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DEALING ROOM OPERATIONSMANAGEMENT

TREASURY MARKETING UNITNEW DELHI

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DEALING ROOMDEALING ROOM

Dealing Room is that unit of an organization which manages the cash flows of a business, its borrowings and its investments, as also the associated risks and pursues the optimum performance consistent with those risks. It also quotes rates for the customer’s forex transactions, does the cover operations and also provides for their hedging requirements.The trading in currencies is done to further supplement the overall profitability of the unit.

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DEALING ROOMDEALING ROOM

•BANKS HAVE TO SELL CURRENCIES BOUGHT•IT ALSO HAS TO BUY BACK CURRENCIES SOLD•THIS PROCESS OF MATCHING IS CALLED COVER OPERATIONS•BANKS DEAL AMONGST THEMSELVES TO ADJUST MISMATCHES•THIS GIVES RISE TO INTER BANK MARKET•BANKS ALSO BUYS AND SELLS ON THEIR OWN ACCOUNT TRADING

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INTER BANK MARKETINTER BANK MARKET

•CONSISITS OF BANKS, CORPORATES AND BROKERS•MARKET REMAINS OPEN ROUND THE CLOCK EXCEPT ON SATURDAYS, SUNDAYS AND LOCAL HOLIDAYS•NO RATE DIFFERENCE INSPITE OF DIFFERENT GEOGRAPHICAL LOCATIONS•ALL CURRENCIES ARE QUOTED AGAINST US DOLLAR•ALL QUOTES ARE TWO-WAY (BID, ASK, SPREAD)•MOST CURRNECIES ARE IN DIRECT MODE•EXCEPT EUR,GBP,AUD AND NZD

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INTER BANK MARKETINTER BANK MARKET

•READY AND FORWARD RATES•DISCOUNT AND PREMIUM•FORWARD/SWAP POINTS•LONG/SHORT/SQUARE•DAYLIGHT/OVER NIGHT/STOP LOSS LIMIT•TRENDING OF QUOTES

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TYPE OF TRANSACTIONSTYPE OF TRANSACTIONS

•SPOT TRANSACTIONS

•TOM TRANSACTIONS

•CASH TRANSACTIONS

•FORWARD TRANSACTIONS

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CURRENCY QUOTESCURRENCY QUOTES

RIC BID ASK NAME TIME HIGH LOWINR=45.75 45.80 SBTM 12.20 45.87 45.72JPY=118.75 118.78 BOTQ 12.21 118.90 118.50GBP=1.7215 1.7220 NWBL 12.20 1.7250 1.7200EUR=1.1770 1.1775 BNPP 12.22 1.1778 1.1740AUD=.7580 .7585 CBAS 12.21 .7590 .7545XAU=480.00 480.50 ABCL 12.18 482.00 479.00

BUY LOW SELL HIGH

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Inter Bank DealInter Bank Deal

SBTM: USD/INR 2CIBY: 72/74SBTM: MINECIBY: OK DONESBTM: To reconfirm at 45.74 I buy USD 2 mio

My USD to SBI N York chipsuid 230542value 25/1105

CIBY: All agreed. My INR to my MumbaiTx deal n bifn.

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EXCHANGE RATE MECHANISMEXCHANGE RATE MECHANISM

EXCHANGE RATE IS THE CONVERSION RATE OF ONE CURRENCY IN TERMS OF OTHER CURRENCY

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WHY DO WE NEED EXCHANGE RATESWHY DO WE NEED EXCHANGE RATES

•INTERNATIONAL BUSINESS REQUIRES CROSS BORDER PAYMENTS.•DIFFERENT COUNTRIES HAVE DIFFERENT CURRENCIES.•IMPORTER/EXPORTER REQUIRE PAYMENT IN THEIR RESPECTIVE CURRENCIES.

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WHAT FACTORS AFFECT WHAT FACTORS AFFECT

EXCHANGE RATE MOVEMENTSEXCHANGE RATE MOVEMENTS

POLITCAL

ECONOMIC

SPECULATIVE

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POLITICAL FACTORSPOLITICAL FACTORS

•TYPE OF GOVERNMENT•STABILITY•TRACK RECORD OF THE COUNTRY•CURRENT POLITICAL DEVELOPMENTS•VISION OF POLITICAL LEADERSHIP

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ECONOMIC FACTORSECONOMIC FACTORS

•GROWTH RATE OF ECONOMY•INTEREST RATES•BOP POSITION•MOVEMENT OF CAPITAL•PURCHASING POWER PARITY•CENTRAL BANK INTERVENTION

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SPECULATIVE FACTORSSPECULATIVE FACTORS

•BUYING/SELLING BY BANKS IN ORDER TO MAKE MONEY

•SPECULATIVE ACTIVITES BY CORPORATES/ INVESTEMT HOUSES MAILY IN INTERNATIONAL MARKETS

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OTHER FACTORS AFFECTING EXCHANGE RATEOTHER FACTORS AFFECTING EXCHANGE RATE

Exchange Rate

Terrorism

Oil Prices Capital FlowsInflation

Interest Rates

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ROLE OF CENTRAL BANKROLE OF CENTRAL BANK

•AVOIDING EXCESS VOLATILITY

•VERBAL INTERVENTION

•ACTUAL SALE/PURCHASE

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DEMAND OF FOREXDEMAND OF FOREX

•IMPORTS•INVISIBLES•CAPITAL OUTFLOWS•FIIs•LOAN REPAYMENTS•FCNR REPAYMENTS•RBI

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SUPPLY OF FOREXSUPPLY OF FOREX

•EXPORTS•INVISIBLES•CAPITAL INFLOWS•FIIs•ECB•LOANS•RBI

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CLASSIFICATION OF TRANSACTIONSCLASSIFICATION OF TRANSACTIONS

•BREAK-EVEN•SUPER FINE•VERY FINE•FINE•FULL REMUNERATION

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AUTHORITY STRUCTURE FOR CONCESSIONAL RATEAUTHORITY STRUCTURE FOR CONCESSIONAL RATE

A+++ CMC BREAK-EVEN RATEA++ DGM/AGM of the 25% of usual margin

branch or controller to be includedA+ if incumbency is CM 50% of usual marginA or lower 75% of usual margin

to be included

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Broad areas of Risk associated with Broad areas of Risk associated with

business…..business…..

Foreign Exchange

Interest Rate

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Post LiberalizationPost Liberalization

Deregulation has made markets more efficient

Cost of efficiency:

Higher volatility in Interest rates and Exchange rates

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Why manage these risks?Why manage these risks?

One of the fundamental requirement for any business is MONEYWith increased volatility management of the financial risks is necessary to gain competitive advantage

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When to hedge?When to hedge?

The timing depends on your

INTEREST RATE VIEWEXCHANGE RATE VIEW

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Treasury Products for managing the Treasury Products for managing the

Risks on account of Forex ExposuresRisks on account of Forex Exposures

Forward Contract …

Contract to buy or sell a specified amount of currency at a specified price on a specified future date

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FORWARD TRANSACTIONSFORWARD TRANSACTIONS

WHEN THE SETTLEMENT DATE IS BEYOND SPOT DATE, IT IS CALLED A FORWARD TRANSACTION.

FORWARD CONTRACTS ARE MOST PRIMITIVE HEDGING INSTRUMENTS IN INDIAN MARKET

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REASONS FOR DIFFERENCE IN SPOT AND REASONS FOR DIFFERENCE IN SPOT AND

FORWARD RATESFORWARD RATES

INTEREST RATE DIFFERENTIAL BETWEEN THE RESPECTIVE CURRENCIES.DEMAND AND SUPPLY

BASED ON THIS THE FORWARD RATE CAN BE AT PREMIUM OR DISCOUNT

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Advantage Forward Contract……Advantage Forward Contract……

•Simple

•Easy to use

•Liquid

•Transparent

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Disadvantage Forward Contract…..Disadvantage Forward Contract…..

• No chance of participating in market volatility

• Profit/loss crystallized on the date of booking

• The upside and downside (opportunity profit/loss) theoretically unlimited

• INR based forwards demand and supply dependent

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ILLUSTRATIONILLUSTRATION

FWD SALE

CONTRACT45

FORWARDUSD/INR

47

46

42

43

41

44

-

FORWARD CONTRACT

+ PROFIT

LOSS

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$/INR FORWARD PREMIUM$/INR FORWARD PREMIUM

C/T 0.10 0.15T/S 0.10 0.15Oct 0.0 1.00Nov 3.00 4.00Dec 5.00 6.00Jan 7.00 8.00Feb 9.0 10.0Mar 11.0 12.0Apr 12.0 14.0May 14.0 16.0Jun 16.0 17.0

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USD/JPY SWAP POINTUSD/JPY SWAP POINT

JPYON= -1.08 -0.88JPYTN= -1.01 -0.96JPYSN= -1.10 -1.05JPYSW= -7.12 -7.02JPY1M= -29.21 -29.01JPY3M= -96.35 -95.75JPY6M= -198.29 -197.09JPY9M= -302.13 -300.62JPY1Y= -405.10 -402.10JPY2Y= -803.00 -797.00

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Other Risk Mitigating Other Risk Mitigating InstrumentsInstruments

•Options•Forward Rate Agreements•Swaps

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Some Thumb Rules ……..Some Thumb Rules ……..

Return is only half the equation Appreciate that rewards and risks go hand in hand

Trust your common sense Better to be appx right than precisely wrongSeek and give transparency Be clearly understood and also understand

fullySeek experience Business is managed by people not productsKnow what you do not know See what assumptions are being made in

productCommunicate Discuss risks openly

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