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Indian Institute of Banking & Finance: Risk Management - Module C Treasury Management
Indian Institute of Banking & Finance: Risk Management - Module C Treasury Management
FINANCE
Ans: c.
Treasury Products
Products of Foreign Exchange Market.
-Most Liquid
-Most Transparent
-Virtual Market
-It’s a near perfect market with efficient price
discovery system.
ABC Bank enters into an Interest Rate Swap with XYZ Ltd on the
following terms
Principal Amount Rs. 100crores
Corporate to Pay 6.50% Fixed
Corporate to Receive 3 month NSE MIBOR
Start date 25-4-08
Tenor 6 months
Termination date 25-10-08
Interest Payment Dates 25th July & 25th Oct
First Fixing 6.10%
18 60
1)Demand Liabilities in the above case
works out to ……………
a) 631000******
b) 638000
c) 1238000
d) None of the above
2)Time Liabilities is equal to ……………………
a) 600000********
b) 120000
c) 127000
d) None of the above
3)Other demand
and time
Liabilities
amounts to
………………
……
a) 10000
b) 17000
c) 18000
d) None of the
above
4)Which of the following is not an
exempted category for the
purpose of CRR calculation?
a) Credit Balances in ACU Dollar
Accounts
b) CBLO
c) DTL in respect of OBUs
d) Staff Security Deposits ********
Which of the following can be
included for DTL/NDTL
computation
a. Amount received from
DICGC Claims
b. Amount received from
Insurance company on ad
hoc settlement of claims
c. Amount received from the
court receiver
d. Amount held as margin
against LC*********
ABC IS A CORPORATE, WHOSE BANKER IS XYZ.
ABC WILL IMPORT RAW MATERIAL WORTH
USD.500000.00 IN THE MONTH OF JANUARY &
PAYMENT IS TO BE MADE ON 31ST JANUARY,2008
ABC WANTS TO BOOK A FORWARD CONTRACT
FOR THIS TRANSACTION :
SPOT RATE OF USD : 39.32/33
PREMIUM UPTO 31ST JANUARY,2008 :RS.0.15 PAISE
BANK WILL KEEP A MARGIN OF RS.0.03 PAISE
BASED ON THE ABOVE, WHAT WILL BE THE RATE
TO BE QUOTED TO ABC, BY XYZ :
(A) RS. 39.50
(B) RS. 39.51
(C) RS.39.44 Answer : B
(D) RS.39.48
The credit portfolio of ABC Bank has undergone
a uniform downgrade as on 31-3- 2008
after an economic downturn. The position prior
to the downgrade is given below:.The minimum capital required after
downgrade is …………..
Rating Scale Risk Weight (%) Exposure Extent of
Rs. In crores downgrade
AAA 20 200 20 %
AA 50 200 20 %
A 50 100 20 %
BBB 100 200 20 %
BB& Below 150 100
800
Minimum capital Rs.48.60 crores
under Basel II
a)57.6 crores***********
b)58.6 crores
c)60.6 crores
d)52.6 crores
Working
Ratin Risk Expos RWA Exposur RWA
g Weig ure Before e after AFTER
Scal ht down Downgra DOWNGRA
e grade de DE
540 630
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 in ALM
FRONT OFFICE
Dealing
settlement
MIS
Treasury
Money Market
Certificate of Deposit (CD)
Commercial Paper (C.P)
Inter Bank Participation Certificates
Inter Bank term Money
Treasury Bills
Call Money
Certificate of Deposit
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)
Features of CD
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
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 all-
Eligibility for issue of CP
(100-99.1489)*365*100= 31065.15
----------------------------
(99.1489*55 days) =5453.18
=5.70%
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.
Difference between debenture
and bond
Long-term debt securities issued by the
Government of India or any of the State
Government’s or undertakings owned by
them or by development financial institutions
are called as bonds. Instruments issued by
other entities are called debentures.
Current yield
Gain
Net interest cost LIBOR- .5%
Net Interest cost 9+[ 1%+0.5%]=10.5%
Mechanics
Interest payments to each
Gain other in years t 1 to t 7.
A B
9.5%
Borrows at Borrows at
9.0% LIBOR + 1%
fixed LIBOR floating
for 7 years for 7 years
Which set of the following statements is true in respect
of Commercial Paper (CP):
1, Commercial Paper (CP) is an unsecured money market instrument
issued in the form of a promissory note
2. CP can be issued by Corporate, primary dealers (PDs) and the all-
India financial institutions (FIs)
3. A corporate would be eligible to issue CP provided the tangible net
worth of the company, as per the latest audited balance sheet, is not
less than Rs.4 crore;
4.. The minimum credit rating shall be P-1 of CRISIL or such
equivalent rating by other agencies.
5. CP can be issued for maturities between a minimum of 7 days and a
maximum up to six months from the date of issue.
6. Amount invested by a single investor should not be less than Rs.15 lakh .
A.1,2 & 4
B.1,2 & 3*****
C.1,4 & 5
D.1,4 & 6
Which of the following is/are true in respect of Certificate of
Deposit?
1. CDs can be issued by (i) scheduled commercial banks excluding
Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii)
select all-India Financial Institutions .
2.. Minimum amount of a CD should be Rs.5 lakh i.e., the minimum
deposit that could be accepted from a single subscriber should not be
less than Rs. 5 lakh and in the multiples of Rs. 1 lakh thereafter.
3. CDs can be issued to individuals, corporations, companies, trusts,
funds, associations, etc.
4.. The maturity period of CDs issued by banks should be not less than 7
days and not more than three years.
A. 1&2
B. 1 & 3*******
C 1&4
D 2&3
Credit Risk Mitigation
In the above case, the RWA for the net exposures of A & B under Basel II are …..………………
A)Rs.28 crore and Rs 50 crore respectively********
B)Rs.172.50 crore and Rs.53 crore respectively
C)Rs.18 crore and Rs.12 crore respectively
D)Rs.150 crore and Rs.75 crore respectively
A dealer has a $200 million open position. He finds that his
VaR for a one day period with a one percent probability is
$1000,000.Which of the following is true?
a) This means that the dealer can expect to lose at least $1000,000
in any given day about one percent of the time, or in other words,
2.5 times in a year (assuming 250 trading days).****
b)This means that the dealer can expect to lose at least $1000,000
in any given day about 99 percent of the time, or in other words,
247.5 times in a year (assuming 250 trading days).
c) This means that the dealer can expect to lose at least $2,000,000
in any given day about one percent of the time, or in other words,
2.5 times in a year (assuming 250 trading days).
d)This means that the dealer can expect to lose at least $ 4000,000
in any given day about one percent of the time, or in other words,
2.5 times in a year (assuming 250 trading days).
Bank A enters into a Overnight Indexed Swap (OIS) with XYZ Ltd whereby
Bank agrees to pay 7 days OIS at 6.25% for Rs.25 crores and receive
MIBOR Overnight Rate.
Actual MIBOR rates for 7 days are given below:
Day 1 6.15%
Day 2 6.05%
Day 3 6.10%
Day 4 6.15%
Day 5 6.05%
Day 6 6.05%
Day 7 6.10%
In the above case. the difference to be settled between the bank and
the XYZ Ltd amounts to……………..
a)Rs.7671*********
b)Rs.7692
c)Rs.8035
d)Rs.8074
The following is the NPA status of XYZ Exporters Ltd account in
Bank A
Ans: b.
Example
Which of the following is true about a
uniform price auction?
a. a. An auction in which all successful bids are
made for the same price.
b. b. An auction in which all bidders have bid a
uniform price.
c. c. An auction in which all successful bidders
are allotted bonds at the same price.
d. d. An auction in which the cut-off price is
derived as the weighted average of all successful
bids.
Answer: c
Example
A treasury bill maturing on 28-Jun-2008 is
trading in the market on 3-Jul-2007 at a
price of Rs. 92.8918. What is the discount
rate in this price?
Answer:
The yield is computed as:
= ((100-price)*365)/(Price * No of days to
maturity)
= ((100-92.8918)*365)/(92.8918*360)) =
7.7624%
Example
Rs. 95.4858
Example
What is the day count convention in the treasury
bill markets?
a. 30/360
b. Actual/Actual
c. Actual/360
d. Actual/365
Answer: d
Example
Answer: b
Repo
A 3-day repo is entered into on July 10, 2007, on an 11.99%
2009 security, maturing on April 7, 2009. The face value of
the transaction is Rs. 3, 00, 00, 000. The price of the security
is Rs. 116.42. If the repo rate is 7%, what is the settlement
amount on July 10, 2007?
Answer: Settlement amount on July 10, 2007 is the transaction
value for the securities plus accrued interest.
Transaction Value:
3, 00, 00, 000 * 116.42/100 =Rs. 3, 49, 26, 000
Accrued Interest:
The number of days is 93.
Accrued interest = 3, 00, 00, 000 * 11.99%* 93/360 = Rs. 9, 29,
225.00
Therefore, the settlement amount is: Rs. 3,49,26,000 + Rs.
9, 29, 225.00 = Rs. 3, 58, 55, 225.00
Example
Compute the Rupee value of an SGL transaction, with the following data:
Coupon Rate: 11.68%
Maturity date: August 6, 2008
Settlement Date: July 11, 2007
Price: Rs. 105.4025
Transaction amount: Rs. 50000000
Answer:
Value of the transaction = number of securities * trade price
= (50000000/100) * 105.4025
= Rs. 5,27,01,250
Accrued Interest for the period since the last coupon is
= days since the last coupon/360 * coupon rate * face value
= (155/360) * 0.1168 * 50000000
= Rs. 25,14,444
Settlement amount = Value of transaction + Accrued Interest
= Rs. 5,27,01,250 + 25,14,444
= Rs. 5,52,15,694
A GOI security with coupon of
1