Forex &Treasury

8/8/2019 Forex &Treasury

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Forex &Treasury


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Treasury

Dept responsible for bank s efficient fundmanagement and risk mitigation.Involves availability of right quantity of fundsat right time at optimal cost.Operation in diverse markets such as moneymarket, FOREX & securities management.

Generally considered specialised or elitefunction in Banks. Role is more that of

investment not lending.


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Organization Structure

Front OfficeDealing

Mid OfficeLimit setting & monitoring exposureRisk management

Back officeDeal slip verification & confirmationSettlement, Accounting and reconciliation

Reporting


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Global Financial Market

Money MarketFixed income securities Market

Equity MarketForex MarketDerivatives Market


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H ow do they make Money

InvestmentSpreads

Proprietary TradingArbitrageRelative value

Customer serviceH edging


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Money Market

Trades Near Money / Liquid assetsLow risk, Short term marketable obligations ata lower costParticipants

Govt Banks Insurance Company Mutual Funds Corporates


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MM Instruments

Loans & DepositsInterbank placement and takings(Call/

Notice/Term Money)Certificate of depositsRepos

Treasury billsCommercial paper


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Fixed Income market

Total return to the investor is fixed for thetenor

Return may fluctuate during the tenorThe periodical return on Fixed income is calledcoupon

Fixed income intruments also coverdiscounted bonds


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Fixed Income Terminologies

Face valueCoupon Rate

Redemption AmountTenorClean Price and Dirty Price

Nominal Yield, Current Yield and YTM


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Equity MarketPRIMARY

MARKETS

SECONDARY

MARKETS

Company offers new financialinstruments to the investingpublic. This very first issue of shares by a company is called anInitial Public Offering or IPO

Once an asset has been bought byan investor from the company,subsequent transactions in theinstrument take place in thesecondary market

Companies issue shares andbonds

Secondary markets merelyrepresent the transfer of ownership of an asset from oneinvestor to another

Primary markets therefore enableborrowers to raise funds


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Forex Market

Purely OTC marketMarket operates 24/7

Price of one currency quoted in terms of another currency is called Exchange rateA quote can be a direct quote or indirect

quoteQuote would contain Bid/Ask rate43.25/43.70 INR/USD


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Direct Quote

If the price of the foreign currency is quotedas the number of units of the Domesticcurrency per unit of the Foreign currency, it iscalled a Direct Quote.

For example Rs 43.75 per dollar is an illustration of a direct quote.


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Indirect Quotes

We can also quote an exchange rate as thenumber of units of foreign currency per unit of the domestic currency.For instance if we have a quote of USD 2.25per INR 100, it would be an indirect quote inIndia.


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Forward Rates

Forward trading is very common in foreigncurrency markets.

If the forward rate is greater than the spotrate then the foreign currency is said to betrading at a forward premium.Spot: 43.2500-43.2800 INR/USD1 M Forward: 43.2650-43.3050Forward Margin is quoted instead of ForwardRate


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Products Offered in Forex market

FX CashFX TOM

FX SpotFX ForwardFX Swaps

FX Options


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Derivatives

Forward ContractsFutures Contracts

Options ContractsSwaps


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Futures

Similar to Forward contractTraded on a exchange

Traded in LotsInitial marginDaily Marked to market(MTM)

Additional Margin required based onrevaluation


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Options

An options contract gives the buyer the right totransact on or before a future date at a price thatis fixed at the outset.

It imposes an obligation on the seller of thecontract to transact as per the agreed uponterms, if the buyer of the contract were toexercise his right.A Call Option gives the holder the right to acquirethe asset.A Put Option gives the holder the right to sell theasset.


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FRA

FRA is a mutual compensation contractbetween buyer and seller:

Buying an FRA will provide compensationwhen interest rates rise above the FRAcontract rate. It protects an implied borrowerSelling an FRA will provide compensationwhen interest rates f all below the FRAcontract rate. It protects an implied lender


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FRA (Cont...)

On Wednesday 14 March 2007, for value Friday 16 March 2007,a 3 x 12 USD LIBOR FRA has the following:

Settlement date Monday 18 June 2007 Value + 3-mthsFixing date Thursday 14 June 2007 Settle 2 bus daysMaturity date Monday 18 March 2008 Value + 12-mths

The difference between contract rate and reference rate on the notional principalis settled on value date by discounting the interest

If Reference Rate > Contract Rate then Seller (Lender) Pays Buyer

If Reference Rate < Contract Rate then Buyer (Borrower) Pays Seller


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Swaps

A swap is a contractual agreement betweentwo parties to exchange specified cash flowsat pre-defined points in time.

There are two broad categories of swaps InterestRate Swaps and Currency Swaps.


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IRS

The cash flows being exchanged, representinterest payments on a specified principal, whichare computed using two different parameters.

For instance one interest payment may be computedusing a fixed rate of interest, while the other may bebased on a variable rate such as LIBOR.

There are also swaps where both the interestpayments are computed using two different

variable rates. For instance one may be based on the LIBOR and the

other on the Prime Rate of a country.


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IRS(Cont...)

Since both the interest payments aredenominated in the same currency, the actualprincipal is not exchanged.

Consequently the principal is known as a notionalprincipal.

Also, once the interest due from one party tothe other is calculated, only the difference orthe net amount is exchanged if the frequencyof both the legs are same.


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Currency Swaps

In this case the two parties first exchangeprincipal amounts denominated in two differentcurrencies which will be swapped back.

Each party will then compute interest on theamount received by it as per a pre-definedyardstick, and exchange it periodically.In this case, since the payments being exchangedare denominated in two different currencies, wecan have:

fixed-floating floating-floating as well as fixed-fixed swaps.


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Complex derivatives

Option on FuturesCompound option

SwaptionCredit derivative

MBS

ABS

Documents

Forex &Treasury