treasury business - an overview.pdf

8/11/2019 Treasury business - an overview.pdf

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TREASURY BUSINESSAN OVERVIEW

Nguyen Viet AnhInstitutional Sales, ANZ Vietnam

November 2010

Nguyen Viet AnhInstitutional Sales, ANZ Vietnam


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CONTENTS

>What is Treasury?

- From the basic.

- The modern structure of Treasury business.

>ALM- What is ALM and its roles?

- How does this function and make profit?

>Trading

- What is Trading and its roles?

- How does this function and make profit?

>Sales

- What is Sales and why do we need them?

- Corporate Sales & Institutional Sales.

>Debt Capital Market (DCM)

>Derivatives products (examples)

>Q&A


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WHAT IS TREASURY?FROM THE BASIC

Bank's function is to act as a financialintermediary between depositors (peoplewith a temporary surplus of funds) andborrowers (people with a temporary need

of funds).

To accomplish this function, banks organize around deal flows:

1) The deal can originate from the depositor.

2) The deal can originate from the borrower.

BANKS

Financial intermediaryMatch borrowers and depositors

People who People who

concentrate concentrate

on getting on placing

money in money out

DEPOSITOR

People with temporarysurplus of funds

BORROWER

People with temporaryneed of funds


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Money does not flow directly from those who take funds in from depositors to

those who hand them out to borrowers; the use of money must be coordinated

to maintain liquidity and maximize the bank's profits. It is the coordination, or

management, of these funds that is the role of the Treasury Department

Objectives: The Treasury manages clients, markets, and products in order to:

Provide funds to meet the bank's obligations to depositors.

Help borrowers and issuers raise funds.

Reduce assets on the bank's balance sheet and supply investors withinvestment alternatives.

Maximize the bank's profits through trading and sales.

Increase fee income through deal structuring.

WHAT IS TREASURY?FROM THE BASIC


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INTRODUCTION: WHAT IS TREASURY?THE MODERN STRUCTURE

Because of its objectives, the modern structure of Treasury business are divided

into 4 main parts as below:

Assets and Liabilities Management (ALM) Trading (FX, Bond)

Sales (Corporate Sales, Institutional Sales)

Debt Capital Market (DCM)CHINESS WALL

TRADING

ALM

SALES DCM

PUBLIC SIDE PRIVATE SIDE


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ALMWHAT IS ALM AND ITS ROLES?

ALM is stand for Asset and Liability

Management which is the practice of

managing risks that arise due to mismatches

between the assets and liabilities (debts andassets) of the bank.

In reality, banks faces serveral risks such as

liquidity risk, interest rate risk, credit risk andoperational risk. ALM is a strategic

management tool to manage interest rate risk

and liquidity risk faced by banks.


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ALMWHAT IS ALM AND ITS ROLES?

1. Liquidity risk is the risk that a given asset cannot be traded (buy or sell) quickly

enough in the market to prevent a loss (or make the required profit).

Asset liquidity: An asset cannot be sold due to lack of liquidity in the market Managing liquidity on the asset side means that some assets must be cash or

easily converted to cash.

Liabilitites liquidity: Risk that liabilities 1) Cannot be met when they fall due 2)

Can only be met at an uneconomic price 3) Can be name-specific or systemic Managing liquidity on the liability side means having the credit to obtain funds

at market price when needed.

2. Interest risk for banks is the risk of unfavour interest rate movement impact to

the asset or liabilities which are bearing the fixed interest rates. In general, as rates

increase, the value of an fixed rate asset will fall while the value of an fixed rate

liabilities will raise.


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GAPPING STRATERGYA GAP is a a difference between the tenors in our assets and the tenors in our liabilities.Creating a gap or gapping is a strategy to take advantage of expected changes ininterest rates.

1.Negative gap is the situation when we fund long-term assets with short-term liabilities.

1 year at 12%ASSETS

6 months at 10% 6 months at 10% or lower

LIABILITIES

A Negative gap is created if you expect thatfutures interest rates will remain equal to or go below current market rates.

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ALMHOW DOES IT FUNCTION AND MAKE PROFIT?


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GAPPING STRATERGYA GAP is a a difference between the tenors in our assets and the tenors in our liabilities.Creating a gap or gapping is a strategy to take advantage of expected changes ininterest rates.

2.Positive gap is the situation when we a short-term asset funded with a long-termliability.

6 months at 10% 6 months at 14% or higherASSETS

1 year at 12%LIABILITIES

A Positive gap is created if you expect thatfuture market interest rates will be equal to or higher than current market rates.

ALMHOW DOES IT FUNCTION AND MAKE PROFIT?


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TRADINGWHAT IS TRADING AND ITS ROLES?

Trading is simply buying and selling a specific product when:

- Market has the arbitrage opportunities

- Taking a view that this products price will be up or down.

There are a lot of products traded by banks such as: Currencies, Stocks,

Derivatives, Commodities

InterestRate Commodity

FX

TRADING IS ALL ABOUT SPECULATION


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TRADINGHOW DOES IT FUNCTION AND MAKE PROFITS?

Currencies Trading (FX trading):

Lets assume we are trading in only 2 currencies, USD and VND

The market rate is about 1 USD = 19,500 VND USDVND 19,500

We start with squareFX postion means we have no USD:

Arbitraging opportunities: happens when there is a difference in the

rate (one bank willing to sell USD at USDVND 19490 and other bank willing to buyUSDVND at 19510)

FX Trader make easy money. And no change in FX position, no Risk taking.

Taking FX position: Long or Short?

- A Long position is built when you think that the rate is going up,

means you buy USD now and expect to sell it back later at a higher rate.

- A Short position is built when you think that the rate is going down,

means you sell USD now and expect to buy it back later at a higher rate.

FX Trader takes risk.


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TRADINGHOW DOES IT FUNCTION AND MAKE PROFITS?

Economics fundamental or Technical analysis?


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ALM & TRADING

ALM and Trading are the dealers

who are dealing in with other dealers from other banks

in the so call interbank market


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SALESWHO IS SALES AND WHY DO WE NEED THEM?

Beside dealing in the interbank market with other banks, we also have

Corporate customers and Institutional customers who has demands to

deal with us in all type of products (FX, Bond, Derivatives)

However demands from these customers are come from their own

businesss needs (not from speculation).

Sales are people who works in Tresury but do not deal in the interbank market

Sales are designed to serve these kindof customers.


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SALESCORPORATE SALES & INSTITUTIONAL SALES

CORPORATE SALES INSTITUTIONAL SALES

1. Customers coverage: Corporate

customers

2. Products coverage:

- Vanilla: FX

- Advanced: FX options, IRS,

CCS (hedging solutions).

3. Skills needed: More focus on

customer relationships.

1. Customers coverage: Financial

institutional customers (Banks,

Finance company, Securities

companies, Funds)

2. Products coverage:

- FX, Straight Bonds

- Advanced: Investment

structures, IRS, CCS (hedging

solutions).

- Selling DCM products.

3. Skills needed: More focus on

technical and providing

solutions.


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DEBT CAPITAL MARKETS (DCM)

DCM is the business which gives service in consulting customer who needs

to raise fund to issue Bonds (Straight, Bond with Warrants, Convertible

bond) or arranging fund for this customer via the syndicated loans.

CHINESSE WALL

ISSUER

(customer

who needsfund)

DCMINSTITUTIONAL

SALEPRIVATE SIDE PUBLIC SIDE

INVESTOR

(customerwho surplus

funds)

CHINESSE WALL is a policy to prohibit the flows of confidential information

from Private side to Public side in order to prevent parties from Insider trading


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Derivatives ProductsPlain Vanilla Hedging

(Example)


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FX OPTIONS

Description

Outcome at Expiry

Indicative Parameters

If spot 0.8400, the option lapses If spot > 0.8400, the option is exercised

An FX option contract is an agreement in which

a seller conveys to a buyer of a contract the

right, but not the obligation, to buy or sell aspecific quantity of a specific CCY at a specified

price on or before a specified date.

Tenor : 3 months

Notional : AUD 10 million

Underlying : AUD/USD

Spot Reference : 0.8050

Strike : 0.8400

Type : AUD Call

Style : European

Direction : Client buys

Premium : Client pays 90 pips

Payoff profile

00.8400

0.8490

Spot performance at expiry$510,000Optionsexercised

0.9000

$0Optionsexercised

0.8490

-$90,000Optionslapses

0.7000

Client payoffScenarioSpot


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INTEREST RATE SWAP

Description

Outcome

Indicative Parameters

1. If USD 3m Libor fixing = 4%

ANZ receives USD fixed rate 3.30%

ANZ pays USD 3m Libor = 4.00%

Net ANZ pays USD fixed rate 1%

2. If USD 3m Libor fixing = 2%

ANZ receives USD fixed rate 3.30%

ANZ pays USD 3m Libor = 2%

Net ANZ receives USD fixed rate 1.30%

An Interest Rate Swap (IRS) is an

agreement between two parties whereby the

payment or receipt of fixed interest is

exchanged for the payment of receipt of

floating (variable rate) interest. There is no

exchange of principal but the interest amounts

are calculated on a defined notional principal.

Tenor: 3 years

Notional: USD 10 mio

Amortisation: Bullet

Interest Payment: Quarterly

On each interest payment

ANZ pays: USD 3m Libor

ANZ receives: USD fixed rate 3.30%

Clients Net Exposure

USD Libor

USD Libor(Unhedged)

USD IRS(Hedged)

treasury business - an overview.pdf

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