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
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