1. TREASURY
MANAGEMENT

2. RISK MANAGEMENT
Treasury Management
 Treasury
Products
 Treasury Risk Management
 Derivative Products

3. Integrated Treasury

Integrated Treasury refers to integration of
money market, securities market and foreign
exchange operations.
-Meeting reserve requirements
-Efficient merchant services
-Global cash management
-Optimizing profit by exploiting market
opportunities in forex market, money market and
securities market
-Risk management
-Assisting bank management

4. Treasury
Function
Responsible for
Front
office
MidOffice
Dealing
Back
office
Risk
management,
accounting
and
management
information
Confirmations,
settlement
and
reconciliation

5. FRONT OFFICE
Dealing
MID OFFICE
BACK OFFICE
settlement
MIS

6. Treasury

7. Money Market
 Certificate of Deposit (CD)
 Commercial Paper (C.P)
Inter Bank Participation Certificates
 Inter Bank term Money
 Treasury Bills


8. Certificate of Deposit



CDs are short-term borrowings in the form of
Usance Promissory Notes having a maturity of
not less than 15 days up to a maximum of one
year.
CD is subject to payment of Stamp Duty under
Indian Stamp Act, 1899 (Central Act)
They are like bank term deposits accounts.
Unlike traditional time deposits these are freely
negotiable instruments and are often referred to
as Negotiable Certificate of Deposits

9. Features of CD







CDs can be issued by all scheduled commercial
banks
Minimum period 15 days
Maximum period 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

10. Commercial Paper
 Commercial Paper (CP) is an unsecured
money market instrument issued in the
form of a promissory note.
 Who can issue Commercial Paper
(CP)
Highly rated corporate borrowers, primary
dealers (PDs) and satellite dealers (SDs)
and financial institutions (FIs)

11. Rating Requirement



All eligible participants should obtain the credit
rating for issuance of Commercial Paper
The Pakistan Credit Rating Agency Limited
(PACRA)
JCR-VIS Credit Rating Co. Ltd.

12. Maturity
 CP can be issued for maturities between a
minimum of 15 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.

13. To whom issued
CP is issued to and held by individuals,
banking companies, other corporate
bodies registered or incorporated in
Pakistan and unincorporated bodies, NonResident Pakistanis and Foreign
Institutional Investors (FIIs).

14. 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.

15. 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%

16. Call Money Market
The call money market is an integral part of
the Pakistani 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".

17. Call Money Market
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.

18. 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 SBP and the Government policies which
determine some of the variables mentioned
above.

19. Treasury Bills
Treasury bills, commonly referred to as T-Bills
are issued by Government of Pakistan 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.

20. Who can invest in T-Bill
Banks, Primary Dealers, State
Governments, Provident Funds, Financial
Institutions, Insurance Companies,
NBFCs, DFIs invest in T-Bills.

21. 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

22. Debenture
 A Debenture is a debt security issued by a
company (called the Issuer), which offers
to pay interest in lieu of the money
borrowed for a certain period.
 These are long-term debt instruments
issued by private sector companies.
These are issued in denominations as low
as Rs 1000 and have maturities ranging
between one and ten years.

23. 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.

24. YIELD CURVE
 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

25. 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

26. LIBOR


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.

27. CRR & SLR
The minimum and maximum levels of CRR are
prescribed at 7% and 18% of demand and term
liabilities (DTL) of the bank, respectively, under
SBP BPRD Circular 9 of 2006. The CRR and
SLR are to be maintained on fortnightly basis.
The SBP is authorized to increase or decrease
the CRR and SLR at its discretion.

28. Demand and Time Liabilities





Main components of DTL are:
Demand deposits (held in current and savings
accounts, margin money for LCs, overdue fixed
deposits etc.)
Time deposits (in fixed deposits, recurring deposits,
reinvestment deposits etc.)
Overseas borrowings
Foreign outward remittances in transit (FC liabilities
net of FC assets)
Other demand and time liabilities (accrued interest,
credit balances in suspense account etc. )

29. SLR
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 SBP.

30. 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).

31. 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 /
PKR 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.

32. Exchange Rate Quotation
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.


33. Principles




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.

34. Spot and Forward
Transactions
 ‘A’ 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.

35. Interpretation of Quotation




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

36. TT Buying Rate


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.

37. Bills Buying Rate
 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.

38. Problem
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 ?

39. 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

40. Swap
 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.

41. Mechanics
 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.
Firm A
Fixedrate
finance
Floatingrate
finance
Firm B
9%
11%
LIBOR LIBOR
+0.0% +1%

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

43. Mechanics
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