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Guest Speaker_IF & IFM_200909

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treasury management

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Treasury Management EVP & DIRECTOR TREASURY AND CAPITAL MARKET SECTORS, FINANCIAL MANAGEMENT GROUP ()

Deposit (Cash , Cheque , Bahtnet) Bill of Exchange (B/E) Income payment services Repay Loan Sell Bond (Bank Portfolio) Issue Bond FX Transactions

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Co unter Pa rt y : Ba nk o f Thaila nd Bilateral Repo Deposit Facility Standing Facility (Corridor) SWAP Co unter Pa rty : Fin ancia l Inst it utio ns Private Repo Interbank SWAP Buy Bond (Primary and Secondary Market) Sell and Buy Back (Bond) Call Loan3

Policy Rate (Bilateral Repo Overnight Rate) Corridor Interest Rate (+/- 0.50% of Policy Rate) Interbank Rate BIBOR Rate (Bangkok Interbank Offered Rate)BIBOR Rate are determined from information that is available during 10.45-11.00 AM (Bangkok time) in each working day. BIBOR is the rate of interest at which banks borrow funds from other banks in the Bangkok interbank market4

Reserve+Cash in Hand++= (1*0%) + (2*0%) + (3*2.19%) + 94.X% = 100*1.25% 0 + 0 + 0.0657. + 94X% = 1.25 . 94X% = 1.25-0.0657 . X = (1.25-0.0657)/94 = 0.0126 . X (%) X % = 0.0126*100 =1.26% (%) = 1.26-1.25 = 0.01% 0.4% = 1.26 + 0.4 = 1.66 %5

Reserve+Cahs in Hand++= (6*0%) + (0*0%) + (0*2.19%) + 94.X% = 100*1.25% 0 + 0 + 0 + 94X% = 1.25 . 94X% = 1.25 . X = (1.25)/94 = 0.013 . X (%) X % = 0.013*100 = 1.30% (%) = 1.30-1.25 = 0.05% 0.4% = 1.30 + 0.4 = 1.70 %

Non-Resident Reserve 6%

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Introduction forForeign Exchange

International Market Opening

4.00 a.m. Sydney 8.30 p.m. New York 6.00 a.m. Tokyo 7.00 a.m. Singapore Hong Kong

INTERNATIONAL MARKET OPENING

2.00 p.m. London 1.00 p.m. Frankfurt

Remark: Bangkok Time

12.00 a.m. Bahrain8

Sett leme nt

(Time Zone) USD/THB USD USD New York Replaceme nt Risk

Risk

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:Continuous Linked Settlement (CLS) system

2517 Bankhaus Herstatt 60% 3 2538 Bearing Brothers European(ECU) Currencies Union (Settlement Risk)

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- Bank A THB BANK B

Bank A

ThailandTHB

Bank B

Canada

Bank B CAD Bank A

BATHNET* 03.00-11.00 CET

CAD LVTS*

Bank Bs nostro bank

Bank As nostro bank

14.00-24.00 CET

Bank A Bank B time zone * BAHTNET (Bank of Thailand Automated High-value Transfer Network) * LVT (Large-value funds transfer system)12

Credit Crunch

2550 : Sub-prime CDOs Asset-backed commercial paper (ABCP) 2551: Northern Rock (Bank of England) 2550 2551 Northern Rock 1.4 write-off 2551: Bear Stearns JPMorgan Chase Bear Stearn Bear s 30 Bear Stearns 2551: Merril Lynch Bank of America 13

Credit Crunch

2551: Citigroup 60% 1 20 Citigroup 25 2552: (Bank of England) Quantitative Easing 150 Credit Crisis 2552: Colonial Bank 6 2552 14 Colonial Bank BB&T

Continuous Linked Settlement (CLS) systemCLS Bank International G 20 2540 . London Clearing House Settlement Agent 15 AUD, CAD, CHF, EUR, GBP, JPY, USD, DKK, NOK, SEK, SGD, HKD, KRW, NZD, ZAR CLS (Settlement Risk) settle 2 (Payment versus Payment)15

CLS as a settlement agentMuti-currency (net payment) Muti-currency (net payment)

Bank A

CLS Bank Matching & Payment versus Payment at CLS Bank

Bank B

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CLS- Operation TimelineC.E.T. 0 - 6.30 7.00 8.00 8.01 9.00 9.01 10.00 10.05 10.25 Thai Time 6.00 12.30 13.00 14.00 14.01 15.00 15.01 16.00 16.05 16.25 Submitting Instruction CLS Settlement Process Begins First Pay-In Time Grid Pay-In Short Warning, Member Failure to Meet Pay-In Second Pay-In Time Grid Suspend Member for Pay-Out if notification issued Final Pay-In due for Asian Pacific Currencies Pay-In Calls issued for Asian Pacific Currencies Asian Pacific Currency Closed Deadline17

CLS- Operation Timeline (Cont)C.E.T. 12.00 12.05 13.00 Thai Time 18.00 18.05 19.00 Final Pay-In due for EU / N. Amer / S. African Currencies Pay-In Calls issued for EU / N. Amer / S. African Currencies EU/N, Amer/S, African Currencies Cloased Deadline

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Failure ManagementFirst Day CLS Bank arrange an overnight today/tomorrow swap transaction(s) with its Liquitdity Provider (s)

Second Day

Fail to Pay

Fail to Pay

CLS will arrange outright purchase from liquidity provider (s)

CLS assess combined loss allocation

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Failure Management Netting Part LossTransactionFirst Day Failure Total Payment A Total Payment B CLS

Real Payment - NettingPayment A Pay for A Liquidity ProviderCLS allocate loss to settlement members according to policy Settlement CLS Settlement Member 1 Member 2 Settlement Member N20

Second Day Failure

CLS pay payment A back to Liquidity Provider

Payment A Liquidity Provider

CLSCLS Bank1.

Settlement Members User Members Third Parties

Nostro Agents

SM UM TC SM UM TC Shareholders (Account) CLS Bank Settlement Instructions Third Parties . 2549 SM UM 56 TC 750 21

2.

3.

Autorize Via d by SM SM/UM

Settlement Members (Shareholders) Operation settle CLS operation: 1.) CLSS SWIFTFin SWIFTNet 2.) Pay-in Pay-out Schedule 3.) Funding Contigency Plan : 1.) Capital Ratio 2.) Short-term rating A3 3.)

Settlement Member

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Third PartyThird Parties Settlement Members User Members Third Parties CLS Bank ( shareholder cost USD 4.94 mil.)23

1.) Settlement Risk 2.) Member Third Parties 3.) Back Office Straight Through Processing 4.) CLS Netting Net Finding (/ gross ) ,

CLS

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CLS1.) Foreign Exchange 2.) discriminate Bid-Ask Spread rate 3.) Basel ll

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International Trade Finance (Export & Import) International Lending (Onshore & Offshore) Foreign Exchange and Derivative (Spot Swap Forward FX-Options IRS CIRS Interest Options Swaption) Remittance (Inward & Outward) Speculation (Hedging)

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Spot Chart

Spot / 2 2 Deal Date Sell 34.1996 O/N 0.0002 TOM 0.0002 2 days

Spot date Sell 34.20

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Forward Chart

Forward / 2 Deal Date Maturity DateSell 34.1996 Spot Date Sell 34.20 Sell 34.206 1 Mth 0.06

O/N

Tom

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Swap Chart

Swap / Value date BUY BUY/SELLSELL/BUY

Deal Date

Maturity Date SELL

Value date SELL

Maturity Date Buy

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SwapSwap / Swap = Spot + Forward Swap 2 Swap Sell-Buy Value Spot Value Forward SELL SPOT AND BUY FORWARD(S/B) Swap Buy-Sell Value Spot Value Forward BUY SPOT AND SELL FORWARD(B/S)

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Swap

USD USD Swap USD (Spot) USD (Forward) Forward Contract Premium/Discount Spot=33.40 ,1 MTHS= 0.03 33.40 -USD +THB Customer Position do swap sell spot and buy forward 33.43 +USD -THB

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Swap

Swap USD (Spot) USD (Forward) Forward Contract Spot=33.45 , 1MTH= 0.02 33.45 33.47 Customer Position do swap buy spot and sell forward +USD -THB -USD +THB

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Swap PointSwap Point = Spot*(Domestic interest Foreign Interest)*time 100

: Premium Discount

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FX OPTIONBasic Introduction

Futures OptionsFutures Options 37

Buyer vs SellerOption buyer owns right to exercise

Option seller is obliged to deliver upon exercise by owner

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Option ParametersCall/Put

Strike Predetermined exchange rate upon exercised. Expiry Date Date when option can be exercised. Delivery Date Spot settlement from expiry date. Notional Size Size of the option.

Call: The right to buy a currency. Put: The right to sell a currency.

Example; USD CALL THB PUT Strike (K) = 34.16 Expiry = 3M Notional (N) = USD1mil Premium = 0.33/USD or THB330 ,000

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STYLE & CUTOFFStyle European Style = option buyer can only exercise at expiry American Style = Option buyer can exercise at any time Exercise Cut-Off time TOK Cut = 3 p.m. Tokyo time NY Cut = 10 a.m. New York time All options done in Asia are done by default TOK cut and European style unless stated otherwise40

ITM, OTM, ATMFTake the example of a 1 month USD/THB option strike 33.60 FORWAR PUT CALL D > Strike 34.00 = Strike < Strike 33.00 OTM ATM ITM ITM ATM OTM

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Barrier Option KI = Knock-in = option activated upon barrier trading.- 3 month USD PUT THB CALL, K=32.00, KI=31.00

KO = knock-out = option expired upon barrier trading.

- 3 month USD PUT THB CALL, K=31.00, KO=32.00

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Corporate HedgingHedger Exporter Outright Sell Call Short Call Obligation to sell (Writer) Long Call Right to buy (Holder) Put Long Put Right to Sell (Holder) Short Put Obligation to buy (Writer)

Importer

Buy

Buy options (Holder) is Right to Buy or Sell when the options is ITM Sell option (Writer) is Obligated to Buy or Sell when the Holder exercised43

Payoff DiagramBuy call plus Sell put : Importpayoff payoff

+call Pay premium spot -put Sell call plus Buy put : Exportpayoff payoff

Receive premium

spot

+put spot

Receive premium -call

spot

Pay premium

Premium Limit Loss = Premium Paid and Unlimit Gain Premium Gain = Premiun Received and Oligated to sell or buy

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Interest Rate Swap (IRS)Basic Introduction

definitiona swap contract that one party exchanges a stream of interest for another party's stream. (No exchange of notional) The cash flow streams are fixed or based on some floating index such as Libor, Sibor, THBFIX, TFD(Thai Baht fixed Deposit)

BenefitsHedging of interest rate. Managing asset and liability mismatch. Reducing cost of funds by taking a view on future interest rate movement.46

Interest Rate Swap (IRS)Fixed Rate Payer: Client @ 4.63% p.a. Floating Rate Payer: KTB @ 6 month THBFIX Effective Date: Spot Date Termination Date: 5 years Notional: THB1,000,000,000 Amortization: No6 month THBFIX 6 month THBFIX 6 month money market rate

Counter PartyFixed 4.58%

KTB IRSFixed 4.63%

Client

KTB Packing47

Interest Rate Swap (IRS)Example: Client is borrowing USD20mil at 3 month LIBOR + 65bps with maturity 28/6/12. Party A: Krung Thai Bank Party B: Client Effective Date: 28/6/07 Termination Date: 28/6/12 Notional: USD20,000,000 Floating Rate Payer: Party A Floating Rate: 3 month LIBOR + 65bps Fixed Rate Payer: Party B Fixed Rate: 5.25%LIBOR + 65bps LIBOR + 65bps LIBOR + 65bps

Counter PartyFixed 5.20%

KTBFixed 5.25%

Client

Lender48

Payoff Diagram IRS NettingPay off Float Rate

Paid fixed Received

2 KTB pay Float Received Fixed49

Currency Interest Rate Swap (CIRS)Basic Introduction

Currency Interest Rate Swap (CIRS)definitio n an OTC bilateral contract between two parties to exchange periodic coupon payments in two different currencies over a period of time. The principle amounts are mostly exchanged initially and at maturity at prevailing market exchange rate.

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Currency Interest Rate Swap (CIRS)Initial Principal ExchangeUSD Notional

JPY Notional (at Spot FX) JPY Coupon

KTBUSD Coupon

Client

JPY Coupon

JPY Lender

JPY Notional

USD Notional

Final Principal Exchange52

Currency Interest Rate Swap (CIRS)KTBJPY Notiona l

Pay

fix JPY

JPY Notiona l

ClientUSD Notiona l

Pay Libor USD

USD Notiona l53

Currency Interest Rate Swap (CIRS)Description: Involves the exchange of principal and interest in one currency for principal and interest in another currency. Principals are exchanged at the start (optional) and end of the swap. Allows a client to convert effectively a liability or an asset from one currency to another. Characteristic: Can be floating to floating, fixed to fixed or fixed to floating Final exchange of principal is needed.

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Currency Interest Rate Swap (CIRS)Example: A state enterprise has a loan from JBIC of JPY10bln with maturity of 20/12/2023. Fixed interest rate at 1.05% p.a. Client is looking to covert the loan to THB loan by CIRS. Party A: Krung Thai Bank Party B: Client Notional: JPY10,000,000,000 Effective Date: 28/6/2007 Termination Date: 20/12/2023 Initial Exchange: None Final Exchange: Yes Exchange Rate: 0.2850 Interest Exchange: On Interest Payment Date (Dec 20 , Jun 20) KTB pays to Client: JPY 1.05% Semi-annually, Act/365F JPY Fixed 1.05% JPY Fixed Semi-annually, Client pays to KTB: THB 3.50% 1.05% Act/365F

KTBTHB Fixed 3.50%

Client

Lender

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Currency Interest Rate Swap (CIRS)Example: A state enterprise has a loan from JBIC of JPY10bln with maturity of 20/12/2023. Fixed interest rate at 1.05% p.a. Client is looking to covert the loan to THB loan by CIRS. Party A: Krung Thai Bank Party B: Client Notional: JPY10,000,000,000 Effective Date: 28/6/2007 Termination Date: 20/12/2023 Initial Exchange: None Final Exchange: Yes Exchange Rate: 0.2850 Interest Exchange: On Interest Payment Date (Dec 20 , Jun 20) KTB pays to Client: JPY 1.05% Semi-annually, Act/365F JPY Fixed 1.05% JPY Fixed Semi-annually, Client pays to KTB: THB 3.50% 1.05% Act/365F

KTBTHB Fixed 3.50%

Client

Lender

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Thank You

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