CA Sumat Singhal

(B,Com, ACA, ACS, CAIIB,CWA(F)

Manager (Credit)
Punjab National Bank, New Delhi

1.

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.

2. Asset-liability management; Interest rate risk; interest rate

futures;stock options; debt instruments; bond portfolio strategy;
risk control and hedging instruments.
3. Investments Treasury bills Money markets instruments such
as CDs, CPs, IBPs; Securitisation and Forfaiting; Refinance and
rediscounting facilities.

Spot Trades-Settlement takes place two working days from the trade
date.
-TOM Next Day
-All exchange rates are qouted on the screen are for spot trade.

Forward-purchase or sale of currency on a future date. Forward

exchange rates are arrived at on the basis of interest rate differentials
of two currencies added or deducted from spot exchange rate.

Swap-The spot and forward transactions are the primary products in

foreign exchange market.A combination of spot and forward
transactions is called a swap.

 Products

of Foreign Exchange Market.

-Most Liquid
-Most Transparent
-Virtual Market
-Its a near perfect market with efficient
price discovery system.

FRONT OFFICE

Dealing

MID OFFICE

BACK OFFICE

settlement
MIS

 Certificate

of Deposit (CD)
Commercial Paper (C.P)
Inter Bank Participation Certificates
Inter Bank term Money
Treasury Bills
Call Money

CDs are short-term borrowings BY BANKS in the form of Usance

Promissory Notes having a maturity of not less than 7 days up to a
maximum of one year.

CD is subject to payment of Stamp Duty under Indian Stamp Act,

1899 (Central Act)
Issued by all scheduled commercial banks except RRBs
Minimum period 7 days
Maximum period upto 1 year
Minimum Amount Rs 1 lac and in multiples of Rs. 1 lac
CDs are transferable by endorsement
CRR & SLR are to be maintained
CDs are to be stamped

Commercial Paper (CP) is an unsecured money market instrument

issued in the form of a promissory note by corporates/PDs/Fis.

Who
can
issue
Commercial
Paper
(CP)
Highly rated corporate borrowers, primary dealers (PDs) and allIndia financial institutions (FIs).
Eligibility:

a)

b)

The tangible net worth of the company, as per the latest

audited balance sheet, is not less than Rs. 4 crore;
The borrowal account of the company is classified as a
Standard Asset by the financing bank/s.

All eligible participants should obtain the credit rating for

issuance of Commercial Paper
Credit Rating Information Services of India Ltd. (CRISIL)
Investment Information and Credit Rating Agency of India
Ltd. (ICRA)
Credit Analysis and Research Ltd. (CARE)
Duff & Phelps Credit Rating India Pvt. Ltd. (DCR India)
The minimum credit rating shall be P-2 of CRISIL or such
equivalent rating by other agencies

CP can be issued for maturities between a minimum of 7

days and a maximum upto one year from the date of issue.

If the maturity date is a holiday, the company would be

liable to make payment on the immediate preceding
working
day.

It is a transaction in which two parties agree to sell and

repurchase the same security. Under such an agreement
the seller sells specified securities with an agreement to
repurchase the same at a mutually decided future date
and a price.

The Repo/Reverse Repo transaction can only be done at

Mumbai between parties approved by RBI and in securities
as approved by RBI (Treasury Bills, Central/State Govt
securities).

 Uses

of Repo
It helps banks to invest surplus cash
It helps investor achieve money market
returns with sovereign risk.
It helps borrower to raise funds at better
rates
An SLR surplus and CRR deficit bank can use
the Repo deals as a convenient way of
adjusting SLR/CRR positions simultaneously.
RBI uses Repo and Reverse repo as
instruments for liquidity adjustment in the
system

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.
Example:
10% Aug 2015 10 year Govt Bond
Face Value RS.1000
Market Value Rs.1200
In this case Coupon rate is 10%
Yield is 8.33%
1000*10
----------= 8.33%
1200

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 money that is lent for one day in this market is known as
"Call Money",
if it exceeds one day (but less than 15 days) it is referred
to as "Notice Money".
Banks borrow in this market for the following purpose
To fill the gaps or temporary mismatches in funds
To meet the CRR & SLR mandatory requirements as
stipulated by the Central bank
To meet sudden demand for funds arising out of large
outflows.

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
determine some of the variables mentioned above.

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.

Banks, Primary Dealers, State Governments,

Provident Funds, Financial Institutions,
Insurance Companies, NBFCs, FIIs (as per
prescribed norms), NRIs & OCBs can invest in
T-Bills.

Auction is a process of calling of bids with an

objective of arriving at the market price. It is
basically a price discovery mechanism

 Y=

(100-P)*365*100

----------------------
P*D
Y = Yield
P= Price
D =Days to maturity

91

days treasury bills maturing on

6-12-2008
Purchased on 12-10-2008 Rate
quoted is Rs.99.1489 per Rs100
(100-99.1489)*365*100= 31065.15
---------------------------(99.1489*55 days) =5453.18
=5.70%

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.

The relationship between time and yield on a homogenous

risk class of securities is called the Yield Curve. The
relationship represents the time value of money - showing
that people would demand a positive rate of return on the
money they are willing to part today for a payback into the
future

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

OMO or Open Market Operations is a market regulating

mechanism often resorted to by Reserve Bank of India.
Under OMO Operations Reserve Bank of India as a market
regulator keeps buying or/and selling securities through it's
open market window. It's decision to sell or/and buy
securities is influenced by factors such as overall liquidity
in the system,

LIBOR stands for the London Interbank Offered Rate and

is the rate of interest at which banks borrow funds from
other banks, in marketable size, in the London
interbank market.

LIBOR is the most widely used "benchmark" or reference

rate for short term interest rates. It is compiled by the
British
Bankers Association as a free service and
released to the market at about 11.00[London time]
each day.

SLR is to be maintained in the form of the

following assets:
Cash balances (excluding balances
maintained for CRR)
Gold (valued at price not exceeding current
market price)
Approved securities valued as per norms
prescribed by RBI.

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).
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.

Exchange Quotations :
There are two methods
Exchange rate is expressed as the price per unit
of foreign currency in terms of the home
currency is known as the Home currency
quotation or Direct Quotation
Exchange rate is expressed as the price per unit
of home currency in terms of the foreign
currency is known as the Foreign Currency
Quotation or Indirect Quotation
Direct Quotation is used in New York and other
foreign exchange markets and Indirect Quotation
is used in London foreign exchange market.

Direct Quotation: Buy Low, Sell High:

The prime motive of any trader is to make profit. By

purchasing the commodity at lower price and selling it at a
higher price a trader earns the profit. In foreign
exchange, the banker buys the foreign currency at a lesser
price and sells it at a higher price.

Indirect Quotation: Buy High, Sell Low:

A trader for a fixed amount of investment would acquire

more units of the commodity when he purchases and for
the same amount he would part with lesser units of the
commodity when he sells.

Bank agrees to buy from B Bank USD

100000. The actual exchange of currencies
i.e. payment of rupees and receipt of US
Dollars, under the contract may take place :
on the same day or
two days later or
some day later, say after a month.

 The

market quotation for a currency consists

of the spot rate and the forward margin.
The outright forward rate has to be
calculated by loading the forward margin
into the spot rate. For example US Dollar is
quoted as under in the inter-bank market on
a given day as under :
Spot
1 USD = Rs.44.1000/1300
Spot/November
0200/0500
Spot/December
1500/1800

TT Buying Rate (TT stands for Telegraphic Transfer).

This is the rate applied when the transaction does not

involve any delay in realization of the foreign exchange
by the bank. In other words, the nostro account of the
bank would already have been credited. The rate is
calculated by deducting from the inter-bank buying
rate the exchange margin as determined by the Bank.

This is the rate to be applied when a foreign bill is

purchased. When a bill is purchased, the proceeds will be
realized by the Bank after the bill is presented to the
drawee at the overseas center. In the case of a usance bill
the proceeds will be realized on the due date of the bill
which includes the transit period and the usance period of
the bill.

You would like to import machinery from USA

worth USD 100000
to be payable to the overseas supplier on 31st
Oct
[a] Spot Rate
USD = Rs.45.8500/8600
Forward Premium
September 0.2950/3000
October
0.5400/5450
November 0.7600/7650
[b] exchange margin 0.125%
[c] Last two digits in multiples of nearest 25
paise
Calculate the rate to be quoted by the bank ?

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

A swap agreement between two parties commits each

counterparty to exchange an amount of funds, determined
by a formula, at regular intervals, until the swap expires.

In the case of a currency swap, there is an initial exchange

of currency and a reverse exchange at maturity.

 Firm

A needs fixed rate loan AAA rated

Firm B needs floating rate
-A rated
Firm A enjoys an absolute advantage in both
credit markets.

Fixedrate
finance

Firm A

Firm B

9%

11%

Floating- LIBOR LIBOR

rate
finance +0.0% +1%

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%

Interest payments to each

other in years t 1 to t 7.

Gain
A

B
9.5%

Borrows at
9.0%
fixed
for 7 years

LIBOR

Borrows at
LIBOR + 1%
floating
for 7 years

What is the price at which a treasury bill maturing on 23rd

March 2008 would be valued on July 13, 2007 at a yield of
6.8204%?
Answer:
The price can be computed as
= 100/(1+(yield% * (No of days to maturity/365))
= 100/(1+(6.8204%*(253/365)) =
Rs. 95.4858

Wish U All the Very Best!

Har Manzil, Karo Hasil

CA Sumat Singhal
(B,Com, ACA, ACS, CAIIB,CWA(F)
Manager (Credit)
Punjab National Bank, New Delhi