Professional Documents
Culture Documents
XIMB August2010
Rishi Rakesh
Understanding Treasury
Dynamics
Contents
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o
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Session I (Overview):
Role of Treasury in an organization
Balance Sheet Dynamics
Benchmark\Transfer Pricing
Session- I
Treasury Overview
Course Objectives
o
o
Course Outcome
o
The Evolution
Building Blocks of the Banking Business:
Credit/Lending
Marketing
Operations
Treasury Management
Credit
Marketing
Operations
AND Treasury
Risk Providers /
Sellers
B
A
N
K
S
Risk Investors /
Buyers
Role of Treasury
Customer Business Proposition
Market Strategy
Credit
Op. Capacity
Product Planning Process
Funding / Investment
Treasury Cycle
Transaction initiation
Revenue / Expense
Stream management
- Interest rate
- FX rate
Liquidity / Cash flow
management.
Marketing / Sales
Credit Cycle
Credit Initiation
Account Maintenance
Collection - write offs
Role of Treasury
o
Liquidity risk
10
Summary
Treasury Actions
Hedging
Investments
Funding
Asset / Liability Management
11
12
LIABILITIES
Our accounts
Their accounts
Bank placements
Bank borrowings
Mandatory reserves
Commercial paper
Swap assets
Swap liabilities
TP assets
Capital
TP Liabilities
(bond issues)
13
14
Liquidity Management
Treasury Assets
Treasury Liabilities
Contingency liquidity
buffer
Investment of excess
liquidity from
consumer deposits
15
Limited by
Available instruments
Available liquidity to make the investment
16
FCY deposits are used to fund LCY balance sheets in certain markets
(e.g. India FX swaps)
17
Regulatory Compliance
Reserve requirements
Deposits
Government
Other
securities
18
Treasury Assets
o
Bank placements
19
Summary
Treasury Responsibilities for
Balance Sheet Management
20
Key concepts
Treasurys Response
Summary
21
Key Concepts
The three variables that Treasury is most interested in are:
Re-pricing characteristic
Repayment characteristic
Liquidity management
22
Key Concepts
23
Key Concepts
24
$150MM
Liabilities
Consumer Time
Deposit
$100MM
Floating Rate
Loan
$50MM
Floating Rate
Deposit
$50MM
Mortgage Loan
$100MM
$300MM
Professional CD
$150MM
$300MM
25
Tenor
Behaviour
Loan
3 years
Fixed rate
4 years
Repriceable Yearly
Mortgage Loan
10 years
Amortizing
Professional CD
3 years
Fixed rate
Repriceable Yearly
Time Deposit
5 years
26
2 YR
3 YR
150
4 YR
50
50
50
50
10
70
100
54
54
205
57
10
70
300
5 YR
> 5 YR
50
150
50
50
50
Time Deposit
25
25
Total
75
75
200
Gap
(21)
(21)
Cum
(21)
(42)
(37)
TOTAL
150
150
50
50
50
50
100
50
(40)
70
(30)
(70)
300
27
2 YR
3 YR
150
4 YR
5 YR
> 5 YR
50
TOTAL
150
50
Mortgages
10
70
100
Total
155
57
10
70
300
Prof CD
150
150
50
50
Time Deposit
25
25
50
100
Total
25
25
150
50
50
Gap
(21)
(21)
(40)
70
Cum
(21)
(42)
(37)
(30)
(70)
300
29
30
31
Product Dynamics
Product
Pricing
Liquidity
Product
Agreement
Behavior often
observed
Product
Agreement
Behavior often
observed
Term deposit
(e.g. 3 month
fixed rate TD)
Agreed upon
rate
Market lagging /
Pricing pressure
(competition)
Contractual for 3
months
Roll-over /
Pre-termination
Current a/c
Savings a/c
On demand
(short-term)
Sticky pricing
On demand (shortterm)
Portfolio
Dynamics:
Core (LT) vs NonCore (ST)
Agreed upon
rate
Contractual for 15
years
Refinancing with
another bank
Credit cards
Limited repricing
ability due to
competitive pressure
or statutory max.
Minimum payment
by due date
Portfolio
Dynamics:
Transactor vs.
Revolver
32
Savings Example
REPAYMENT ANALYSIS
This analysis will identify a certain core percentage of deposits that can
be said to have an indefinite maturity.
33
Savings Example
REPRICING ANALYSIS
34
Savings Example
Assigning
a Tenor to
Savings is
a
CHALLENG
E!
It all depends
35
Treasurys Response
Ceilings / Floors
Advertising / promotion campaigns
Innovation
36
Treasurys Response
37
Summary
38
the concept
Benchmark determination
Benchmark pricing examples
Benchmark pricing in practice
Summary
39
What is a Benchmark?
40
Benchmarks are designed to transfer market risk exposure from the individual product
managers to treasury, where all risk is centrally located and professionally managed on
a portfolio basis
Fundamental to the overall concept of market risk neutrality and stable Net Interest
Margin (NIM)
Provides acute focus upon product profitability, customer pricing, positioning and
product development
Without benchmark, the impact of market risk is buried in the results of the product
manager
41
Asset Spread
(Loans)
5%
Yield Curve
Risk Management
Gap (tenor
mismatch)
4%
Liability Spread (Deposits)
Time
42
Liabs
3.0%
4.0%
3.0%
Spread
5.0%
1.0%
Risk Totally
Treasury
Mgt
Matched
Transfer Price Income 5.0% 5.0%
Transfer Price Expense
4.0%
Treasury Risk Mgt Revenue
1.0%
5.0%
0.0%
Adding the matched spreads (3%+1%) and the treasury spread (1.0%)
equates to the total business spread of 5.0%. The 1% treasury spread
is the net impact arising from the banks market risk. Generally the
spread is positive when the asset tenors are longer than liabilities.
43
44
Session- II
Managing Treasury Risk
45
46
47
Basis Mismatch
Volume Risk
Embedded options
48
49
Q1
Q2
Q3
Q4
LIABILITY
REPRICING
Asset
Liability
Run-off Gap
Cumulative Gap
0
0
100
(100)
100
100
0
100
(100) 0
0
0
0
0
0
0
TYPE
DEFINITION / IMPLICATIONS
IF RATES
MOVE UP
IF RATES
MOVE DOWN
Positive
Gap
Profits rise
Profits fall
Negative
Gap
Profits fall
Profits rise
52
INTENTIONAL GAP
53
Lend (long)
Borrow (short)
Spread
Year 1
10%
10%
Year 2
10%
9%
1%
Year 3
10%
8%
2%
54
Lend (short)
Borrow (long)
Spread
Year 1
10%
10%
Year 2
11%
10%
1%
Year 3
12%
10%
2%
55
7.25%
7.00%
7.50%
56
FYF
100
Actual
100
B/(W)
-
100
120
(20)
100
80
20
58
59
KEY CONCEPTS
DV01
(Earnings At Risk)
60
DV01
Management Tool to evaluate risk and define
economic loss parameter
61
62
II. Dv01
An Example:
Executed Placement deal of USD 100 mio for
Tenor 6 mths
Dv01 = 0.01% * 100 mio * 6/12
= 5,000
63
Liquidity Risk
Overview
64
Liquidity Problem?
How much water should you bring if you are going to a 7-day trip across the
Sahara?
Carrying enough water for 1-day only assuming there will be wells or
suppliers along the way taking a risk of not being able to find the well
(source of liquidity) before dying of thirst.
65
Liquidity risk-taking is
Fundamental to banking
An important source of revenue
66
For survival:
For growth:
67
Contingency situations:
68
Contingency Situations
Market Disruption
Name Problem
69
Liquidity Management
Objectives
o
70
Country Treasurer
71
Summary
72
Session- III
Money Market Instruments
73
No specific trend
Rates
Maturities
74
Rates
Rates
Rates
Maturities
Change Shape
Parallel Shift
Maturities
Maturities
75
76
May 2004
June 2003
77
June 2005
May 2004
78
August 2006
June 2005
79
May 2006
May 2007
80
May 2007
May 2008
81
82
83
84
Definition
Purpose:
85
Assets
$50MM mortgages
Avg. Life: 10 yrs
Avg. Rate: 11%
(fixed for 10 yrs)
Liabilities
$50MM TDs
Avg. Life: 6 mths
Avg. Rate: 8%
Swap Agreement:
87
11%
XYZ
SWAP
ABC
(8%)
FLOATING RATE = 8%
FUNDING
SOURCE
FLOATING RATE
Liability
88
(8%)
8%
0%
11%
9%
2%
89
With SWAP
(10%)
10%
0%
11%
9%
2%
Without SWAP
(10%)
11%
-1%
10
Interest Rates
Fixed
Rate Paid
to XYZ
Resets
91
R2
R3
(11%) (12%)
11%
11%
0%
(1%)
R4
(10%)
11%
1%
(8%)
11%
3%
11%
(9%)
2%
12%
(9%)
3%
10%
(9%)
1%
8%
(9%)
(1%)
2%
2%
2%
2%
Without the interest rate swap, ABC has interest rate risk based on the
changing cost of 6 month borrowings
92
93
Jargon
94
ASSETS
$50MM auto loans
Tenor: 1year
Fixed Rate: 10%
LIABILITIES
$50MM TDs
Tenor: 3mths
Rate: 7.5%
95
96
R1 + 0.5%
R2 + 0.5%
R3 - 1.0%
8.5
7.5
8.0
7.0
Interest Rates
Resets
97
Auto Loan
3mth interbank
Spread before FRA
FRA
FRA Gain/(Loss)
Effective Rate
Net Spread
R0
R1
10% 10%
7.5% 8.0%
2.5% 2.0%
-
R2
R3
10% 10%
8.5% 7.0%
1.5% 3.0%
98
Definition:
Purpose:
99
100
Rate Quotation:
a. Cross Rates:
b. Price Quotation:
101
Spot Transaction:
Settlement within two business days from deal date
Forward Transaction:
Settlement at a specified future date (>two business
days)
Common tenors are 1, 2, 3, 6, 9 and 12 months
102
International trade
Capital movements
Financial transactions
Exchange of services
Tourism
103
Commercial banks
Speculators
Fund Managers
Non financial businesses
Central banks
Investment houses
104
Sovereign policy
Exchange control/regulations
Economic performance
Money supply
Inflation
Interest rates
Speculation
105
Types of FX Exposure
Transaction Exposure
(daily Mark-to-Market):
106
Types of FX Exposure
Translation Exposure
107
FX Treasury Products
We will briefly discuss the 3 basic forms of
derivative products:
1. Forwards
2. FX Swaps
3. Options
108