The document discusses treasury functions in banks. It covers the structure of treasury including front, mid, and back offices. It also discusses various treasury products like merchant flows, forwards, options, swaps, and pricing of some options and swaps. The regulatory structure of treasury operations and key participants in treasury markets are also summarized.

1. TREASURY FUNCTIONS IN
BANKS

2. Topics covered
 Structure of Treasury
 Treasury Products
 Concept of MTM
 A New Product – Currency Futures

3. REGULATORY STRUCTURE OF TREASURY
1
FRONT OFFICE
(Dealing Room)
Money and Fixed
Income Dealings
 FX & Derivative
Treasury Sales
Equities
2
MID OFFICE
(RISK)
Identification,
Measurement &
Monitoring of Risk
Counterparty,
Product & Dealer
Limits
3
BACK OFFICE
(Administration)
Settlement
 Reconciliation
of Nostros
 Accounting

4. Structure of Treasury
Treasury Front Office
 Front Office is responsible for deal execution in the market.
 Different dealers for different desks of treasury i.e. fixed income,
forex and derivatives.
 Most Banks have main dealing room in Mumbai, however for
forex and derivative sales , most Banks are coming up with
regional dealing rooms.

5. Structure of Treasury
Treasury Back Office
 Back office is responsible for settling the deal executed by the
front office.
 Once a deal is executed by the dealers, back office of both the
counterparties confirm the transactions to each other.
 On the settlement day, the transaction is settled by exchange of
funds or securities.

6. Structure of Treasury
Treasury Mid Office
 Mid office is responsible for ensuring adherence to the various
tolerance limits specified by the Bank’s Management.
 These limits include VaR, stop loss limits, currency limits, broker
limits etc.
 Mid office is also responsible for proper valuation of the entire
portfolio.
 Considering its role, the mid office does not report to Head
Treasury rather to Head of Risk Department.

7.  TREASURY BILLS (T-Bill)
Short-term instruments of GOI’s borrowing issued in the auctions at discount
maturing in – 91, 182 and 364 day.
 CALL/NOTICE MONEY MARKET
Primarily inter-bank market where banks borrow or lend to meet CRR
requirement as well as other liquidity needs. Call Money is for 24 hours or
one day and Notice Money is for 2 to 14 days.
 REPOS:
It is a money market instrument. Repos involve sale of securities with an
undertaking to repurchase after a specified period. It can be done only in
securities as approved by RBI (TBs, Central/ State Govt. Dated secs.)
 COMMERCIAL PAPER (CP)
CPs are issued by non-bank entities like manufacturing companies, NBFCs
and primary dealers etc. in the form of promissory note. It is short term debt
instrument for the minimum period of 7 days and maximum period of 1 year.
The minimum size of CP must be Rs. 5 lakh and it may be issued in the
multiples of Rs. 5 lakh.
MONEY MARKET INTRUMENTS

8.  CERTIFICATE OF DEPOSIT (CD)
CDs are issued by Scheduled commercial banks excluding Regional Rural
Banks (RRBs) and Local Area Banks (Labs). They are allowed to issue
CDs for a maturity period of 7 days to 1 year. The minimum size of CD is
Rs. 1 lakh and in multiples of Rs. 1 lakh.
 COLLATERALISED BORROWING & LENDING OBLIGATIONS
(CBLO)
It is an obligation by the borrower to return the money borrowed at a
specified future date. The underlying charge on securities held in custody
(with CCIL) for the amount borrowed/lent.
Features:
 Settlement of CBLO transactions fully guaranteed by CCIL.
 CBLO in electronic demat form not subjected to stamp duty.
 Traded at discount to face value.
MONEY MARKET INTRUMENTS Contd…
BACK

9. MARKET PARTICIPANTS
ARBITRAGEURS
SPECULATORS CENTRAL BANK
HEDGERS

10. Treasury Products
 Merchant Flows (Cash, Tom & Spot)
 Forward Contracts
 Derivatives (Options, Swaps and combinations thereof)
 Treasury Advisory Services

11. Merchant Flows
 Simple Transactions involving inflow or outflow of foreign
currency.
 Here income arises on account of conversion of rupee to any
other currency or vice-versa.
 No limits required.
 Easy and fast income.

12. CASH
(T)
TOM
(T + 1)
SPOT
(T + 2)
FORWARDS
(SPOT + N)
SETTLEMENT CYCLE
BACK

13. Forward Contracts
 Locking the exchange rate today for a future date.
 Forward rate = Spot rate (+/-) Premium/Discount.
 Simplest hedging tool.
 Forwards can be booked on the basis of genuine underlying only.
 Limits are required under FC node.
 Forward market is generally liquid up to one year.
 Here also we get easy and fast income.

14. Options
 An option is a financial contract in which the buyer of the option
has the right, but not the obligation, to buy or sell an asset, at a
fixed price, on / before a specified date.
 Buyer of the option always pays the premia.
 Seller of the option always receives the premia.
 Buyer of the option has limited loss (premia) but unlimited gains.
 Seller of the option has unlimited loss but limited gains (premia).

15. Option Types
Call option
An option to buy the underlying asset at a fixed rate on / before a
specified future date
Put option
An option to sell the underlying asset at a fixed rate on / before a
specified future date.
Buy
Call
Option
Sell
Call
option
Buy
Put
option
Sell
Put
Option

16. Pay Off Diagrams
Buying a call option
Call Strike
X-axis: Price of the underlying asset, Y-axis: Gain/Loss.

17. Pay Off Diagrams
Selling a call option
Call Strike
X-axis: Price of the underlying asset, Y-axis: Gain/Loss.

18. Pay Off Diagrams
Buying a Put option
Put Strike
X-axis: Price of the underlying asset, Y-axis: Gain/Loss.

19. Pay Off Diagrams
Selling a Put Option
Put Strike
X-axis: Price of the underlying asset, Y-axis: Gain/Loss.

20. Indicative option pricing
Notional USD 1 million
Spot reference 46.20
Maturity Date 03.11.10
Settlement date 08.11.10
Case I
Client to buy USD Call INR Put at a strike of 47.50
Cost: INR 6,00,000

21. Indicative option pricing
Case II
Client to buy USD Call INR Put at a strike of 47.50
Client to sell USD Call INR Put at a strike of 50.00
Cost: INR 4,00,000
Case III
Client to buy USD Call INR Put at a strike of 47.50
Client to sell USD Call INR Put at a strike of 50.00
Client to sell USD Put INR Call at a strike of 44.00
Cost: INR 3,50,000

22. Swaps
 Swap is a derivative instrument used to hedge certain risks or to
speculate on the basis of some expectations.
 Most swaps are OTC products and are tailor made as per
requirements of the counterparties.
 Swaps can broadly be classified into following types:
Interest Rate Swaps
Currency Swaps

23. Swaps
Swaps we generally enter into:
USD IRS: Swapping the floating USD interest rates to fixed.
POS: Principal only swap
COS: Coupon only swap
CCS: Cross currency swap
IRS: Interest rate swap on rupee. (Mibor swap)
and others as per the requirement of the customer.

24. Interest Rate Swap
 Suppose a Corporate is having a Dollar loan of USD 10 mio
having repayment of 2 mio every year end.
 Cost of Loan : 6 months Libor + 110 bps, LIBOR reset every 6
months at the beginning of the interest period. (Interest to be
paid on outstanding USD notional.)
 We can convert this fixed rate loan into floating rate @ 2.7%
(say)
 Its just similar to converting a floating rate Housing loan into a
fixed rate Housing Loan.

25. USDINR POS
 A POS is an exchange of principal in two currencies on
specific dates with an exchange of fixed interest payments in
the two currencies on specific dates.

26. Derivatives : Classic case
 Trade Date March 27 , 2008.
 Delivery Date March 31, 2010.
 Notional : USD 8 mio Imports , Spot Ref : 99
 ABC to Sell USD Put JPY Call option for USD 8 mio at strike
of 130, European KI @ 90 and American KO @ 112
 ABC to Buy USD Call JPY Put Option for USD 4 mio at
strike of 130. American KI @ 90
 ABC to Buy double one touch on USDJPY @ 98.5 & 99.5,
with a payout of USD 1 mio to be paid to ABC on hit.

27. PCFC Pricing
 PCFC is given out of EEFC and FCNR deposits.
 One can resort to INR/USD swap to make USD funds available
in the form of PCFC.
 Availability of funds has to be checked with Treasury.
 RBI rate ceilings:
Upto 6 months : 6 months LIBOR + 200 bps
 On Rollover : 6 months LIBOR + 400 bps
(upto 12 months)

28. Thank You.