Treasury Products

CAIIB Bank Financial Management

Module C Risk Management
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Treasury Products

There are 3 main markets for Treasury for Risk Management. 1. Products of Foreign Exchange Market 2. Products of Money Market 3. Products of Securities Market

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1. Products of Foreign Exchange Market Foreign exchange (Forex) market is the most liquid market as free currencies (Major currencies which are fully convertible eg. USD, GBP, JPY etc.

a. Spot Trades: Spot means currency bought and sold, with settelement on the same day i.e. Today.
b. Forward Rates: Forwards refer to purchase or sale of a currency on a future date. Forward exchange rates are arrived at on the basis of interest rate differentials of two currencies, added or deducted from spot exchange rate.
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c. Swaps: A combination of spot and forward transactions, or a combination of two forward transactions is called a swap. A swap transaction is also described as an exchange of cashflows. Ex:Buying USD (with Rupees) in spot market and selling same amount of USD in forward market or vice versa, constitutes a USD/INR swap.

If there is purchase and sale of currency on two forward dates (Forward to Forward) is also a swap.
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d. Investment of foreign exchange surpluses: Banks are permitted to invest foreign exchange surpluses in globle money markets/in shortterm securities. These can be done by 1. Inter-bank Loans: Short-term deposits with domestic and globle banks. 2. Short-term investments: Banks are premitted to invest overseas in short-term instruments of high credit quality. 3. Nastro Accounts: Nastro accounts are current account denominated in foreign currency, maintained by the banks with their correspondent banks in the home country of the currency. Balance in Nastro account not earn any interest.
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e. Loans and advances: Banks give loan by means of FCNR loans, PCFC and discount of foreign currency bills to select customers.
f. Rediscounting of foreign bills: Banks are purchased / negotiated foreign currency bills by another banks.

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Treasury Products 2. Money Market Products

Call money: The money that is lent for one day in this market is known as Call Money. The call money market is an integral part of the Indian Money Market,where the day- to-day surplus funds (mostly of banks) are traded. Notice Money :If it exceeds one day but less than 15 days, it is called "Notice Money Term Money: It is exceed of 14 days, but not exceeding 1 year.

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

Banks borrow in this market for the following purpose 1. To fill the gaps or temporary mismatches in funds. 2. To meet the CRR & SLR mandatory requirements as stipulated by the Central bank 3. To meet sudden demand for funds arising out of large outflows.

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Treasury Products
Treasury Bills: Bills are issued by Government of India against their short term borrowing requirements with maturities ranging between 14 to 364 days. Presently RBI is Issuing 91 days , 182 days & 364 days T-bill All these are issued at a discount-to-face value. For example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of it's tenure at Rs. 100.00. Who can invest in T-Bill

Banks, Primary Dealers, State Governments, Provident Funds, Financial Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs can invest in T-Bills.
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Commercial Paper (CP): CP is a short term usance money market instrument, issued by corporate , Primary Dealers and Financial Institute (FI) to raise short term resources. 1. The eligible company shall obtain credit rating minimum P2. 2. Net worth as per last balance sheet must not be below Rs.4 cr. 3. Any advances from bank must be under standard asset clasification of the bank. Maturities period between a minimum of 7 days and a maximum of up to one year. CP can be issued in denominations of Rs.5 lakh or multiples.
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Treasury Products

Certificates of Deposits (CD): CDs are against funds deposited at a bank or other eligible financial institution for a specified time period either in Fixed or Floating rate. CDs can be issued by all scheduled commercial banks except RRBs Minimum period 15 days Maximum period 1 year Minimum Amount Rs 1 lac and in multiples of Rs. 1 lac

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Repo: Repo is used for lending and borrowing for 1 day to1 year. Repos being short term (overnight) money market instruments are necessarily being used for smoothening volatility in money market rates by RBI through injection of short term liquidity into the market as well as absorbing excess liquidity from the system when RBI absorbs liquidity it is termed as Reverse Repo and the RBI injecting liquidity is the repo operation

Reserve Bank gradually extended repos facility to all Central govt. dated securities, Treasury Bills and State govt. securities
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Collateralized borrowing and lending obligation (CBLO) There is fixed term ranging from 1 day to1 year. CBLO is a RBI approved money market instrument. - Members can contribute securities and / or cash towards their collateral / margin for operating in the CBLO segment - The minimum cash collateral of Rs.1 lacs needs to be maintained by a member at all time - The securities eligible as collateral are central government securities including Treasury bills as specified by CCIL from time to time - Banks are permitted to invest in equity subject to capital market exposure
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Treasury Products

Bills rediscounting:

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

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

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Treasury Products
(3) Securities market products:
-Government Securities: To satisfy SLR requirement, banks can invest in Government securities. G-sec yeild set benchmark rates for corporate bonds, RBI has issued bonds for various maturities ranging from 1 years to 30 years, so as to establish a market determined yield curve. - Corporate debt paper: Corporate debt paper refers to medium and long-term bonds and debentures issued by corporates and financial institutions, which are tradables. They are non-SLR securitites. Banks are allowed to invest only in demat securities.
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- Debenture and bonds: These are issued by corporate bodies, literally with a charge on specific assets. The literal meaning has been lost in practice and debentures and bonds may be issued with or without securities. Debentures are governed by company law and are transferable only by registration Bonds are negotiable instruments governed by law of contracts.

- Convertible Bonds: Bond-holders are given an option to convert the debt into equity. Coupon on convertible bond is generally lower than the coupon on non-convertible bond.
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Equities: Banks are permitted to invest in equities subject to a limit on capital market exposure, set by RBI.

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

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Domestic and global markets: Funds can be swapped freely from one currency to another currency or transfer easily from one market to another market. These can be done by options like: a. FII investment: Foreign investment flow in india by way of foreign direct investment (long project related investment ) and portfolio investment (In stock market or debt market). In FII investors investment banks and hedge funds are included. b. ADR / GDR issued by indian companies: Issue equity in global market by ADR/GDR. Holder of ADR/GDR have a option to sell their holding in domestic market and received proceeds in foreign currency.
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c. External Commercial Borrowings: (ECB): Indian companies can borrow in global market from banks or issue debt paper with guldeline issued by RBI to fund their project. d. Foreign currency funds of banks: Banks can use their FCNR deposit funds for investment in overseas markets as well as for domestic lending in foreign currency. It is used for short term loans. e. Special facility to exporters: Banks can allowed pre-shipment and post-shipment facilities to exporters in foreign currency.

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f. Overseas Direct Investment (ODI): RBI allows corporates to invest in joint ventures / subsidiary units overseas, from their Rupee resources subject to a cap based on their networth (currently 3 times their net worth). This has allowed leading Indian business groups to expand globally by establishing companies or by acquiring other companies.

g. Free remittance: Individuals are now permitted to remit overseas freely, without RBI approval, up to USD 2,00,000 a year, for any purpose ( with a few exceptions like gambling and margin trading). The may choose to invest the funds in global debt, equity or simply spend the money for consumption purposes.

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Thank You

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