Treasury Management PDF

ASSET LIABILITY MANAGEMENT (ALM) WITHDRAWING FUNDS The term covers tools and techniques used by a BANK LEVY - a legal process used by creditors bank to minimise exposure to market risk and to collect debts from a debtor's bank account. l...

ASSET LIABILITY MANAGEMENT (ALM) WITHDRAWING FUNDS The term covers tools and techniques used by a BANK LEVY - a legal process used by creditors bank to minimise exposure to market risk and to collect debts from a debtor's bank account. liquidity risk whilst achieving its profit objectives. When a bank receives a levy, it freezes the A financial technique that can help companies to debtor's account and places a hold on all funds manage the mismatch of asset and liability available. and/or cash flow risks. BANK RUN Techniques for assessing Asset Liability Risk Occurs when a large group of depositors withdraw Gap Analysis & Duration Analysis their money from banks at the same time. Both approaches worked well if assets and liabilities comprise fixed cash flows. INTEREST Keeps the economy moving by encouraging people MANAGE ASSET & LIABILITIES to borrow, to lend and to spend. Effectively begins with gaining a comprehensive understanding of a company's financial position. FINANCIAL MARKET The financial landscape is dynamic, and the Where buyers and sellers engage in the trade of effectiveness of ALM strategies can shift over time. assets. Are fundamental to long term economic growth and ALM IN BANKS financial stability. ALM in banks is paramount due to the unique A place where firms and individuals enter into nature of a bank's balance sheet. contracts to sell or buy a specific product, such Used to synchronize the maturities and interest as a stock, bond, or futures contract. rate sensitivities of assets and liabilities, mitigating risks such as interest rate and liquidity risk. The Financial Market Analysis (FMA) covers areas like the pricing of fixed-income securities and equity; ALM Analyst the term structure of interest rates; portfolio allocation Responsible for analyzing the organization's and diversification; and an introduction to risk financial data and market trends to make informed management. predictions about the future financial standing. This role requires a strong understanding of financial MONEY MARKET modeling and risk management principles. An integral part of the financial market in which financial instruments with high liquidity and short ALM Manager maturities are traded. Responsible for managing the organization's assets and liabilities to achieve optimal financial BOND MARKET performance. This role requires excellent strategic Known as the debt, credit, or fixed income planning skills and a comprehensive securities market. understanding of finance and risk management. MORTGAGE MARKET ALM Trader Where mortgage loans are traded. Trades and hedges the organization's balance sheet to manage and mitigate associated risks. They FUTURE MARKET analyze market trends and financial landscapes. Help businesses to manage price risks. Futures contracts can help protect buyers against rising prices Risk Manager and sellers against declining prices through futures Play a critical role in ALM. They identify, analyze, contracts. and mitigate potential risks that could affect the organization's financial health. STOCK MARKET The Crash that led to the Great Depression is Automatic Payments famous. Many remember recent stock-market Offer unparalleled convenience. You set them up drops in 1989 and in 1997. once, and your bills are paid on time, without lifting a Grew out of small meetings of people who wanted finger. to buy and sell their stocks. RESERVES FOR BANKS BULL & BEAR MARKET Reserves are funds that banks keep on hand to Used to describe the general market trends. meet unexpected withdrawals or to cover potential losses. Bull market stock prices are generally rising. Bear market stock prices are generally falling. LOAN TO DEPOSIT RATIO (LDR) Plays a crucial role in assessing the financial health Potential buyers place an order with a broker for of banks, credit unions, and other lending the stock they wish to purchase. institutions. The LDR represents a key indicator of a Broker puts in the order to buy on the appropriate financial institution's ability to meet the demands exchange. of its clients for credit and loans.  Transaction takes place when someone wants to CAPITAL MARKET INSTRUMENTS sell and someone wants to purchase the stock at 1) Treasury notes the same price. 2) Treasury bonds Certificates can be transferred from one owner to 3) Municipal bonds another or held by the broker on the investor's 4) Corporate bonds behalf. Bonds also can be transferred from one owner to CORPORATE BONDS another. 1) Zero coupon bonds Stocks, bonds, and futures contracts can also 2) Floating rate bonds be sold in groups as mutual funds. 3) Convertible bonds Mutual funds employ professional managers to make decisions about what to buy and sell. 3 MAJOR GRP IN BOND MARKET 1) Issuers (Governments, banks, corp) Nobel Laureate / Harry Markowitz (1952, 1959) 2) Underwriters Provided basic concepts on portfolio selection 3) Purchasers process in the field of asset pricing. In 1952, Harry Markowitz published a paper called FIXED INCOME MARKETS “Portfolio Selection” in The Journal of Finance. Integral component to economic growth, He won the Nobel Prize for his work in 1990. providing efficient, long term and cost-effective funding. EX-ANTE & EX-POST Important to funding corporate, government, and Are Latin terminologies used in predicting the the financial sector’s capital requirements and returns of a security. instruments such as “green bonds”. Ex-ante means “before the event” Ex-post means “after the event” GLOBAL FIXED INCOME MARKETS Ex-post is backward-looking. The largest subset of financial markets in terms of number of issuances and market capitalization, they MEAN VARIANCE ANALYSIS bring borrowers and lenders together to allocate A technique that investors use to make decisions capital globally to its most efficient uses. about financial instruments to invest in. DEBT FINANCING 2 MAIN COMPONENTS: Important source of funds for households, 1) Variance - measures how distant or spread the governments, government-related entities, financial numbers in a data set are from the mean, or institutions, and non-financial companies. average. 2) Expected return - This is the estimated return The type of Issuer that a security is expected to produce. 1) Bonds credit quality 2) Maturity COVARIANCE 3) Currency denomination Determine what assets to include in the 4) Type of Coupon portfolio. 5) The bonds are issued and traded Statistical measure of the directional relationship between two asset prices. Major Bond Market (H,N,G,F) 1) The household CORRELATION 2) Non-financial corporate Determining to what extent the prices of the assets 3) Government tend to move in the same direction in response 4) Financial institution sectors to macroeconomic trends. INVESTORS AND INVESTMENT MANAGERS CAPITAL MARKETS Use fixed-income indexes to describe bond 1) Money markets markets or sectors. 2) Bond Markets 3) Mortgage Markets PRIMARY MARKETS 4) Stock Markets Issuers first sell bonds to investors to raise capital. 5) Spot or cash Markets 6) Derivatives Markets SECONDARY MARKETS 7) Foreign exchange Markets Existing bonds are subsequently traded among 8) Interbank Markets investors. MONEY MARKET 2 Mechanisms a bond in Primary Markets: 1) Treasury bills Public offering - any member of the public may 2) Federal agency notes buy the bonds. 3) Certificates of deposit (CDs) Private placement - only an investor or small 4) Commercial papers group of investors may buy the bonds. 5) Bankers’ acceptances 6) Repurchase agreements (repos) SHELF REGISTRATION FOREIGN EXCHANGE MARKET The issuer files a single document with regulators. A global decentralized marketplace where currencies are bought and sold. AUCTION Began in the 1970s when the Bretton Woods A public offering method that involves bidding. system of fixed exchange rates collapsed. The internet in the 1990s transformed the forex MATURITIES market. Money market (overnight 1 yr) Capital market (more than 4 yrs) EXCHANGE RATE The value of one currency relative to another. FINANCIAL MARKET BASIC TYPES Where buyers and sellers engage in the trade of 1) Free Float assets. 2) Fixed 3) Pegged and Managed float (Adjustable Peg) FINANCIAL DERIVATIVES A specific financial instrument or indicator or CURRENCY VALUE commodity. Enable parties to trade specific Influenced by a variety of factors. financial risks 1) Economic indicators 2) Geopolitical events COMMERCIAL PAPER 3) Central bank policies Short term unsecured security 3 TYPES OF FOREX COLLATERALIZED LOAN OBLIGATION (CLO) 1) SPOT FOREX MARKET - currencies are traded for Structured finance security that is collateralized by immediate delivery. below investment grade. 2) FORWARD FOREX MARKET - future date at a predetermined exchange rate. REPURCHASE AGREEMENT 3) FUTURES FOREX MARKET - the future delivery Sale of security (collateral) with a simultaneous of a specified currency at a predetermined price. agreement by the seller. FUTURE CONTRACT - used for hedging and speculative purposes. GOVERNMENT BOND - Debt security issued by govt. PERIODIC INV. PAYMENT - Coupon payment ADVANTAGES OF FOREX FEDERAL BONDS - Known as treasuries 1) High liquidity: Largest and most liquid market FUTURE VALUE - Quantities what an investment will 2) Accessibility 3) Diverse trading options: Wide range of currency be worth at a specified time in the future. 4) Low transaction costs PRESENT VALUE - Current worth of future inv.. 5) Leverage: Increase their trading position INTERNAL RATE OF RETURN - Rank diverse project. 6) Global market: To manage their currency risk. 7) Transparency: Highly transparent TYPES OF DEBT INSTRUMENTS DISADVANTAGES OF FOREX 1) Money market Instruments 1) Volatility: Large losses for traders. 2) Corporate Bonds 2) Risk of leverage - Magnify losses/lead to fncl risk. 3) US Treasury Securities 3) High competition -Highly competitive 4) Agency Securities 4) Limited regulation - Fraudulent activities/scams 5) Sovereign debt 5) Complex market - have a good understanding 6) Economic and political events TRADABLE SECURITIES 7) High barriers to entry - knowledge, experience, Backed by pools of underlying financial assets such as and capital. mortgages, loans, credit cards. PARTICIPANTS OF FOREX MORTGAGE BACKED SECURITY 1) Commercial banks Can purchase through bond market 2) Central banks 3) Hedge funds and investment firms FANNIE MAE AND FREDDIE MAC 4) Corporations Biggest buyers of conventional loans 5) Retail traders 6) Governments GINNIE MAE Buyers as well but focus on homeownership more INFLUENCE THE FOREX accessible. 1) Economic indicators 2) Central bank policies 3) Geopolitical events 4) Market sentiment 5) Natural disasters 6) Speculation Real Effective Exchange Rate (REER) Measure of a country's currency value relative to a basket of other currencies. Calculated by adjusting the nominal exchange rate using the country's inflation rate and the inflation rates of its trading partners. FOREX in the Global Economy 1) International trade 2) Capital flows 3) Monetary policy 4) Economic growth EXCHANGE RATES TO FALL 1) Decreased demand 2) Economic factors 3) Political instability 4) Central bank policies 5) Trade imbalances FIXED EXCHANGE RATES Established in nations with central banks. FLOATING EXCHANGE RATES Controlled by market supply and demand. CROSS RATE Made in two currencies which are then valued to a third currency. During this process, two transactions are being computed. INDIRECT Quotations How much base currency is needed. DIRECT Quotations How much of the quoted currency is needed. MARKET ANALYSIS Called Forex analysis. The practice of examining the changes in currency pair prices. FORWARD EXCHANGE CONTRACTS (FECs) Custom agreements between two parties to exchange currencies at a preset rate on a future date. FOREIGN EXCHANGE SWAPS Financial transaction in which two counterparties exchange specific amounts of two different currencies. CURRENCY SWAPS Used by a wide variety of participants. HEDGING Involve the use of financial instruments known as derivatives. DERIVATIVES 1) Options 2) Future CURRENCY OPTIONS (CO) CONTRACT Gives investors the right, but not the obligation. COs give investors the right to buy the underlying Currency Future.