banking presentation

1

Objectives

At the end of the session you will be able to

•Explain general banking operation

•Demonstrate general understanding on IB products

• Foreign Exchange

• Securities

• Commodities

• Derivatives

2

Why do Banks exist?

• To Provide Financial products and Services

3

Who are clients

Banks

Corporate

Individuals

Deutsche Bank

Citibank

ABN Amro

Deutsche Asset Management

Fund Managers

Multinational

Small / Mid size firms

High Street Banking (Chase Bank) US Only

High Net Worth Individuals (Millionaires / Billionaires)

4

Banking as a Whole

Clients

Includes Auto Finance, Consumer Banking, Home Finance, Insurance and Small Business Banking

Provides mutual fund, insurance & home finance and workplace banking products to consumers and small businesses

One of the world’s leading investment banks

Services provided: Advice on corporate strategy and structure, raising and placing capital, making markets in financial instruments and offering sophisticated risk management services

Provides investment & wealth management services to institutional investors, high net worth individuals & retail customers

Provides personalized advice and solutions to wealthy individuals

Global leader in transaction processing and information services to wholesale clients

Three Businesses: Institutional Trust Services, Investor Services(WSS) and Treasury Services

Major provider of financial services including corporate finance, cash management, & credit

Comprises of five national business segments: Middle Market Banking, Mid-Corporate Banking, Commercial Real Estate, Asset Based Lending and Commercial Leasing

Delivers credit card and other related payment products to cardholders and merchant outlets

Aims to be the preferred payment card in existing customers wallets and to increase access to new customers

Investment Bank

Treasury and Securities Services

Card Services

Asset and

wealth Management

Retail Financial Services

CommercialBanking

5

International Banking Locations

North America

Latin America

EMEA Asia Pacific

6

Banking and Banking operations

Bank is a commercial institution licensed as a receiver of deposits. Banks are mainly concerned with making and receiving payments as well as supplying short-term loans to individuals.

Exists to help you make the most of your money

Assist you with your monetary requirements and promote savings

How do they do it ??

By offering different products and ServicesBanking Services

Deposits Loans Services Capital Market

Short Term Long Term Retail Institutional

Fund based activities, greater market risk

Fee based activities, lesser market risk

E.g.

Savings

Current

Fixed E.g.

Overdraft

E.g.

Auto Loan

Home Loan

E.g.

DDs

Lockers

Bill Pay

E.g.

Bank Guarante

e

Trade Finance

E.g.

DP

Custodian

Merchant Banking

Debenture

Trustees

7

Role of Banks

Intermediary role between lenders and borrowers

• Lenders – Deposits funds with Banks• Liability products (Liability for Banks)

• Borrowers – Borrows funds from Banks• Asset Products (Assets for Banks)

8

Different types of Banks

Types of Banks

Central Bank (RBI)

Non Banking Finance

Companies (NBFCs)

Commercial Banks Term Financial Institutions

State Finance Corporations

(SFCs)Indian Financial

Institutions

E.g.

IFCI

NABARD

SIDBI

Public Sector

Private Sector Foreign Co-

operative Banks

Regional Rural BanksE.g.

SBI

PNB

BOB

E.g.

HDFC Bank

UTI Bank

ICICI Bank

E.g.

Citibank

ABN Amro

HSBC

State/Central Private

Primary Credit

Societies

9

Broad Categories

•Retail Banking

•Whole Sale Banking

10

•Accepting deposits from Public

•Lending money to public

•Remittances/Collection Business

•Keeping valuables in safe custody

•Government business

•Acting as trustee

•Treasury services

•Capital Market activity

Activities of a Bank

11

Capital Markets Overview

Markets – A place where exchange of goods and services happen

Capital Market

•Place where capital (fund) requirements of the issuers are met; i.e. Issuers (Corporate, Government, etc) raise funds

•Trades in these markets are for debt, equity securities or other instruments

•Organized, as they are governed by regulatory bodies [Securities & Exchange Board of India, RBI]

12

Financial Markets

13

Regulator

Underwriters

Merchant Banker / Investment Bank – JPM

Brokers

Exchanges

Custodians

Banks

Depositories

Depositary Participants

R & T Agents

Market Participants

Capital Markets intermediaries

14

SEBI – Securities Board of India

SEC – Securities & Exchange commission (USA)

FSA – Financial Services Authority (UK)

Capital Markets – Regulators

15

Underwriter

•Who underwrites the issue in case of under-subscription; takes the stock in its books

Merchant Banker / Investment Bank

•An underwriter or agent for corporations and municipalities issuing securities

•Maintain broker/dealer operations mostly, maintain markets for previously issued securities

•Offer advisory services to investors

•Large role in facilitating mergers and acquisitions, private equity placements and corporate restructuring

•Do not accept deposits from and provide loans to individuals (Investment Banks, especially)


16

Brokers•An individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor.

•The role of a firm when it acts as an agent for a customer and charges the customer a commission for its services.

Exchanges

•A market in which securities, commodities, options, or futures are traded.

•Although you will mostly trade stocks through a broker

•NSE, BSE, NYSE, NASDAQ, LSE


17

Custodian

An agent, bank, trust company, or other organization which holds and safeguards an individual's, mutual fund's, or investment company's assets for them.

Bank

An organization, usually a corporation, chartered by a state or federal government, which does most or all of the following: receives demand deposits and time deposits, honors instruments drawn on them, and pays interest on them; discounts notes, makes loans, and invests in securities; collects checks, drafts, and notes; certifies depositor's checks; and issues drafts and cashier's checks.


18

Depositories

An institution which facilitates the clearing of securities between the stock exchange & depository participants; holds assets in electronic form on behalf of ultimate beneficiaries

Depository Participant

Any institution like a bank that maintains the dematerialized accounts of beneficiaries, provides services of settling securities traded on the exchange; Agent of Depository

Registrar and Transfer Agents

maintain the records of members (shareholders) for the issuer company


19

Market Participants

Various persons / entities that indulge in buying & selling Examples:

•Qualified Institutional Buyers

•Foreign Institutional Investors, Foreign Venture Capital

•Domestic Institutional Investors - Banks, Financial Institutions, Insurance Companies, Mutual Funds, Venture Capital

•Non - Institutional - High Net worth Clients (E.g. NRI, HUF, Government & Private Corporate bodies)

•Retail Individual Investors


20

Primary Market

Sell (float) new stocks and bonds to the public for the first time. In the primary market the security is purchased directly from the issuer

Secondary Market

Secondary market is where investors trade among themselves. An investor purchases a security from another investor rather than the issuer. Auction market forms a part of this market.

Primary and Secondary Capital Markets

21

Banking Treasury Products

Foreign Exchange

• What is an FX trade

• How does it work

• Why are banks in the in the FX Market

22

Products: Foreign Exchange

Definition: Buying (or selling) of a currency and paying for it with another at an agreed price

(exchange rate) for settlement on an agreed date

Complete the grid of descriptions using the following words

1. Payment Instructions

2. Receiving / receipt Instructions

3. Currencies

4. 2 Counterparties

5. Broker

6. Value date

7. Booked the right way round

8. Amount

9. Exchange rate

10. Trade Date

23


Explanation

Has to be two of these for the exchange to be possible

A numerical figure that shows the value of the trade

The price of one currency expressed in another

The day the trade will settle. i.e. the funds will be debit / credit from / to your account

Shows which currency we are paying and receiving.

Helps to arrange a trade on behalf of others

The entities involved in the trade

The day the deal was agreed

Where we are receiving our currency to?

Where are we paying the currency to?

Trade Date

Receipt Instructions

Payment Instructions

2 Counterparties

Broker

Booked Right Way Round

Value date

Exchange rate

Amount

Currencies

Component

24

Different Trades

• Spot trade: Value date = trade date + 2

• Cash trade: value date = trade date

• Tom trade: Value date = trade date +1

• Forward trade: Value date = trade date +

3(or more)

25


Example

BMWMunich

Gear Box Supplier

USA

Citibank

Supplies gear boxes at agreed price.

BMW need to pay in USD

BMW need to import gearboxes that have been made in the US.

Cost $5,000,000

BMW now need to pay in USD but only have a EURO account

The Solution: Do a Foreign Exchange Trade

Contact Citibank:

Want to Buy $5,000,000.

Will pay for it in EURO’s.

JPMorgan will ask what date they want the currency (Value Date)

JPMorgan will advise the Exchange rate. (How much will $5mio cost in EURO)Rate is 1.27 (Euro 1 = $1.27)

Pay EURO 3,937,008.

Pay USD 5,000,000 to BMW (for Gear Box Supplier)

26

Speculation

Example

JPMC

Microsoft

USA

Microsoft speculates that GBP price will increase from $1.7 to 1.9 in 3 months time

Contact JPMorgan:

Want to Buy GBP 1,000,000.

Will pay for it in

JPMorgan will ask what date they want the currency (Value Date)

JPMorgan will advise the Exchange rate. (How much will GBP5mio cost in USD)Rate is 1.7 (GBP 1 = $1.7)

sell 1.7M USD

buy

GBP1M

Citibank

USA

Sell GBP 1 M

Rec $1.9 M

27

Currencies

What currencies do you know?

Have a name:

Eg United States Dollar, Japanese Yen

Have a 3 figure code

Eg, USD and JPY

28

Price of a currency

• Factors that affect the price of a currency

-Economic e.g. Interest rate, inflation rate

- Political

• Strong currency

• Weak currency

29

WHY FX

• For personal requirement

• For business requirement

• For speculation

30

Commodities

What are Commodities?

Commodities Categories

Example of a trade

Products: Commodities

31


What are Commodities?

Review cards and put them into 4 categories

Put a name to the 4 categories

32

Banks trade in Commodities just as they do in currencies.

Commodities are split Into 4 groups:

• Energy – e.g. Gas, Oil

• Base Metals – e.g. Copper, Aluminium

• Precious Metals – e.g. Gold, Silver

• Soft Commodities – e.g. Coffee, Sugar, paper


33

What Precious metals do banks trade in?

XAU

XAG

XPT

XPD

Gold

Silver

Platinum

Palladium

(In place of currency codes the chemical elements of the metal are used to identify the metal)


34

Example:

SWISS Tony’s Gold

watch Company

JPMorgan

Watch maker requires gold to manufacture watches

Finds a company selling goldAgrees how much Gold

Agree on the price

Agree on Delivery

Want to buy 1,000 oz

Price is $300 per oz

Total Price is $300,000

Deliver Gold

Pay $300,000


35


Settlement

• Use depositories

• Allocated

• Un allocated

36

Products: Bonds

Bond Trades

What is a Bond?

How does it work?

What role does JPMorgan play?

37

What is a Bond?

Our Products: Bonds

A certificate of debt (usually interest-bearing) that is issued by a government or corporation in order to raise money

The issuer is required to pay a fixed sum annually until maturity and then a fixed sum to repay the principal

Effectively it is a loan. The company who receives the money, issues a Bond with terms and conditions stating when they will pay back interest and principle amount to the lender of the money (Investor)

38

Products: Bonds

Key Terms of a Bond

• Face Value

• Coupon

• Maturity

• Issuer

Nominal Amount

What the Bond is worth when redeemed at maturity

Amount of interest paid to Bond Holder during the life: (e.g. 5% = 5% of Face Value of investment)

Date for coupon payments. Usually 6 monthly (does depend on terms of issuance)

Date the principle amount is paid back to the investor.

Activity: Lets Look at a practical example.

Who Issued the Bond. (Received the money)

39

Bond Issuere.g. A Corporation or

GovernmentInvestor

Pay $1,000,000

Receives Bond

Makes regular payments (Coupons)

Bond maturity pay back $1m

Products: Bonds

Conceptual Example

40

Big Company Ltd

Small Company Inc

1. Big Company Ltd want to buy Small Company Inc.In order to do so it needs to raise capital.The purchase price is $1,000,000

2. Raising capital:In this example, Big Company A looks to borrow money

3. Raising capital:It borrows money by issuing a BOND.

4.Raising capital:An Investor buys the bond. (can be a bank, corporation, Individual etc etc)

Products: Bonds

Conceptual Example

Investor(s)

Pays $1,000,000

Issues Bond(s) to Investors

5. End Result

Big Company Ltd can now finance its purchase of Small Company Inc and will pay the Investors back. How much depends on the bond (loan) terms.

41

Big Company Ltd Investor(s)

Investors hold the Bond until Maturity

Coupons of 5% are paid semi annually by Big Company to Investors.

Products: Bonds

Pay back principle amount (e.g. $1,000,000) at maturity

Conceptual Example

Paid $1,000,000

Coupon payments made every 6 months

for term of bond

10 Year Bond = 20 payments

42

Role of banks in bonds

Products: Bonds

BMWBMW

Want to start design and produce a new model car

Estimate they need EURO 5 million to do this

They chose to raise this capital by issuing a Bond

BMW Contact JPMorgan and appoint them as Lead Manager on Bond Issue

JPMorgan Pay BMW EURO 5 Million and receive Bonds

Issue Bonds into the market

Investors

Bond Buyer

Investors

Bond Buyer

JPMorganJPMorgan

Example

EURO 5 M

Bonds Bonds

EURO 5 MBond

Market

Pay cash Pay cash Pay cash

Receive Bonds

Receive

Bonds

Receive

Bonds

Investors

Bond Buyer

43

Products: Equities

Equity Trades

What is an Equity trade?

How does it work?


44

Products: Equities

Big Company Ltd

Big Company is now looking to expand its operation again and needs to raise cash in order to do this.

The company decides it will raise the cash by selling shares

Will Issue IPO.

Bank

It uses a bank to advise how to do this

45

Big Company LtdBank

Products: Equities

Bank will:

• Assist with company valuation

• Can under-write shares

• Advise on timing

• Advise on how much of company to sell

Advertise the IPO

Potential investors contact bank and register their interest

Investors

46

Current Share holders

Investor

Investor

Investor

Investor

Investor

InvestorInvesto

rInvesto

r

Products: Equities

Secondary Market

Stock Exchange(Including

Stock Brokers)

47

Investor

Investor

Investor

Investor

Investor

InvestorInvesto

rInvesto

r

Products: Equities

Stock Exchange(Including

Stock Brokers)

Big Company Ltd

Secondary Market

48

Products: Equities

How do banks participate in the Equities market?

Client A

Client A, wants to buy shares in Big Company Ltd

JPMorgan(JPMSL)

They contact JPMorgan with the details of their requirements

Stock Exchange

JPMorgan trader contacts Stock Exchange.Wants to Buy 500 shares

Current Shareholder

Stock Broker

JPMorgan and Stock Broker agree price and

terms through the Stock Exchange

Through Stock Exchange JPMorgan will source a seller of the Shares.

A price will be agreed

€20 per share

49

Share name

Number of shares

Price of share

Buying or Selling

Currency paying

Trade date

Value date

Payment details

Products: Equities

What are we looking to confirm?

Big Company Ltd

500

EURO €20

Buying Shares

EURO

13th October 2005

15th October 2005 (T +2)

Where to pay shares and cash to

(from both parties)

Activity

50

Products: Settling through clearing house

Payments: How do they get made?

JPMorgan

Current Shareholder

BNP Frankfurt

Citibank Frankfurt

JPMorgan and Client send instructions to their Agents.

Details of the trade and when to settle

Share A/C EURO Cash a/c

JPMorgan a/c

Current Shareholder a/c

The trade will then settle across the Kassenverein Central Depository.

Delivery versus Payment (DVP)

€10,000

€10,000500

500

Trades can settle over a central depository

Before Payment

After PaymentThe Shares are now transferred to JPMorgan’s a/c within KassenvereinThey will hold shares on behalf of their client

Original Big Company Share Holder, now has €10,000

Central Depository

e.g. Kassenverein

51

Types of Shares

• Ordinary Share – These shares give the investor the right to a dividend, if declared. Should the company go into liquidation, then holders of this class of share holds the

lowest priority of repayment.

• Deferred Ordinary share- These give shareholders additional voting rights or the right to higher dividends. Often these shares will not qualify for dividend until a particular date has been reached or the company profit has reached a pre- determined.

• Golden Shares – These shares are designed to allow the shareholders the right to a casting vote. In cases of privatization, the government often held golden shares. This allowed them to have the casting vote if required, as a form of control, during take-over bids or other serious matters. These shares are normally used in UK.

• Preference Shares – These shares form part of the share capital of the company. They pay fixed dividend and in the event of liquidation they hold preference

52

Differences

• Bonds Vs Equities

53

Derivative Trades

What is a Derivative?

How does it work?


Products: Derivatives

54


Definition

A security, such as an Option or Futures contract, whose value depends on the performance of an underlying product.

Derivative in itself is not a product, it does however rely on an underlying product for its market value.

For this course we will look at 3 derivative examples

• Futures

• Options

• Single Currency Interest Rate Swap

55

Futures

What is a Future?

How does it work?


56


Futures

Definition

Standardised exchange-traded contract to buy or sell a commodity at an agreed price for settlement or delivery on an agreed future date

How does it work

57


Futures

UK PotatoFarmer

UK PotatoFarmer

• Has crop of potatoes

• Ready to sell in 6 months

What can happen in the 6 months before the potatoes are ready?

• Potato Supplies worldwide except UK could fail

• In 5 months time there is a scare about effect of potatoes on health

• Supply remains stable with no impact on current prices

58


Futures

What can happen in the 6 months before the potatoes are ready?

Risks:

• Crop could fail

• Price movement

Controls:

• Insurance

• Agree buyer now at agreed price (Future trade)

59


Futures

Futures

Exchange

Supermarket

Supermarket

UK PotatoFarmer

UK PotatoFarmer

Farmer enters into a Futures contract

Using the Futures Exchange

Seller: UK Potato Farmer

Buyer: Supermarket

Product: Grade A Potatoes

Price: £5 / sack

Quantity: 5,000 Sacks

Delivery: 5th June 2005

Total Price: £25,000

Future Contract

Agree to sell potatoes

Agree to buy potatoes

Finds a buyer for potatoes

Agrees a price

Agrees a delivery date

60


Futures

June 5th 2005

• Farmer will deliver potatoes to Supermarket through Exchange

• Supermarket will pay Farmer through Exchange

• Farmer has guaranteed income (providing crop doesn’t fail – insurance would cover this)

This agreement means the Farmer has an obligation to deliver potatoes on this date and Supermarket has an obligation to pay farmer the agreed price. All this happens via Exchange

61


Options

What is an Option?

How does it work?

62


The buyer has the right, but not the obligation to buy or sell the underlying product at an agreed price on an agreed date

The buyer pays a premium to the seller have this right.

Definition

Let’s look at an FX Option

Options

Page 45-49 in Workbook

63

FX Option


Big Company USA

Big Company USA

Computer R Us UK(CRUUK)

Computer R Us UK(CRUUK)

Big Company has ordered a supply of computer components from CRUUK (Computer R Us UK)

Computer R Us UK will deliver the computer equipment in 3 months time

This will cost Big Company Ltd GBP 1,000,000. in 3 months

What needs to happen

To Pay for this order Big Company will have to do a Foreign Exchange trade.

They need to buy GBP 1,000,000 (to pay CRUUK)

And pay for it with USD

Have to pay

£1,000,000

Deliver Computer

Components in 3

months


64

FX Option


What choices does Big Company Ltd have?

• Buy the £’s via a forward FX trade (arrange today value 3 months)

• Buy the £’s in 3 months – spot trade (exchange rate unknown until 3 months)

• Do an FX Option


65

FX Option


Big Company Ltd decide to use an FX Option

Why?

• Want to know state of cash flows (now and future)

• FX Option will limit any exchange rate movements


66

FX Option


How does it work?

Buyer: Big Company

Seller: JPMorgan

FX Option Details

Call: GBP: 1,000,000

Put: USD: 1,500,000

Strike Price 1.5

Expiry Date 5th March 2004

Delivery date 7th March 2004

Premium: $5000

Big Company (USA)

Big Company (USA)

JPMorganJPMorgan

On January 5th 2004

Big Company contact JPMorgan

Big Company agree to buy an FX Option from JPMorgan.

This Option gives them the right but NOT the obligation to use this trade on the delivery date

The FX OptionBought By

To have this right but not obligation Big

Company pay JPMorgan a premium


67

FX Option


Buyer: Big Company

Seller: JPMorgan

FX Option Details

Call: GBP: 1,000,000

Put: USD: 1,500,000

Strike Price 1.5



Premium: $5000

Big company now have the right to use [exercise] this trade for settlement on March 7th

The FX OptionWhat are the key dates?

Expiry Date:

Date that Big Company have to decide whether to exercise the Option

Delivery Date:

Date that transfer of funds would occur if Big Company Ltd exercise this Option

Other FX Option Components

Call:

Currency that the buyer of the Option would receive

Put:

Currency that the buyer of the Option would sell

Strike:

Exchange Rate that would be used if Option is exercised


68


FX Option

Buyer: Big Company

Seller: JPMorgan

FX Option Details

Call: GBP: 1,000,000

Put: USD: 1,500,000

Strike Price 1.5



Premium: $5000

The FX Option

How do Big company know whether to exercise the Option?

On 5th March

• Look at current FX [Spot] rate

• If they used the spot rate (Not the Option Strike rate) how much would it cost to buy the £1,000,000?

• Would it be cheaper to use the Spot rate and let the Option expire or…

• Use the Option because the spot price in market would cost more in USD.

Lets look at possible choices Big Company Could make


69

Buyer: Big Company

Seller: JPMorgan

FX Option Details

Call: GBP: 1,000,000

Put: USD: 1,500,000

Strike Price 1.5



Premium: $5000

The FX Option


FX Option

RATE WouldCOST in USD

To buy £1,000,000 on Spot Market

1.3

1.7

Exercise Option

If SPOT Rate

If SPOT Rate $1,300,000

$1,700,000

5th March

To Buy £1,000,000. using the FX Option would cost:?

$1,500,000

NO

YES

Remember: Big Company bought the Option 3 months ago So wouldn’t know what the rates would be today. Buying the Option limits the cost of the Computer purchases to a maximum of $1,500,000. (plus the $5000 premium)


70

‘In’, ‘At’ or ‘Out Of’ the Money?

Cost

in

USD

Foreign Exchange Spot Rate

1.3 1.5 1.7

$1,700,000

$1,500,000

$1,300,000


FX Option: To buy £1,000,000

Out of the Money

At the Money

In the Money


banking presentation

Economy & Finance

banking operations bank

individuals investment

banks borrowers

consumer banking

sale banking

information services

advisory services

middle market banking