The Banking Tutor

Bank Financial Management

Module C – Treasury Management

001. Conventionally, Treasury function was confined to funds

management maintaining adequate cash balance to meet day-to-day
requirements, deploying surplus funds generated from operations and
sourcing funds to bridge occasional gaps in cash flow.

002. Treasury Management includes a firm's collections, disbursements,

concentration, investment and funding activities. In larger firms, it may
also include financial risk management. Most banks have whole
departments devoted to treasury management and supporting their
clients' needs in this area.

003. Cash management is the process that involves collecting and

managing cash flows from the operating, investing, and financing
activities of a company. In business, it is a key aspect of an organization's
financial stability. ... Banks are typically a primary financial service provider.

004. Cash Management Vs. Treasury Management

Treasury Management. Though these terms are used interchangeably, the

scope of Treasury Management is much larger and includes a company's
funding and investment activities. In contrast, Cash Management usually
refers to wire transfers, sweep accounts, merchant services, and business
credit options.

005. Treasury plays an active role in ALM (Asset Liability Management).

006. Integrated treasury is a holistic approach to funding the balance sheet

and deployment of funds across the domestic as well as global money and
forex markets. This approach enables the bank to optimize its asset-
liability management and also capitalize on arbitrage opportunities.

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007. Traditionally, the forex dealing room of a bank managed the foreign
exchange dealings mainly arising out of merchant trans-actions (forex
buying from and selling to customers) and conse-quent cover operations
in interbank market. The domestic trea-sury/investment operations were
independent of forex dealings of a bank.

008. The treasury operations were treated as a cost center, specifically

devoted to reserve management (CRR and SLR) and consequent fund
management. The treasury also undertook in-vestment in Government
and non-government securities.

009. The need for integration of forex dealings and domestic treasury
operations has arisen on account of interest rate deregulations,
liberalization of exchange control, development of forex market,
introduction of derivative products and technological advance-ment in
settlement systems and dealing environment.

010. Driving forces of Integrated Treasury are (1) Integrated Cash Flow
Management; (2) Interest Arbitrage (3) Access to Global resources (4)
Corporate demand for high end services, and (5) Risk Management.

011. The integrated treasury performs not only the traditional roles of
forex dealing room and treasury unit but also many other functions.
Functions of Integrated Treasury:

(a) Reserve Management and Investment

(b) Liquidity and Funds Management
( c) Asset Liability Management (ALM)
(d) Risk Management
( e) Transfer Pricing
(f) Derivative Products
(g) Arbitrage
(h) Capital Adequacy:

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012. Reserve Management and Investment involves:

(i) Meet-ing CRR/SLR obligations,

(ii) Having an approximate mix of investment portfolio to optimize yield

and duration. Duration analysis is used as a tool to monitor the price
sensitivity of an investment instrument to interest rate changes.

013. Liquidity and Funds Management involves:

(i) Analysing of major cash flows arising out of asset-liability transactions,

(ii) Providing a balanced and well-diversified liability base to fund the

various assets in the balance sheet of the bank, and

(iii) Providing policy inputs to the strategic planning group of the bank on
funding mix (currency, tenor and cost) and yield expected in credit and
investment.

014. Asset Liability Management (ALM) calls for determining the optimal
size and growth rate of the balance sheet and also price the assets and
liabilities in accordance with prescribed guidelines.

015. Risk Management - Integrated treasury manages all market risks

associated with a bank’s liabilities and assets. The market risk of liabilities
pertains to floating interest rate risks and asset and liability mismatches.

016. Market risk for assets can arise from:

(i) Unfavourable change in interest rates,

(ii) Increasing levels of disintermediation,
(iii) Securitization of assets, and
(iv) Emergence of credit derivatives, etc.

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017. While the credit risk assessment continues to be in the domain of
Credit Department, the treasury would monitor the cash inflow impact
from changes in asset prices due to interest rate changes by adhering to
prudential exposure limits.

018. Transfer Pricing - The treasury has to ensure that the funds of the
bank are deployed optimally, without sacrificing yield or liquidity. An
integrated treasury unit has an idea of the bank/s overall funding needs
as well as direct access to various markets (like money market, capital
market, forex market, credit market). Hence, ideally the treasury should
provide benchmark rates, after assuming market risk, to various business
groups and product categories about the correct business strategy to
adopt.

019. Derivative Products - The treasury can develop Interest Rate Swap
(IRS) and other rupee based/cross-currency deriva-tive products for
hedging bank’s own exposures and also sell such products to
customers/other banks.

020.Arbitrage - Treasury units of banks undertake arbitrage by

simultaneous buying and selling of the same type of assets in two different
markets in order to make profit less risk/y.

021. Capital Adequacy - This function focuses on quality of assets, with

Return on Assets (ROA) being a key criterion for measuring the efficiency
of deployed fund.

022. Proprietary Position is also known as “ Proprietary trading" or

"prop trading," this type of trading activity occurs when a financial firm
chooses to profit from market activities rather than thin-margin
commissions obtained through client trading activity. Proprietary trading
may involve the trading of stocks, bonds, commodities, currencies or other
instruments.

023. Nature of Integration - To start with, there is geographical and

infrastructural integration.

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024. Under horizontal integration the dealing/trading rooms engaged in
the same trading activity are brought under the same policies, hierarchy,
technological and accounting platform.

025. In vertical integration all existing and diverse trading and arbitrage
activities are brought under one control with common pool of funding
and contribu-tions. The impact of transactions of all units on rupee funds
is merged. There is computerized linking of transactions.

026. Independent Forex Role, Investment Treasury Role and Integrated

Role

The basic objective of integration is to improve portfolio profitability,

risk-insulation and synergize banking assets with trading assets.

Banking assets are held basically for client relationship/ steady

income/statutory obligations and are generally held till maturity, whereas
trading assets are held primarily for generating profits on short-term
differences in prices/yields.

The purpose is achieved through efficient utilization of funds, cost

effective sourcing of liability, proper transfer pricing, availing arbitrage
opportunities, on-line and off-line exchange of information be-tween the
money and forex dealers, single window service to customers, effective
MIS, improved internal control, minimiza-tion of risks and better
regulatory compliance.

An integrated treasury acts as a center of arbitrage and hedging activities.

It seeks to maximize its currency portfolio and free transfer of funds from
one currency to another in order to remain a proactive profit center. With
phased liberalization on capital account convertibil-ity, there will be scope
for banks with integrated treasury to structure multi-currency balance
sheets and take advantage of strategic positioning.

027. Globalisation is the principal factor contributing to integration of

treasury activity.

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028. Globalisation refers to interaction between domestic and global
markets.

029. Globalisation may be defined as “the process on integrating

domestic market with global market, characterised by free capital flow and
minimum regulatory intervention.”

030. Funds flow on capital account may take one or more of the following
routes.

Portfolio investment
Direct investment
External Commercial Borrowings
Issue of Equity/Debt in Global Markets
Mergers & Acquisitions involving domestic and foreign entities.
Payment for technology transfer, royalties, financial services etc.

031. Funds flow on capital account involve payment of or receipt of

interest, fee, dividends and repatriation of capital denominated in foreign
currency . All these known as transfer of savings.

032. Impact of Globalisation is three fold –

(i) interest rates are influenced by global trends.

(ii) New institutional structure consisting regulatory agencies like SEBI on
one hand and public/private institutions like CCIL and Credit Rating
Agencies have come into existence.
(iii) The range of products offered by Treasury have widened with
innovative product structure.

033. An integrated treasury is a major profit center. It has its own P and
L measurement. It undertakes exposures through proprietary trading
(deals done to make profits out of movements in market
interest/exchange rates) that may not be required for general banking.

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034. Conventional Sources of Treasury Profits are

(i) Foreign Exchange Business

(ii) Money Market Deals
(iii) Investment Activity

035. Contemporary Sources of Treasury Profits are

(i) Interest Arbitrage

(ii) Trading

036. Difference between ‘Buy’ and ‘Sell’ rates is known as ‘Spread”.

037. Any residual position of a Bank at the end of day overbought or over
sold – is known as ‘Open” position, which involves exchange risk.

038. Trading (related to Treasury) is a speculative activity.

039. While trading in Currencies and securities, Treasuries are open to

market risk, or price risk.

040. Transfer Pricing is an accounting practice that represents the price

that one division in a company charges another division for goods and
services provided.

041. A Dealing Room is a centralised establishment, usually of a

commercial bank, which is willing to make/offer a two way dealing price
for different currencies at all times, even when they may not wish to deal,
but all during prescribed business hours.

042. A Securities Market is a system of interconnection between all

participants (professional and nonprofessional) that provides effective
conditions: to attract new capital by means of issuing new security
(securitization of debt) to transfer real asset into financial asset.

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043. Securities are negotiable financial instruments issued by a company
or government that give ownership rights, debt rights, or rights to buy,
sell, or trade an option.

044. The Primary Market is where securities are created, while the
secondary market is where those securities are traded by investors. In the
primary market, companies sell new stocks and bonds to the public for the
first time, such as with an initial public offering (IPO).

045. The Secondary Market is where investors buy and sell securities they
already own. It is what most people typically think of as the "stock market,"
though stocks are also sold on the primary market when they are first
issued.

046. The Middle Office (Mid-office) supports the front office by

processing transactions negotiated by the front office personnel to ensure
that transactions are booked and fulfilled appropriately. Other functions
performed by the middle office include risk management, information
technology, accounting, and legal support.

047. Treasury and Finance - The main difference between treasury

management and financial management lies in their level of activity. The
financial management focuses on the long-term and strategic
investments, but when it comes to treasury management, the focus is on
short-term and day to day monitoring of the investments.

048. Investment Department will deal in primary issues. It also serves

governments, corporations, and institutions by providing underwriting
capital raising.

049. Treasury will maintain (a) ALM Book (b) Merchant Book and (c )
Trading Book, according to its role in balance sheet management,
merchant services and trading, across the currency and security markets.

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050. Arbitrage is an investing strategy in which people aim to profit from
varying prices for the same asset in different markets. Quick-thinking
traders have always taken advantage of arbitrage opportunities in
markets.

051. Arbitrage is the process of simultaneous buying and selling of an

asset from different platforms, exchanges or locations to cash in on the
price difference (usually small in percentage terms). While getting into an
arbitrage trade, the quantity of the underlying asset bought and sold
should be the same. Only the price difference is captured as the net pay-
off from the trade.

052. Derivatives are financial instruments that have values tied to other
assets like stocks, bonds, or futures.

053. Hedging is a type of investment strategy intended to protect a

position from losses.

054. A put option is an example of a derivative that is often used to hedge

or protect an investment.

055. An emerging market (or an emerging country or an emerging

economy) is a market that has some characteristics of a developed market,
but does not fully meet its standards. This includes markets that may
become developed markets in the future or were in the past. The term
"frontier market" is used for developing countries with smaller, riskier, or
more illiquid capital markets than "emerging".

056. Emerging markets are the markets of developing countries that are
rapidly growing and industrializing.

057. Emerging markets are nations that are investing in more productive
capacity. They are moving away from their traditional economies that
have relied on agriculture and the export of raw materials. Leaders of
developing countries want to create a better quality of life for their people.
They are rapidly industrializing and adopting a free market or mixed
economy.

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058. Leverage is an investment strategy of using borrowed money—
specifically, the use of various financial instruments or borrowed capital—
to increase the potential return of an investment. Leverage can also refer
to the amount of debt a firm uses to finance assets.

059. Leverage is a trading mechanism investors can use to increase their

exposure to the market by allowing them to pay less than the full amount
of the investment. Consequently using leverage in a stock transaction,
allows a trader to take on a greater position in a stock without having to
pay the full purchase price.

060. Trading assets are a collection of securities held by a firm for the
purpose of reselling for a profit.

061. Speculation refers to the act of conducting a financial transaction

that has substantial risk of losing value but also holds the expectation of
a significant gain.

062. A Credit Default Swap (CDS) is a financial derivative or contract that

allows an investor to "swap" or offset his or her credit risk with that of
another investor. For example, if a lender is worried that a borrower is
going to default on a loan, the lender could use a CDS to offset or swap
that risk.

063. Demat Account is short for dematerialisation account and makes the
process of holding investments like shares, bonds, government securities,
Mutual Funds, Insurance and ETFs easier, doing away the hassles of
physical handling and maintenance of paper shares and related
documents.

064. An Over-The-Counter (OTC) market is a decentralized market in

which market participants trade stocks, commodities, currencies, or other
instruments directly between two parties and without a central exchange
or broker.

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065. A Futures Market is an auction market in which participants buy and
sell commodity and futures contracts for delivery on a specified future
date. Futures are exchange-traded derivatives contracts that lock in future
delivery of a commodity or security at a price set today.

066. A Spot Trade, also known as a spot transaction, refers to the

purchase or sale of a foreign currency, financial instrument, or commodity
for instant delivery on a specified spot date. ... In a foreign exchange spot
trade, the exchange rate on which the transaction is based is referred to
as the spot exchange rate.

067. A Forward Market is an over-the-counter marketplace that sets the

price of a financial instrument or asset for future delivery. Forward markets
are used for trading a range of instruments, but the term is primarily used
with reference to the foreign exchange market.

068. A Forward Rate is the settlement price of a transaction that will not
take place until a predetermined date; it is forward-looking.

069. A Swap is an agreement for a financial exchange in which one of the

two parties promises to make, with an established frequency, a series of
payments, in exchange for receiving another set of payments from the
other party. These flows normally respond to interest payments based on
the nominal amount of the swap.

070. Call Money is a facility under which banks borrow money from each
other to maintain CRR at rate of interest known as Call Rate. This rate
keeps on changing from day to day and sometimes from hour to hour.

071. Notice Money refers to the borrowing and lending of funds for 2-14
days. Term money refers to borrowing and lending of funds for a period
of more than 14 days.

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072. Term Money refers to borrowing/lending of funds for period
between 15 days and one year. Scheduled commercial banks (excluding
RRBs), co-operative banks (other than Land Development Banks) and
Primary Dealers (PDs), are permitted to participate in call/notice money
market both as borrowers and lenders.

073. Treasury Bills (or T-bills) are short-term securities that mature in
one year or less from their issue date. T-bills are purchased for a price less
than or equal to their par (face) value, and when they mature, Treasury
pays their par value.

074. Cash Management Bill (CMB) is a short-term security sold by the

U.S. Department of the Treasury. The money raised through these issues
is used by the Treasury to meet any temporary cash shortfalls and provide
emergency funding.

075. Commercial Paper is a money-market security issued by large

corporations to obtain funds to meet short-term debt obligations (for
example, payroll) and is backed only by an issuing bank or company
promise to pay the face amount on the maturity date specified on the
note.

076. A Certificate of Deposit (CD) is a product offered by banks and credit

unions that provides an interest rate premium in exchange for the
customer agreeing to leave a lump-sum deposit untouched for a
predetermined period of time.

077. A Repurchase Agreement (Repo) is a form of short-term borrowing

for dealers in government securities. ... Repos are typically used to raise
short-term capital. They are also a common tool of central bank open
market operations.

078. Liquidity Adjustment Facility (LAF) - It is short term loan that RBI
allows to a commercial bank to cover the short term liquidity problem. It
is through repo-reverse repo mechanism.

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079. Marginal standing facility (MSF) is a window for banks to borrow
from the Reserve Bank of India in an emergency when inter-bank liquidity
dries up completely.

080. CBLO (Collateralised Borrowing & Lending Obligations ) is a money

market instrument that represents an obligation between a borrower and
a lender. These instruments are operated by the Clearing Corporation of
India Ltd. The instrument works like a bond where the lender buys the
CBLO and a borrower sells the money market instrument with interest.

081. The borrowing and lending of Collateralised Borrowing & Lending

Obligations are collateralized which means they are secured using G-Sec
or T-Bills.

082. Foreign Institutional Investment (FII) denotes all those investors

or investment companies that are not located within the territory of the
country in which they are investing. “SEBI's definition of FIIs presently
includes foreign pension funds, mutual funds, charitable /endowment/
university funds etc.

083. Overseas Direct Investment or ODI stands for investments, by way

of contribution to the capital or subscription to the memorandum of a
foreign entity, or by way of purchase of existing shares of a foreign entity,
either by market purchase or private placement or through stock
exchange, but does not include Portfolio.

084. The External Commercial Borrowings or ECBs is the financial

instrument used to borrow money from the foreign sources of financing
to invest in the commercial activities of the domestic country. ... External
commercial borrowings cannot be used for the investments in a stock
market or any speculation business.

085. ADR and GDR are commonly used by Indian companies in order to
raise accurate funds from the foreign capital market. ADR is traded on US
stock exchanges, while GDR is traded on the European stock exchanges.
The full form of both is American Depository Receipts and Global
Depository Receipts respectively.

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086. Money Market refers to the financial market where financial
instruments with high liquidity and short-term maturities are traded.

087. Exchange Earners' Foreign Currency Account (EEFC) is an account

maintained in foreign currency with an Authorised Dealer Category - I
bank i.e. a bank authorized to deal in foreign exchange.

088. Gilts are securities issued by Government and which do ot have any
credit risk.

089. A Benchmark Rate is the standard rate used widely for other for
settling financial obligations. Interest rate benchmark means the rate that
is used as a standard or base to pay interest rate for deposits and loans.

090. Reserve Bank of India offers Subsidiary General Ledger Account

(SGL) facility to select entities who can maintain their securities in SGL
accounts maintained with the Public Debt Offices of the Reserve Bank of
India. This facilitates trading of Government securities on the stock
exchanges.

091. Credit Rating is an analysis of the credit risks associated with a

financial instrument or a financial entity. These ratings based on detailed
analysis are published by various credit rating agencies like Standard &
Poor's, Moody's Investors Service, ICRA etc.

092. A Counterparty is the other party that participates in a financial

transaction, and every transaction must have a counterparty in order for
the transaction to go through.

093. Yield is the income returned on an investment, such as the interest

received from holding a security. The yield is usually expressed as an
annual percentage rate based on the investment's cost, current market
value, or face value.

094. In a rising interest rate scenario, the risk of erosion of NII (Net Interest
Income) is on account of deposits with floating rates and advances with
fixed rates.

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095. Convertible Bond: A bond giving the investor the option to convert
the bond into equity at a fixed conversion price.

096. Marking to Market Mark to market (MTM) is a method of measuring

the fair value of accounts that can fluctuate over time, such as assets and
liabilities. Mark to market aims to provide a realistic appraisal of an
institution's or company's current financial situation based on current
market conditions.

In trading and investing, certain securities, such as futures and mutual

funds, are also marked to market to show the current market value of
these investments.

Mark to market can present a more accurate figure for the current value
of a company's assets, based on what the company might receive in
exchange for the asset under current market conditions.

097. Systematic Risk ( “Systematic Risk” is different from “Systemic

Risk”) –
Systematic risk refers to the risk inherent to the entire market.
Systematic risk, also known as “undiversifiable risk,” “volatility” or
“market risk,” affects the overall market, not just a particular stock or
industry. This type of risk is both unpredictable and impossible to
completely avoid. It cannot be mitigated through diversification, only
through hedging or by using the correct asset allocation strategy.

Systemic Risk is the possibility that an event at the company level could
trigger severe instability or collapse an entire industry or economy.
Systemic risk was a major contributor to the financial crisis of 2008.
Companies considered to be a systemic risk are called "too big to fail." (
“Systemic Risk” is different from “Systematic Risk”).

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Systematic Risk Versus Systemic Risk

Systemic Risk describes an event that can spark a major collapse in a

specific industry or the broader economy.

Systematic Risk is the pervasive, far-reaching, perpetual market risk that

reflects a variety of troubling factors.

098. International Current Accounts : Types of Accounts:

Nostro Accounts - Nostro is an Italian word. “Our account with you”. It's a
foreign currency account. Say Canara Bank is maintaining account with Citi
Bank, New York.

Vostro Accounts - “Your account with us” Rupee account of a foreign bank
in India. Say Citi Bank, New York with SBI, India.

Loro account - “Their Account with you......” Account of a third bank

abroad. say Canara Bank has an account with Citi Bank, New York &
another Indian Bank wants to refer to that account, say BOI.

099. CRR. CRR (Cash Reserve Ratio) - Scheduled Commercial Banks are
required to maintain CRR as per section 42(1) of RBI Act.

Banks are required to maintain certain percentage of Net Demand & Time
Liabilities as cash with RBI as on the last Friday of the second preceding
fortnight. RBI will not pay any interest on the CRR balances.

If a bank fails to maintain 95% of required balance with RBI on any day of
the fortnight, RBI will charge penal interest for that day at the rate of three
per cent per annum above the bank rate on the amount of shortfall. If the
shortfall continues on the next succeeding day/s, penal interest will be
recovered at a rate of five per cent per annum above the bank rate.

Reserve Bank of India has prescribed statutory returns i.e. Form A return
(for CRR) under Section 42 (2) of the RBI, Act, 1934 to be sent fortnightly.

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100. SLR - Statutory Liquidity Ratio is maintained as per section 24 of
Banking Regulation Act.

RBI is free to fix minimum SLR. However, it can be increased to maximum

of 40% of NDTL.

SLR can be kept in the form of (a) cash (b) gold valued at a price not
exceeding the current market price, (c) unencumbered approved securities
valued at a price as specified by the RBI from time to time (d) cash balance
with other banks (e) excess cash balance with RBI. Cash management bill
issued by Government of India will be treated as Government of India T
Bills and accordingly shall be treated as SLR securities.

For calculation of SLR, banks are required to send monthly statement on

Form VIII under Section 24 of the B R Act.

If a bank fails to maintain SLR on any day of the fortnight, RBI will charge
penal interest for that day at the rate of three per cent per annum above
the bank rate on the amount of shortfall. If the shortfall continues on the
next succeeding day/s, penal interest will be recovered at a rate of five per
cent per annum above the bank rate.

101. “RTGS" stands for Real Time Gross Settlement. RTGS system is a funds
transfer mechanism where transfer of money takes place from one bank
to another on a "real time" and on "gross" basis. This is the fastest possible
money transfer system through the banking channel. Settlement in "real
time" means payment transaction is not subjected to any waiting period.
The transactions are settled as soon as they are processed. "Gross
settlement" means the transaction is settled on one to one basis without
bunching with any other transaction. Considering that money transfer
takes place in the books of the Reserve Bank of India, the payment is taken
as final and irrevocable.

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102. Difference between RTGS and National Electronics Funds Transfer
System (NEFT) - NEFT is also an electronic fund transfer system that
operate on a deferred net settlement (DNS) basis which settles
transactions in batches. In DNS, the settlement takes place at a particular
point of time. All transactions are. held up till that time. For example, NEFT
settlement takes place 11 times a day during the week days and 5 times
during Saturdays. Any transaction initiated after a designated settlement
time would have to wait till the next designated settlement time. In RTGS,
transactions are processed continuously throughout the RTGS business
hours.

103. The Negotiated Dealing System, or NDS, is an electronic trading

platform operated by the Reserve Bank of India to facilitate the issuing
and exchange of government securities and other types of money market
instruments.

104. Asian Clearing Union (ACU) is a payment arrangement whereby the

participants settle payments for intra-regional transactions among the
participating central banks on a net multilateral basis.

105. The Asian Monetary Units (AMUs) is the common unit of account of
ACU and is denominated as 'ACU Dollar', 'ACU Euro' and 'ACU Yen', which
is equivalent in value to one US Dollar, one Euro and one Japanese Yen
respectively. All instruments of payments under ACU have to be
denominated in AMUs.

106. An offshore bank is a bank located outside the country of residence

of the depositor, typically in a low tax jurisdiction (or tax haven) that
provides financial and legal advantages. These advantages typically
include: ... Low or no taxation (i.e., Tax havens). Easy access to deposits (at
least in terms of regulation).

107. An off-shore banking unit (OBU) is a bank shell branch, located in

another international financial center. For instance, a London-based bank
with a branch located in Delhi. Offshore banking units make loans in the
Eurocurrency market when they accept deposits from foreign banks and
other OBUs.

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108. The SWIFT code is an 8 or 11 alphanumeric characters code that
uniquely identifies financial institution throughout the world. SWIFT
stands for ‘Society for Worldwide Interbank Financial Telecommunication’.
SWIFT Code is also known as BIC (Business Identifier) Codes; SWIFT-BIC
and ISO 9362. Headquarters of SWIFT is located in La Hulpe, Belgium.

109. Anonymous trading occurs when high profile investors execute

trades that are visible in an order book but do not reveal their identity.
While most traders trade non-anonymously, there are several reasons that
larger traders prefer to keep their participation in a market a secret.

110. Delivery versus payment (DVP) is a securities industry settlement

method that guarantees the transfer of securities only happens after
payment has been made. DVP stipulates that the buyer's cash payment
for securities must be made prior to or at the same time as the delivery of
the security.

111. NSDL & CSDL facilitate DVP for Secondary market deals in equity and
debt paper.

112. NSDL (National Securities Depository Limited) is an Indian central

securities depository and a division of the Securities and Exchange Board
of India, It was established in August 1996 as the first electronic securities
depository in India with national coverage.

113. CSDL (Central Depository Services Ltd) is the first listed Indian central
securities depository and a division of the Securities and Exchange Board
of India.

114. The term broad money is known as M3. Broad Money (M3) = M2 +
Term Deposits of residents with a contractual maturity of over one year
with the Banking System + Call/Term borrowings from 'Non-depository'
financial corporations by the Banking System.

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115. The Fixed Income Money Market and Derivatives Association of India
(FIMMDA) is an association of banks, public financial institutions, primary
dealers and insurance companies.

116. Macro Hedge is designed to eliminate or reduce economic risk of an

entire entity or portfolio with offsetting futures contracts.

117. For ensuring effective risk control RBI expects banks to segregate
functions between Front Office, Mid Office and Back Office.

118. Market Risk is important one in Treasury.

119. Intra-day Limit; Over night open position limit and Stop Loss limits
are meant for controlling Risks.

120. VaR (Vale at Risk) is a measure to capture probable loss in a portfolio

within a time horizon at a given confidence level.

121. Yield and Price of Bond move in inverse proportion.

122. Yield Curve is a line where yields of risk-free securities for different
maturities at a given point of time are graphically plotted.

123. Volatility refers to degree of fluctuation of markets.

124. Options refer to contracts where the buyer of an option has a right
but no obligation.

125. The moneyness of an option contract is a classification method

wherein each option (strike) gets classified as either – In the money (ITM),
At the money (ATM), or Out of the money (OTM) option.

126. At the money (ATM) is a situation where an option's strike price is

identical to the current market price of the underlying security.

127. A call option is said to be in ITM if the strike price is less than the
current spot price of the security.

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128. A call option is said to be in OTM if the strike price is more than the
current spot price of the security.

129. A currency swap is an agreement in which two parties exchange the

principal amount of a loan and the interest in one currency for the
principal and interest in another currency. At the inception of the swap,
the equivalent principal amounts are exchanged at the spot rate.

130. Financial Benchmark India Pvt. Ltd (FBIL) is an entity jointly

created by the financial benchmark administrators – FIMMDA and FEDAI
and the IBA to administer financial benchmarks. It is owned by three
organizations: FIMMDA (76%) FEDAI (14%) and IBA (10%).

The FBIL was formed in December 2014 as a private limited company

under the Companies Act 2013. FBIL is regulated by Reserve Bank of India,
the central bank of the country, for the activities of administering specific
benchmarks.

Its objective is to develop and administer India’s benchmarks relating to:

Money Market,
Government Securities and
Foreign Exchange Market

131. An embedded option is a provision in a financial security (typically

in bonds) that provides an issuer or holder of the security a certain right
but not an obligation to perform some actions at some point in the future.
The embedded options exist only as a component of financial security
such as a bond or stock and cannot be separated from it. Although
embedded options can be attached to any financial security, they are
mostly included in bonds.

132. Plain Vanilla type Swap - a Currency and Interest Rate Swaps with
basic structure, without inbuilt options or knock-out levels.

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133. Balance Sheet Management means managing the market risk
inherent in the assets and liabilities of a Bank.

134. The Value of Derivative is determined by the value of the underlying

asset.

135. In OTC Derivatives, counterparty risk is prominent, whereas in

exchange traded derivatives, Counterparty risk is totally absent.

136. In case of free currencies, forward premium or discount is exactly

equal to the difference between Risk-free interest rates of the two
currencies.

137. In India Market for Currency Futures commenced in August 2008.

138. A Credit Derivative is a financial contract in which the underlying is

a credit asset (debt or fixed-income instrument). The purpose of a credit
derivative is to transfer credit risk (and all or part of the income stream in
relation to the borrower) without transferring the asset itself.

139. Market Maker refers to a firm or individual who actively quotes two-
sided markets in a particular security, providing bids and offers (known as
asks) along with the market size of each. Market makers provide liquidity
and depth to markets and profit from the difference in the bid-ask spread.
They may also make trades for their own accounts, which are known as
principal trades.

140. Run on the bank mean when a large number of customers of a bank
or other financial institution withdraw their deposits simultaneously over
concerns of the bank's solvency. As more people withdraw their funds, the
probability of default increases, prompting more people to withdraw their
deposits.

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141. Liquefiable Security or a Liquid Asset is an asset that can easily be
converted into cash in a short amount of time. Liquid assets include things
like cash, money market instruments, and marketable securities. ... For the
purposes of financial accounting, a company's liquid assets are reported
on its balance sheet as current assets

142. Sensitivity Ratio is Ratio of interest rate sensitive assets to rate

sensitive liabilities.

143. Risk Appetite is the capacity and willingness to absorb losses on

account of market risk.

144. A Special Purpose Vehicle (SPV) is a subsidiary company that is

formed to undertake a specific business purpose or activity. SPVs are
commonly utilized in certain structured finance applications, such as asset
securitization, joint ventures, property deals, or to isolate parent company
assets, operations, or risks.

145. A Self-Regulatory Organization (SRO) is an entity such as a non-

governmental organization, which has the power to create and enforce
stand-alone industry and professional regulations and standards on its
own. In the case of financial SROs, such as a stock exchange, the priority
is to protect investors by establishing rules, regulations, and set standards
of procedures that promote ethics, equality, and professionalism. FIMMDA
and FEDAI are SROs.

146. A credit default swap (CDS) is a type of credit derivative that provides
the buyer with protection against default. ... The buyer of a CDS makes
periodic payments to the seller until the credit maturity date.

147. Credit Default Swap Spread - The "spread" of a CDS is the annual
amount the protection buyer must pay the protection seller over the
length of the contract, expressed as a percentage of the notional amount.

148. Liquidity Risk is reflected as maturity mis-match which is the gap in

cash inflow and cash outflow.

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149. The ISDA Master Agreement is an internationally agreed document
published by the International Swaps and Derivatives Association, Inc.
(“ISDA”) which is used to provide certain legal and credit protection for
parties who enter into over-the-counter or “OTC” derivatives transactions.

150. Credit Derivatives segregate the credit risk from the assets through
credit default swaps for a fee.

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