General Banking –Treasury Operations

TEMENOS EDUCATION CENTRE

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Objectives

 At the end of this course you will be able to understand the basics of
Treasury operations of a Bank like

 main functions of Treasury department

 its Products and Services

 associated business functionalities

 risks associated and mitigation

Slide 2
Organisational structure of Banks

Retail Credit Treasury Private

Banking

Slide 3
Treasury and its functions

 What is Treasury?
 Place where money is stored
Derived from “treasure”

 Treasury department of Bank manages

 its reserve requirement
 temporary surplus and shortage of funds
 Asset Liability profile
 foreign currency position

Slide 4
Treasury – Markets, Products and players

Loans, Placements Deposits, Takings

Call, Notice Call, Notice
Fixed Term Money Fixed term
Market

Certificate Commercial
of Deposit Paper

Shares
Brokers Forward
Spot

Capital Commercial
CommercialBanks
Banks
Central FOREX
Market CentralBanks
Banks Market
Mutual
MutualFunds
Funds
Corporates
Corporates
Swap
Bonds

Slide 5
FOREX Market – business associated

Spot
Forward
Changing Money from one currency
to another

Changing it with immediate value

or
changing it with future value

Changing it with immediate value

Swap AND
Re-exchange with future value

Slide 6
Workshop – 1 Sell News paper for 5 minutes

 You are a News paper vendor

 You are selling YOUR paper to Neighbour

 Bargain and take something else in exchange – pen, pencil, clip..

 How did the News paper vendor quote ?

 1 News paper = 4 pencils
 1 pen = 2.1 News paper

 What did the News paper vendor buy and sell?

 Bought Pen and sold News paper

Slide 7
FOREX Market – Exchange rates

Subsequent
SubsequentSelling
Selling
Indirect
Indirectquotation
quotation quote
quoteby
bypaper
papervendor
vendor
11News
Newspaper
paper== 0.25
0.25CD
CD 11News
Newspaper
paper== 22Pens
Pens
11News
Newspaper
paper==0.27
0.27CD
CD To
ToSELL
SELLPen
Pen
BUY
BUYHIGH
HIGHSELL
SELLLOWLOW
11News
Newspaper
paper==3.1
3.1Pens
Pens
11News
Newspaper
paper==33Pens
Pens

Direct
Directquotation
quotation
Subsequent 11CD
CD==0.12
0.12News
Newspaper
SubsequentSelling
Selling paper
quote 10
10CDs
CDs==1.2
1.2News
quoteby
bypaper
papervendor
vendor News
100 paper
100Clips
Clips==1.5
1.5papers
papers paper
To
ToSELL
SELLClips
Clips
BUY 100
100Clips
Clips==1.37
1.37papers
BUYLOW
LOWSELL
SELLHIGH
HIGH papers

Slide 8
FOREX Market - Exchange rates

 Treasury Dealers always give Two way quotes

 Bid rate / Offer or Ask rate

 1EUR = USD1.4659 / 1.4663 (Local currency USD)

 1.4659 is bid and 1.4663 is ask rate
 0.0004 is spread

 Two way quote is a sign of mature Market

Slide 9
Quiz - 1 Exchange rates

 John has GBP 25,000. He goes to his Bank in USA and asks for local
currency in return
 Bank’s quote is 1GBP = USD 2 / 2.1

 What type of a quote is this?

 Direct quote

 What is the profit making rule for this quote?

 Buy low sell high

 What rate will the Bank apply now?

 1GBP = USD 2

Slide 10
Quiz - 2 Exchange rates

 Peter requests the Bank to sell him GBP 20,000

 Bank’s quote is 1GBP = USD 2 / 2.1

 How much should Peter pay?

 USD 42,000

 How much profit has the Bank made so far?

 USD 2,000

 How much GBP is still with the Bank now?

 GBP 5000
 It is overbought position

Slide 11
FOREX Market - Exchange rates

1EUR = USD1.4671 / 1.4675

Quoted at Premium due to
Interest rate differential
EUR 2% USD 3%

1EUR = USD1.4646 / 1.4650

Quoted at Discount due to
Interest rate differential
1EUR = USD1.4659 / 1.4663
EUR 3% USD 2%
Spot rate influenced by
Demand – Supply
Relative strength of economies
Trade surplus – deficit
Market perception

Slide 12
Money Market – Business associated

CP
CD
Near Cash
Call Deposit Call Loan
Changes cash to near cash
and near cash to cash
Notice Loan
Notice Deposit Single Currency transactions

Usually highly liquid market

Short term
Short term instruments
Short term Loan
Deposit High volume, low risk
Placements

Takings
Driven by temporary
Surplus / Shortage

Slide 13
Money Market – Business associated

FIXED

FLOATING

INTEREST HYBRID / MIX

LIQUIDATED
ON MATURITY
ROLL OVER
PRINCIPAL AUTOMATIC

ROLL OVER

Slide 14
Quiz – 3 Money Market

 What are the different types of interest?

Fixed,Floating,
Fixed, Floating,Hybrid
Hybridor
ormix
mixof
ofboth
both

 What is the name of a transferable deposit?

Certificate of Deposit

 What is the name of inter bank deposit?

Takings

 How is Call deposit different from Notice deposit?

Call deposit can be closed without notice

Slide 15
Treasury – How it is organised

 Front office I buy

 Dealing room I sell

 Mid office
 Surveillance

 Back office
 Settlement
 Nostro and Vostro accounts Limit
Ok !

I am Confirming…

Slide 16
Risk faced by the Bank

 Risk inevitable
 Mitigation essential

 Counter party risk

 Default risk. Counterparty may not honour obligation
 Normally low. Assess financial strength and fix limits

 Country risk
 Political or sovereign risk
 Spreading across to safer countries and fix Country limits

Slide 17
Risk faced by the Bank

 Risk inevitable
 Mitigation essential

 Currency risk
 Arises from changes in price of currencies
 Close monitoring of open positions and square them

 Interest rate risk

 Arises from interest rate changes - upwards or downwards
 Match Asset and Liabilities interest profile

Slide 18
Workshop – 2 Tom and Jerry on Treasure hunt

 Go through handout “Tom and Jerry on Treasure hunt”

 Help them find all the Treasury related jargons you have come across
earlier in the day

 Can you explain what they stand for in Treasury language?

 Time: 10 minutes

Slide 19
Summary

 We have so far seen

 what Treasury is and its role in a Bank

 different markets and players

 various types of products in Forex and Money Markets

 risks related to Treasury operations and mitigation methods

Slide 20