1. INDIAN INSTITUTE OF BANKING & FINANCE RISK MANAGEMENT MODULE C & D BY M.Ravindran [email_address]

2. Syllabus Module C: Treasury Management : Treasury management ; concepts and functions; instruments in the treasury market; development of new financial products; control and supervision of Treasury management; linkage of domestic operations with foreign operations. Asset-liability management ; Interest rate risk; interest rate futures; stock options; debt instruments; bond portfolio strategy; risk control and hedging instruments. Investments – Treasury bills – Money markets instruments such as CDs, CPs, IBPs; Securitisation and Forfaiting; Refinance and rediscounting facilities.

6. Treasury Function Responsible for Front office Dealing Mid-Office Risk management, accounting and management information Back office Confirmations, settlement and reconciliation

7. FRONT OFFICE BACK OFFICE MID OFFICE Dealing MIS settlement

8. Treasury

16. To whom issued CP is issued to and held by individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs).

19. Coupon rate and Yield The difference between coupon rate and yield arises because the market price of a security might be different from the face value of the security. Since coupon payments are calculated on the face value, the coupon rate is different from the implied yield.

21. Call Money Market 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. The loans are of short-term duration varying from 1 to 14 days. The money that is lent for one day in this market is known as " Call Money ", and if it exceeds one day (but less than 15 days) it is referred to as " Notice Money ".

23. Factors influencing interest rates The factors which govern the interest rates are mostly economy related and are commonly referred to as macroeconomic factors . Some of these factors are: 1) Demand for money 2) Government borrowings 3) Supply of money 4) Inflation rate 5) The Reserve Bank of India and the Government policies which determine some of the variables mentioned above.

24. Gilt edged securities The term government securities encompass all Bonds & T-bills issued by the Central Government, and state governments. These securities are normally referred to, as "gilt-edged" as repayments of principal as well as interest are totally secured by sovereign guarantee.

25. Treasury Bills Treasury bills, commonly referred to as T-Bills are issued by Government of India against their short term borrowing requirements with maturities ranging between 14 to 364 days. 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.

26. Who can invest in T-Bill Banks, Primary Dealers, State Governments, Provident Funds, Financial Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs & OCBs can invest in T-Bills.

27. What is auction of Securities Auction is a process of calling of bids with an objective of arriving at the market price. It is basically a price discovery mechanism

29. Difference between debenture and bond Long-term debt securities issued by the Government of India or any of the State Government’s or undertakings owned by them or by development financial institutions are called as bonds. Instruments issued by other entities are called debentures.

30. Current yield This is the yield or return derived by the investor on purchase of the instrument (yield related to purchase price) It is calculated by dividing the coupon rate by the purchase price of the debenture. For e. g: If an investor buys a 10% Rs 100 debenture of ABC company at Rs 90, his current Yield on the instrument would be computed as: Current Yield = (10%*100)/90 X 100 , That is 11.11% p.a.

32. What role do Primary Dealers play? The role of Primary Dealers is to; (i) commit participation as Principals in Government of India issues through bidding in auctions (ii) provide underwriting services (iii) offer firm buy - sell / bid ask quotes for T-Bills & dated securities (v) Development of Secondary Debt Market

35. SHAPE OF YIELD CURVE A yield curve can be positive, neutral or flat. A positive yield curve, which is most natural, is when the slope of the curve is positive, i.e. the yield at the longer end is higher than that at the shorter end of the time axis. This results, as people demand higher compensation for parting their money for a longer time into the future. A neutral yield curve is that which has a zero slope, i.e. is flat across time. T his occurs when people are willing to accept more or less the same returns across maturities. The negative yield curve (also called an inverted yield curve) is one of which the slope is negative, i.e. the long term yield is lower than the short term yield

37. CRR & SLR The minimum and maximum levels of CRR are prescribed at 3% and 20% of demand and term liabilities (DTL) of the bank, respectively, under Reserve Bank of India Act of 1934. The minimum and maximum SLR are prescribed at 25% and 40% of DTL respectively, under Banking Regulation Act of 1949. The CRR and SLR are to be maintained on fortnightly basis. The RBI is authorized to increase or decrease the CRR and SLR at its discretion.

40. VaR Value at Risk (VaR) is the most probable loss that we may incur in normal market conditions over a given period due to the volatility of a factor, exchange rates, interest rates or commodity prices. The probability of loss is expressed as a percentage – VaR at 95% confidence level, implies a 5% probability of incurring the loss; at 99% confidence level the VaR implies 1% probability of the stated loss. The loss is generally stated in absolute amounts for a given transaction value (or value of a investment portfolio).

41. VaR The VaR is an estimate of potential loss, always for a given period, at a given confidence level.. A VaR of 5p in USD / INR rate for a 30- day period at 95% confidence level means that Rupee is likely to lose 5p in exchange value with 5% probability, or in other words, Rupee is likely to depreciate by maximum 5p on 1.5 days of the period (30*5% ) . A VaR of Rs. 100,000 at 99% confidence level for one week for a investment portfolio of Rs. 10,000,000 similarly means that the market value of the portfolio is most likely to drop by maximum Rs. 100,000 with 1% probability over one week, or , 99% of the time the portfolio will stand at or above its current value.

49. Solution This is an example Forward Sale Contract . Inter Bank Spot Selling Rate Rs. 45.8600 Add Forward Margin .5450 -------------- 46.4050 Add Exchange Margin .0580 --------------- Forward Rate 46.4630 Rounded Off to multiple of 25 paise Rs.46.4625 Amount Payable to the bank Rs.46,46,250

52. Mechanics STEP ! Firm A will borrow at Fixed rate 9% Firm B will borrow at floating rate (LIBOR +1)% STEP 2 Firm A will pay Floating rate [LIBOR] to Firm B Firm B will Pay Fixed rate [9.5%] only Gain Net interest cost LIBOR- .5% Net Interest cost 9+[ 1%+0.5%]=10.5%

53. Mechanics Gain A B Borrows at 9.0% fixed for 7 years Borrows at LIBOR + 1% floating for 7 years 9.5% LIBOR Interest payments to each other in years t 1 to t 7 .