treasury risk management and forex risk management
TRANSCRIPT
Treasury and Forex Risk Management in Banks- a case study
By: Ashish SharmaI am ONN
THE INSTITUTE OF COMPANY SECRETARIES OF INDIA
What is Treasury Management?
• "To plan, organize and control cash and borrowings so as to optimize interest and currency flows, and minimize the cost of funds "
THE INSTITUTE OF COMPANY SECRETARIES OF INDIA
Objectives of Treasury Management
• Availability of funds in right quantity
• Availability of funds at right time
• Deployment of Funds in right quantity
• Deployment of funds at right time
• Profiting from availability and deployment
THE INSTITUTE OF COMPANY SECRETARIES OF INDIA
Structure of an Integrated Treasury
SBI Annual Report 2015 & THE INSTITUTE OF COMPANY SECRETARIES OF INDIA
Treasury Risk
Systemic Risk Affects participants within either domestic or global market eg:– US market drop 20%– A top 5 international bank defaults
SBI Annual Report 2015 & THE INSTITUTE OF COMPANY SECRETARIES OF INDIA
Treasury Risk
Financial Risk•Liquidity Risk•Country and Sovereign Risks eg. Greece•Interest Rate Risk•Credit Risk•Forex Exchange Risk
SBI Annual Report 2015 & THE INSTITUTE OF COMPANY SECRETARIES OF INDIA
Treasury Risk
Interest Rate Risk
SBI Annual Report 2015 & THE INSTITUTE OF COMPANY SECRETARIES OF INDIA
Treasury RiskCredit RiskAs per RBI Guidelines, the Bank has identified CARE, CRISIL, ICRA, India Rating, SMERA and Brickwork (Domestic Credit Rating Agencies) and FITCH, Moody’s and S&P (International Rating Agencies) as approved Rating Agencies, for the purpose of rating Domestic and Overseas Exposures, respectively, whose ratings are used for the purpose of computing Risk-weighted Assets and Capital Charge.
THE INSTITUTE OF COMPANY SECRETARIES OF INDIA
Functions of an Integrated Treasury• Reserve Management and Investment
• Liquidity and Funds Management
• Asset-Liability Management
• SLR Maintenance
• CRR Maintenance
• Derivatives Trading
Forex Risk Management
• Foreign exchange risk means a risk arising from a foreign currency exposure.
• Foreign Exchange Exposure is the sensitivity of the real domestic currency value of assets, liabilities, or operating incomes to unanticipated changes in exchange rates.
THE INSTITUTE OF COMPANY SECRETARIES OF INDIA
THE INSTITUTE OF COMPANY SECRETARIES OF INDIA
Exposure of Foreign Exchange Risk
THE INSTITUTE OF COMPANY SECRETARIES OF INDIA
THE INSTITUTE OF COMPANY SECRETARIES OF INDIA
Foreign Exchange Risk Management Hedging
• Foreign Currency Assets & Liabilities Matches.
• Hedging using Derivatives -Foreign Currency Futures
-Foreign Currency Swap -Foreign Currency Options
-Foreign Currency Forward Contracts
• Hedging through Diversification of Foreign Asset-Liability Portfolio.
THE INSTITUTE OF COMPANY SECRETARIES OF INDIA
Hedging through Foreign Currency Assets & Liabilities Matches
• If a bank has a liability in shape of a deposit for one year in US$ at rate of 3% p.a. and it has another liability of same type but in PKR @ 10% p.a., it can match itsassets with these liabilities by advancing US$ at rate of 4.5% p.a. and PKR @15% p.a.
• Using this the bank has locked into the profit of spread. Bank will get US$ & PKR to repay the principal and exchange rate will not affect the cost of exchanging the currencies.
THE INSTITUTE OF COMPANY SECRETARIES OF INDIA
Hedging through Diversification of Foreign Asset-Liability Portfolio
• Commercial Banks try to mitigate the foreign currency risk on its individual currency by holding Multicurrency Asset-Liability Positions.
• Holding assets and liabilities in various foreign currencies does not reduce the risk of the portfolio of assets and liabilities of a bank alone but also significantly lower the cost of capital.
• The risk of holding any net open position in a currency isdiversified by holding a position in foreign currency.
