Balance Sheet Management Ashim Kumar SahaHead Of Treasury

*LIQUIDITY Settlement Cash management Cash flow Balance sheet ratiosMARKET RISKS Yield curve Basis Convexity Liquidity CurrencyPRODUCT SUPPORT Risk identification Product pricing Transfer pricing Funding strategyBALANCE SHEET MANAGEMENT Funding strategy Money markets Capital markets Structured funding Securitization Currency marketsGOVERNANCE Regulatory compliance Rating agency compliance Accounting requirementsALCOsCAPITAL Analysis & Planning M&A Dividends Stock repurchase IssuanceTREASURY Treasury Functions

Revenue GenerationInterest Rate risk takingTenor mismatch of asset & liabilities (accrual accounting)Bond portfolio: Government securities (Accrual)IR Swaps (MTM) to hedge positionsUtility FunctionsCentral Bank funding all vehicles/activities:LoansTradingPaymentsPurchasesUnderwritingsDepositsPlacements and InvestmentsWindow to the marketIR pool transfer pricing price of moneyCapital HedgingLiquidity Risk Management:RatiosContingency funding plans The Role of Treasury

*Manages the capital, funding, and liquidity of all legal vehicles within the jurisdictionCreates clear (dis)incentive for appropriate long term balance sheet liquidity usage and supplySupports product, customer and geographic businesses with risk identification, risk management, product development and funding strategyEnsures the resulting liquidity, interest rate and currency risk are managed within approved limitsCommunicates to Board or Senior Management accurate and timely information about material balance sheet exposure, changes and issues

The Treasurer

Key ConceptsThe two variables that Treasury is most interested in are:Re-pricing characteristicRepayment characteristicThese characteristics are the core of:Interest rate risk managementLiquidity managementEvery product has certain re-pricing and repayment dynamicsWe need to understand the profile of each asset and liability category

The actual re-pricing/maturity of assets vs. liabilities determines the inherent amount of interest rate risk and liquidity riskMatched or square indicates that re-pricing/maturity of assets matches liabilities; there is no positionA Gap indicates a mismatch of re-pricing/maturing assets and liabilities

Key Concepts

The Appropriate PositionFACTORS TO CONSIDER

Rate ForecastTiming and Magnitude of rate changesYield CurveProfit Center EarningsVolume Growth

* Liquidity of assets determines appropriate funding Diversify by market, instrument, lender and currency Develop contingency plans to buy time In a crisis liquidity is more important than earnings Real liquidity comes from reducing assets Build liquidity when you dont need it Fund assets in the same currency Liquidity is developed and implemented by legal entity Optimize regulatory capital Avoid raising liabilities in a hostile environment Liquidity Principles

Risk Management Tools

Risk Management PropositionWhat is Risk?A change in portfolio valueKinds of Changes in ValueAbsolute ChangeRelative Change (benchmark/ peers )Risk MeasuresDuration/ DV01/ Delta by tenorConvexity (Gamma)Other Greeks: Theta, VegaValue at Risk

Currency SwapWhen two payment streams in an interest rate swap are denominated in two different currenciesMay include up-front excahnge of principalMay be fixed / fixed, fixed / floating, floating / floating

Bank

Counterparty

Receives 6 month USD LIBORPays 4.4% EUR Fixed5 Year Swap with Semi annual Payments USD 138 MM / EUR 100 MM

Forward Rate AgreementsAn agreement to pay the difference between an interest rate that is calculated using a market rate and one calculated using a contract rate at a future dateAn example3 month spot rate is 8%6 month spot rate is 10%What should be the 3 x 6 FRA?

Options Basic definition & terminologyA currency option contract is a financial agreement giving the buyer the right, but not the obligation, to buy or sell a specified amount of currency at a specified rate on a specified date. Compare with a forward agreement..the buyer is obligated to transact at a specified rate on a specified date.The seller (or writer) of the currency option contract has the obligation to deliver the specified mount of currency at the specified rate on the specified date.

Options Basic definition & terminologyCall OptionThe right to buy a specified amount of currency at a specified rate Put Option The right to sell .......Premium The price of the optionStrike PriceThe rate at which the right can be exercisedExpiry DateThe date on which the right can be exercised

Options Basic definition & terminologyEuropean Style OptionOption exercisable only on the expiry dayAmerican Style OptionOption exercisable at any time until expiryNote: most currency options are european style.

Thank You

Any Questions?

***Bullet point #2 : there is no position is an academic / theoretical concept*