Treasury Crash Course



Treasury Crash CourseBy Jawwad Ahmed FaridContents TOC \h \z \t "Heading 1,2,Heading 2,3,Heading 3,4,Section,1,Book sections,1" What is a Treasury? PAGEREF _Toc317842382 \h Treasury PAGEREF _Toc317842383 \h The Money Market desk PAGEREF _Toc317842384 \h The FX Desk PAGEREF _Toc317842385 \h The Equity Desk PAGEREF _Toc317842386 \h The Specialized Desks PAGEREF _Toc317842387 \h What do treasuries really do? PAGEREF _Toc317842388 \h How is a corporate treasury different from a bank treasury? PAGEREF _Toc317842389 \h The Treasury Function PAGEREF _Toc317842390 \h 1.Trade Flows (FX desk) PAGEREF _Toc317842391 \h 2.The Treasury Function Operations PAGEREF _Toc317842392 \h i.Introduction PAGEREF _Toc317842393 \h ii.Front Office Function PAGEREF _Toc317842394 \h a.User Roles PAGEREF _Toc317842395 \h b.Money Market Desk Activities PAGEREF _Toc317842396 \h c.Foreign Exchange Desk Activities PAGEREF _Toc317842397 \h d.Capital Market (CM) Desk Activities PAGEREF _Toc317842398 \h iii.Middle Office Function PAGEREF _Toc317842399 \h a.User Roles PAGEREF _Toc317842400 \h b.Activities PAGEREF _Toc317842401 \h iv.Back Office Function PAGEREF _Toc317842402 \h a.User Roles PAGEREF _Toc317842403 \h b.Activities PAGEREF _Toc317842404 \h c.Basic Treasury Back Office Tasks PAGEREF _Toc317842405 \h 3.Related Terminologies PAGEREF _Toc317842406 \h i.Four eyes PAGEREF _Toc317842407 \h a.Ticket Approval PAGEREF _Toc317842408 \h b.Ticket Verification PAGEREF _Toc317842409 \h c.Ticket Authorization PAGEREF _Toc317842410 \h ii.Confirmation PAGEREF _Toc317842411 \h a.Society for Worldwide Interbank Financial Telecommunication (SWIFT) PAGEREF _Toc317842412 \h iii.Settlement PAGEREF _Toc317842413 \h a.Delivery versus payment (DVP) PAGEREF _Toc317842414 \h iv.Reconciliation PAGEREF _Toc317842415 \h a.Broker Reconciliation PAGEREF _Toc317842416 \h b.Securities Reconciliation PAGEREF _Toc317842417 \h v.Accounting PAGEREF _Toc317842418 \h vi.Price discovery PAGEREF _Toc317842419 \h vii.Proprietary Trading PAGEREF _Toc317842420 \h viii.Treasury Risks PAGEREF _Toc317842421 \h a.Credit Risk PAGEREF _Toc317842422 \h b.Market Risk PAGEREF _Toc317842423 \h c.Operational Risk PAGEREF _Toc317842424 \h 4.Treasury Markets PAGEREF _Toc317842425 \h i.Foreign Exchange Market PAGEREF _Toc317842426 \h a.FX Ready/ Forward/ Split PAGEREF _Toc317842427 \h b.FX Swap PAGEREF _Toc317842428 \h c.FX Placements/ Borrowings PAGEREF _Toc317842429 \h d.FX Miscellaneous PAGEREF _Toc317842430 \h e.FX TMU – Import/ Export/ Remittance/ Encashment PAGEREF _Toc317842431 \h f.FX TMU – Foreign Bill Purchase (Bill Discounting) PAGEREF _Toc317842432 \h g.FX TMU – Close Out/ Take Up PAGEREF _Toc317842433 \h ii.Fixed Income /Money Market PAGEREF _Toc317842434 \h a.Call/ Clean/ Placements PAGEREF _Toc317842435 \h b.Repo/ Reverse Repo PAGEREF _Toc317842436 \h c.Sale against Reverse Repo (SARR) PAGEREF _Toc317842437 \h d.Outright purchase/ sale PAGEREF _Toc317842438 \h e.Inter branch PAGEREF _Toc317842439 \h iii.Capital Market PAGEREF _Toc317842440 \h a.Outright Sale/ Purchase -Ready Equity PAGEREF _Toc317842441 \h Cross Selling Treasury Products PAGEREF _Toc317842442 \h Five core themes for treasury customer discussions PAGEREF _Toc317842443 \h Price PAGEREF _Toc317842444 \h Risk or Volatility PAGEREF _Toc317842445 \h Value PAGEREF _Toc317842446 \h Models PAGEREF _Toc317842447 \h Relative Value PAGEREF _Toc317842448 \h Products PAGEREF _Toc317842449 \h Limits PAGEREF _Toc317842450 \h Wrap- up and overview PAGEREF _Toc317842451 \h Core Treasury products and TMU customer reactions PAGEREF _Toc317842452 \h Core Treasury Products PAGEREF _Toc317842453 \h TMU Customer Reactions PAGEREF _Toc317842454 \h Payoff profile PAGEREF _Toc317842455 \h Answers for customers reactions PAGEREF _Toc317842456 \h Derivatives – Terminology PAGEREF _Toc317842457 \h 1.The Terminology Crash Course PAGEREF _Toc317842458 \h i.Forward Contracts PAGEREF _Toc317842459 \h a.The Investment Bank Intern PAGEREF _Toc317842460 \h ii.Futures Contracts PAGEREF _Toc317842461 \h iii.Options PAGEREF _Toc317842462 \h a.Maturities and Exercise date PAGEREF _Toc317842463 \h vi.Payoff Profiles PAGEREF _Toc317842464 \h v.The Payoff profile for a forward contract PAGEREF _Toc317842465 \h vi.Payoff profiles for Calls and Puts PAGEREF _Toc317842466 \h vii.Building Blocks and Synthetic Configurations PAGEREF _Toc317842467 \h paring a Call with a Forward contract PAGEREF _Toc317842468 \h paring a Call and a Put with a Forward contract PAGEREF _Toc317842469 \h bining a long call with a short put to create a long forward PAGEREF _Toc317842470 \h Products & Pricing PAGEREF _Toc317842471 \h 1.A Second Look at Derivative Contracts PAGEREF _Toc317842472 \h 2.Standard Template for Evaluating Derivatives PAGEREF _Toc317842473 \h 3.Options PAGEREF _Toc317842474 \h i.Option Price PAGEREF _Toc317842475 \h a.European option price PAGEREF _Toc317842476 \h b.American Option Price PAGEREF _Toc317842477 \h 4.Forward Contracts PAGEREF _Toc317842478 \h i.Forward Price PAGEREF _Toc317842479 \h 5.Futures Contracts PAGEREF _Toc317842480 \h i.Futures Price PAGEREF _Toc317842481 \h 6.Swaps PAGEREF _Toc317842482 \h i.Interest Rate Swap (IRS) PAGEREF _Toc317842483 \h ii.Currency Swap PAGEREF _Toc317842484 \h Product Variations PAGEREF _Toc317842485 \h 1.Options PAGEREF _Toc317842486 \h i.Stock Options PAGEREF _Toc317842487 \h ii.Foreign Currency Options PAGEREF _Toc317842488 \h iii.Index Options PAGEREF _Toc317842489 \h iv.Futures Options PAGEREF _Toc317842490 \h v.Warrants PAGEREF _Toc317842491 \h vi.Employee Stock Options PAGEREF _Toc317842492 \h vii.Convertibles PAGEREF _Toc317842493 \h viii.Interest Rate Options PAGEREF _Toc317842494 \h a.Bond Options PAGEREF _Toc317842495 \h b.Interest Rate Caps/ Floors/ Collars PAGEREF _Toc317842496 \h c.European Swap Options PAGEREF _Toc317842497 \h ix.Exotic Options PAGEREF _Toc317842498 \h a.Bermuda Option PAGEREF _Toc317842499 \h b.Quanto Option PAGEREF _Toc317842500 \h posite Option PAGEREF _Toc317842501 \h d.Digital or Binary or “All or nothing” options PAGEREF _Toc317842502 \h e.Barrier Options PAGEREF _Toc317842503 \h f.Asian Options PAGEREF _Toc317842504 \h g.Average Strike Options PAGEREF _Toc317842505 \h h.Look back Options PAGEREF _Toc317842506 \h pound Options PAGEREF _Toc317842507 \h j.Chooser (As you like it) Options PAGEREF _Toc317842508 \h k.Exchange Options PAGEREF _Toc317842509 \h l.Forward Start Options PAGEREF _Toc317842510 \h m.Basket Options PAGEREF _Toc317842511 \h n.Shout Options PAGEREF _Toc317842512 \h 2.Forwards PAGEREF _Toc317842513 \h i.Synthetic Forward Contract PAGEREF _Toc317842514 \h ii.Forward Rate Agreement (FRA) PAGEREF _Toc317842515 \h 3.Futures PAGEREF _Toc317842516 \h i.Stock Index Futures PAGEREF _Toc317842517 \h ii.Futures Contracts on Currencies PAGEREF _Toc317842518 \h iii.Futures Contracts on Commodities PAGEREF _Toc317842519 \h iv.Interest Rate Futures PAGEREF _Toc317842520 \h a.Treasury Bond Futures PAGEREF _Toc317842521 \h b.Treasury Note Futures PAGEREF _Toc317842522 \h c.5-year Treasury Note Futures PAGEREF _Toc317842523 \h d.Treasury Bill Futures PAGEREF _Toc317842524 \h e.Eurodollar Futures PAGEREF _Toc317842525 \h 4.Swaps PAGEREF _Toc317842526 \h i.Fixed for fixed currency swap PAGEREF _Toc317842527 \h ii.Floating for floating currency swap PAGEREF _Toc317842528 \h iii.Cross-currency interest rate swap PAGEREF _Toc317842529 \h iv.Step-up Swaps PAGEREF _Toc317842530 \h v.Amortizing Swaps PAGEREF _Toc317842531 \h vi.Basis Rate Swap PAGEREF _Toc317842532 \h vii.Forward or Deferred Swaps PAGEREF _Toc317842533 \h pounding Swaps PAGEREF _Toc317842534 \h ix.LIBOR-in- Arrears Swap PAGEREF _Toc317842535 \h x.Constant Maturity Swap PAGEREF _Toc317842536 \h xi.Constant Maturity Treasury Swap PAGEREF _Toc317842537 \h xii.Differential Swap or Quanto PAGEREF _Toc317842538 \h xiii.Variance or Volatility Swap PAGEREF _Toc317842539 \h xiv.Equity Swap PAGEREF _Toc317842540 \h modity Swap PAGEREF _Toc317842541 \h xvi.Asset Swap PAGEREF _Toc317842542 \h xvii.Accrual Swap PAGEREF _Toc317842543 \h xviii.Cancellable Swap PAGEREF _Toc317842544 \h xix.Extendable Swap PAGEREF _Toc317842545 \h Advanced Products PAGEREF _Toc317842546 \h 1.Structured Products PAGEREF _Toc317842547 \h i.Cross Currency Swaps PAGEREF _Toc317842548 \h ii.Participating Forwards PAGEREF _Toc317842549 \h iii.Equity Linked Notes PAGEREF _Toc317842550 \h iv.Capital Protected / Capital Guaranteed Notes PAGEREF _Toc317842551 \h modity Linked Notes PAGEREF _Toc317842552 \h vi.Range Accruals PAGEREF _Toc317842553 \h vii.Switchable PAGEREF _Toc317842554 \h viii.IRD (Interest Rate Differential) Trades PAGEREF _Toc317842555 \h a.Swap basis PAGEREF _Toc317842556 \h b.Note basis PAGEREF _Toc317842557 \h c.Quanto PAGEREF _Toc317842558 \h d.Cumulative Cap PAGEREF _Toc317842559 \h e.Steepener/ Flattener Note PAGEREF _Toc317842560 \h f.Inverted Curve Instrument PAGEREF _Toc317842561 \h g.Ranges PAGEREF _Toc317842562 \h 2.Credit products PAGEREF _Toc317842563 \h i.Credit Default Swaps PAGEREF _Toc317842564 \h ii.Total Return Swaps PAGEREF _Toc317842565 \h iii.Collateralized Debt Obligation (CDO) PAGEREF _Toc317842566 \h Calculating Forward Prices and Forward Rates in EXCEL PAGEREF _Toc317842567 \h 1.Introduction PAGEREF _Toc317842568 \h 2.How to calculate the forward price of security PAGEREF _Toc317842569 \h Forward Price of a security with no income PAGEREF _Toc317842570 \h Forward Price of a security with known cash income PAGEREF _Toc317842571 \h Forward Price of a security with known dividend yield PAGEREF _Toc317842572 \h 3.How to determine Spot Rates and Forward Rates & Yield to Maturity PAGEREF _Toc317842573 \h How to determine Forward Rates from Spot Rates PAGEREF _Toc317842574 \h How to determine Spot Rates from Forward Rates PAGEREF _Toc317842575 \h How to calculate the Yield to Maturity (YTM) of a bond PAGEREF _Toc317842576 \h Trial and error process PAGEREF _Toc317842577 \h EXCEL’s Goal Seek PAGEREF _Toc317842578 \h 4.How to calculate the values of Forward Rate Agreements (FRA) PAGEREF _Toc317842579 \h Value of an FRA (zero coupon rate calculated on a discrete basis) PAGEREF _Toc317842580 \h Value of an FRA (zero coupon rate calculated on a continuously compounded basis) PAGEREF _Toc317842581 \h 5.How to calculate Forward Exchange Rates PAGEREF _Toc317842582 \h Interest Rates compounded on a discrete basis PAGEREF _Toc317842583 \h Interest Rates compounded on a continuous basis PAGEREF _Toc317842584 \h 6.How to calculate the value of a forward contract PAGEREF _Toc317842585 \h Value of a long forward contract (continuous) PAGEREF _Toc317842586 \h Value of a long forward contract (discrete) PAGEREF _Toc317842587 \h Value of a long forward contract (continuous) which provides a known income PAGEREF _Toc317842588 \h Value of a long forward contract (continuous) which provides a known yield PAGEREF _Toc317842589 \h Value of a forward foreign currency contract PAGEREF _Toc317842590 \h Other Treasury Formulas PAGEREF _Toc317842591 \h Cost of deposit PAGEREF _Toc317842592 \h Asset Liability Management PAGEREF _Toc317842593 \h 1.Introduction PAGEREF _Toc317842594 \h i.Interest Rate Risk PAGEREF _Toc317842595 \h ii.Liquidity Risk PAGEREF _Toc317842596 \h 2.Duration and Convexity PAGEREF _Toc317842597 \h i.Duration PAGEREF _Toc317842598 \h a.Macaulay Duration PAGEREF _Toc317842599 \h b.Modified Duration PAGEREF _Toc317842600 \h iii.Convexity PAGEREF _Toc317842601 \h a.Impact of convexity PAGEREF _Toc317842602 \h b.Modified, Effective, Positive, Negative PAGEREF _Toc317842603 \h c.Convexity in Asset Liability Management PAGEREF _Toc317842604 \h 3.ALM Risk Measurement Tools PAGEREF _Toc317842605 \h i.Fall in Market Value of Equity PAGEREF _Toc317842606 \h ii.Earnings at Risk PAGEREF _Toc317842607 \h iii.Cost to Close PAGEREF _Toc317842608 \h iv.Rate Sensitive Gap PAGEREF _Toc317842609 \h v.Price Sensitive Gap PAGEREF _Toc317842610 \h vi.Liquidity Gap PAGEREF _Toc317842611 \h Interest Income (NII) at Risk PAGEREF _Toc317842612 \h viii.Duration Gap Analysis PAGEREF _Toc317842613 \h 4.Applications PAGEREF _Toc317842614 \h i.Bank PAGEREF _Toc317842615 \h a.Duration matching/ immunization PAGEREF _Toc317842616 \h ii.Pension Funds and Insurance PAGEREF _Toc317842617 \h a.Portfolio dedication PAGEREF _Toc317842618 \h Liquidity Management PAGEREF _Toc317842619 \h 1.Liquidity Ratios and Analysis PAGEREF _Toc317842620 \h a.Current Ratio PAGEREF _Toc317842621 \h b.Quick Ratio PAGEREF _Toc317842622 \h c.Unused lines of credit PAGEREF _Toc317842623 \h d.Borrowing/ Debt-to-Equity Ratio PAGEREF _Toc317842624 \h Working Capital Ratio PAGEREF _Toc317842625 \h f.Loan-to-Deposit Ratio PAGEREF _Toc317842626 \h g.Loan- to- Asset Ratio PAGEREF _Toc317842627 \h 2.Liquidity Management PAGEREF _Toc317842628 \h i.Contingency Funding Plan PAGEREF _Toc317842629 \h a.General requirements for a liquidity contingency plan PAGEREF _Toc317842630 \h b.Specific requirements for a liquidity contingency plan PAGEREF _Toc317842631 \h ii.Liquidity enhancement tactics PAGEREF _Toc317842632 \h a.For Systemic Crisis PAGEREF _Toc317842633 \h b.For company specific crisis PAGEREF _Toc317842634 \h Setting Limits PAGEREF _Toc317842635 \h 1.Risk Limits and Control Process PAGEREF _Toc317842636 \h i.Operational (Exception or Management Action) Limits PAGEREF _Toc317842637 \h ii.Capital Loss & Stop Loss Limits PAGEREF _Toc317842638 \h iii.Inventory Age Limits PAGEREF _Toc317842639 \h iv.Concentration Limits PAGEREF _Toc317842640 \h v.Transaction Limits PAGEREF _Toc317842641 \h vi.Exposure and Sensitivity Limits PAGEREF _Toc317842642 \h vii.Pre Settlement Risk (PSR) and Potential Future Exposure (PFE) Limits PAGEREF _Toc317842643 \h viii.Hierarchy of Limits PAGEREF _Toc317842644 \h 2.A More Detailed Look at Limits PAGEREF _Toc317842645 \h i.Capital Loss and Stop Loss Limits PAGEREF _Toc317842646 \h ii.Value-at-Risk Limits PAGEREF _Toc317842647 \h iii.Regulatory Approach Limits PAGEREF _Toc317842648 \h iv.Other Limits PAGEREF _Toc317842649 \h a.Duration Limits PAGEREF _Toc317842650 \h b.Convexity Limits PAGEREF _Toc317842651 \h c.PVBP Limits PAGEREF _Toc317842652 \h v.Credit Risk Limits PAGEREF _Toc317842653 \h a.PSR Limits PAGEREF _Toc317842654 \h b.Settlement Risk Limits PAGEREF _Toc317842655 \h c.Financial Institution (FI)/ Counterparty Limits PAGEREF _Toc317842656 \h d.Regulatory Limits PAGEREF _Toc317842657 \h e.Internal / Concentration Limits PAGEREF _Toc317842658 \h vi.Application to Products PAGEREF _Toc317842659 \h vii.Setting Limits for Liquidity Risk PAGEREF _Toc317842660 \h a.Cash flow mismatch or gap limits PAGEREF _Toc317842661 \h b.Maturity Limits PAGEREF _Toc317842662 \h c.Target Liquid Reserves PAGEREF _Toc317842663 \h d.Concentration Limits PAGEREF _Toc317842664 \h e.Contingent liability limit PAGEREF _Toc317842665 \h f.Review PAGEREF _Toc317842666 \h ix.Setting Limits for Interest Rate Risk PAGEREF _Toc317842667 \h Repricing limits PAGEREF _Toc317842668 \h x.Limit Breach, Exception processing, Action Plan for Trigger Zones PAGEREF _Toc317842669 \h a.Exception Handling PAGEREF _Toc317842670 \h b.Example of an Action Plan for Trigger Zones PAGEREF _Toc317842671 \h Treasury Profitability PAGEREF _Toc317842672 \h 1.Treasury Profitability - Foreign Exchange Desk PAGEREF _Toc317842673 \h 2.Treasury Profitability – Capital Market (Equity (EQ)) Desk PAGEREF _Toc317842674 \h Annexure A- Calculating Value at Risk PAGEREF _Toc317842675 \h 1.Introduction PAGEREF _Toc317842676 \h 2.VaR Methods PAGEREF _Toc317842677 \h a.Variance Covariance Approach PAGEREF _Toc317842678 \h b.Historical Simulation Method PAGEREF _Toc317842679 \h c.Monte Carlo Simulation PAGEREF _Toc317842680 \h d.Quick Review PAGEREF _Toc317842681 \h e.Implementing VaR PAGEREF _Toc317842682 \h 2.Methodology PAGEREF _Toc317842683 \h i.Setting the Scene PAGEREF _Toc317842684 \h Sample Portfolio PAGEREF _Toc317842685 \h ii.Preliminary steps PAGEREF _Toc317842686 \h iii.VaR Approach Specific Steps PAGEREF _Toc317842687 \h a.Variance-Covariance (VCV) VaR PAGEREF _Toc317842688 \h b.Determining Historical Simulation daily VaR PAGEREF _Toc317842689 \h iv.Scaling of the daily VaR PAGEREF _Toc317842690 \h 2.Caveats, Qualifications, Limitations and Issues PAGEREF _Toc317842691 \h Annexure B: Building Maturity & Liquidity profiles for Deposits and Advances for ALCO, Liquidity Coverage & ICAAP reporting. PAGEREF _Toc317842692 \h Lesson Zero: Introduction and Course Overview PAGEREF _Toc317842693 \h Bank Deposit & Asset Maturity profiles for ALM - Objectives PAGEREF _Toc317842694 \h Advances and Deposits Maturity & Liquidity Profile - Methodology & Sample output PAGEREF _Toc317842695 \h Step 1: The Core Banking Dump PAGEREF _Toc317842696 \h Step 2: Pre-processing the data and adding intelligence for the purpose of building a pivot table PAGEREF _Toc317842697 \h Step 3: Creating the ivot Table and Generating Presentation Graphs using Pivot Charts PAGEREF _Toc317842698 \h Lesson One: Preparing the Core Banking Dataset PAGEREF _Toc317842699 \h Extracting Relevant Data PAGEREF _Toc317842700 \h The DTM (Days to Maturity) formula PAGEREF _Toc317842701 \h Lesson Two: Adding Intelligence for the Pivot Table PAGEREF _Toc317842702 \h Deposit Size Bracket PAGEREF _Toc317842703 \h Maturity Bucket Bracket PAGEREF _Toc317842704 \h Cost of Deposits Bracket PAGEREF _Toc317842705 \h Lesson Three: Creating the Pivot Table PAGEREF _Toc317842706 \h Lesson Four: Reading the PivotTable and PivotChart PAGEREF _Toc317842707 \h Lesson Five: Quick Review & Extending the framework. PAGEREF _Toc317842708 \h Lesson Six: Pivot Shoot Out- Pivot Tables and Pivot Charts Galore PAGEREF _Toc317842709 \h Lesson Seven: The Pivot Chart Shoot out for Advances PAGEREF _Toc317842710 \h Maturity Profile Bucket PAGEREF _Toc317842711 \h Advances Size Bucket PAGEREF _Toc317842712 \h Pivot Table and Chart Variations PAGEREF _Toc317842713 \h Lesson 8: Wrap up and building the ALM profile for the banking book PAGEREF _Toc317842714 \h Bibliography PAGEREF _Toc317842715 \h 9List of Figures PAGEREF _Toc317842716 \h 10Disclaimer PAGEREF _Toc317842717 \h BibliographyOptions, Futures?and Other Derivatives, John C. Hull, 7th Edition, Prentice Hall, 2009The Handbook of Fixed Income Securities, Frank J. Fabozzi, 7th Edition, McGraw-Hill, 2005Risk?Management and Financial Institutions, John C. Hull, Low Price Edition, Pearson Education, Inc., 2007Exotic Equity Derivatives Manual, Salomon Smith Barney, August 1998Understanding Market, Credit and Operational Risk- The Value at Risk?Approach, Linda Allen, Jacob Boudoukh and Anthony Saunders,Blackwell Publishing, 2004Beyond Value at Risk, The New Science of Risk Management, Kevin Dowd, John Wiley & Sons, 1998Higher-Order Simulations: Strategic Investment Under Model-Induced Price Patterns, Gilbert Peffer and Bàrbara Llacay, Journal of Artificial Societies and Social Simulation vol. 10, no. 2, 6 <;, 2007VaR?Applications: Setting VaR-based Limits, Carlos Blanco and Sally Blomstrom, Financial Engineering Associates, Inc., May 1999Commonly Used Market Risk?Limits, Guidelines on Risk Management of Derivatives and other traded instruments, Annex DQuantitative Finance, Second Edition, Paul Wilmott, John Wiley&Sons, Ltd., 2006Liquidity Risk Management, Leonard M. Martz, 2007Back Office and Beyond- A guide to procedures, settlements and risk in financial markets, Mervin J. King, Harriman House Ltd., 1999Mastering Treasury Office Operations- Denis Nolan & Gordon Amos, FT Prentice Hall, 2001Valuation of interest-sensitive financial instruments, Babbel David F., SOA Monograph M-FI196-1, 1996List of Figures TOC \h \z \c "Figure" Figure 1: Treasury Desks PAGEREF _Toc317842718 \h Figure 2: Money Market Desk PAGEREF _Toc317842719 \h Figure 3: FX Desk PAGEREF _Toc317842720 \h Figure 4: Equity Desk PAGEREF _Toc317842721 \h Figure 5: Specialized Desks PAGEREF _Toc317842722 \h Figure 6: Flow chart for Treasury Function PAGEREF _Toc317842723 \h Figure 7: Foreign Currency Asset and Liability balances import functionality on a Treasury system PAGEREF _Toc317842724 \h Figure 8: Foreign Currency Asset and Liability balances input screen on a Treasury system PAGEREF _Toc317842725 \h Figure 9: Day Start and End functionality on a Treasury system PAGEREF _Toc317842726 \h Figure 10: Five core themes for approaching TMU customers PAGEREF _Toc317842727 \h Figure 11: WTI price graph PAGEREF _Toc317842728 \h Figure 12: Price and trailing volatility for WTI PAGEREF _Toc317842729 \h Figure 13: Gold Price Model – Actual and Simulated Prices PAGEREF _Toc317842730 \h Figure 14: Gold WTI Ratio PAGEREF _Toc317842731 \h Figure 15: Gold-WTI with USD/CHF PAGEREF _Toc317842732 \h Figure 16: Product wise payoffs PAGEREF _Toc317842733 \h Figure 17: Potential Future Exposure over life of contract PAGEREF _Toc317842734 \h Figure 18: Core Treasury Products and Exposure Estimation PAGEREF _Toc317842735 \h Figure 19: Difference between FX Forward Sale and Purchase contract and Bill Discounting PAGEREF _Toc317842736 \h Figure 20: TMU customer reactions PAGEREF _Toc317842737 \h Figure 21: Payoff Profile Tool PAGEREF _Toc317842738 \h Figure 22: Pay off profile for a long forward contract PAGEREF _Toc317842739 \h Figure 23: Payoff profile for a long call option PAGEREF _Toc317842740 \h Figure 24: Treasury strategies and structures PAGEREF _Toc317842741 \h Figure 25: Pay off profile for a short call option PAGEREF _Toc317842742 \h Figure 26: Payoff profile for a combination of a short call and long call PAGEREF _Toc317842743 \h Figure 27: Payoff profiles for forwards & futures contracts PAGEREF _Toc317842744 \h Figure 28: Payoff profiles for option contracts PAGEREF _Toc317842745 \h Figure 29: Quadrant IV - Payoff profiles for a long forward contract PAGEREF _Toc317842746 \h Figure 30: Payoff profile for a long forward contract PAGEREF _Toc317842747 \h Figure 31: Payoff profile for underlying security PAGEREF _Toc317842748 \h Figure 32: Payoff profile for the holder of a call option PAGEREF _Toc317842749 \h Figure 33: Payoff profile for the writer of a call option PAGEREF _Toc317842750 \h Figure 34: Payoff profile for the holder of a put option PAGEREF _Toc317842751 \h Figure 35: Payoff profile for the writer of a put option PAGEREF _Toc317842752 \h Figure 36: Building blocks for synthetic configurations PAGEREF _Toc317842753 \h Figure 37: Synthetic forward contract creations PAGEREF _Toc317842754 \h Figure 38: Comparative payoff profiles for calls & forwards PAGEREF _Toc317842755 \h Figure 39: Comparative payoff profiles for calls, puts & forwards PAGEREF _Toc317842756 \h Figure 40: Payoff profile for a synthetic long forward PAGEREF _Toc317842757 \h Figure 41: Revised payoff profile for a synthetic long forward PAGEREF _Toc317842758 \h Figure 42: Template for evaluating derivatives PAGEREF _Toc317842759 \h Figure 43: Comparative look at derivatives PAGEREF _Toc317842760 \h Figure 44: Payoff to the buyer & seller of a call option PAGEREF _Toc317842761 \h Figure 45: Payoff to the buyer & seller of a put option PAGEREF _Toc317842762 \h Figure 46: Binomial tree - prices of the underlying asset PAGEREF _Toc317842763 \h Figure 47: Using a Binomial tree to calculate the price of an American Call Option PAGEREF _Toc317842764 \h Figure 48: Payoffs for the buyer & seller of a forward contract PAGEREF _Toc317842765 \h Figure 49: Plain Vanilla Interest Rate Swap PAGEREF _Toc317842766 \h Figure 50: Interest Rate Cap PAGEREF _Toc317842767 \h Figure 51: Interest Rate Floor PAGEREF _Toc317842768 \h Figure 52: Sample trade ticket for a Cap/ Floor PAGEREF _Toc317842769 \h Figure 53: Sample term sheet for a double barrier PAGEREF _Toc317842770 \h Figure 54: Sample term sheet for a look back swap PAGEREF _Toc317842771 \h Figure 55: Sample term sheet for a basket option PAGEREF _Toc317842772 \h Figure 56: Payoffs for the buyer of a call & seller of a put i.e. of a synthetic forward contract PAGEREF _Toc317842773 \h Figure 57: Sample term sheet for an amortizing swap PAGEREF _Toc317842774 \h Figure 58: Sample term sheet for a variance swap PAGEREF _Toc317842775 \h Figure 59: Term sheet for an Equity Linked Note PAGEREF _Toc317842776 \h Figure 60: Key elements of a Capital Protected Note term sheet PAGEREF _Toc317842777 \h Figure 61: Term sheet for a Commodity Linked Note PAGEREF _Toc317842778 \h Figure 62: Term sheet for a Range Accrual Option PAGEREF _Toc317842779 \h Figure 63: Sample Trade Tickets for Switchables PAGEREF _Toc317842780 \h Figure 64: Sample Trade Ticket for an IRD swap PAGEREF _Toc317842781 \h Figure 65: Sample Trade Ticket for an IRD note PAGEREF _Toc317842782 \h Figure 66: Sample Trade Ticket for a Quanto PAGEREF _Toc317842783 \h Figure 67: Sample Term Sheet for a Cumulative Cap PAGEREF _Toc317842784 \h Figure 68: Sample Trade Tickets for Steepener Notes PAGEREF _Toc317842785 \h Figure 69: Sample Trade Ticket for an inverted curve instrument PAGEREF _Toc317842786 \h Figure 70: Sample Trade Ticket for a single range step up PAGEREF _Toc317842787 \h Figure 71: Sample Trade Ticket for a tiered range PAGEREF _Toc317842788 \h Figure 72: Sample Trade Ticket for a range note PAGEREF _Toc317842789 \h Figure 73: Structure of a Credit Default Swap PAGEREF _Toc317842790 \h Figure 74: Sample Term Sheet for a Credit Default Swap PAGEREF _Toc317842791 \h Figure 75: Structure of a Total Return Swap PAGEREF _Toc317842792 \h Figure 76: Sample Term sheet of a Total Return Swap PAGEREF _Toc317842793 \h Figure 77: Sample Term sheet of a Collateralized Debt Obligation PAGEREF _Toc317842794 \h Figure 78: Forward price of a security with no income PAGEREF _Toc317842795 \h Figure 79: Forward price of a security with known cash income PAGEREF _Toc317842796 \h Figure 80: Forward price of a security with known dividend yield PAGEREF _Toc317842797 \h Figure 81: Spot Rates and Forward Rates –time line PAGEREF _Toc317842798 \h Figure 82: Deriving forward rates from spot rates PAGEREF _Toc317842799 \h Figure 83: Deriving spot rates from forward rates –method 1 PAGEREF _Toc317842800 \h Figure 84: Calculating accumulation factors PAGEREF _Toc317842801 \h Figure 85: Deriving spot rates from forward rates –method 2 PAGEREF _Toc317842802 \h Figure 86: Iterations for determining YTM using the trial and error process PAGEREF _Toc317842803 \h Figure 87: Determining YTM using EXCEL’s Goal Seek functionality – setting up the input and out cells PAGEREF _Toc317842804 \h Figure 88: Determining YTM using EXCEL’s Goal Seek functionality – selecting the Goal Seek function PAGEREF _Toc317842805 \h Figure 89: Determining YTM using EXCEL’s Goal Seek functionality – defining the values in the Goal Seek pop-up window PAGEREF _Toc317842806 \h Figure 90: Determining YTM using EXCEL’s Goal Seek functionality – solving for the YTM PAGEREF _Toc317842807 \h Figure 91: Value of an FRA (zero coupon rate calculated on a discrete basis) PAGEREF _Toc317842808 \h Figure 92: Value of an FRA (zero coupon rate calculated on a continuous basis) PAGEREF _Toc317842809 \h Figure 93: FX rates (interest rates compounded on a discrete basis) PAGEREF _Toc317842810 \h Figure 94: FX rates (interest rates compounded on a continuous basis) PAGEREF _Toc317842811 \h Figure 95: Value of a long forward contract (continuous) PAGEREF _Toc317842812 \h Figure 96: Value of a long forward contract (discrete) PAGEREF _Toc317842813 \h Figure 97: Value of a long forward contract (continuous) which provides a known income PAGEREF _Toc317842814 \h Figure 98: Value of a long forward contract (continuous) which provides a known yield PAGEREF _Toc317842815 \h Figure 99: Value of a long forward foreign currency contract PAGEREF _Toc317842816 \h Figure 100: Price-yield relationship PAGEREF _Toc317842817 \h Figure 101: Impact of convexity PAGEREF _Toc317842818 \h Figure 102: PKRV rates PAGEREF _Toc317842819 \h Figure 103: Calculated return series PAGEREF _Toc317842820 \h Figure 104: Days to maturity/ reset PAGEREF _Toc317842821 \h Figure 105: Weights of each asset/ liability PAGEREF _Toc317842822 \h Figure 106: Weighted average return series PAGEREF _Toc317842823 \h Figure 107: Daily volatility and holding VaR PAGEREF _Toc317842824 \h Figure 108: Weighted average YTM for each asset in the fixed income bond category PAGEREF _Toc317842825 \h Figure 109: Weighted average YTM for assets PAGEREF _Toc317842826 \h Figure 110: Holding VaR, YTM and Rate Shocks for Asset and Liability PAGEREF _Toc317842827 \h Figure 111: Weighted average Duration for each asset in the fixed income bond category PAGEREF _Toc317842828 \h Figure 112: Weighted average Duration for interest sensitive assets PAGEREF _Toc317842829 \h Figure 113: Fall in Market Value of Equity PAGEREF _Toc317842830 \h Figure 114: PKRV rates PAGEREF _Toc317842831 \h Figure 115: Calculated return series PAGEREF _Toc317842832 \h Figure 116: Sample on and off balance sheet item PAGEREF _Toc317842833 \h Figure 117: Expected Cash flow and Days to Maturity PAGEREF _Toc317842834 \h Figure 118: Expected Cash flows slotted into rate buckets as per their DTM PAGEREF _Toc317842835 \h Figure 119: Calculation of weights for each sub-bucket PAGEREF _Toc317842836 \h Figure 120: Weighted average return series PAGEREF _Toc317842837 \h Figure 121: Rate VaR PAGEREF _Toc317842838 \h Figure 122: Weighted average base rate PAGEREF _Toc317842839 \h Figure 123: Weighted average DTM PAGEREF _Toc317842840 \h Figure 124: On-balance sheet and cumulative gaps PAGEREF _Toc317842841 \h Figure 125: Earning at Risk PAGEREF _Toc317842842 \h Figure 126: Buckets definition PAGEREF _Toc317842843 \h Figure 127: Determination of future instalments due and time to receipt/ payment PAGEREF _Toc317842844 \h Figure 128: Slotting cash flows into appropriate buckets based on time to receipt/ payment PAGEREF _Toc317842845 \h Figure 129: Cost to close PAGEREF _Toc317842846 \h Figure 130: Rate Sensitive Gap PAGEREF _Toc317842847 \h Figure 131: Term sheet for coupon bearing instrument PAGEREF _Toc317842848 \h Figure 132: Limit monitoring and review process PAGEREF _Toc317842849 \h Figure 133: Risk reporting process PAGEREF _Toc317842850 \h Figure 134: Capital Loss calculation example PAGEREF _Toc317842851 \h Figure 135: Allocation of actual stop loss limits by lines of investment PAGEREF _Toc317842852 \h Figure 136: Example of slippage PAGEREF _Toc317842853 \h Figure 137: Odds, Confidence Levels & Limits PAGEREF _Toc317842854 \h Figure 138: Example - Setting VaR limits for sub portfolios PAGEREF _Toc317842855 \h Figure 139: Determination of multiple for setting an upper bound on VaR limit PAGEREF _Toc317842856 \h Figure 140: Setting Duration & Convexity limits PAGEREF _Toc317842857 \h Figure 141: Setting PVBP limits PAGEREF _Toc317842858 \h Figure 142: Limits applicable to Money Market Products PAGEREF _Toc317842859 \h Figure 143: Limits applicable to Capital Market Products PAGEREF _Toc317842860 \h Figure 144: Limits applicable to Foreign Exchange Products PAGEREF _Toc317842861 \h Figure 145: Types of FX Deals PAGEREF _Toc317842862 \h Figure 146: Components of FX Transactions PAGEREF _Toc317842863 \h Figure 147: Treatment of FX Swap PAGEREF _Toc317842864 \h Figure 148: Currency Convention PAGEREF _Toc317842865 \h Figure 149: Example 1 – Single Currency Buy PAGEREF _Toc317842866 \h Figure 150: Example 2 – Cross Currency Buy PAGEREF _Toc317842867 \h Figure 151: Types of EQ Trades PAGEREF _Toc317842868 \h Figure 152: EQ Inventory PAGEREF _Toc317842869 \h Figure 153: Realized Gain/ Loss on AFS transaction PAGEREF _Toc317842870 \h Figure 154: Realized Gain/ Loss on HFT transaction PAGEREF _Toc317842871 \h Figure 155: Unrealized Gain/ Loss on AFS transaction PAGEREF _Toc317842872 \h Figure 156: Unrealized Gain/ Loss on HFT transaction PAGEREF _Toc317842873 \h Figure 157: Dividend Income PAGEREF _Toc317842874 \h Figure 158: Dividend Income PAGEREF _Toc317842875 \h Figure 159: Treasury EQ Profitability PAGEREF _Toc317842876 \h Figure 160: Value at Risk PAGEREF _Toc317842877 \h Figure 161: Distribution of returns PAGEREF _Toc317842878 \h Figure 162: Variance Co-variance Approach PAGEREF _Toc317842879 \h Figure 163: Historical Simulation Method PAGEREF _Toc317842880 \h Figure 164: Monte Carlo Simulation Method PAGEREF _Toc317842881 \h Figure 165: Comparison of VaR Methods PAGEREF _Toc317842882 \h Figure 166: Daily time series data PAGEREF _Toc317842883 \h Figure 167: Interpolated Interest Rates PAGEREF _Toc317842884 \h Figure 168: Derived Bond Price Series PAGEREF _Toc317842885 \h Figure 169: Daily return series PAGEREF _Toc317842886 \h Figure 170: Calculation of portfolio weights PAGEREF _Toc317842887 \h Figure 171: Portfolio daily return series PAGEREF _Toc317842888 \h Figure 172: Squared differences of the returns series PAGEREF _Toc317842889 \h Figure 173: Calculation of weights under EWMA PAGEREF _Toc317842890 \h Figure 174: Scaling of weights PAGEREF _Toc317842891 \h Figure 175: Calculation of EWMA variance PAGEREF _Toc317842892 \h Figure 176: SMA and EWMA daily VaRs PAGEREF _Toc317842893 \h Figure 177: Ordered portfolio return series PAGEREF _Toc317842894 \h Figure 178: Holding Period VaR PAGEREF _Toc317842895 \h Figure 179: Core banking data PAGEREF _Toc317842896 \h Figure 180: Pivot Table - Maturity profile of deposits by size PAGEREF _Toc317842897 \h Figure 181: Pivot Chart - Deposits by maturity bucket PAGEREF _Toc317842898 \h Figure 182: Pivot Chart – Deposits size versus maturity profile PAGEREF _Toc317842899 \h Figure 183: Pivot Chart – Deposits cost versus size PAGEREF _Toc317842900 \h Figure 184: Pivot Chart – Loan size versus maturity PAGEREF _Toc317842901 \h Figure 185: Pivot Chart – Loan Segment versus maturity PAGEREF _Toc317842902 \h Figure 186: Pivot Chart –loan product versus maturity PAGEREF _Toc317842903 \h Figure 187: Core banking data extract - deposits PAGEREF _Toc317842904 \h Figure 188: Days to Maturity Formula PAGEREF _Toc317842905 \h Figure 189: Months to Maturity Formula PAGEREF _Toc317842906 \h Figure 190: Applying formulas to dataset PAGEREF _Toc317842907 \h Figure 191: Adding additional columns to data set for deposit size, maturity and cost PAGEREF _Toc317842908 \h Figure 192: Grades/ Categories for bucketing deposit data PAGEREF _Toc317842909 \h Figure 193: Assigning grades for deposit size PAGEREF _Toc317842910 \h Figure 194: Assigning grades for maturity bucket PAGEREF _Toc317842911 \h Figure 195: Assigning grades for deposit cost PAGEREF _Toc317842912 \h Figure 196: Applying formulas to entire data set PAGEREF _Toc317842913 \h Figure 197: Selecting pivot table functionality from Excel spreadsheet Insert Tab PAGEREF _Toc317842914 \h Figure 198: Selecting pivot chart option from pivot table functionality PAGEREF _Toc317842915 \h Figure 199: Pivot Table information capture pop-up PAGEREF _Toc317842916 \h Figure 200: Selecting the data range for the pivot table functionality PAGEREF _Toc317842917 \h Figure 201: Pivot table information capture pop-up after data range selection PAGEREF _Toc317842918 \h Figure 202: Selecting the location for display of the Pivot Table and Pivot Chart PAGEREF _Toc317842919 \h Figure 203: Display of the Pivot Table and Pivot Chart output field before population PAGEREF _Toc317842920 \h Figure 204: Data fields and Pivot Table and Chart output construction customization functionality PAGEREF _Toc317842921 \h Figure 205: Data fields and Pivot Table only output construction customization functionality PAGEREF _Toc317842922 \h Figure 206: Data fields selection and allocation for rows (axis) and columns (legends) PAGEREF _Toc317842923 \h Figure 207: Rows (axis) and columns (legends) polluted in pivot table and chart output PAGEREF _Toc317842924 \h Figure 208: Data field selection and allocation for Values PAGEREF _Toc317842925 \h Figure 209: Values populated in pivot table and chart PAGEREF _Toc317842926 \h Figure 210: Pivot table output before number formatting PAGEREF _Toc317842927 \h Figure 211: Number formatting functionality in EXCEL PAGEREF _Toc317842928 \h Figure 212: Pivot table and chart output after number formatting PAGEREF _Toc317842929 \h Figure 213: Grades/ Categories for bucketing deposit data PAGEREF _Toc317842930 \h Figure 214: Functionality for changing Value field settings -1 PAGEREF _Toc317842931 \h Figure 215: Functionality for changing Value field settings -2 PAGEREF _Toc317842932 \h Figure 216: Functionality for changing Value field settings -3 PAGEREF _Toc317842933 \h Figure 217: Updated values field after value field setting is changed PAGEREF _Toc317842934 \h Figure 218: Maturity profile versus size concentration by amount and number PAGEREF _Toc317842935 \h Figure 219: Selecting data fields for displaying size and cost PAGEREF _Toc317842936 \h Figure 220: Pivot table for deposit size and cost PAGEREF _Toc317842937 \h Figure 221: Pivot table and chart combo for deposit size and cost PAGEREF _Toc317842938 \h Figure 222: Pivot table and chart combo maturity and cost PAGEREF _Toc317842939 \h Figure 223: Pivot table and chart combo for deposit size and product PAGEREF _Toc317842940 \h Figure 224: Pivot table and chart combo for cost and size by number of accounts PAGEREF _Toc317842941 \h Figure 225: Pivot table and chart combo for total deposit amounts by maturity PAGEREF _Toc317842942 \h Figure 226: Pivot table and chart combo for total deposit amounts by cost PAGEREF _Toc317842943 \h Figure 227: Core banking data for loans extract PAGEREF _Toc317842944 \h Figure 228: Grades/ Categories for bucketing loan data PAGEREF _Toc317842945 \h Figure 229: Assigning grades for maturity buckets PAGEREF _Toc317842946 \h Figure 230: Assigning grades for loan size PAGEREF _Toc317842947 \h Figure 231: Pivot chart for loan size against maturities PAGEREF _Toc317842948 \h Figure 232: Pivot table for loan size against maturities PAGEREF _Toc317842949 \h Figure 233: Pivot chart for business line against maturities PAGEREF _Toc317842950 \h Figure 234: Pivot table for business line against maturities PAGEREF _Toc317842951 \h Figure 235: Pivot table for advances product against maturities PAGEREF _Toc317842952 \h Figure 236: Pivot chart for advances product against maturities PAGEREF _Toc317842953 \h Figure 237: Pivot table and chart for advances maturities PAGEREF _Toc317842954 \h Figure 238: Pivot table and chart for concentration of advances in size versus maturity brackets by number PAGEREF _Toc317842955 \h Figure 239: Maturity profile- advances PAGEREF _Toc317842956 \h Figure 240: Maturity profile- deposits PAGEREF _Toc317842957 \h Figure 241: Maturity profile-results PAGEREF _Toc317842958 \h ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download