Treasury Markets and Operations E-Book

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 545

Veröffentlichungsjahr: 2014

Beschreibung

An in-depth look at how banks and other financial institutions manage treasury operations Created for banking and finance professionals with a desire to expand their management skillset, this book focuses on treasury operations in banking. It was written by the experts at the world-renowned Hong Kong Institute of Bankers, an organization dedicated to providing the international banking community with education and training. * Offers a detailed look at treasury operations and how banks manage their relationships with various markets, including foreign exchange, bond markets, and derivatives * Gives practitioners a thorough understanding of balance sheet management, settlement, and control * Provides bankers with the specialised knowledge they need to undertake critical reviews of treasury operations in banks, manage a wide range of treasury activities, and identify risks

Leseprobe

Treasury Markets and Operations

The Hong Kong Institute of Bankers

Cover Design: Wiley Cover Images: Fountain © iStock.com/Giorgio Fochesato; techno background © iStockphoto.com/Polygraphus; Marble © iStockphoto.com/Rusm

Copyright © 2014 by John Wiley & Sons Singapore Pte. Ltd.

Published by John Wiley & Sons Singapore Pte. Ltd.

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All rights reserved.

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Library of Congress Cataloging-in-Publication Data

ISBN 978-0-470-82757-4 (Paperback)

ISBN 978-0-470-82759-8 (ePDF)

ISBN 978-0-470-82760-4 (ePub)

Contents

Preface

Part 1: Treasury Management

Chapter 1: Treasury Management of Financial Institutions

Learning objectives

Introduction

Issues in Treasury Operations

Treasury Controls and Measures

Summary

Key Terms

Study Guide

Further Reading

Notes

Chapter 2: The Foreign Exchange Market

Learning objectives

Introduction

Basic Operation of Forex Market

Determining Exchange Rates

Forward Markets

Hedging the FX Exposure

Summary

Key Terms

Study Guide

Further Reading

Notes

Chapter 3: Money and Capital Markets

Learning objectives

Introduction

Hong Kong Dollar Market

International Market

Bond Market

RMB Market

The Money Market Desk

Money Market Operations

Treasury Bills

Capital Markets: Risk and Valuations

Summary

Key Terms

Study Guide

Further Reading

Notes

Chapter 4: Bond Market

Learning objectives

Introduction

Basics of the Bond Market

Pricing Bonds

Interest Rate Risk

Summary

Key Terms

Study Guide

Further Reading

Notes

Chapter 5: Derivatives

Learning objectives

Introduction

Derivatives for Hedging

Credit Derivatives

Options

Trading Strategies

Summary

Key Terms

Study Guide

Further Reading

Notes

Part 2: Treasury Operations

Chapter 6: Treasury Operations

Learning objectives

Introduction

Front Office

Middle Office

Back Office

Summary

Key Terms

Study Guide

Further Reading

Notes

Chapter 7: Market Risk and Other Risk Measures

Learning objectives

Introduction

Risk Considerations

Value-at-Risk

Basis Point Value and Hedging Market Risk

Managing Financial Risk

Summary

Key Terms

Study Guide

Further Reading

Notes

Chapter 8: RMB Payments and Settlements

Learning objectives

Introduction

RMB Clearing and Settlement

Summary

Key Terms

Study Guide

Further Reading

Notes

Part 3: Case Studies

Chapter 9: Case Studies

Learning objectives

Introduction

Segregation of Duties: Barings Bank

Settlement Risk: Herstatt Bank

Liquidity Risk in Position Hedging: Metallgesellschaft AG

Liquidity Risk: Lehman Brothers

Summary

Key Terms

Study Guide

Further Reading

Notes

Appendix A: CMU Members

Appendix B: Bond Pricing

Return on Debt Securities

Bond Products

Notes

Index

End User License Agreement

List of Tables

Chapter 1

Table 1.1

Table 1.2

Chapter 3

Table 3.1

Table 3.2

Chapter 4

Table 4.1

Table 4.2

Chapter 5

Table 5.1

Table 5.2

Table 5.3

Table 5.4

Table 5.5

Table 5.6

Table 5.7

Table 5.8

Table 5.9

Table 5.10

Table 5.11

Table 5.12

Table 5.13

Table 5.14

Table 5.15

Table 5.16

Table 5.17

Table 5.18

Table 5.19

Chapter 7

Table 7.1

Table 7.2

Table 7.3

Chapter 8

Table 8.1

Appendix B

Table B.1

Table B.2

Table B.3

List of Illustrations

Chapter 2

Figure 2.1 Illustrative foreign exchange transaction costs

Figure 2.2 Illustrative example of the settlement process

Figure 2.3 Relationship between transaction date and spot date

Figure 2.4 Trading in related currency pairs

Figure 2.5 Three trades to capture arbitrage profit

Figure 2.6 Value of forward contract at maturity

Figure 2.7 Positives and negatives of forward contracts

Figure 2.8 Hedging with a forward contract

Figure 2.9 Timeline for an optional forward contract

Figure 2.10 Theoretical value of an optional forward contract

Figure 2.11 Illustrative example of a par forward contract

Figure 2.12 Replicating theoretical value of a forward contract

Figure 2.13 Replicating theoretical value of a forward contract

Figure 2.14 Market rate rollover

Figure 2.15 Historical rate rollover

Figure 2.16 Hedging financial and operational tools

Chapter 3

Figure 3.1 Calendar months for tenor examples

Figure 3.2 Summary of short-date tenor examples

Figure 3.3 Summary of term money tenor examples

Figure 3.4 Two cases of different returns

Figure 3.5 Forward rate and spot rate

Figure 3.6 Measures of potential credit risk exposure

Figure 3.7 Expected and maximum exposures, cross currency swap

Figure 3.8 Credit ratings by major agencies, long-term bonds

11

Chapter 4

Figure 4.1 Yield and price relationship of a fixed rate bond

Figure 4.2 Yield and price relationship of a callable bond

Figure 4.3 Normal yield curve

Figure 4.4 Inverted yield curve

Figure 4.5 UK Gilt and swap yield curves pre-recession

Figure 4.6 UK Gilt and swap yield curves during recession

Figure 4.7 UK Gilt and swap yield curves after recession

Chapter 5

Figure 5.1 TT swap quotes

Figure 5.2 Illustration of cash flow in a B/S USD/HKD deal

Figure 5.3 Summary of cash flow in speculating on the interest rate movement

Figure 5.4 Replicating bid of a 1 × 4 FRA

Figure 5.5 Short term interest rate futures contracts

9

Figure 5.6 Illustration of a credit default swap relationship

Figure 5.7 Illustration of a total return swap relationship

Figure 5.8 How a credit-linked note works

Figure 5.9 Generic cash flow of a CDO

11

Figure 5.10 Balance sheet and arbitrage CDOs

12

Figure 5.11 Typical tranching of CDOs

Figure 5.12 Structure of a cash CDO

Figure 5.13 Structure of a synthetic CDO

Figure 5.14 Slope of a European call option at expiry

Figure 5.15 Slope of a European put option at expiry

Figure 5.16 Log normal distribution

Figure 5.17 Summary of strategies in options trading

Figure 5.18 Impact of “smile” on a long straddle

Figure 5.19 Example of a bull put spread, XYZ Corp

Figure 5.20 Example of a bear spread, XYZ Corp

Figure 5.21 Strip hedge strategy

Figure 5.22 Stack hedge strategy

Figure 5.23 Hedging interest rate risk

Chapter 7

Figure 7.1 Fat-tailed distribution

Appendix B

Figure B.1 Pricing a floater

Figure B.2 Duration of a fixed rate bond

Figure B.3 Duration of a zero coupon bond

Figure B.4 Duration and convexity compared

Guide

Cover

Table of Contents

Preface

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Preface

Treasury Markets and Operations (TMO) and Bank Asset and Liability Management (ALM) are the two modules within the Hong Kong Institute of Bankers' (HKIB) curriculum of Treasury Management. As part of the Associate of the Hong Kong Institute of Bankers (AHKIB) Qualifications structure, the syllabuses are tailor made for learning and development of a banking career in Hong Kong and Mainland China. Therefore, the two modules—TMO and ALM—are closely related with one focusing on treasury market knowledge and tools for strategic execution and the other on how the overall composition of assets and liabilities should be formulated and managed to support the bank business model.

Why is the role of bank treasury important? Bank treasury needs to have the capability to understand the complexity of market conditions and the usage of treasury market products to implement the ALM strategy set by the asset and liability management committee (ALCO) and bank management. It is also closely involved in the control of a number of key risks including market risk, interest rate risk and liquidity risk, which are among the eight inherent risks under constant vigilance at banks and financial institutions.

This book Treasury Markets and Operations aims to equip bank treasury professionals with the necessary knowledge and tools to understand the complexity of changing market conditions and to apply their learning to manage risks and take advantage of emerging opportunities. The launch of this book on treasury markets and operations is very timely given recent developments in 2013–14, including:

Increased market volatility in both the currency and money market, such as the further liberalization of the CNY foreign exchange rate mechanisms, the Bank of Japan policy on the JPY exchange rate, and the tapering of the third iteration of the Federal Reserve program of quantitative easing and the effect on the interest rate cycle.

The beginning of the rollout of Basel III, which will take effect through 2013–2019 and will have significant effects on the future of bank business models in particular the size of balance sheets through the leverage ratio, the decision on the holdings of high quality liquid assets against the composition of bank liabilities, the complexity of internal transfer pricing on both liquidity and capital costs, and the complexity of collateral management for ver the counter (OTC) derivatives contracts.

In his 2013–14 Budget Speech, the Financial Secretary of Hong Kong mentioned the importance of financial services as one of the four pillar industries for the territory.

There are several areas that the industry will depend upon to develop a strong bank treasury sector:

Strengthening RMB-denominated financial products in promoting Hong Kong as an offshore RMB business centre;

Enhancing services for multinational enterprises to manage their global or regional treasury functions in Hong Kong; and

Increasing the depth of the bond market with the growing adoption of bonds (post-2015) as eligible high quality liquid assets for bank liquidity risk management.

The Hong Kong economy has been resilient against international financial crisis and has earned the highest AAA sovereign credit rating from Standard & Poor's since 2010, thanks in part to the strong standard of governance and a well-regulated and capitalized banking sector. Due to the cross border nature and the growing size of financial intermediation activities vis-à-vis the size of our economy, the banking sector must remain vigilant against future financial shocks. A strong bank treasury operations are critical to the timely and sound execution, especially during times of crisis.

Strong treasury management operations are key to the safe and successful operation of a bank or financial institution.

This book is divided into three parts and nine chapters that delve deeply into the subject matter. Every effort has been made to ensure that policies and regulations discussed are up to date and current as of early 2014. Students are advised to keep themselves up-to-date on evolving TMO issues available through the web sites of the Institute, the Hong Kong Monetary Authority (HKMA), and the Bank for International Settlements (BIS).

The first part of this book starts with a background discussion of bank treasury management. Chapter 1 considers treasury management in financial institutions and the issues the bank treasury has to deal with. Chapter 2 looks at the foreign exchange market, a significant part of bank treasury operations given that Hong Kong was ranked in the 2013 BIS survey as the world's fifth largest centre for foreign exchange trading. Chapter 3 looks at the money and capital markets with a particular focus on how these markets operate in Hong Kong. Chapter 4 then looks in depth at the bond market—and an appendix provides a more detailed discussion of the quantitative aspects of bond valuation. The discussion then moves on to derivative products in Chapter 5.

The second part of this book starts with Chapter 6, with a discussion of the various operations associated with the treasury. Because much of what the treasury does involves considerations of risk, that is exactly what Chapter 7 starts to consider with a discussion of the various types of risk, in particular market risk and how to assess their potential impact. Chapter 8 then moves on to a discussion of RMB payment and settlement systems as part of the development of Hong Kong as an offshore RMB centre, which are critical to managing treasury operational risks.

The final chapter in this book brings the discussion to a practical conclusion by considering a series of case studies to illustrate how weaknesses in treasury control can result in significant financial loss to financial institutions.

This book includes detailed explanations, summaries, tables, and charts to help industry professionals develop a sound theoretical framework for their work in the field. Both students and working professionals can benefit from this detailed work, produced in collaboration with some of Hong Kong's most prominent professionals. Aimed at banking practitioners and designed as an essential tool to achieve learning outcomes, this book includes recommendations for additional readings. This textbook should be used in conjunction with related regulatory documents published by the BIS, HKMA and other institutions, some of which are referenced in the text. A list of further readings at the end of each chapter will help readers expand their knowledge of each subject while supplementary readings can help readers dig deeper into specific areas. Essential readings will occasionally be highlighted and these are important for students preparing for the examinations leading to the Associate of the Hong Kong Institute of Bankers designation (AHKIB).

The information resources in the collection of Hong Kong Monetary Authority publications provided essential references in developing much of the book. The preparation of this work would not have been possible without the support and assistance of a number of subject expert advisors. We would like to extend our sincere thanks to Mr. Peter Wong Wai Man for his valuable insight and review on the syllabus and content of this book. Mr. Wong is also the Executive Board Member of the Treasury Markets Association. There are many others whose generous advice, support and encouragement have contributed to the development of the book. The Hong Kong Institute of Bankers and future banking professionals are indebted to all of them.

The Hong Kong Institute of Bankers

PART 1TREASURY MANAGEMENT

CHAPTER 1Treasury Management of Financial Institutions

  Learning  objectives  

After studying this chapter, you should be able to:

Understand the role the treasury plays in financial institutions including those of the front office, middle office, and back office.

Discuss treasury issues such as management of the balance sheet, liquidity risk, settlement and pre-settlement credit risk, interest rate risk, and foreign exchange exposure.

Understand the implications of the Basel III accords on asset and liability management.

Describe the controls and measures in treasury management to protect against overexposure, errors, and fraud, manage conflicts of interest, and other issues.

Introduction

Among companies in general, the corporate treasury department makes sure there is sufficient cash at all times to meet the operational needs of the business. Treasury also takes charge of cash forecasting, working capital management, cash management, investment management, treasury risk management, and fund-raising.

Treasury in financial institutions functions the same way—with one important addition. In institutions where investment banking is a key activity, treasury also participates in the foreign exchange, loans and deposits, debt securities, commodity products, and their derivative instruments on behalf of the bank and the bank’s clients.