Q.1 Collateralised Borrowing and Leading Obligations (CBOL) is a product in the money market launched in 2003 by CCIL.

Discuss the process involved in obtaining membership of CCIL for CBLO. Ans:- Collateralised Borrowing and Lending Obligations (CBLO) is a product in the money market launched in 2003 by Clearing Corporation of India Limited (CCIL). Collateral is a physical security given as a guarantee by a borrower for participation in the transaction. CBLO provides liquidity to non-banking entities that have been phased out of call money market or have restrictions on borrowing/lending transactions in call money market. It is a tripartite repo in which the borrower deposits his securities with a third party acceptable to the lender. CBLO is a repo used in international markets. The third party guarantees the return of funds from the borrower on the specified date. The third party sells the securities in the market to repay the funds to lender. In most of the repo transactions, both the borrower and lender cant unwind the deal before the due date. In certain cases even if the liquidity condition of the borrowers improves before the specified date, they cannot unwind repo deal. Similarly, even the lenders cannot get back their funds until the maturity date of the repo deal. When lenders need funds, they have to enter into a new repo deal or borrow funds. To resolve this problem, CCIL designed the CBLO to lend or borrow at various maturities. RBI has prescribed the mode of operations in the CBLO segment. The minimum order for auction market is ` 50 lakh and in multiples of ` 5 lakh. In 2002 RBI permitted CBLOs developed by Clearing Corporation of India (CCIL) without any restriction on denomination or lock-in period. There is a facility to unwind lending and borrowing at prices depending on the market situation. Since the lenders and borrowers have the flexibility to unwind the deal at their will, they may have to bear risk of buying CBLOs with longer maturity period. In auction market, the borrowers will submit their offers and the lenders will give their bids, specifyi ng the discount rate and maturity period. The bids and offers are screened from 9.45 am to 1.30 pm on working days. In normal market, the minimum order lot is fixed at ` 5 lakh and in multiplies of ` 5 lakh. The members will place their buy/sell orders on the screen which is opened from 9:30 am to 3.30 pm on all working days. The orders are selected based on best quotations and negotiations are also allowed. The borrowers issue the debt instruments under the guarantee of CCIL. CCIL identifies lenders and borrowers to promote CBLO. It, provides guarantee, manages the instrument, and acts as a clearing house for settlement between the purchaser and seller through clearing operations. In a demanding situation, it also acts as a buyer or seller. The CBLO members are required to maintain a cash margin with CCIL as a cover for the exposure obligations during the course of borrowing. The borrowing members retain the ownership of the securities as the securities are not transferrable to the lenders. The participants in CBLO transactions are the members of Negotiated Dealing System (NDS) such as banks, financial institutions, cooperative banks mutual funds and primary dealers. The Non-NDS members like cooperative banks, corporates, Non-banking Financial Companies (NBFCs), pension/provident funds and trusts can participate by registering themselves as associate members to CBLO segment. The associate members can participate in normal market to borrow and lend funds, but not in auction market. The CCIL designates a bank and the associate members are required to open a current account for settlement of funds. Q.2 Commodities market in which commodities like oil, gold and agricultural products are trade. Who are the players in the commodity market? How do the commodities move? Ans: - Definition of commodities markets:Commodities market is the market in which commodities like oil, gold, and agricultural products are traded. It operates on agreements for buying and selling commodities at agreed prices on a specific date. The main commodities markets are in London, New York and Chicago. In India, commodities market facilitates multi-commodity exchange within and outside the country based on requirements. The Indian commodity market has grown tremendously after the liberalisation of the economy. The demand for commodities in the Indian domestic and global market is estimated to grow four times in the next five years. Regulators of commodities markets:Regulation of commodity market is done by governmental commissions that process the trading.

In India Forward Market Commission (FMC) acts as the regulator. Head quartered in Mumbai, FMC is overseen by the Ministry of Company Affairs. FMC helps introduce new instruments like options, benefiting the stakeholders including farmers who benefit from price discovery and price risk management. Commodity exchanges:Commodity exchange refers to commodity purchases and trading contracts for future delivery. These exchanges facilitate trading in physical goods like corn, timber or oil. Most commodity exchanges trade in a single commodity product like oil or rice. A few commodity exchanges work with spot market for providing immediate delivery. This paves way for traders to purchase products in spot market and use or store them for later use. Other products include futures, where an agreement is made for trading at a given price in future. These markets help people make investments that hedge the risk. Some of the commodity exchanges work over the counter (OTC) and have no central place for sharing price quotes or set terms. Instead the traders and brokers deal among themselves. This advantage is a certain amount of certainty and clarity of process and terms, but the disadvantage is limited liquidity and relatively low prices for commodities. The three commodity exchanges set up in India in the year 2003 are National Commodity and Derivatives Exchange, Multicommodity Exchange, and National Multi-commodity Exchange. Players in commodity market: Hedgers and arbitrageurs The group includes production, processing or merchandising of a commodity. Commercials do the bulk of trading in commodity markets. Large speculators group of investors pooling their money to reduce risk and increase gain. Large speculators consist of money managers making investment decisions for overall investors group Small speculators group of individual commodity traders trading on their own account or through brokers.

Q.3 Suppose you are the manager of a company operating in three countries; India, US and UK. What are the risks you face relating to foreign exchange? Ans: - Foreign exchange risk management (FERM) is intended to preserve the value of currency inflows, outflows, investments and loans. The objective is to predict adverse outcome of exchange rate fluctuation and minimize it effectively. Illustration: AB Ltd places an order for raw materials costing $1 million, and on the day of ordering the exchange rate is ` 54/US$. But payment is to be made 3 months later on receipt of the goods, and the rate may depreciate or climb to ` 56/US$. AB Ltd has a forex risk of ` 2 million ($1 million X (56 54)). A good plan for FERM requires: 1 Establishing and executing comprehensive forex risk policies 2 Evolving and implementing effective forex risk control procedures Objectives of foreign exchange risk management 3 To reduce the variability of cash flows 4 To improve, simplify and modernise procedures of foreign exchange Dealings 5 To develop preventive solutions to reduce negative influence of adverse currency movements FERM policies Policies for the following aspects of foreign exchange management should be well-defined: 1 The objective should be clear: is it only protection against loss or does it mandate the management team to make profit from forex transactions? The policies, strategies and procedures will be significantly different for these two objectives. A typically risk-averse business will want only to cover its exposure and reduce risk, while a reward-seeking firm may want to gain from forex rate fluctuations. 2 The limits beyond which exposure should not be allowed: this depends upon the risk appetite of the company and, to some extent, upon the objective of FERM. 3 Authorisation levels for decisions on FERM: The managerial levels at which decisions on forex risk cover can be taken should be defined. FERM Instruments

Effective management of forex risks is done through a variety of financial instruments mainly in the for-mat of derivatives. 1 Forward contract 2 Currency futures 3 Currency options 4 Currency swaps Forward contracts Foreign exchange forward contracts are the most common instrument for hedging forex transactions. A forward contract is an agreement to buy or sell foreign exchange for an amount determined in advance at a specified exchange rate on a designated date in future. The specified rate is called the forward rate and the designated date the settlement date or delivery date. Forward con-tracts are privately negotiated over the counter and hence are not standardized. This gives rise to counterparty risk or default risk arising out of failure of the counterparty to honour its commitment. Currency futures Currency futures are standardized forward contracts in which two parties agree to ex-change something in the future on a regulated exchange. As futures contracts are traded on exchange with appropriate controls, counterparty risk is eliminated. Globally the major currency futures market is the EUR futures market, based upon the Euro to US Dollar exchange rate. The most popular currency futures are provided by the Chicago Mercantile Exchange group, and include the following futures markets: EUR Euro to US Dollar futures 1 GBP British Pound (Sterling) to US Dollar futures 2 CAD Canadian Dollar to US Dollar futures 3 CHF Swiss Franc to US Dollar futures Types of Foreign Exchange Risks The different risks associated with foreign exchange can be classified as follows: 1 Transaction risk 2 Settlement or credit risks 3 Mismatch or liquidity risk 4 Sovereign risks 5 Position risk 6 Cross-country risks Q.4 Explain interest rate and various types and various sources of interest rate. Ans: - Interest Rate Risk Interest Rate Risk is the risk 1 to the earnings from an asset portfolio caused by interest rate changes 2 to the economic value of interest-bearing assets because of changes in interest rates 3 to costs of fixed-rate debt securities from falling bank rates 4 to impact of interest rates on cost of capital used by the firm as hurdle rate for capital investment Types of interest rate risk 1 Volatility risk The volatility or likelihood of adverse change in option value on account of changes in the price of underlying asset 2 Rate level risk The change in interest rates according to the period of investment, during which re-structuring of interest rate levels might take place 3 Reinvestment risks The risk of having to reinvest cash flows from an investment at lower rates of interest 4 Price risk Variations in market price of securities or commodities on which trading has taken place 5 Call/put risks The risk of swings in interest rates in reverse direction to the option offered (call or put) 6 Real interest rate risk The risk of inflation and consequent fall in the purchasing power of the rupee causing a dent in the real interest earned vis--vis the nominal interest rate

Sources of interest rate risk in modern times 1. Yield curve risk: Market perception of long-term v. short-term, as evidenced by the yield curve creates this risk. The capital market exhibits buoyancy by a yield curve slanting upwards, showing higher long-term interest rates; the reverse happens when the economy is under recessionary trends. Investment action would be accordingly oriented to long or short periods. This term structure risk also builds in there-pricing risk . 2. Basis risk: Basis risk occurs due to changes in relationships between different financial markets or financial instruments, which vary with time and amount. For example, an organisation holding large un-traded stocks may find offloading in the current market unprofitable and so enter into futures contract with the stock index. This reduces the liquidity risk but increases the basis risk due to the differences be-tween the spot and stock index prices. 3. Optionality risk: This is similar to the option risk referred to earlier in 9.2 viz. the term risk on fixed in-come options. For instance the risk in an option based on a bond would be proportionate to the term of the bond. 4. Embedded option risk: An embedded option is an inseparable part of another instrument. The callable embedded option bond consists of hold (option-free bond) option and call option. The value of the bond changes according to the changes occurring in interest rates of embedded options values. The price of callable bond is equal to the price of hold option bond minus price of call option bond. The decline in interest rates increases the callable option price bond Liquidity risk is represented by the difficulty of an organization to generate cash to do a transaction or meet a liability when desired. Effective liquidity management enables the organisation to achieve optimal gains at minimum cost. Liquidity risk has two elements. In the context of a business Liquidity risk is the inability to meet liability or a commitment for want of cash. It also arises when a party is interested in trading an asset but there is no buying party or vice versa. Measuring Liquidity Risk A three-dimensional framework is recommended for measuring liquidity risk. 1 Net funding requirement (NFR) 2 Market access 3 Contingencies Net Funding Requirement (NFR) Net Funding Requirement (NFR) of an organization like a bank or Treasury of a global corporation consists in building a maturity ladder of cash outflow for a specified period of time, matching it to inflow what can be planned and deriving the net deficit that has to be funded. This is like cash forecast, except that it is built step-by-step. Using NFR, two simple ways to measure and forecast liquidity are: 1 Stock approach and 2 Flow approach Stock approach The stock approach treats liquidity as stock and extrapolates what the value of this stock would be at the end of a period, by arriving at other asset and liability balances using prevailing norms, ratios etc. Flow approach The flow approach computes liquidity for different short periods like days, weeks or months using the projected outflows and inflows for these periods. Though this method does not give any strategic or managerial insight into liquidity, it is operationally more powerful and helps balance the maturity ladder with postponements or adjustments in the cash flows. Q.5 The Treasury function of a company plays a key role in working capital. Analyse the interface between treasury and working capital. Ans: - The role of Treasury in working capital The Treasury function of a company plays a key role in working capital. The interface between treasury and working capital management can be seen in the following aspects. 1. Cash balance, a significant component of working capital, is entirely in the hands of Treasury. As we have seen above, deciding the optimum cash balance and maintaining the actual balance at that level is a key requirement of good working

capital management. Especially when cash is held in foreign currencies this becomes a technical matter and needs a treasury managers expertise. 2. Treasury highlights hidden problems in working assets like pipeline funds. For instance, a customer payment may take a week to get into the bank and become usable. This will not be apparent from a balance sheet but will be brought up by Treasury and can be resolved. Banks, acting as the Treasury arm of corporate India, has played a major role in reducing pipeline cash through cash management systems that make cash available almost in real time though it is collected in a different place, even a different country. 3. Foreseeing spikes and troughs in working asset balances and planning for the same is an integral part of Treasury function. This calls for special skills and precise information management. Particularly in seasonal businesses, the variations are prominent and can cause great liquidity hardships. Treasury assists managements in such situations to monitor the ups and downs of assets like inventories and receivables, and identify which part of the variation is acceptable and which has to be attacked and resolved. 4. Current assets and liabilities Current assets and liabilities in foreign currency pose a challenge to the Treasury Head in terms of protection against adverse changes. Monetary assets in foreign currency viz. cash and bank balances, receivables and investments, as well as monetary liabilities viz. import payables, foreign currency loans and other liabilities to be repaid in forex pose a threat to the bottom line in view of the volatility of the currencies. Treasury helps in defining the risk more precisely and suggesting action that can be taken to cope with the risk. Q.6 Treasury products are the product in the market available to the treasury for raising and deploying for investment and trading in securities and forex markets. Ans: - Treasury Products Treasury products are the products in the market available to the treasury for raising and deploying funds for investment, and trading in securities and forex markets. Treasury products yield returns and manage the mismatches in the liquidity position. Forex services Forex is a market where currencies of various countries are traded. It is the most liquid market as free currencies such as USD, EURO and other currencies are instantly bought and sold. Free currencies refer to the currencies of developed countries. Partially convertible currencies have limited demand. Some forex products are: 1 Spot trade Spot refers to payment and receipt of funds in foreign currencies two working days from the transaction date. Currencies of various countries are traded in spot centre. Companies typically are buyers of spot trades. 2 Forwards Forwards are sales and purchases of a currency at a specified future date at a rate fixed one given day? Treasury enters into forward contracts with banks based on import/export exposure. The customers enter into forward contract with their respective banks to cover currency risk. The main purpose of treasury in forward contracts is to cover the currency risk, but for banks it is a big opportunity to make profits. 3 Swaps Swaps refer to an agreement between two parties to exchange currencies at a certain ex-change rate and at a certain time in future. Swaps are a combination of spot and forward transaction. Swap is used for funding requirements, limiting risks, overcoming restrictions in certain markets and balancing portfolios. It also provides financial profit. Example ABC Company has USD funds, but it is in need of rupees to invest in commercial papers for three months. The company may enter into USD/Rupee swap and it sells USD at spot rate .It converts USD funds into rupee and buys back the USD after 3 months at forward rate. The rupee fund on commercial paper has earned interest higher than the cost of USD funds. This swap results in profit 4 Debt capitals Though the treasury is not usually involved in sourcing of debt funds and this is handled by a separate team in Finance, it gets involved in short-term arrangements like discounting of foreign and domestic bills, bridge loans or meeting with temporary cash requirements.

1 Forex management with EEFC accounts A company with exports and imports will want to eliminate its forex risk exposure by operating an EEFC (exchange earners foreign currency) a/c. Remittances received in foreign currency can be banked in this account and converted at the option of the company subject to guidelines of RBI implemented by the bank. The rules updated by RBI* stipulate that 100% Forex earnings can be credited to the EEFC account subject to the condition that the sum total of the accruals in the account during a calendar month should be converted into Rupees on or before the last day of the succeeding calendar month after adjusting for utilization of the balances for approved purposes or forward commitments. The account balance can even be Sold forward for future delivery and rolled over. This is a good instrument in Treasurys hands that offers scope both for hedging and for making a good profit if rupee weakens against the US$. Money products Money market is a short-term market with maturity period less than one year. The funds are borrowed or lent for a short-term. The money market products are Treasury Bills (T-bills), Commercial Paper (CPs), Certificate of Deposit (CDs), repo and bill rediscounting. Almost all these are relevant for banks and banking companies. Treasuries of companies can float CPs and make very short-term investment in other instruments. Rediscounting and repo are purely between banks. Securities Securities products form an integral part of integrated treasury. In securities market investors can buy and sell the products available in the securities market. Some of the securities products available are: 1 Government securities (G-sec) are debt instruments auctioned by RBI on behalf of the Government of India. Study the FAQ section of RBI 2 Corporate debt issued by other corporate: Since the corporate debt security paper is issued in demat form and have a credit rating they are active in the secondary market. Global rating is necessary if the debt paper is issued in international markets. Treasuries invest on corporate debt paper because the yields on these bonds are higher than from government securities. It can invest in Foreign Currency Non-Resident (FCNR) funds and foreign currency surplus in the global market as per guidelines approved by the organization. 3 Debentures and bonds issued by corporate of private sector: The interest is received at regular intervals and the principal amount repaid on maturity. Debentures and bonds are issued in different structures to enhance the marketability and to reduce the cost of the issue. 4 Convertible bonds which give option to the bondholder to convert bonds to common stocks or shares of the issuing company.