Treasury & Risk Management

Post Graduate Diploma in Management (ePGDM)

(Fourth Semester)

Mumbai Education Trust

October 2017 to February 2018

16th December 2018

 TREASURY MARKET : CLASSIFICATION

TREASURY MARKET

DOM ESTI C T R EA SUR Y IN TER NAT ION AL O R FO R EX T R EA SUR Y

Money Capital Govt. Securities Commodities

Market Market Market Market Banks Central Banks Customers Brokers
FOREIGN EXCHANGE MARKET IN INDIA : MAIN CONSTITUENTS

Foreign Exchange Management Act

RBI
 FOREX TREASURY : STRUCUTRE

FOREX TREASURY
(Headed by Chief Dealer
OR Head – Forex Treasury)

Forex Derivatives /
Interbank Forex Desk Merchant Forex Desk
Structuring Desk
 FOREX MARKET IN INDIA

CHARACTERISTICS OF INDIAN FOREX MARKET

Forex markets in India consists of three tiers –

 Tier-I : Between RBI & ADs
 Tier-II : Between ADs in the interbank market (market makers)
 Tier-III : Between ADs and their customers

KEY PLAYERS IN FOREX MARKET

1. Banks/ADs - who are intermediaries between buyers & sellers of Forex

2. Forex Brokers – help in bringing sellers and buyers together
3. Corporates - who buy and sell Forex to finance international trade
4. RBI - maintains exchange rate stability & manages country’s foreign exchange
5. Individuals - who send/receive remittance
6. FIIs - who open separate foreign currency and rupee accounts in India to support
their investment operations
 FOREX MARKET IN INDIA

FOREIGN EXCHANGE FLOWS

 Flows in Forex market depends upon the openness of the economy to the external
world
 In India, the inflows & outflows in forex are governed under FEMA, 1999
 Forex transaction are classified into two categories :
1) Capital Account transaction - transactions which alters the assets and liabilities
outside India of a person resident in India or vice versa
2) Current Account transaction - consists of flow of trade in goods and services

FOREIGN EXCHANGE : DEMAND AND SUPPLY

Demand of Forex by – Supply of Forex by –
i. Importers i. Exporters
ii. Foreign Travelers, students, patients ii. Remittance by NRIs
iii. People who want to remit money abroad iii. FIIs and FDIs
 FOREX MARKET : TYPES OF ACCOUNTS FOR SETTLEMENT OF FUNDS
NOSTRO ACCOUNT
 Nostro means - Our account with You
An Indian bank opening a FCY a/c with a
foreign bank in that bank’s home country
Eg.- For PNB Mumbai, this account is called
Nostro account (my account with you)
 Funding of Nostro accounts
All purchase & sale transactions in foreign
currency are reflected in bank’s nostro a/c
If the purchase of FCY is more than the sales,
the excess could be sold of and where sales
exceeds purchase, the bank has to acquire
requisite forex in the inter-bank market to
fund its Nostro a/c so as to avoid overdraft in
the Nostro a/c
PNB Mumbai
Opens a current a/c in $
with
VOSTRO ACCOUNT
 Vostro means - Your account with Us
A foreign bank opening a rupee a/c with an
Indian bank in India
Eg. - For Citibank NY, the same account is
called Vostro (your account with us)
 Funding of Vostro accounts
Foreign bank maintaining Vostro a/c in India
may request the Indian bank to fund its
Vostro a/c with rupees against credit to Indian
bank’s Nostro a/c maintained abroad or with
any other branch abroad
Citibank NY
 FOREX MARKET : TYPES OF ACCOUNTS FOR SETTLEMENT OF FUNDS

LORO ACCOUNT
 Loro means - Their account with You
It is a third party’s (bank’s) Nostro account
 Eg. – For SBI Mumbai, Nostro a/c of HSBC London with Citibank NY is LORO a/c.
Similarly, Nostro a/c of SBI Mumbai is LORO a/c for HSBC London.

HSBC London Citibank NY

Opens a current
a/c in $ with

Opens a
current
a/c in $
with

SBI Mumbai
 RBI INTERVENTION & LIQUIDITY

(On account of RBI Intervention in India)

Abroad

$ $ $

FII Nostro a/c of Nostro a/c of RBI’s a/c with the

Bank ‘A’ Bank ‘B’ Fed Reserve NY
 In India

Rs FII Rupee Rs
Bank ‘A’ Stock Market
a/c in India
Rs
Rs $ $

Bank ‘B’ RBI Rupee a/c of seller

Rs of stocks

• RBI buying USD from banks controls Rupee appreciation (USD depreciation)
• Injects Rupee into the banking system (Rupee liquidity increases)
 FII INFLOWS & LIQUIDITY

Abroad

$ Nostro a/c of $ Nostro a/c of

FII
Bank ‘A’ in India Bank ‘B’ in India

(On account of inter bank sale)

In India

Bank ‘A’ FII Rupee a/c

On account Rs in India
of USD sold
by Bank A to Rs $
Bank B • Sale of USD/INR by Bank A to Bank
B and so on drives USD/INR down
Bank ‘B’
• Rupee appreciates no change in
rupee liquidity
 FOREX TREASURY : INTERBANK & MERCHANT DESK

 Provide liquidity in the market by giving two-way quotes in USD/INR

Cash, TOM, Spot and Forward rates
 Provide quotes in Spot and Forward rates in Cross Currency pairs
(GBP/CHF, EUR/GBP, EUR/JPY, EUR/USD, GBP/USD etc.)
Interbank Forex
Desk  Runs proprietary trading position
 Enable cover operation for deals done by Sales and Derivatives Desk
 Management of Nostro accounts balances
 Provides information on market developments and currency views

 Preparation of Card rates for small-ticket transactions

 Quoting of Merchant forex rates for Exporters, Importers and
Remittances
Merchant Forex  Booking of merchant forward contracts
Desk  Acceptance and monitoring of customer orders
 Apprising customers of currency movements and views on various
currencies
 On-board new customers and business for forex transactions
 FOREX TREASURY : FOREX DERIVATIVES

 Structuring and pricing of new derivative products for Corporates for

hedging their Exchange Rate Risk
 Run USD/INR and Cross Currency Option Book (OTC and ETCO)
Forex Derivatives  Run Forex Swap Book
Desk
 Run a proprietary Exchange Traded Currency Futures book
 Provide quotes to the Treasury Sales team for structured deals
 Interact with other banks in India and abroad to devise new products