Your Practical Guide to Banking in Nepal
•Download as PPT, PDF•
1 like•2,666 views
This document provides an overview of the banking system in Nepal. It begins by explaining the purpose of banks and then outlines the different types of banks in Nepal, including central banks, commercial banks, development banks, finance companies, and microcredit development banks. A total of 30 commercial banks, 82 development banks, 48 finance companies, and 37 microcredit development banks currently operate in Nepal. The document also includes organizational charts of the banking hierarchy and describes some of the key roles and services provided by banks, such as accepting deposits, lending money, remittances, safe deposit services, and capital market activities.
Recommended
More Related Content
What's hot
What's hot (20)
Viewers also liked
Viewers also liked (20)
Similar to Your Practical Guide to Banking in Nepal
Similar to Your Practical Guide to Banking in Nepal (20)
Recently uploaded
Recently uploaded (20)
Your Practical Guide to Banking in Nepal
- 1. Banking Training Your Practical guide to Banking
- 2. 2 Why do Banks exist? • To Provide Financial products and Services
- 3. Banks in Nepal 1. Central Bank – One Parent Bank 2. Commercial Banks (Class A) 3. Development Banks (Class B) 4. Finance Companies (Class C) 5. (a) Micro Credit Development Banks (Class D) (b) Saving and Credit Co-operatives (Limited Banking – over 15000 across Nepal) 3
- 4. Commercial Banks (A) in Nepal Nepal Bank Limited Kumari Bank Limited Rastriya Banijya Bank Limited Laxmi Bank Limited Agriculture Development Bank Limited Siddhartha Bank Limited Nabil Bank Limited Global IME Bank Limited Nepal Investment Bank Limited Citizens Bank International Limited Standard Chartered Bank Nepal Limited Prime Commercial Bank Limited Himalayan Bank Limited Sunrise Bank Limited Nepal SBI Bank Limited Grand Bank Nepal Limited Nepal Bangladesh Bank Limited NMB Bank Limited (Nepal) Everest Bank Limited Prabhu Bank Limited Bank of Kathmandu Limited Janata Bank Nepal Limited Nepal Credit and Commerce Bank Limited Mega Bank Nepal Limited Lumbini Bank Limited Civil Bank Limited NIC Asia Bank Limited Century Commercial Bank Limited Machhapuchchhre Bank Limited Sanima Bank Limited 4 Total No. 30
- 5. Development Banks (B) in Nepal 5 Nepal Industrial Development Corporation Malika Bikash Bank Limited Siddhartha Development Bank Limited Yeti Development Bank Limited United Bikash Bank Limited Narayani Development Bank Limited Pashimanchal Development Bank Limited Sahayogi Bikas Bank Limited Karnali Bikash Bank Limited Triveni Development Bank Limited (in merger process with Bright and Triveni) Supreme Development Bank Limited Bhrikuti Bikas Bank Limited (in merger process with NMB Bank) Shubhechchha Bikas Bank Limited Sangrila Development Bank Limited Gorkha Bikas Bank Limited Gandaki Bikas Bank Limited Infrastructure Development Bank Limited Business Development Bank Limited Biratlaxmi Bikas Bank Limited Excel Development Bank Limited Western Development Bank Limited H. & B. Development Bank Limited Arniko Development Bank Limited NDEP Development Bank Limited (in merger process with Rising Development Bank) Clean Energy Development Bank Limited (im merger process with NMB Bank) Miteri Development Bank Limited Tinau Bikas Bank Limited Rising Development Bank Limited (in merger process with NDEP Bank) Muktinath Bikas Bank Limited Sewa Bikas Bank Limited Kankai Bikas Bank Limited Public Development Bank Limited (in merger process with Triveni and Bright Bank) Ace Development Bank Limited Mahakali Bikas Bank Limited Bhargab Bikas Bank Limited Vibor Bikas Bank Limited Country Development Bank Limited Alpine Development Bank Limited Nilgiri Bikas Bank Limited Kasthamandap Development Bank Limited Professional Diyalo Bikas Bank Limited Kamana Bikas Bank Limited Corporate Development Bank Limited City Development Bank Limited Garima Bikas Bank Limited Biswo Bikas Bank Limited Pathibhara Bikas Bank Limited (in merger process with NMB Bank) Kabeli Bikas Bank Limited Purnima Bikas Bank Limited Jyoti Bikas Bank Limited Shine Resunga Development Bank Limited Bagmati Development Bank Limited Hamro Bikas Bank Limited Total No. 82 Kakre Bihar Bikas Bank Limited Pacific Development Bank Limited Civic Development Bank Limited International Development Bank Limited Kanchan Development Bank Limited Bright Development Bank Limited (in merger process with Triveni and Public Bank) Matribhumi Bikas Bank Limited Innovative Development Bank Limited Jhimruk Bikas Bank Limited Metro Development Bank Limited Raptibheri Bikas Bank Limited Gaumukhi Bikas Bank Limited Tourism Development Bank Limited Mission Development Bank Limited Mount Makalu Development Bank Limited Sindhu Bikas Bank Limited Sahara Development Bank Limited Nepal Community Development Bank Limited Cosmos Development Bank Limited Manasalu Development Bank Limited Ekata Development Bank Limited Kalinchowk Development Bank Limited Kailash Development Bank Limited Salapa Development Bank Limited Saptakoshi Development Bank Limited Sajha Development Bank Limited Apex Development Bank Limited Green Development Bank Limited Reliable Development Bank Limited
- 6. Finance Companies (C) in Nepal 6 Nepal Aawas Finance Limited Multipurpose Finance Co. Ltd Nepal Finance Limited Synergy Finance Limited NIDC Capital Markets Limited Shrijana Finance Limited Narayani National Finance Limited Om Finance Limited Nepal Share Markets and Finance Limited World Merchant Banking & Finance Limited Kathmandu Finance Limited Capital Merchant Banking & Finance Co. Limited Himalaya Finance Limited Crystal Finance Limited Union Finance Limited Guheshworil Merchant Banking & Finance Limited Paschhimanchal Finance Co. Limited Patan Finance Co. Limited Samjhana Finance Co. Limited Fewa Finance Limited Goodwill Finance Limited Everest Finance Limited Siddhartha Finance Limited Prudential Finance Company Ltd (in merger process with NMB Bank) Shree Investment & Finance Co. Ltd. ICFC Finance Limited Lumbini Finance & Leasing Co. Limited Sagarmatha Merchant Banking and Finance Ltd Mahalaxmi Finance Limited Kuber Merchant Finance Limited Lalitpur Finance Co. Limited Seti Finance Limited United Finance Co. Limited Hama Merchant & Finance Limited General Finance Limited Nameste Bitiya Sanstha Limited Progressive Finance Limited Kaski Finance Limited Janaki Finance Co. Limited Unique Financial Institution Limited Pokhara Finance Limited Manjushree Financial Institution Limited Central Finance Limited Jebil`s Finance Limited Premier Finance Co. Limited Reliance Finance Limited Arun Finance Limited Bhaktapur Finance Limited Total No. 48
- 7. Micro Credit Development Banks (D) 7 Purbanchal Grameen Bikas Bank Limited Kalika Microcredit Development Bank Limited Sudur Pashimanchall Grameen Bikas Bank Limited Mirmire Microfinance Development Bank Limited Pashimanchall Grameen Bikas Bank Limited Janautthan SamudayikMicrofinance Dev. Bank Limited Madhya Pashimanchal Grameen Bikas Bank Limited Reliable Microfinance Limited Madhymanchall Grameen Bikas Bank Limited ILFCO Microfinance Bittiya Sanstha Ltd Nirdhan Utthan Bank Limited Womi Microfinance Bittiya Sanstha Ltd. Rural Microfinance Development Centre Limited Laxmi Microfinance Bittiya Sanstha Ltd. Deprosc Microfinance Development Bank Limited Mahila Sahayatra Microfinance Bittiya Sanstha Ltd. Chhimek Microfinance Development Banks Limited Vijaya Laghubitta Bittiya Sanstha Ltd. Shawalamban Laghu Bitta Bikas Banks Limited Kisan Microfinance Bittiya Sanstha Ltd. Sana Kisan Vikas Bank Limited Clean Village Microfinance Bittiya Sanstha Ltd. Nerude Laghu Bitta Bikas Bank Limited FORWARD Community Microfinance Bittiya Sanstha Naya Nepal Laghu Bitta Bikas Bank Limited Reliable Microfinance Bittiya Sanstha Ltd. Mithila Laghu Bitta Bikas Banks Ltd Mahuli Samudyik Laghubitta Bittiya Sanstha Ltd. Summit Microfinance Development Bank Ltd Suryodaya Laghubitta Bitiya Sanstha Ltd. Microfinance Bittiya Sanatha Ltd. Sworojagar Laghu Bitta Bika Bank Ltd Samata Microfinance Bittiya Sanatha Ltd. Frist Microfinance Development Bank Ltd RSDC Laghubitta Bitiya Sanstha Ltd. Nagbeli Microfinance Development Bank Ltd Samudayik Laghubitta Bitiya Sanstha Ltd National Microfinance Bittiya Sanstha Ltd Total No. 37
- 9. 9 Banking as a Whole Clients Includes Auto Finance, Consumer Banking, Home Finance, Insurance and Small Business Banking Provides mutual fund, insurance & home finance and workplace banking products to consumers and small businesses One of the world’s leading investment banks Services provided: Advice on corporate strategy and structure, raising and placing capital, making markets in financial instruments and offering sophisticated risk management services Provides investment & wealth management services to institutional investors, high net worth individuals & retail customers Provides personalized advice and solutions to wealthy individuals Global leader in transaction processing and information services to wholesale clients Three Businesses: Institutional Trust Services, Investor Services(WSS) and Treasury Services Major provider of financial services including corporate finance, cash management, & credit Comprises of five national business segments: Middle Market Banking, Mid-Corporate Banking, Commercial Real Estate, Asset Based Lending and Commercial Leasing Delivers credit card and other related payment products to cardholders and merchant outlets Aims to be the preferred payment card in existing customers wallets and to increase access to new customers Investment Bank Treasury and Securities Services Card Services Asset and wealth Management Retail Financial Services Commercial Banking
- 10. 10 International Banking Locations North America Latin America EMEA Asia Pacific
- 11. 11 Banking and Banking operations Bank is a commercial institution licensed as a receiver of deposits. Banks are mainly concerned with making and receiving payments as well as supplying short-term loans to individuals. Exists to help you make the most of your money Assist you with your monetary requirements and promote savings How do they do it ?? By offering different products and Services Banking Services Deposits Loans Services Capital Market Short Term Long Term Retail Institutional Fund based activities, greater market risk Fee based activities, lesser market risk E.g. Savings Current Fixed E.g. Overdraft E.g. Auto Loan Home Loan E.g. DDs Lockers Bill Pay E.g. Bank Guarantee Trade Finance E.g. Depository Participants Custodian Merchant Banking Debenture Trustees
- 12. 12 For Foreigners: Copy of Passport of their respective countries with Valid Employment of Student Visa. Tourist visa is not acceptable. Copy of an authorized letter issued by their place of Employment or Academic Institution for students Two copies of recent photograph should also be obtained Documents required to open a Bank Account For Individual (Nepal & India): Copy of citizenship certificate for Nepali national. Copy of Embassy registration certificate issued by Embassy of India, Kathmandu, as Indian national/copy of valid passport. Two copies of recent photograph should also be obtained
- 13. 13 Documents required to open a Bank Account For Proprietorship Firm: Declaration of Sole Proprietorship. Copy of renewed Firm Registration Certificate. Copy of renewed Income Tax Registration Certificate. Copy of identification paper of promoter/ account operators. Two copies of recent photograph of proprietor should also be obtained. For Partnership Firm: Letter of Partnership duly signed by all partners. Copy of Partnership Deed duly attested. Certified copy of Partnership Registration. Identification papers of all partners and account operators. Income tax registration/renewed certificate
- 14. 14 Documents required to open a Bank Account For Corporate Bodies: Memorandum and Articles of Association of the company. List of existing directors. Resolution of Board of Directors to open and operate the account. Company registration and Income Tax registration/renewed certificate. Identification papers of directors and account operators. Notification of appointment of office bearers as authorized account operators in case of Corporations. For Clubs, Societies and Associations: List of Office Bearers and their addresses. Copy of Resolution to open and operate the account. Name and signature of persons authorized to operate the account. Copy of registration certificate. Identification papers of account operators. Affiliation certificate with the Social Welfare Council or other concerned Councils.
- 15. 15 Role of Banks Intermediary role between lenders and borrowers • Lenders – Deposits funds with Banks • Liability products (Liability for Banks) • Borrowers – Borrows funds from Banks • Asset Products (Assets for Banks)
- 16. 16 Different Type of Payment method 1.Normal Cheque 2.Good-for-Payment Cheque: Good for payment cheque is a tool used by a bank as guarantee to pay the money to beneficiary of the cheque endorsed by the bank. Such cheques are issued to the depositors having adequate funds to pay for their liabilities. 3.Demand Draft is a pre-paid instrument, wherein Bank by whom the DD has been made undertakes responsibility to make full payment. 4.A letter of credit (LC) is a document from a bank guaranteeing that a seller will receive payment in full as long as certain delivery conditions have been met. In the event that the buyer is unable to make payment on the purchase, the bank will cover the outstanding amount.
- 17. 17
- 18. 18 Different types of Banks Types of Banks Central Bank (RBI) Non Banking Finance Companies (NBFCs) Commercial Banks Term Financial Institutions State Finance Corporations (SFCs) Indian Financial Institutions E.g. IFCI NABARD SIDBI Public Sector Private Sector Foreign Co- operative Banks Regional Rural BanksE.g. SBI PNB BOB E.g. HDFC Bank UTI Bank ICICI Bank E.g. Citibank ABN Amro HSBC State/Central Private Primary Credit Societies
- 19. 19 Broad Categories Retail Banking Typical mass-market banking in which individual customers use local branches of larger commercial banks. Services offered include savings and checking accounts, mortgages, personal loans, debit/credit cards and certificates of deposit (CDs). Whole Sale Banking Banking services which (in contrast to retail banking) are offered only to government agencies, pension funds, other institutional customers and to corporations with strong balance sheets and sound income statements. These services include cash management, fleet and equipment leasing, large-sum loans, loan participation, merchant banking, and trust services. Borrowing and lending amongst banks in inter-bank market, often involving very large sums.
- 20. 20 •Accepting deposits from Public •Lending money to public •Remittances/Collection Business •Keeping valuables in safe custody •Government business •Acting as trustee •Treasury services •Capital Market activity •Merchant Banking Activities of a Bank
- 21. 21 Capital Markets Overview Markets – A place where exchange of goods and services happen Capital Market •Place where capital (fund) requirements of the issuers are met; i.e. Issuers (Corporate, Government, etc) raise funds •Trades in these markets are for debt, equity securities or other instruments •Organized, as they are governed by regulatory bodies [Securities & Exchange Board of India, RBI]
- 22. 22 Regulator Underwriters Merchant Banker / Investment Bank – JPM Brokers Exchanges Custodians Banks Depositories Depositary Participants R & T Agents Market Participants Capital Markets intermediaries
- 23. 23 SEBI – Securities Board of India SEC – Securities & Exchange commission (USA) FSA – Financial Services Authority (UK) NRB – Nepal Rastra Bank Capital Markets – Regulators
- 24. 24 Underwriter Who underwrites the issue in case of under-subscription; takes the stock in its books Assessing the credit worthiness of borrowers and agreeing to fund loans Agreeing to bear the financial risk inherent in an insurance contract Guarantee a minimum selling price (in case of IPO) by the investment banker Merchant Banker / Investment Bank •An underwriter or agent for corporations and municipalities issuing securities •Maintain broker/dealer operations mostly, maintain markets for previously issued securities •Offer advisory services to investors •Large role in facilitating mergers and acquisitions, private equity placements and corporate restructuring •Do not accept deposits from and provide loans to individuals (Investment Banks, especially) Capital Markets intermediaries
- 25. 25 Brokers •An individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor. •The role of a firm when it acts as an agent for a customer and charges the customer a commission for its services. Exchanges •A market in which securities, commodities, options, or futures are traded. •Although you will mostly trade stocks through a broker •NSE, BSE, NYSE, NASDAQ, LSE Capital Markets intermediaries
- 26. 26 Custodian An agent, bank, trust company, or other organization which holds and safeguards an individual's, mutual fund's, or investment company's assets for them. Bank An organization, usually a corporation, chartered by a state or federal government, which does most or all of the following: receives demand deposits and time deposits, honors instruments drawn on them, and pays interest on them; discounts notes, makes loans, and invests in securities; collects checks, drafts, and notes; certifies depositor's checks; and issues drafts and cashier's checks. Capital Markets intermediaries
- 27. 27 Depositories An institution which facilitates the clearing of securities between the stock exchange & depository participants; holds assets in electronic form on behalf of ultimate beneficiaries Depository Participant Any institution like a bank that maintains the dematerialized accounts of beneficiaries, provides services of settling securities traded on the exchange; Agent of Depository Registrar and Transfer Agents maintain the records of members (shareholders) for the issuer company Capital Markets intermediaries
- 28. 28 Market Participants Various persons / entities that indulge in buying & selling Examples: •Qualified Institutional Buyers •Foreign Institutional Investors, Foreign Venture Capital •Domestic Institutional Investors - Banks, Financial Institutions, Insurance Companies, Mutual Funds, Venture Capital •Non - Institutional - High Net worth Clients (E.g. NRI, HUF, Government & Private Corporate bodies) •Retail Individual Investors Capital Markets intermediaries
- 29. 29 Products: Foreign Exchange Definition: Buying (or selling) of a currency and paying for it with another at an agreed price (exchange rate) for settlement on an agreed date Complete the grid of descriptions using the following words 1. Payment Instructions 2. Receiving / receipt Instructions 3. Currencies 4. 2 Counterparties 5. Broker 6. Value date 7. Booked the right way round 8. Amount 9. Exchange rate 10. Trade Date
- 30. 30 Products: Foreign Exchange Explanation Has to be two of these for the exchange to be possible A numerical figure that shows the value of the trade The price of one currency expressed in another The day the trade will settle. i.e. the funds will be debit / credit from / to your account Shows which currency we are paying and receiving. Helps to arrange a trade on behalf of others The entities involved in the trade The day the deal was agreed Where we are receiving our currency to? Where are we paying the currency to? Trade Date Receipt Instructions Payment Instructions 2 Counterparties Broker Booked Right Way Round Value date Exchange rate Amount Currencies Component
- 31. 31 Currencies What currencies do you know? Have a name: Eg United States Dollar, Japanese Yen Have a 3 figure code Eg, USD and JPY
- 32. 32 Price of a currency • Factors that affect the price of a currency -Economic e.g. Interest rate, inflation rate - Political • Strong currency • Weak currency
- 33. 33 WHY FX • For personal requirement • For business requirement • For speculation
- 34. 34 Banks trade in Commodities just as they do in currencies. Commodities are split Into 4 groups: • Energy – e.g. Gas, Oil • Base Metals – e.g. Copper, Aluminium • Precious Metals – e.g. Gold, Silver • Soft Commodities – e.g. Coffee, Sugar, paper Products: Commodities
- 35. 35 What Precious metals do banks trade in? XAU XAG XPT XPD Gold Silver Platinum Palladium (In place of currency codes the chemical elements of the metal are used to identify the metal) Products: Commodities
- 36. 36 Products: Commodities Settlement • Use depositories • Allocated • Un allocated
- 37. 37 What is a Bond? Our Products: Bonds A certificate of debt (usually interest-bearing) that is issued by a government or corporation in order to raise money The issuer is required to pay a fixed sum annually until maturity and then a fixed sum to repay the principal Effectively it is a loan. The company who receives the money, issues a Bond with terms and conditions stating when they will pay back interest and principle amount to the lender of the money (Investor)
- 38. 38 Products: Bonds Key Terms of a Bond • Face Value • Coupon • Maturity • Issuer Nominal Amount What the Bond is worth when redeemed at maturity Amount of interest paid to Bond Holder during the life: (e.g. 5% = 5% of Face Value of investment) Date for coupon payments. Usually 6 monthly (does depend on terms of issuance) Date the principle amount is paid back to the investor. Activity: Lets Look at a practical example. Who Issued the Bond. (Received the money)
- 39. 39 Bond Issuer e.g. A Corporation or Government Investor Pay $1,000,000 Receives Bond Makes regular payments (Coupons) Bond maturity pay back $1m Products: Bonds Conceptual Example
- 40. 40 Big Company Ltd Small Company Inc 1. Big Company Ltd want to buy Small Company Inc. In order to do so it needs to raise capital. The purchase price is $1,000,000 2. Raising capital: In this example, Big Company A looks to borrow money 3. Raising capital: It borrows money by issuing a BOND. 4.Raising capital: An Investor buys the bond. (can be a bank, corporation, Individual etc etc) Products: Bonds Conceptual Example Investor(s) Pays $1,000,000 Issues Bond(s) to Investors 5. End Result Big Company Ltd can now finance its purchase of Small Company Inc and will pay the Investors back. How much depends on the bond (loan) terms.
- 41. 41 Big Company Ltd Investor(s) Investors hold the Bond until Maturity Coupons of 5% are paid semi annually by Big Company to Investors. Products: Bonds Pay back principle amount (e.g. $1,000,000) at maturity Conceptual Example Paid $1,000,000 Coupon payments made every 6 months for term of bond 10 Year Bond = 20 payments
- 42. 42 Role of banks in bonds Products: Bonds BMWBMW Want to start design and produce a new model car Estimate they need EURO 5 million to do this They chose to raise this capital by issuing a Bond BMW Contact JPMorgan and appoint them as Lead Manager on Bond Issue JPMorgan Pay BMW EURO 5 Million and receive Bonds Issue Bonds into the market Investors Bond Buyer Investors Bond Buyer JPMorganJPMorgan Example EURO 5 M Bonds Bonds EURO 5 M Bond Market Pay cash Pay cash Pay cash Receive Bonds Receive Bonds Receive Bonds Investors Bond Buyer
- 43. 43 Types of Shares • Ordinary Share – These shares give the investor the right to a dividend, if declared. Should the company go into liquidation, then holders of this class of share holds the lowest priority of repayment. • Deferred Ordinary share- These give shareholders additional voting rights or the right to higher dividends. Often these shares will not qualify for dividend until a particular date has been reached or the company profit has reached a pre- determined. • Golden Shares – These shares are designed to allow the shareholders the right to a casting vote. In cases of privatization, the government often held golden shares. This allowed them to have the casting vote if required, as a form of control, during take-over bids or other serious matters. These shares are normally used in UK. • Preference Shares – These shares form part of the share capital of the company. They pay fixed dividend and in the event of liquidation they hold preference
- 44. 44 Products: Derivatives Definition A security, such as an Option or Futures contract, whose value depends on the performance of an underlying product. Derivative in itself is not a product, it does however rely on an underlying product for its market value. For this course we will look at 3 derivative examples • Futures • Options • Single Currency Interest Rate Swap
- 45. 45 Futures What is a Future? How does it work? Products: Derivatives
- 46. 46 Products: Derivatives Futures Definition Standardised exchange-traded contract to buy or sell a commodity at an agreed price for settlement or delivery on an agreed future date How does it work
- 47. 47 Products: Derivatives Futures UK Potato Farmer UK Potato Farmer • Has crop of potatoes • Ready to sell in 6 months What can happen in the 6 months before the potatoes are ready? • Potato Supplies worldwide except UK could fail • In 5 months time there is a scare about effect of potatoes on health • Supply remains stable with no impact on current prices
- 48. 48 Products: Derivatives Futures What can happen in the 6 months before the potatoes are ready? Risks: • Crop could fail • Price movement Controls: • Insurance • Agree buyer now at agreed price (Future trade)
- 49. 49 Products: Derivatives Futures Futures Exchang e SupermarketSupermarketUK Potato Farmer UK Potato Farmer Farmer enters into a Futures contract Using the Futures Exchange Seller: UK Potato Farmer Buyer: Supermarket Product: Grade A Potatoes Price: £5 / sack Quantity: 5,000 Sacks Delivery: 5th June 2005 Total Price: £25,000 Future Contract Agree to sell potatoes Agree to buy potatoes Finds a buyer for potatoes Agrees a price Agrees a delivery date
- 50. 50 Products: Derivatives Futures June 5th 2005 • Farmer will deliver potatoes to Supermarket through Exchange • Supermarket will pay Farmer through Exchange • Farmer has guaranteed income (providing crop doesn’t fail – insurance would cover this) This agreement means the Farmer has an obligation to deliver potatoes on this date and Supermarket has an obligation to pay farmer the agreed price. All this happens via Exchange
- 51. 51 Products: Derivatives Options What is an Option? How does it work?
- 52. 52 Products: Derivatives The buyer has the right, but not the obligation to buy or sell the underlying product at an agreed price on an agreed date The buyer pays a premium to the seller have this right. Definition Let’s look at an FX Option Options Page 45-49 in Workbook
- 53. 53 FX Option Products: Derivatives Big Company USA Big Company USA Computer R Us UK (CRUUK) Computer R Us UK (CRUUK) Big Company has ordered a supply of computer components from CRUUK (Computer R Us UK) Computer R Us UK will deliver the computer equipment in 3 months time This will cost Big Company Ltd GBP 1,000,000. in 3 months What needs to happen To Pay for this order Big Company will have to do a Foreign Exchange trade. They need to buy GBP 1,000,000 (to pay CRUUK) And pay for it with USD Have to pay £1,000,000 Deliver Computer Components in 3 months Page 45-49 in Workbook
- 54. 54 FX Option Products: Derivatives What choices does Big Company Ltd have? • Buy the £’s via a forward FX trade (arrange today value 3 months) • Buy the £’s in 3 months – spot trade (exchange rate unknown until 3 months) • Do an FX Option Page 45-49 in Workbook
- 55. 55 FX Option Products: Derivatives Big Company Ltd decide to use an FX Option Why? • Want to know state of cash flows (now and future) • FX Option will limit any exchange rate movements Page 45-49 in Workbook
- 56. 56 FX Option Products: Derivatives How does it work? Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP: 1,000,000 Put: USD: 1,500,000 Strike Price 1.5 Expiry Date 5th March 2004 Delivery date 7th March 2004 Premium: $5000 Big Company (USA) Big Company (USA) JPMorganJPMorgan On January 5th 2004 Big Company contact JPMorgan Big Company agree to buy an FX Option from JPMorgan. This Option gives them the right but NOT the obligation to use this trade on the delivery date The FX OptionBought By To have this right but not obligation Big Company pay JPMorgan a premium Page 45-49 in Workbook
- 57. 57 FX Option Products: Derivatives Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP: 1,000,000 Put: USD: 1,500,000 Strike Price 1.5 Expiry Date 5th March 2004 Delivery date 7th March 2004 Premium: $5000 Big company now have the right to use [exercise] this trade for settlement on March 7th The FX Option What are the key dates? Expiry Date: Date that Big Company have to decide whether to exercise the Option Delivery Date: Date that transfer of funds would occur if Big Company Ltd exercise this Option Other FX Option Components Call: Currency that the buyer of the Option would receive Put: Currency that the buyer of the Option would sell Strike: Exchange Rate that would be used if Option is exercised Page 45-49 in Workbook
- 58. 58 Products: Derivatives FX Option Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP: 1,000,000 Put: USD: 1,500,000 Strike Price 1.5 Expiry Date 5th March 2004 Delivery date 7th March 2004 Premium: $5000 The FX Option How do Big company know whether to exercise the Option? On 5th March • Look at current FX [Spot] rate • If they used the spot rate (Not the Option Strike rate) how much would it cost to buy the £1,000,000? • Would it be cheaper to use the Spot rate and let the Option expire or… • Use the Option because the spot price in market would cost more in USD. Lets look at possible choices Big Company Could make Page 45-49 in Workbook
- 59. 59 Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP: 1,000,000 Put: USD: 1,500,000 Strike Price 1.5 Expiry Date 5th March 2004 Delivery date 7th March 2004 Premium: $5000 The FX Option Products: Derivatives FX Option RATE Would COST in USD To buy £1,000,000 on Spot Market 1.3 1.7 Exercise Option If SPOT Rate If SPOT Rate $1,300,000 $1,700,000 5th March To Buy £1,000,000. using the FX Option would cost:? $1,500,000 NO YES Remember: Big Company bought the Option 3 months ago So wouldn’t know what the rates would be today. Buying the Option limits the cost of the Computer purchases to a maximum of $1,500,000. (plus the $5000 premium) Page 45-49 in Workbook
- 60. 60 ‘In’, ‘At’ or ‘Out Of’ the Money? Cost in USD Foreign Exchange Spot Rate 1.3 1.5 1.7 $1,700,000 $1,500,000 $1,300,000 Products: Derivatives FX Option: To buy £1,000,000 Out of the Money At the Money In the Money Page 45-49 in Workbook
Editor's Notes
- The treasury department of a bank is responsible for balancing and managing the daily cash flow and liquidity of funds within the bank. The department also handles the bank's investments in securities, foreign exchange, asset/liability management and cash instruments.
- DP: intermediaries between the depository and the investors Depository: refer to any place where something is deposited for storage or security purposes A bank guarantee is a promise from a bank or other lending institution that if a particular borrower defaults on a loan, the bank will cover the loss. Note that a bank guarantee is not the same as a letter of credit. A merchant bank is a financial institution that provides capital to companies in the form of share ownership instead of loans. A merchant bank also provides advisory on corporate matters to the firms in which they invest. In the United Kingdom, the term "merchant bank" refers to an investment bank. 'Debenture' A type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital.