Presentation on Treasury Products

A PRESENTATION ON TREASURY PRODUCTS

BY GROUP 2SAURABH VOHRA

TAMAL MUKHERJEECHETNA AWASTHI

NADEEM AHMEDIDRIS SEVLIVALA

SHORT TERMSHORT TERMFUNDFUND

• A type of fund that invests in short-term investments of high quality and low risk.

• The goal of this type of fund is to protect capital with low-risk investments while achieving a return that beats a relevant benchmark such as a Treasury bill index.

3

DEFINITION OF ‘SHORT-TERM FUND’ 

CONTD…

• Short-term investment funds include cash, bank notes, corporate notes, government bills and various safe short-term debt instruments.

• These types of funds are usually used by investors who are temporarily parking funds before moving them to another investment that will provide higher returns.

4

INVESTMENT INVESTMENT MANAGEMENTMANAGEMENT

• Commitment of funds for a period of time in order to derive future payments

• Future payments must compensate the investor for:1. Time the funds are committed 2. Expected rate of inflation3. Uncertainty of future payments

INVESTMENT DEFINED

6

• Reflects the combination of risk and return available on all assets at a given time

SECURITY MARKET LINE (SML)

7

• Overvalued and Undervalued Assets

• Shift of an asset along the SML – due to change in its risk-return characteristics

• Shift in the SML – due to a change in NRFR

• Tilt in the SML – due to a change in investors’ attitude towards risk

SECURITY MARKET LINE

8

• Certificates of Deposit• Bonds• Equities• Investment Trusts• Structured Products• Derivatives

ASSETS ON THE SML

9

• Tenure usually between 1 and 36 months• Virtually Risk-free• Fixed Interest Rate• Larger Principle,

Higher Interest Rate• Mimics Yield Curve• Specific Currency• Withdrawals before

maturity are subject to a penalty

CERTIFICATES OF DEPOSIT

10

• An IOU given by a borrower (the issuer) to a lender (the investor)

• Issuers:– Government (Sovereign Bonds)– Firms (Corporate Bonds)

BONDS - OVERVIEW

11

• Common Stock

• Share of ownership in a corporation

• Carries voting rights (no. of votes is proportional to the no. of shares owned)

• Traded in the Secondary Market (Stock Market) or in the Primary Market (Initial Public Offering)

EQUITIES - OVERVIEW

12

• Bid and Offer Price• Volume• Market Capitalization• Earnings per Share (EPS)• Price/Earnings Ratio (P/E)• Dividend Yield• Short Selling• Margin Financing

EQUITIES - TERMS

13

• Real Estate Investment Trust (REIT)– Ownership of a share in a fund which invests

in properties– Receive periodic payouts due to rental income

earned by the REIT– Potential for Capital Appreciation– Trades like a stock on stock exchanges– E.g. Suntec REIT

• Business Trusts– E.g. First Ship Lease

INVESTMENT TRUSTS - OVERVIEW

14

• Packaged investment products. Includes:– Financial Assets– Financial Derivatives

• Returns can be made to depend on:– Single stocks, bonds or commodity prices– Indices– Interest Rates

• In some cases, Principal is protected if held till Maturity

STRUCTURED PRODUCTS

15

• Financial Instruments which value is derived from underlying stock indices, interest rates, commodity prices or currencies

• Provides very high leverage• Complex and very risky• Commonly used for Hedging purposes• Possible to lose more than capital outlay• Traded on Stock Exchanges and 24/5

Commodity cum Futures Exchanges

DERIVATIVES – OVERVIEW

16

• Futures

• Options– Put Options– Call Options

• Swaps

DERIVATIVES – EXAMPLES

17

1. Analyze your future cash flow needs2. Decide on your investment time horizon3. Determine your risk profile & investment

goals4. Set weights to various asset classes5. Diversify across companies, sectors and

geographical regions6. Select Securities and Funds & make the

trade

THE INVESTMENT PROCESS

18

FINANCIAL MARKET

• A financial market is a market in which people and entities can trade financial securities, commodities, and other fungible item of value at low transaction cost and at price that reflect supply & demand.

19

CONTD…

Financial market facilitate:• The raising of capital (in the capital markets)• The transfer of risk (in the derivatives markets)• Price discovery• Global transactions with integration of financial

markets• The transfer of liquidity (in the money markets)• International trade (in the currency markets)

20

TYPES OF FINANCIAL MARKETS:

• Capital Market : stock markets & bond markets

• Commodity Markets• Money Markets• Derivative Markets • Futures Markets• Insurance Markets• Foreign Exchange Markets

21

FUNCTIONS OF FINANCIAL MARKET

• INTERMEDIARY FUNCTIONS: 1. Transfer of resources 2. Enhancing Income 3. Productive usage 4. Capital Formation 5. Price Determination

22

CONTD….

• FINANCIAL FUNCTIONS: 1. Providing the borrower with funds.

2.Providing the lenders with earning assets so as to enable them to earn wealth.

3.Providing liquidity in the market so as to

facilitate trading of funds.

23

MONEY MARKET

• As money became a commodity, the money market became a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. Trading in the money markets is done over the counter, is wholesale

24

FUNCTIONS OF THE MONEY MARKET

• Transfer of large sums of money• Transfer from parties with surplus funds to

parties with a deficit• Allow governments to raise funds• Help to implement monetary policy• Determine short-term interest rates

25

CALL MONEY

• Call money is a short term finance repayable on demand, with maturity period of one day to fifteen days, used for inter bank transactions. Commercial banks have to maintain a minimum cash balance known as cash reserve ratio.

26

CONTD…..

• Call money is a method by which banks borrow from each other to be able to maintain the cash reserve ratio. The interest rate paid on call money is known as call rate. It is a highly volatile rate that varies from day-to-day and sometimes even from hour-to-hour.

27

WHAT IS A GOVERNMENT SECURITIES

• A Government security is a tradable instrument issued by the Central Government or the State Governments.

• Such securities are short term or long term.•  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).

28

CONTD….

• Government securities carry practically no risk of default and, hence, are called risk-free gilt-edged instruments. Government of India also issues savings instruments (Savings Bonds, National Saving Certificates (NSCs), etc.) or special securities (oil bonds, Food Corporation of India bonds, fertiliser bonds, power bonds, etc.). They are, usually not fully tradable and are, therefore, not eligible to be SLR securities.

29

TYPES OF INSTRUMENTS

• TREASURY BILLS :- Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India.

• CASH MANAGEMENT BILLS :- 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.

30

CONTD…

• DATED GOVT 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.

31

CONTD….

• 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.

• 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 by adding a spread over a base rate.

32

CONTD…..

• 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.

• 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.

33

CONTD….

• 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.

34

REPO’S

• A repurchase agreement, also known as a report, or sale and repurchase agreement , is the sale of securities together with an agreement for the seller to buy back the securities at a later date.

• The repurchase price should be greater than the original sale price, the difference effectively representing interest, sometimes called the repo rate.

35

CONTD….

• The party that originally buys the securities effectively acts as a lender. The original seller is effectively acting as a borrower, using their security as collateral for a secured cash loan at a fixed rate of interest.

• A repo is equivalent to a spot sale combined with a forward contract.

36

STRUCTURE

• A repo is economically similar to a secured loan, with the buyer receiving securities as collateral to protect him against default by the seller.

• Almost any security may be employed in a repo, though highly liquid securities are preferred as they are more easily disposed of in the event of a default.

37

TYPES OF REPO

There are three types of repo maturities: overnight, term, and open repo.

1.Overnight refers to a one-day maturity transaction.

2.Term refers to a repo with a specified end date.

3.Open simply has no end date.

38

CERTIFICATE OF DEPOSITS

• A certificate of deposit (CD) is a time deposit, a financial product commonly offered to consumers in the United States by banks, thrift institutions, and credit unions.

• CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for banks and by the National Credit Union Administration (NCUA) for credit unions.

39

40

• A commercial paper in India is the monetary instrument issued in the form of promissory note.

• Prior to Commercial Paper in Indian money market i.e. before 1990, the corporate companies had to depend upon the crude and traditional method of borrowing working capital from the commercial banks by pledging the inventory of raw materials as Collateral security.

41

CONTD….• The introduction of commercial paper as

debt instrument has promoted commercial paper market as one of the components of Indian money market.

• In this commercial paper market, the issuers of commercial paper create supply while the subscribers to commercial paper create demand for these papers.

42

CONTD…

• The main issuers of Commercial paper in this market are corporate and the main subscribers to the Commercial papers are the banking companies.

• The face value of Commercial Paper is in the denomination of Rs. 0.5 million and multiples thereof.

43

FOREIGN EXCHANGE MARKET

• The foreign exchange market is a form of exchange for the global decentralized trading of international currencies.

• The foreign exchange market determines the relative values of different currencies.

44

CONTD…

• Foreign Exchange Market in India works under the central government in India and executes wide powers to control transactions in foreign exchange.

• The Foreign Exchange Management Act, 1999 or FEMA regulates the whole foreign exchange market in India.

45

• The Company is subject to a variety of risks due to its foreign operations, including currency risk and credit risk.

• If the currency rate rises the company operating in the foreign currency may suffer losses.

46

CONTD…

• The Company attempts to minimize its exposure to foreign currency exchange fluctuations by the use of forward contracts on non-functional currency cash and accounts receivable balances.

47