changes only for small changes in interest rates.
Convexity together with Modified Duration captures price changes of bonds
accurately, when the market interest rate changes.

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Treasury Operations
Front Office
Finacle presents a comprehensive dealer-friendly front office module that enables
efficient deal capture. The treasury solution provides the flexibility to price and
capture deals through the front office, or import them from external sources through
seamless interfaces.
Trade entry
User-friendly interface
Personalized layout
Online updates
Multi-dimensional organization structure
Blotters
Pricing
Simulation
Limits monitoring
Real time position keeping and P & L
Middle Office
Finacle offers real-time tools to view positions and manage market, currency and
credit risks effectively.
Multiple revaluation methodologies
Risk management
Limits management
Value at risk

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Back Office
Finacle offers a comprehensive back office module for real-time management of
treasury instruments and their derivatives. This comprises complete deal processing
including deal settlement, updating, verification, confirmation, Nostro reconciliation
and tickets printing.
Straight Through Processing (STP)
Deal lifecycle
Permissioning system
Exceptions management
Blotter operations
Nostro blotter
Setup of static data
Accounting
Reporting
Electronic messaging infrastructure
Message management

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Important Areas for Verification as per RBI Guidelines on Treasury
Operations
(ii) If branch has acted within HO instructions for purchase and sale of securities.
(ii) Periodic confirmation of Derivative contracts with counterparties.
(iii) Adherence to regulatory guidelines with respect to Treasury deals/structured deals.
(iv) Controls around deal modification/cancellation/deletion, wherever applicable.
(v) Cancellation of forward contracts and passing/recovery of exchange gain/loss.
(vi) Gaps and OPL maintained in different currencies vis-à-vis prescribed limit for
the same.
(vii) Reconciliation of Nostro and Vostro accounts-balances in Nostro accounts in

different foreign currencies are within the limits prescribed by the bank.
(viii) Collection of underlying documents for Derivative & Forward contracts. Delays, if any.
(ix) Instances of booking and cancellation of forward contracts with the same
counterparty within a span of couple of days or a few days.
(x) Sample check of some of the deals and comment on the correctness of computation.
(xi) Checking of application money, reconciliation of SGL account, compliance to
RBI norms.
(xii) Checking of custody of unused BR Forms & their utilization in terms of

Master Circular on Prudential Norms on Classification, Valuation and
Operations of Investment Portfolio by banks.
(xiii) To ensure that the treasury operations of the bank have been conducted in
accordance with the instructions issued by the RBI from time to time.

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List of Statements, Registers, Advices, Covering Letters, Messages, Which
are Generated by the Computer and Printed Daily, Weekly, Fortnightly &
Monthly
Daily Printout:
Rupee funding deals today
Ready Deals done today
Bills purchased today
Forward Contracts Book today
Bills Reversed today
Interbank Deals Register
Daily Position Balancing
Nostro Ledger
Nostro Balances
Country Exposure
Counterparty Exposure
Advance Bills Outstanding
Daily Advance Bills Reports
Gap Daily
Forward Contract Advices to Customers
Supplementary Cash Book
Summary of Nostro Accounts Valuation

Page 136
5 day’s Summary of Funds
Rupee settlement-Interbank Contracts maturing on a given date (Purchase
and Sale against Rupees)
Interbank Contracts maturing on a given date (Forward Deals) including TOM / SPOT /
FORWARD
Confirmations
Interbank Settlement Vouchers
Money Market Settlement Vouchers
Money Market Confirmation
Rupee Funding Statement
Payment Message by Swift
Payment / Receipts to RTGS, NEFT etc.
Currency-wise and date-wise consolidated Forward Purchases and Sales
Statements for Next Two Months. This is generated for making use of
funding/reducing gap through swap.
Funds on given date

Funds Summary
Forex Outstanding Deals
Weekly Printout:
Forward Diary
Friday Position
Fortnightly Printouts:
Forward Diary
R Returns and Supplement
Sales & Purchase Sheets
Some Monthly Printouts:

O/s Interbank
O/s Bills

Page 137
List of Statements, Registers, Advices, Covering Letters, Messages ….
O/s Ready
O/s Forward Contract currency wise, slip-wise, month-wise.
O/s Advance Bills
True Position Statement
R Returns & Supplement
Friday Position
Nostro Valuation
Forward Valuation
Brokerage
FEDAI Rates
RBI Sales
Rupee Funding
Merchant / Interbank Ratio
Interbank Turnover
Merchant Turnover
Currency Turnover
Money Market Funds Position
Reconciliation Ledger
(O/s = Outstanding)

Page 138
Features of the Investment Policy
An investment policy should ideally have the following features:

5. Objectives – The Policy should set forth the objectives of investment
business, whether it is to manage liquidity, to improve returns, or to achieve
capital growth. Quite often, the objective would be a mix of all the three
components and the policy should set forth the type of funds to be outlayed, in
terms of proportion to total.
6. Sources of Funds – Investment policy should identify whether the investible
funds should come from equity, or from floating funds, or from any other
source. The Policy should also lay down what should be the optimum level of
investment, consistent with the objectives of the corporate.
7. Asset Quality – The policy should prescribe the minimum credit rating
requirements and such other minimum requirements to the net worth and
financial position of the issuer. The policy should prescribe the acceptable
maturities for investment. The Policy may also prescribe minimum and
maximum maturity as per the clause of the issuer, e.g. Sovereign or non-
sovereign.
8. Risk Management – The Policy should provide risk management guidelines
in terms of acceptable level of interest rate exposure. Appropriate risk
measure such as duration should be prescribed for the investment portfolio.
Similar guidelines for credit exposure in terms of counter party limits should
also be contained in the policy.
9. Stop – Loss limits should be prescribed for securities trading, preferably with
different limits for different types of securities. The trader should also be
required to operate within the prevailing economic environment and in case of
any major change (say, currency depreciation or regulatory restrictions)
should seek fresh guidelines from the management.
10. Valuation – The securities portfolio is to be revalued from time to time and
provisions for the depreciation in market values should be made in
accordance with generally accepted accounting principles. The revaluation of
securities would also help the management to assess the performance of the
trader from time to time.

Page 139
10. Separate guidelines need to be issued to the securities traders as to the
hedging of business risks and use of derivatives. In several countries, central
banks insist on necessary approvals from the top management at board level,
for use of derivatives.
11. Sound internal control systems are to be built up with segregation of front and
back offices and regular audit and inspection of accounting records.
Risk Indicators
Risks very rarely occur as accidents. There are symptoms that indicate the
possibility of risk. These indicators can be used to take pre-emptive actions. These
actions may not eliminate the risks but they would at least facilitate minimizing their
impact. Some of the indications are given below:
Lack of supervision of lending / investment activities by designated officers.
Lack of specific lending or treasury policies or failure to enforce the existing policies.
Lack of code of conduct or failure to enforce existing code.
Dominant figure allowed to exerting influence without restraint.
Lack of separation of duties.
Lack of accountability.
Lack of written policies and / or internal controls.
Circumvention of established policies and / or controls.
Lack of independent members of management and / or Board.
Entering into transactions where the institution lacks expertise.
Excessive growth through low quality loans.
Unwarranted concentrations.
Volatile sources of funding such as short-term deposits from out-of-area brokers.
Too much emphasis on earnings at the expense of safety and soundness.
Compromising credit policies.
High rate high risk investments.
Underwriting criteria allowing high risk loans.
Lack of documentation or poor documentation.
Lack of adequate credit analysis.
Failure to properly obtain and evaluate credit date, collateral, etc.

Page 140
Failure to properly analyze and verify financial statement data.
Too much emphasis on character and collateral and not enough emphasis on credit.
Lack of proper mix in asset portfolio.
Unresolved exceptions or frequently recurring exceptions on exception reports.
Out-of-balance conditions.
Funds used for purposes other than the purpose recorded.
Lax Policies on payment of checks against uncollated funds.
The institution is a defendant in a number of lawsuits alleging improper
handling of transactions.
Possible Risks Facing a Bank
Type of Risk Possible Risk Events

Compliance, contamination, employment theft
External Risk Environment and
public health.
Civil disorders, economic shock,
Country expropriation,
natural disasters.
Change of Government, corporate / sales tax
Fiscal rate
changes
.
Consumer demand, effect of Government
Government change,
inflation, anti-business ethos.
Product liability, safety, side
Litigation effects.
Capital adequacy, competition policy,
Regulatory tariff
barriers, trade policy.
Intellectual property theft, sabotage,
Security physical
property theft.
Fund inappropriat
Management Dealing Market information, e internal
information, market collapse, personnel,
Risk rogue
dealing.
Collusion, dealing error, fraud, input / output
Processing error.
Financial regulation, legal issues, taxation
Statutory treaties.
Documentation, execution settlement
Trading accuracy, ,

Page 141
valuation
methodology.
Infrastructure Lack of staff, quality of staff, strike action, lack
Risk Human Resource of
training, succession planning.
Objectives, policies, alliances, market
Organizational image,
authority limits, audit, sales force profile.
Planning Accuracy of situation appraisal, incorrect
budgeting, poor quality of data, forecasting
inaccuracies.

Page 142
Accountin flow
Reporting g policies, data , complex
management policy.
Inadequate performance, alignment to
Systems business
strategy, availability of systems, data
integrity,
disaster planning, programming quality,
network
security, telecommunications, verified
algorithms.
interruption confidence
Liquidity Risk Cash Flow Business , customer ,
forecasting quality, access to
finance.
Default (credit) risk, financial performance
Counter Party of
counterparty, credit rating, bank confidence,
liquidity, supplier confidence.
Market confidence, market sector re-
Rating rating,
shareholder risk.
Delivery mechanism, global distribution
Operational Risk Logistics handling of
shortages
.
Alternative source identification, quality of
Procurement parts,
stock exchanges, supplier
profile.
Cost, make versus buy, process problems,
Production quality
reviews, technology.
Non-convertibility of currency, economic
Position (Market) Currency factors,
transaction risk, translation risk,
Risk mismatches,
volatility.
Basis risk, parallel yield curve shifts, twists in
Interest Rate yield
curve, incorrect day count
basis.
Competitor product action, inferior product,
Proposition Risk Competitive product
imitation, patent
expiry.
Client pricing, competitor pricing, market
Economic share,
market developments, product
expiry.

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Business portfolio, developmen
Strategy communication, t
methodology efficiency, human resource
profile,
initial pricing, lack of competitor knowledge,
poor
market identification, poor market
strategy,
reputation, research focus, tracking against
plan.

Page 144
Market Terminology
The commonly used expressions, in the Money and Debt Markets in India and their
generally accepted meanings are as under:
Expressions Generally accepted meaning

I Bid / Buy The Price at which I am willing to buy.
I Offer / Sell The Price at which I am willing to sell.
Typically the dealers quote only the decimal places omitting
Quotes / Prices the
integer part. It is assumed the players know the integer part
in the
prevailing market price.
Example:1
If on a given day the security 11.40GOI2008 is being quoted
at a
price of around ` 117.50 then the bid at 45/offer at 55 would
mean
that the dealer is willing to buy the security at ` 117.45 and
sell it at
` 117.55.
Example:2
If on a given day the Treasury Bill maturing on 18th October,
2008 is
being quoted at a yield of around 6.90 then the bid at 95 /
offer at
90 would mean that the dealer is willing to buy the security at
6.95
and sell it at 6.90.
However, the complete price should be used while
confirming
deals.
The price of a bond, excluding the accrued interest since the
Clean Price last
interest payment date.
The price of a bond, including the accrued interest since the
Dirty Price last
interest payment date. This is also known as the gross price.
The difference between the actual market value and the
Hair Cut value
ascribed to the collateral used in a repo transaction.
Mine I Buy at the Price you have offered.
Yours I Sell at the Price you have bid.
Close / Done I conclude the deal at the mutual agreed price.

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Two Way Quote Quote which includes both Buy and Sell Price.
Example: 45/50 indicate that the dealer is willing to buy at `
117.45
and sell at ` 117.50.
Choice Quote is a single price quoted by a dealer and it

Choice Quote means that
he/she is willing to Buy as well as Sell at that price.
Example: A Quote of ‘5 Choice’ for a security means that the
dealer
will buy as well as sell at 5 paise.
No more negotiations. It is the price at which the dealer is

Final Price willing to
close the deal.
Level / Indicative Prices quoted by dealers to indicate the level at which they
Price are
interested in doing the deal but are willing to negotiate.
Big Figure The integer part of the price.

Example: If the ruling price of a security is 117.50, then the
Big
Figure here is 117.
Price when quoted in integers without the decimal part is

Figure known as
Figure.
Example: When the dealer is willing to deal
11.40GOI2008 at
117.00 (when the ruling quote is 116.95/117.05), he will state
that
he is willing to do the deal at Figure.
“Check” during chat means that the dealer is withdrawing his

Check / her
quote with immediate effect.
“CBC” during chat means that the dealer has the freedom to
Check Before Closing modify
the price and / or amount during the chat. Hence, the
(CBC) counter-party
dealer / broker should seek confirmation before concluding
the
deal.

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Pass / No Interest / I am not interested in the deal at the moment.
Squared
Dated Government Securities are generally identified by

Referring to Securities their
coupon and year of maturity. In case of securities having
during chat identical
coupons in the same year of maturity, the actual
nomenclature
should be used to differentiate them.
Example:
11.5008,11.5010
11.50 GOI2011, 11.50 GOI2011A

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Treasury Bills, Commercial Papers and Certificate of
Deposits
should be referred to using their date of maturity and the
actual
nomenclature should be used for confirmation.
Example:
TB 18/10102, 3640 TB Maturing on 18/10102
ACC Maturing on 20/12/01. Confirmation calls for full
particulars.
SBI Maturing on 20102/02, Confirmation calls for full
particulars.
Same day value /
Value Settlement to be effected at “t + O”, where t is the trade date.
Today
TOM and Value TOM mean that the settlement will be done
TOM / Value TOM / on the
next settlement date. Value ‘t + n’ means that settlement will
Value ‘t + n’ be
done on settlement day after the trade date (excluding
holiday(s)
observed by RBI, Mumbai).
It will be assumed that the quote is for the standard market lot
Quantum / Amount of `
5 crore, unless otherwise explicitly stated.
I to borrow clean The dealer intends to borrow cash clean (without collateral).
I to borrow under The dealer intends to borrow cash against the collateral
Repo of
securities.
I to lend clean The dealer intends to lend cash clean (without collateral).
The dealer intends to lend cash against the collateral of
I to lend under Repo securities.
Given below could be a typical conversation between dealers during

negotiation:
Bank A Calls Bank B
Bank Terminology used Meaning

Bank A 11.4008 for 25 crore Bank A is asking Bank B for a 2-way
quote on 11.40% maturing 2008 for
a
total amount of ` 25 crore (face
value)
for settling today.
Bank B 12/18 for 15 crore Bank B has given a price to buy at `
117.12 and to sell at ` 117.18 and
the

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quote is valid for ` 15 crore only.
Bank A tells Bank B that he is
Bank A Any improvement, me to buy looking
to buy but at a lower price.

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Bank B is willing to reduce the price
Bank B 17 for you for
the buyer to ` 117.17.
Bank A Done / Close Bank A concludes the deal.
Confirmed, Bank B sells Bank B confirms the deal
Bank B 11.40% specifying
08 15 Crore value today at security, amount, price, settlement
117.17 date
to Bank A and counterparty.
Swap Market Terminology

Some of the expressions used in the interest rate swaps market are given below
(apart from the typical expressions given above).
Expressions Generally accepted meaning
Overnight Indexed Swaps bench market typically against
OIS (Overnight FIMMOA –
Indexed Swap) NSE MIBOR rates.
A two-way quote in the OIS parlance would mean that the
Two way Quote dealer is
ready to Pay and Receive Fixed Rate. The quote should also
specify
the tenor. If not otherwise specified, the FIMMOA-NSE
Overnight
MIBOR should be taken as the bench mark.
Example: A quote of “7.60/7.70 for 2 months” indicates the
dealer’s
willingness to Pay a Fixed Rate of 7.60% and to Receive a
Fixed
Rate of 7.70% per annum for a period of 2 months.
I receive the Fixed Rate quoted against paying the
Mine / I receive Floating
benchmark.
Yours / I Pay I pay the Fixed Rate quoted against receiving the Floating
benchmark.
Pay simple Fixed Rate against receipt of overnight Floating
INR-MIBOR Rate for
tenors up to (and including) 1 Year. Pay simple semi-annual
Fixed
Rate against receipt of overnight Floating Rate for tenors of
longer
than 1 Year.
Pay simple Fixed Rate against receipt of overnight Floating
INR-MITOR Rate for
tenors up to (and including) 1 Year. Pay simple semi-annual
Fixed
Rate against receipt of overnight Floating Rate for tenors of

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longer
than 1 Year.
Pay annual Fixed Rate against receipt of 3 month Floating
INR-MIFOR Rate for
tenors up to (and including) one year. Pay semi-annual Fixed
Rate
against receipt of 6 month Floating Rate for tenors of longer
than one
year.

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Pay annual Fixed Rate against receipt of 3-month Floating
INR-MIOIS Rate for
tenors up to (and including) one year. Pay semi-annual Fixed
Rate
against receipt of 6 month Floating Rate for tenors of longer
than one
year.
Pay annual Fixed Rate against receipt of annualized Floating
INR-BMK Rate for
all tenors.
Pay annual Fixed Rate against receipt of annualized Floating
INR-CMT Rate for
all tenors.

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Some more import updates:
Treasury Management – Additional Reading Material
GOVERNMENT SECURITIES
Treasury Bills (T-bills)

Treasury bills or T-bills, which are money market instruments, are short term debt instruments
issued by the Government of India and are presently issued in three tenors, namely, 91 days, 182
days and 364 days.
Treasury bills are zero coupon securities and pay no interest. They are issued at a discount and
redeemed at the face value at maturity. For example, a 91 days Treasury bill of Rs.100/- (face
value) may be issued at say Rs. 98.20, that is, at a discount of say, Rs.1.80 and would be
redeemed at the face value of Rs.100/-. The return to the investors is the difference between the
maturity value or the face value (that is Rs.100) and the issue price.
The Reserve Bank of India conducts auctions usually every Wednesday to issue T-bills.
Payments for the T-bills purchased are made on the following Friday. The 91 days T-bills are
auctioned on every Wednesday. The Treasury bills of 182 days and 364 days’ tenure are
auctioned on alternate Wednesdays. T-bills of 364 days’ tenure are auctioned on the Wednesday
preceding the reporting Friday while 182 T-bills are auctioned on the Wednesday prior to a non-
reporting Fridays.
The Reserve Bank releases an annual calendar of T-bill issuances for a financial year in the last
week of March of the previous financial year. The Reserve Bank of India announces the issue
details of T-bills through a press release every week.
Cash Management Bills (CMBs)

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Government of India, in consultation with the Reserve Bank of India, has decided to issue a new
short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary
mismatches in the cash flow of the Government.
The CMBs have the generic character of T-bills but are issued for maturities less than 91 days.
Like T-bills, they are also issued at a discount and redeemed at face value at maturity. The tenure,
notified amount and date of issue of the CMBs depends upon the temporary cash requirement of
the Government.
The announcement of their auction is made by Reserve Bank of India through a Press Release
which will be issued one day prior to the date of auction. The settlement of the auction is on T+1
basis.
The non-competitive bidding scheme has not been extended to the CMBs. However, these
instruments are tradable and qualify for ready forward facility.
Investment in CMBs is also reckoned as an eligible investment in Government securities by

banks for SLR purpose under Section 24 of the Banking Regulation Act, 1949. First set of CMBs
were issued on May 12, 2010.
Dated Government Securities

Dated Government securities are long term securities and carry a fixed or floating coupon
(interest rate) which is paid on the face value, payable at fixed time periods (usually half-yearly).
The tenor of dated securities can be up to 30 years.
The Public Debt Office (PDO) of the Reserve Bank of India acts as the registry / depository of
Government securities and deals with the issue, interest payment and repayment of principal at
maturity.
Most of the dated securities are fixed coupon securities.
The nomenclature of a typical dated fixed coupon Government security contains the following
features - coupon, name of the issuer, maturity and face value. For example,
7.49% GS 2017 would mean:
Coupon 7.49% paid on face value
Name of Issuer Government of India
Date of Issue April 16, 2007
Maturity April 16, 2017
Coupon Payment Dates Half-yearly (October 16 and April 16)

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every year
Minimum Amount of issue/ sale Rs.10,000
In case there are two securities with the same coupon and are maturing in the same year, then
one of the securities will have the month attached as suffix in the nomenclature. For example,
6.05% GS 2019 FEB, would mean that Government security having coupon 6.05 % that mature
in February 2019 along with the other security with the same coupon, namely, 6.05% 2019 which
is maturing in June 2019.
If the coupon payment date falls on a Sunday or a holiday, the coupon payment is made on the
next working day. However, if the maturity date falls on a Sunday or a holiday, the redemption
proceeds are paid on the previous working day itself.
Just as in the case of Treasury Bills, dated securities of both, Government of India and State
Governments, are issued by Reserve Bank through auctions. The Reserve Bank announces the
auctions a week in advance through press releases. Government Security auctions are also
announced through advertisements in major dailies. The investors are thus, given adequate time
to plan for the purchase of government securities through such auctions.
Fixed Rate Bonds
These are bonds on which the coupon rate is fixed for the entire life of the bond. Most Government bonds
are issued as fixed rate bonds.
For example – 8.24%GS2018 was issued on April 22, 2008 for a tenor of 10 years maturing on April 22,
2018. Coupon on this security will be paid half-yearly at 4.12% (half yearly payment

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being the half of the annual coupon of 8.24%) of the face value on October 22 and April 22 of each year.
Floating Rate Bonds

Floating Rate Bonds are securities which do not have a fixed coupon rate. The coupon is re-set at
pre-announced intervals (say, every six months or one year) by adding a spread over a base rate.
In the case of most floating rate bonds issued by the Government of India so far, the base rate is
the weighted average cut-off yield of the last three 364- day Treasury Bill auctions preceding the
coupon re-set date and the spread is decided through the auction.
For example, a Floating Rate Bond was issued on July 2, 2002 for a tenor of 15 years, thus
maturing on July 2, 2017. The base rate on the bond for the coupon payments was fixed at 6.50%
being the weighted average rate of implicit yield on 364-day Treasury Bills during the preceding
six auctions.
In the bond auction, a cut-off spread (markup over the benchmark rate) of 34 basis points (0.34%)
was decided. Hence the coupon for the first six months was fixed at 6.84%.
Zero Coupon Bonds
Zero coupon bonds are bonds with no coupon payments. Like Treasury Bills, they are issued at a
discount to the face value. The Government of India issued such securities in the nineties; it has not
issued zero coupon bonds after that.
Capital Indexed Bonds

These are bonds, the principal of which is linked to an accepted index of inflation with a view to
protecting the holder from inflation. A capital indexed bond, with the principal hedged against
inflation, was issued in December 1997. These bonds matured in 2002.

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The government is currently working on a fresh issuance of Inflation Indexed Bonds wherein
payment of both, the coupon and the principal on the bonds, will be linked to an Inflation Index
(Wholesale Price Index).
In the proposed structure, the principal will be indexed and the coupon will be calculated on the
indexed principal. In order to provide the holders protection against actual inflation, the final WPI
will be used for indexation.
Bonds with Call/ Put Options

Bonds can also be issued with features of optionality wherein the issuer can have the option to
buy-back (call option) or the investor can have the option to sell the bond (put option) to the
issuer during the currency of the bond. 6.72%GS2012 was issued on July 18, 2002 for a maturity
of 10 years maturing on July 18, 2012.
The optionality on the bond could be exercised after completion of five years’ tenure from the
date of issuance on any coupon date falling thereafter.
The Government has the right to buy back the bond (call option) at par value (equal to the face
value) while the investor has the right to sell the bond (put option) to the Government at par value
at the time of any of the half-yearly coupon dates starting from July 18, 2007.
Special Securities
In addition to Treasury Bills and dated securities issued by the Government of India under the
market borrowing programme, the Government of India also issues, from time to time, special
securities to entities like Oil Marketing Companies, Fertilizer Companies, the Food Corporation of
India, etc. as compensation to these companies in lieu of cash subsidies.
These securities are usually long dated securities carrying coupon with a spread of about 20-25
basis points over the yield of the dated securities of comparable maturity.
These securities are, however, not eligible SLR securities but are eligible as collateral for
market repo transactions.

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The beneficiary oil marketing companies may divest these securities in the secondary market to
banks, insurance companies / Primary Dealers, etc., for raising cash.
STRIPS
Steps are being taken to introduce new types of instruments like STRIPS (Separate Trading of
Registered Interest and Principal of Securities). STRIPS are instruments wherein each cash flow
of the fixed coupon security is converted into a separate tradable Zero Coupon Bond and traded.
For example, when Rs.100 of the 8.24%GS2018 is stripped, each cash flow of coupon (Rs.4.12
each half year) will become coupon STRIP and the principal payment (Rs.100 at maturity) will
become a principal STRIP. These cash flows are traded separately as independent securities in
the secondary market.
STRIPS in Government securities will ensure availability of sovereign zero coupon bonds, which
will facilitate the development of a market determined zero coupon yield curve (ZCYC).
STRIPS will also provide institutional investors with an additional instrument for their asset-
liability management.
As STRIPS have zero reinvestment risk, being zero coupon bonds, they can be attractive to
retail/non-institutional investors.
The process of stripping/reconstitution of Government securities is carried out at RBI, Public Debt
Office (PDO) in the PDO-NDS (Negotiated Dealing System) at the option of the holder at any time
from the date of issuance of a Government security till its maturity. All dated Government
securities, other than floating rate bonds, having coupon payment dates on 2nd January and 2nd
July, irrespective of the year of maturity are eligible for Stripping/Reconstitution.
Eligible Government securities held in the Subsidiary General Leger (SGL)/Constituent

Subsidiary General Ledger (CSGL) accounts maintained at the PDO, RBI, Mumbai, are eligible
for Stripping/Reconstitution. Physical securities shall not be eligible for stripping/reconstitution.

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Minimum amount of securities that needs to be submitted for stripping/reconstitution will be Rs. 1
crore (Face Value) and multiples thereof.
State Development Loans (SDLs)

State Governments also raise loans from the market. SDLs are dated securities issued through
an auction similar to the auctions conducted for dated securities issued by the Central
Government.
Interest is serviced at half-yearly intervals and the principal is repaid on the maturity date.
Like dated securities issued by the Central Government, SDLs issued by the State Governments
qualify for SLR.
They are also eligible as collaterals for borrowing through market repo as well as borrowing by
eligible entities from the RBI under the Liquidity Adjustment Facility (LAF).
The SDLs do not carry any credit risk. In this regard, they are similar to securities issued by the
Government of India (GoI). This can also be seen from the fact that the risk weights assigned to
the investments in SDLs by the commercial banks is zero for the calculation of CRAR under the
Basel III.
How are the Government Securities issued?

Government securities are issued through auctions conducted by the RBI. Auctions are
conducted on the electronic platform called the NDS – Auction platform.
Commercial banks, scheduled urban co-operative banks, Primary Dealers, insurance companies
and provident funds, who maintain funds account (current account) and securities accounts (SGL
account) with RBI, are members of this electronic platform.
All members of PDO-NDS can place their bids in the auction through this electronic platform. All
non-NDS members including non-scheduled urban co-operative banks can participate in the
primary auction through scheduled commercial banks or Primary
Dealers.

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For this purpose, the urban co-operative banks need to open a securities account with a bank /
Primary Dealer – such an account is called a Gilt Account. A Gilt Account is a dematerialized
account maintained by a scheduled commercial bank or Primary Dealer for its constituent (e.g., a
non-scheduled urban co-operative bank).
The RBI, in consultation with the Government of India, issues an indicative half-yearly auction
calendar which contains information about the amount of borrowing, the tenor of security and the
likely period during which auctions will be held.
A Notification and a Press Communique giving exact particulars of the securities, viz., name,
amount, type of issue and procedure of auction are issued by the Government of India about a
week prior to the actual date of auction.
What are the different types of auctions used for issue of securities?
Prior to introduction of auctions as the method of issuance, the interest rates were administratively fixed
by the Government. With the introduction of auctions, the rate of interest (coupon rate) gets fixed through
a market based price discovery process. An auction may either be yield based or price based.
Yield Based Auction
A yield based auction is generally conducted when a new Government security is issued. Investors bid in
yield terms up to two decimal places (for example, 8.19 per cent, 8.20 per cent, etc.). Bids are arranged in
ascending order and the cut-off yield is arrived at the yield corresponding to the notified amount of the
auction. The cut-off yield is taken as the coupon rate for the security. Successful bidders are those who
have bid at or below the cut-off yield. Bids which are higher than the cut-off yield are rejected.
An illustrative example of the yield based auction is given below:

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Yield based auction of a new security
Maturity Date: September 8, 2018
Coupon: It is determined in the auction (8.22% as shown in the illustration below)
Auction date: September 5, 2008
Auction settlement date: September 8, 2008*
Notified Amount: Rs.1000 crore
(iii) September 6 and 7 being holidays, settlement is done on September 8, 2008 under T+1
cycle.
Details of bids received in the increasing order of bid yields
Bid No. Bid Yield Amount of bid Cumulative amount (Rs. Price with
(Rs. crore) Cr) coupon as
8.22%
1 8.19% 300 300 100.19
2 8.20% 200 500 100.14
3 8.20% 250 750 100.13
4 8.21% 150 900 100.09
5 8.22% 100 1000 100
6 8.22% 100 1100 100
7 8.23% 150 1250 99.93
8 8.24% 100 1350 99.87
The issuer would get the notified amount by accepting bids up to 5. Since the bid number 6 also is
at the same yield, bid numbers 5 and 6 would get allotment pro-rata so that the notified amount is
not exceeded. In the above case, each would get Rs. 50 crores. Bid numbers 7 and 8 are rejected
as the yields are higher than the cut-off yield.

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Price Based Auction
A price based auction is conducted when Government of India re-issues securities issued earlier. Bidders
quote in terms of price per Rs.100 of face value of the security (e.g., Rs.102.00, Rs.101.00, Rs.100.00,
Rs.99.00, etc., per Rs.100/-). Bids are arranged in descending order and the successful bidders are those
who have bid at or above the cut-off price. Bids which are below the cut-off price are rejected.
An illustrative example of price based auction is given below:

Price based auction of an existing security 8.24% GS 2018
Maturity Date: April 22, 2018
Coupon: 8.24%
Auction date: September 5, 2008
Auction settlement date: September 8, 2008*
Notified Amount: Rs.1000 crore
(bj) September 6 and 7 being holidays, settlement is done on September 8, 2008 under T+1
cycle.
Details of bids received in the decreasing order of bid price
Bid no. Price of bid Amount of bid Implicit Cumulative amount
(Rs. Cr) yield
1 100.31 300 8.1912% 300
2 100.26 200 8.1987% 500
3 100.25 250 8.2002% 750
4 100.21 150 8.2062% 900
5 100.20 100 8.2077% 1000
6 100.20 100 8.2077% 1100
7 100.16 150 8.2136% 1250
8 100.15 100 8.2151% 1350
The issuer would get the notified amount by accepting bids up to 5. Since the bid number

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6 also is at the same price, bid numbers 5 and 6 would get allotment in proportion so that the
notified amount is not exceeded. In the above case each would get Rs. 50 crores. Bid numbers 7
and 8 are rejected as the price quoted is less than the cut-off price.
Depending upon the method of allocation to successful bidders, auction could be classified as Uniform
Price based and Multiple Price based.
In a Uniform Price auction, all the successful bidders are required to pay for the allotted quantity of
securities at the same rate, i.e., at the auction cut-off rate, irrespective of the rate quoted by them.
On the other hand, in a Multiple Price auction, the successful bidders are required to pay for the allotted
quantity of securities at the respective price / yield at which they have bid. In the example under Price
based auction above, if the auction was Uniform Price based, all bidders would get allotment at the cut-off
price, i.e., Rs.100.20. On the other hand, if the auction was Multiple Price based, each bidder would get
the allotment at the price he/ she has bid, i.e., bidder 1 at Rs.100.31, bidder 2 at Rs.100.26 and so on.
An investor may bid in an auction under either of the following categories:

Competitive Bidding
In a competitive bidding, an investor bids at a specific price / yield and is allotted securities if the price /
yield quoted is within the cut-off price / yield. Competitive bids are made by well informed investors such
as banks, financial institutions, primary dealers, mutual funds, and insurance companies. The minimum
bid amount is Rs. 10,000 and in multiples of Rs. 10,000 thereafter. Multiple bidding is also allowed, i.e.,
an investor may put in several bids at various price/ yield levels.
Non-Competitive Bidding

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With a view to providing retail investors, who may lack skill and knowledge to participate in the
auction directly, an opportunity to participate in the auction process, the scheme of non-
competitive bidding in dated securities was introduced in January 2002.
Non-competitive bidding is open to individuals, HUFs, RRBs, co-operative banks, firms,

companies, corporate bodies, institutions, provident funds, and trusts.
Under the scheme, eligible investors apply for a certain amount of securities in an auction without
mentioning a specific price / yield. Such bidders are allotted securities at the weighted average
price / yield of the auction. In the illustration given under Price Based auction above, the notified
amount being Rs.1000 crore, the amount reserved for non-competitive bidding will be Rs.50
crores (5 per cent of the notified amount as indicated below). Non-competitive bidders will be
allotted at the weighted average price which is Rs.100.26 in the given illustration.
The participants in non-competitive bidding are, however, required to hold a gilt account with a
bank or PD. Regional Rural Banks and co-operative banks which hold SGL and Current Account
with the RBI can also participate under the scheme of non-competitive bidding without holding a
gilt account.
In every auction of dated securities, a maximum of 5 per cent of the notified amount is reserved
for such non-competitive bids. In the case of auction for Treasury Bills, the amount accepted for
non-competitive bids is over and above the notified amount and there is no limit placed. However,
non-competitive bidding in Treasury Bills is available only to State Governments and other select
entities and is not available to the co-operative banks.
Only one bid is allowed to be submitted by an investor either through a bank or Primary Dealer.
For bidding under the scheme, an investor has to fill in an undertaking and send it along with the
application for allotment of securities through a bank or a Primary Dealer. The minimum amount
and the maximum amount for a single bid is Rs. 10,000 and Rs.2
crores respectively in the case of an auction of dated securities.

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A bank or a Primary Dealer can charge an investor up to maximum of 6 paise per Rs.100 of
application money as commission for rendering their services. In case the total applications
received for non-competitive bids exceed the ceiling of 5 per cent of the notified amount of the
auction for dated securities, the bidders are allotted securities on a pro-rata basis.
Non-competitive bidding scheme has been introduced in the State Government securities (SDLs)
from August 2009. The aggregate amount reserved for the purpose in the case of SDLs is 10% of
the notified amount (Rs.100 Crore for a notified amount of Rs.1000 Crore) and the maximum
amount an investor can bid per auction is capped at 1% of the notified amount (as against Rs.2
Crore in Central Government securities). The bidding and allotment procedure is similar to that of
Central Government securities.
CRR & SLR

Introduction
With a view to monitoring compliance of maintenance of statutory reserve requirements viz. CRR and
SLR by the SCBs, the Reserve Bank of India has prescribed statutory returns i.e. Form A Return (for
CRR) under Section 42(2) of the Reserve Bank of India (RBI) Act, 1934 and Form VIII Return (for SLR)
under Section 24 of the Banking Regulation Act, 1949.
CRR
In terms of Section 42(1) of the RBI Act, 1934 the Reserve Bank, having regard to the needs of securing
the monetary stability in the country, prescribes the CRR for SCBs without any floor or ceiling rate.
Maintenance of CRR
At present, effective from the fortnight beginning February 09, 2013, the CRR is prescribed at 4.00 per
cent of a bank's total of DTL adjusted for the exemptions
Incremental CRR
In terms of Section 42(1A) of RBI Act, 1934, the SCBs are required to maintain, in addition to the
balances prescribed under Section 42(1) of the Act, an additional average daily balance, the amount of
which shall not be less than the rate specified by the Reserve Bank in the notification

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published in the Gazette of India from time to time. Such additional balance will be calculated with
reference to the excess of the total of DTL of the bank as shown in the Returns referred to in Section 42(2)
of the RBI Act, 1934 over the total of its DTL at the close of the business on the date specified in the
notification.
At present no incremental CRR is required to be maintained by the banks.
Computation of DTL
Liabilities of a bank may be in the form of demand or time deposits or borrowings or other miscellaneous
items of liabilities. As defined under Section 42 of the RBI Act, 1934, liabilities of a bank may be towards
the banking system or towards others in the form of demand and time deposits or borrowings or other
miscellaneous items of liabilities. As the Reserve Bank of India has been authorized in terms of Section
42(1C) of the RBI Act, 1934, to specify whether any transaction or class of transactions would be
regarded as a liability of banks in India, banks are advised to approach the RBI in case of any question as
to whether any transaction would be regarded as reservable liability.
Demand Liabilities
Demand Liabilities of a bank are liabilities which are payable on demand. These include current deposits,
demand liabilities portion of savings bank deposits, margins held against letters of credit/guarantees,
balances in overdue fixed deposits, cash certificates and cumulative/recurring deposits, outstanding
Telegraphic Transfers (TTs), Mail Transfers (MTs), Demand Drafts (DDs), unclaimed deposits, credit
balances in the Cash Credit account and deposits held as security for advances which are payable on
demand. Money at Call and Short Notice from outside the banking system should be shown against
liability to others.
Time Liabilities
Time Liabilities of a bank are those which are payable otherwise than on demand. These include fixed
deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank
deposits, staff security deposits, margin held against letters of credit, if not payable on demand, deposits
held as securities for advances which are not payable on demand and Gold deposits.

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Other Demand and Time Liabilities (ODTL)
ODTL include interest accrued on deposits, bills payable, unpaid dividends, suspense account balances
representing amounts due to other banks or public, net credit balances in branch adjustment account, any
amounts due to the banking system which are not in the nature of deposits or borrowing. Such liabilities
may arise due to items like collection of bills on behalf of other banks, interest due to other banks and so
on.
The balance outstanding in the blocked account pertaining to segregated outstanding credit entries for
more than 5 years in inter-branch adjustment account, the margin money on bills purchased / discounted
and gold borrowed by banks from abroad, should also be included in ODTL.
Cash collaterals received under collateralized derivative transactions should be included in the bank’s
DTL/NDTL for the purpose of reserve requirements as these are in the nature of ‘outside liabilities’.
Interest accrued on deposits should be calculated on each reporting fortnight (as per the interest
calculation methods applicable to various types of accounts) so that the bank’s liability in this regard is
fairly reflected in the total NDTL of the same fortnightly return.
Assets with the Banking System
Assets with the banking system include balances with banks in current account, balances with banks and
notified financial institutions in other accounts, funds made available to banking system by way of loans or
deposits repayable at call or short notice of a fortnight or less and loans other than money at call and
short notice made available to the banking system. Any other amounts due from the banking system
which cannot be classified under any of the above items are also to be taken as assets with the banking
system.
Borrowings from abroad by banks in India
Loans/borrowings from abroad by banks in India will be considered as 'liabilities to others' and will be
subject to reserve requirements. Upper Tier II instruments raised and maintained abroad shall be
reckoned as liability for the computation of DTL for the purpose of reserve requirements.
Arrangements with Correspondent Banks for Remittance Facilities

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When a bank accepts funds from a client under its remittance facilities scheme, it becomes a liability
(liability to others) in its books. The liability of the bank accepting funds will extinguish only when the
correspondent bank honours the drafts issued by the accepting bank to its customers. As such, the
balance amount in respect of the drafts issued by the accepting bank on its correspondent bank under the
remittance facilities scheme and remaining unpaid should be reflected in the accepting bank's books as
liability under the head 'Liability to others in India' and the same should also be taken into account for
computation of DTL for CRR/SLR purpose.
The amount received by correspondent banks has to be shown as 'Liability to the Banking System' by
them and not as 'Liability to others' and this liability could be netted off by the correspondent banks
against the inter-bank assets. Likewise sums placed by banks issuing drafts/interest/dividend warrants
are to be treated as 'Assets with banking system' in their books and can be netted off from their inter-bank
liabilities.
Liabilities not to be included for DTL/NDTL computation
The under-noted liabilities will not form part of liabilities for the purpose of CRR and SLR:
Paid up capital, reserves, any credit balance in the Profit & Loss Account of the bank, amount of
any loan taken from the RBI and the amount of refinance taken from Exim Bank, NHB, NABARD,
SIDBI;
Net income tax provision;
Amount received from DICGC towards claims and held by banks pending adjustments thereof;
Amount received from ECGC by invoking the guarantee;
Amount received from insurance company on ad-hoc settlement of claims pending judgement of
the Court;
Amount received from the Court Receiver;
The liabilities arising on account of utilization of limits under Bankers’ Acceptance Facility (BAF);
District Rural Development Agency (DRDA) subsidy of ₹10,000/- kept in Subsidy Reserve Fund
account in the name of Self Help Groups;

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Subsidy released by NABARD under Investment Subsidy Scheme for
Construction/Renovation/Expansion of Rural Godowns;
Net unrealized gain/loss arising from derivatives transaction under trading portfolio;
Income flows received in advance such as annual fees and other charges which are not
refundable;
Bill rediscounted by a bank with eligible financial institutions as approved by RBI;
Exempted Categories
SCBs are exempted from maintaining CRR on the following liabilities:
(e) Liabilities to the banking system in India as computed under clause (d) of the explanation to
Section 42(1) of the RBI Act, 1934;
(f) Credit balances in ACU (US$) Accounts; and
(g) Demand and Time Liabilities in respect of their Offshore Banking Units (OBU).
(h) The eligible amount of incremental FCNR (B) and NRE deposits of maturities of three years and
above from the base date of July 26, 2013, and outstanding as on March 7, 2014, till their
maturities/pre-mature withdrawals, and
Procedure for Computation of CRR
In order to improve cash management by banks, as a measure of simplification, a lag of one fortnight in
the maintenance of stipulated CRR by banks was introduced with effect from the fortnight beginning
November 06, 1999.
Maintenance of CRR on Daily Basis
With a view to providing flexibility to banks in choosing an optimum strategy of holding reserves
depending upon their intra fortnight cash flows, all SCBs are required to maintain minimum CRR balances
up to 95 per cent of the average daily required reserves for a reporting fortnight on all days of the fortnight
with effect from the fortnight beginning September 21, 2013.
No Interest Payment on Eligible Cash Balances maintained by SCBs with RBI under CRR

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In view of the amendment carried out to RBI Act 1934, omitting sub-section (1B) of Section 42, the
Reserve Bank does not pay any interest on the CRR balances maintained by SCBs with effect from the
fortnight beginning March 31, 2007.
Penalties
From the fortnight beginning June 24, 2006, penal interest is charged as under in cases of default in
maintenance of CRR by SCBs:
(i) In case of default in maintenance of CRR requirement on a daily basis which is currently 95 per cent of
the total CRR requirement, penal interest will be recovered for that day at the rate of three per cent per
annum above the Bank Rate on the amount by which the amount actually maintained falls short of the
prescribed minimum on that day and if the shortfall continues on the next succeeding day/s, penal interest
will be recovered at the rate of five per cent per annum above the Bank Rate.
(iv) In cases of default in maintenance of CRR on average basis during a fortnight, penal interest will be
recovered as envisaged in sub-section (3) of Section 42 of Reserve Bank of India Act, 1934.SCBs are
required to furnish the particulars such as date, amount, percentage, reason for default in maintenance of
requisite CRR and also action taken to avoid recurrence of such default.
Statutory Liquidity Ratio (SLR)
Consequent upon amendment to the Section 24 of the Banking Regulation Act, 1949 through the Banking
Regulation (Amendment) Act, 2007 replacing the Regulation (Amendment) Ordinance, 2007, effective
January 23, 2007, the Reserve Bank can prescribe the SLR for SCBs in specified assets. The value of
such assets of a SCB shall not be less than such percentage not exceeding 40 per cent of its total DTL in
India as on the last Friday of the second preceding fortnight as the Reserve Bank may, by notification in
the Official Gazette, specify from time to time.

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SCBs can participate in the Marginal Standing Facility (MSF) Scheme introduced by Reserve Bank with
effect from May 09, 2011. Under this facility, the eligible entities may borrow up to two per cent of their
respective NDTL outstanding at the end of the second preceding fortnight from April 17, 2012.
Additionally, the eligible entities may also continue to access overnight funds under this facility against
their excess SLR holdings. In the event, the banks’ SLR holding falls below the statutory requirement up
to two per cent of their NDTL, banks will not have the obligation to seek a specific waiver for default in
SLR compliance arising out of use of this facility in terms of notification issued under sub section (2A) of
section 24 of the Banking Regulation Act, 1949.
Within the mandatory SLR requirement, Government securities to the extent allowed by the RBI under
Marginal Standing Facility (MSF) are permitted to be reckoned as the Level 1 High Quality Liquid Assets
(HQLAs) for the purpose of computing Liquidity Coverage Ratio (LCR) of banks. In addition to this, banks
are permitted to reckon up to another 5 per cent of their NDTL within the mandatory SLR requirement as
level 1 HQLA. This is the Facility to Avail Liquidity for Liquidity Coverage Ratio that was notified vide
DBR.BP.BC.No.52/21.04.098/2014-15.
Reserve Bank has specified that w.e.f. the fortnight beginning February 07, 2015, every SCB shall
continue to maintain in India assets as detailed below, the value of which shall not, at the close of
business on any day, be less than 21.5 per cent of the total NDTL as on the last Friday of the second
preceding fortnight valued in accordance with the method of valuation specified by the Reserve Bank of
India from time to time:
(b) Cash or (b) in Gold valued at a price not exceeding the current market price, or (c) Investment in the
following instruments which will be referred to as "Statutory Liquidity Ratio (SLR) securities":
Dated securities issued up to May 06, 2011 as listed in the Annex to Notification
DBOD.No.Ret.91/12.02.001/2010-11 dated May 09, 2011;
Treasury Bills of the Government of India;
Dated securities of the Government of India issued from time to time under the market borrowing
programme and the Market Stabilization Scheme;

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(c) State Development Loans (SDLs) of the State Governments issued from time to time under the
market borrowing programme; and
(d) Any other instrument as may be notified by the Reserve Bank of India.
(e) Provided that the securities (including margin) referred to above, if acquired under the Reserve
Bank- Liquidity Adjustment Facility (LAF), shall not be treated as an eligible asset for this purpose.
The fourth Bi-monthly monetary policy statement by the Reserve Bank of India made on September 29,
2015 prescribed changes in SLR requirements as given below.
S. No Prescription of SLR Effective date
i 21.25 per cent From April 02, 2016
ii 21.00 per cent From July 09, 2016
iii 20.75 per cent From October 01, 2016
iv 20.50 per cent From January 07, 2017
Explanation:
(d) For the above purpose, "market borrowing programme" shall mean the domestic rupee loans
raised by the Government of India and the State Governments from the public and managed by the
Reserve Bank of India through issue of marketable securities, governed by the Government Securities
Act, 2006 and the Regulations framed there under, through an auction or any other method, as specified
in the Notification issued in this regard.
(e) Encumbered SLR securities shall not be included for the purpose of computing the percentage
specified above.
Provided that for the purpose of computing the percentage of assets referred to hereinabove, the
following shall be included, viz:
securities lodged with another institution for an advance or any other credit arrangement to the
extent to which such securities have not been drawn against or
availed of; and,

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Securities offered as collateral to the Reserve Bank of India for availing liquidity assistance from
Marginal Standing Facility (MSF) up to two per cent of the total NDTL in India carved out of the
required SLR portfolio of the bank concerned.
(f) In computing the amount for the above purpose, the following shall be deemed to be cash maintained
in India:
The deposit required under sub-section (2) of Section 11 of the Banking Regulation Act,
1949 to be made with the Reserve Bank by a banking company incorporated outside
India;
Any balance maintained by a scheduled bank with the Reserve Bank in excess of the
balance required to be maintained by it under Section 42 of the Reserve Bank of India
Act,1934 (2 of 1934);
Net balance in current accounts with other SCBs in India.
Procedure for Computation of SLR
The procedure to compute total NDTL for the purpose of SLR under Section 24 (2A) of Banking
Regulation Act, 1949 is broadly similar to the procedure followed for CRR. The liabilities mentioned under
Section 1.11 will not form part of liabilities for the purpose of SLR also. SCBs are required to include inter-
bank term deposits / term borrowing liabilities of all maturities in 'Liabilities to the Banking System'.
Similarly, banks should include their inter-bank assets of term deposits and term lending of all maturities
in 'Assets with the Banking System' for computation of NDTL for SLR purpose.
Penalties
If a banking company fails to maintain the required amount of SLR, it shall be liable to pay to RBI in
respect of that default, the penal interest for that day at the rate of three per cent per annum above the
Bank Rate on the shortfall and if the default continues on the next succeeding working day, the penal
interest may be increased to a rate of five per cent per annum above the Bank Rate for the concerned
days of default on the shortfall.

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Return in Form VIII (SLR)
(g) Banks should submit to the Reserve Bank before 20th day of every month, a Return in Form VIII
showing the amounts of SLR held on alternate Fridays during immediate preceding month with particulars
of their DTL in India held on such Fridays or if any such Friday is a public holiday under the Negotiable
Instruments Act, 1881, at the close of business on preceding working day.
(h) Banks should also submit a statement as Annexure to Form VIII Return giving daily position of
(a) assets held for the purpose of compliance with SLR, (b) excess cash balances maintained by them
with RBI in the prescribed format, and (c) mode of valuation of securities.
Correctness of computation of DTL to be certified by Statutory Auditors
The Statutory Auditors should verify and certify that all items of outside liabilities, as per the bank’s books
had been duly compiled by the bank and correctly reflected under DTL/NDTL in the fortnightly/monthly
statutory returns submitted to Reserve Bank for the financial year.
FBIL Overnight MIBOR
All trades executed on NDS-Call system excluding reciprocal and reported Deals within the first hour of
trading (currently from 9.00 A.M. to 10.00 A.M.) will be used for computation of the benchmark Overnight
Rate. The trades will be pulled out from the NDS-CALL system immediately after the cut-off time.
Only T+0 Settlement deals are to be picked up for calculation of Overnight Weighted Average Rate that
will be called FBIL Overnight Mumbai Inter-Bank Outright Rate (FBIL-Overnight MIBOR).
For any weekday, the maturity of the deals picked up for computation of FBIL-Overnight MIBOR should
be of the next succeeding Mumbai Business Day excluding Saturdays. For example, if Friday is a holiday
but succeeding Monday is a Mumbai Business working day, FBIL-Overnight MIBOR calculation on
Thursday will pick up trades with a maturity of 4 days. Only trades for ` 5 crore or above are retained for
further calculation.
A minimum of 10 trades with a total traded value of `500 crore in the NDS-Call segment will be
considered as the minimum threshold limit (both) for estimation of the volume weighted average rate.

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In case either of the criteria mentioned in the above paragraph is not met, the timeframe for computation
of rates will be extended by 30 minutes first and if the threshold criteria are still not met, then by another
30 minutes. If the threshold criteria are not met even after the two extensions, no rate computation will be
initiated. The Previous Day’s values will be used for dissemination. This may continue for a maximum of
two consecutive working days (in case the threshold criteria are not met) after which if the threshold
criteria are still not met, CCIL will not disseminate any rate on such days and Banks will use their own
fallback mechanism. There will be a notification to that effect published on CCIL/FIMMDA websites.
The Weighted Average Rate and Standard Deviation (STDEV) are calculated for the retained
trades after meeting the threshold criteria. These numbers will be rounded off to two decimal
places.
A rate Range will be computed – Max will be Weighted Average Rate + 3* Standard Deviation
and Min will be Weighted Average Rate - 3* Standard Deviation.
Any trades at rates outside the said Max and Min range will be considered as outliers and
dropped from the data (i.e. Higher than Max and Lower than Min).
The final volume weighted average rate and standard deviation will then be computed using the
remaining trades. The said numbers would be rounded off to two decimal places at each stage.
The Final Rate will be released as FBIL-Overnight MIBOR for the day by 10.45 A.M on the
websites of FIMMDA and CCIL or such websites as may be notified. If the time is extended due
to non-fulfillment of the threshold criteria, the dissemination time will be suitably extended.
FBIL Term MIBOR

FIMMDA/Benchmark Administrator’s Authorized Submitters will be having access to submit the
Rates for various Terms (14-Day, 1-Month and 3-Month) using a suitable Module in NDS-Call
system.
NDS-Call system will receive the mid-rates from approved Submitters between 11.00AM
to 11.15AM using the specific Module inside the System. In case the time is extended

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for the FBIL Overnight MIBOR due to non-fulfillment of the threshold criteria, the polling time will
be suitably extended for the term rate. The Submitters would submit the rates in two decimal
places.
A minimum of 8 quotes will be required for dissemination of the Term Rate for that Tenor. If the
threshold of 8 quotes for a Tenor is not met, CCIL will not disseminate the
Rate for that Tenor for the day. The Previous Day’s Rate for that Tenor will be displayed with due
notification. The same may be repeated maximum for 2 consecutive working days in case the
threshold is not met. After that, if the threshold is not met on the third day, CCIL will not
calculate/compute any rate for that tenor with due notification and the Banks will follow their own
fallback mechanism. After receiving the rates, the Mean Rate and Standard Deviation will be
computed for each category of rates. The said calculated numbers will be rounded off to two
decimal places at each stage.
A Rate Range will be computed using Mean Rate +/- (3*Standard Deviation) for each category of
Rates.
Any polled Rate outside the said Range (i.e. Rate higher than Max or lower than Min in their
respective categories) will be dropped from Final Rate Calculation.
After removal of Outliers, the Mean Rate and Standard Deviation will be computed for each
category of Rates (viz. 14-day, 1-Month and 3-Months). The said calculated numbers will be
rounded off to two decimal places.
The final rates will be released as FBIL POLLED TERM MIBOR (Mumbai Interbank Outright Rate)
for the day by 11.45AM on the websites of FIMMDA and CCIL or such websites as may be
notified. If the time is extended, the dissemination time will be suitably extended.
What is Delivery versus Payment (DvP) Settlement?
Delivery versus Payment (DvP) is the mode of settlement of securities wherein the transfer of securities
and funds happen simultaneously. This ensures that unless the funds are paid, the securities are not
delivered and vice versa. DvP settlement eliminates the settlement risk in

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transactions. There are three types of DvP settlements, viz., DvP I, II and III which are explained below;
= DvP I – The securities and funds legs of the transactions are settled on a gross basis, that is, the
settlements occur transaction by transaction without netting the payables and receivables of the
participant.
= DvP II – In this method, the securities are settled on gross basis whereas the funds are settled on
a net basis, that is, the funds payable and receivable of all transactions of a party are netted to
arrive at the final payable or receivable position which is settled.
= DvP III – In this method, both the securities and the funds legs are settled on a net basis and only
the final net position of all transactions undertaken by a participant is settled.
= Liquidity requirement in a gross mode is higher than that of a net mode since the payables and
receivables are set off against each other in the net mode.
CALL & MONEY MARKETS
Introduction
The money market is a market for short-term financial assets that are close substitutes of money. The
most important feature of a money market instrument is that it is liquid and can be turned into money
quickly at low cost and provides an avenue for equilibrating the short-term surplus funds of lenders and
the requirements of borrowers. The call/notice money market forms an important segment of the Indian
Money Market. Under call money market, funds are transacted on an overnight basis and under notice
money market; funds are transacted for a period between 2 days and 14 days.
Participants
Scheduled commercial banks (excluding RRBs), co-operative banks (other than Land Development
Banks) and Primary Dealers (PDs), are permitted to participate in call/notice money market both as
borrowers and lenders.

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Prudential Limits
The prudential limits in respect of both outstanding borrowing and lending transactions in call/notice
money market for scheduled commercial banks, co-operative banks and PDs are as follows:-
Table: Prudential Limits for Transactions in Call/Notice Money Market
Sr.
Participant Borrowing Lending
No.
1 Scheduled On a fortnightly average basis, borrowingOn a fortnightly average basis,
Commercial outstanding should not exceed 100 per cent lending outstanding should not
Banks of capital funds (i.e., sum of Tier I and Tier II exceed 25 per cent of their capital
capital) of latest audited balance sheet. funds. However, banks are allowed
However, banks are allowed to borrow ato lend a maximum of 50 per cent
maximum of 125 per cent of their capitalof their capital funds on any day,
funds on any day, during a fortnight. during a fortnight.
2 Co-operative Outstanding borrowings of State Co- No limit.
Banks operative Banks/District Central Co-
operative Banks/ Urban Co-operative Banks
in call/notice money market, on a daily basis
should not exceed 2.0 per cent of their
aggregate deposits as at end March of the
previous financial year.
3 PDs PDs are allowed to borrow, on average in a PDs are allowed to lend in
reporting fortnight, up to 225 per cent ofcall/notice money market, on

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their net owned funds (NOF) as March at end- average in a reporting fortnight, up to 25
of the previous financial year. per cent of their NOF.
Banks/PDs/ Co-operative banks may, with the approval of their Boards, arrive at the prudential limits for
borrowing/lending in Call/Notice Money Market in terms of guidelines given in paragraph 3.1 above. The
limits so arrived at may be conveyed to the Clearing Corporation of India Ltd. (CCIL) for setting of limits in
NDS-CALL System, under advice to Financial Markets Regulation Department (FMRD), Reserve Bank of
India. Non-bank institutions (other than PDs) are not permitted in the call/notice money market.
Interest Rate
Eligible participants are free to decide on interest rates in call/notice money market. Calculation of interest
payable would be based on the methodology given in the Handbook of Market Practices brought out by
the Fixed Income Money Market and Derivatives Association of India (FIMMDA).
COLLATERALIZED BORROWING AND LENDING OBLIGATION (CBLO)
Introduction:
CBLO as the name implies facilitates in a collateralized environment, borrowing and lending of funds to
market participants who are admitted as members in CBLO Segment. CBLO is conceived and developed
by CCIL CBLO Dealing system, an anonymous order matching platform, is hosted and maintained by
Clearcorp Dealing Systems (India) Ltd, a fully owned subsidiary of CCIL. CCIL becomes Central
Counterparty to all CBLO trades and guarantees settlement of CBLO trades. The borrowing and / or
lending in CBLO is facilitated for a maximum tenor of one year. CBLO is traded on Yield Time priority.
The access to CBLO Dealing system for NDS Members is made available through INFINET and for non
NDS Members through Internet. The Funds settlement of members in CBLO segment is achieved in the
books of RBI for members who maintain an RBI Current Account and are allowed to operate that current

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account for settlement of their secondary market transactions. In respect of other members, CBLO Funds
settlement is achieved in the books of Settlement Bank.
What does CBLO facilitate?
CBLO facilitates borrowing and lending for various tenors, from overnight up to a maximum of one year,
in a fully collateralised environment.
Membership
Entities who qualify and fulfil the eligibility criteria laid down for membership of CBLO Segment can apply
for becoming a member in CBLO Segment. The type of entity eligible for CBLO Membership are
Nationalized Banks, Private Banks, Foreign Banks, Co-operative Banks, Financial Institutions, Insurance
Companies, Mutual Funds, Primary Dealers, Bank cum Primary Dealers, NBFC, Corporate, Provident/
Pension Funds etc. Entities who have been granted CBLO Membership are classified based on their NDS
Membership. CBLO Members who are also NDS Members are CBLO (NDS) Members and other CBLO
Members are CBLO (Non NDS) Members or Associate Members.
Eligible Securities
Eligible securities are Central Government securities including Treasury Bills as specified by CCIL from
time to time.
Borrowing Limit and Initial Margin
Borrowing limit for the members is derived based eligible securities deposited by member in CBLO
segment, multiplied by mark to market prices, less hair cut applicable on respective security. The
members can borrow up a maximum of Borrowing Limit including all amounts which are borrowed and
outstanding at that point in time. Members are required to deposit initial margin in the form of Cash
(minimum Rs.1 lac). Initial margin is computed at the rate of

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0.50% on the total amount borrowed/lent by the members. CBLO members may seek intraday
enhancement of BL/ IM by depositing additional collaterals/ Government Securities/ Cash. Similarly,
Members may withdraw securities intraday from CBLO segment provided they are unencumbered.
However, one day prior notice is required for cash withdrawal.
Borrowing and Lending under CBLO
Borrowing and lending under CBLO can be done by both CBLO (NDS) members and Associate
members. The access to CBLO (NDS) members is made available through INFINET whereas Associate
members are provided access through Internet. Members have to deposit Cash and/ or eligible securities
prior to starting CBLO Dealing operations. The limits are made available to members based on cash /
eligible securities deposited with CCIL for that purpose in CBLO Segment. CBLO Members can place
borrow / lend orders till the closure of market hours for T+0 settlement type for the same day settlement
and till closure of market hours for T+1 settlement type for settlement on next business day. The date for
repayment of borrowing/ receipt of lending is identified by the nomenclature of CBLO itself which captures
as part of the description the repayment of borrowing/ receipt of lending date. The borrowing and lending
orders match on Yield Time priority. The Borrow limit and Initial Margin are blocked on post trade basis
and hence the onus is on the members to ensure prior to placing the order that sufficient BL and IM are
available. For a few members Borrow Limit and Initial Margin are blocked at the time of placing order in
the system.
CBLO Timing
CBLO order matching system is available for all members (including Associate Members) for settlement
on T+0 and T+1 basis. The CBLO Borrowing / Lending timing for settlement type T+0 and T+1 for various
business days shall be as decided by Clearcorp Dealing Systems (India) Ltd. and notified from time to
time.
Clearing & Settlement

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CBLO system operates on a Straight through Processing (STP) environment. The trade flows from CBLO
Dealing System seamlessly to CCIL for Clearing and Settlement. The trades received by CCIL are
novated and netted for settlement. A single obligation is generated for each member for each settlement
date by netting trades received for settlement that business date with borrowing / lending maturity
obligation for the same date. The funds settlement is achieved at Settlement Bank for those CBLO
members who maintain a current account with Designated Settlement Bank (DSB). CBLO Funds
settlement is achieved at RBI for those members who maintain current account at RBI and are allowed to
settle secondary market transactions in such account. The securities of equivalent value are blocked for
members utilizing borrow limits. CBLO Account balance credits are displayed for those members who
have lent funds after the CBLO Funds settlement is completed. This indicates that the lendings are
collateralised. A report is made available to borrower giving details of securities encumbered in CBLO
segment.
CBLO Funds Settlement
The instructions for settlement of funds obligations, for members settling at Settlement Bank, is
transmitted electronically to the Settlement Bank containing details of Funds Pay-in and Pay-out to be
effected by the respective Settlement Bank. The Settlement Bank shall after effecting such Pay-in and
Pay-out, confirm back electronically the completion of such process. The onus on ensuring that sufficient
funds are made available in the respective current account with Settlement Bank rests with the CBLO
members settling through Settlement Bank.
CBLO Funds Settlement @ RBI Current Account:
The instructions for settlement of funds obligations, for members settling at RBI, is transmitted to RBI
which include Pay-in and Pay-out positions in respect of their proprietary positions and for Settlement
Banks, it also includes, those obligations of other members for whom they have undertaken the function
as a Settlement Bank.
Risk Management:
CCIL addresses risk relating to trading and settlement by adopting stringent membership norms and
admit the members who meet the minimum eligibility criteria. Members are allowed to borrow to the
extent of the limit fixed after MTM valuation of securities with appropriate haircut. Members are also
required to deposit Initial Margin required for borrowing and/ or lending in CBLO Segment. Cash
deposited by members, in CBLO segment shall be treated as Initial Margin. The Initial Margin available, if
is lesser than the requirement, then system would source the initial margin excess utilised from the free
Borrow Limit available. The members are required to deposit immediately, in the CBLO CSGL account,

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securities required for replenishing the shortfall in Borrow Limit, if any. Similarly, the members are also
required to replenish the Initial Margin shortfall, immediately on it Initial Margin utilisation exceeding the
available Initial Margin.
Any shortfall in Borrow Limit shall be treated as settlement shortage and shall be handled as per the
process laid down for handling CBLO shortage. Further, members failure to deposit such deficit (both
Borrow limit & Initial Margin), immediately shall be treated as a Margin Default and penalty is charged
accordingly.
Default handling:
(i) Funds Shortage:
Shortfall in funds can take place when the members (by lenders on the day of lending and by borrowers
on the day of redemption) fail to meet funds obligation on the day of settlement. In such cases, CCIL
meets the shortage by utilizing the lines of credit extended by the member banks / Settlement Banks and
complete the settlement. CCIL then initiates the default handling process by withholding the CBLO
Account balance credit receivable by the lenders (member-in-shortage). In case of failure by the borrower
to meet the redemption proceeds on maturity of borrowing transactions, the underlying securities of such
member stands encumbered till the funds are replenished along with charges. In case of eventual default
i.e. non replenishment of settlement shortage by member-in-shortage, CCIL liquidates the underlying
securities and adjust the proceeds towards the shortfall and other charges.
(ii) CBLO Shortage:

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CBLO shortage can take place when the members Borrow without having sufficient borrowing limit. In
case of CBLO shortfall, CCIL withholds the funds receivable by the member-in-shortage. The funds
withheld remains as collateral for securing the lenders to the extent.
WHAT IS VALUE AT RISK?
What is the maximum I can lose on this investment? This is a question that almost every investor
who has invested or is considering investing in a risky asset asks at some point in time. Value at
Risk tries to provide an answer, at least within a reasonable estimate. In fact, it is misleading to
consider Value at Risk, or VaR as it is widely known, to be an alternative to risk adjusted value
and probabilistic approaches.
In lay man terms Value at Risk measures largest loss likely (in future) to be suffered on a portfolio
position over a holding period with a given probability (confidence level). VAR is a measure of
market risk, and is equal to one standard deviation of the distribution of possible returns on a
portfolio of positions.
Value-at-risk (VaR) is a Probabilistic Metric of Market Risk (PMMR) used by banks and other
organizations to monitor risk in their trading portfolios. For a given probability and a given time
horizon, value-at-risk indicates an amount of money such that there is that probability of the
portfolio not losing more than that amount of money over that horizon.
Value at Risk Measures:

(d) The Amount of Potential Losses
(e) The chance of that loss

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3. The Time Frame of the Loss
Calculation, Significance and Use of Value at Risk (VaR) Measures
Value at Risk is one unique and consolidated measure of risk, which has been at the center of
much expectations, popularity and controversy. It is also referred to as a summary statistic which
quantifies the asset or portfolio’s exposure to market risk. It has been in the news for many wrong
reasons as much popularity it gained among the financial market dealers since 2008 wall street
crash. Later economists and analysts have been able to develop more comprehensive and reliable
VaR stats but the basic characteristic of all the measure remains the same or at least they are
derived from Traditional VaR statistic. Here we will take a look at what are the qualities which made
this statistic gain popularity and notoriety at the same time.
Features of Value at Risk (VaR): Given below are features of Traditional VaR estimate:
(d) VaR is probability based and allows the users to interpret possible losses for various
confidence levels.
(e) It is a consistent measurement of financial risk as it uses the possible dollar loss metric
enabling the analysts to make direct comparisons across different portfolios, assets or
even business lines.
(f) VaR is calculated based on a common time horizon, and thus, allows for possible losses to
be quantified for a particular period.
(g) The choice of confidence level is usually based on the industry requirements or reporting
norms suggested by the Regulators. Choice of time horizon will depend on the type of
asset being analyzed, for example:
(h) On a common stock it can be estimated for any horizon depending on the frequency of
trade or user requirement.
(i) On a portfolio VaR can be calculated for a period of turnover only; i.e. till the time portfolio
holdings remain consistent, as the holding changes or in other words if a trade is recorded
in the portfolio the VaR has to be calculated again. Therefore,

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time-horizon for a portfolio depends on the frequency of trading in its assets.
B. For a business analysis it may depend on the employee evaluation periods, key decision
making events etc. could provide the possible time horizons.
C. Regulatory and taxation requirements
D. External Quality Assessments etc.
It is important to note that VaR comparison between two portfolios, business lines or assets
requires that the two variables, i.e. time horizon and confidence level, be consistent for all the
portfolios being compared.
Uses of Value at Risk (VaR) :

VaR has four main uses in finance:
Risk Management
Financial Control
Financial Reporting and
Computing Regulatory Capital.
VaR is sometimes used in non-financial applications as well.
The greatest benefit of VAR is that it imposes a structured methodology for critically measuring risk.
Institutions that go through the process of computing their VAR are forced to keep a check on their
exposure to financial risks and to set up a proper risk management function. Thus the process of
getting to VAR may be as important as the number itself.
The other benefit of VaR is that it allows organizations to divide risk in two parts.
Inside the VaR Limit
Outside the VaR Limit
"A risk manager has two jobs: make people take more risk the 99% of the time it is safe to do so,
and survive the other 1% of the time. VaR is the border. So by using VaR the limit of the Risk that
can be undertaken is defined.

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In the early 1990s, three events dramatically expanded use of value-at-risk:
The Group of 30 (1993) published a groundbreaking report on derivatives practices. It was

influential and helped shape the emerging field of financial risk management. It promoted the use
of value-at-risk by derivatives dealers and appears to be the first publication to use the phrase
“value-at-risk.”
JP Morgan (1994) released the first detailed description of value-at-risk as part of its free Risk
Metrics service. This was intended to promote the use of value-at-risk among the firm’s institutional
clients. The service comprised a technical document describing how to implement a VaR measure
and a covariance matrix for several hundred key factors updated daily on the internet.
In 1995, the Basel Committee on Banking Supervision implemented market risk capital
requirements for banks. These were based upon a crude value-at-risk measure, but the committee
also approved, as an alternative, the use of banks’ own proprietary VaR measures in certain
circumstances.
Criticism of VaR
VaR is compared to "an airbag that works all the time, except when you have a car accident."
The major criticism of VaR is:
Led to excessive risk-taking and leverage at financial institutions
Focused on the manageable risks near the center of the distribution and ignored the tails
Created an incentive to take "excessive but remote risks"
Was "potentially catastrophic when its use creates a false sense of security among senior
executives and watchdogs."
Limitation of VaR: These are some common limitations of VaR:

Referring to VaR as a "worst-case" or "maximum tolerable" loss. In fact, you expect two or
three losses per year that exceed one-day 1% VaR.

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Making VaR control or VaR reduction the central concern of risk management. It is far
more important to worry about what happens when losses exceed VaR.
Assuming plausible losses will be less than some multiple, often three, of VaR. The entire
point of VaR is that losses can be extremely large, and sometimes impossible to define,
once you get beyond the VaR point. To a risk manager, VaR is the level of losses at which
you stop trying to guess what will happen next, and start preparing for anything.
Reporting a VaR that has not passed a backtest. Regardless of how VaR is computed, it
should have produced the correct number of breaks (within sampling error) in the past. A
common specific violation of this is to report a VaR based on the unverified assumption
that everything follows a multivariate normal distribution.

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Treasury Problems for Practice
PROBLEM
On 1 January 2014, an entity grants an interest free loan of ` 100 to an employee. It
is repayable on December 31, 2014. The market rate of interest is 8%.
Determine the fair value of the loan and the accounting for the difference between
the fair value and the transaction price.
Solution
The fair value of the loan is ` 92.59 (` 100/1.08). The difference of transaction price
(i.e. 100) and fair value (i.e. 92.59) is ` 7.41 that is considered as employee
remuneration.
PROBLEM
An entity issues a perpetual debt instrument for consideration of ` 100. Market rate
of interest of Rs 6 is payable annually in perpetuity. The instrument is not
redeemable.
Determine the effective interest rate?
Solution
The effective rate that discounts ` 6 annually in perpetuity to ` 100 is 6 %. ` 6 will be
recognized each year the profit or loss and there would be no amortization of the
principal amount.
PROBLEM
Entity A could sell its financial asset in two different markets:
Market Quoted market price Transaction cost
A ` 80 `2
`
B ` 85 10
Determine the most advantageous market and the fair value of the financial asset.
Solution
While determining the most advantageous market, Entity A would consider the
market that provides higher cash flow in comparison to the other.

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Net cash flow in Market A = ` 78
Net cash flow in Market B = ` 75
Therefore the most advantageous market would be market A and the estimate of
the fair value would be ` 80 (disregarding transaction costs that will be incurred on
disposal).
PROBLEM
Entity A acquires a financial asset for Rs 110, which is not quoted in an active
market. The asset’s fair value based on the entity’s own valuation technique
amounted to Rs 115. However, that valuation technique does not solely use
observable market data, but relies on some entity-specific factors that market
participants would not normally consider.
Determine whether Entity A can recognize a “day 1” profit of ` 5 and record the
asset at Rs 115.
Solution
No. The entity cannot recognize a 'day 1' profit of Rs 5 and record the asset at ` 115.
The use of unobservable entity-specific inputs to calculate a fair value that is
different from transaction price on 'day 1' is so subjective that its reliability is called
into question. Hence, recognition of a 'day 1' gain or loss is not appropriate.
Accordingly, the entity restricts its valuation to the transaction price and the asset is
recorded at ` 110.
PROBLEM
On January 1, 2010, an entity originates a loan of ` 100 Million that is measured at
amortized cost. The loan is repayable in five annual repayments of ` 25 Million on
December 31, 2010 to December 31, 2014. Ignoring future credit losses, it is
expected that all contractual cash flows will be received; hence effective interest
rate is 7.93%.
The carrying amount of the loan is, therefore, ` 82.93 Million as on December 31,
2010. On January 1, 2011, the entity receives information regarding the future
prospects of the sector in which the borrower operates. This information coincides
with a downgrading of the borrower’s credit rating. Together, these two occurrences
are deemed to constitute a loss event and it is now expected that the 2013 and
2014 repayments will not be received.
Solution
Present value of estimated cash flows discounted at the original effective interest
rate@7.93% - ` 25/1.0793 + ` 25/(1.0793)^2 = ` 44.62 Million.
Carrying amount of the loan as at Jan 1, 2011-` 82.93
Million Impairment loss to be recognized = ` 38.31
Million (` 82.93 Million – ` 44.62 Million)

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PROBLEM
Entity D acquires an investment in an available-for -sale instrument debt instrument
at 1/1/2011. Entity D has a calendar year reporting period end and applies IAS 39 in
measuring and classifying its financial assets.
At 31/12/2013, there was objective evidence of impairment and the fair value loss
recognized in other comprehensive income is reclassified from equity to profit or
loss in accordance with IAS 39.
At 31/12/2014 there is objective evidence that the impairment loss has reversed.
Determine the accounting for the impairment reversal.
Solution
The gain recognized in other comprehensive income is reclassified from equity to
profit or loss. This however may not necessarily equal the amount of loss
recognized earlier in profit or loss, i.e. the loss recognized in 2013.
Example: Repo Transaction computation
Bank A agrees to borrow approximately ` 10 Crores from Bank B for a period of 3
days at an interest rate of 5%.
Borrower Bank A
Lender Bank B
Tenor 3 days
Repo Rate 5.00%
6.85% GOI 2012
(Government of India security with a
coupon rate of 6.85% and maturing
on
05 April 2012)
Security 15 November 2005
Ready Leg Date 18 November 2005
Forward Leg Date
Ready Leg Computation
Ready Leg Price of Security ` 100/-
Face Value of Security ` 10,00,00,000/-
Principal Value of Security ` 10,00,00,000/- A
Last Interest Date 05 October 2005
Accrued Interest on Security ` 7,61,111.11 B
Ready Leg Proceeds (A+B) ` 10,07,61,111.11 C
Forward Leg Computation
Repo Interest Amount (` 10,07,61,111.11) x .05 x 3/365

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` 41,408.68 D
Forward Leg Proceeds (C+D) ` 10,08,02,519.79 E
Accrued Interest on Security ` 8,18,194.44 F
Principal Value of Security (F-F) ` 9,99,84,325.35 G
Forward Leg Price of Security [G/(100000000)]x100
` 99,984.43
(The above example illustrates how the forward leg price is derived for a Repo Transaction).
Question
A 3-day repo is entered into on 10th July, 2001, at 11.99% 2009 security, maturing on 7th April,
2009. The face value of the transaction is ` 3,00,00,000. The price of the security is ` 116.42. If the
repo rate is 7%, what is the settlement amount on 10th July, 2001?
Answer
Settlement amount on 10th July, 2001 is the transaction value for the securities plus accrued
interest.
Transaction Value:
3,00,00,000 * 116.42 / 100 = ` 3,49,26,000.
Accrued Interest:
The security’s maturity date is 7th April, 2009. Using the Coupdaybs function, we can find the
number of days from last coupon date. (Settlement: 10th July, 2001; Maturity: 7th April, 2009;
Frequency:2; Basis:4; The number of day is 93.
Accrued Interest = 3,00,00,000 * 11.99% * 93/360 = ` 9,29,225.00
Therefore, the settlement amount is : ` 3,49,26,000 + ` 9,29,225.00 = ` 3,58,55,225.00
Question
Using the same date as mentioned in the above question, determine the settlement amount for the
second leg of the repo transaction.
Solution
The settlement amount for the second leg involves the following:
Interest on the Amount borrowed:
= 35855225 * .07 * 3/365
= ` 20,629.03
Amount to be settled: 35855225 + 20629.03 = ` 35875854.03

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Case- 1
International Bank has following assets and liabilities in its balance sheet as on Mar 31, 2010:
Capital — Rs. 4400 cr, Reserves — Rs. 8600 cr, demand deposits — Rs. 26000 cr, Saving Bank deposits — Rs.
82000 cr, Term deposits — Public Rs. 123200 cr, Term deposits — Banks Rs. 5200 cr; Borrowing from financial
institutions — Rs. 800 cr, NABARD refinance — Rs. 600 cr, Bills payable Rs. 200 cr, Interest accrued Rs. 80 cr,
Subordinated debt Rs. 800 cr and suspense account Rs. 120 cr. Total liabilities Rs. 252000 cr. Based on this
information, and assuming CRR to be 5%, answer the following questions.
01 What is the amount of liabilities that will not be included in net demand and time liabilities for the purpose of
CRR calculation:
a) Rs. 13000 cr b) Rs. 13600 cr
c) Rs. 18200 cr d) Rs. 18800 cr
02 What is the amount of Net demand and time liabilities (NDTL), on which the CRR is to be maintained:
a) Rs. 233200 cr b) Rs. 238600 cr
c) Rs. 248300 cr d) Rs. 252000 cr
03 At 5% of NDTL rate prescribed by RBI, what will be the average balance to be maintained by the bank with
RBI:
a) Rs. 10960 cr b) Rs. 11660 cr
c) Rs. 11860 cr d) Rs. 12960 cr

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04 What is the minimum balance in the CRR account with RBI, in the above situation which should be available:
a) Rs. 8712 cr c) Rs. 8162 cr

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b) Rs. 8514 cr
d) Rs. 8092 cr
05 While calculating the net demand and time liabilities, for CRR purpose, which of the following liability is
to be excluded:
10. Capital and reserves
11. Refinance from NABARD, NHB, SIDBI
12. Inter-bank deposits with original maturities of 15 days or above
13. All the above
Answ ers: 1-d 2-a, 3 -b 4 -c 5-d
Explanations:
Que-1: Capital Reserves -I- term deposit from banks + refinance from NABARD are not to be
taken. Hence 4100 + 8600 + 5200 + 600 = 18800 cr.
Que-2: Total liabilities — exempted liabilities (Capital + Reserves + term deposit from banks +
refinance from NABARD). Hence 252000 — 18800 = 233200 cr
Que-3: 233200 x 5% = 11660 cr
Que-4: Minimum balance is 70% of the average balance i.e. 11660 x 70% = 8162.cr
Que-5: The given answer is correct. It does not require any explanation
Case - 2
International Bank has maintained following balance with RBI in its CRR account for the fortnight ended
Feb 12, 2010.
1st 10 days — Minimum balance of 70%
11th and 12th day — Rs. 1600 cr
The average balance required to be maintained is Rs. 700 cr.
Based on this information, answer the following questions:
01 On product basis, what is the CRR balance for fortnight, to comply with the CRR-requirement:
a) Rs. 10500 cr b) Rs. 9800 cr
c) Rs. 6880 Cr d) Inadequate information
02 On product basis, what balance has been maintained by the bank, during the first 10 days of the fortnight:
a) Rs. 4900 cr b) Rs. 5600 cr
c) Rs. 6300 cr d) Rs. 7000 cr
03 On product basis, what balance has been maintained by the bank on 11th and 12th day:
a) Rs. 1600 cr b) Rs. 3200 cr
c) Rs. 3600 cr d) Rs. 4800 cr
04 On product basis, what balance has been maintained by the bank for 1st [2 days of the fortnight:
a) Rs. 3200 cr b) Rs. 4900 cr
c) Rs. 8100 cr d) Rs. 9800 cr
05 How much minimum balance the bank will be required to maintain on 13th and 14th day> to ensure
compliance of CRR requirement during the fortnight:
a) Rs. 700 cr b) Rs. 760 cr
c) Rs. 810 cr d) Rs. 850 cr
Answers: 1-b 2-a 3-b 4-c 5-d
Explanations:
Que-1: 700 x 14 = 9800 cr
Que-2: 70% of the required Rs. 700 cr i.e. 490 cr (700 x 70%). Hence total balance for 10 days = 490
x 10 = 4900 cr
Que-3: 1600 x 2 = Rs. 3200 cr
Que-4: (490 x 10 = 4900 cr) f (1600 x 2 = Rs. 3200 cr) = 8100 cr
Que-5: Balance required to be maintained on product basis = 9800 cr minus balance already maintained = Rs.
8100 = 1700 cr. Hence for 2 days, the average balance = 1700/2 = 850 cr.
Case – 3
Pune branch of International Bank (With HQ in Mumbai) has received an investment proposal for investing in
commercial paper issued by a company known as XYZ Limited. The bank has received the request for
subscribing to the CP up to Rs.50 cr for 182 days at 8% p.a. rate of interest and submitted the following
information/ documents on Feb 10, 2010:
14. Copy of credit rating certificate (PRI) issued by CARE which is dated Jan 25, 2010
15. Coy of resolution passed by Board of Directors of the company to this effect which restricts issued of CP
up to Rs.100 cr, with a maximum tenure of 182 days.
16. The company has submitted the letters from two non-bank finance companies subscribing to the
commercial paper up to Rs.50 cr in the first tranche on Feb28, 2010. On the basis of above information,
answer the following questions:
01 Which of ______ the following other information/confirmation is not required by the bank to ensure
that company-fulfils the eligibility criteria:
17. proof of sanction of working capital limits by a bank or financial institutions
18. Copy of latest audited balance sheet to ensure that company has required net worth of at least Rs.4 cr.

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19. proof that their loan accounts with other banks are standard loan account
20. none of the above
02 Which of the following steps will be initiated by the branch:
21. the branch will immediately subscribe the commercial paper
22. the branch will decline, the subscription, as banks cannot invest in commercial papers
23. the branch will refer the proposal to Treasury Department of the bank in HO, as it is an investment proposal
24. the branch will refer this case to its Regional Head, as case is to be sanctioned in the form of a loan.
03 What is the amount as balance amount, the company can get subscribed as commercial paper?
a) Rs.100 cr b) Rs.50 cr
c) Rs.10 cr d) none of the above
04 If the bank decides to subscribe the commercial paper to the extent of Rs.10 cr, what amount will be bank
pay to the company?
a) Rs.10 lac b) Rs.961538
c) Rs.958276 d) 952945
05 If the bank subscribes the CP on Feb 14, 2010, the company shall repay back the amount of
commercial paper on :
a) August 13, 2010 b) August 14, 2010
c) August 15, 2010 d) August 16, 2010

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Ans. 1-d 2-cq 3-b 4-b 5-b Explanations: —
Que-1: As per RBI guidelines, the eligibility criteria include (a) sanction of working capital limits by a bank or Fl
25. credit rating of at least P2 from CRISIL or equivalent from other rating agency (c) loan accounts are
standard accounts (d) net worth is at least Rs.4 cr.
Que-2: Investment in commercial paper, is an investment decision and the evaluation of the proposal and
decision to invest, shall be taken by the Treasury Deptt, of the bank.
Que-3: Rs.100 cr– Rs.50 cr (already subscribed) = Rs.50 cr.
Que-5: The discounted value = P/1+r = 10 lad 1.04 = 961538 (rate of interest of 8% for 6 months will be
half of 8%.
Que-5: The maturity date is Aug 15. But it being a holiday, the company shall have to pay on the preceding
day i.e. Aug 14.
CASE STUDIES ON DERIVATIVES
Case-1 : CREDIT DERIVATIVES
01 A corporate client has requested the bank for sanction of a term loan of Rs. 200 cr for setting up a
project. The loan will be repaid within 5 years. Due to industry exposure ceiling, the bank is unable to undertake the
exposure. In view of the long standing relationship with the customer, the bank wants to accommodate the customer.
If this loan is sanctioned, to hedge the loan concentration, which of the following will be used by the bank:
26. Credit default swap
27. Total return swap
28. Credit linked notes
29. Credit spread options
30. A corporate needs a corporate loan of Rs. 1000 cr to be withdrawn immediately and availed for one
year. Among other banks, Universal Bank is also approached for this. The bank is ready to sanction a loan up
to -Rs. 250 cr (due to exposure ceiling), while the company has requested for a loan of Rs. 500 cr, as the
balance part has been managed by the company, from other banks. In order to retain the customer, for
accommodating the party to the extent of Rs. 500 cr, which of the following will be used by the bank:
31. Credit default swap
32. Total return swap
33. Credit linked notes
34. Credit spread options
Answers: 1-b 2-a Explanations:
35. In this case, the total return swap (TRS) would be appropriate. (TRS represents an off balance sheet
replication of a financial assets such as a loan). The bank, after extending the loan, can arrange a TRS
with a hedge fund investor. The bank in this way will receive a spread for 5 years, can retain the
customer, hedge the risk of the loan and reduce the amount of regulatory capital.
36. The bank can sanction a loan of Rs. 500 cr and go for credit default swap (CDS) of Rs. 250 cr and can
sell this amount to a protection seller (particularly those banks that are at a disadvantages so for as
credit risk origination is concerned)-under CDS. In this transaction, the loan will continue to be with the
originating bank and will not be required to be transferred to the bank.
Case- 2 : OPTIONS
X is the seller of an option and Y is the buyer of the option. As per the option, the option buyer can buy
USD 100000 at a strike price of Rs. 45 per USD with expiry at the end of 3 months.
01 According to this contract:
37. Y has the right to sell USD 100000 to X
38. Y has the right to buy USD 100000 from X
39. X has the right to buy USD 100000 from Y
40. Y has the obligation to buy USD 100000 from X
02 In the above case (i.e. call option), if the spot price of USD is. Rs. 45.50 on the expiry day, it is
an:
41. At-the-money option
42. Out-of-money option
43. In-the-money option
44. American option
03 In the above case (i.e. call option), if the spot price of USD is Rs. 44.50 on the expiry day, it is an:
48. American option
04 In the above case (i.e. call option), if the shot price of USD is Rs. 45.00 on the expiry day, it is an:
52. American option
Answers: 1-b 2-b 3-c 4-a Explanations:

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53.From buyer's view point, this is a call option as the buyer can purchase USD 100000 without any obligation to
purchase. In case the transaction does not turn out to be profitable he may choose not to exercise the option.

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54. When the strike price = spot price of the currency, it is at the money option. When the strike price < spot price in a
call option and strike price > spot price in a put option, it is called out of the money option. When the strike price >
spot price in a call option and strike price < spot price in a put option, it is called in the money option.
55. When the strike price = spot price of the currency, it is at the money option. When the strike price <
spot price in a call option and strike price > spot price in a put option, it is called out of the money option. When the
strike price > spot price in a call option and strike price < spot price in a put option, it is called in the money option.
56. When the strike price = spot price of the currency, it is at the money option. When the strike price < spot price in a
call option and strike price > spot price in a put option, it is called out of the money option. When the strike price >
spot price in a call option and strike price < spot price in a put option, it is called in the money option.
Case -3: FUTURES
A futures contractof USD 10000 is traded at National Stock Exchange for delivery on Aug 28, 2011 at one USD = Rs.
45.00 as against the spot rate of Rs. 44.30.
01 The contract implies that:
57. Buyer would deliver the holder of the contract USD 10000 against payment of equivalent
rupees at the agreed rate of Rs. 45.00
58. Seller would deliver the holder of the contract USD 10000 against payment of equivalent rupees
at the agreed rate of Rs. 45.00
59. Seller would deliver to the buyer of the contract USD 10000 against payment of equivalent rupees
60. Buyer would deliver to the seller of the contract USD 10000 against payment of equivalent rupees
02 In the above case, if the market rate of USD is Rs. 45.90
61. The seller will pay to the holder, the difference in contract price and spot price on that date
62. The buyer will pay to the holder, the-difference in contract price and spot price on that date
63. The seller will pay to the buyer, the difference in contract price and spot price on
that date d) The seller will pay to the buyer, the amount of contract price
03 In the above case, if the market price is less than the contract price:
64. The buyer of the contract will get the profit
65. The buyer of the contract will bear the loss
66. The seller of the contract will bear the loss
67. The profit or loss, if any, will be shared between the buyer_and the seller
Answers: 1-b 2-a 3-b Explanations:
A futures contract is traded at an Exchange. Under the contract, the seller delivers the holder of the contract, the
agreed currency (USD 10000) against payment of equivalent rupees at the agreed rate of Rs. 45.00.
2.The seller will pay to the holder, the difference in contract price and spot price on that date, to settle
the contract.
68. The buyer will pay to the holder, the difference in contract price and spot price on that date.
BANK FINANCIAL MANAGEMENT
CASE STUDIES ON RATING MIGRATION

Case- 1
You are provided the following information about the no. of loan accounts with different rating, in
international Bank as on Mar 31 2009 and Mar 31 2010.
Rating Mar 31, 2009 Mar 31, 2010
AAA AA+ AA A+ A BBB C Default

AAA 100 70 16 4' 4 .2 2 2 -
AA+ 100 10 60 14 10 - 2 2 2
AA - - - - - _ -
A+ - - - - - - - -
A 200 - - 20 160 12 4 4
BBB 400 - - - 20 - 240 60 80-
C 60 - - - - - 10 40 10
Default -
Based on this information, answer the following question.
01 What is the %age of AAA rated borrower that remained at the same rating level during the
observation period:
a) 70%© b) 65%
C) 60% d) 55%
02 What is the no. of AAA rated accounts as at the end of observation period:
a) 100 b) 80
c) 70 d) 60
03 What is the percentage of migration of borrowers from A and BBB category to default category:
a) 1%, 20% b) 2%, 20%

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c) 1%, 10% d) 2%, 10%

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04 What is the percentage of migration of loan accounts from C rated to default category:
a) 10% b) 12.50%
c) 15.5% d) 16.7%
05 What is the total no. of borrower in the default category at the beginning and end of the
observation period:
a) Nil, 80 b) Nil, 90
69. Nil, 96
70. Inadequate information to answer the question
06 Calculate the percentage for migration of AA+ account to AA category:
a) 10% b) 125
c) 14% d) 16%
07 What is the percentage of BBB category accounts, that did not change their category during the
observation period:
a) 70% b) 60%
c) 50% d) 40%
08 What is the percentage of A category accounts that were upgraded to A+ category:
a) 10% b) 12.5%
c) 15% d) 17.5%
Ans wers: 1-a 2- b 3- b 4- d 5- c 6- c 7- b 8-a
Explanations:
Que-1: Mar 2010 = 70 accounts. Mar 2009 = 100 account. Hence 70/100x100 = 70%
Que-2: 70+10 = 80
Que-3: For A category = 4/200x100 = 2%. For BBB category = 80/400x100 = 20%
Que-4: 10/60x100 = 16.7%
Que-5: At beginning — nil At end = 2+4+80+10=96
Que-6: 14/100x100 = 14%
Que-7: 240/400x100 = 60%
Que-8: 20/200x100 = 10%
Case -2
You are provided the following information about the no. of loan accounts with different rating, in International Bank as
on Mar 31, 2009 and Mar 31 2010.
Rating Mar 31, 2009 Mar 31, 2010
AAA AA+ AA A+ A BBB C Default

AAA 200 150 10 12 14 8 6 - 4
AA+ - - - - - - - - -
AA 50 - - - - - _ -
A+ 100 - 1 16 80 - - 3 -
A - - - - - - - -
BBB 400 - - - 20 20 330 20 10
C 100 - - - - - 20 60 20
Default -
01 What is the percentage of AA rated and BBB rated account that retained their existing rating:
a) 64%, 85% b) 64%, 82.55
c) 65.5%, 80% d) 60%, 78%
02 What is the no. A+ account at the end of observation period:
a) 100 b) 110
c) 118 d) Inadequate information
03 What is the change percentage in no. of accounts in AAA category:
a) 20% increase b) 22.5% decrease
c) 24% decrease d) 25% decrease
04 What is the percentage of account in all categories that have been shifted to default category:
a) 5.4% b) 6.2%
c) 6.8% d) 7.5%
05 What is the %age of AAA category accounts that has been shifted to BBB and AA category:
a) 3%, 6% b) 3%, 5%
c) 4%, 6% d) 4%, 5%
06 What is the percentage change in AA category accounts:
a) 15% b) 17.5%
c) 20% d) 25%
07 In which category of accounts, the migration has been highest (in %age terms) during the observation period:
a) AAA b) AA
c) BBB d) C

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08 In which category of accounts, the migration has been lowest, during the observation period:
a) C b) BBB

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c) A+ d) AA
Answers: 1-b 2-c 3-d 4-a 5-a 6-c 7-d 8-c
Explanations:
Que-1: AA=32/50x 100=64% BBB=330/400x100=82.5%
Que-2: 14+4+80+M = 118
Que-3: 50/200x100 = 25% dedine
Que-4: 36/850x 100= 5.4%
Que-5: To BBB = 6/200X100 = 3% To AA category = 12/200x100 = 6%
Que-6: (Change 60-50 = 10) 10/50x100 = 20%
Que-7: In C category — 40%. In AA category — 36%. In other categories it is lesser than in these categories.
Que-8: A +. It is 20%. In other categories it is higher
CASE STUDIES ON COMPUTATION OF EXPOSURE ON A BORROWER

Case — 1
Credit facility I Sanctioned amount Outstanding amount Credit — 1
conversion factor for
non-fund
Cash credit 500 300

Bills 100 50
Export loans 200 100
Term loan 300 100
Financial guarantees 100 80 100%
Performance Guarantee 100 100 50%
Standby LC 100 50 100%

Documentary LC 400 300 20%
Unconditional take out 100 100 100%

finance
Conditional take out 100 100 50%

finance
Total 2000 1280

Balance amount of 200 of term loan to be withdrawn as under: Within one year 100 and after 1 year 100. In
case of un-drawn portion, the exposure is to be taken as under:
Cash credit = 20%; Term Loan to be withdrawn within one year = 20%; Term Loan to be withdrawn after one year =
50%
01 The exposure for undrawn amount of fund based limits other than term-loans to be taken at:
a) 20 b) 50
c) 70 d) 140
02 The exposure for undrawn amount of term loans to be taken at:
a) 20 b) 50
c) 70 d) 140
03 The amount of exposure for undrawn amount for fund based limit does not match in which of the following:
71. Cash credit, bills and export loans 70
72. Term loan to be withdrawn in one year 20
73. Term loan to be withdrawn after one year 20
74. Total amount for non-withdrawn amount 140
04 What is the credit equivalent of non-fund based exposure in respect of letter of credit:
a) 130 b) 110
c) 150 d) 390
05 What is the credit equivalent of non-fund based exposure of bank guarantees:
a) 130 b) 110
c) 150 d) 390
06 What is the credit equivalent of non-fund based exposure in respect of take out finance:
a) 130 b) 110
c) 150 d) 390
07 What is the credit equivalent of total non-fund based exposure
a) 130 b) 110
c) 150 d) 390
08 What is the total exposure on account of the borrower:
a) 2000 b) 1280
c) 1080 d) 900
Answers: 1-c 2-c 3-c 4-b 5-a 6-c 7-d 8-c
Explanations:

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75. Undrawn amount under fund based limits-other than term loan = 800-450= 350 at 20% = 70

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76. Exposure for undrawn amount of term loan as per RBI guidelines: within one year 100 @ 20% = 20 and after
year 100 @ 50% = 50. Total = 20 + 50 = 70.
77. Undrawn amount under fund based limits other than term loan = 800-450 = 350 at 20% = 70
Undrawn amount of term loan = within one year 100 @ 20% = 20; after 1 year 100 @
50% 50. Total exposure for non-withdrawn amount = 70 + 20 + 50 = 140.
78. Letter of credit standby - 50 x 100% = 50.
Documentary 300 x 20% = 60. Total = 50 + 60 = 110.
Bank guarantees - Financial guarantee = 80 x 100% = 80,
Performance guarantee = 100 x 50% = 50. Total 80 + 50 = 130.
79. Take out financing for unconditional = 100 x 100% = 100. For
conditional 100 x 50% = 50. - Total = 100 + 50 = 150.
80. Letter of credit = 50 x 100% = 50, 300 x 20% = 60, Total = 50 + 60 = 110. Bank
guarantees = 80 x 100% = 80, 100 x 50% = 50, Total = 80'+ 50 = 130. Take out
financing = 100 x 100% = 100, 100 x 50% = 50, Total = 100 + 50 =150. Total = 390
81. FB Based drawn = 550, FB undrawn = 140, Non-fund based = 390, Total = 1080
Case -2
Popular Bank has a credit exposure of Rs. 80 cr which is secured by financial collateral security of A+ rated bonds of
Rs. 40 cr issued by a Public Sector Undertaking of Govt. of India. The period of this exposure is 4 years and the
residual maturity of the financial collateral is 3 years. The financial collateral is an eligible credit risk mitigant. There
is no currency mismatch. (As per RBI guidelines the haircut applicable to this collateral is 6% and the haircut on
account of currency mismatch is 0 if no currency mismatch is there and 0.08, if there is currency mismatch).
01 Based on the above information, calculate the haircut adjusted collateral value:
a) Rs. 40.00 cr b) Rs. 37.60 cr c) Rs. 27.57 cr d) Rs. 12.43 cr
02 On the basis of above information, what is value of haircut adjusted collateral after adjustment on
account of maturity mismatch:
a) Rs. 40.00 cr b) Rs. 37.60 cr c) Rs. 27.57 cr d) Rs. 12.43 cr
03 On the basis on the above information, calculate the value of exposure at Risk:
a) Rs. 40.00 a- b) Rs. 37.60 cr c) Rs. 27.57 cr d) Rs. 12.43 cr
Answers: 1-b 2-c 3-d
Explanations:
82. In this case the residual maturity of collateral is less than the residual maturity of the loan, hence there is
maturity mismatch. There is no currency mismatch as stated in the problem. To find out the net exposure qualifying
for capital adequacy purpose, at the first stage, the hair cut of the collateral will be calculated and then value of hair-
cut adjusted collateral will be calculated, taking into account the adjustment on account of maturity mismatch.
Stage 1- Haircut adjusted collateral value or C = C x (1 -
H, C = 40 x (1 - 6% - 0%) = 40 x 94% = Rs. 37.60 Cr.
(Here, C is original value of collateral. I-lc is haircut appropriate to the collateral-security (as per RBI
guidelines it is 6%) and Hu is the haircut for currency mismatch (0% if exposure and collateral are in the
same currency and 0.08% if the exposure and collateral are in the different currency).
State 2 - Value of haircut adjusted collateral after adjustment on account of maturity mismatch: P
= C x (t - 0.25) / (T - 0.25) = 37.60 x (3-0.25) / (4-0.25) = 37.60 x 2.75 / 3.75 = 27.57.
(P = value of credit risk mitigant adjusted for maturity mismatch, t is minimum of T and residual maturity of
credit protection expressed in years and T is minimum of 5 years and residual maturity of the exposure
expressed in years). The value of exposure at risk (E) = Max {0, (current value of the exposure - value
of the adjusted collateral for any hair cut and maturity mismatch)} = Max {0, (40 - 27.57) = 12.43 cr
83. As above
84. As above
Case - 3
85. company has raised a loan of Rs. 100 cr and collateral in this account is a bank term deposit of Rs. 40 cr.
Calculate the net exposure qualifying for capital adequacy purpose, if there is not maturity mismatch
a) Rs. 100 b) Rs. 60 cr
c) Rs. 40 cr d) Inadequate information
Answer:
Solution: 100 - 40 = Rs. 60 cr. The haircut in respect of collateral of bank deposit is Zero as per RBI
guidelines. Hence the full Value of Rs. 40 cr would be deducted from the exposure, without any haircut. .
Case — 4
86. Bank has an exposure of Rs. 100 cr (residual maturity 3 years) which is collaterally secured by RBI relief Bonds of
Rs. 20 cr with a residual maturity mismatch. The applicable haircut as per RBI guidelines for relief honds is 7% and fr,r Pa.
rated bonds 4%. What is the adjusted collateral vaiue of this security for the purpose of risk mitigation:
a) Rs. 100 cr b) Rs. 50 cr
c) Rs. 49.20 cr d) Rs. 50.80 cr
87. Bank has an exposure of Rs. 100 cr (residual maturity 3 years) which is secured collaterally by
RBI relief Bonds of Rs. 20 cr with a residual maturity of 3 years and AA rated bonds of Rs. 30 cr. There

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is no maturity mismatch. The applicable haircut as per RBI guidelines for relief bonds is 2% and for AA
rated bonds 4%. Calculate the value of exposure at risk for the purpose of risk mitigation:

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a) Rs. 100 cr b) Rs. 50 cr
c) Rs. 49.20 cr d) Rs. 50.80 cr
Answers: 1-c 2-d Explanations:
88. The weightage of the collateral is 20% for relief bonds and 30% for AA
rated bonds. The HC = (20% x 2%) + (30% x 4%) = 0.4 + 1.2 = 1.6%
The
value of hair cut adjusted collateral C = C x (1 —
1-1, — C = 50 x (1 — 1.6% - 0%) = 50 x
98.40% = Rs. 49.20 Cr.
89. The weightage of the collateral is 20% for relief bonds and 30% for AA
rated bonds. The HC = (20% x 2%) + (30% x 4%) = 0.4 + 1.2 =
1.6% The
value of hair cut adjusted collateral C = C x (1 —
C = 50 x (1. — 1.6% - 0%) = 50 x 98.40% = Rs. 49.20 Cr.
The value of exposure at risk (E) {0, (current value of the exposure — value of the
adjusted collateral for any hair cut and maturity mismatch)} = Max {0, (100 — 49.20) =
Rs. 50.80 cr
Q. The 8.15% 2022 Government Bond matures on the 11th of June 2022 and pays semi annual
interest on the 11th of June and 11th of December. The Repo rate is 7.50%. The bond is trading at
a price of Rs 101.93 The last interest payment date on the bond was 11th of December 2012 and
the next interest payment date is the 11th of June 2013.
The first leg settlement date is 11th of March 2013 and the second leg settlement date is 12th of
March 2013.
1) The cash inflow to the Repo Borrower in the first leg is
a) 103.9675--
b) 104.9685
c) 103.9855
d) 103.6675
2) The interest outgo for the Repo rate borrower in the second leg is
a) 0.0256
b) 0.0214--
c) 0.0514
d) 0.0255
3) The purchase price of the second leg is
a) 101.9280
b) 101.9287--
c) 101.9245
d) 101.9255
4) The cash outflow for the second leg is
a) 103.9587
b) 103.9889--
c) 103.9546
d) 103.9666
5) The accured interest for Second Leg
a) 2.0601--
b) 2.0501
c) 2.0401
d) 2.0301
6) The accured interest for First Leg
a) 2.0375--
b) 2.0361
c) 2.0365
d) 2.0355

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Objective Type Questions
1. A swap transaction involves

a) purchase of currency b) sale of currency
c) purchase of currency against sale or forward sale of the currency. d) simultaneous purchase
and sale of one currency against another for different settlement dates.
5. If you purchase a Rs.100,000 interest-rate futures contract for 105, and the price of the Treasury
securities on the expiration date is 108
a) your profit is Rs.3000. b) your loss is Rs.3000. c) your profit is Rs.8000. d) your loss is Rs.8000.
e) your profit is Rs.5000.
If you sell a Rs.100,000 interest-rate futures contract for 110, and the price of the Treasury
securities on the expiration date is 106
a) your profit is Rs.4000. b) your loss is Rs.4000. c) your profit is Rs.6000. d) your loss is Rs.6000.
e) your profit is Rs.10,000.
To hedge the interest rate risk on Rs. 4 million of Treasury bonds with Rs.100,000 futures
contracts, you would need to purchase
a) 4 contracts. b) 20 contracts. c) 25 contracts. d) 40 contracts. e) 400 contracts.
5. The number of futures contracts outstanding is called

a) liquidity. b) volume. c) float. d) open interest. e) turnover.
If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of
treasury securities should interest rates rise, he could
a) buy put options on financial futures.b) buy call options on financial
futures. c) sell put options on financial futures. d) sell call options on financial futures.
3. A swap that involves the exchange of a set of payments in one currency for a set of payments in
another currency is an
a) interest rate swap.b) currency swap.c) swap options.d) national swap.
8. If Second National Bank has more rate-sensitive assets than rate-sensitive liabilities, it can
reduce interest rate risk with a swap that requires Second National to
a) pay fixed rate while receiving floating rate.
b) receive fixed rate while paying floating rate.
c) both receive and pay fixed rate.
d) both receive and pay floating rate.
9. If the RBI announces that it has done repos of Rs. 3000 crore, what does this imply?
a. RBI has lent securities worth Rs. 3000 crore through the repo markets to the participants.
b. RBI has reversed the repo deals of participants who entered into a repo with RBI.
c. RBI has inducted funds amounting to Rs. 3000 crores into the market.

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d. RBI has borrowed securities from the banking system, and lent them onward in the repo
markets.
4. A 3-day repo is entered into on July 10, 2013, on an 11.99% 2022 security, maturing on April 7,
2022. The face value of the transaction is Rs. 3,00,00,000. The price of the security is Rs. 116.42. If
the repo rate is 7%,
I. What is the settlement amount on July 10, 2013 (transaction value for repo)? Consider Face
value of security Rs.100/- & number of days from last coupon is 93 days.
a. Rs. 3,58,55,225 b. Rs.3,00,17,500 c. Rs.3,00,03,331 d. Rs.3,49,29,331
II. What is the amount to be settled against borrowing in repo?
a. Rs.3,00,17,260 b. Rs. 3,58,75,854 c. Rs.3,00,59,128 d. None of these
4. A bank has having following figures in 1- 3 months bucket. You are required to calculate impact on
NII if interest rates goes up by 0.50%. Total liabilities Rs 3123 cr, Total assets Rs 2106cr.
a. + 5.08 cr b. - 4.16cr c. – 5.08cr d. + 4.16 cr
With regard to a swap bank acting as a dealer in swap transactions, interest rate risk refers to a.
The risk that arises from the situation in which the floating-rates of the two counterparties are not
pegged to the same index.
b. The risk that interest rates changing unfavorably before the swap bank can lay off to an opposing
counterparty on the other side of an interest rate swap entered into with the first counterparty.
c. The risk the swap bank faces from fluctuating exchange rates during the time it takes for the
bank to lay off a swap it undertakes with one counterparty with an opposing transaction.
d. The risk that a counterparty will default.
Use the following information to calculate the quality spread differential (QSD):
Fixed Rate Borrowing Floating rate borrowing

cost cost
Company X 10% LIBOR
Company Y 12% LIBOR + 1.5%
a. 0.50% b. 1.00% c. 1.50% d. 2.00%

14. The term interest rate swap
a. refers to a "single-currency interest rate swap" shortened to "interest rate swap"
b. involves "counterparties" who make a contractual agreement to exchange cash flows at periodic
intervals
c. can be "fixed-for-floating rate" or "fixed-for-fixed rate"
d. All of the above
Which of the following is an agreement to exchange two currencies on one date and to reverse
the transaction at a future date?
a. Interest rate swap b. Foreign currency swap c. Total return swap d. Credit default swap
16. What will be the impact on EVE if interest rates goes up by 1%

a. increase b. decrease c. no change d. decreases by 1%
17. In case of interest rate future contract the underlined bond is ------
a. notional 10 yr 7% bond b. 7% bond 5 yrs maturity c. 7.5% bond for more than 15 yr
maturity
d. none of these
18. The minimum lots size for interest rate future is

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a. 100 bonds b. 200 bonds c. 1,000 bonds d.2,000 bonds
19. The last trading day incase of IRF is ------ before the expiry date.
a. 2 business days b. 3 business days c.1 business days d. 4 business days.
20. The final settlement in case of IRF involves ----- of the bond.
a. cash settlement b. physical delivery c. non-delivery d. difference between sell and by
price
21. Which of the following is not a characteristic of money market instruments?
a. short-term to maturity b. small denomination c. low default risk d. high marketability
1. Which of the following market securities is usually not found on a commercial bank’s balance
sheet?
a. commercial paperb. treasury bills c. certificate of deposit d. banker’s acceptance
23. Banks invest in government securities for a variety of reasons except:

a. income b. safety c. acceptable for collateral d. high relative yield
The bank discount rate (ask) on a 91-day T-bill is 5.35%. What is the price of the Rs.1000 T-bill?
a. Rs.976.40b. Rs.986.48 c. Rs.981.20 d. Rs.989.45
25. In a portfolio of a bank, Bond A has duration of 5.6 while bond B has duration of 6.0. Bond B:
a. will have greater price variability, given a change in interest rates, relative to bond A
b. will have a shorter maturity than bond A
c. will have a higher coupon rate than bond A
d. will have less price variability, given a change in interest rates, relative to bond A
26. Interest rate risk is

a. duration
b. the extent that coupon rates vary with time
c. the potential variability in the realized rate of return caused by a change in market interest rates d.
the potential variability in the realized rate of return caused by a changing discount rates.
27. Balance Sheet for Hamara Bank is as follows:
Assets Yield Liabilities Cost

Rate sensitive Rs. 500 8.0% Rs. 600 4.0%
Fixed rate Rs. 350 11.0% Rs. 220 6.0%
Non earning Rs. 150 Rs. 100
Rs. 920
Equity
Total Rs. 1,000 Rs. 1,000
I. Calculate NII from it

a. -41.3 b. 41.3 c. 35.30 d. 68.80
II. How much is the NIM
a. 4.13% b. 4.48% c. 5.03% d. 4.86%
III. Calculate the GAP
a. -100 b. 100 c. 80 d. -20
IV. What is the effect on NIM if the spread is decrease by 1%

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a. NIM increases b. NIM decreases c. NIM remains the same in % points V. If
the all assets and liabilities has been doubled what is effect on NIM
a. NIM will increase by 100% b. NIM decreases by 100% c. NIM remains the same in % points d.
NIM will increase/decrease according to gap
VI. RSAs increase to Rs.540, while fixed-rate assets decrease to Rs.310 and RSLs decrease to
Rs.560 while fixed-rate liabilities increase to Rs.260, what is the effect on gap & NII
a. Gap increase, NII lower b. Gap Decrease, NII higher c. Both decreases d. Both increases
28. To Reduce asset sensitivity, what the bank is required to do:

a. Shorten loan maturities b. Make more loans on a floating-rate basis
c. Move from floating-rate loans to term loans d. Increase the non fund based loans
29. To Increase liability sensitivity, what the bank is required to do:
a. Issue long-term subordinated debt b. Shorten loan maturities
c. Reduce the short term deposit rate d. Increase short-term deposit rates
30. Excel Bank enters into an Interest rate swap with ABC Ltd on the following terms:
Principal Amount Rs. 100crores

Corporate to Pay 6.50% Fixed
Corporate to Receive 3 month NSE MIBOR
Start date 25-4-12
Tenor
25 10
Interest Payment Dates 25 July & 25 Oct
First Fixing 6.10%
In the above case, which of the following is correct in respect of net interest amount
payable/receivable on 25th July 2012?
a. ABC Ltd to pay Rs.986301 b. ABC Ltd to receive Rs.986301
c. ABC Ltd to pay Rs. 1972602 d. ABC Ltd to receive Rs.1972602
31. General Ledger Balance of Modern Bank as on 12-10-2012

Rs. In 000’s
Liabilities Rs Assets Rs
Paid up capital 10,000 Building 10,000
Current Account 180,000 Car 20,000
SB 450,000 Cash Credit 10,00,000
Fixed Deposit 600,000 Term Loan 8,00,000
Interest accrued 10,000
Margin on LCs 2,000 Suspense Account 10,000

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TT Payable 1,000 Branch Adjustment Account 20,000
CBLO(Colaterised Borrowing 600,000
& Lending Obligations)
ECGC Claims 7,000
Total 18,60,000 Total 18,60,000
1. Demand Liabilities in the above case works out to ……………

a. 632000 b. 638000 c. 1238000 d. None of the above
2. Time Liabilities is equal to ………………………..
a. 120000 b. 600000 c. 127000 d. None of the above
3. Which of the following can be included for DTL/NDTL computation
a. Amount received from DICGC Claims
b. Amount received from Insurance company on ad hoc settlement of claims
c. Amount received from the court receiver
d. Amount held as margin against LC
4. Other demand and time Liabilities amounts to ……………………
a. 10000 b.17000 c. 18000 d. None of the above
32. Which set of the following statements is true in respect of Commercial Paper (CP):
1, Commercial Paper (CP) is an unsecured money market instrument issued in the form of a
promissory note
2. CP can be issued by Corporate, primary dealers (PDs) and the all-India financial institutions (FIs)
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 not less than Rs.4 crore;
4. The minimum credit rating shall be P-1 of CRISIL or such equivalent 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.15 lakh .
a.1,2 & 4 b.1,2 & 3 c.1,4 & 5 d.1,4 & 6

33. The issuer of loans pooled and securitized is often:
a. A Liquidity enhancement b. A Credit Enhancement c. A Trustee
d. A credit rating agency
Answers
1 d 2 a 3 a 4 d 5 d

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6 a 7 b 8 b 9 c 10 (I)** a
10 (II)* b 11 b 12 b 13** a 14 d
15 b 16 a 17 a 18 d 19 a
20 b 21 b 22 d 23 d 24 b
25 a 26 c 27 - I b 27 - II d 27 - III a
27 -IV b 27 -V c 27 VI c 28 c 29 d
30** a 31 – a 31- 2 b 31 - 3 d 31 - 4 a
1**
32 b 33 1
10.** Answer: I.
Settlement amount on July 10, 2013 is the transaction value for the securities plus accrued interest.
Transaction Value: 3,00,00,000*116.42/100= Rs.3,49,26,000 Accrued Interest: The security’s
maturity date is April 7, 2022. The number of days is 93 from the last coupon date.
Accrued interest=3,00,00,000 * 11.99%* 93/360 = Rs. 9,29,225.00
Therefore, the settlement amount is: Rs. 3,49,26,000 + Rs. 9,29,225.00= Rs. 3,58,55,225.00
II.
Interest on the Amount borrowed: = 35855225 * .07 * 3/365 = Rs. 20629.03
Amount to be settled: 35855225 + 20629.03 = Rs. 35875854.03
14.** The QSD = (12% - 10%) - (LIBOR + 1.5% - LIBOR) = 0.50%

30.** 1000000000*90*.4
-------------------------
36500
31.** Explanation:
Demand and Time Liabilities: Main components of DTL are:
Demand deposits (held in current and savings accounts, margin money for LCs, overdue fixed
deposits etc.)
Time deposits (in fixed deposits, recurring deposits, reinvestment deposits etc.)
Overseas borrowings
Foreign outward remittances in transit (FC liabilities net of FC assets)
Other demand and time liabilities (accrued interest, credit balances in suspense account etc.)

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MCQs:
1) Leverage means ability of a business concern:
a) To with stand pressures in the times of crisis
b) To meet its liabilities in time
c) To borrow or build up assets on the basis of given capital d) none of these
2) In case of banks, lev-erage is expressed by:

a) Return on Assets b) Net NPA ratio c) Capital adequacy ratio
d) Capital to outside liabilities e) None of these
3) Treasury deals are normally done over phone or over a dealing screen_ The deal
terms are-con-firmed in writing by
a) Front office b) back office c) middle office d) any of these
4) Delivery versus payment means one account is debited and another is credited:
a) on the same day b) by next day c) at the same time d) none of these
5) lh Treasury Operations, the term 'carry' means
a) Interest cost of funds locked in a trading position
b) Carrying forward the contract to next trading period
c) Carrying forward the settlement to next day d) none of these
6) "Marked to Market" means valuation of trading positions applying
a) Purchase price b) current market value
c) current market value or purchase price whichever is lower d) None of these
7) Mismatch refers to:
a) Difference in interest rates paid and received
b) Difference in sale and purchase price
c) Difference in duration of assets and liabilities d) all of these a) None of these
8) Which of the following is a reason for importance of Treasury risk management
a) Adverse market movements may result in instant losses
b) Treasury transactions are of high value needing relatively low capital
c) Large size of transactions done at the sole discretion of the Treasurer
d) Both (a) & (b) only e) All of these
9) High leverage means:
a) Very low capital requirement
b) Very high capital requirement
c) Very high profits compared to capital
d) Very high productivity e) None of these
10) Which of the following is/are not a conventional tool of management control on a
treasury function
a) Back office which checks all transactions of dealers
b) Exposure limits for counterparties avoiding concentration risk
c) Intra day and overnight ceiling on open positions and stop loss limits
d) Value at risk and duration techniques e) None of these
11) Which of the following is not a function of Back office of a treasury
a) Generating deals i.e. purchase and sale of foreign exchange, securities etc.
b) Settling the trade after verifying internal controls
c) Obtaining independent confirmation of deal from the counterparty
d) Verifying that rates / prices mentioned in the deal slip are conforming to the market
rates at the time of the deal e) None of these
12) Which of the following is responsible for ensuring compliance with various risk limits
imposed by the Management and RBI as well as accuracy and objectivity of the transaction?
a) front office b) back office c) middle office

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d) both (a) & (b) only e) All of these
13) Middle office in a treasury is responsible for:
a) Validating deal wise information from accounting point of view
b) Overall risk management and MIS
c) Both (a) & (b) d) None of these
14) Default risk in Treasury means:
a) Failure of the borrowing bank in the call money market to repay the amount on due date to the lending
bank
b) Possible failure of the counterparty to the transaction to deliver I settle their part of transaction

15) The exposure limits for counterparties are fixed on the basis of counterparty's
a) net worth b) market reputation c) track record
d) size of treasury operations e) all of these
16) The Exposure limits for counterparties are:
a) Vary in relation to period of exposure
b) Remain same irrespective of period
c) Fixed only as per net worth irrespective of period d) none of these
17) In which of the following areas trading limits are not fixed by management?
a) limits on deal size b) limits on open position c) stop loss limits
d) all of these e) None of these
18) Open Position refers to:
a) Trading positions where the buy / sell positions are not matched
b) Trading positions where the securities are bought in the open market
c) Open market operations d) none of these
19) Limit on open positions are fixed because
a) There may be loss if there is adverse movement in rates
b) There is 'carry' cost
20) Which of the following is incorrect regarding open position in forex?
a) Position limits are prescribed currency wise as also for aggregate position in Rupees
b) There are separate limits for 'day light' and 'over night' c) None of these
TREASURY RISK MANAGEMENT

1 C 2 C 3 B 4 C 5 A 6 B 7 C 8 E 9 A 10 D
11 A 12 D 13 B 14 C 15 E 16 A 17 E 18 A 19 C 20 C
Derivatives – Forward Contracts

1..Derivatives can be used by an exporter for managing-
(a) Currency Risk
(b) Cargo Risk
(c) Credit Risk
(d) All of the above
2. The term RISK in business refers to-
(a) Chance of losing Business
(b) Chance of making Losses
(c) Uncertainty associated with expected event leading to loss or gain

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(d) Threat from competitors
3. Derivatives are so called because -
(a) They are subsidiary products in the market
(b) They are derived from combination of different assets
(c) Their value is dependent on the value of some other fundamental variable
(d) They are traded on derivative exchanges
4. The following is not a feature of a derivative instrument-
(a) It is a financial instrument
(b) Its use always leads to profit
(c) It is executable on a future date
(d) Its pay-off is dependent on the value of any other basic variable

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10. A derivative can be -
(a) OTC product only
(b) Exchange traded product only
(c) OTC product or exchange-traded product
(d) Always OTC Product and exchange-traded product combined
11. The following is not a feature of exchange-traded derivative -
(a) It is a standard size
(b) It is available only on specified exchanges
(c) The seller is always a bank
(d) None of the above
12. Under the forward exchange contract-
(a) The exchange rate is determined on the future date
(b) The parties agree to meet at a future date for finalization
(c) Delivery of foreign exchange is done on a predetermined future date
13. Forward contract facility is available only for-
(a) Genuine trade transaction
(b) Genuine foreign exchange exposure
(c) Exporters
(d) Traders in Goods
14. A bank has entered into an option forward contract with an export customer.
That means -
(a) The bank has the option to accept or not to accept delivery under the contract
(b) The customer has the option delivery or not to delivery foreign exchange
under the contract
(c) The customer has the option to deliver the foreign exchange during
the option period
(d) The bank has the option to accept foreign exchange under the contract
during the option period

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13. The option period for a forward contract can be for a maximum period of-
(a) 21 days
(b) One month
(c) 10 days
(d) Six months
14. The bank should verify the letter of credit / sale contract for booking a -
(a) Forward sale contract
(b) Forward purchase contract
(c) Cancelling a forward contract
15. Forward purchase contract cannot be booked for -
(a) Exporters of services
(b) Full-fledged money changers
(c) Deferred exporters
16. Normally, forward purchase contract booked should be used by the customer -
(a) For executing the export order for which the contract was booked
(b) For any export order from the same buyer
(c) For any export order for the same commodity
(d) For any export order
17. The period for which a forward purchase contract is booked -
(a) Should not be earlier than 6 months from the expected date of shipment
of the goods concerned
(b) Should not be later than 6 months from the expected date of
shipment of the goods concerned
(c) Should be within 6 months from the date of booking
(d) Can be any period for which the bank can find cover

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17. For booking a forward sale contract, the bank should verify -
(a) The letter of credit
(b) The import licence
(c) The letter of credit or purchase order
18. For extending the due date of a forward contract, the bank should take prior
permission from -
(a) Reserve Bank of India
(b) FEDAI
(c) Bank’s board of directors
19. Forward contracts without production of documentary evidence and on the
declaration of the customer can booked -
(a) Only for exporters
(b) Upto 50% of the limits worked on previous performance basis
(c) Up to 100% of the limits worked on previous performance basis
(d) Without any limit
20. Cancellation and re-booking of forward contracts is permitted -
(a) For exposures for any period for exporters and for exposures up to
one year for others
(b) Only for exporters
(c) Only for importers
(d) When cancelled within six months of booking the contract
21. Currency future is not -
(a) Traded on futures exchanges
(b) A special type of forward contract
(c) Of standard size

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23. The margin for a currency future should be maintained with the clearing house by-
(a) The buyer
(b) The seller
(c) Both the buyer and the seller
(d) Either the buyer or the seller as per the agreement between them
24. The marking- to- market in respect of a currency future refers to
(a) Putting up for sale specific lot of futures
(b) Adjusting the margin money of buyer and seller to reflect the
current value of futures
(c) Quoting rates for different maturities
(d) Allotting futures among different brokers
25. The futures exchange prescribes an initial margin of USD 5,000 and
maintenance margin of USD 3,000 against one Euro futures. The maximum
level of margin that buyer of futures should keep with the exchange for one
futures is -
(a) USD 5,000
(b) USD 3,000 and if a special call is given USD 5,000
(c) USD 8,000
(d) USD 5,000 and if a special call is given additional USD 3,000
26. The marking to market of a futures contract is done -
(a) Daily, based on the opening price for the day
(b) Weekly, based on the opening price for the week
(c) Daily, based on the closing price for the previous day
(d) Weekly, based on the closing price for the previous week
27. For the balance kept in the margin account for futures-
(a) Interest is paid at riskless rate
(b) Interest is paid at LIBOR rate
(c) Interest is paid for the surplus over the required minimum
(d) No interest is paid

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29. A feature of currency options that distinguishes it from other derivatives is -
(a) It carries premium to be paid upfront
(b) It is option to enter into the contract
(c) The buyer has only right, but no obligation to executive the contract
(d) The seller has the right, but no obligation to execute the contract
30. The following statement with respect to currency option is wrong-
(a) Call option will be used by exporters
(b) Put option gives the buyer the right to sell the foreign currency
(c) Foreign currency – rupee option is available in India
(d) An American option can be executed on any day during its currency
31. For contingency exposure of foreign exchange, the best derivative that can be
used to hedge is -
(a) Forwards
(b) Futures
(c) Options
(d) Swaps
32. The strike price under an option is -
(a) The price at which the option is auctioned
(b) The exchange rate at which the currencies are agreed to be
exchanged under the contract
(c) Lower of the market price and the agreed price
33. An option is at-the-money when -
(a) The strike price is greater than the spot price, in the case of a call option
(b) The strike price is greater than the spot price, in the case of a put option
(c) The option has a ready market
(d) The strike price and spot price are same

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33. The intrinsic value of an option is -
(a) The difference between the option price and spot price at the time of
entering into the contract
(b) The difference between the option price and spot price estimated to
prevail on the due date
(c) The difference between the option price and spot price prevailing on the due date
34. Where an option is out of the money -
(a) The premium will be refunded to the buyer
(b) The buyer is unable to take up the contract
(c) The seller gains to the extent of the premium received
(d) No further purchase by the buyer is permitted
35. Banks permitted to run option book are required to fulfill the condition of -
(a) Continuous profit for at least 3 years
(b) Minimum CRAR of 9%
(c) Minimum net worth of ` 200 crores
(d) All the above
36. In India, option contracts cannot be used to cover contingency exposure except -
(a) By export houses
(b) For submission of bids in foreign exchange
(c) By units in SEZs
37. The customers are entitled to write options only by fulfilling the condition -
(a) They make adequate protective measures
(b) They write only upto 25% of their exposures
(c) That it is done as a cost reduction measure and does not result in
net receipt of premium
(d) That premium receivable is higher than the premium payable

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41. A knock-in option becomes effective -
(a) When the spot rate reaches a particular level from below
(b) When the spot rate reaches a particular level from above
(c) Either (a) or (b)
(d) Neither (a) nor (b)
42. This is a barrier option -
(a) Knock-in-option
(b) Asian option
(c) Plain vanilla option
43. Range Forwards and Ratio Range Forwards are -
(a) Cost effective methods of option contracts
(b) The range for which forward contracts are available
(c) The option period under forward contract
(d) Types of special derivative instruments
44. In a participatory forward, the buyer is-
(a) Protected fully from losses and gains fully from exchange rate changes
(b) Protected fully from losses but does not gain from exchange rate changes
(c) Protected partially from losses and gains partially from exchange rate changes
(d) Protected fully from losses and gains partly from exchange rate changes
45. While borrowing for long term on floating rate basis, the interest risk is -
(a) The interest rate may fall in the market in future
(b) The interest rate may increase in the market in future
(c) The loan may not be renewed, if interest rate falls in the market
46. The Capital Risk caused by an increase in Market Rate of interest is-
(a) Interest outgo will be higher on borrowings
(b) Investors do not share in the market rate increase

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Holders of Fixed Income Securities find the value of the assets falling
Both borrowers and investors lose on tax
4. An Interest rate swap helps the user to -
Fix the cost of borrowing
Reduce the Cost of Borrowing
Cover Exchange Risk
Avail Tax Benefit
5. Zero Coupon Swap is an agreement -
Involving Exchange of Zero coupon bonds
Whereby only one party makes payment periodically
Whereby one of the counterparties makes payment in lump sum
instead of periodically
None of the above
6. The acronym CIRCUS Stands for -
Currency Interest Rate Swap
Circular Currency Swap
Combined Income Range Currency Swap
Combined Interest Rate and Currency Swap
7. A forward rate agreement helps the user to -
Fix the cost of borrowing
Reduce the cost of borrowing
Cover exchange Risk
Avail Tax benefit
8. The swap arrangement where principal amounts are not exchanged, but only
periodical interest payments are made will be a -
Currency swap
Cross currency interest rate swap
Interest rate swap
Non-financial swap

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5. Under the interest rate option, the buyer -
Avoids un-favorable movement in interest rates
Gains from favorable movement in interest rates
Both (a) and (b) above
Gains nothing, only the seller gains
6. An Interest rate cap is a series of -
Call options
Put options
Periodical payments
Differential payments
7. FRAs can be used for -
Hedging
Arbitraging
Speculating
Any of the above
8. Interest Rate collar involves -
Simultaneous purchase of interest rate cap and floor
Purchasing a series of caps
Purchase of cap and sale of floor
Purchasing caps for half value
9. Which of the following statements is true?
Exchange exposure leads to exchange risk
Exchange risk leads to exchange exposure
Exchange exposure and exchange risk are unrelated
None of the above
10. The net potential gain or loss likely to arise from exchange rate changes is -
Exchange exposure
Exchange risk

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Profit / loss on foreign exchange
Exchange difference
6. The exchange loss / gain due to transaction exposure is reckoned on -
Entering into a transaction in foreign exchange
Quoting a price for a foreign currency transaction
Conversion of foreign currency into domestic currency
Entry in the books of accounts
7. Transaction exposure can be hedged -
By internal methods only
By external methods only
Either by internal methods or by external methods, but not by both
Either by internal methods or by external methods or a combination of both
8. The external methods of hedging transaction exposure do not include-
Forward contract hedge
Money market hedge
Cross hedging
Futures hedging
9. The true cost of hedging transaction exposure by using forward market is -
The difference between agreed rate and the spot rate at the time of
entering into the contract
The difference between agreed rate and the spot rate on the due
date of the contract
The forward premium / discount annualized
None of the above
10. Money market hedge involves -
Borrowing / investing the concerned currency in the money market
and squaring the position on the due date of receivable / payable.
Borrowing / investing the concerned currency in the money market and
covering the position immediately in the forward market.

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(c) Covering an exposure in the domestic currency.
(d) Simultaneous borrowing and lending the money market.
58. The cost of hedging through options includes -
(a) Option premium
(b) Interest on option premium till due date of the contract
(c) Both (a) and (b) above
(d) (a) above and difference between option price and spot price
59. Hedging with options is best recommended for -
(a) Hedging receivables
(b) Hedging payables
(c) Hedging contingency exposures
(d) Hedging foreign currency loans
60. A firm operating in India cannot hedge its foreign currency exposure through -
(a) Forwards
(b) Futures
(c) Options
61. Internal hedge for transaction exposure does not include
(a) Exposure netting
(b) Choosing currency of invoicing
(c) Cross hedging
62. Foreign currency exposure can be avoided by -
(a) Entering into forward contracts
(b) Denominating the transaction in domestic currency
(c) Exposure netting
(d) Maintaining foreign currency account

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63. Maintaining a foreign currency account is helpful in -
(a) Avoiding transaction cost
(b) Avoiding exchange risk
(c) Avoiding both transaction cost and exchange risk
(d) Avoiding exchange risk and domestic currency depreciation
64. The following method does not result in sharing of exchange risk between
importer and exporter -
(a) Denominating in a third currency
(b) Denominating partly in the importer’s currency and partly in the
exporter’s currency
(c) Entering an exchange rate clause in the contract

(d) Denominating in domestic currency
65. Leading refers to –
(a) Advancing of receivables
(b) Advancing of payable
(c) Advancing payments either receivables or payables
(d) Advancing of receivables and delaying of payables
Treasury Management
3. If A invests ` 24 at 7 % interest rate for 5 years, total value at end of five years is:
(a) 31.66
(b) 33.66
(c) 36.66
(d) 39.66
4. What is the effective annual rate of 12% compounded semi-annually?
(a) 11.24%
(b) 12.00%
(c) 12.36%
(d) 2.54%

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3. What is the effective annual rate of 12% compounded
continuously?
(a) 11.27%
(b) 12.00%
(c) 12.68%
(d) 12.75%
4. A study is done to see if there is a linear relationship between the life
expectancy of an individual and the year of birth. The year of birth is
______________.
(a) Unable to
determine
(b) dependent
variable
(c) independent
variable
(d) None of the
above
5. Which of the following is an example of using
statistical sampling?
(a) Statistical sampling will be looked upon by the courts as providing
superior audit evidence.
(b) Statistical sampling requires the auditor to make fewer judgmental

decisions.
(c) Statistical sampling aids the auditor in evaluating results.
(d) Statistical sampling is more convenient to use than non-statistical sampling.
9. Which of the following best illustrates the concept of sampling risk?
(a) An auditor may select audit procedures that are not appropriate to
achieve the specific objective.
(b) The documents related to the chosen sample may not be available for inspection.
(c) A randomly chosen sample may not be representative of the
population as a whole.
(d) An auditor may fail to recognize deviations in the documents examined.
10. The advantage of using statistical sampling techniques is that such techniques
(a) Mathematically measure risk.
(b) Eliminate the need for judgmental decisions.
(c) Are easier to use than other sampling techniques.
(d) Have been established in the courts to be superior to non-statistical sampling.

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8. Gradual shifting of a time series over a long period of time is called:
(a) periodicity
(b) cycle
(c) regression
(d) trend
9. Seasonal components,
(a) cannot be predicted
(b) are regular repeated patterns
(c) are long runs of observations above or below the trend line
(d) reflect a shift in the series over time
10. Short-term, unanticipated, and nonrecurring factors in a time series provide
the random variability known as:
(a) uncertainty
(b) the forecast error
(c) the residuals
(d) the irregular component
11. The focus of smoothing methods is to smooth:
(a) the irregular component
(b) wide seasonal variations
(c) significant trend effects
(d) long range forecasts
12. Linear trend is calculated as Tt = 28.5 + .75t. The trend projection for period 15 is:
(a) 11.25
(b) 28.50
(c) 39.75
(d) 44.25

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15. The forecasting method that is appropriate when the time series has no
significant trend, cyclical, or seasonal effect is:
(a) moving averages
(b) mean squared error
(c) mean average deviation
(d) qualitative forecasting methods
16. In 3 years you are to receive 50,000. If the interest rate were to suddenly
increase, the present value of that future amount to you would.
(a) fall.
(b) rise*
(c) remain unchanged
(d) cannot be determined without more information
17. You are considering investing in a zero-coupon bond that sells for 2,500. At
maturity in 16 years, it will be redeemed for 10,000. What approximate annual
rate of growth does this represent?
(a) 8 percent
(b) 9 percent
(c) 12 percent
(d) 25 percent
18. For 1,000 you can purchase a 5-year ordinary annuity that will pay you a
yearly payment of 263.80 for 5 years. The compound annual interest rate
implied by this arrangement closest to 1000=263.80(PVIFA, X%, 5)is:
(a) 8 percent
(b) 9 percent
(c) 10 percent
(d) 11 percent
19. The value of a 4 year 12 per cent bond with face value of ` 100, if coupon
payments are made every half year and a prevailing interest rate is 10%, is:
(a) 96.46
(b) 106.46

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(c) 116.46
(d) 86.46
19. If the prevailing interest rate is greater than coupon rate of a bond then the
(a) Bond is traded at a premium
(b) Bond is traded at a discount
(c) Bond is available at zero premium
(d) Bond price does not matter
20. Value of a bond depends on its yield. Following is appropriate when price of a
bond goes up:
(a) Yield goes up
(b) Yield goes down
(c) Yield remains unchanged
(d) Yield and bond price go hand in hand
21. Consider a bond maturing in 3 years with face value of ` 100 and coupon rate
of 6 per cent. The price prevailing today at prevailing interest rate of 8 per cent
is:
(a) ` 96.43
(b) ` 94.85
(c) ` 98.15
(d) ` 100.00
Important Points for exam::

5. Fund management has been the primary activity of treasury, but treasury is also
responsible for Risk Management & plays an active part in ALM.
6. D-mat accounts are maintained by depository participants to hold securities in

electronic form.
7. In present scenario treasury function is liquidity management and it is considered as a

service center.
8. From an organizational point of view treasury was considered as a service center but due to
economic reforms & deregulation of markets treasury has evolved as a profit center.
9. Treasury connects core activity of the bank with the financial markets.

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10.Investment in securities & Foreign Exchange business are part of integrated treasury.
11.Integrated treasury refers to integration of money market, Securities market and

Foreign Exchange operations.
12.Banks have been allowed large limits in proportion of their net worth for overseas
borrowings and investment.
13.Banks can also source funds in global markets and Swap the funds into domestic currency
or vice versa.
14. The treasury’s transactions with customers is known as merchant business.
15. The treasury encompasses funds management, Investment and Trading in a multy
currency environment.

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11. Globalization refers to integration between domestic and global markets.
12. RBI has been progressively relaxing the Exchange Controls.
13. The Exchange Control Department of RBI has been renamed as Foreign Exchange
Department with effect from January 2004.
14. Though treasury trades with narrow spreads, the profits are generated due to high volume of
business.
15. Foreign currency position at the end of the day is known as open position.
16. Open position is also called Proprietary position or Trading position.
17. Treasury sells Foreign Exchange services, various risk management products &
structured loans to corporates.
18. Forward Rate Agreement (FRA) is entered to fix interest rates in future.
19. SWAP is offered to convert one currency into another currency.
20. Allocation of costs to various departments or branches of the bank on a rational basis
is called transfer pricing.
21. The treasury functions with a degree of autonomy and headed by senior management person.
22. The treasury may be divided into three main divisions 1) Dealing room 2) Back office and 3)
Middle office.
23. Securities market is divided into two parts, primary & secondary markets.
24. The security dealers deals only with secondary market.
25. The back office is responsible for verification & settlement of the deals concluded by
the dealers.
26. Middle office monitors exposure limits and stop loss limits of treasury and reports to
the management on key parameters of performance.
27. Minimum marketable investment is Rs. 5.00 Crores.
---------------------------------------------------------------------------------------------

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1. The driving force of integrated treasury are:
4 Integrated cash flow management B) Interest arbitrage C) Investment opportunities D)

Risk Management..
63.The functions of Integrated Treasury are:
(a) Meeting Reserve requirements B) Efficient Merchant services C) Global cash

management D) Optimizing profit by exploiting market opportunities in Forex market, Money
market and Securities market E) Risk management F) Assisting bank management in ALM.
66.The immediate impact of globalization is three fold A) Interest rate B) New

institutional structure C) Derivatives were allowed.
67. RBI is allowing banks to borrow and invest through their overseas correspondents, in
foreign currency upto 25% of their Tier – I capital or USD 10Million which amounts higher.
68.Treasury products have become more attractive for two reasons 1) Treasury operations are
almost free of credit risk and require very little capital allocation and 2) Operation coats are low
as compared to branching banking.
5. Treasury generates profits from under noted businesses.
(a) Conventional A) Foreign exchange business and B) Money market deals.

(b) Investment activities e.g. SLR, non – SLR & investment in Subsidiaries.
(c) Interest Arbitrage.
(d) Trading is a speculative activity, where profits arise out of favorable price
movements during the interval between buying and selling.
6. ARBITRAGE: is the benefit accruing to traders, who play in different markets

simultaneously.
7. DERIVATIVES are financial contracts to buy or sell or to exchange a cash flow in any
manner at a future date, the price of which is based on market price of an underlying assets
which may be financial or a real asset with or with out an obligation to exercise the contract.
8. EMERGING MARKET COUNTRIES are countries with a fast developing economy,

which are largely market driven.
9. D-MAT ACCOUNTS are maintained by depository participants to hold securities in

electronic form, so that transfer of securities can be affected by debit or credit to the
respective account holders without any physical document.
TREASURY PRODUCTS

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4 In Foreign Exchange market free currencies can be bought and sold readily.
5 Free Currencies belong to those countries whose markets are highly developed and
where exchange controls are practically dispensed with.
6 Foreign Exchange market is most transparent & it is virtual market.
7 Foreign Exchange market may be called near perfect with an efficient price discovery system.
8 Spot settlement takes place two working days from the trade date i.e. on third day.
9 Customers expecting Foreign Currency transactions cover their risk by entering

forward contracts.
10 Treasury enters into Forward Contract for making profits out of price movements.
11 Forward exchange rates are arrived at on the basis of interest rates differentials of
two currencies.
12 A combination of Spot and Forward transactions is called Swap.
13 The Swap route is used extensively to convert cash flows from one currency to another
currency.
14 Inter bank loans, Short term investments and Nostro accounts are the avenues for
investment of Forex surpluses.
15 Nostro accounts are current accounts maintained in Foreign Currency by the banks with
their correspondent banks in the home currency of the country.
16 Balance held in Nostro accounts do not earn any interest.
17 Rediscounting of Foreign Bills is an inter bank advance.
18 RBI has allowed banks to include rediscounting of bills in their credit portfolio
19 Money market refers to raising and developing short term resources.
20 Inter bank market is subdivided into Call Money, Notice Money & Term Money.
21 Call Money refers to overnight placement.
22 Notice Money refers to placement beyond overnight for periods not exceeding 14 days.
23 Term Money refers placement beyond 14 days but not exceeding one year.
24 RBI pays interest on CRR balance in excess of 3% at Reverse Repo Rate.

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11. Inter bank market carries lowest risk next to Sovereign risk.
12. The interest on treasury bills is by way of discount i.e. Bills are priced below face value,
this is known as implicit yielding.
13. Each issue of 91 days T-bills is for Rs.500 Crores and auction is conducted on Weekly
basis I.e. on every Wednesday.
14. Each issue of 364 days T-bills is Rs.1000 Crores and auction is conducted on Fortnightly
basis i.e. on alternate Wednesday.
15. The payment of T-bills is made and received through Clearing Corporation of India
Limited ( CCIL )
16. Commercial paper is short term debt market paper.
17. The Commercial Paper issuing company should have minimum P2 credit rating.
18. Banks can invest in Commercial Paper only if it is issued in D-mat form.
19. Certificate of Deposit attracts stamp duty.
20. Repo is used for lending and borrowing money market funds.
21. Repo refers to sale of securities with a commitment to repurchase the same securities at
a later date.
22. Presently only Govt. securities are being dealt with under Repo transaction.
23. Repo is used extensively by RBI as an instrument to control liquidity in the inter
bank market.
24. Infusion of liquidity is effected through lending to banks under Repo transactions.
25. Absorption of liquidity is done by accepting deposits from banks known as Reverse Repo.
26. Banks may submit their bids to RBI either for Repo or for Reverse Repo.
27. The Repo would set upper rate of interest and Reverse Repo would set floor for the
money market.
28. Investment business is composed of buying and selling products available in

securities market.
29. To satisfy SLR banks can also invest in priority sector bonds of SDBI & NABARD.

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13. State Government also issue State Development Bonds through RBI.
14. Corporate Debt papers includes medium and long term bonds & debentures issued
by corporates and Financial Institutions.
15. Debentures and bonds are debt instruments issued by corporate bodies with or without
security.
16. In India debentures are issued by corporates in private sector and bonds are issued
by institutions in Public Sector.
17. Debentures are governed by relevant company law and transferable only by registration.
But bonds are negotiable instruments governed by law of contracts.
18. If the bond holders are given an option to convert the debt into equity on a fixed date
or during a fixed period , these bonds are called Convertible bonds.
19. Banks are permitted to invest in equities subject to a ceiling presently 5% of its total assets.
20. Foreign Institutional Investors are now allowed to invest in debt market subject to an overall
ceiling currently USD 1.75 Billion.
21. Index Futures, Index Options, Stock futures and Stock Options etc. are the
Derivative products recently introduce.
22. The Derivative Products are highly popular for Risk Management as well as for speculation.
23. Banks are also permitted to borrow or invest in overseas markets with in a ceiling subject
to guidelines issued by RBI presently 25% of Tier – I capital or minimum USD 10 Million.
24. The treasury operates in exchange market, Money market and Securities market.
25. Foreign Exchange transaction includes Spot, Forward and Swap trades.
26. Money market is used for deployment of surplus funds and also to raise short term funds
to bridge gaps in the cash flow of bank.
27. Money market products include T-bills, Commercial paper, Certificate of Deposit and Repo.
28. Under EEFC exporters are allowed to hold a portion of the export proceeds in
current account with the bank.
29. GILTS are securities issued by Government which do not have any risk.
30. SGL accounts are maintained by Public Debt Office of RBI in electronic form.

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20. FCNR deposit is denominated in four major currencies maintained by NRIs.
FUNDING AND REGULATORY ASPECTS
4 Cheques and Credit Cards etc are near money and also add to money supply.
5 The money in circulation is indicated by Broad Money or M3.
6 The cash component is just 15% of money supply or M3.
22.The monetary policy of RBI is aimed at controlling the inflation and ensuring stability
of financial markets.
23.Liquidity refers to surplus funds available with banks.
24.An excess of liquidity leads to inflation while shortage of liquidity may result in high
interest rates and depreciation of rupee exchange rate.
25.CRR is to be calculated on the basis of DTL with a lag of one fortnight.
26.The interest on CRR is paid at the reverse repo rate of RBI ( presently 6.25% P.A.)
27.SLR is to be maintained in the form of Cash, Gold and approved securities.
28. Liquidity adjustment facility (LAF) is the principal operating instrument of RBI’s
monetary policy.
29. LAF is used to day to day liquidity in the market.
30. LAF refers to RBI lending funds to banking sector through Repo instrument.
31. RBI also accepts deposits from banks under Reverse Repo.
32. RBI purchases securities from banks with an agreement to sell back the securities after
a fixed period is called Repo.
33. The Repo rate is 7.25% on par with bank rate and Reverse Repo rate is 6.25%.
34. The objective of RBI policy is the money market rates should normally move with in
the corridor of Repo rates and Reverse Repo rates.
35. Banks can borrow and lend overnight upto maximum of 100% and 25% respectively of
their net worth.
36. The securities clearing against assured payment is handled by CCLI.

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F CCIL is a specialized institution promoted by major banks.
G RTGS has been fully activated by RBI from Oct – 2004.
H All inter bank payments and high value customer payments are settled instantly under
RTGS.
I Banks accounts with all the branch offices of RBI are also integrated under RTGS.
J The INFINET has helped introduction of SFMS.
K The SFMS facilitates domestic transfer of funds and authenticated messages similar to
SWIFT used by banks for international messaging.
L All security dealings are done through NDS and settled by CCIL.
B The organizational controls refer to the checks and balanced within system.
C In Treasury business front office is called Dealing Room.
D Exposure limits protect the bank from Credit Risk.
E The Counter party Risk is bankruptcy or inability of counter party to complete the
transaction at their end.
F The exposure limits are fixed on the basis of the counter party’s net worth, market reputation
and track record.
G RBI has imposed a ceiling of 5% of total business in a year with individual branches.
H Limits imposed are preventive measures to avoid or contain losses in adverse

market conditions.
I Trading limits are of three kinds, they are 1) Limits on deal size 2) Limits on open
positions and 3) Stop loss limits.
J Open position refers to the trading positions, where the buy / sell positions are not matched.
K All the forward contracts are revalued periodically ( Every month )
L The stop loss limits prevent the dealer from waiting indefinitely and limit the losses to
a level which is acceptable to the management.

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b The Stop loss limits are prescribed per deal, per day, per month as also an aggregate
loss limit per year.
c Two main components of market risk are Liquidity risk and Interest rate risk.
d Liquidity risk implies cash flow gaps which could not be bridged.
e Liquidity risk and Interest rate risk are like two sides of a coin.
f The Interest rate risk refers to rise in interest costs eroding the business profits or resulting in
fall in assets prices.
g The interest rate risk is present where ever there is mismatch in assets and liabilities.
h If the currency is convertible, the exchange rate and interest rate changes play greater role
in attracting foreign investment inflows into the secondary market.
i Marker Risk is a confluence of liquidity risk, interest rate risk, Exchange rate risk,
Equity risk and Commodity risk.
j BIS defines Market Risk as, “ The Risk that the value of on- or – off Balance Sheet
positions will be adversely affected by movements in equity and interest rate markets, Currency
exchange rates and Commodity prices”
k The Market Risk is closely connected with ALM.
l The Market Risk is also known as Price Risk.
m Two important measures of risk are Value at Risk and Duration method.
n Value at Risk (VAR) at 95% confidence level implies a 5% probability of incurring the loss.
o VAR is an estimate of potential loss always for a given period at a confidence level.
p There are three approaches to calculate the AVR i.e. Parametric Approach, Monte
Carlo Approach and Historical Data.
q VAR is derived from a statistical formulae based on volatility of the market.
r Parametric Approach is based on sensitivity of various Risk components.
s Under Monte Carlo model a number of scenarios are generated at random and their
impact on the subject is studied.
t Duration is widely used in investment business.

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6. The rate at which the present value equals the market price of a bond is known as YTM.
7. Yield & price of a bond moves in inverse proportion.
8. Duration is weighted average measure of life of a bond, where the time of receipt of a
cash flow is weighted by the present value of the cash flow.
9. Duration method is also known as Mecalay Duration, its originator is Frederic Mecalay.
10. Longer the duration, greater is the sensitivity of bond price to changes in interest rate.
11. A proportionate change in prices corresponding to the change in yields is possible,

only when the yield curve is linear.
12. Derivatives are used to protect treasury transactions from Market Risk.
13. Derivatives are also useful in managing Balance Sheet risk in ALM.
14. Treasury transactions are of high value & relatively need low capital.
15. Market movements are mainly due speculation.
16. VAR is the maximum loss that may take place with in a time horizon at a given
confidence level.
17. Leverage is Capital Adequacy Ratio incase of companies it is expressed as Debt / Equity
Ratio.
---------------------------------------------------------------------------
+ Treasury Risk is sensitive because 1) The Risk of loosing capital is much higher than the risk
in the credit business 2) Large size of transactions done at the discretion of treasurer 3) Losses in
treasury business materialize in very short term and the transactions once confirmed are
irrevocable.
+ The conventional control and supervisory measures of treasury can be divided in to three parts
1) Organizational controls 2) Exposure ceiling and 3) Limits on trading portions and stop
loss limits.
DERIVATIVE PRODUCTS

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+ Treasury uses derivatives to manage risk including ATL, to cater needs of corporate
customers and to trade.
+ The value of a Derivative is derived from on underlying market.
+ Derivatives always refer to future price.
+ The Derivatives that can be directly negotiated and obtained from banks and
investment institutions are known as over the counter (OTC) products.
+ Derivatives are of two types OTC products and Exchange traded products.
+ The value of trade in OTC products is much larger than that of Exchange traded products.
+ Derivative products can be broadly categorized into Options, Futures & Swaps.
+ Options refer to contracts where the buyer of an Option has a right but no obligation
to exercise the contract.
+ Put Option gives a right to the holder to buy an underlying product at a pre-fixed rate on a
specified date.
+ Call option gives a right to the holder to sell the underlying product at a pre-fixed rate on
a specified date or during a specified period.
+ The pre-fixed rate is known as Strike Rate.
+ Options are two types, an American type option can be executed at any time before
expiry date and European type option can be exercised only on expiry date. In India we use
only European type of Option.
+ A Dollar put Option gives right to the holder to sell Dollars.

+ If the strike price is same as the spot price, it is known as at the money.
+ The option is in the money (ITM), if the strike price is less than the forward rate in case of
a Call Option or strike price is more than the forward rate in case of a put option.
+ The Option is out of Money (OTM) if the strike price is more than the forward rate in
case of call option or if the strike price is less than forward rate in case of a put Option.
+ In the context of Options spot rate is the rate prevailing on the date of maturity.
+ The profit potential of buyer of an option is unlimited .
+ The option seller’s potential loss is unlimited.

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(b) Payment of differences between strike price & market price on expiry is known as
cash settlement.
(c) The buyer of an option pays premium to the seller for purchase of Option.
(d) The option premium is paid upfront.
(e) A USD put Option on TJY is right to sell USD against JPY at ‘X’ price.
(f) A stock option is the right to buy or sell equity of a company at the strike price.
(g) Options are used to hedge against price fluctuations.
(h) A convertible option may be the bond holder option of converting the debt into equity
on specified terms.
(i) A bond with call option gives right to the issuer to prepay the debt on specified date.
(j) Futures are forward contracts.
(k) Under Futures contract the seller agrees to deliver to the buyer specified security / Currency
or commodity on a specified date.
(l) Future Contracts are of standard size with prefixed settlement dates.
(m) A distinct feature of Futures is the contracts are marked to market daily and members
are required to pay margin equivalent to daily loss if any.
(n) In case of Futures the exchange guarantees all trades roughted through its members and in
case of default or insolvency of any member the exchange will meet the payment out of its
trade protection fund.
(o) Currency Futures serve the same purpose as Forward Contracts, conventionally issued
by banks in foreign exchange business.
(p) Futures are standardized and traded on exchanges but Forward Contracts are customized
OTC Contracts.
(q) The Futures can be bought only for fixed amounts and fixed periods.
(r) A Swap is an exchange of cash flow.
(s) An interest rate Swap is an exchange of interest flows on an underlying asset or liability.
(t) The cash flows representing the interest payments during the Swap period are exchanged.

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BW For USD the bench mark rates are generally LIBOR ( London Inter Bank Offer Rate)
BX MIBOR is announced daily at 9.50 A.M by NSE.
BY MIBOR is used as a base rate for short term and Medium Term lending.
BZ Interest rate Swap is shifting of interest rate calculation from fixed rate to floating or
floating rate to fixed rate or floating rate to floating rate.
CA A Floating to Floating rate Swap involves change of bench mark.
CB Quanto Swaps refer to paying interest in home currency at rate s applicable to

foreign currency.
CC Coupon Swaps refer to floating rate in one currency exchanged to fixed rate in
another currency.
CD In Indian Rupee market only plain vanilla type Swaps are permitted.
CE A Currency Swap is an exchange of cash flow in one currency with that of another currency.
CF The need for Currency Swap arises when loan raised in one currency is actually required
to be used in another currency.
CG The Interest rate Swaps (IRS) and Forward rate agreements (FRA) were first allowed
by RBI in 1998.
CH Banks and counter parties need to execute ISDA master agreement before entering into any
derivative contracts.
CI A right to buy is Call Option and a right to Sell is Put Option.
CJ Swaps are used to minimize cost of borrowings and also to benefit from arbitrage in
two currencies.
CK Currency and interest rate Swaps with basic structure without in built positions or knock-out
levels are plain vanills type Swaps.
TREASURY AND ASSET LIABILITY MANAGEMENT
3. The risks arise out of mismatch of Assets and Liabilities of the Bank.
4. ALM is defined as protection of net worth of the Bank.
5. Liquidity Risk translates into interest rate risk when the bank has to recycle the deposit
funds or role over a credit on market determined terms.

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4. Liquidity implies a positive cash flow.
5. The difference between sources and uses of funds in specific time band is known as
Liquidity Gap which may be positive or negative.
6. Interest rate risk is measured by the gap between interest rate sensitive asset and interest
rate sensitive liability in a given time band.
7. The Assets & Liabilities are rate sensitive when their value changes in reverse direction
corresponding to a change in market rate of interest.
8. The Gap management is only way of monitoring ALM.
9. The Duration and Simulation methods are used to make ALM more effective.
10. Derivatives are useful in reducing the Liquidity & Interest rate Risk.
11. Derivatives replicate market movements.
12. Derivatives can be used to hedge high value individual transactions.
13. The Derivative transaction is independent of the banking transaction.
14. Treasury products such as Bonds & Commercial papers are subject to credit risk.
15. Credit Risk in a loan & bond are similar, unlike a loan bond is tradable and hence it is more
liquid asset.
16. Now a days the conventional credit is converted into tradable treasury product through
Securitisation process by issue of PTC.
17. Securitisation infuses liquidity into the issuing bank & frees blocked capital.
18. Transfer pricing refers to fixing the cost of resources and return on Assets of the bank in
a rational manner.
19. In a multi branch transfer pricing is particularly useful to assess the branch profitability.
20. ALM policy prescribes composition of ALCO & operational assets of ALM.
21. Liquidity policy prescribes minimum liquidity to be maintained.
22. Modern banking may be defined as Risk Intermediation.
23. Market Risk comprises of Liquidity and interest rate risk.

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Banks are highly sensitive to liquidity risk as they can not afford to default or delay
in meeting their obligations to depositors and other lenders.
Liquidity & interest rate sensitivity gap are measured in specified time bands.
Treasury connects core banking activity with financial markets.
Derivatives and Options are used in managing the mismatches in bank’s Balance Sheet.
Treasury is also responsible for transfer pricing.
A situation where depositors of a bank lose confidence in the bank and withdraws
their balances immediately is known as Run on the Bank.
Securities that can be readily sold for cash in secondary markets are Liquefiable securities.
Ratio of interest rate sensitive assets to rate sensitive liabilities is Sensitive Ratio.
Capacity and willingness to absorb losses on account of market risk is Risk Appetite.

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Government Securities Market A Primer Q& A from RBI
released document
Contents
Sl. No Question Page No.

1 What is a bond; What is Government security? 5
2 Why should one invest in G-Secs? 11
3 How are the G-Secs issued? 13
4 What are the different types of auctions used for issue of 15
securities?
5 What are Open Market Operations (OMOs)? 19
6 What is Liquidity Adjustment Facility (LAF) and whether Re-repo in 19
Government Securities Market allowed?
7 How and in what form can G-Secs be held? 20
8 How does the trading in G-Secs take place? 21
9 Who are the major players in the G-Secs market? 23
10 What are the Do’s and Don’ts prescribed by RBI for the Co- 23
operative banks dealing in G-Secs?
11 How are the dealing transactions recorded by the dealing desk? 25
12 What are the important considerations while undertaking security 26
transactions?
13 Why does the price of G-Sec change? 27
14 How does one get information about the price of a G-Sec? 28
15 How are the G-Secs transactions reported? 29
16 How do the G-Secs transactions settle? 29
17 What is shut period? 30
18 What is Delivery versus Payment (DvP) settlement? 30
19 What is the role of the Clearing Corporation of India Limited 31
(CCIL)?
20 What is the ‘When Issued’ market and “Short Sale”? 31
21 What are the basic mathematical concepts one should know for 32
calculations involved in bond prices and yields?
22 How is the Price of a bond calculated? What is the total 34
consideration amount of a trade and what is accrued interest?
23 What is the relationship between yield and price of a bond? 35
24 How is the yield of a bond calculated? 35
25 What are the day count conventions used in calculating bond 37
yields?
26 How is the yield of a Treasury Bill calculated? 38
27 What is Duration? 38
28 What are the important guidelines for valuation of securities? 41
29 What are the risks involved in holding G-Secs? What are the 44
techniques for mitigating such risks?
30 What is money market? 45
31 What is the role of FIMMDA & FBIL? 48

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Government Securities Market in India – A
Primer Background
90. What is a Bond?
1.1 A bond is a debt instrument in which an investor loans money to an entity (typically
corporate or government) which borrows the funds for a defined period of time at a
variable or fixed interest rate. Bonds are used by companies, municipalities, states and
sovereign governments to raise money to finance a variety of projects and activities.
Owners of bonds are debt holders, or creditors, of the issuer.
What is a Government Security (G-Sec)?

1.2 A Government Security (G-Sec) is a tradeable instrument issued by the Central
Government or the State Governments. It acknowledges the Government’s debt obligation.
Such securities are short term (usually called treasury bills, with original maturities of less
than one year) or long term (usually called Government bonds or dated securities with
original maturity of one year or more). In India, the Central Government issues both,
treasury bills and bonds or dated securities while the State Governments issue only bonds
or dated securities, which are called the State Development Loans (SDLs). G-Secs carry
practically no risk of default and, hence, are called risk-free gilt-edged instruments.
(e) Treasury Bills (T-bills)

1.3 Treasury bills or T-bills, which are money market instruments, are short term debt
instruments issued by the Government of India and are presently issued in three tenors,
namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon securities and pay
no interest. Instead, they are issued at a discount and redeemed at the face value at
maturity. For example, a 91 day Treasury bill of `100/- (face value) may be issued at say `
98.20, that is, at a discount of say, `1.80 and would be redeemed at the face value of
`100/-. The return to the investors is the difference between the maturity value or the face
value (that is `100) and the issue price (for calculation of yield on Treasury Bills please see
answer to question no. 26).
b. Cash Management Bills (CMBs)
1.4 In 2010, Government of India, in consultation with RBI introduced a new short-term
instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches
in the cash flow of the Government of India. The CMBs have the generic character of T-
bills but are issued for maturities less than 91 days.
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c. Dated G-Secs
1.5 Dated G-Secs are securities which carry a fixed or floating coupon (interest rate) which
is paid on the face value, on half-yearly basis. Generally, the tenor of dated securities
ranges from 5 years to 40 years.
The Public Debt Office (PDO) of the Reserve Bank of India acts as the
registry / depository of G-Secs and deals with the issue, interest payment
and repayment of principal at maturity. Most of the dated securities are fixed
coupon securities.
The nomenclature of a typical dated fixed coupon G-Sec contains the following features -
coupon, name of the issuer, maturity year. For example, - 7.17% GS 2028 would mean:
Coupon : 7.17% paid on face value
Name of Issuer : Government of India
Date of Issue : January 8, 2018
Maturity : January 8, 2028
Coupon Payment Dates : Half-yearly (July 08 and January 08) every year
Minimum Amount of issue/ sale : `10,000
In case, there are two securities with the same coupon and are maturing in the same year,
then one of the securities will have the month attached as suffix in the nomenclature. eg.
6.05% GS 2019 FEB, would mean that G-Sec having coupon 6.05% that mature in
February 2019 along with the other similar security having the same coupon. In this case,
there is another paper viz. 6.05%GS2019 which bears same coupon rate and is also
maturing in 2019 but in the month of June. Each security is assigned a unique number
called ISIN (International Security Identification Number) at the time of issuance itself to
avoid any misunderstanding among the traders.
If the coupon payment date falls on a Sunday or any other holiday, the coupon payment is
made on the next working day. However, if the maturity date falls on a Sunday or a holiday,
the redemption proceeds are paid on the previous working day.
1.6 Instruments:
(v) Fixed Rate Bonds – These are bonds on which the coupon rate is fixed for the
entire life (i.e. till maturity) of the bond. Most Government bonds in India are
issued as fixed rate bonds.
For example – 8.24%GS2018 was issued on April 22, 2008 for a tenor of 10
years maturing on April 22, 2018. Coupon on this security will be paid half-

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yearly at 4.12% (half yearly payment being half of the annual coupon of 8.24%)
of the face value on October 22 and April 22 of each year.
(vii) Floating Rate Bonds (FRB) – FRBs are securities which do not have a fixed
coupon rate. Instead it has a variable coupon rate which is re-set at pre-
announced intervals (say, every six months or one year). FRBs were first
issued in September 1995 in India. For example, a FRB was issued on
November 07, 2016 for a tenor of 8 years, thus maturing on November 07,
2024. The variable coupon rate for payment of interest on this FRB 2024 was
decided to be the average rate rounded off up to two decimal places, of the
implicit yields at the cut-off prices of the last three auctions of 182 day T- Bills,
held before the date of notification. The coupon rate for payment of interest on
subsequent semi-annual periods was announced to be the average rate
(rounded off up to two decimal places) of the implicit yields at the cut-off prices
of the last three auctions of 182 day T-Bills held up to the commencement of
the respective semi-annual coupon periods.
(viii) The Floating Rate Bond can also carry the coupon, which will have a base rate
plus a fixed spread, to be decided by way of auction mechanism. The spread
will be fixed throughout the tenure of the bond. For example, FRB 2031
(auctioned on May 4, 2018) carry the coupon with base rate equivalent to
Weighted Average Yield (WAY) of last 3 auctions (from the rate fixing day) of
182 Day T-Bills plus a fixed spread decided by way of auction. Zero Coupon
Bonds – Zero coupon bonds are bonds with no coupon payments. However,
like T- Bills, they are issued at a discount and redeemed at face value. The
Government of India had issued such securities in 1996. It has not issued zero
coupon bonds after that.
(ix) Capital Indexed Bonds – These are bonds, the principal of which is linked to an
accepted index of inflation with a view to protecting the Principal amount of the
investors from inflation. A 5 year Capital Indexed Bond, was first issued in
December 1997 which matured in 2002.
(x) Inflation Indexed Bonds (IIBs) - IIBs are bonds wherein both coupon flows and
Principal amounts are protected against inflation. The inflation index used in
IIBs may be Whole Sale Price Index (WPI) or Consumer Price Index (CPI).
Globally, IIBs were first issued in 1981 in UK. In India, Government of India
through RBI issued IIBs (linked to WPI) in June 2013. Since then, they were
issued on monthly basis (on last Tuesday of each month) till December 2013.
Based on the success of these IIBs, Government of India in consultation with
RBI issued the IIBs (CPI based) exclusively for the retail customers in

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December 2013. Further details on IIBs are available on RBI website under
FAQs.
(f) Bonds with Call/ Put Options – Bonds can also be issued with features of
optionality wherein the issuer can have the option to buy-back (call option) or
the investor can have the option to sell the bond (put option) to the issuer
during the currency of the bond. It may be noted that such bond may have put
only or call only or both options. The first G-Sec with both call and put option
viz. 6.72% GS 2012 was issued on July 18, 2002 for a maturity of 10 years
maturing on July 18, 2012. The optionality on the bond could be exercised after
completion of five years tenure from the date of issuance on any coupon date
falling thereafter. The Government has the right to buy-back the bond (call
option) at par value (equal to the face value) while the investor has the right to
sell the bond (put option) to the Government at par value on any of the half-
yearly coupon dates starting from July 18, 2007.
(g) Special Securities - Under the market borrowing program, the Government of
India also issues, from time to time, special securities to entities like Oil
Marketing Companies, Fertilizer Companies, the Food Corporation of India, etc.
(popularly called oil bonds, fertiliser bonds and food bonds respectively) as
compensation to these companies in lieu of cash subsidies These securities
are usually long dated securities and carry a marginally higher coupon over the
yield of the dated securities of comparable maturity. These securities are,
however, not eligible as SLR securities but are eligible as collateral for market
repo transactions. The beneficiary entities may divest these securities in the
secondary market to banks, insurance companies / Primary Dealers, etc., for
raising funds.
Government of India has also issued Bank Recapitalisation Bonds to specific
Public Sector Banks in 2018. These securities are named as Special GoI
security and are non-transferable and are not eligible investment in pursuance
of any statutory provisions or directions applicable to investing banks. These
securities can be held under HTM portfolio without any limit.
(h) STRIPS – Separate Trading of Registered Interest and Principal of Securities. -
STRIPS are the securities created by way of separating the cash flows
associated with a regular G-Sec i.e. each semi-annual coupon payment and
the final principal payment to be received from the issuer, into separate
securities. They are essentially Zero Coupon Bonds (ZCBs). However, they are
created out of existing securities only and unlike other securities, are not issued
through auctions. Stripped securities represent future cash flows (periodic

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interest and principal repayment) of an underlying coupon bearing bond. Being
G-Secs, STRIPS are eligible for SLR. All fixed coupon securities issued by
Government of India, irrespective of the year of maturity, are eligible for
Stripping/Reconstitution, provided that the securities are reckoned as eligible
investment for the purpose of Statutory Liquidity Ratio (SLR) and the securities
are transferable. The detailed guidelines of stripping/reconstitution of
government securities is available in RBI notification
IDMD.GBD.2783/08.08.016/2018-19 dated May 3, 2018. For example, when
`100 of the 8.60% GS 2028 is stripped, each cash flow of coupon (` 4.30 each half
year) will become a coupon STRIP and the principal payment (`100 at maturity) will
become a principal STRIP. These cash flows are traded separately as independent
securities in the secondary market. STRIPS in G-Secs ensure availability of
sovereign zero coupon bonds, which facilitate the development of a market
determined zero coupon yield curve (ZCYC). STRIPS also provide institutional
investors with an additional instrument for their asset liability management (ALM).
Further, as STRIPS have zero reinvestment risk, being zero coupon bonds, they
can be attractive to retail/non-institutional investors. Market participants, having an
SGL account with RBI can place requests directly in e-kuber for
stripping/reconstitution of eligible securities (not special securities). Requests for
stripping/reconstitution by Gilt Account Holders (GAH) shall be placed with the
respective Custodian maintaining the CSGL account, who in turn, will place the
requests on behalf of its constituents in e-kuber.
(iv) Sovereign Gold Bond (SGB): SGBs are unique instruments, prices of which are
linked to commodity price viz Gold. SGBs are also budgeted in lieu of market
borrowing. The Bonds shall be denominated in units of one gram of gold and
multiples thereof. Minimum investment in the Bonds shall be one gram with a
maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided
Family (HUF) and 20 kg for trusts and similar entities notified by the
Government from time to time per fiscal year (April – March), provided that (a)
annual ceiling will include bonds subscribed under different tranches during
initial issuance by Government and those purchased from the secondary
market; and (b) the ceiling on investment will not include the holdings as
collateral by banks and other Financial Institutions.. The tenor of the SGB is for
a period of 8 years with exit option from 5th year to be exercised on the interest
payment dates. The bonds under SGB Scheme may be held by a person
resident in India, being an individual, in his capacity as an individual, or on

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behalf of minor child, or jointly with any other individual. The bonds may also be
held by a Trust, Charitable Institution and University. Price of the bonds shall
be fixed in Indian Rupees on the basis of simple average of closing price of
gold of 999 purity published by the India Bullion and Jewelers Association
Limited for the last three business days of the week preceding the subscription
period. The issue price of the Gold Bonds will be Rs 50 per gram less than the
nominal value to those investors applying online and the payment against the
application is made through digital mode. The Bonds shall bear interest at the
rate of 2.50 percent (fixed rate) per annum on the amount of initial investment.
Interest shall be paid in half-yearly rests and the last interest shall be payable
on maturity along with the principal. The redemption price shall be fixed in
Indian Rupees and the redemption price shall be based on simple average of
closing price of gold of 999 purity of previous 3 business days from the date of
repayment, published by the India Bullion and Jewelers Association Limited.
SGBs acquired by the banks through the process of invoking
lien/hypothecation/pledge alone shall be counted towards Statutory Liquidity
Ratio. The above subscription limits, interest rate discount etc. are as per the
current scheme and are liable to change going forward.
7.75% Savings (Taxable) Bonds, 2018: Government of India has decided to
issue 7.75% Savings (Taxable) Bonds, 2018 with effect from January 10, 2018
in terms of GoI notification F.No.4(28) - W&M/2017 dated January 03, 2018
and RBI issued notification vide IDMD.CDD.No.1671/13.01.299/2017-18 dated
January 3, 2018. These bonds may be held by (i) an individual, not being a
Non-Resident Indian-in his or her individual capacity, or in individual capacity
on joint basis, or in individual capacity on any one or survivor basis, or on
behalf of a minor as father/mother/legal guardian and (ii) a Hindu Undivided
Family. There is no maximum limit for investment in these bonds. Interest on
these Bonds will be taxable under the Income Tax Act, 1961 as applicable
according to the relevant tax status of the Bond holders. These Bonds will be
exempt from wealth-tax under the Wealth Tax Act, 1957. These Bonds will be
issued at par for a minimum amount of Rs 1,000 (face value) and in multiples
thereof.
(f) State Development Loans (SDLs)

1.7 State Governments also raise loans from the market which are called SDLs. SDLs are
dated securities issued through normal auction similar to the auctions conducted for dated
securities issued by the Central Government (please see question 3). Interest is serviced
at half-yearly intervals and the principal is repaid on the maturity date. Like dated

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securities issued by the Central Government, SDLs issued by the State Governments also
qualify for SLR. They are also eligible as collaterals for borrowing through market repo as
well as borrowing by eligible entities from the RBI under the Liquidity Adjustment Facility
(LAF) and special repo conducted under market repo by CCIL. State Governments have
also issued special securities under “Ujjwal Discom Assurance Yojna (UDAY) Scheme for
Operational and Financial Turnaround of Power Distribution Companies (DISCOMs)”
notified by Ministry of Power vide Office Memorandum (No 06/02/2015-NEF/FRP) dated
November 20, 2015.
2. Why should one invest in G-Secs?

2.1 Holding of cash in excess of the day-to-day needs (idle funds) does not give any return.
Investment in gold has attendant problems in regard to appraising its purity, valuation,
warehousing and safe custody, etc. In comparison, investing in G-Secs has the following
advantages:
(j) Besides providing a return in the form of coupons (interest), G-Secs offer the
maximum safety as they carry the Sovereign’s commitment for payment of interest and
repayment of principal.
(k) They can be held in book entry, i.e., dematerialized/ scripless form, thus, obviating the
need for safekeeping. They can also be held in physical form.
(l) G-Secs are available in a wide range of maturities from 91 days to as long as 40 years
to suit the duration of varied liability structure of various institutions.
(m) G-Secs can be sold easily in the secondary market to meet cash requirements.
(n) G-Secs can also be used as collateral to borrow funds in the repo market.
(o) Securities such as State Development Loans (SDLs) and Special Securities (Oil bonds,
UDAY bonds etc) provide attractive yields.
(p) The settlement system for trading in G-Secs, which is based on Delivery versus
Payment (DvP), is a very simple, safe and efficient system of settlement. The DvP
mechanism ensures transfer of securities by the seller of securities simultaneously
with transfer of funds from the buyer of the securities, thereby mitigating the settlement
risk.
(q) G-Sec prices are readily available due to a liquid and active secondary market and a
transparent price dissemination mechanism.
(r) Besides banks, insurance companies and other large investors, smaller investors like
Co-operative banks, Regional Rural Banks, Provident Funds are also required to
statutory hold G-Secs as indicated below:

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A. Primary (Urban) Co-operative Banks (UCBs)
2.2 Section 24 (2A) of the Banking Regulation Act 1949, (as applicable to co-operative
societies) provides that every primary (urban) cooperative bank shall maintain liquid
assets, the value of which shall not be less than such percentage as may be specified by
Reserve Bank in the Official Gazette from time to time and not exceeding 40% of its DTL
in India as on the last Friday of the second preceding fortnight (in addition to the minimum
cash reserve ratio (CRR) requirement). Such liquid assets shall be in the form of cash,
gold or unencumbered investment in approved securities. This is referred to as the
Statutory Liquidity Ratio (SLR) requirement. It may be noted that balances kept with State
Co-operative Banks / District Central Co-operative Banks as also term deposits with public
sector banks are now not eligible for being reckoned for SLR purpose w.e.f April 1, 2015.
B. Rural Co-operative Banks

2.3 As per Section 24 of the Banking Regulation Act 1949, the State Co-operative Banks
(SCBs) and the District Central Co-operative Banks (DCCBs) are required to maintain
assets as part of the SLR requirement in cash, gold or unencumbered investment in
approved securities the value of which shall not, at the close of business on any day, be
less than such per cent, as prescribed by RBI, of its total net demand and time liabilities .
DCCBs are allowed to meet their SLR requirement by maintaining cash balances with
their respective State Co-operative Bank.
C. Regional Rural Banks (RRBs)

2.4 Since April 2002, all the RRBs are required to maintain their entire Statutory Liquidity
Ratio (SLR) holdings in Government and other approved securities.
D. Provident funds and other entities

2.5 The non- Government provident funds, superannuation funds and gratuity funds are
required by the Central Government, effective from January 24, 2005, to invest 40% of
their incremental accretions in Central and State G-Secs, and/or units of gilt funds
regulated by the Securities and Exchange Board of India (SEBI) and any other negotiable
security fully and unconditionally guaranteed by the Central/State Governments. The
exposure of a trust to any individual gilt fund, however, should not exceed five per cent of
its total portfolio at any point of time. The investment guidelines for non- Government PFs
have been recently revised in terms of which minimum 45% and up to 50% of investments
are permitted in a basket of instruments consisting of (a) G-Secs, (b) Other securities (not
in excess of 10% of total portfolio) the principal whereof and interest whereon is fully and
unconditionally guaranteed by the Central Government or any State Government SDLs
and (c) units of mutual funds set up as dedicated funds for investment in G-Secs (not

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more than 5% of the total portfolio at any point of time and fresh investments made in
them shall not exceed 5% of the fresh accretions in the year), effective from April 2015.
3. How are the G-Secs issued?

3.1 G-Secs are issued through auctions conducted by RBI. Auctions are conducted on the
electronic platform called the E-Kuber, the Core Banking Solution (CBS) platform of RBI.
Commercial banks, scheduled UCBs, Primary Dealers (a list of Primary Dealers with their
contact details is given in Annex 2), insurance companies and provident funds, who
maintain funds account (current account) and securities accounts (Subsidiary General
Ledger (SGL) account) with RBI, are members of this electronic platform. All members of
E-Kuber can place their bids in the auction through this electronic platform. The results of
the auction are published by RBI at stipulated time (For Treasury bills at 1:30 PM and for
GoI dated securities at 2:00 PM or at half hourly intervals thereafter in case of delay). All
non-E-Kuber members including non-scheduled UCBs can participate in the primary
auction through scheduled commercial banks or PDs (called as Primary Members-PMs).
For this purpose, the UCBs need to open a securities account with a bank / PD – such an
account is called a Gilt Account. A Gilt Account is a dematerialized account maintained
with a scheduled commercial bank or PD. The proprietary transactions in G-Secs
undertaken by PMs are settled through SGL account maintained by them with RBI at PDO.
The transactions in G-Secs undertaken by Gilt Account Holders (GAHs) through their PMs
are settled through Constituent Subsidiary General Ledger (CSGL) account maintained by
PMs with RBI at PDO for its constituent (e.g., a non-scheduled UCB).
3.2 The RBI, in consultation with the Government of India, issues an indicative half-yearly
auction calendar which contains information about the amount of borrowing, the range of
the tenor of securities and the period during which auctions will be held. A Notification and
a Press Communique giving exact particulars of the securities, viz., name, amount, type of
issue and procedure of auction are issued by the Government of India about a week prior
to the actual date of auction. RBI places the notification and a Press Release on its
website (www.rbi.org.in) and also issues advertisements in leading English and Hindi
newspapers. Auction for dated securities is conducted on Friday for settlement on T+1
basis (i.e. securities are issued on next working day i.e. Monday). The investors are thus
given adequate time to plan for the purchase of G-Secs through such auctions. A
specimen of a dated security in physical form is given at Annex 1. The details of all the
outstanding dated securities issued by the Government of India are available on the RBI
website at http://www.rbi.org.in/Scripts/financialmarketswatch.aspx. A sample of the
auction calendar and the auction notification are given in Annex 3 and 4 respectively.

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3.3 The Reserve Bank of India conducts auctions usually every Wednesday to issue T-
bills of 91day, 182 day and 364 day tenors. Settlement for the T-bills auctioned is made on
T+1 day i.e. on the working day following the trade day. The Reserve Bank releases a
quarterly calendar of T-bill issuances for the upcoming quarter in the last week of the
preceding quarter. e.g. calendar for April-June period is notified in the last week of March.
The Reserve Bank of India announces the issue details of T-bills through a press release
on its website every week.
3.4 Like T-bills, Cash Management Bills (CMBs) are also issued at a discount and
redeemed at face value on maturity. The tenor, notified amount and date of issue of the
CMBs depend upon the temporary cash requirement of the Government. The tenors of
CMBs is generally less than 91 days. The announcement of their auction is made by
Reserve Bank of India through a Press Release on its website. The non-competitive
bidding scheme (referred to in paragraph number 4.3 and 4.4 under question No. 4) has
not been extended to CMBs. However, these instruments are tradable and qualify for
ready forward facility. Investment in CMBs is also reckoned as an eligible investment in G-
Secs by banks for SLR purpose under Section 24 of the Banking Regulation Act, 1949.
First set of CMB was issued on May 12, 2010.
3.5 Floatation of State Government Loans (State Development Loans)
In terms of Sec. 21A (1) (b) of the Reserve Bank of India Act, 1934, the RBI may, by
agreement with any State Government undertake the management of the public debt of
that State. Accordingly, the RBI has entered into agreements with 29 State Governments
and one Union Territory (UT of Puducherry) for management of their public debt. Under
Article 293(3) of the Constitution of India (Under section 48A of Union territories Act, in
case of Union Territory), a State Government has to obtain the permission of the Central
Government for any borrowing as long as there is any outstanding loan that the State
Government may have from the Centre.
Market borrowings are raised by the RBI on behalf of the State Governments to the extent
of the allocations under the Market Borrowing Program as approved by the Ministry of
Finance in consultation with the Planning Commission.

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RBI, in consultation with State Governments announces, the indicative quantum of
borrowing on a quarterly basis. All State Governments have issued General notifications
which specify the terms and conditions for issue of SDL. Before every auction, respective
state governments issue specific notifications indicating details of the securities being
issued in the particular auction. RBI places a press release on its website and also issues
advertisements in leading English and vernacular newspapers of the respective states.
Currently, SDL auctions are held generally on Tuesdays every week. As in case of Central
Government securities, auction is held on the E-Kuber Platform. 10% of the notified
amount is reserved for the retail investors under the non-competitive bidding.
4. What are the different types of auctions used for issue of securities?
Prior to introduction of auctions as the method of issuance, the interest rates were
administratively fixed by the Government. With the introduction of auctions, the rate of
interest (coupon rate) gets fixed through a market based price discovery process.
4.1 An auction may either be yield based or price based.
(q) Yield Based Auction: A yield based auction is generally conducted when a new
G-Sec is issued. Investors bid in yield terms up to two decimal places (e.g., 8.19%,
8.20%, etc.). Bids are arranged in ascending order and the cut-off yield is arrived
at the yield corresponding to the notified amount of the auction. The cut-off yield is
then fixed as the coupon rate for the security. Successful bidders are those who
have bid at or below the cut-off yield. Bids which are higher than the cut-off yield
are rejected. An illustrative example of the yield based auction is given below:
Yield based auction of a new security

(d) Maturity Date: January 11, 2026
(e) Coupon: It is determined in the auction (8.22% as shown in
the illustration below)
(f) Auction date: January 08, 2016
(g) Auction settlement date/Issue date: January 11, 2016*
(h) Notified Amount: `1000 crore
(d) January 9 and 10 being holidays (Saturday and Sunday),
settlement is done on January 11, 2016 (T+1 settlement).

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Details of bids received in the increasing order of bid yields
Bid Amount of bid Cumulative Price* with
Bid No. Yield (`Cr) amount (`Cr) coupon as 8.22%
1 8.19% 300 300 100.19
2 8.20% 200 500 100.14
3 8.20% 250 750 100.13
4 8.21% 150 900 100.09
5 8.22% 100 1000 100
6 8.22% 100 1100 100
7 8.23% 150 1250 99.93
8 8.24% 100 1350 99.87
The issuer would get the notified amount by accepting bids up to bid at sl. no. 5.
Since the bid number 6 also is at the same yield, bid numbers 5 and 6 would get
allotment on pro-rata basis so that the notified amount is not exceeded. In the
above case each of bidder at sl. no. 5 and 6 would get ` 50 crore. Bid numbers 7
and 8 are rejected as the yields are higher than the cut-off yield.
*Price corresponding to the yield is determined as per the relationship given
under YTM calculation in question 24.
(c) Price Based Auction: A price based auction is conducted when Government of
India re-issues securities which have already been issued earlier. Bidders quote in
terms of price per `100 of face value of the security (e.g., `102.00, `101.00, `100.00,
` 99.00, etc., per `100/-). Bids are arranged in descending order of price offered and
the successful bidders are those who have bid at or above the cut-off price. Bids which
are below the cut-off price are rejected. An illustrative example of price based auction
is given below:
Price based auction of an existing security 8.22% GS 2026

Maturity Date: January 11, 2026
Coupon: 8.22%
Auction date: January 08, 2016
Auction settlement date: January 11, 2016*
Notified Amount: `1000 crore
(iv) January 9 and 10being holidays (Saturday and Sunday), settlement is done
on January 11, 2016 under T+1 cycle.

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Details of bids received in the decreasing order of bid price
Amount of bid Implicit Cumulative amount
Bid no. Price of bid (` Cr) yield (`Cr)
1 100.19 300 8.19% 300
2 100.14 200 8.20% 500
3 100.13 250 8.20% 750
4 100.09 150 8.21% 900
5 100 100 8.22% 1000
6 100 100 8.22% 1100
7 99.93 150 8.23% 1250
8 99.87 100 8.24% 1350
The issuer would get the notified amount by accepting bids up to 5. Since the bid
number 6 also is at the same price, bid numbers 5 and 6 would get allotment in
proportion so that the notified amount is not exceeded. In the above case each of
bidders at sl. no. 5 and 6 would get securities worth ` 50 crore. Bid numbers 7 and 8 are
rejected as the price quoted is less than the cut-off price.
4.2 Depending upon the method of allocation to successful bidders, auction may be
conducted on Uniform Price basis or Multiple Price basis. In a Uniform Price auction, all
the successful bidders are required to pay for the allotted quantity of securities at the
same rate, i.e., at the auction cut-off rate, irrespective of the rate quoted by them. On the
other hand, in a Multiple Price auction, the successful bidders are required to pay for the
allotted quantity of securities at the respective price / yield at which they have bid. In the
example under (ii) above, if the auction was Uniform Price based, all bidders would get
allotment at the cut-off price, i.e., `100.20. On the other hand, if the auction was Multiple
Price based, each bidder would get the allotment at the price he/ she has bid, i.e., bidder 1
at `100.31, bidder 2 at `100.26 and so on.
4.3 An investor, depending upon his eligibility, may bid in an auction under either of the
following categories:
Competitive Bidding: In a competitive bidding, an investor bids at a specific price / yield

and is allotted securities if the price / yield quoted is within the cut-off price / yield.
Competitive bids are made by well-informed institutional investors such as banks, financial
institutions, PDs, mutual funds, and insurance companies. The minimum bid amount is
`10,000 and in multiples of `10,000 in dated securities and minimum ` 10,000 in case of T-Bills
and in multiples of ` 10,000 thereafter. Multiple bidding is also allowed, i.e., an investor may
put in multiple bids at various prices/ yield levels.

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Non-Competitive Bidding (NCB):
With a view to encouraging wider participation and retail holding of Government securities,
retail investors are allowed participation on “non-competitive” basis in select auctions of
dated Government of India (GoI) securities and Treasury Bills. Participation on a non-
competitive basis in the auctions will be open to a retail investor who (a) does not maintain
current account (CA) or Subsidiary General Ledger (SGL) account with the Reserve Bank
of India; and (b) submits the bid indirectly through an Aggregator/Facilitator permitted
under the scheme. Retail investor, for the purpose of scheme of NCB, is any person,
including individuals, firms, companies, corporate bodies, institutions, provident funds,
trusts, and any other entity as may be prescribed by RBI. Regional Rural Banks (RRBs)
and Cooperative Banks shall be covered under this Scheme only in the auctions of dated
securities in view of their statutory obligations and shall be eligible to submit their non-
competitive bids directly. State Governments, eligible provident funds in India, the Nepal
Rashtra Bank, Royal Monetary Authority of Bhutan and any Person or Institution, specified
by the Bank, with the approval of Government, shall be covered under this scheme only in
the auctions of Treasury Bills without any restriction on the maximum amount of bid for
these entities and their bids will be outside the notified amount. Under the Scheme, an
investor can make only a single bid in an auction.
Allocation of non-competitive bids from retail investors except as specified above will be
restricted to a maximum of five percent of the aggregate nominal amount of the issue
within the notified amount as specified by the Government of India, or any other
percentage determined by Reserve Bank of India. The minimum amount for bidding will be
Rs. 10,000 (face value) and thereafter in multiples in Rs.10,000 as hitherto. In the auctions
of GoI dated securities, the retail investors can make a single bid for an amount not more
than Rupees Two crore (face value) per security per auction.
In addition to scheduled banks and primary dealers, specified stock exchanges are also
permitted to act as aggregators/facilitators. These stock exchanges submit a single
consolidated non-competitive bid in the auction process and will have to put in place
necessary processes to transfer the securities so allotted in the primary auction to their
members/clients.
Allotment under the non-competitive segment will be at the weighted average rate of
yield/price that will emerge in the auction on the basis of the competitive bidding. The
Aggregator/Facilitator can recover up to six paise per Rs.100 as
brokerage/commission/service charges for rendering this service to their clients. Such
costs may be built into the sale price or recovered separately from the clients. It may be
noted that no other costs, such as funding costs, should be built into the price or
recovered from the client. In case the aggregate amount of bid is more than the reserved

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amount (5% of notified amount), pro rata allotment would be made. In case of partial
allotments, it will be the responsibility of the Aggregator/Facilitator to appropriately allocate
securities to their clients in a transparent manner. In case the aggregate amount of bids is
less than the reserved amount, the shortfall will be taken to competitive portion.
The updated Scheme for Non-Competitive Bidding Facility in the auctions of Government
Securities and Treasury Bills is issued by RBI vide IDMD.1080/08.01.001/2017-18 dated
November 23, 2017.
4.4 NCB scheme has been introduced in SDLs from August 2009. The aggregate amount
reserved for the purpose in the case of SDLs is 10% of the notified amount (eg. `100
Crore for a notified amount of `1000 Crore) subject to a maximum limit of 1% of notified
amount for a single bid per stock. The bidding and allotment procedure is similar to that of
G-Secs.
5. What are Open Market Operations (OMOs)?
OMOs are the market operations conducted by the RBI by way of sale/ purchase of G-
Secs to/ from the market with an objective to adjust the rupee liquidity conditions in the
market on a durable basis. When the RBI feels that there is excess liquidity in the market,
it resorts to sale of securities thereby sucking out the rupee liquidity. Similarly, when the
liquidity conditions are tight, RBI may buy securities from the market, thereby releasing
liquidity into the market.
5 (b) What is meant by repurchase (buyback) of G-Secs?

Repurchase (buyback) of G-Secs is a process whereby the Government of India and State
Governments buy back their existing securities, by redeeming them prematurely, from the
holders. The objectives of buyback can be reduction of cost (by buying back high coupon
securities), reduction in the number of outstanding securities and improving liquidity in the
G-Secs market (by buying back illiquid securities) and infusion of liquidity in the system.
The repurchase by the Government of India is also undertaken for effective cash
management by utilising the surplus cash balances. For e.g. Repurchase of four securities
(7.49GS2017 worth Rs 1385cr, 8.07GS2017 worth Rs 150cr, 7.99GS2017 worth Rs
1401.417 cr and 7.46GS2017 worth Rs 125cr) was done through reverse auction on
March 17, 2017. State Governments can also buy-back their high coupon (high cost debt)
bearing securities to reduce their interest outflows in the times when interest rates show a
falling trend. States can also retire their high cost debt pre-maturely in order to fulfill some
of the conditions put by international lenders like Asian Development Bank, World Bank
etc. to grant them low cost loans. For e.g. Repurchase of seven securities of Government
of Maharashtra was done through reverse auction on March 29, 2017. Governments make
provisions in their budget for buying back of existing securities. Buyback can be

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done through an auction process (generally if amount is large) or through the secondary
market route, i.e. NDS-OM (if amount is not large).
(iii) What is Liquidity Adjustment Facility (LAF) and whether Re-repo in

Government Securities Market is allowed?
LAF is a facility extended by RBI to the scheduled commercial banks (excluding RRBs)
and PDs to avail of liquidity in case of requirement or park excess funds with RBI in case
of excess liquidity on an overnight basis against the collateral of G-Secs including SDLs.
Basically, LAF enables liquidity management on a day to day basis. The operations of LAF
are conducted by way of repurchase agreements (repos and reverse repos – please refer
to paragraph numbers 30.4 to 30.8 under question no. 30 for more details) with RBI being
the counter-party to all the transactions. The interest rate in LAF is fixed by RBI from time
to time. LAF is an important tool of monetary policy and liquidity management. The
substitution of collateral (security) by the market participants during the tenor of the term
repo is allowed from April 17, 2017 subject to various conditions and guidelines prescribed
by RBI from time to time. The accounting norms to be followed by market participants for
repo/reverse repo transactions under LAF and MSF (Marginal Standing Facility) of RBI are
aligned with the accounting guidelines prescribed for market repo transactions. In order to
distinguish repo/reverse repo transactions with RBI from market repo transactions, a
parallel set of accounts similar to those maintained for market repo transactions but
prefixed with ‘RBI’ may be maintained. Further market value of collateral securities
(instead of face value) will be reckoned for calculating haircut and securities acquired by
banks under reverse repo with RBI will be bestowed SLR status. RBI has also issued the
Tri-Party Repo (Reserve Bank) Directions, 2017 dated August 10, 2017 (the Directions).
Scheduled commercial banks, Primary Dealers along with Mutual Funds and Insurance
Companies (subject to the approval of the regulators concerned) maintaining Subsidiary
General Ledger account with RBI are permitted to re-repo the government securities,
including SDLs and Treasury Bills, acquired under reverse repo, subject to various
conditions and guidelines prescribed by RBI time to time.
7. How and in what form can G-Secs be held?
7.1 The Public Debt Office (PDO) of RBI, acts as the registry and central depository for G-
Secs. They may be held by investors either as physical stock or in dematerialized
(demat/electronic) form. From May 20, 2002, it is mandatory for all the RBI regulated
entities to hold and transact in G-Secs only in dematerialized (SGL) form.

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(iv) Physical form: G-Secs may be held in the form of stock certificates. A stock
certificate is registered in the books of PDO. Ownership in stock certificates cannot
be transferred by way of endorsement and delivery. They are transferred by
executing a transfer form as the ownership and transfer details are recorded in the
books of PDO. The transfer of a stock certificate is final and valid only when the
same is registered in the books of PDO.
(v) Demat form: Holding G-Secs in the electronic or scripless form is the safest and the
most convenient alternative as it eliminates the problems relating to their custody,
viz., loss of security. Besides, transfers and servicing of securities in electronic form
is hassle free. The holders can maintain their securities in dematerialsed form in
either of the two ways:
(a)SGL Account: Reserve Bank of India offers SGL Account facility to select entities
who can hold their securities in SGL accounts maintained with the Public Debt
Offices of the RBI. Only financially strong entities viz. Banks, PDs, select UCBs and
NBFCs which meet RBI guidelines (please see RBI circular IDMD.DOD.No.
13/10.25.66/2011-12 dt Nov 18, 2011) are allowed to maintain SGL with RBI.
(b) Gilt Account: As the eligibility to open and maintain an SGL account with the RBI is
restricted, an investor has the option of opening a Gilt Account with a bank or a PD
which is eligible to open a CSGL account with the RBI. Under this arrangement, the
bank or the PD, as a custodian of the Gilt Account holders, would maintain the
holdings of its constituents in a CSGL account (which is also known as SGL II
account) with the RBI. The servicing of securities held in the Gilt Accounts is done
electronically, facilitating hassle free trading and maintenance of the securities.
Receipt of maturity proceeds and periodic interest is also faster as the proceeds are
credited to the current account of the custodian bank / PD with the RBI and the
custodian (CSGL account holder) immediately passes on the credit to the Gilt
Account Holders (GAH).
7.2 Investors also have the option of holding G-Secs in a dematerialized account with a
depository (NSDL / CDSL, etc.). This facilitates trading of G-Secs on the stock exchanges.
8. How does the trading in G-Secs take place?

8.1 There is an active secondary market in G-Secs. The securities can be bought / sold in
the secondary market either through (i) Negotiated Dealing System-Order Matching (NDS-
OM) (anonymous online trading) or through (ii) Over the Counter (OTC) and reported on
NDS-OM or (iii) NDS-OM-Web (para 8.5) and (iv) Stock exchanges (para 8.6)

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i. NDS-OM
In August 2005, RBI introduced an anonymous screen based order matching module
called NDS-OM. This is an order driven electronic system, where the participants can
trade anonymously by placing their orders on the system or accepting the orders already
placed by other participants. Anonymity ensures a level playing field for various categories
of participants. NDS-OM is operated by the CCIL on behalf of the RBI (Please see answer
to the question no.19 about CCIL). Direct access to the NDS-OM system is currently
available only to select financial institutions like Commercial Banks, Primary Dealers, well
managed and financially sound UCBs and NBFCs, etc. Other participants can access this
system through their custodians i.e. with whom they maintain Gilt Accounts. The
custodians place the orders on behalf of their customers. The advantages of NDS-OM are
price transparency and better price discovery.
8.2 Gilt Account holders have been given indirect access to the reporting module of NDS-
OM through custodian institutions.
8.3 Access to NDS-OM by the retail segment, comprising of individual investors having
demat account with depositories viz. NSDL and/or CDSL, desirous of participating in the
G-Sec market is facilitated by allowing them to use their demat accounts for their
transactions and holdings in G-Sec. This access would be facilitated through any of the
existing NDS-OM primary members, who also act as Depository Participants for NSDL
and/or CDSL. The scheme seeks to facilitate efficient access to retail individual investor to
the same G-Sec market being used by the large institutional investor in a seamless
manner.
ii. Over the Counter (OTC)/ Telephone Market

8.4 In the G-Sec market, a participant, who wants to buy or sell a G-Sec, may contact a
bank / PD/financial institution either directly or through a broker registered with SEBI and
negotiate price and quantity of security. Such negotiations are usually done on telephone
and a deal may be struck if both counterparties agree on the amount and rate. In the case
of a buyer, like an UCB wishing to buy a security, the bank's dealer (who is authorized by
the bank to undertake transactions in G-Secs) may get in touch with other market
participants over telephone and obtain quotes. Should a deal be struck, the bank should
record the details of the trade in a deal slip (specimen given at Annex 5). The dealer must
exercise due diligence with regard to the price quoted by verifying with available sources
(See question number 14 for information on ascertaining the price of G-Secs). All trades
undertaken in OTC market are reported on the Reported segment of NDS-OM within 15
minutes, the details of which are given under the question number 15.

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iii. NDS-OM-Web
8.5 RBI has launched NDS-OM-Web on June 29, 2012 for facilitating direct participation of
gilt account holders (GAH) on NDS-OM through their primary members (PM) (as risk
controller only and not having any role in pricing of trade). The GAH have access to the
same order book of NDS-OM as the PM. GAH are in a better position to control their
orders (place/modify/cancel/hold/release) and have access to real time live quotes in the
market. Since notifications of orders executed as well as various queries are available
online to the GAH, they are better placed to manage their positions. Web based interface
that leverages on the gilt accounts already maintained with the custodian Banks/PDs
provides an operationally efficient system to retail participants. NDS OM Web is provided
at no additional cost to its users. PMs, however, may recover the actual charges paid by
them to CCIL for settlement of trades or any other charges like transaction cost, annual
maintenance charges (AMC) etc. It has been made obligatory for the Primary Members to
offer the NDS-OM-Web module to their constituent GAHs (excluding individual) for online
trading in G-sec in the secondary market. Constituents not desirous of availing this facility
may do so by opting out in writing. On the other hand, individual GAHs desirous of the
NDS-OM-Web facility may be provided the web access only on specific request.
iv. Stock Exchanges

8.6 As advised by SEBI, the stock exchanges (like NSE, BSE, MCX) have been asked to
create dedicated debt segment in their trading platforms. In compliance to this, stock
exchanges have launched debt trading (G-Secs as also corporate bonds) segment which
generally cater to the needs of retail investors. The process involved in trading of G-Secs
in Demat form in stock exchanges is as follows:
a. The Gilt Account Holder (GAH), say XYZ provident fund, approaches his custodian
bank, (say ABC), to convert its holding held by custodian bank in their CSGL account (to
the extent he wishes to trade, say ` 10,000), into Demat form.
b. ABC reduces the GAH’s security balance by ` 10,000 and advises the depository of
stock exchange (NSDL/CSDL) to increase XYZ’s Demat account by ` 10,000. ABC also
advises to PDO, Mumbai to reduce its CSGL balance by ` 10,000 and increase the CSGL
balance of NSDL/CSDL by ` 10,000.
c. NSDL/CSDL increases the Demat balance of XYZ by ` 10,000.
d. XYZ can now trade in G-Sec on stock exchange.

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9. Who are the major players in the G-Secs market?
Major players in the G-Secs market include commercial banks and PDs besides
institutional investors like insurance companies. PDs play an important role as market
makers in G-Secs market. A market maker provides firm two way quotes in the market i.e.
both buy and sell executable quotes for the concerned securities. Other participants
include co-operative banks, regional rural banks, mutual funds, provident and pension
funds. Foreign Portfolio Investors (FPIs) are allowed to participate in the G-Secs market
within the quantitative limits prescribed from time to time. Corporates also buy/ sell the G-
Secs to manage their overall portfolio.
b What are the Do's and Don’ts prescribed by RBI for the Co-operative banks
dealing in G-Secs?
While undertaking transactions in securities, UCBs should adhere to the instructions
issued by the RBI. The guidelines on transactions in G-Secs by the UCBs have been
codified in the master circular DCBR. BPD (PCB).MC.No. 4/16.20.000/2015-16 dated July
1, 2015 which is updated from time to time. This circular can also be accessed from the
RBI website under the Notifications – Master circulars section
(https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9849). The important
guidelines to be kept in view by the UCBs relate to formulation of an investment policy
duly approved by their Board of Directors, defining objectives of the policy, authorities and
procedures to put through deals, dealings through brokers, preparing panel of brokers and
review thereof at annual intervals, and adherence to the prudential ceilings fixed for
transacting through each of the brokers, etc.
The important Do’s & Don’ts are summarized in the Box I below.
BOX I
Do’s & Don’ts for Dealing in G-Secs
Do’s
(bk) Segregate dealing and back-office functions. Officials deciding about purchase and
sale transactions should be separate from those responsible for settlement and
accounting.
(bl) Monitor all transactions to see that delivery takes place on settlement day. The funds
account and investment account should be reconciled on the same day before close of
business.
(bm) Keep a proper record of the SGL forms received/issued to facilitate counter-checking
by their internal control systems/RBI inspectors/other auditors.

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(f) Seek a Scheduled Commercial Bank (SCB), a PD or a Financial Institution (FI) as
counterparty for transactions.
(g) Give preference for direct deals with counter parties.
(h) Insist on Delivery versus Payment for all transactions.
(i) Take advantage of the NCB facility for acquiring G-Secs in the primary auctions
conducted by the RBI.
(j) Restrict the role of the broker only to that of bringing the two parties to the deal
together, if a deal is put through with the help of broker.
(k) Have a list of approved brokers. Utilize only brokers registered with NSE or BSE or
OTCEI for acting as intermediary.
(l) Place a limit of 5% of total transactions (both purchases and sales) entered into by a
bank during a year as the aggregate upper contract limit for each of the approved
brokers. A disproportionate part of the business should not be transacted with or
through one or a few brokers.
(m) Maintain and transact in G-Secs only in dematerialized form in SGL Account or Gilt
Account maintained with the CSGL Account holder.
(n) Open and maintain Gilt account or dematerialized account
(o) Open a funds account for securities transactions with the same Scheduled
Commercial bank or the State Cooperative bank with whom the Gilt Account is
maintained.
(p) Ensure availability of clear funds in the designated funds accounts for purchases and
sufficient securities in the Gilt Account for sales before putting through the transactions.
(q) Observe prudential limits and abide by restrictions for investment in permitted non-SLR
securities (Prudential limit : shall not exceed 10% of the total deposits of bank as on
March 31 of the preceding financial year) ( Instruments : (i) “A” or equivalent and
higher rated CPs, debentures and bonds, (ii) units of debt mutual funds and money
market mutual funds, (iii) shares of market infrastructure companies eg. CCIL, NPCI,
SWIFT).
(r) The Board of Directors to peruse all investment transactions at least once a month
Don’ts
(iv) Do not undertake any purchase/sale transactions with broking firms or other
intermediaries on principal to principal basis.
(v) Do not use brokers in the settlement process at all, i.e., both funds settlement and
delivery of securities should be done with the counter-parties directly.
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Do not give power of attorney or any other authorisation under any circumstances to
brokers/intermediaries to deal on your behalf in the money and securities markets.
Do not undertake G-Secs transaction in the physical form with any broker.
Do not routinely make investments in non-SLR securities (e.g., corporate bonds, etc)
issued by companies or bodies.
11. How are the dealing transactions recorded by the dealing desk?
11.1 For every transaction entered into by the trading desk, a deal slip should be generated
which should contain data relating to nature of the deal, name of the counter-party, whether
it is a direct deal or through a broker (if it is through a broker, name of the broker), details of
security, amount, price, contract date and time and settlement date. The deal slips should
be serially numbered and verified separately to ensure that each deal slip has been
properly accounted for. Once the deal is concluded, the deal slip should be immediately
passed on to the back office (it should be separate and distinct from the front office) for
recording and processing. For each deal, there must be a system of issue of confirmation
to the counter-party. The timely receipt of requisite written confirmation from the counter-
party, which must include all essential details of the contract, should be monitored by the
back office. The need for counterparty confirmation of deals matched on NDS-OM will not
arise, as NDS-OM is an anonymous automated order matching system. In case of trades
finalized in the OTC market and reported on NDS-OM reported segment, both the buying
and selling counter parties report the trade particulars separately on the reporting platform
which should match for the trade to be settled.
11.2 Once a deal has been concluded through a broker, there should not be any
substitution of the counterparty by the broker. Similarly, the security sold / purchased in a
deal should not be substituted by another security under any circumstances.
11.3 On the basis of vouchers passed by the back office (which should be done after
verification of actual contract notes received from the broker / counter party and
confirmation of the deal by the counter party), the books of account should be
independently prepared.
What are the important considerations while undertaking security transactions?

The following steps should be followed in purchase of a security:
Which security to invest in – Typically this involves deciding on the maturity and
coupon. Maturity is important because this determines the extent of risk an investor
like an UCB is exposed to – normally higher the maturity, higher the interest rate
risk or market risk. If the investment is largely to meet statutory requirements, it
may be advisable to avoid taking undue market risk and buy securities with shorter

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maturity. Within the shorter maturity range (say 5-10 years), it would be safer to
buy securities which are liquid, that is, securities which trade in relatively larger
volumes in the market. The information about such securities can be obtained from
the website of the CCIL (http://www.ccilindia.com/OMMWCG.aspx), which gives
real-time secondary market trade data on NDS-OM. Pricing is more transparent in
liquid securities, thereby reducing the chances of being misled/misinformed. The
coupon rate of the security is equally important for the investor as it affects the total
return from the security. In order to determine which security to buy, the investor
must look at the Yield to Maturity (YTM) of a security (please refer to Box III under
para 24.4 for a detailed discussion on YTM). Thus, once the maturity and yield
(YTM) is decided, the UCB may select a security by looking at the price/yield
information of securities traded on NDS-OM or by negotiating with bank or PD or
broker.
(i) Where and Whom to buy from- In terms of transparent pricing, the NDS-OM is the
safest because it is a live and anonymous platform where the trades are
disseminated as they are struck and where counterparties to the trades are not
revealed. In case, the trades are conducted on the telephone market, it would be
safe to trade directly with a bank or a PD. In case one uses a broker, care must be
exercised to ensure that the broker is registered on NSE or BSE or OTC Exchange
of India. Normally, the active debt market brokers may not be interested in deal
sizes which are smaller than the market lot (usually ` 5 cr). So it is better to deal
directly with bank / PD or on NDS-OM, which also has a screen for odd-lots (i.e.
less than ` 5 cr). Wherever a broker is used, the settlement should not happen
through the broker. Trades should not be directly executed with any counterparties
other than a bank, PD or a financial institution, to minimize the risk of getting
adverse prices.
(j) How to ensure correct pricing – Since investors like UCBs have very small
requirements, they may get a quote/price, which is worse than the price for
standard market lots. To be sure of prices, only liquid securities may be chosen for
purchase. A safer alternative for investors with small requirements is to buy under
the primary auctions conducted by RBI through the non-competitive route. Since
there are bond auctions almost every week, purchases can be considered to
coincide with the auctions. Please see question 14 for details on ascertaining the
prices of the G-Secs.

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13. Why does the price of G-Sec change?
The price of a G-Sec, like other financial instruments, keeps fluctuating in the secondary
market. The price is determined by demand and supply of the securities. Specifically, the
prices of G-Secs are influenced by the level and changes in interest rates in the economy
and other macro-economic factors, such as, expected rate of inflation, liquidity in the
market, etc. Developments in other markets like money, foreign exchange, credit,
commodity and capital markets also affect the price of the G-Secs. Further, developments
in international bond markets, specifically the US Treasuries affect prices of G-Secs in
India. Policy actions by RBI (e.g., announcements regarding changes in policy interest
rates like Repo Rate, Cash Reserve Ratio, Open Market Operations, etc.) also affect the
prices of G-Secs.
14. How does one get information about the price of a G-Sec?
14.1 The return on a security is a combination of two elements (i) coupon income – that is,
interest earned on the security and (ii) the gain / loss on the security due to price changes
and reinvestment gains or losses.
14.2 Price information is vital to any investor intending to either buy or sell G-Secs.
Information on traded prices of securities is available on the RBI website
http://www.rbi.org.in under the path Home → Financial Markets → Financial Markets
Watch → Order Matching Segment of Negotiated Dealing System. This will show a screen
containing the details of the latest trades undertaken in the market along with the prices.
Additionally, trade information can also be seen on CCIL website
http://www.ccilindia.com/OMHome.aspx. On this page, the list of securities and the
summary of trades is displayed. The total traded amount (TTA) on that day is shown
against each security. Typically, liquid securities are those with the largest amount of TTA.
Pricing in these securities is efficient and hence UCBs can choose these securities for
their transactions. Since the prices are available on the screen they can invest in these
securities at the current prices through their custodians. Participants can thus get near
real-time information on traded prices and take informed decisions while buying / selling
G-Secs. The screenshots of the above webpage are given below:

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NDS-OM Market
The website of the Financial Benchmarks India Private Limited (FBIL), (www.fbil.org.in) is
also a right source of price information, especially on securities that are not traded
frequently.
15. How are the G-Secs transactions reported?

15.1 Transactions undertaken between market participants in the OTC / telephone market
are expected to be reported on the NDS-OM platform within 15 minutes after the deal is
put through over telephone. All OTC trades are required to be mandatorily reported on the
NDS-OM reported segment for settlement. Reporting on NDS-OM is a two stage process
wherein both the seller and buyer of the security have to report their leg of the trade.
System validates all the parameters like reporting time, price, security etc. and when all
the criterias of both the reporting parties match, the deals get matched and trade details
are sent by NDS-OM system to CCIL for settlement.
15.2 Reporting on behalf of entities maintaining gilt accounts with the custodians is done
by the respective custodians in the same manner as they do in case of their own trades
i.e., proprietary trades. The securities leg of these trades settles in the CSGL account of
the custodian. Funds leg settle in the current account of the PM with RBI.
15.3 In the case of NDS-OM, participants place orders (amount and price) in the desired
security on the system. Participants can modify / cancel their orders. Order could be a ‘bid’
(for purchase) or ‘offer’ (for sale) or a two way quote (both buy and sell) of securities. The
system, in turn, will match the orders based on price and time priority. That is, it matches

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bids and offers of the same prices with time priority. It may be noted that bid and offer of
the same entity do not match i.e. only inter-entity orders are matched by NDS-OM and not
intra-entity. The NDS-OM system has separate screen for trading of the Central
Government papers, State Government securities (SDLs) and Treasury bills (including
Cash Management Bills). In addition, there is a screen for odd lot trading also essentially
for facilitating trading by small participants in smaller lots of less than ` 5 crore. The
minimum amount that can be traded in odd lot is ` 10,000 in dated securities, T-Bills and
CMBs. The NDS-OM platform is an anonymous platform wherein the participants will not
know the counterparty to the trade. Once an order is matched, the deal ticket gets
generated automatically and the trade details flow to the CCIL. Due to anonymity offered
by the system, the pricing is not influenced by the participants’ size and standing.
(v) How do the G-Sec transactions settle?

Primary Market
(c) 1 Once the allotment process in the primary auction is finalized, the successful participants
are advised of the consideration amounts that they need to pay to the Government on
settlement day. The settlement cycle for auctions of all kind of G-Secs i.e. dated securities, T-
Bills, CMBs or SDLs, is T+1, i.e. funds and securities are settled on next working day from the
conclusion of the trade. On the settlement date, the fund accounts of the participants are
debited by their respective consideration amounts and their securities accounts (SGL accounts)
are credited with the amount of securities allotted to them.
Secondary Market
(f) 2 The transactions relating to G-Secs are settled through the member’s securities / current
accounts maintained with the RBI. The securities and funds are settled on a net basis i.e.
Delivery versus Payment System-III (DvP-III). CCIL guarantees settlement of trades on the
settlement date by becoming a central counter-party (CCP) to every trade through the process
of novation, i.e., it becomes seller to the buyer and buyer to the seller.
(f) 3 All outright secondary market transactions in G-Secs are settled on a T+1 basis. However,
in case of repo transactions in G-Secs, the market participants have the choice of settling the
first leg on either T+0 basis or T+1 basis as per their requirement. RBI vide
FMRD.DIRD.05/14.03.007/2017-18 dated November 16, 2017 had permitted FPIs to settle
OTC secondary market transactions in Government Securities either on T+1 or on T+2 basis
and in such cases, It may be ensured that all trades are reported on the trade date itself.

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17. What is shut period?
‘Shut period’ means the period for which the securities cannot be traded. During the period
under shut, no trading of the security which is under shut is allowed. The main purpose of
having a shut period is to facilitate finalizing of the payment of maturity redemption
proceeds and to avoid any change in ownership of securities during this process.
Currently, the shut period for the securities held in SGL accounts is one day.
18. What is Delivery versus Payment (DvP) Settlement?
Delivery versus Payment (DvP) is the mode of settlement of securities wherein the
transfer of securities and funds happen simultaneously. This ensures that unless the funds
are paid, the securities are not delivered and vice versa. DvP settlement eliminates the
settlement risk in transactions. There are three types of DvP settlements, viz., DvP I, II
and III which are explained below:
i. DvP I – The securities and funds legs of the transactions are settled on a gross basis,
that is, the settlements occur transaction by transaction without netting the payables and
receivables of the participant.
(e) DvP II – In this method, the securities are settled on gross basis whereas the funds
are settled on a net basis, that is, the funds payable and receivable of all transactions of a
party are netted to arrive at the final payable or receivable position which is settled.
(f) DvP III – In this method, both the securities and the funds legs are settled on a net
basis and only the final net position of all transactions undertaken by a participant is
settled.
Liquidity requirement in a gross mode is higher than that of a net mode since the payables
and receivables are set off against each other in the net mode.
19. What is the role of the Clearing Corporation of India Limited (CCIL)?
The CCIL is the clearing agency for G-Secs. It acts as a Central Counter Party (CCP) for
all transactions in G-Secs by interposing itself between two counterparties. In effect,
during settlement, the CCP becomes the seller to the buyer and buyer to the seller of the
actual transaction. All outright trades undertaken in the OTC market and on the NDS-OM
platform are cleared through the CCIL. Once CCIL receives the trade information, it works
out participant-wise net obligations on both the securities and the funds leg. The payable /
receivable position of the constituents (gilt account holders) is reflected against their
respective custodians. CCIL forwards the settlement file containing net position of
participants to the RBI where settlement takes place by simultaneous transfer of funds and
securities under the ‘Delivery versus Payment’ system. CCIL also guarantees settlement
of all trades in G-Secs. That means, during the settlement process, if any participant fails
to provide funds/ securities, CCIL will make the same available from its own means. For

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this purpose, CCIL collects margins from all participants and maintains ‘Settlement
Guarantee Fund’.
20. What is the ‘When Issued’ market and “Short Sale”?

'When Issued', a short term of "when, as and if issued", indicates a conditional transaction
in a security notified for issuance but not yet actually issued. All "WI " transactions are on
an "if" basis, to be settled if and when the security is actually issued. 'WI transactions in
the Central G-Secs have been permitted to all NDS-OM members and have to be
undertaken only on the NDS-OM platform. WI market helps in price discovery of the
securities being auctioned as well as better distribution of the auction stock. For urban
cooperative banks, detailed guidelines have been issued in the RBI master circular
DCBR.BPD. (PCB). MC.No 4/16.20.000/2015-16 dated July 01, 2015.
Short Sale is defined as sale of securities one does not own. Scheduled Commercial
Banks and Primary Dealers are permitted to undertake short sale of Central Government
dated securities in NDS-OM as well as OTC market, subject to limits and other terms and
conditions prescribed by the RBI from time to time. Certain Urban Cooperative Banks
specifically permitted by the Department of Cooperative Bank Supervision for the purpose,
can also undertake intra-day short sale of Government securities subject to adherence to
the short sale limits, reporting and other risk management requirements prescribed for
eligible entities by RBI from time to time.
Further a custodian is allowed to undertake a short sale transaction with its GAH within the
permissible short sale limits and a custodian is allowed to put through a cover transaction
with a GAH to square a short sale transaction in the related security undertaken with a
market participant other than its GAH/s.
RBI vide FMRD.DIRD.04/14.03.007/2017-18 dated November 16, 2017 had decided that
market participants undertaking ‘notional’ short sale need not compulsorily borrow
securities in the repo market. While the short selling entity may ordinarily borrow securities
from the repo market, in exceptional situations of market stress (e.g. short squeeze), it
may deliver securities from its own HTM/AFS/HFT portfolios. If securities are delivered out
of its own portfolio, it must be accounted for appropriately and reflect the transactions as
internal borrowing. All ‘notional’ short sales must be closed by an outright purchase in the
market. It may be ensured that the securities so borrowed are brought back to the same
portfolio, without any change in book value. The short selling entity must adhere to the
extant regulations and accounting norms governing sale or valuation of securities in its
portfolios.

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(g) What are the basic mathematical concepts one should know for calculations
involved in bond prices and yields?
The time value of money functions related to calculation of Present Value (PV), Future
Value (FV), etc. are important mathematical concepts related to bond market. An outline of
the same with illustrations is provided in Box II below.
Box II
Time Value of Money

Money has time value as a Rupee today is more valuable and useful than a
Rupee a year later.
The concept of time value of money is based on the premise that an investor
prefers to receive a payment of a fixed amount of money today, rather than an
equal amount in the future, all else being equal. In particular, if one receives
the payment today, one can then earn interest on the money until that
specified future date. Further, in an inflationary environment, a Rupee today
will have greater purchasing power than after a year.
Present value of a future sum

The present value formula is the core formula for the time value of money.
The present value (PV) formula has four variables, each of which can be solved
for:
Present Value (PV) is the value at time=0

Future Value (FV) is the value at time=n
i is the rate at which the amount will be compounded each
period n is the number of periods
The cumulative present value of future cash flows can be calculated by adding
the contributions of FVt, the value of cash flow at time=t
An illustration
Taking the cash flows as;
Period (in Yrs) 1 2 3

Amount 100 100 100
Assuming that the interest rate is at 10% per annum;
The discount factor for each year can be calculated as 1/(1+interest rate)^no.
of years

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The present value can then be worked out as Amount x discount factor
The PV of `100 accruing after 3 years:

Year Amount discount factor P.V.
1 100 0.9091 90.91
2 100 0.8264 82.64
3 100 0.7513 75.13
The cumulative present value = 90.91+82.64+75.13 = ` 248.69
Net Present Value (NPV)
Net present value (NPV ) or net present worth (NPW) is defined as the
present value of net cash flows. It is a standard method for using the time
value of money to appraise long -term projects. Used for capital budgeting,
and widely throughout economics, it measures the excess or shortfall of cash
flows, in present value (PV) terms, once financing charges are met.
Formula
Each cash inflow/outflow is discounted back to its present value (PV). Then
they are summed. Therefore
Where
t - the time of the cash flow
N - the total time of the project
r - the discount rate (the rate of return that could be earned on an
investment in the financial markets with similar risk.)
Ct - the net cash flow (the amount of cash) at time t (for educational
purposes, C0 is commonly placed to the left of the sum to emphasize its role
as the initial investment.).
In the illustration given above under the Present value, if the three cash
flows accrues on a deposit of ` 240, the NPV of the investment is equal to
248.69-240 = ` 8.69
(i) How is the Price of a bond calculated? What is the total consideration amount of
a trade and what is accrued interest?
The price of a bond is nothing but the sum of present value of all future cash flows of the
bond. The interest rate used for discounting the cash flows is the Yield to Maturity (YTM)
(explained in detail in question no. 24) of the bond. Price can be calculated using the excel
function ‘Price’ (please refer to Annex 6,).
Accrued interest is the interest calculated for the broken period from the last coupon day
till a day prior to the settlement date of the trade. Since the seller of the security is holding
the security for the period up to the day prior to the settlement date of the trade, he is

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entitled to receive the coupon for the period held. During settlement of the trade, the buyer
of security will pay the accrued interest in addition to the agreed price and pays the
‘consideration amount’.
An illustration is given below;
For a trade of ` 5 crore (face value) of security 8.83% 2023 for settlement date Jan 30,
2014 at a price of `100.50, the consideration amount payable to the seller of the security is
worked out below:
Here the price quoted is called ‘clean price’ as the ‘accrued interest’ component is not
added to it.
Accrued interest:
The last coupon date being Nov 25, 2013, the number of days in broken period till Jan 29,
2014 (one day prior to settlement date i.e. on trade day) are 65.
The accrued interest on `100 face value for 65 days = 8.83 x (65/360)
= `1.5943
When we add the accrued interest component to the ‘clean price’, the resultant price is
called the ‘dirty price’. In the instant case, it is 100.50+1.5943 = `102.0943
The total consideration amount = Face value of trade x dirty price

5,00,00,000 x (102.0943/100)
` 5,10,47,150
(c) What is the relationship between yield and price of a bond?

If market interest rate levels rise, the price of a bond falls. Conversely, if interest rates or
market yields decline, the price of the bond rises. In other words, the yield of a bond is
inversely related to its price. The relationship between yield to maturity and coupon rate of
bond may be stated as follows:
D When the market price of the bond is less than the face value, i.e., the bond sells at a
discount, YTM > > coupon yield.
E When the market price of the bond is more than its face value, i.e., the bond sells at a
premium, coupon yield > > YTM.
F When the market price of the bond is equal to its face value, i.e., the bond sells at par,
YTM = coupon yield.

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24. How is the yield of a bond calculated?
24.1 An investor who purchases a bond can expect to receive a return from one or more
of the following sources:
= The coupon interest payments made by the issuer;
= Any capital gain (or capital loss) when the bond is sold/matured; and
= Income from reinvestment of the interest payments that is interest-on-interest.
The three yield measures commonly used by investors to measure the potential return
from investing in a bond are briefly described below:
i) Coupon Yield
24.2 The coupon yield is simply the coupon payment as a percentage of the face value.
Coupon yield refers to nominal interest payable on a fixed income security like G-Sec.
This is the fixed return the Government (i.e., the issuer) commits to pay to the investor.
Coupon yield thus does not reflect the impact of interest rate movement and inflation on
the nominal interest that the Government pays. Coupon yield = Coupon Payment / Face
Value
Illustration:
Coupon: 8.24
Face Value: `100
Market Value: `103.00
Coupon yield = 8.24/100 = 8.24%
ii) Current Yield

24.3 The current yield is simply the coupon payment as a percentage of the bond’s
purchase price; in other words, it is the return a holder of the bond gets against its
purchase price which may be more or less than the face value or the par value. The
current yield does not take into account the reinvestment of the interest income received
periodically.
Current yield = (Annual coupon rate / Purchase price) X100
Illustration:
The current yield for a 10 year 8.24% coupon bond selling for `103.00 per `100 par
value is calculated below:
Annual coupon interest = 8.24% x `100 = `8.24
Current yield = (8.24/103) X 100 = 8.00%

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The current yield considers only the coupon interest and ignores other sources of return
that will affect an investor’s return.
iii) Yield to Maturity
24.4 Yield to Maturity (YTM) is the expected rate of return on a bond if it is held until its
maturity. The price of a bond is simply the sum of the present values of all its remaining
cash flows. Present value is calculated by discounting each cash flow at a rate; this rate is
the YTM. Thus, YTM is the discount rate which equates the present value of the future
cash flows from a bond to its current market price. In other words, it is the internal rate of
return on the bond. The calculation of YTM involves a trial-and-error procedure. A
calculator or software can be used to obtain a bond’s YTM easily (please see the Box III).
Box III
YTM Calculation
YTM could be calculated manually as well as using functions in any standard

spread sheet like MS Excel.
Manual (Trial and Error) Method

Manual or trial and error method is complicated because G -Secs have many
cash flows running into future. This is explained by taking an example below.
Take a two year security bearing a coupon of 8% and a price of say ` 102 per
face value of ` 100; the YTM could be calculated by solving for ‘r’ below.
Typically, it involves trial and error by taking a value for ‘r’ and solving the
equation and if the right hand side is more than 102, take a higher value of ‘r’
and solve again. Linear interpolation technique may also be used to find out
exact ‘r’ once we have two ‘r’ values so that the price value is more than 102
for one and less than 102 for the other value.
102 = 4/(1+r/2)1+ 4/(1+r/2)2 + 4/(1+r/2)3 +
104/(1+r/2)4 Spread Sheet Method using MS Excel
In the MS Excel programme, the following function could be used for
calculating the yield of periodically coupon paying securities, given the price.
YIELD (settlement, maturity, rate, price, redemption, frequency, basis)
Wherein;
Settlement is the security's settlement date. The security settlement date is
the date on which the security and funds are exchanged. Maturity is the
security's maturity date. The maturity date is the date when the security
expires.
Rate is the security's annual coupon rate.
Price is the security's price per `100 face value.
Redemption is the security's redemption value per `100 face value.
Frequency is the number of coupon payments per year. (2 for
Government bonds in India)
Basis is the type of day count basis to use. (4 for Government bonds
in India which uses 30/360 basis)

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25. What are the day count conventions used in calculating bond yields?
Day count convention refers to the method used for arriving at the holding period (number
of days) of a bond to calculate the accrued interest. As the use of different day count
conventions can result in different accrued interest amounts, it is appropriate that all the
participants in the market follow a uniform day count convention.
For example, the conventions followed in Indian market are given below.
Bond market: The day count convention followed is 30/360, which means that irrespective
of the actual number of days in a month, the number of days in a month is taken as 30 and
the number of days in a year is taken as 360.
Money market: The day count convention followed is actual/365, which means that the
actual number of days in a month is taken for number of days (numerator) whereas the
number of days in a year is taken as 365 days. Hence, in the case of T-Bills, which are
essentially money market instruments, money market convention is followed.
In some countries, participants use actual/actual, some countries use actual/360 while
some use 30/actual. Hence the convention changes in different countries and in different
markets within the same country (eg. Money market convention is different than the bond
market convention in India).
= How is the yield of a T- Bill calculated?
It is calculated as per the following formula
100-P 365
Yield = --------- X ----- X 100
P D
Wherein;
P – Purchase price
D – Days to maturity
Day Count: For T- Bills, = [actual number of days to maturity/365]
Illustration
Assuming that the price of a 91 day T-- bill at issue is ` 98.20, the yield on the same would
be
Yield = 100-98.20X365X100 = 7.3521%
98.20 91
After say, 41 days, if the same T- bill is trading at a price of ` 99, the yield would then be
Yield = 100-99X365X100 = 7.3737%
99 50
Note that the remaining maturity of the T-Bill is 50 days (91-41).

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27. What is Duration?
27.1 Duration (also known as Macaulay Duration) of a bond is a measure of the time taken
to recover the initial investment in present value terms. In simplest form, duration refers to
the payback period of a bond to break even, i.e., the time taken for a bond to repay its own
purchase price. Duration is expressed in number of years. A step by step approach for
working out duration is given in the Box IV below.
Box: IV
Calculation for Duration
First, each of the future cash flows is discounted to its respective present value for each
period. Since the coupons are paid out every six months, a single period is equal to six
months and a bond with two years maturity will have four time periods.
Second, the present values of future cash flows are multiplied with their respective time
periods (these are the weights). That is the PV of the first coupon is multiplied by 1, PV of
second coupon by 2 and so on.
Third, the above weighted PVs of all cash flows is added and the sum is divided by the
current price (total of the PVs in step 1) of the bond. The resultant value is the duration in
no. of periods. Since one period equals to six months, to get the duration in no. of year,
divide it by two. This is the time period within which the bond is expected to pay back its
own value if held till maturity.
Illustration:
Taking a bond having 2 years maturity, and 10% coupon, and current price of Rs.102, the
cash flows will be (prevailing 2 year yield being 9%):
Time period (years) 1 2 3 4 Total
Inflows (`) 5 5 5 105
PV at an yield of 9% 4.78 4.58 4.38 88.05 101.79
PV*time 4.78 9.16 13.14 352.20 379.28
Duration in number of periods = 379.28/101.79 =

3.73 Duration in years = 3.73/2 = 1.86 years
More formally, duration refers to:

(f) The weighted average term (time from now to payment) of a bond's cash flows or
of any series of linked cash flows.
(g) The higher the coupon rate of a bond, the shorter the duration (if the term of the
bond is kept constant).
(h) Duration is always less than or equal to the overall life (to maturity) of the bond.

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(j) Only a zero coupon bond (a bond with no coupons) will have duration equal to its
maturity.
(k) The sensitivity of a bond's price to interest rate (i.e., yield) movements.
Duration is useful primarily as a measure of the sensitivity of a bond's market price to

interest rate (i.e., yield) movements. It is approximately equal to the percentage change in
price for a given change in yield. For example, for small interest rate changes, the duration
is the approximate percentage by which the value of the bond will fall for a 1% per annum
increase in market interest rate. So a 15-year bond with a duration of 7 years would fall
approximately 7% in value if the interest rate increased by 1% per annum. In other words,
duration is the elasticity of the bond's price with respect to interest rates.
What is Modified Duration?

27.2 Modified duration (MD) is a modified version of Macaulay Duration. It refers to the
change in value of the security to one per cent change in interest rates (Yield). The
formula is
Illustration
In the above example given in Box IV, MD = 1.86/(1+0.09/2) = 1.78
What is PV 01?
27.3 PV01 describes the actual change in price of a bond if the yield changes by one
basis point (equal to one hundredth of a percentage point). It is the present value impact
of 1 basis point (0.01%) (1%=100 bps) movement in interest rate. It is often used as a
price alternative to duration (a time measure). Higher the PV01, the higher would be the
volatility (sensitivity of price to change in yield).
Illustration
From the modified duration (given in the illustration under 27.2), we know that the security
value will change by 1.78% for a change of 100 basis point (1%) change in the yield. In
value terms that is equal to 1.78*(102/100) = ` 1.81.

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Hence the PV01 = 1.81/100 = ` 0.018, which is 1.8 paise. Thus, if the yield of a bond with
a Modified Duration of 1.78 years moves from say 9% to 9.05% (5 basis points), the price
of the bond moves from `102 to `101.91 (reduction of 9 paise, i.e., 5x1.8 paise).
What is Convexity?
27.4 Calculation of change in price for change in yields based on duration works only for
small changes in prices. This is because the relationship between bond price and yield is
not strictly linear i.e., the unit change in price of the bond is not proportionate to unit
change in yield. Over large variations in prices, the relationship is curvilinear i.e., the
change in bond price is either less than or more than proportionate to the change in yields.
This is measured by a concept called convexity, which is the change in duration of a bond
per unit change in the yield of the bond.
28. What are the important guidelines for valuation of securities?

28.1 For Cooperative banks, investments classified under 'Held to Maturity' (HTM)
category need not be marked to market and will be carried at acquisition cost unless it is
more than the face value, in which case the premium should be amortized over the period
remaining to maturity. The individual scrip in the ‘Available for Sale’ (AFS) category in the
books of the cooperative banks will be marked to market at the year-end or at more
frequent intervals. The individual scrip in the ‘Held for Trading’ (HFT) category will be
marked to market at monthly or at more frequent intervals. The book value of individual
securities in AFS and HFT categories would not undergo any change after marking to
market.
28.2 RBI vide FMRD.DIRD.7/14.03.025/2017-18 dated March 31, 2018 has notified that
(Financial Benchmark India Pvt. Ltd) FBIL has been advised to assume the responsibility
for administering valuation of Government securities with effect from March 31, 2018.
From this date, FIMMDA has ceased to publish prices/yield of Government securities and
this role has been taken over by FBIL. FBIL had commenced publication of the G-Sec and
SDL valuation benchmarks based on the extant methodology. Going forward, FBIL will
undertake a comprehensive review of the valuation methodology. RBI regulated entities,
including banks, non-bank financial companies, Primary Dealers, Co-Operative banks and
All India Financial Institutions who are required to value Government securities using
prices published by FIMMDA as per previous directions may use FBIL prices with effect
from March 31, 2018. Other market participants who have been using Govt. securities
prices/yields published by FIMMDA may use the prices/yields published by FBIL for
valuation of their investment portfolio.

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28.3 State Government and other securities are to be valued by applying YTM method by
marking it up by a spread on the Central G-Sec yield of the corresponding residual
maturity. Currently, a spread of 25 basis points (0.25%) is added while valuing State G-
Secs, special securities (oil bonds, fertilizer bonds, SBI bonds, etc.) whereas for corporate
bonds the spreads given by the FIMMDA need to be added. An illustration of valuation
taking a State Government bond is given in the Box V below.
Box: V
Valuation of securities
Illustration for valuation of State Government Bonds
Security – 9.40% West Bengal SDL 2024
Issue date – Jan 1, 2014
Maturity date – Jan 1, 2024
Coupon – 9.40%
Date of valuation – Jan 27, 2014
Procedure
Valuation of the above bond involves the following steps
E. Find the residual maturity of the bond to be valued.
F. Find the Central G-Sec yield for the above residual maturity.
G. Add appropriate spread to the above yield to get the yield for the security
H. Calculate the price of the security using the derived yield above.
Step i.
Since valuation is being done on Jan 27, 2014, we need to find out the number of years
from this date to the maturity date of the security i.e. Jan 1, 2024 to get the residual
maturity of the security. This could be done manually by counting the number of years
and months and days. However, an easier method will be to use MS. Excel function
‘Yearfrac’ wherein we specify the two dates and basis (please refer to Annex 6 on Excel
functions for details). This gives us the residual maturity of 9.93 years for the security.
Step ii.
To find the Central Government yield for 9.93 years, we derive it by interpolating the
yields between 9.75 years and 10 years, which are given out by FIMMDA (now by FBIL).
As on Jan 27, 2014, FIMMDA yields for 9.75 and 10 years are 8.83% and 8.84%
respectively. The yield for the 9.93 years is derived by using the following formula.

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(8.84-8.83)
8.83 + (10-9.75) X ---------------------= 8.84%
(10-9.75)
Here we are finding the yield difference for 0.93 year and adding the same to the yield for
9 years to get the yield for 9.93 years. Also notice that the yield has to be used in decimal
form (e.g., 7.73% is equal to 7.73/100 which is 0.0773)
Step iii.
Having found the Central Government yield for the particular residual maturity, we have
to now load the appropriate spread to get the yield of the security to be valued. Since the
security is State G-Sec, the applicable spread is 25 basis points (0.25%). Hence the yield
would be 8.84%+0.25% = 9.09%.
Note: FBIL yields are now available from 3 months to upto 38 years with 3 month interval
i.e. yield is available for 3 month, 6 month, 9 month, 1 yr, 1.25 yr and so on upto 38 year
security.
Step iv.
The price of the security can now be calculated using the MS Excel function ‘Price’
(Please see the details in Annex 6). Here, we specify the valuation date as Jan 27, 2014,
maturity date as Jan 1, 2024, rate as 9.40% which is the coupon, yield as 9.09%,
redemption as 100 which is the face value, frequency of coupon payment as 2 and basis
as ‘4’ (Pl. see example 3 in Annex 6). The price we get in the formula is `101.9843 which
is the value of the security.
If the bank is holding `10 crore of this security in its portfolio, the total value would be
10*(101.9843/100) 10.19843 crore.
28.4 In the case of corporate bonds, the procedure of valuation is similar to the illustration
given in Box V above. The only difference is the spread that need to be added to the
corresponding yield on central G-Sec will be higher (instead of the fixed 25 bps for State
G-Secs), as published by the FIMMDA from time to time. FIMMDA gives out the
information on corporate bond spreads for various ratings of bonds. While valuing a bond,
the appropriate spread has to be added to the corresponding CG yield and the bond has
to be valued using the standard ‘Price’ formula.

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For example, assuming that a ‘AAA’ rated corporate bond is having same maturity as that
of the State Government bond in Box V, the applicable yield for valuation will be 8.83%+
2.09% (being the spread given by FIMMDA) which is 10.92%. With the same parameters
as in Box V, the value of the bond works out to ` 90.9121.
D. What are the risks involved in holding G-Secs? What are the techniques for
mitigating such risks?
G-Secs are generally referred to as risk free instruments as sovereigns rarely default on
their payments. However, as is the case with any financial instrument, there are risks
associated with holding the G-Secs. Hence, it is important to identify and understand such
risks and take appropriate measures for mitigation of the same. The following are the
major risks associated with holding G-Secs:
29.1 Market risk – Market risk arises out of adverse movement of prices of the securities
due to changes in interest rates. This will result in booking losses on marking to market or
realizing a loss if the securities are sold at adverse prices. Small investors, to some extent,
can mitigate market risk by holding the bonds till maturity so that they can realize the yield
at which the securities were actually bought.
29.2 Reinvestment risk – Cash flows on a G-Sec includes fixed coupon every half year
and repayment of principal at maturity. These cash flows need to be reinvested whenever
they are paid. Hence there is a risk that the investor may not be able to reinvest these
proceeds at profitable rates due to changes in interest rate scenario prevailing at the time
of receipt of cash flows by investors.
29.3 Liquidity risk – Liquidity in G-Secs is referred to as the ease with which security can
be bought and sold i.e. availability of buy-sell quotes with narrow spreads. Liquidity risk
refers to the inability of an investor to liquidate (sell) his holdings due to non-availability of
buyers for the security, i.e., no trading activity in that particular security or circumstances
resulting in distressed sale (selling at a much lower price than its holding cost) causing
loss to the seller. Usually, when a liquid bond of fixed maturity is bought, its tenor gets
reduced due to time decay. For example, a 10 year security will become 8 year security
after 2 years due to which it may become illiquid. The bonds also become illiquid when
there are no frequent reissuances by the issuer (RBI) in those bonds. Bonds are generally
reissued till a sizeable amount becomes outstanding under that bond. However, issuer
and sovereign has to ensure that there is no excess burden on Government at the time of
maturity of the bond as very large amount maturing on a single day may affect the fiscal

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position of Government. Hence, generally reissuances under any security are stopped
after outstanding under that bond touches a particular limit. Due to illiquidity, the investor
may need to sell at adverse prices in case of urgent funds requirement. However, in such
cases, eligible investors can participate in market repo and borrow the money against the
collateral of such securities.
Risk Mitigation
29.4 Holding securities till maturity could be a strategy through which one could avoid
market risk. Rebalancing the portfolio wherein the securities are sold once they become
short term and new securities of longer tenor are bought could be followed to manage the
portfolio risk. However, rebalancing involves transaction and other costs and hence needs
to be used judiciously. Market risk and reinvestment risk could also be managed through
Asset Liability Management (ALM) by matching the cash flows with liabilities. ALM could
also be undertaken by matching the duration of the cash flows.
Advanced risk management techniques involve use of derivatives like Interest Rate Swaps
(IRS) through which the nature of cash flows could be altered. However, these are
complex instruments requiring advanced level of expertise for proper understanding.
Adequate caution, therefore, need to be observed for undertaking the derivatives
transactions and such transactions should be undertaken only after having complete
understanding of the associated risks and complexities.
30. What is Money Market?

30.1 While the G-Secs market generally caters to the investors with a long term
investment horizon, the money market provides investment avenues of short term tenor.
Money market transactions are generally used for funding the transactions in other
markets including G-Secs market and meeting short term liquidity mismatches. By
definition, money market is for a maximum tenor of up to one year. Within the one year,
depending upon the tenors, money market is classified into:
i. Overnight market - The tenor of transactions is one working day.
(5) Notice money market – The tenor of the transactions is from 2 days to 14 days.
(6)Term money market – The tenor of the transactions is from 15 days to one year.
What are the different money market instruments?

30.2 Money market instruments include call money, repos, T- Bills (for details refer para
1.3), Cash Management Bills (for details refer para 1.4), Commercial Paper, Certificate of
Deposit and Collateralized Borrowing and Lending Obligations (CBLO).

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Call money market
30.3 Call money market is a market for uncollateralized lending and borrowing of funds.
This market is predominantly overnight and is open for participation only to scheduled
commercial banks and the primary dealers.
Repo market
30.4 Repo or ready forward contact is an instrument for borrowing funds by selling
securities with an agreement to repurchase the said securities on a mutually agreed future
date at an agreed price which includes interest for the funds borrowed.
30.5 The reverse of the repo transaction is called ‘reverse repo’ which is lending of funds
against buying of securities with an agreement to resell the said securities on a mutually
agreed future date at an agreed price which includes interest for the funds lent.
30.6 It can be seen from the definition above that there are two legs to the same
transaction in a repo/ reverse repo. The duration between the two legs is called the ‘repo
period’. Predominantly, repos are undertaken on overnight basis, i.e., for one day period.
Settlement of repo transactions happens along with the outright trades in G-Secs.
30.7 The consideration amount in the first leg of the repo transactions is the amount
borrowed by the seller of the security. On this, interest at the agreed ‘repo rate’ is
calculated and paid along with the consideration amount of the second leg of the
transaction when the borrower buys back the security. The overall effect of the repo
transaction would be borrowing of funds backed by the collateral of G-Secs.
30.8 The repo market is regulated by the Reserve Bank of India. All the above mentioned
repo market transactions should be traded/reported on the electronic platform called the
Clearcorp Repo Order Matching System (CROMS).
30.9 As part of the measures to develop the corporate debt market, RBI has permitted
select entities (scheduled commercial banks excluding RRBs and LABs, PDs, all-India FIs,
NBFCs, mutual funds, housing finance companies, insurance companies) to undertake
repo in corporate debt securities. This is similar to repo in G-Secs except that corporate
debt securities are used as collateral for borrowing funds. Only listed corporate debt
securities that are rated ‘AA’ or above by the rating agencies are eligible to be used for
repo. Commercial paper, certificate of deposit, non-convertible debentures of original

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maturity less than one year are not eligible for this purpose. These transactions take place
in the OTC market and are required to be reported on FIMMDA platform within 15 minutes
of the trade for dissemination of trade information. They are also to be reported on the
clearing house of any of the exchanges for the purpose of clearing and settlement.
Collateralised Borrowing and Lending Obligation (CBLO)

30.10 CBLO is another money market instrument operated by the Clearing Corporation of
India Ltd. (CCIL), for the benefit of the entities who have either no access to the inter-bank
call money market or have restricted access in terms of ceiling on call borrowing and
lending transactions. CBLO is a discounted instrument available in electronic book entry
form for the maturity period ranging from one day to ninety days (up to one year as per
RBI guidelines). In order to enable the market participants to borrow and lend funds, CCIL
provides the Dealing System through Indian Financial Network (INFINET), a closed user
group to the Members of the RBI CBS E-Kuber, who maintain Current account with RBI
and through Internet for other entities who do not maintain Current account with RBI.
30.11 Membership to the CBLO segment is extended to entities who are RBI- NDS
members, viz., Nationalized Banks, Private Banks, Foreign Banks, Co-operative Banks,
Financial Institutions, Insurance Companies, Mutual Funds, Primary Dealers, etc.
Associate Membership to CBLO segment is extended to entities who are not members of
RBI- CBS E-Kuber, viz., Co-operative Banks, Mutual Funds, Insurance companies,
NBFCs, Corporates, Provident/ Pension Funds, etc.
30.12 By participating in the CBLO market, CCIL members can borrow or lend funds
against the collateral of eligible securities. Eligible securities are Central G-Secs including
Treasury Bills, and such other securities as specified by CCIL from time to time. Borrowers
in CBLO have to deposit the required amount of eligible securities with the CCIL based on
which CCIL fixes the borrowing limits. CCIL matches the borrowing and lending orders
submitted by the members and notifies them. While the securities held as collateral are in
custody of the CCIL, the beneficial interest of the lender on the securities is recognized
through proper documentation.
Commercial Paper (CP)

30.13 Commercial Paper (CP) is an unsecured money market instrument issued in the
form of a promissory note and held in a dematerialized form through any of the
depositories approved by and registered with SEBI. A CP is issued in minimum
denomination of Rs 5 lakh and multiples thereof and shall be issued at a discount to face

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value No issuer shall have the issue of CP underwritten or co-accepted and options (call/put)
are not permitted on a CP. Companies, including NBFCs and AIFIs, other entities like co-
operative societies, government entities, trusts, limited liability partnerships and any other
body corporate having presence in India with net worth of Rs 100cr or higher and any other
entities specifically permitted by RBI are eligible to issue Commercial papers subject to
conditions specified by RBI. All residents, and non-residents permitted to invest in CPs under
Foreign Exchange Management Act (FEMA), 1999 are eligible to invest in CPs; however, no
person can invest in CPs issued by related parties either in the primary or secondary market.
Investment by regulated financial sector entities will be subject to such conditions as the
concerned regulator may impose.
RBI has issued Reserve Bank Commercial Paper Directions 2017 - FMRD.DIRD.01/CGM
(TRS) - 2017 dated August 10, 2017
Certificate of Deposit (CD)
30.14 Certificate of Deposit (CD) is a negotiable money market instrument and issued in
dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other
eligible financial institution for a specified time period. Banks can issue CDs for maturities
from 7 days to one year whereas eligible FIs can issue for maturities from 1 year to 3 years.
31. What are the role and functions of FIMMDA & FBIL
31.1 The Fixed Income Money Market and Derivatives Association of India (FIMMDA), an
association of Scheduled Commercial Banks, Public Financial Institutions, Primary Dealers
and Insurance Companies was incorporated as a Company under section 25 of the
Companies Act,1956 on June 3, 1998. FIMMDA is a voluntary market body for the bond,
money and derivatives markets. FIMMDA has members representing all major institutional
segments of the market. The membership includes Nationalized Banks such as State Bank of
India, its associate banks and other nationalized banks; Private sector banks such as ICICI
Bank, HDFC Bank; Foreign Banks such as Bank of America, Citibank, Financial institutions
such as IDFC, EXIM Bank, NABARD, Insurance Companies like Life Insurance Corporation of
India (LIC), ICICI Prudential Life Insurance Company, Birla Sun Life Insurance Company and
all Primary Dealers.
31.2 FIMMDA represents market participants and aids the development of the bond, money
and derivatives markets. It acts as an interface with the regulators on various issues that
impact the functioning of these markets... FIMMDA also plays a constructive role in the

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evolution of best market practices by its members so that the market as a whole operates
transparently as well as efficiently.
Glossary & Abbreviation:
Arbitrage
In its simplest form, involves buying and selling the same security, more or less simultaneously,
to profit from a price disparity. In the forex market, arbitrage trades capitalize on forward
exchange rates being out of line with the interest differential.
Call Option
A financial (DERIVATIVE) instrument giving the right but no obligation to the holder to buy a
security (or currency) at a predetermined price (or exchange rate) from the option seller. The
option holder (buyer) pays the option seller a premium for this privilege. If the option can be
exercised at any time before its maturity, it is called an American option. European options, in
contrast, can be exercised only on maturity.
Call and PUT options in cross-currencies (i.e., USD/JPY, Euro/USD, GBP/USD, etc.) are allowed
to be bought and sold by banks in India on a fully hedged basis. The option seller should be a
bank abroad. USD/INR options are on the anvil.
In the context of bonds, a call option gives the issuer the right to redeem the bonds before
maturity. This will happen if interest rates have fallen since the issue was made. A put option
enables investors to redeem the bond before maturity and will happen if interest rates rise after
the issue.
Capital Adequacy
The minimum unencumbered, undiluted capital, consisting of paid-up equity, free reserves and
long-term subordinated debt that a bank must maintain as a percentage of its risk assets.
Currently 9%.
Capital Fund
Comprises Tier I and Tier II capital of the Bank.
Cash Market
The market in a financial instrument like bonds, equities, foreign exchange.
Cash Reserve Ratio (CRR)
CRR is the percentage of Net Demand and Time Liabilities (NDTL) that scheduled commercial
banks must maintain with the RBI as cash.

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Treasury – Terminology
Clearing
The process of exchanging securities and funds through a Clearing House after a trade/deal is
concluded.
Clearing House
An Indian example of a Clearing House is CCIL, which clears trades in G-Secs. Some Clearing
Houses (abroad) combine the functions of clearing and custody.
Clean Price/Dirty Price
The price of a debt instrument excluding interest for the period elapsed since the last coupon was
paid is called the clean price. Market prices are clean prices. Dirty price includes interest from the
last coupon date to the settlement date.
Country Risk
The possibility that a country will default on its Government’s obligations to foreigners and / or on
the foreign liabilities of its banking system/private sector for lack of foreign exchange reserves.
Current / Capital Account Transactions

18. Transactions involving imports and exports of goods and services and interest/dividends on
financial investments are current account transactions.
19. Transactions involving deposits and financial investments in India or abroad by
foreigners/foreign entities and Indian individuals/entities respectively are capital account
transactions.
Current Yield
Annual coupon on a bond divided by the purchase price or market price of the security
CRISIL
Short for Credit Rating Information Services of India Ltd, which rates debt issues and other
financial obligations in the Indian market.
Demat
The existence of securities in electronic form in depositories and depository participants
Dematted / Dematting
The process of converting physical securities to electronic (demat) form.
Depository Participant(s) (DPs)
Satellites of apex depositories - NSDL or CDSL. They maintain records of ownership of securities.

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Derivatives
Financial instruments or contracts based on an underlying cash instrument. An example is a
forward contract in foreign exchange in which the purchase/sale of a currency for a future date is
fixed today. The forward contract is “derived” and exists because of spot transactions between
the two currencies, that is, the existence of a spot (cash) market, which is a fundamental
condition. The price of a derivative is a function of the price of the underlying instrument or
product in the cash market and other variables such as interest rates, time to maturity of the
derivative and volatility of prices in the cash market.
FEDAI
Short for Foreign Exchange Dealers’ Association of India, a body comprising representatives of
the foreign exchange departments of banks and entrusted with the formulation of norms for inter-
bank and merchant forex transactions and self-regulation of forex markets.
Forward Premium
A currency is at a premium in the forward market when fewer can be bought for a forward
maturity than spot.
Forward Discount
Refers to the value of a currency in the forward market, i.e., for future delivery. When a currency
is at a discount compared to the spot rate, it is worth less or, in other words, is cheaper to buy in
the forward market than for spot settlement.
FIMMDA
Acronym for Fixed Income Money Market and Derivatives Association of India, a body
comprising representatives of the treasury departments of banks and entrusted with the
responsibility of self-regulation of money markets and fixed income and derivative markets.
Floors
An interest rate option product which protects lenders/investors from falling interest rates.
FRAs
Short for Forward Rate Agreements. Enables FRA buyer or seller to lock-in a rate of interest for
a future period. An example of how it is structured is a bank selling a 6-6 FRA @7%. This means
the FRA buyer will pay 7% interest for the 6- month period commencing 6 months hence
(nomenclature, therefore, as 6-6), irrespective of the actual market rate for 6 months at that time.
Forward Contracts (Forex)

Forex deals between two currencies to be settled on a future date specified at the time of the deal.
100

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Hedging
Insulating (for example) interest rate exposures from market fluctuations, mostly using derivative
instruments like swaps and futures. (See Interest Rate Swap below).
Interest Rate Swap (IRS)
A derivative transaction in which one party pays a fixed rate of interest and the counterparty pays
a floating rate of interest (reset at predetermined intervals) on an agreed principal.
For example, Bank A might pay 9% fixed (semi-annually) to Bank B and Bank B pays MIBOR
+ 0.25%, (half-yearly) to Bank A on ` 100cr. No exchange of principal takes place at the
beginning or end. Only interest payments or the net flow from Bank A to Bank B or vice-versa at
six- monthly intervals takes place.
This swap protects Bank A’ s investments from a rise in interest rates as it receives and pays
offsetting fixed rates through the swap.
INFINET
Short for Indian Financial Network. A secure closed-user group (CUG) hybrid network
consisting of VSATs and closed lines. Membership is restricted to entities having SGL and
current accounts with the RBI. All banks and PDs are obliged to become members of INFINET,
as only INFINET members can participate in the NDS and CCIL Settlements.
Issuing and Paying Agent (IPA)
The bank responsible for due diligence, issue and redemption in the issue of Commercial Paper
(CP) by a corporate.
Liquidity Adjustment Facility (LAF)
A facility designed by the RBI to mop up excess liquidity or supply liquidity to the banking system
on a daily basis through repo/ reverse repo auctions.
Thus, if the market is surplus in funds, the RBI will attract more reverse repos. When the market
is liquidity – short, LAFs will attract more repos. (Repos and reverse repo are used here from the
perspective of the RBI-it borrows cash in a repo and borrows securities in a reverse repo).
LIBOR
London Interbank Offer Rate, the rate at which banks in London lend and borrow U.S. dollars
from one another.

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Market Participants and Players
Product Participants/Players
1. Call Money, Notice/Term Money Banks, Primary Dealers, Financial institutions,
mutual funds, insurance companies – the last three
only as lenders.
2. Repos Banks, PDs and mutual funds
3. Certificates of Deposit (CDs) Can be issued only by banks and financial
institutions. For issues by financial institutions, the
maturity should be at least one year. No restrictions
on the buy side.
4. Commercial Paper (CP) Can be issued only by credit-rated corporates. No
restrictions on the buy side.
5. Government of India securities T-bills/Issued by Government of India/State
State Government securities Governments through the RBI. No restrictions on
buy side.
6. Government of India-Securities No restrictions Government – guaranteed
securities on buying.
7. Non-SLR Bonds Issued by corporates – no buy/sell restrictions.
8. Spot Foreign Exchange Only forex authorised branches of banks and term-
lending institutions (IDBI, IFCI) on both buy and sell
sides. Corporates and individuals must have
underlying physical and approved current/capital
account transactions and must route their deals
through authorised dealers.
9. Forward Contracts in Foreign As for spot foreign exchange
10. Derivatives Entirely inter-bank, inter-institutional product on
originating side.
11. Equities and Mutual Funds Primary issues by corporates/mutual funds. No
restrictions on buy and sell sides.
Market makers
Entities (brokers, banks, institutions) which maintain a market (liquidity) in a security or a currency
by always quoting buy (bid) and sell (offer) prices for the security or currency.

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Marked-to-Market
The valuation of a security at its market price on a continuous basis. Applied generally on trading
positions in the securities and forex markets to determine the profit (or loss) on these exposures.
MIBOR
Mumbai Inter-bank Offer Rate (MIBOR) is the interest rate at which a bank can borrow in the
money market.
MIFOR
Mumbai Inter-bank Forward Offered Rate indicates the sum of LIBOR and the forward premium
on USD/INR.
NDTL
Short for Net Demand and Time Liabilities.
The liability base of a bank, as defined by the RBI, on which the bank must maintain minimum
CRR and SLR as prescribed by the RBI.
Net Owned Funds (NOF)
Paid-up equity plus free unencumbered reserves – also called net worth – of a bank.
NSE
Acronym for National Stock Exchange.
Nostro Accounts
Nostro Accounts are foreign currency accounts maintained with correspondent banks to facilitate
clearing forex transactions of the Bank.
Non-SLR Bonds/Securities
Debt instruments that do not qualify for inclusion in the SLR of a bank. Usually corporate bonds.
NSDL
Short for National Securities Depository Ltd, the apex depository for electronic custody,
ownership and transfer of securities, of which DPs are members.
Offer(s)
The price(s) at which market makers / sellers want to sell securities or foreign exchange to the
market.

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Open Market Operations (OMOs)

When the RBI itself buys securities from or sells securities to the market, they are called open
market operations or OMOs. The RBI’s actions have the effect of decreasing the money supply
when selling securities to the market and increasing the money supply when buying securities
from the market.
On-the-run
Recently – issued or latest issues of G-Secs. which are generally most active in the secondary
market.
On balance sheet
Items of assets and liabilities which figure in the balance sheet. Examples are paid-up capital,
reserves, borrowings, investments, fixed assets, etc.
Off balance sheet
Items which do not appear in the main balance sheet. Examples are contingent liabilities such as
guarantees and LCs. Swaps are also treated as such.
PDO (Public Debt Office)
RBI’s department maintaining SGL accounts and handling SGL transfers.
Put Option
A financial instrument giving the holder the right but no obligation to sell a security at a
predetermined price and during or at a predetermined time to the option seller.
Primary Dealers (PDs)
These are the intermediaries between the RBI and the market. They are under an obligation to
take a minimum percentage of the primary issues of securities by the RBI through the central
bank’s auctions as and when they take place. For this commitment, they are paid a commission
by the RBI, based on the value of securities absorbed by them.
Reporting Fortnight/Friday
This is the day of the week, every alternate week, for which banks must report their closing Net
Demand and Time Liabilities (NDTL) to the RBI. The RBI checks their compliance with the Cash
Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) obligations based on the NDTL data
provided by the banks on reporting Fridays. Reporting fortnight refers to the gap between two
reporting Fridays.

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Repo/Reverse Repo
Repo is short for repurchase agreement.
A repurchase agreement, as the name suggests, is a contract to buy securities today and sell
them back on a future date at a price fixed today. The securities are nominally transferred to the
buyer but the seller has full entitlement to interest/dividends and all other benefits accruing as if
he is the owner of the securities between the time of sale and buyback.
The difference between the repurchase price (future) and sale price (today) is normally based on
the inter-bank rate of interest for the tenor of the repo.
The buyer of securities in a repo in effect borrows securities and gives cash while the seller in the
repo lends securities and receives cash. The transaction is termed repo for the seller of securities
and reverse repo for the buyer of securities.
Risk Weight
The full capital ratio for ‘risky’ assets is 9%. Risk weight is the proportion of the full capital ratio
applicable to individual assets/asset categories. For example, G-Secs carry a risk weight of 2.5%.
This means the capital provision for the G-Secs asset category should be 2.5% of 9%, i.e.,
0.225% of the investment in G-Secs. Similarly, if the risk weight is 50%, the capital provision
required for the asset is 4.5%.
RTGS (Real Time Gross Settlement)
System of clearing trades in securities immediately on completion of a deal. Is possible on STP
platform. RBI/NDS/CCIL plan to move to RTGS mode in the near future in the G-Secs market.
Securitization
The conversion of loans into tradable securities based on the underlying cash flows from the
loans for interest payments and principal amortization.
Settlement
The process of exchanging securities and funds after a trade/deal is concluded. If done through a
clearing house, called clearing. The custodian is responsible for accepting or delivering securities
bought or sold by its clients. Depository participants are examples of custodians. In Western
countries, major banks also perform the role of custodians. They may even settle and guarantee
trades on behalf of their clients.
Settlement of foreign exchange deals involve crediting and debiting nostro accounts for cross-
currency deals (i.e., deals entirely in foreign currencies) and nostro account and rupee account
for USD/INR deals.

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Sensex
The BSE index of its 30 most actively traded shares.
Short(s)
A sale position in the cash or futures markets without the investor actually owning the underlying
shares. The trade anticipates the price will decline, enabling squaring up the (short) sale at a
lower price.
Short selling
Selling securities without actually owning the securities, in the expectation of buying them back at
a lower price later.
SGL Depository and SGL
The SGL (short for Subsidiary General Ledger) Depository is a computerized system of
records of ownership of SLR securities issued by the Government of India and State
Governments.
The RBI pays the coupons and redeems the SGL securities on the interest due and redemption
dates.
SLR Bonds / Securities
Securities notified by the RBI the ownership of which by a bank qualifies for inclusion in
computation of the SLR of the bank.
Statutory Liquidity Ratio (SLR)
The Statutory Liquidity Ratio is the mandatory minimum percentage of Net Demand and Time
Liabilities (NDTL), which scheduled commercial banks must invest in notified securities (also
called SLR Securities). This is monitored by the RBI with reference to the NDTL position in each
bank at the close of every reporting fortnight (alternate Fridays). Currently the SLR is 25%.
Subsidiary General Ledger (SGL)

An electronic record of ownership of G-Secs / T-bills / State Government Securities maintained by
the RBI.
STRIPS
Separation of interest from principal in a fixed – income instrument. Each interest payment till
maturity is converted into a security, which is priced on prevailing market interest rates for that
maturity. The principal becomes a separate security representing a one-off payment on maturity
and is similarly priced. A stripped security becomes, in essence, a series of zero coupon
securities representing interest and principal cash flows from the security.

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Spot
Foreign exchange deals between two currencies to be settled two working days after the deal.
SWIFT
‘Society for Worldwide Interbank Financial Telecommunication’ is a co-operative society created
under Belgian law and having its Corporate Office at Brussels. The Society, which has been in
operation since May 1977 and covers most of Western Europe and North America, operates a
computer-guided communication system to rationalize international payment transfers. It
comprises a computer network system between participating banks with two operating centers, in
Amsterdam and Brussels, where messages can be stored temporarily before being transmitted to
the relevant bank’s terminal.
Standard Assets
Loans/investments which are not in arrears or default with regard to interest and principal.
Trading Portfolio
As defined by the RBI, the trading portfolio of a bank consists of securities bought with a view to
profit from short-term upward movements in their prices. They must be compulsorily marked-to-
market.
T-bills
Short for Treasury Bills. Sovereign debt of the Government of India. Qualifies for inclusion in the
SLR. Issued through auctions by the RBI. Maximum maturity: one year. A discount instrument.
Tail
The lower among the bid prices is an auction, if bids are arranged in descending order.
Tier I Capital
Consists of paid-up equity and free reserves and constitutes the core capital of the Bank.
Tier II Capital
Consists of revaluation reserves, general provisions and loss reserves and subordinated debt in
the form of long-term bonds and Investment Fluctuation Reserve.
Subordinated debt issued by banks/FIs/NBFCs to meet Tier II capital requirements are called Tier
II bonds.
TT Buying/Selling Rates
Rates quoted by a bank for immediate purchases/sales of foreign exchange. Usually the inter-
bank rate ± bank’s spread. TT buying/selling rates are converted to TT forward rates by applying
the applicable forward premiums on the foreign currency.

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Vostro Accounts
Vostro Accounts are rupee accounts maintained by banks outside India with Bank of Baroda to
clear their rupee transactions.
Value Date
Payment date to settle a transaction, that is, the date on which funds will actually be credited or
debited.
Volatility
The standard deviation (average deviation of individual prices from the mean) of a series of prices
of a financial instrument. Measures the fluctuation over time in the market price of an instrument
and is extensively used in the valuation of financial instruments.
Yield Curve
A plot of YTM against time for various maturities for a specific class of bonds. Usually done for G-
Secs (or Treasuries), in which case it is described as the Treasury benchmark (risk-free) yield
curve.
YTM (Yield to Maturity)
The rate of interest which equates the present value of future interest payments and principal
redemption with today’s price of the bond.
Zero Coupon Yield
The yield on bonds paying no coupons and cumulating interest till maturity.

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Asst. Liability Management – Terminology
Asset
An asset is anything of value that is owned by a person or business
Available for Sale
The securities available for sale are those securities where the intention of the bank is neither to
trade nor to hold till maturity. These securities are valued at the fair value which is determined by
reference to the best available source of current market quotations or other data relative to
current value.
Balance Sheet
A balance sheet is a financial statement of the assets and liabilities of a trading concern, recorded
at a particular point in time.
Banking Book
The banking book comprises assets and liabilities, which are contracted basically on account of
relationship or for steady income and statutory obligations and are generally held till maturity.
Basel Capital Accord

The Basel Capital Accord is an Agreement concluded among country representatives in 1988 to
develop standardised risk-based capital requirements for banks across countries. The Accord
was replaced with a new capital adequacy framework (Basel II), published in June 2004. Basel II
is based on three mutually reinforcing pillars that allow banks and supervisors to evaluate
properly the various risks that banks face.
These three pillars are: minimum capital requirements, which seek to refine the present
measurement; supervisory review of an institution's capital adequacy and internal assessment
process; and market discipline through effective disclosure to encourage safe and sound banking
practices

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Basel Committee on Banking Supervision

The Basel Committee is a committee of bank supervisors consisting of members from each of the
G10 countries. The Committee is a forum for discussion on the handling of specific supervisory
problems. It coordinates the sharing of supervisory responsibilities among national authorities in
respect of banks' foreign establishments with the aim of ensuring effective supervision of banks'
activities worldwide.
Basic Indicator Approach
An operational risk measurement technique permitted under Basel II. The approach sets a charge
for operational risk as a fixed percentage ("alpha factor") of a single indicator. The indicator
serves as a proxy for the bank's risk exposure.
Basis Risk
The risk that the interest rate of different assets, liabilities and off-balance sheet items may
change in different magnitude is termed as basis risk.
Capital
Capital refers to the funds (e.g., money, loans, equity) which are available to carry on a business,
make an investment, and generate future revenue. Capital also refers to physical assets which
can be used to generate future returns.
Capital adequacy
A measure of the adequacy of an entity's capital resources in relation to its current liabilities and
also in relation to the risks associated with its assets. An appropriate level of capital adequacy
ensures that the entity has sufficient capital to support its activities and that its net worth is
sufficient to absorb adverse changes in the value of its assets without becoming insolvent. For
example, under BIS (Bank for International Settlements) rules, banks are required to maintain a
certain level of capital against their risk-adjusted assets.
Capital reserves
That portion of a company's profits not paid out as dividends to shareholders. They are also
known as un-distributable reserves.
Convertible Bond
A bond giving the investor the option to convert the bond into equity at a fixed conversion price or
as per a pre-determined pricing formula.
Core Capital
Tier 1 capital is generally referred to as Core Capital

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Credit risk
Risk that a party to a contractual agreement or transaction will be unable to meet their obligations
or will default on commitments. Credit risk can be associated with almost any transaction or
instrument such as swaps, repos, CDs, foreign exchange transactions, etc. Specific types of
credit risk include sovereign risk, country risk, legal or force majeure risk, marginal risk and
settlement risk.
Debentures
Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific
dates and principal amount repayable on a particular date on redemption of the debentures.
Deferred Tax Assets

Unabsorbed depreciation and carry forward of losses which can be set-off against future taxable
income which is considered as timing differences result in deferred tax assets. The deferred Tax
Assets are accounted as per the Accounting Standard 22. Deferred Tax Assets have an effect of
decreasing future income tax payments, which indicates that they are prepaid income taxes and
meet definition of assets; whereas deferred tax liabilities have an effect of increasing future year's
income tax payments, which indicates that they are accrued income taxes and meet definition of
liabilities.
Derivative
A derivative instrument derives much of its value from an underlying product. Examples of
derivatives include futures, options, forwards and swaps. For example, a forward contract can be
derived from the spot currency market and the spot markets for borrowing and lending. In the
past, derivative instruments tended to be restricted only to those products which could be derived
from spot markets. However, today the term seems to be used for any product that can be
derived from any other.
Duration
Duration (Macaulay duration) measures the price volatility of fixed income securities. It is often
used in the comparison of the interest rate risk between securities with different coupons and
different maturities. It is the weighted average of the present value of all the cash flows
associated with a fixed income security. It is expressed in years. The duration of a fixed income
security is always shorter than its term to maturity, except in the case of zero coupon securities
where they are the same.
Foreign Institutional Investor
An institution established or incorporated outside India which proposes to make investment in
India in securities; provided that a domestic asset management company or domestic portfolio
manager who manages funds raised or collected or brought from outside India for

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investment in India on behalf of a sub-account shall be deemed to be a Foreign Institutional

Investor.
Forward Contract
A forward contract is an agreement between two parties to buy or sell an agreed amount of a
commodity or financial instrument at an agreed price for delivery on an agreed future date. In
contrast to a futures contract, a forward contract is not transferable or exchange tradable, its
terms are not standardized and no margin is exchanged. The buyer of the forward contract is said
to be long the contract and the seller is said to be short the contract.
General provisions and loss reserves
Such reserves, if they are not attributable to the actual diminution in value or identifiable potential
loss in any specific asset and are available to meet unexpected losses, can be included in Tier II
capital
General risk
Risk that relates to overall market conditions while specific risk is risk that relates to the issuer of
a particular security
Hedging
Taking action to eliminate or reduce exposure to risk
Held for Trading
Securities where the intention is to trade by taking advantage of short-term price / interest rate
movements.
Horizontal Disallowance
A disallowance of offsets to required capital used the BIS Method for assessing market risk for
regulatory capital. In order to calculate the capital required for interest rate risk of a trading
portfolio, the BIS Method allows offsets of long and short positions. Yet interest rate risks of
instruments at different horizontal points of the yield curve are not perfectly correlated. Hence, the
BIS Method requires that a portion of these offsets be disallowed.
Hybrid debt capital instruments
In this category fall a number of capital instruments which combine certain characteristics of
equity and certain characteristics of debt. Each has a particular feature which can be considered
to affect its quality as capital. Where these instruments have close similarities to equity, in
particular when they are able to support losses on an ongoing basis without triggering liquidation,
they may be included in Tier II capital.

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Interest rate risk

Risk that the financial value of assets or liabilities (or inflows/outflows) will be altered because of
fluctuations in interest rates. For example, the risk that future investment may have to be made at
lower rates and future borrowings at higher rates.
Long Position
A long position refers to a position where gains arise from a rise in the value of the underlying.
Market risk
Risk of loss arising from movements in market prices or rates away from the rates or prices set
out in a transaction or agreement.
Modified Duration
The modified duration or volatility of an interest bearing security is its Macaulay Duration divided
by one plus the coupon rate of the security. It represents the percentage change in the securities’
price for a 100-basis point change in yield. It is generally accurate for only small changes in the
yield.
MD = - dP /dY x 1/P
Where, MD= Modified Duration
P= Gross price (i.e. clean price plus accrued interest)
dP= Corresponding small change in price
dY = Small change in yield compounded with the frequency of the coupon payment.
Mortgage-backed security
A bond-type security in which the collateral is provided by a pool of mortgages. Income from the
underlying mortgages is used to meet interest and principal repayments.
Mutual Fund
Mutual Fund is a mechanism for pooling the resources by issuing units to the investors and
investing funds in securities in accordance with objectives as disclosed in offer document. A fund
established in the form of a trust to raise monies through the sale of units to the public or a
section of the public under one or more schemes for investing in securities, including money
market instruments.
Net Interest Margin
Net interest margin is the net interest income divided by average interest earning assets
Net NPA
Net NPA = Gross NPA – (Balance in Interest Suspense account + DICGC/ECGC claims
113

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received and held pending adjustment + Part payment received and kept in suspense account
+ Total provisions held)‘
Nostro accounts
Foreign currency settlement accounts that a bank maintains with its overseas correspondent
banks. These accounts are assets of the domestic bank.
Off-Balance Sheet exposures
Off-Balance Sheet exposures refer to the business activities of a bank that generally do not
involve booking assets (loans) and taking deposits. Off-balance sheet activities normally generate
fees, but produce liabilities or assets that are deferred or contingent and thus, do not appear on
the institution's balance sheet until or unless they become actual assets or liabilities.
Open position
It is the net difference between the amounts payable and amounts receivable in a particular
instrument or commodity. It results from the existence of a net long or net short position in the
particular instrument or commodity.
Option
An option is a contract which grants the buyer the right, but not the obligation, to buy (call option)
or sell (put option) an asset, commodity, currency or financial instrument at an agreed rate
(exercise price) on or before an agreed date (expiry or settlement date). The buyer pays the seller
an amount called the premium in exchange for this right. This premium is the price of the option.
Risk
The possibility of an outcome not occurring as expected. It can be measured and is not the same
as uncertainty, which is not measurable. In financial terms, risk refers to the possibility of financial
loss. It can be classified as credit risk, market risk and operational risk.
Risk Asset Ratio
A bank's risk asset ratio is the ratio of a bank's risk assets to its capital funds. Risk assets include
assets other than highly rated government and government agency obligations and cash, for
example, corporate bonds and loans. The capital funds include capital and undistributed reserves.
The lower the risk asset ratio the better the bank's 'capital cushion'.
Risk Weights
Basel II sets out a risk-weighting schedule for measuring the credit risk of obligors. The risk
weights are linked to ratings given to sovereigns, financial institutions and corporations by
external credit rating agencies.

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Securitization
The process whereby similar debt instruments/assets are pooled together and repackaged into
marketable securities which can be sold to investors. The process of loan securitisation is used
by banks to move their assets off the balance sheet in order to improve their capital asset ratios.
Short position
A short position refers to a position where gains arise from a decline in the value of the underlying.
It also refers to the sale of a security in which the seller does not have a long position.
Specific risk
Within the framework of the BIS proposals on market risk, specific risk refers to the risk
associated with a specific security, issuer or company, as opposed to the risk associated with a
market or market sector (general risk).
Subordinated debt
Refers to the status of the debt. In the event of the bankruptcy or liquidation of the debtor,
subordinated debt only has a secondary claim on repayments, after other debt has been repaid.
Tier one (or Tier I) capital

A term used to refer to one of the components of regulatory capital. It consists mainly of share
capital and disclosed reserves (minus goodwill, if any). Tier I items are deemed to be of the
highest quality because they are fully available to cover losses. The other categories of capital
defined in Basel II are Tier II (or supplementary) capital and Tier III (or additional supplementary)
capital.
Tier two (or Tier II) capital
Refers to one of components of regulatory capital. Also known as supplementary capital, it
consists of certain reserves and certain types of subordinated debt. Tier II items qualify as
regulatory capital to the extent that they can be used to absorb losses arising from a bank's
activities. Tier II's capital loss absorption capacity is lower than that of Tier I capital.
Trading Book
A trading book or portfolio refers to the book of financial instruments held for the purpose of short-
term trading, as opposed to securities that would be held as a long- term investment. The trading
book refers to the assets that are held primarily for generating profit on short - term differences in
prices/yields. The price risk is the prime concern of banks in trading book.

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Underwrite
Generally, to underwrite means to assume a risk for a fee. Its two most common contexts are:
(u) Securities: a dealer or investment bank agrees to purchase a new issue of securities from
the issuer and distribute these securities to investors. The underwriter may be one person
or part of an underwriting syndicate. Thus the issuer faces no risk of being left with unsold
securities.
(v) Insurance: a person or company agrees to provide financial compensation against the risk
of fire, theft, death, disability, etc., for a fee called a premium.
Undisclosed Reserves
These reserves often serve as a cushion against unexpected losses, but they are less permanent
in nature and cannot be considered as ‘Core Capital’. Revaluation reserves arise from revaluation
of assets that are undervalued on the bank’s books, typically bank premises and marketable
securities. The extent to which the revaluation reserves can be relied upon as a cushion for
unexpected losses depends mainly upon the level of certainty that can be placed on estimates of
the market values of the relevant assets, the subsequent deterioration in values under difficult
market conditions or in a forced sale, potential for actual liquidation at those values, tax
consequences of revaluation, etc.
Value at risk (VAR)
It is a method for calculating and controlling exposure to market risk. VAR is a single number
(currency amount) which estimates the maximum expected loss of a portfolio over a given time
horizon (the holding period) and at a given confidence level.
Venture capital Fund
A fund with the purpose of investing in start- up business that is perceived to have excellent
growth prospects but does not have access to capital markets.
Vertical Disallowance
In the BIS Method for determining regulatory capital necessary to cushion market risk, a reversal of the
offsets of a general risk charge of a long position by a short position in two or more securities in the same
time band in the yield curve where the securities have differing credit risks
ACH - Automated Clearing Houses

ACU - Asian Clearing Union
AD - Authorised Dealer
ADB - Asian Development Bank
ADR - American Depository Receipt
AFS - Available for Sale
AIFI - All India Financial Institutions
ALD - Aggregate Liabilities to the Depositors

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ALM - Asset Liability Management
AMFI - Association of Mutual Funds in India
AML - Anti Money Laundering
AMS - Aggregate Measures of Support
ARCIL - Asset Reconstruction Company of India Ltd.
ARDC - Agriculture Refinance and Development Corporation
ASEAN - Association of South East Asian Nations
BCBS - Basel Committee on Banking Supervision
BCP - Business Continuity Plan
BFS - Board for Financial Supervision
BFSI - Banking, Financial Services and Insurance
BIFR - Board for Industrial and Financial Reconstruction
BIS - Bank for International Settlements
BoP - Balance of Payments
BPLR - Benchmark Prime Lending Rate

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BPSS - Board for Payment and Settlement Systems
CBLO - Collateralized Borrowing and Lending Obligation
CBoT - Chicago Board of Trade
CCIL - Clearing Corporation of India Limited
CD - Certificate of Deposit
CDR - Corporate Debt Restructuring
CEPT - Common External Preferential Tariff
CFMS - Centralized Funds Management System
CFS - Consolidated Financial Statement
CFTS - Centralized Funds Transfer System
CGRA - Currency and Gold Revaluation Account
CGTSI - Credit Guarantee Fund Trust for Small Industries
CIB - Capital Indexed Bond
CIBIL - Credit Information Bureau of India Limited
CLF - Collateralized Lending Facility
CPI - Consumer Price Index
CPI-IW - Consumer Price Index for Industrial Workers
CPR - Consolidated Prudential Report
CP - Commercial Paper
CPSS - Committee on Payment and Settlement Systems
CRAR - Capital to Risk-Weighted Assets Ratio
CRM - Country Risk Management
CRR - Cash Reserve Ratio
CSGL - Constituents' Subsidiary General Ledger Account
CVPS - Currency Verification and Processing System
DBOD - Department of Banking Operations and Development
DBS - Department of Banking Supervision
DCA - Debtor-Creditor Agreement

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DFHI - Discount and Finance House of India
DFI - Development Finance Institution
DFRC - Duty Free Replenishment Certificate
DICGC - Deposit Insurance and Credit Guarantee Corporation
DNSS - Deferred Net Settlement System
DP - Depository Participant
DRI - Differential Rate of Interest
DRS - Disaster Recovery System
DSS - Debt Swap Scheme
DRT - Debt Recovery Tribunal
DTA - Domestic Tariff Area
DTL - Demand and Time Liabilities
DvP - Delivery versus Payment
EC - Exchange Control
ECB - External Commercial Borrowing
ECD - Exchange Control Department
ECGC - Export Credit Guarantee Corporation
ECR - Export Credit Refinance
ECS - Electronic Clearing Services
EDI - Electronic Data Interchange
EEA - Exchange Equalization Account
EEFC - Exchange Earners' Foreign Currency Account
EFT - Electronic Funds Transfer
EKMS - Enterprise Knowledge Management System
EME - Emerging Market Economy
EMU - European Monetary Union
EOU - Export Oriented Unit
EPCG - Export Promotion Capital Goods

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EU - European Union
EXIM - Export Import
FCA - Foreign Currency Assets
FCNRA - Foreign Currency Non-Resident Account
FCNR (B) - Foreign Currency Non-Resident (Banks)
FCRA - Forward Contract Regulation Act
FCCB - Foreign Currency Convertible Bond
FDI - Foreign Direct investment
FEDAI - Foreign Exchange Dealers’ Association of India
FED - Foreign Exchange Department
FEMA - Foreign Exchange Management Act
FER - Foreign Exchange Reserves
FET-ERS - Foreign Exchange Transactions Electronic Reporting System
FII - Foreign Institutional Investor
FIMMDA - Fixed Income Money Market and Derivatives Association of India
FRA - Forward Rate Agreement
FRB - Floating Rate Bond
FRBM - Fiscal Responsibility and Budget Management
FSSA - Financial System Stability Assessments
FTT - Foreign Travel Tax
G-20 - Group of Twenty
GAAP - Generally Accepted Accounting Principles
GATS - General Agreement on Trade in Services
GATT - General Agreement on Tariffs and Trade
GDCF - Gross Domestic Capital Formation
GDP - Gross Domestic Product
GDS - Gross Domestic Saving
GDR - Global Depository Receipt

Page 358
GFCF - Gross Fixed Capital Formation
GFD - Gross Fiscal Deficit
GRF - Guarantee Redemption Fund
GSO - Green Shoe Option
HFT - Held for Trading
HTM - Held to Maturity
IAS - Integrated Accounting System
ICA - Inter-creditor Agreement
ICDs - Inter-Corporate Deposits
ICOR - Incremental Capital Output Ratio
IDL - Intra-day Liquidity
IDMD - Internal Debt Management Department
IDR - Indian Depository Receipt
IFC - International Finance Corporation
IFCI - Industrial Finance Corporation of India
IFI - International Financial Institution
IFR - Investment Fluctuation Reserve
IIBI - Industrial Investment Bank of India
IIP - Index of Industrial Production
IIP - International Investment Position
IMF - International Monetary Fund
IMFC - International Monetary and Financial Committee
INFINET - Indian Financial Network
IRB - Internal Rating Based
IRDA - Insurance Regulatory and Development Authority
IRF - Interest Rate Future
IRS - Interest Rate Swap
ISA - Information System Audits

Page 359
ISP - Information Security Policy
LAF - Liquidity Adjustment Facility
LaR - Liquidity at Risk
LC - Letter of Credit
LIBOR - London Inter-Bank Offered Rate
LIFFE - London Inter-Bank Financial Futures Exchange
M3 - Broad Money
MBS - Mortgage-Backed Securities
MFA - Multi Fiber Agreement
MICR - Magnetic Ink Character Recognition
MIFOR - Mumbai Inter-Bank Forward Offered Rate
MNBC - Miscellaneous Non-Banking Company
MoU - Memorandum of Understanding
MPBF - Maximum Permissible Bank Finance
MPI - Macro-Prudential Indicator
MSS - Market Stabilization Scheme
MTFRP - Medium-Term Fiscal Reforms Programme
NAV - Net Asset Value
NFA - Net Foreign Assets
NBFC - Non-Banking Financial Company
NCAER - National Council of Applied Economic Research
NCD - Non-Convertible Debenture
NDA - Net Domestic Assets
NDS - Negotiated Dealing System
NDTL - Net Demand and Time Liabilities
NEER - Nominal Effective Exchange Rate
NEFT - National Electronic Funds Transfer
NHAI - National Highway Authority of India

Page 360
NIC - National Industrial Credit
NMS - Network Management System
NOF - Net-Owned Fund
NPA - Non-Performing Asset
NPC - National Payments Council
NRE - Non-Resident External
NRI - Non-Resident Indian
NR(NR)RD - Non-Resident (Non-Repatriable) Rupee Deposits
NRO - Non-Resident Ordinary Accounts
NRSR - Non-Resident Special Rupee Deposits
NSSF - National Small Saving Fund
NSDL - National Securities Depository Ltd.
NSS - National Settlement System
NIC - National Industrial Credit
OBU - Offshore Banking Unit
OCB - Overseas Corporate Body
OLTAS - Online Tax Accounting Systems
OMO - Open Market Operation
ONGC - Oil and Natural Gas Commission
OPAC - Online Public Access Catalogue
OPEC - Organisation of Petroleum Exporting Countries
OSMOS - Off-site Monitoring and Surveillance
OTCEI - Over-the-Counter Exchange of India
OTS - One-Time Settlement
PCA - Prompt Corrective Action
PCD - Partially Convertible Debenture
PD - Primary Dealer
PDO - Public Debt Office

Page 361
PFI - Public Financial Institution
PIO - Person of Indian Origin
PKI - Public Key Infrastructure
PLR - Prime Lending Rate
PMO - Primary Market Operations
PMS - Portfolio Management Services
PSRS - Prudential Supervisory Reporting System
PSSC - Payment and Settlement Systems Committee
PTA - Preferential Trading Agreement
QIS - Quantitative Impact Study
RBS - Risk-Based Supervision
RC - Reconstruction Companies
RDBMS - Relational Data Base Management System
REER - Real Effective Exchange Rate
RFC (D) - Resident Foreign Currency (Domestic)
Repo - Ready Forward/Repurchase Agreement
RIB - Resurgent India Bond
RIDF - Rural Infrastructure Development Fund
RIN - Risk Intelligence Network
RNBC - Residuary Non-Banking Company
ROA - Return on Total Assets
ROE - Return on Equity
RPT - Risk Profile Template
RSSS - Recommendations for Securities Settlement System
RTGS - Real Time Gross Settlement
RTIA - Regional Trade and Investment Area
SAFE - South Asian Federation of Stock Exchanges
SAFTA - South Asian Free Trade Agreement

Page 362
SASF - Stressed Assets Stabilization Fund
SCRA - Securities Contracts (Regulation) Act, 1956
SDF - Submission of Declaration Form
SDRM - Sovereign Debt Restructuring Mechanism
SDR - Special Drawing Right
SEFER - Securities held as Foreign Exchange Reserves
SEFT - Special Electronic Funds Transfer
SFMS - Structured Financial Messaging Solution
SGL - Subsidiary General Ledger
SIPS - Systemically Important Payment System
SITP - Strategic Information Technology Plan
SLR - Statutory Liquidity Ratio
SME - Small and Medium Enterprise
SPV - Special Purpose Vehicle
BS -Securities Settlement System
STP - Straight Through Processing
SIFI - Systemically Important Financial Intermediaries
SWIFT - Society for Worldwide Inter-bank Financial Telecommunications
TAC - Technical Advisory Committee
TBT - Technical Barriers to Trade
TFPG - Total Factor Productivity Growth
TIN - Tax Information Network
UIP - Uncovered Interest Parity
UNCTAD - United Nations Conference for Trade and Development
VaR - Value at Risk
WADR - Weighted Average Discount Rate
WAN - Wide Area Network
WCDL - Working Capital Demand Loan

Page 363
WDM - Wholesale Debt Market
WMA - Ways and Means Advance
WPI - Wholesale Price Index
Y-on-Y - Year-on-Year
YTM - Yield-to-Maturity
**BEST OF LUCK **
Disclaimer
While every effort has been made by me to avoid errors or omissions in this publication, any error or
discrepancy noted may be brought to my notice through e-mail to
Srinivaskante4u@gmail.com which shall be taken care of in the subsequent editions. It is also
suggested that to
clarify any doubt colleagues should cross-check the facts, laws and contents of this publication with
original Govt. / RBI / Manuals/Circulars/Notifications/Memo/Spl Comm. of our bank.

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Certified Treasury Professionals

Srinivas Kante B.Tech, CAIIB

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- Persons identified for posting in the dealing room

- People aspiring to become dealers in future

Subject of Online Examination :

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(iii) There will NOT be negative marking for wrong answers.

- 25 or more marks out of 50 marks in the Classroom Training.

COURSE STRUCTURE & DELIVERY

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Module - II : Money Market Operations

Module - III : Investments

Module - IV : Forex Dealings

Module - VI : Model Code and Dealing Ethics

Module - VII : Time Value of Money and Interest Rate Calculations

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Some of the recollected questions of certified treasury professional exam held on

∆Y= change in the yield of a bond in decimal

Average percentage price change per basis point change in yield

cash inflow and outflow of the repo borrower in a repo transaction

Yield and price of 364 and 91 days treasury bill.

1) Financial institutions -banks, mutual funds, insurance companies etc

MARKETS & REGULATORS

CAPITAL MARKET MONEY MARKET MUTUAL FUNDS INSURANCE

SEBI RBI AMFI IRDA

The Structure of Financial Market of India

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industry, trade and others.

two bases of study, we give a single functional- cum-institutional classification in Figure

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(i) Inter-bank call money market

(ii) Bill market, and

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Capital markets which consist of:

Commodity markets, which facilitate the trading of commodities.

Foreign exchange markets, which facilitate the trading of foreign exchange.

Interbank lending market

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Individuals and doubles

Puts money in a savings account at a bank

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Some of the important functions of financial market are as follows:

exchange of financial assets.

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Financial markets perform following four important functions:

1. Mobilization of Savings and channelizing them into Most Productive Use:

savers to most appropriate investment opportunities.

2. Facilitate Price Discovery:

3. Provide Liquidity to Financial Assets:

platform to convert securities in cash.

4. Reduce the Cost of Transaction:

readily available in financial markets

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Maturities can range from overnight to up to a year.

offer significantly lower returns than most other securities.

institutions that are linked electronically.

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“break the buck” when needed.

defaults over the years, but they are not common.

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faith and credit of the United States government.