Treasury Products
Treasury products Treasury refers to the products available in the financial market for raising and deploying funds for (a) investment and (b) trading in foreign exchange and securities market Products available in Forex Market:
The forex is a virtual market without physical boundaries_ The information dissemination is very fast through electronic media such as Reuters, Money Line, Bloomberg etc. The foreign exchange markets, as such, are as near-perfect with an efficient price discovery system_ The products are explained as under:
I. Spot trades
Forward
Swap
Investment of foreign exchange surpluses
Loans and advances
Rediscounting of bills
Spot trade : The spot trading in foreign currencies refers to a situation where the settlement takes place up to T+2 days i.e. maximum on the 3rd day. The settlement may take place on same day (ready rate) or on T 1 day i.e. by the next day (TOM rate). The ready rate and TOM rate are less favourable to the buyer and more favourable to seller_ Example : X sells certain foreign currency to Popular Bank on Feb I I, the settlement will take place on the same day. Bank will make payment by applying ready rate. If the settlement is to take place on Feb 12, the bank will apply TOM rate. If it takes place on Feb 13, Tf rate would be applied_
2_ Forward The forward in foreign currencies refers to a situation where the settlement takes place in future i.e. after T+2 days, on a pre-fixed rate and on a pre-fixed date, which are decided on the date of contract. Forward may be at a discount (where future rate of forex. is lower compared to present/spot rate) or at a premium (where future rate of forex. is higher). Example US $ is quoted at Rs.39.20 on Dec 12 (which is its spot rate). It is quoted at Rs.39.40 for delivery in January (which is forward rate). Here the forward is at a premium_ Had the January rate been lower than Rs.39.20, the forward would have been at a discount.
Forward rates are arrived at on the basis of interest rate differentials of two currencies (which are added or deducted from spot exchange rate). For example, for US S and UK Pound Sterling, the difference between the spot rate and forward rate represents the difference in interest rates in USA and UK. The interest rate differential is added to the spot rate for low-interest yielding currency (representing forward premium) and vice versa.
Swap : Swap represents a combination of spot and forward transactions. Buying one currency in the spot market and selling the same currency for the same quantity in the forward market, constitutes a swap. Though swap is used for funding of requirements but at times there is some element of arbitrage.
Example XYZ Limited an exporter have with them $ 200000 today but they do not need foreign currency today. However, they will require the same amount of foreign currency at the end of the month from now. If the company sells the currency today in spot and buys the same amount 2 months' forward, today itself, it would be a swap transaction. By doing so, they will be able to hedge forex fluctuation risk.
Investment in forex surplus : The forex surplus arcing from (a) profits on treasury operations (b) profits from overseas branch operations (c) forex borrowings in overseas market (d) foreign currency convertible rupee deposits, are left at the disposal of the
Treasury.
Banks are allowed to invest these surpluses in global money markets or short term securities.
Inter bank loans: These loans arc of short term nature up to one year and many times, overnight lending to domestic or global banks.
Short term investments: Banks invest in Treasury bills or gilt edged securities issued by the foreign govt. and other debt instruments.
Balance in NOSTRO accounts: Banks also keep balances in these accounts, which do not earn interest. Some correspondent banks, however, offer the facility to invest automatically once the balance exceeds the floor limits.
5. Loans and advances : Though Treasury does not undertake the loan granting function, but consent of Treasury is obtained by the credit appraisal department and disbursement function regarding availability of foreign exchange funds or credit lines, prior to sanction of such loans by the Credit Function.
6. Rediscounting of bills : Rediscounting is an inter-bank advance and Treasury provides refinance for the foreign currency bills purchased or discounted by other banks. These are normally of a short term period ranging from 15 days to one year.
Treasury products Treasury refers to the products available in the financial market for raising and deploying funds for (a) investment and (b) trading in foreign exchange and securities market Products available in Forex Market:
The forex is a virtual market without physical boundaries_ The information dissemination is very fast through electronic media such as Reuters, Money Line, Bloomberg etc. The foreign exchange markets, as such, are as near-perfect with an efficient price discovery system_ The products are explained as under:
I. Spot trades
Forward
Swap
Investment of foreign exchange surpluses
Loans and advances
Rediscounting of bills
Spot trade : The spot trading in foreign currencies refers to a situation where the settlement takes place up to T+2 days i.e. maximum on the 3rd day. The settlement may take place on same day (ready rate) or on T 1 day i.e. by the next day (TOM rate). The ready rate and TOM rate are less favourable to the buyer and more favourable to seller_ Example : X sells certain foreign currency to Popular Bank on Feb I I, the settlement will take place on the same day. Bank will make payment by applying ready rate. If the settlement is to take place on Feb 12, the bank will apply TOM rate. If it takes place on Feb 13, Tf rate would be applied_
2_ Forward The forward in foreign currencies refers to a situation where the settlement takes place in future i.e. after T+2 days, on a pre-fixed rate and on a pre-fixed date, which are decided on the date of contract. Forward may be at a discount (where future rate of forex. is lower compared to present/spot rate) or at a premium (where future rate of forex. is higher). Example US $ is quoted at Rs.39.20 on Dec 12 (which is its spot rate). It is quoted at Rs.39.40 for delivery in January (which is forward rate). Here the forward is at a premium_ Had the January rate been lower than Rs.39.20, the forward would have been at a discount.
Forward rates are arrived at on the basis of interest rate differentials of two currencies (which are added or deducted from spot exchange rate). For example, for US S and UK Pound Sterling, the difference between the spot rate and forward rate represents the difference in interest rates in USA and UK. The interest rate differential is added to the spot rate for low-interest yielding currency (representing forward premium) and vice versa.
Swap : Swap represents a combination of spot and forward transactions. Buying one currency in the spot market and selling the same currency for the same quantity in the forward market, constitutes a swap. Though swap is used for funding of requirements but at times there is some element of arbitrage.
Example XYZ Limited an exporter have with them $ 200000 today but they do not need foreign currency today. However, they will require the same amount of foreign currency at the end of the month from now. If the company sells the currency today in spot and buys the same amount 2 months' forward, today itself, it would be a swap transaction. By doing so, they will be able to hedge forex fluctuation risk.
Investment in forex surplus : The forex surplus arcing from (a) profits on treasury operations (b) profits from overseas branch operations (c) forex borrowings in overseas market (d) foreign currency convertible rupee deposits, are left at the disposal of the
Treasury.
Banks are allowed to invest these surpluses in global money markets or short term securities.
Inter bank loans: These loans arc of short term nature up to one year and many times, overnight lending to domestic or global banks.
Short term investments: Banks invest in Treasury bills or gilt edged securities issued by the foreign govt. and other debt instruments.
Balance in NOSTRO accounts: Banks also keep balances in these accounts, which do not earn interest. Some correspondent banks, however, offer the facility to invest automatically once the balance exceeds the floor limits.
5. Loans and advances : Though Treasury does not undertake the loan granting function, but consent of Treasury is obtained by the credit appraisal department and disbursement function regarding availability of foreign exchange funds or credit lines, prior to sanction of such loans by the Credit Function.
6. Rediscounting of bills : Rediscounting is an inter-bank advance and Treasury provides refinance for the foreign currency bills purchased or discounted by other banks. These are normally of a short term period ranging from 15 days to one year.
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