Theory and Practice of T heor Forex and Treasury Management y and P Module I r ac tic e of F or e x and T r easur y Managemen ISBN: 978-81-8441-812-5 t M odule I Committee on Financial Markets and Investors' Protection The Institute of Chartered Accountants of India ICAI Bhawan, A-29, Sector 62, Administrative Wing (8th Floor), Noida - 201 309, India, Telephone - 0120 3045 945 Committee on Financial Markets and Investors Protection (CFMIP) Email id: [email protected] November/2015/P1857(New) The Institute of Chartered Accountants of India (Set up by an Act of Parliament) New Delhi Theory and Practice of Forex and Treasury Management (Module I) Committee on Financial Markets and Investors Protection (CFMIP) The Institute of Chartered Accountants of India (Set up by an Act of Parliament) New Delhi © The Institute of Chartered Accountants of India All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic mechanical, photocopying, recording, or otherwise, without prior permission, in writing, from the publisher. Edition : November, 2015 Committee/Department : Financial Markets and Investors Protection Email : [email protected] Website : www.icai.org Price : ` /- (Including CD) ISBN No. : 978-81-8441- Published by : The Publication Department on behalf of the Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi - 110 002. Printed by : Sahitya Bhawan Publications, Hospital Road, Agra 282 003 November/2015/500 Contents 1. Treasury – Organisational Structure 1-25 Treasury – Its Evolution and Objectives Organisation Structure of Treasury – Front, Back & Mid Office Functions of Treasury Department Role of Treasury and Treasurer in: o Raising Capital o Managing Bank Relationships o Money Management o Treasury Performance Management o Liquidity Management o Credit Management o Forex Management o Risk Management Responsiblities of a Treasurer Intergrated Treasury Management - Cost Centre and Profit Centre 2. Treasury - Process 26-55 Treasury Management - Systems and Techniques. Treasury Policy and Procedure Manual. Delegation with Accountability: o Open Position Limits: Daylight, Overnight, Asset Position Limit, Intraday Limit. o Deal Size, Individual Dealer’s Limit o Stop Loss Limits Control and Reporting Requirements. Dealing and Trading Operations – Control and Orderly Conduct, Moral and Ethical Codes, Checks of Balances, Sigining Ethical Code Agreement. An insight into: o Float, Availability, Swaps o Account Analysis, Clearing Houses o Lockboxes, Disbursement Benchmark Rates for Discounting Cash Flows. Liquidity and Cash Flow Management - CRR. o Objectives, Sources and Deployment o Internal Control, Netting, Gap Management Treasury Management Processes like Domestic Remittances, International Remittances. Payment & Settlement Systems, CCIL, CLS and RTGS, NEFT, SWIFT. Dealing Room Operations: Nostro / Vostro/ Loro & Mirror A/cs – Open Currency Position / Cash Position by Dealers. 3. Treasury - Domestic 56-108 Classification of Treasury Market: o Domestic or National Treasury Market o Forex or International Treasury Markets Money Market: o Need for the Market - Participants o Types of Interest / Yield Rate Quotations o FIMMDA, Role of CCIL and Products – CBLO (Collaterized Borrowing and Lending Obligation), NDS-OM, CROMS Money Market Instruments: o Government Securities - Treasury Bills - Promissory Notes - Fixed Income Securities o Repurchase Agreements (REPOS / Reverse Repo) o RBI Money Market Operations like Sterilization and Non-Sterilization - LAF o Commercial Paper, Certificate of Deposits. o Alternative Investments - Bills Discounting, Refinance and Rediscounting Facilities, Inter Bank Dealings, Factoring, Forfating Mutual Funds Capital Markets: o Primary & Secondary Market o Principles of Valuation-Settlements of Transactions Bond Market – Types and its Futures o Corporate Bonds, Zero Coupon Bonds ,Perpetual Bonds o NCDs, STRIPS, Venture Capital, Private Equity, Angel Funds, Investment in ARCs. iv Understanding Current Yields, YTM, Changes in Yields, Different Maturities of Treasury Bonds, Revaluation – Mark to Market and Profit Calculations, VaR (Value at Risk). Negative list of investments. Guidelines on Non-performing investments. Commodity Market: o Structure of Commodity Market o Leading Commodity Exchanges in India o Commodity Futures Trading in India o Linkage Domestic with Foreign Operations 4. Treasury - Forex 109-213 Foreign Exchange Markets: o Different Kinds of Inter-Bank Forex Markets o Highly Traded Markets - Cash/OTC o Nature of Transactions o Cross Border Currency Flows o Liberalization of Exchange Control o Role of Banks in Forex Market o Factors Impacting Forex Market o Convertibility and BOP Forex Concepts: o Exchange Rate Quotes o Factors affecting Exchange Rates o Exchange Rate Mechanism o Spot and Cross and Forward Rates o Premium and Discount o Forward Contracts–Booking, Extension, Cancellation. International Treasury: o Market Participants o Various Forex Treasury Products o Volatility of Major Currencies o Currency Trading o Global Securities – Portfolio Management External Commercial Borrowings (ECBs) o FEMA Regulations for Import / Export Transactions - Current A/c Rules – Capital Account Transactions v o FDI / FPI Guidelines in India and impact of Inflows & Outflows on Forex Treasury o GDRs / ADRs, Tandoori Bonds, Pass Through Certificates o Loan Syndications and FRN o Interest Rates and Volumes o Tax Implications International Funding Organisations. o Impact of Recent Global Crises – Role of IMF, FEDAI/WORLD BANK/NEW DEVELOPMENT BANK/AIIB BANK Derivative Markets o Futures, Options and Swaps o Price Calculation of Various Instruments o Swaps - Outright Deals, Dealer Operations o Trends in Futures Market o Short Term Interest Rate Futures Practical Concepts of Options Market: o Comparison on Options & Synthetics o Rules of Options - OTC/Exchange Traded o Option Strategies like KIKOs Black Scholes and Beyond – In Options. Settlement of Futures / Option Contract. Swaps Market: o OIS Swap o MIFOR Swap o INBMK Swap o Coupon - Only Swap o Hedging of Buyers Credit / ECB Hedge Accounting. Standard International Agreements 5 Treasury - Mathematics 214-289 Concept of Time Value of Money. Hypothesis Testing – Time Series Analysis. Technical Analysis – Evaluating Securities. Linear Programming – Decision Making – Simulation. Core Tools for Cash Management - Cash and Liquidity Forecasting. vi YTM - Yield Curve, Modified YTM, Current Yield, Different Versions – Callable Bonds, Callable Yield Notes, Puttable Bonds. Building ZCC and and Use of ZCC Yields. Bootstrapping Process to derive the Zero Curve. Liquidity & Interest Rate Sensitivity Gap measures - RBI Guidelines. Bond & Securities Valuation – Bond Dynamics - Duration – Modified Duration. Risk Measures – VaR – Mecaulay Duration. Back Testing of VaR: o By Historical Simulation Method o By Monte Carlo Simulation Method Investment Appraisals. Financial Statement Analysis: o Cash Return on Assets Ratio o Returns Ratios o Solvency Ratios o Liquidity Ratios o Profitability Ratios and Growth o Efficiency Ratios & Valuation Ratios 6. Treasury - Technology 290-333 Role of Information Technology in Treasury Management. Overview of Software used in Treasury - Banks, Insurance Companies and Corporates. Storage of Data Files - Reports Generation, IT Risks Mitigation Measures like Business Continuity Plan (BCP), Disaster Recovery Plan (DRP) and Transaction Protections etc. Bloomberg / Thomson Reuters screenshot showing Forward Markets and their Interpretation. FX Swap Curve across the globe and Indian and Correlation between Swap Curves. List of Recommended Books 334-334 vii viii 1 Treasury – Organisational Structure Treasury – Its Evolution and Objectives Treasury management (or treasury operations) include management of an enterprise's holdings, with the ultimate goal of maximizing the firm's liquidity and mitigating its operational, financial and reputational risk. Treasury Management includes a firm's collections, disbursements, concentration, investment and funding activities. In larger firms, it may also include trading in bonds, currencies, financial derivatives and the associated financial risk management. Most banks have whole departments devoted to treasury management and supporting their clients' needs in this area. Until recently, large banks had the stronghold on the provision of treasury management products and services. However, smaller banks are increasingly launching and/or expanding their treasury management functions and offerings, because of the market opportunity afforded by the recent economic environment (with banks of all sizes focusing on the clients they serve best), availability of (recently displaced) highly-seasoned treasury management professionals, access to industry standard, third-party technology providers' products and services tiered according to the needs of smaller clients, and investment in education and other best practices. For non-banking entities, the terms Treasury Management and Cash Management are sometimes used interchangeably, while in fact, the scope of treasury management is larger (and includes funding and investment activities mentioned above). In general, a company's treasury operations come under the control of the CFO, Vice-President / Director of Finance or Treasurer, and are handled on a day to day basis by the organization's