IIBF & NISM Adda: IIBF Treasury Management

Showing posts with label IIBF Treasury Management. Show all posts

Sunday, 22 March 2020

New All IIBF Certifications PDFs in single link 2020-2021

Saturday, 28 December 2019

CTP recollected questions on 28.12.2019

Certified treasury professional exam 28.12.19
1)question on price yield curve like nature of curve,meaning of intersection of curve with price axis, etc 5 question
2)option question... Like in the money, at the money, out of money, time Valueof option, intrinsic, call put questions on option based on strike and spot price
3)forward rate agreement.. Numerical 5 marks as per mac mill an book with some changes
4)repo question numerical like forward leg ready leg numerical as per mc millian book
5)bond question npv of coupons and principal related questions 5 marks
6)commercial paper theory questions 5 marks like who can issue, whether cp gives coupon, net worth for issuing cp etc.. Read Mac millian book ,all questions answerable
7)question on forex tt rate bill rate based on nature of transactions which rate to be selected.. 5 questions
8)numecrical on yield calculations and prices calculations for t bills.. Numerical similar to what has been given in appendix at back of Macmillan book 5 question
9)theoretical question were also conceptual.. Question related to bond option derivative swap
Overall questions were medium level of toughness for those who have not worked in this area
These questions I can recollect
Best of luck to those who wish to appear for CTP exam.

Numerical based on FRA, CURRENCY EXCHANGE, REPO TRANSCATION, BOND/YTM, YIELDS ON T-BILL, CURRENT YIELD
A 5 MARKS EASY SET OF QUESTION FROM COMMERCIAL PAPER

Other Theory questions from Bond theorem, Delta, gama etc.
35-40 marks numerical is there.

Sunday, 27 October 2019

CCP recollected questions on 26.10.2019

Questions were mainly from conceptual undestandings Export Credit (LC), Tandon Committee, IRAC norms, Priority Sector Lending Certificates, Restructuring, Financial Ratios

CP
WC(1nd and 2nd method)
Break even case study
ICR
Ratios interpretation
WCG
Syndication
Consortium

Minors
Public ltd company
Charge creation

Mortgage

CTP recollected on 26.10.2019

CTP recollected on 26.10.2019

5 case studies we're there , 2 from bonds yield calc, 1 forward rate agreement, 2 forex total 25 qn from case study. 15 simple mathematics qn, and rest are theories.

Certified Treasury Professional Online exam , 64.
Thanks to Sir and Group members for their valuable guidences.
Paper is Moderate, deep study required.

Mechmillan book.
Notes of Sir,
BFM book (Module C)
FAQs avilable on FIMMDA website,
Treasury Terminology available on IIBF website
Mock tests etc.

Sunday, 29 September 2019

Certified treasury professional yesterday's exam review 28.09.2019

Cleared treasury operations today first stage ,second stage training programme is pending but few things I want to illustrate:

1.I prepared from MC Millan book only but some things were from Fabozzi book also

2.Make sure read and learn bond valuation must because about 10-15 questions from bond

3.one case study from FRA WAS THERE IN EXAM BUT SIMPLE ONE

4.FOREIGN EXCHANGE RATES MEANS WHEN AND HOW TO APPLY

5.READ EXAMPLES AT BACK OF BOOK MOST IMPORTANT

6.HAVE THOROUGH READING OF LAST CHAPTERS BECAUSE MOST OF QUESTIONS WERE REGARDING STRATEGY U OPT WHEN U ARE IN TREASURY

PAPER WAS TOUGH I PERSONALLY FELT

Cleared treasury professional today , paper was tough main topics were FRA, FOREX,BOND MOST IMPORTANT . Read treasury management book line by line

Monday, 26 August 2019

Treasury management mcqs

Treasury Management::

1 The significance of Treasury operations in Asset Liability management is:

a) It operates in financial markets directly.

b) Treasury is a link between core banking functions and market operations

c) Treasury identifies and monitors the market risk d) All of these

2_ How the Treasury operations are useful in minimizing Asset Liability mismatch?

a) Through uses of derivatives

b) Use of new products

c) Through Bridging the liquidity and rate sensitivity gaps d) All of these

3 Which of the following statements is correct?

a) Trading in securities is exposed to market risk

b) At times the Risks are compensatory in nature and help to minimize the mismatches.

c) Options can be economic only in marketable size d) All of these

4. Treasury operations also help in effective monitoring and implementation of Asset

Liability management process in view of the:

a) Credit instruments can be replaced by Treasury instruments

b) Treasury products are more liquid.

c) Treasury operations monitor exchange rate and interest rate movements

d) All of these

5. Which of the following statements is not correct regarding Treasury operations in

Asset Liability management process?

a) Derivatives can be widely used in Treasury operations

b) Derivatives increases liquidity risk

c) The capital requirement for derivative operations is small.

d) Derivatives replicate market Movements.

6. Asset Liability mismatches can be reduced through use of derivatives in Treasury

operations because:

a) Derivatives can be used to hedge high value transactions

b) It can also minimize aggregate risk in Asset liability mismatches

c) (a) and (b) both d) None of these

7 Suppose a Bank is fundingmedium term loan of 3 years with deposits having

average maturity of 3 months as short term deposits or borrowings are cheaper than

3 years deposits. what would be the consequences and what a bank should do?

a) Bank would resort to short term resources to increase the spread.

b) The (a) above will have liquidity risk

c) This will also have interest Risk since every time the deposits would be priced.

d) The Bank should swap 3 month interest rate into a fixed rate for 3 years.

8. Suppose a Bank prices the 3 month deposit at 91 day T-Bill + 1% and swap rate of

the loan yield T-Bill+3%. What is the impact?

a) Fixed interest of the loan is swapped into floating rate

b) Bank has a spread of 2%

c) The Risk is protected during the period of loan. d) All of these

9. Suppose a Bank borrows US dollars at 3% and lends in domestic market at 8.5%.

The Bank pays forward premium of 1.5% to cover exchange Risk. What is the overall impact?

a) The Bank earns a spread of 2% without any exchange Risk.

b) A bank through Treasury operations can supplement domestic liquidity.

c) The above process is known as arbitrage. d) All of these

10. A Bank under the Treasury operations can buy call options to protect foreign

currency obligations as under:

a) This will help the Bank to protect rupee value of foreign currency receipts and payments

b) The Bank will gain if the spot rate of call option on the exercise date is more favourable than the strike

price of the option.

c) (a) and (b) both d) none of the above

11. Which of the followings is relevant when interest rate is linked to the rate of

Compiled by Sanjay Kumar Trivedy, ChiefManager, Canara Bank, Shrigonda,Ahmed Nagar, Maharashtra 67 | P a g e

inflation?

a) Index linked Bonds b) Treasury Bonds

c) Corporate Debt Instruments d) All of these

12. The significance of index linked bonds is:

a) It provides protection against inflation rate rise.

b) It is inbuilt in the process.

c) (a) and (b) both d) None of these

13. Suppose a Bank- issues 7 year Bond with a put option at the end of 31-6 year. What

does it signify?

a) It is as good as 3 year investment

b) The investment becomes more liquid

c) (a) and (b) both d) None of these

14. The limitations of Derivatives are:

a) If interest rate on deposits and loans are not based on benchmar-k

rates interest rate swaps may not be that useful.

b) The product prices may not move in line with market rates.

c) The Treasury operations may not provide perfect hedge. d) All of these

15'. Which of the followings is correct?

a) Treasury operations are concerned with market risk

b) Treasury operations has no link with the credit risk

c) Credit risk in Treasury operations are contained by exposure limits

d) All the above

16. Why the corporate prefer to issue debt paper than to Bank credit?

a) The cost of debt paper is much lower

b) The procedure is easy

c) (a) and (b) both d) None of these

17. A Bank may prefer to invest in corporate Bonds because:

a) Bbnd is more liquid Asset

b) Bond has an easy exit

c) Bond can be sold at discount d) All of these

18. Which of the following is not credit substitute?

a) Commercial paper b) Mortgage loan

c) Corporate bond d) Certificate of Deposit

19. The difference between a Bond and loan is:

a) The loan has normally fixed rate of interest. Bond price is dependent on Market interest rate movements.

Bonds are more liquid

Yield to maturity value can be known easily in a bond d) All of these

What is securitization?

A process which converts conventional credit into tradable Treasury Assets.

Credi t receivabl es of the Bank can be conver ted into Bonds i .e. .pass through

certificates

These certificates can be traded in the market

The advantages of securitization for a Bank is:

It provides liquidity to the issuing Bank

The Bank capital does not get blocked

Securitization proceeds can be used for fresh lending

22. Which of the following loans cannot be securitized?

a) Long term loans b) Short term loans

c) Medium term loans d) Retail loans

23. Which of the followings is true?

a) Surplus funds with the banks can be invested in pass through certificates

b) This will be indirect expansion of credit portfolio

c) (a) and (b) both d) None of these

24. The features of credit derivatives are:

a) It segregates credit Risk from loan

b) The Risk is transferred from the owner of the Asset to another person for a fee.

a) Allof these

d) All of these

Compiled by Sanjay Kumar Trivedy, ChiefManager, Canara Bank, Shrigonda,Ahmed Nagar, Maharashtra 68 | P a g e

c) The instrument is known as credit linked certificates d) All of these

25. The constituents of a credit Derivatives are:

a) Protection Buyer b) Protection Seller

c) Reference Asset d) All of these

26. The process of credit Derivative involves:

a) The protection seller guarantees payment of principal and interest or both of the Asset owned by the

protection Buyer in case of credit default.

b) The protection Buyer pays a premium to the protection Seller

c) (a) and (b) both d) None of these

27. The advantages of credit Derivatives are:

a) It helps the issuer to diversity the credit risk

b) The capital can be used more efficiently

c) Credit Derivative is a transferable instrument d) All of these

28. What is transfer pricing under Treasury operations?

a) It is the process of fixing the cost of resources and return on Assets of a Bank in rational manner.

b) The Treasury buys and sells deposits and loans of Bank. -

c) The price fixed by the treasury becomes the basis for assessing profitability of a Bank

d) All the above

29. The parameters for fixing price by a Treasury are:

a) Market interest rate

b) Cost of hedging market Risk

c) Cost of maintaining reserve assets of the Bank d) All of these

30. Which of the following statements is correct regarding transfer pricing under Treasury operations?

a) If Bank procures deposit at 7% but the Treasury buys at a lower cost, the difference being the cost would be borne by the

Bank.

b) If the Bank lends at higher rate and sells the loan to Treasury at lower rate, the Balance being risk premium

would be the income for the Bank.

c) (a) and (b) both d) None of these

31. An integrated Riskmanagement policy under Asset Liabilitymanagement should focus on: a) Riskmeasurement andmonitoring b) Risk

Neutralisation, c) Product pricing d) All of these

32. Liquidity policy survival prescribe: a) Minimum liquidity to be maintained b) Funding of Reserve Assets c) Exposure limit

to money market d) All of these

33. The derivative Policy should consist:

a) Capital Allocation b) Restrictions on Derivative Trading

c) Exposure limits d) All of these

34. The investment policy should contain:

a) Permissible investments b) SLR and non SLR investments

c) Private placement d) All of these

35. The investment policy need not contain:

a) Derivative Trading b) Trading in Securities and Repos

c) Valuation and Accounting policy d) Classification of Investments

36. The composite Risk policy under Treasury operations should include the following:

a) Norms for Merchant and Trading positions b) Securities Trading

c) Exposure limits d) All of these

37. Composite Risk policy should also contain the following:

a) Intra-day and overnight positions b) Stop loss limits

c) Valuation of Trading positions d) All of these

38. Transfer pricing policy shduld prescribe:

a) Spread to be retained by the Treasury

b) Segregation of Administrative and Hedging cost

c) Allocation of cost d) All of these

39. According to RBI, policy of Investment and Risk should be supplemented with:

a) Prevention of money laundering policy

b) Hedging policy for customer Risk_ c) (a) and (b) -d) None of these

40. Which of the following are essential requirements for formulation of policy

guidelines?

a) It should be approved by the Board

b) It should comply with the guidelines of RBI and SEBI

c) It should follow current market practices d) All of these

41. Which of the followings is correct?

a) All policies should be reviewed annually

b) A copy of the policy guidelines needs to be filed with RBI

c) (a) and (b) both d) None of above

42. A Run of the Bank signifies:

a) A situation where depositors lose confidence and start withdrawing their balances.

b) A Bank running in continuous loss

c) A Bank where non-performing Assets level is high. d) All of these

43. Liquefiable securities are:

a) Securities that can be readily sold in the secondary market.

b) Securities that have easy liquidity

c) Short term securities d) All of these

44. What is Sensitivity Ratio?

a) Extent of interest sensitive Assets

b).Ratio of interest rate sensitive Assets to interest rate sensitive Liabilities

c) -(a) and (b) both d) All of these

45. Risk appetite is:

a) The capacity and willingness to absorb losses on account of market Risk.

b) The extent of Risk involved in securities c) (a) & (b) d) All of these

46. Which of the followings is correct?

a) Special purpose vehicle is formed exclusively to handle securities paper on behalf of sponsoring Bank.

b) Hedging policy is a document which specifies extent of coverage of foreign currency obligations.

c) Self regulatory organizations formulate market related code of conduct

d) All of the above

47. Liquidity policy of a Bank should contain:

a) Contingent funding

b) Inter-Bank committed credit lines

c) (a) and (b) both d) All of these

ANS: 1 D 2 D 3 D 4 D 5 B 6 C 7 D 8 D 9 D 10 C

11 A 12 C 13 C 14 D 15 D 16 A 17 D 18 B 19 D 20 D

21 D 22 B 23 C 24 D 25 D 26 C 27 D 28 D 29 D 30 C

31 C 32 D 33 D 34 D 35 D 36 D 37 D 38 D 39 C 40 D

41 C 42 A 43 A 44 B 45 A 46 B 47 C

Sunday, 25 August 2019

Review for certified treasury professional exam

Review for certified treasury professional exam

Having today cleared the written exam on certified treasury professional ,all I that I gathered and felt during the course of my preparation was that,there is dearth of proper and adequate information available on the subject ,either maybe due to not many candidates appear for this particular exam or may be those who have previously cleared were not too active in sharing their wisdom and experiences centering around the exam .

1.As bankers we are subjected to quite elongated working hours .As such it is always not possible for us to go through the entire book page by page.Although it is advisable to read the entire book to gain knowledge,but at this point of time our main focus should be on clearing the exam.Also do remember that no matter how much theoretical knowledge one gains from book ,one still needs to start afresh and from scratch upon being posted in treasury department as nothing will come close to practical work ex and that is where one will get real flavour of treasury with due respect to bookish theory.
2.If unable to go through entire book ,put special focus on the following chapters -Liquidity Management,Money Market instrument(specifically CP,CD both theory and numerical) ,Repo (numerals and theory),T bills,Call and Term money .Most questions from Money market asked from CP ,Repo,CD and call money.
3.Under capital market chapter read ECB mainly.
4.Read FRA very well both theory and numerical,mainly numerical and if required take help of YouTube.FRA numericals are must do.
5.Chapter on Options and Future should be read in utmost detail and if time permits then Swaps mainly IRS.
6.Fixed Income Duration Convexity Time Value of money chapter should be properly read .Have clarity on Bond theorem and specifically Bond price yield relation,YTM ,Duration,Convexity,Bond numerical like Bond price,Modified Duration calculation,convexity, effect on portfolio due to Bond price /yield increase or decrease numerical.This particular chapter on Fixed income Duration Time value of money is very very important.
7.Other than above if time permits go through Basic forex numerical on bill/TT buying selling,rate to be quoted to exporter/importer ,dealer code of conduct,Types of auction and when issued mkt,role of front mid and back office.
8. Go through numerical on Repo at the backside of the book and on calculation Yield and price of T bills given on the back side of the book.These are very important and 6-7 questions are normally asked on these topics frequently.

That’s it from my side friends.Hope I could be of some help to you all.Thanks again to Srinivas Sir for his untiring efforts towards this forum and his contribution in helping fellow aspirants in clearing these exams and if I can recollect anything else , I will share over here in due course of time.
Take care...

By Mr.Kumar deep

Sunday, 28 April 2019

All IIBF Certifications PDFs in single link Updated on April 2019

Tuesday, 16 April 2019

Treasury Management – Concepts

Treasury Management – Concepts

Banks not only lend money to customers but also invest in securities such as Bonds and Debentures of Government as well as Corporates. These instruments are easily tradable in the capital and money market. The tradability of securities makes investments an attractive option for banks for deployment of their funds. Further, banks buy securities not only to trade but also to hold them till maturity to take advantage of the attractive returns with relatively lower risk. Banks are allowed to invest in shares of companies. However, the volumes are low due to associated high risk besides regulatory restrictions. The investment portfolio of the banks broadly divided into three groups viz.,
Trading Book - Securities purchased with the intention of selling them within 90 days are held in the trading book. Trading opportunities arise in the market on account of fluctuation in interest rates and arbitrage opportunities.
Available for Sale (AFS) - Securities which are bought with the intention of selling them but not necessarily within 90 days is considered to be AFS securities. They are also part of the trading portfolio of the bank but only the time frame is different. Both the trading and AFS securities have to be "Marked to Market" every quarter while finalization of quarterly results.
Held to Maturity (HTM) - These securities are meant to be held till their date of maturity and the purpose investing in them is to earn reasonable steady income. These securities are carried in the books at cost or purchase price till maturity. Hence, HTM securities need not be "Marked to Market" as the bank is certain of receiving the maturity value on the specified date. Banks are not allowed to shift securities freely from trading and AFS to the HTM book as this may lead to overstating of profit figures. However, banks can opt for shifting only once in a year to adjust their overall portfolio. Banks are permitted to exceed the limit of 25% of total investments under HTM category provided (a) the excess comprises of only of SLR securities and (b) the total SLR securities held in the HTM category is not more than 23% by March 2014.
Call Money Markets:
Call and notice money market refers to the market for short term funds ranging from overnight funds to funds for a maximum tenor of 14 days. Under Call money market, funds are transacted on overnight basis where as in case of notice money market; funds are transacted for the period of 2 days to 14 days.
Coupon Rate:
It is a rate at which interest is paid, and is usually represented as a percentage of the par value of a bond. It refers to the periodic interest payments that are made by the borrower (who is also the issuer of the bond) to the lender (the subscriber of the bond) and the coupons are
stated upfront either directly specifying the number (e.g.8%) or indirectly tying with a benchmark rate (e.g. MIBOR+0.5%).
Zero Coupon Bond / Deep Discount Bond:
The bond is issued at a discount to its face value, at which it will be redeemed. When such a bond is issued for a very long tenor, the issue price is at a steep discount to the redemption value. The effective interest earned by the buyer is the difference between the face value and the discounted price at which the bond is bought. The essential feature of this type of bonds is the absence of intermittent cash flows.
Commercial Paper (CP):
It is a short-term instrument to enable non-banking companies to borrow short-term funds through liquid money market instruments. CPs is therefore part of the working capital limits as set by the maximum permissible bank finance (MPBF). CP issues are regulated by RBI Guidelines issued from time to time stipulating term, eligibility, limits and amount and method of issuance. CP can be issued for maturities between a minimum of 7 days and a maximum up to one year from the date of issue. The maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid. CP can be issued in denominations of Rs. 5 lakh and multiples thereof. It is mandatory that CPs should be rated by credit rating agencies. In a bid to make CPs attractive, the RBI has allowed issuers to buyback these instruments through the secondary market before maturity. It attracts stamp duty.
Certificates of Deposits (CDs):
It is a negotiable money market instrument and issued in dematerialized form or as a Usance Promissory Note, for funds, deposited at a bank or other eligible financial institutions to raise short-term resources within the umbrella limit fixed by RBI. CDs may be issued at a discount on face value. CDs differ from term deposit as they involve the creation of paper, and hence have the facility for transfer and multiple ownerships before maturity. Banks use the CDs for borrowing during a credit pickup, to the extent of shortage in incremental deposits.
Minimum amount of a CD should be one lakh and in multiples thereof. The maturity period of CDs should be not less than 7 days and not more than one year. However FIs are allowed to issue CDs not exceeding 3 years from the date of issue. Banks have to maintain the appropriate reserve requirements (CRR/SLR) on the issue price of the CDs. It attracts stamp duty. Banks/FIs cannot grant loans against CDs.
Securitization is an effective tool to reduce the mismatches in the maturities of assets and liabilities. It is a financing technique that involves pooling and re-packing of illiquid financial assets in to marketable securities. There are six players viz., Borrowers, Lending Banker (who becomes an originator for the Securitization transaction), Special Purpose Vehicle

(SPV), Credit Rating Agency, Investors and Service Providers. The process of securitization involves identification of financial assets, rating of these assets by the rating agency, creation of a SPV for handling the securitization transaction, assignment of future receivables in favour of the SPV, issuance of marketable securities based on these underlying financial assets and selling the same to the investors. The service providers recover the amount periodically and remit to the SPV and who in turn pass the benefit to the investors.
Asset and Liability Management:
RBI Guidelines: Of late, it is observed that PSBs have been accepting Bulk Deposits/Certificate of Deposits route to increase balance sheet size at very high interest rates, adversely affecting the profitability besides exposing the banks to ALM Risk. RBI directed banks not to accept Bulk Deposits beyond 10% of the total deposits and the total of Bulk Deposits & Certificates of Deposits should not exceed 15% of total deposits of the bank at any given point of time. An appropriate time-bound strategy for reduction of such existing bulk deposits should be put in place.
Adjusted Net Bank Credit (ANBC):
It denotes Net Bank Credit plus investments made by banks in non-SLR bonds held in HTM category. However, investments made by banks in the Recapitalization Bonds and Inter-bank exposures will not be taken into account for the purpose of priority sector lending targets/sub-targets.
Subordinate Debt:
It is a debt owed to an unsecured creditor that in the event of liquidation can only be paid after the claims of secured creditors have been met. Normally, subordinate debt ranks below other secured loans with regard to claims on assets or earnings.

Sunday, 25 November 2018

Certified Treasury professionals Recollected questions on November 24th 2018

Some of the recollected questions of certified treasury professional exam held on 24/11/2018 3 pm
TT buy/ TT sell bill /buy Bill sell/ TC buy TC /sell Forex card rates of dollar and pound given.
Various forex transaction based questions (5 marks)

∆Y= change in the yield of a bond in decimal
V+ = the estimated value of the bond if yield is increased by ∆Y
V- = the estimated value of the bond if yield is decreased by ∆Y
Vo = Initial price of the bond
All these values given
Questions asked: percentage change in price per basis point Change for an increase in yield of delta y etc.

Average percentage price change per basis point change in yield
(5 marks)

cash inflow and outflow of the repo borrower in a repo transaction
Accured interest for first leg second leg etc (5 marks)

Present value of all coupons 10 years bond coupons payed semi annually.

Apart from black scholes model another famous option pricing model name.
How options Greek measures the sensitivity of an options price

A decrease in interest rates raises bond prices by more than a corresponding increase in rates lowers price

Money market refers to the market for short term maturities upto 1 year.

Yield and price of 364 and 91 days treasury bill.

Given CTP Exam today (24/11/18) 10.00 Slot. Next heading toward FRM & Certified Bank trainer. In today CTP exam, Case Study Questions (5Q ) were from Repo Transaction, T Bills, TT Buying & Bills Buying rates, option price calculations, Bond yield & price calculations, option greeks & duration. Then individual questions (1 - 2Q) from CP, SI,CI, option pricing models, forex valuation, dealers code of conduct, etc.

Monday, 19 November 2018

Treasury and ALM management

Treasury and Asset-Liability Management::

Banks accept deposits from customer the maturity of which ranges from 7 days to 10 years. The banks return these deposits on
maturity for which the depositors have the comfort that banks will not default in repayment on time. These funds are partly invested
in cash to meet CRR requirement, in Govt_ securities to meet the SLR requirements, and in loans and advances of various maturities.
Banks however, do not have similar type of comfort for receiving these funds back, particularly from the borrowers.
For example, a bank raised a term deposit of 3-years at 7% and lends the amount repeatedly for a 3-months bills discounting at
9%. After every 3 months the bank will face the liquidity problem besides other risk. Similarly, if by that time there is decline in
the interest rate (say it comes down from 9% to 8%), the bank will also face interest rate risk. Hence, the risk arises out of
mismatch of assets and liabilities of the bank and the ALM manages such balance sheet risk.
Liquidity Risk vs Interest Rate Sensitivity Risk
Liquidity and interest rate risks: Banks are sensitive to liquidity risk because they cannot afford to default on their payment
obligation towards the depositors as that may lead to a run on the bank. Banks have to roll over the deposits and advances on
market determined terms. Any mismatch in the maturity profile will not only lead to liquidity risk but to interest rate risk.
Liquidity : Liquidity refers to a positive cash flow in the form of cash or cash like assets. The available cash resources are compared
with the immediately due liabilities or liabilities in a given time range (called bucket). The difference between these sources and uses
of funds in specific time buckets is the liquidity gap which may be negative or positive_ Hence the liquidity gap arises out of
mismatch of assets and liabilities. RBI has prescribed 11 maturity time bands (called buckets) beginning from next day to more than
5 years for measuring and monitoring the liquidity gap.
Interest rate: Interest rate risk is measured by the gap between the interest rate sensitive assets and liabilities in a given time band.

Rate sensitive assets and liabilities: Assets and liabilities are called to be rate sensitive when their value changes in the reverse
direction corresponding to a change in the market rate of interest. For example, if a bank has invested in a bond having 8% coupon
and later on the market interest rate increases to 9%, the value of the bond would decline. The difference between rate sensitive
assets-
and liabilities in each time band, either in absolute amount or as sensitivity ratio, is indicative of the risk arising out of interest
rate mismatch.
Role of Treasury in ALM
Treasury maintains the pool of funds of the bank and its core function is funds management. Hence its activities expose the
bank to liquidity and interest rate risk. Treasury Head in a bank is normally an important member of ALCO. Risk management
has become integral part of Treasury, due to the following reasons:
1. Treasury operates in financial market directly by establishing a link between the core banking functions (of
collecting deposits 4: lending) and the market operations. Hence, the market risk is identified and monitored
through Treasury.
2. Treasury makes use of derivative instruments and other means to bridge the liquidity and rate sensitive gaps which arise
due to mismatch in the residual rnattuity of various assets and liabilities in different time buckets.
3. Treasury itself is exposed to market risk due to its trading positions in forex and securities market.
4. With development of financial markets, certain credit products are being substituted by treasury products (in place of
cash credit, the emergence of commercial paper by large companies). Treasury products are marketable and help in
infusion of liquidity in times of need.
Use of Derivatives in ALM
Derivative instruments are used to reduce the liquidity and interest risk or in structuring new product to mitigate market
risk. These are used due to following reasons:
1_ Derivatives replicate the market movements and can be used to counter the risks inherent in regular transactions. For
example, if stocks that are highly sensitive to market movement are purchased, the Treasury can sell the index futures
as a hedge against fall in stock prices.
2. Derivatives require small capital as there is no funds deployment, except margin requirement.
3. Derivatives can be used to hedge high value individual transactions or aggregate risks as reflected in the assets liability
mismatch. For example, if a bank is funding a term loan of 3 years (having higher rate of interest),
with a deposit of 3-months duration (having very low rate of interest) by rolling over the deposit, it has to be rolled over 12 times
and every time the bank is exposed to interest rate risk. To take care of this, the bank may swap the 3--month interest rate into a
fixed rate of 3 years, so that interest cost is fixed and the spread on the loan is protected.
4. Treasury can also protect the foreign currency obligations of the bank from exchange risk by buying call options where it has
to deliver foreign exchange and by buying put option where it has to receive the foreign currency payment The options help
the bank to protect rupee value of the foreign currency receipts and payments.
5. Treasury helps the bank in structuring new products to reduce the mismatch in the balance sheet, such as floating rate
deposits and loans, where the interest rate is linked to a bench mark rate. similarly, the corporate debt paper can be issued
with call and put option. The option improves the liquidity of the investment. (A 5-year bond issued with a put option at the
end of 3"1
year is as good as a 3-year investment).
Treasury and Credit risk & Credit derivatives
Credit risk in Treasury business is largely contained in exposure limits and risk management norms. Treasury gets exposed to
credit risk in the following ways:
Investment in treasury products such as corporate commercial paper and bonds (instead of lending, investing through these
debt instruments). But, the credit risk in a commercial paper being similar to a cash credit advance, the commercial paper is
tradable due to which it is a liquid asset. Hence bank has an easy exit route. Hence the non-SLR portfolio supplements the
credit portfolio and at the same time is more flexible from ALM point of view.
2. The products like securitization convert the traditional credit into tradable treasury products. For example, the housing loans
secured by mortgage, can be converted into pass through certificates (PTCs) and sold in the market (which amounts to sale
of loan assets).
3. Credit derivative instruments such as credit default swaps cr credit linked notes transfer the credit risk of the lending bank to
the bank (called protection seller) which is able to absorb the credit risk, for a fee. Credit derivatives are transferable
instruments due to which the bank can diversify the credit risk.
Treasury and Transfer Pricing
Transfer pricing refers to fixing the cost of resources and return on -assets of the bank in a rational manner. Treasury buys and
sells the deposits and loans of the bank, notionally, at a price which becomes the basis of assessing the profitability of the
banking activity. The price is fixed by Treasury on the basis of :
· market interest rate, cost of hedging market risk and cost of maintaining the reserve assets.

After implementation of transfer pricing, the Treasury takes care of the liquidity and interest rate risk of the bank.
Policy environment
For the ALM to be effective, the bank should have an appropriate policy in place.
1. It should be approved by Board of Directors.
2. .It should comply with RBI & SEBI regulations
3. .It should comply with current market practices and code of conduct evolved by FIMMDA or FEDAI.
4. . It should be subject to periodical review.

Components of integrated Risk rated Risk management Policy
Policy Component
_
ALM Policy Composition of ALCO, operational aspect of ALM 'Such as risk measures, risk monitoring, risk
neutralization, product pricing, MIS etc.
Liquidity policy Minimum liquidity level, -funding of reserve assets, limits on money market exposure, contingent
funding, inter-bank credit lines.
Derivative policy Norms for use of derivatives, capital allocation, restrictions on derivative trading, valuation norms,
exposure
ceilings etc. N Investment policy Permissible investments, norms relating to credit rating, SLR and non-SLR investment, private placement,
trading in securities and repos, accounting policy.

Transfer pricing

Methodology, spreads to be retained by Treasury, segregation of administrative cost and hedging cost,
allocation of cost to branches etc.

Sunday, 14 October 2018

Treasury management

Treasury Management ::
(Read nice article)
Banks not only lend money to customers but also invest in securities such as Bonds and
Debentures of Government as well as Corporates. These instruments are easily tradable
in the capital and money market. The tradability of securities makes investments an
attractive option for banks for deployment of their funds. Further, banks buy securities
not only to trade but also to hold them till maturity to take advantage of the attractive
returns with relatively lower risk. Banks are allowed to invest in shares of companies.
However, the volumes are low due to associated high risk besides regulatory restrictions.
The investment portfolio of the banks broadly divided into three groups viz.,
Trading Book – Securities purchased with the intention of selling them within 90 days
are held in the trading book. Trading opportunities arise in the market on account of
fluctuation in interest rates and arbitrage opportunities.
Available for Sale (AFS) – Securities which are bought with the intention of selling
them but not necessarily within 90 days is considered to be AFS securities. They are also
part of the trading portfolio of the bank but only the time frame is different. Both the
trading and AFS securities have to be “Marked to Market” every quarter while finalization
of quarterly results.
Held to Maturity (HTM) – These securities are meant to be held till their date of
maturity and the purpose investing in them is to earn reasonable steady income. These
securities are carried in the books at cost or purchase price till maturity. Hence, HTM
securities need not be “Marked to Market” as the bank is certain of receiving the
maturity value on the specified date. Banks are not allowed to shift securities freely from
trading and AFS to the HTM book as this may lead to overstating of profit figures.
However, banks can opt for shifting only once in a year to adjust their overall portfolio.
Banks are permitted to exceed the limit of 25% of total investments under HTM category
provided (a) the excess comprises of only of SLR securities and (b) the total SLR
securities held in the HTM category is not more than 23% by March 2014.
Call Money Markets: Call and notice money market refers to the market for short term
funds ranging from overnight funds to funds for a maximum tenor of 14 days. Under Call
money market, funds are transacted on overnight basis where as in case of notice
money market; funds are transacted for the period of 2 days to 14 days.
Coupon Rate: It is a rate at which interest is paid, and is usually represented as a
percentage of the par value of a bond. It refers to the periodic interest payments that
are made by the borrower (who is also the issuer of the bond) to the lender (the
subscriber of the bond) and the coupons are stated upfront either directly specifying the
number (e.g.8%) or indirectly tying with a benchmark rate (e.g. MIBOR+0.5%).
Zero Coupon Bond / Deep Discount Bond: The bond is issued at a discount to its
face value, at which it will be redeemed. When such a bond is issued for a very long
tenor, the issue price is at a steep discount to the redemption value. The effective
interest earned by the buyer is the difference between the face value and the discounted
price at which the bond is bought. The essential feature of this type of bonds is the
absence of intermittent cash flows.
Commercial Paper (CP): It is a short-term instrument to enable non-banking
companies to borrow short-term funds through liquid money market instruments. CPs is
therefore part of the working capital limits as set by the maximum permissible bank
finance (MPBF). CP issues are regulated by RBI Guidelines issued from time to time
stipulating term, eligibility, limits and amount and method of issuance. CP can be issued
for maturities between a minimum of 7 days and a maximum up to one year from the
date of issue. The maturity date of the CP should not go beyond the date up to which the
credit rating of the issuer is valid. CP can be issued in denominations of `5 lakh and
multiples thereof. It is mandatory that CPs should be rated by credit rating agencies. In
a bid to make CPs attractive, the RBI has allowed issuers to buyback these instruments
through the secondary market before maturity. It attracts stamp duty.
Certificates of Deposits (CDs): It is a negotiable money market instrument and
issued in dematerialized form or as a Usance Promissory Note, for funds, deposited at a
bank or other eligible financial institutions to raise short-term resources within the
umbrella limit fixed by RBI. CDs may be issued at a discount on face value. CDs differ
from term deposit as they involve the creation of paper, and hence have the facility for
transfer and multiple ownerships before maturity. Banks use the CDs for borrowing
during a credit pickup, to the extent of shortage in incremental deposits. Minimum
amount of a CD should be one lakh and in multiples thereof. The maturity period of CDs
should be not less than 7 days and not more than one year. However FIs are allowed to
issue CDs not exceeding 3 years from the date of issue. Banks have to maintain the
appropriate reserve requirements (CRR/SLR) on the issue price of the CDs. It attracts
stamp duty. Banks/Fis cannot grant loans against CDs.
Mumbai Inter Bank Offered Rate (MIBOR) - Currently there are two calculating
agents for the benchmark viz., Reuters and the National Stock Exchange (NSE). The NSE
MIBOR benchmark is the more popular of the two and is based on rates polled by NSE
from a representative panel of 31 Banks / Institutions / Primary Dealers. It is used by
different Indian banks either for interbank lending of the surplus funds or for interbank
borrowing for meeting their short term liquidity requirements. MIBOR has been in use as
a reference/benchmark rate by the financial institutions for deciding interest rates for
the different financial instruments like Interest Rate Swaps, Forward Rate Agreements,
Floating Rate Debentures and Term Deposits, Loans of different maturities and
mortgages, etc. It is also the benchmark for the Call Money Market Rates.
Securitization is an effective tool to reduce the mismatches in the maturities of assets
and liabilities. It is a financing technique that involves pooling and re-packing of illiquid
financial assets in to marketable securities. There are six players viz., Borrowers,
Lending Banker (who becomes an originator for the Securitization transaction), Special
Purpose Vehicle (SPV), Credit Rating Agency, Investors and Service Providers. The
process of securitization involves identification of financial assets, rating of these assets
by the rating agency, creation of a SPV for handling the securitization transaction,
assignment of future receivables in favour of the SPV, issuance of marketable securities
based on these underlying financial assets and selling the same to the investors. The
service providers recover the amount periodically and remit to the SPV and who in turn
pass the benefit to the investors.
Asset and Liability Management – RBI Guidelines: Of late, it is observed that PSBs
have been accepting Bulk Deposits/Certificate of Deposits route to increase balance
sheet size at very high interest rates, adversely affecting the profitability besides
exposing the banks to ALM Risk. RBI directed banks not to accept Bulk Deposits beyond
10% of the total deposits and the total of Bulk Deposits & Certificates of Deposits should
not exceed 15% of total deposits of the bank at any given point of time. An appropriate
time-bound strategy for reduction of such existing bulk deposits should be put in place.
Adjusted Net Bank Credit (ANBC) denotes Net Bank Credit plus investments made
by banks in non-SLR bonds held in HTM category. However, investments made by banks
in the Recapitalization Bonds and Inter-bank exposures will not be taken into account for
the purpose of priority sector lending targets/sub-targets.
Subordinate Debt is a debt owed to an unsecured creditor that in the event of
liquidation can only be paid after the claims of secured creditors have been met.
Normally, subordinate debt ranks below other secured loans with regard to claims on
assets or earnings.

Sunday, 12 August 2018

All IIBF Certifications PDFs in single link

Wednesday, 8 August 2018

Important Risk Weighted Assets

Assets/Claim			Risk Weight

Fund/non-fund based loan/claim of (i) Central Govt.or(ii)State Govt. or (iii) loans guaranteed by Central			0%
Govt.

(i)Loans guaranteed by State Govt. (ii)Claims on ECGC			20%

Claim on (i)RBI,(ii) DICGC,(iii)Credit Guarantee Fund Trust for MSE and (iv)CRGFTLIH.			0%

Claims on Foreign Sovereigns /	Foreign Central Banks	with	0%

to AA rating from S&P/India Rating /Moody‘s (it is 20% for A,50% for BBB,100% for BB and B ,150% for below B and 100% for unrated

Claims on foreign public sector enterprises AAA to AA rating from S&P/Fitch /Moody‘s (it is

20%

50% for A,100% for BBB to BB ,150% for below BB and 100% for unrated

Claims

Bank

for

International Settlement,International MonetaryFund

and

20%

Multi-lateral

development banks like BIS,IMF,MDB etc)

Regulatory Retail Loans including education loans (excluding housing loans).Retail loan means (i)max

75%

amount ` 5 cr(ii) max loan to single party 0.2% of overall retail loans portfolio or (iii) annual turnover for

small business less than ` 50 cr)

(a)Individual House loans:

(i)Upto ` 30 lac with Loan to Value(LTV)ratio of less than or equal to 80%

(ii) Upto ` 30 lac with Loan to Value(LTV)ratio of more than 80% but less than or equal to 90%

35%

(iii)Above

lac

and

upto

` 75

lac

with

Loan

50%

Value(LTV)ratio of less than or equal to 75%

35%

)

Above ` 30 lac and upto ` 75 lac with Loan to Value(LTV) ratio of more than 75% but less than or

equal to 80%

)

Above ` 75 lac with Loan to Value(LTV)ratio of less than or equal to 75% (vi)Commercial Real

50%

estate –Residential Housing

75%

(vii)Commercial Real Estate

75%

Capital Market exposure including loan to individuals against shares, credit cards, personal loans

125%

consumer loans

Unsecured portion of NPA where provision is less than 20%

150%

(It is 100% if provision is atleast 20% and 50% if provision is atleast 50%)

Claims on Venture capital funds

150%

Staff loans secured by mortgages or charge on superannuation benefits

20%

Other staff loans (being part of regulatory retail)

75%

Consumer

credit

including personal loan but

excluding educational loan

125%

Claim

NBFC-ND-Sis (Non

Deposit taking Systemically Important NBFCs)

100%

Claims on All scheduled Banks

Level

CRAR (%)

Investments

within

10%

limit

referred

for

other claims

Investee Bank

computing capital funds

9 and above

Higher of 100% or the risk weight as per the rating of

the

20%

instrument or counter party

6 to< 9

150

3 to 6

250

100

0 to 3

350

150

Negative

625

IIBF & NISM Adda