Amity Campus

Uttar Pradesh
India 201303

ASSIGNMENTS
PROGRAM: MFC
SEMESTER-IV
Subject Name : Treasury Management
Study COUNTRY :Somalia
Roll Number (Reg.No.) : MFC001512014-2016073
Student Name :JAMA ABDI BULSHALE

INSTRUCTIONS
a) Students are required to submit all three assignment sets.

ASSIGNMENT DETAILS MARKS

Assignment A Five Subjective Questions 10
Assignment B Three Subjective Questions + Case 10
Study
Assignment C Objective or one line Questions 10

b) Total weightage given to these assignments is 30%. OR 30 Marks

c) All assignments are to be completed as typed in word/pdf.
d) All questions are required to be attempted.
e) All the three assignments are to be completed by due dates and need
to be submitted for evaluation by Amity University.
f) The students have to attached a scan signature in the form.

Signature : ____________ _______

Date : _________30/04/2016______________

( √ ) Tick mark in front of the assignments submitted

Assignment Assignment Assignment ‘C’
‘A’ ‘B’

ASSIGNMENT A

Q1 Answers:
A. Treasury Management: it includes 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.
Mostly larger banks have whole departments devoted to treasury management and
supporting their clients' needs in this area. Until recently, larger 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.
B. Treasury Responsibilities: In today's highly competitive environment, the
treasury plays a vital role in the viability and success of a bank and calls for
effective internal and external interface. It performs a myriad of functions such as
balance sheet management, liquidity management, reserves management, funds
management, investments, managing capital adequacy, transfer pricing,
technology and operations, risk management, trading activities and offering hedge
products. It has to work on arriving at an optimal size of the balance sheet,
interface with various liability and asset groups internally, give correct pricing
signals keeping in mind the liquidity profile of the bank. On the external front it
has to provide active trading support to the market, make two-way prices, add to
the liquidity and continuously strive to provide the customers with value-added
solutions to their specific financial needs.

Q2 Answers
A. The role of information technology in treasury management: The treasurer
requires information that is not normally available through a company‘s standard
accounting systems, or even from its enterprise resources planning (ERP) systems.
Even though an ERP system is designed to aggregate all of the information used in
a modern corporation, the treasurer also requires information from a variety of
external sources regarding investments, foreign exchange positions, interest rates,
and so forth. Consequently, treasury systems are needed that integrate
information from a variety of sources, yielding real - time information that the
treasury staff can use to efficiently perform their tasks.
Furthermore, the treasurer is in the difficult position of requiring information from
many sources, most of which are not required by any other company manager.
Since treasury is a relatively small department that may not command the
resources of larger departments, it can be difficult to collect all of the required
information. Consequently, the treasurer must frequently prioritize information
needs. While priorities may vary by company, the following list establishes a
reasonable set of priorities, in declining order:
a. Cash position. The treasurer‘s overriding obligation is to ensure that the
company has adequate cash to fund its operations.
b. Foreign exchange transactions. Some companies have so little foreign business
that foreign exchange transactions are negligible, but larger firms with
established treasury operations will likely need the ongoing purchase and sale
of multiple currencies.
c. Hedging. For those companies that elect to hedge their interest rates or foreign
exchange positions.
In all cases, transactions generated by the treasury system should automatically
create accounting entries that are interfaced directly into the corporate general
ledger.
In addition to these three core areas, the treasurer also needs a reporting system
that reveals the global cash position, investment portfolio, debt portfolio, cash
forecast, and foreign exchange transactions. The system should also provide mark -
to - market valuations, scenario analysis, and counterparty risk summaries. This
information can be presented through a customized online dashboard that is
updated in real time.
The treasurer‘s technology needs also extend to the efficiency of and control over
treasury activities.
B. Future trend of IT applications in Banks for improving Treasury operations:
Over the past two to three years, just about all corporate that required specialized
applications to support their treasury operations have implemented such systems
and are unlikely to change their technology infrastructure - unless a practical
advantage from a business point of view can be achieved. There are two such
benefits that are attracting the attention of decision makers from a treasury
perspective: (1) global visibility of funds and (2) new efficiencies in multi-banking
relationships, which have become possible due to two current trends: enterprise
application integration (EAI) and standardization. In addition, these trends have
been accelerated by a convergence of the system provider (treasury and banking
and ERP) market.
Treasury departments have increasingly been moving toward the centre of the
financial supply chain. Corporate rely on their treasurers to make informed
decisions with regard to working capital management and risk exposure. Due to the
almost ubiquitous availability of treasury and ERP systems, the trend of increased
EAI is beginning to deliver benefits to the business by integrating information that
was always available in the treasury management system (TMS) with figures from
the accounts payable (A/P) and accounts receivable (A/R) data.

The current trend is for treasury system providers to deliver more value to their
client base by allowing ready-made integration with products from their indirect
competitors (i.e. ERP system providers). Extended functionality is less critical now
and the key need is the ability to integrate all necessary systems from the financial
supply chain into one treasury system that provides treasurers with a complete
overview.

From a business perspective, this trend enables a treasury department - be it a

global shared service centre or one that is decentralized on a national level - to
have a detailed overview of all positions that impact its working capital
management and other liquidity positions.

Q3 Answers
Different types of netting systems: There are at least three different types of
netting:
Close-out netting: In the counterparty bankruptcy or any other relevant event of
default specified in the relevant agreement if accelerated (i.e. effected), all
transactions or all of a given type are netted (i.e. set off against each other)
at market value or if otherwise specified in the contract or if it is not possible to
obtain a market value at an amount equal to the loss suffered by the non-
defaulting party in replacing the relevant contract. The alternative would allow
the liquidator to choose which contracts to enforce and which not to (and thus
potentially "cherry pick"). There are international jurisdictions where the
enforceability of netting in bankruptcy has not been legally tested.

1. Netting by novation: The legal obligations of the parties to make required

payments under one or more series of related transactions are canceled and a
new obligation to make only the net payments is created.
2. Settlement or payment netting: For cash settled trades, this can be applied
either bilaterally or multilaterally and on related or unrelated transactions.
a. Multilateral Net Settlement System': A settlement system in which each
settling participant settles its own multilateral net settlement position
(typically by means of a single payment or receipt).
b. Bilateral Net Settlement System': A settlement system in which every
individual bilateral combination of participants settles its net settlement
position on a bilateral basis.

Q4 Answers:
A. The role of RBI: Banks perform the role of intermediation in the financial
sector. Thus deposits and other liabilities of various maturities, sizes and prices
(interest rates) are deployed by the- bank in assets of differing maturities, sizes
and prices. This role is facilitated by the status and confidence of depositors that
the banks enjoy as good managers of financial risks, particularly credit risk.
It is easy to see that in the process of intermediation, there can always be some
time lag between the acceptance of liabilities and creation of assets that match
with the liabilities. It may also happen that banks may find attractive avenues for
medium/long-term investments but may not have matching resources or raising
funds for the same may take time. Moreover, depositors may suddenly withdraw
their deposits (prematurely) and borrowers prepay their loans.
All these can result in banks at times carrying surplus funds (surplus in liquidity)
and other times facing funds crunch (deficit in liquidity).
Money market is the place where such monies and assets, typically short term in
nature, are priced and traded.
Money market is a center in which financial institutions congregate for the purpose
of dealing impersonally in monetary assets.
RBI is concerned about the functioning of money market on sound lines as
problems in the money market can escalate into systemic risk and result in huge
losses in the absence of proper supervision and risk management.
RBI regulates the money market, and all money market instruments come under its
regulatory purview. Government of India has delegated powers to
RBI under Section 16 of the Securities Contracts (Regulation) Act, 1956, for
regulating contracts in government securities, money market securities, gold
related securities and derivatives based on these securities, as also ready forward
contracts in all debt securities.
RBI has already announced its intention to make call money market a pure
interbank market with banks and primary dealers as members. The lending by non-
banks in the call money market is being phased out.

B. Guidelines given by RBI for risk management: Regarding the guidelines/self

regulations policies from Reserve Bank of India in respect of risk management,
management of risk should be the primary concern of the top management of
banks.
The boards should clearly articulate risk management policies, procedures,
prudential risk limits, review mechanisms and reporting and auditing systems. The
policies should address the bank's exposure on a consolidated basis, and clearly
articulate the risk management systems that capture all material sources of
market risk and assess the effects on the bank. The operating prudential limits and
the accountability of the line management should also be clearly defined.
The successful implementation of any risk management process has to emanate
from the top management in the bank and its strong commitment to integrate
basic operations and strategic decision making with risk management. Ideally, the
organizational set up for Market Risk Management should be as under:-
(a) The Board of Directors
(b) The Asset-Liability Management Committee (ALCO)
(c) The ALM support Groups/ Market Risk Groups
(d) The Risk Management Committee
(e) The Board of directors should have the overall responsibility for management of
risks. The board should decide the risk management policy of the bank and set
limits for liquidity, interest rate, foreign exchange and equity price risks.

Q5 Answers
A. Integrated Treasury
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 arbitrage opportunities.

Traditionally, the forex dealing room of a bank managed the foreign exchange
dealings mainly arising out of merchant transactions (forex buying from and selling
to customers) and consequent cover operations in interbank market. The domestic
treasury /investment operations were independent of forex dealings of a bank. 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 investment in Government and non-government securities.

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 advancement in settlement systems and dealing environment. The
integrated treasury performs not only the traditional roles of forex dealing room
and treasury unit but also many other functions.
B. Functions of Integrated Treasury: The following are the major functions of the
integrated treasury:
(a) Reserve Management and Investment: It involves:
(i) Meeting 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.
(b) Liquidity and Funds Management: It involves:
(i) Analyzing 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.
(c) Asset Liability Management: ALM calls for determining the optimal size and
growth rate of the balance sheet and also prices the assets and liabilities in
accordance with prescribed guidelines.
(d) 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. Market
risk for assets can arise from:
(i) Unfavorable change in interest rates,
(ii) Increasing levels of disintermediation,
(iii) Securitization of assets, and
(iv) Emergence of credit derivatives, etc.
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.
(e) 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.
(f) Derivative Products: The treasury can develop Interest Rate Swap
(IRS) and other rupee based/cross- currency derivative products for
hedging bank‘s own exposures and also sells such products to customers/ other
banks.
(g) 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.
(h) 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.
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.

ASSIGNMENT B

Q1 Answers
A. Real Time Gross Settlement (RTGS): Real Time Gross Settlement Systems
(RTGS) are mechanisms that enable banks to make large-value payments to one
another in real-time using online telecommunication facilities as well as state-of-
the-art computer systems. The payments are settled on gross basis in real time
thus minimizing the systemic risks that are inherent in large-value net settlement
systems. It is a system that has been launched by the Reserve Bank of India on
March 26, 2004, in Indian financial market, after a comprehensive audit and review
of the software and also after conducting extensive training of users at commercial
banks. RTGS provides for an electronic-based settlement of inter-bank and
customer-based transactions with intra-day collateralized liquidity support from
the RBI to the participants of the system.
RTGS is a system of transferring funds from one Bank/Financial Institution (FI) to
another on an immediate basis. In this system, the inter-bank payment instructions
are processed and settled, transaction-by-transaction, one-by-one, continuously,
i.e., in real time. In other words, these transactions are settled individually
without netting debits against credits.
RTGS system will be fully integrated with the accounting system of the Reserve
Bank of India and other settlement services, such as Deferred Net Settlement
(DNS) systems, the settlement of which would be performed as RTGS transactions
through a facility for Multi Lateral Net Settlement (MLNS) Batch Processing. RTGS
system makes use of the state-of-the-art solution by using INFINET as its secure
communication backbone; it also uses Structured Financial Messaging Solutions
(SFMS) 1 as the secure messaging system, IBM/s S/390 mainframe system as the
robust platform at the back-end for implementation, Quaestor, a product from the
solution developer, Logical India, to be customized and used as the front end for
solution. A MQ Series would act as the gluing interface between the various
components of the solution.
RTGS system has several unique features. It is a single, all-India system, with the
settlement being effected in Mumbai. The payments are settled transaction by
transaction. The settlement of funds is final and irrevocable.
As the settlement is done in real time, funds settled can be further used
immediately. It is a fully secure system which uses digital signatures and PKI-based
encryption, for safe and secure message transmission.
ESSENTIAL COMPONENTS OF RTGS
a. Membership of Indian Financial System Network (INFINET)
b. Establishment of Payments Gat way
c. Branch Connectivity with Payments Gateway
 d. Use of Structured Financial Messaging. System (SFMS) as a Common Message
Format.
e. Use of Electronic Coding and Decoding Technology
f. Unique Identification of Bank's Branch for RTGS
TYPES OF TRANSACTIONS COVERED UNDER RTGS
(a) Inter-bank Payments
(b) Customer to Customer Transfers
(c) Own Account Transfers
(d) Multilateral Net Settlement Batches (MNSB)

FUNCTIONING OF RTGS
Each bank has to open a separate RTGS account with the RBI. This will be an
exclusive and dedicated account for RTGS settlement transactions. This account
will be an intra-day account, i.e., the account will have to be funded at the
beginning of the day and the balances left in the account will be swept back to the
regular current account at the end of the day. Thus, this account will show NIL
balance at the end of any day. However, banks have to make suitable
arrangements to ensure that adequate balance is always available in this account
for meeting the settlement of transactions. In case adequate funds are not
available to settle the payment transactions, RTGS system will send a message to
Security Settlement System, where an intra-day liquidity
(IDL) will be allowed against the securities. Banks have to ensure that the
outstanding under IDL are settled on the same day lest the same attract penalty.

B. The most important risk associated with the net settlement system: This
system was prone to various types of risks affecting the overall efficiency of the
banking system (The most important once are systemic risk, settlement risk,
liquidity risk).

C. How to overcome the RTGS risk: To overcome the risks of a net settlement
system, the concept of Real Time Gross Settlement Systems (RTGS) started gaining
acceptance especially in late 1990s all over the world. These systems offered
better payment systems mechanisms, for large value payments, because of their
ability to allow market participants to monitor their positions and settle their
payments in real time. They allowed the monetary authorities to ensure that
systemic risks inherent in any netting based payment systems is effectively
minimized, if not eliminated. And above all they allowed banks’ customers full and
immediate utilization of their liquidity by enabling them to transfer their large
payments across banks immediately.

Q2 Answers:
A. Rate Sensitive Asset and Liability: two assets and liabilities whose interest
costs vary with interest rate changes over some time horizon are referred to as
Rate Sensitive Assets (RSA) or Rate Sensitive Liabilities (RSL). Two assets and
liabilities whose interest costs do not vary with interest rate changes over some
time horizon are referred to as Non Rate Sensitive Assets (NRSA) or Non Rate
Sensitive Liabilities (RSL). It is very important to note that the critical factor in the
classification of the time horizon chosen. An asset or liability that is time sensitive
in certain time horizon may not be sensitive in shorter time horizon and vice versa.
However a significantly a long time horizon virtually all assets and liabilities are
interest rate sensitive. As the time horizon is shortened, the rate of rate sensitive
to non rate sensitive assets and liabilities falls. The table below shows the
classification of the assets and liabilities of the bank according to their interest
rate sensitivity.
Liability Type Asset Type
Demand Deposits NRSL Cash NRSA
Current Accounts NRSL Short Term Securities RSA
Money Market Deposits RSL Long Term Securities NRSA
Short Term Deposits RSL Variable Rate Loans RSA
Short Term Savings NRSL Short Term Loans RSA
Repo Transactions RSL Long Term Loans NRSA
Equity NRSL Other Assets NRSA

B. The following are the five major components of Interest Rate Risks:
1. Real Risk-Free Rate - This assumes no risk or uncertainty, simply reflecting
differences in timing: the preference to spend now/pay back later versus lend
now/collect later.
2. Expected Inflation - The market expects aggregate prices to rise, and the
currency's purchasing power is reduced by a rate known as the inflation rate.
Inflation makes real dollars less valuable in the future and is factored into
determining the nominal interest rate (from the economics material: nominal rate
= real rate + inflation rate).
3. Default-Risk Premium - What is the chance that the borrower won't make
payments on time, or will be unable to pay what is owed? This component will be
high or low depending on the creditworthiness of the person or entity involved.
4. Liquidity Premium- Some investments are highly liquid, meaning they are easily
exchanged for cash (U.S. Treasury debt, for example). Other securities are less
liquid, and there may be a certain loss expected if it's an issue that trades
infrequently. Holding other factors equal, a less liquid security must compensate
the holder by offering a higher interest rate.
5. Maturity Premium - All else being equal, a bond obligation will be more
sensitive to interest rate fluctuations the longer to maturity it is.

Q3 Answers
A. Different kinds of treasury instruments: There are four types of marketable
treasury instruments: Treasury bills, Treasury notes, Treasury bonds, and Treasury
Inflation Protected Securities (TIPS).
B. How forwards differ from future: Fundamentally, forward and futures
contracts have the same function: both types of contracts allow people to buy or
sell a specific type of asset at a specific time at a given price. However, it is in the
specific details that these contracts differ.
A forward contract is an agreement between two parties to buy or sell an asset
(which can be of any kind) at a pre-agreed future point in time at a pre-agreed
price. A futures contract is a standardized contract, traded on a futures
exchange, to buy or sell a certain underlying instrument at a certain date in the
future, at a specified price. So while the date and price are decided in advance in
forward contract, a futures contract is more unpredictable. They also differ in the
 forms that a futures contract is standardized while a forward contract is made to
the customer's need. The below table is the detailed comparison of the two
contracts.

Difference Forward Contract Futures Contract

Guarantees: No guarantee of settlement Both parties must deposit an initial

until the date of maturity guarantee (margin). The value of the
only the forward price, operation is marked to market rates
based on the spot price of with daily settlement of profits and
the underlying asset is paid losses.

Expiry date: Depending on the Standardized

transaction

Transaction Negotiated directly by the Quoted and traded on the Exchange

method: buyer and seller

Contract size: Depending on the Standardized

transaction and the
requirements of
the contracting parties.

Institutional The contracting parties Clearing House

guarantee:

Market regulation: Not regulated Government regulated market

Meaning: A forward contract is an A futures contract is a standardized

agreement between contract, traded on afutures exchange,
two parties to buy or sell to buy or sell a certain
an asset (which can be of underlying instrument at a certain date
any kind) at a pre-agreed in the future, at a specified price.
future point in time.

Risk: High counterparty risk Low counterparty risk

Structure: Customized to customers Standardized. Initial margin payment

need. Usually no initial required.
payment required.

Method of pre- Opposite contract with Opposite contract on the exchange.

termination: same or different
counterparty. Counterparty
risk remains while
terminating with different
counterparty.
Contract Maturity: Forward contract mostly Future contracts may not necessarily
mature by delivering the mature by delivery of commodity
commodity

Case Study

ASSIGNEMENT C
Multiple Choice Questions
1-B 2-A 3-A 4-C 5-A 6-B 7-B 8-A 9-A 10-D
11-D 12-D 13-D 14-A 15-B 16-D 17-D 18-D 19-D 20-C
21-D 22-D 23-D 24-C 25-A 26-C 27-A 28-A 29-D 30-D
31-A 32-A 33-D 34-A 35-C 36-C 37-D 38-D 39-A 40-D