Why Treasury Management is Important

 Treasury management is important because it helps any organization optimize financial resources and manage financial risks effectively.

Aside from managing funds, companies also use treasury management to mitigate potential future risks. Typically, risks can be presented as financial, reputational, and operational.

·        Treasury management can take steps to cushion the financial blow to unexpected losses, how to bolster their internal processes and how to share the information with customers or partners. Overall treasurers are like financial advisors to their companies.

·        Treasury management plays an important role in banking relationships. These key relationships require ongoing reliance and transparency. A trusted advisor will help a company find the value in data to capitalize on opportunities that may not otherwise be known to them.

·        Treasurers also handle foreign exchange risks to determine any underlying exposure.

·        Treasury management is responsible for managing and mitigating risk, for example related to foreign exchange risk, interest rate risk, liquidity risk, or risks related to strategic investments.

 

Organizations need to carefully manage treasury operations in order to ensure that Managers will have sufficient amount of cash to meet any short-term obligations, while also having enough funds available to invest in long-term growth opportunities.

What should be the working strategies for an efficient treasury department in banks

 To ensure the efficiency of a treasury department in a bank, several key strategies and practices can be implemented. Here are some important considerations for an efficient treasury department:

1.     Robust Risk Management Framework: Develop a comprehensive risk management framework and identifies, measures, monitors, and mitigates various financial risks faced by the bank. This includes interest rate risk, liquidity risk, credit risk, foreign exchange risk and operational risk. Implement risk policies, controls and limits to ensure adherence to regulatory requirements and internal risk appetite.

2.     Integrated Technology Solutions: Utilize advanced treasury management systems (TMS) and other integrated technology solutions to automate processes, enhance data accuracy, and improve efficiency. TMS can facilitate cash management, risk analysis, portfolio management, reporting, and streamline treasury operations. Leverage data analytics and reporting tools for real-time monitoring and decision-making.

3.     Cash flow forecasting and liquidity management: Develop robust cash flow forecasting models to accurately predict future cash inflows and outflows. This helps in optimizing liquidity management, maintaining appropriate cash reserves, and minimizing funding costs. Effective liquidity management ensures the bank can meet its financial obligations and regulatory requirements without incurring unnecessary costs.

4.     Optimal funding and capital structure: Determine the optimal mix of funding sources, including short-term and long-term borrowing, equity issuance, and securitization. Assess the bank’s capital structure to maintain a balance between risk and return, ensuring compliance with regulatory capital adequacy requirements. Regularly evaluate funding costs, market conditions, and investor preferences to optimize the bank’s funding strategy.

5.     Proactive Investment Management: Develop a disciplined investment strategy that aligns with the bank’s risk appetite and objectives. Actively manage the bank’s investment portfolio, diversify asset classes and regularly assess investment performance. Monitor market conditions, interest rate movements, and credit quality to make informed investment decisions.

6.     Strong Stakeholder Relationships: Foster effective relationships with internal stakeholders (regulators, auditors, counterparties). Collaborate with other departments to align treasury strategies with the bank’s overall objectives. Engage in open communication and provide timely and accurate information to stakeholders.

7.     Regulatory Compliance and Governance: Stay abreast of regulatory changes and ensure compliance with applicable laws and regulations. Establish robust governance frameworks, internal controls, and reporting mechanisms. Conduct periodic audits and risk assessments to identify areas for improvement and ensure adherence to regulatory guidelines.

By implementing these strategies, a bank can enhance the efficiency and effectiveness of its treasury department, enabling it to proactively manage risks, optimize financial resources, and contribute to the overall success of the institution.

What does a bank’s treasury do? Functions of Treasury Management

A bank's treasury is responsible for managing the bank’s financial asset and liabilities to ensure efficient use of funds, maximize profitability, and maintain liquidity. The treasury department plays a crucial role in managing the bank’s balance sheet and mitigating financial risks.

Here are some key functions and activities performed by a bank’s treasury:

1.     Liquidity Management: The treasury department monitors and manages the bank’s liquidity position, ensuring that it has sufficient funds to meet its obligations and regulatory requirements. This involves analyzing cash flows, maintaining cash reserves, and utilizing various liquidity management tools, such as interbank borrowing, repo agreements and asset-liability management techniques.

2.     Asset and Liability Management: Treasury manages the bank’s assets and liabilities to optimize the balance between risk and return. They analyze the bank’s funding needs, determine appropriate funding sources, and manage interest rate risk. This involves deciding on the composition of the bank’s investment portfolio, monitoring market conditions, and executing investment and funding strategies.

3.     Risk Management: Treasury oversees various types of financial risks, such as interest rate risk, foreign exchange risk, credit risk, and liquidity risk. They develop risk management strategies, employ hedging techniques, and utilize derivatives instruments to mitigate these risks. Additionally, treasury may monitor compliance with regulatory requirements and internal risk limit

4.     Capital Management: The treasury department assesses the bank’s capital position and ensures compliance with regulatory capital adequacy requirements. They manage the bank’s capital structure, including issuing and repurchasing shares, and determine optimal levels of capital to support the bank’s activities and risk appetite.

5.     Market Operation: Treasury engages in financial market operations, such as trading in government securities, foreign exchange, money markets and other financial instruments. They execute transactions to enhance the bank’s income, manage its investment portfolio and actively participate in money and capital markets.

6.     Financial Planning and Analysis: Treasury conducts financial planning and analysis to support strategic decision-making within the bank. This involves forecasting cash flows, analyzing profitability, evaluating investment opportunities, and providing financial insights to senior management.

Overall, the bank’s treasury department plays a vital role in managing the bank’s financial resources, optimizing risk and return, and ensuring the bank’s stability and profitability in a dynamic financial environment.

What is Treasury Management? Objectives of Treasury Management

Treasury Management is the set of managing a company’s day cash flows and large-scale decisions when it comes to finances. It can provide governance over a company’s liquidity, establish and maintain credit lines, optimize investment returns, strategize the best use of funds. As a company raises, earns, or uses cash, treasurers or senior officers ensure that there is working capital to maintain operations and reduce financial risks.

For more

·        Treasure management refers to a number of financial processes that help to optimize and control a business’s cash flow, liquidity and funding.

·        Businesses can operate treasury management functions on their own or work with a financial institution.

·        Treasury management services can help a business take control of it finances and prevent fraud through access to real-time information and reporting.

Treasury management encompasses an assortment of processes that manage a business’s finances with the aim of improving efficiency and mitigating financial risks.

Components of treasury management include cash flow, debt, liquidity management as well as transaction processing, forecasting and reporting capabilities and tools. Managing these functions effectively and efficiently can allow businesses to focus on planning for their future and achieving their goals.

Treasury management has long been an important aspect of many corporations’ financial management. It ensures the business is accurately tracking its daily sales and payments in an effective manner, while also having sufficient liquidity to meet both expected and unexpected financial obligations.

 

Treasury Management Objectives:

·        Maintaining Liquidity

·        Optimizing Cash Resources

·        Establishing and maintaining Access to Short-Term Financing

·        Maintaining shareholder relations

·        Managing risk

·        Coordinating financial functions and sharing financial information

Call Money

 Call Money is a segment of the market where scheduled commercial banks lend or borrow on short notice (say a period of 14 days). In order to manage day-to-day cash flows. The interest rates in the market are market-driven and hence highly sensitive to demand and supply. Also, the interest rates have been known to fluctuate by a large % at certain times.

 Here are some major features of Call Money:

Very Short-term: Call Money is an unsecured loan with the shortest maturity in the money market, typically ranging from one day (overnight) to a maximum of fourteen days. This allows for quick borrowing and repayment to meet immediate liquidity needs.

 Over the counter: Call Money offers a highly liquid and flexible way for financial institutions to manage their short-term cash flow needs, but comes with inherent features like unsecured borrowing, volatile interest rates, and limited transparency.

 Participants: The primary participants in the call money market are financial institutions like banks, non-banking financial companies, and insurance companies. These institutions may have surplus funds they can lend or require short-term funding to meet their obligations.

 Interest Rate Volatility: The interest rate on call money, also known as call rate, is highly volatile and can fluctuate significantly depending on supply and demand for funds in the market.

Limited Transparency: Due to the OTC nature of the market, there’s limited transparency in terms of overall transaction volume and interest rates compared to exchange-traded instruments.

In summary, Call Money offers a highly liquid and flexible way for financial institutions to manage their short-term cash flow needs, but comes with inherent features like unsecured borrowing, volatile interest rates, and limited transparency.

Commercial paper

 Commercial paper: Corporates issue commercial paper (CPs) to meet their short-term working capital requirements. Hence serves as an alternative to borrowing from a bank. Also, the period of commercial paper ranges from 15 days to 1 year. This money market product functions as a promissory note created by a business or organization to raise short-tern capital. It is an unsecured instrument, meaning there is no connected collaterals. Here are some key features of commercial paper:

·        Short-term maturity: Commercial paper is a short-term debt instrument, typically maturing within a timeframe of 30 to 270 days, with most maturing much sooner. This makes it suitable for companies needing to bridge short-term funding gaps.

·        Unsecured debt: Unlike bonds, which may be backed by collateral, commercial paper is unsecured. Investors rely on the creditworthiness and reputation of the issuing company to repay the debt. As a result, commercial paper is typically issued by companies with high credit ratings.

·        High credit quality issuers: Due to the unsecured nature, only companies with a strong financial track record and a demonstrated ability to meet their obligations can issue commercial paper. This makes it a relatively low-risk investment for qualified investors.

·        Discount of interest-bearing: Commercial paper can be issued at a discount or with a fixed interest rate. When issued at a discount, the investor purchases the note for less than its face value and receives the full-face value at maturity. Interest-bearing commercial paper pays a predetermined interest rate at maturity.

·        Low-cost financing: Compared to other borrowing options like bank loans, commercial paper can be a cheaper source of financing for creditworthy companies, especially due to the shorter maturities and potentially lower interest rates.

 

In Summary, commercial paper is a flexible , short-term financing tool that offers advantages for both issuers and investors, including cost-effectiveness, high liquidity, and minimal interest rate risk, while relying heavily on the creditworthiness of the issuing corporation.

B.C Selling Rate

 B.C Selling Rate is a term used in the context of foreign exchange transactions in Bangladesh. It is the rate at which banks sell foreign currency to importers. The B.C. Selling rate is calculated by adding the exchange margin to the TT Selling Rate. The TT Selling rate is the rate used for all transactions that don not involve the handling of documents by the bank, such as issue of demand drafts, mail transfer, telegraphic transfer, etc. other than retirement of an import bill.

 For example, suppose the TT selling Rate for USD is 85.50 and the exchange margin is 0.25. Then the B.C. Selling rate would be calculated as follows

B.C. Selling rate = TT Selling rate + Exchange rate

B.C Selling rate = 85.50 + 0.25 = 85.75

 Therefore the B.C. Selling rate for USD would be 85.75

 The importance of the B.C selling rate lies in its role in facilitating foreign exchange transactions and ensuring compliance with foreign exchange regulations. The B.C. Selling rate helps to promote international trade and investment by providing a reliable and efficient mechanism for foreign exchange transactions. It also helps to maintain the stability of the foreign exchange market by ensuring that foreign exchange transactions are conducted in accordance with the regulations of Bangladesh Bank.

 

 

 

Authorize Dealer (AD)

 An Authorized Dealer (AD) is a financial institution that has been authorized by the Bangladesh Bank to deal in foreign exchange. The ADs are responsible for executing foreign exchange transactions on behalf of their clients and are required to comply with the foreign exchange regulations of Bangladesh.

• The objective of issuing AD licenses is to facilitate foreign exchange transactions and to ensure that transactions are conducted in accordance with the foreign exchange regulations of Bangladesh.
• The ADs are required to maintain records of all foreign exchange transactions and submit periodic returns to the Bangladesh Bank.

The importance of ADs lies in their role in facilitating foreign exchange transactions and ensuring compliance with foreign exchange regulations. ADs help to promote international trade and investment by providing a reliable and efficient mechanism for foreign exchange transactions. They also help to maintain the stability of the foreign exchange market by ensuring that foreign exchange transactions are conducted in accordance with regulations of Bangladesh Bank. By maintaining records of all foreign exchange transactions. ADs help to prevent money laundering and other illegal activities. 

Primary Dealer (PD)

 A Primary Dealer (PD) is a financial institution that acts as an underwriter of government securities in primary auctions. In case the auction committee finds the offered bids unacceptable, they can devolve securities in Primary Dealers. PDS receive periodic underwriting commission on successful bids and developed amount. Primary Dealers Bangladesh Limited (PDBL) is the apes body of primary dealer banks operating in Bangladesh. 

The main objective if PDBL is to create a deep and vibrant secondary market of government securities in Bangladesh. PDBL has a technical committee that consists of representatives from Bangladesh Bank, Bangladesh Association of Banks (BAB) and the Bangladesh Foreign Exchange Dealers' Association (BAFEDA). Primary dealers are financial institutions that have a direct relationship with a country's central bank or monetary authority to participate in the buying and selling of government securities. 

Yield to Maturity (YTM)

 

Yield to Maturity (YTM) is the total rate of return that will have been earned by a bond when it makes all interest payments and repays the original principal. It accounts for the time value of money and present value of future cash flows. YTM is essentially a bond’s internal rate of return if held to maturity. Calculation the yield to maturity can be a complicated process, and it assumes all coupon or interest payments can be reinvested at the same rate of return as the bond. The length of time it’s held. YTM calculations usually don’t account for taxes paid on a bond.

The formula to calculate the YTM of a discount bond is follows:

 

Where, Face value is the bond’s maturity value or par value

Current Price is the bond’s price today.

Structural Liquidity Profile (SLP)

 Structural Liquidity Profile (SLP) is a concept used by Bangladesh Bank (BB) to assess the long-term liquidity position of banks and their ability to withstand changes in market conditions The SLP is a measure of the maturity profile of a bank’s asset and liabilities and provides an indication of the bank’s ability to meet its obligations over time.

 As per BB guidelines, the SLP is calculated by comparing the maturity profile of a bank’s assets and liabilities and analyzing the gap or mismatches between the two. The SLP calculation takes into account all assets and liabilities on the bank’s balance sheet, including loans, deposits investments, and other sources of funding.

The SLP is calculated by dividing the bank’s assets and liabilities into time buckets, usually ranging from less than 1 month to more than 5 years. For each time bucket, the bank calculates the total amount of assets and liabilities maturing within that period, and then compares the two to determine any gaps or mismatches.

 The SLP analysis provides the bank with information on its overall liquidity position and helps it to identify any potential vulnerabilities or areas of risk. Based on the SLP analysis, the bank can take steps to manage its liquidity risk, such as adjusting the maturity profile of its assets and liabilities, diversifying its funding sources and implementing effective risk management practices.

 

Overall, the Structural Liquidity Profile (SLP) as per BB is an important tool used by banks to assess their long-term liquidity position and manage their liquidity risk effectively. The SLP helps banks to ensure that they have adequate liquidity to meet their obligations over time and maintain financial stability.

Bangladesh Government Islamic Investment Bond

The Bangladesh government has issued a Sharia-compliant investment instrument called Sukuk on December 28, 2020, for the first time in its history. The Sukuk is an Islamic financial certificate similar to a treasury bond and structured to generate returns in compliance with Islamic finance principles.

 The debut Sukuk project funded through Sukuk is the Safe Water Supply Project in the Country implemented by DPHE. The total Sukuk proceeds are BDT 8000 crore in two tranches, with BDT 4000 crore in each tranche. The offered rate is 4.69% and tenure is 5 years from the date of 1^st issuance.

The main objective of issuing Sukuk are to reduce the cost of government borrowing through the widening of its debt portfolio, create an additional as well as a secured investment opportunity for the Islamic banks and financial institutions and individual investors, and implement more projects through Sukuk issuing regularly in the future.

 The Shariah-based bond is expected to help the government manage its deficit financing at a time when it is struggling to collect revenues due to economic hardship caused by the coronavirus pandemic.

 The central bank has fixed the rate based on the Bangladesh Government Islamic Investment Bond (BGIIB). The last declared profit-sharing ratio of the six-month BGIIB is 3.69 per cent, and the central bank has added one percentage point to decide the rate for the sukuk.

 Profits will be paid on a half-yearly basis. So, banks prefer the sukuk, which offers a higher fixed profit rate, as a safe haven for their investment, a central banker said.

Demutualization

 Demutualization refers to the process of converting a mutual company or organization into a publicly traded company or a company with shareholders. Mutual companies are typically owned by their policyholders or members, who are entitled to certain rights and benefits based on their participation in the organization.

During demutualization, the mutual company undergoes a transformation that changes its structure and ownership. This often involves converting the rights and interests of the policyholders or members into shares of stock in the newly formed company. These shares are then distributed to the policyholders or members, who become shareholders in the new publicly traded company.

Demutualization can occur in various industries, but it is commonly associated with insurance companies and stock exchanges. In the insurance industry, demutualization allows a mutual insurer to access capital markets for additional funding and potentially expand its operations. For stock exchanges, demutualization enables the exchange to transition from a membership-based organization to a for-profit entity that can issue shares and raise capital from public investors.

The process of demutualization is typically subject to regulatory approvals and may require the consent of policyholders or members through a voting process. The specific details and requirements of demutualization can vary depending on the jurisdiction and nature of the organization seeking to demutualize.

Describes Sterilized Reverse Repo or Sterilized Operation

  Sterilized Reverse Repo, also known as a sterilized operation, is a mandatory policy tool used by central banks to manage liquidity in the financial system. It involves the sale of government securities by the central bank to commercial banks or other financial institutions with an agreement to repurchase them at a future date.

Here is how sterilized reverse repo works:

1.     Sale of Securities: The central bank initiates a sterilized reverse repo operation by selling government securities, such as Treasury bonds or bills, to commercial banks or other eligible counterparties in the open market. These transactions take place through a reverse repurchase agreement (reverse repo), where the central bank acts as the seller and the counterparty buyer.

2.     Cash Inflow and Liquidity Absorption: Through the reverse repo transaction, cash flows from the commercial banks to the central bank, resulting in a temporary reduction in the liquidity available in the banking system. The cash received by the central bank reduces the excess reserves held by commercial banks, absorbing liquidity from the market.

3.     Agreement to Repurchase: At a time, the reverse repo transactions, the central bank and the counterparty agree on a future repurchase date and price. This repurchases agreement ensures that the central bank will buy back the government securities from the counterparty on a specified date, usually at a slightly higher price, effectively reversing the initial transaction.

4.     Interest Rate and Liquidity Management: Sterilized reverse repo operations are primarily used by central banks to manage short-term interest rates and control the level of liquidity in the financial system. By absorbing excess liquidity through the sale of government securities, the central bank can increase short-term interest rates and encourage commercial banks to invest their funds in the reverse repo, which offers a safe and interest earning alternative.

5.     Sterilized of Open Market Operations: The term Sterilized is sterilized reverse repo refers to the central bank’s intention of offset the impact of its open market operations on the money supply. When the central bank purchase government securities in open market operations, it injects liquidity into the market. Sterilized reverse repo operations serve as a tool to withdraw that liquidity and prevent any inflammatory pressure resulting from the initial purchase.

Sterilized reverse repo operations play a significant role in the implementation of monetary policy and the management of liquidity by central banks. They help regulate short-term interest rates, control money supply, and maintain financial stability in the economy.

Wholesale Borrowing

 The wholesale borrowing Limit (WB) is regulatory guideline set by the Bangladesh Bank to limit over-reliance on short-term wholesale funding during times of abundant market liquidity and encourage better assessment of liquidity risk across all on and off-balance sheet items.

 The guidelines are intended to ensure that banks are able to access wholesale funding sources in a prudent and sustainable manner. Without compromising the financial stability of the system. The aim of the wholesale borrowing guidelines is to set a limit for borrowed fund. The limit should be set in absolute amount based on bank’s eligible capital (Tier-1, Tier-2) cand considering liquidity needs due to maturity mismatch, borrowing capacity of the bank and historic market liquidity.

WB covers call borrowing, Short Notice Deposit from banks and financial institutions, placement received with maturity less than 12 months, commercial paper similar instruments and overdrawn Nostro accounts.

 

The WB Limit should be capped at 80% (for non-PD banks) and 100% (for PD banks) of banks’ eligible capital on fortnightly average basis with maximum two deviations (not more than 90% and 110% of the eligible capital for Non-PD and PD Banks respectively) in a particular fortnight. The maximum cumulative outflow (MCO) should ideally not exceed 20% of the total balance sheet.

Know Your Risks (KYR) in banking sector

 In the banking sector, Know Your Risks (KYR) refers to the process by which banks identify, assess, and understand the risks they face in their operations and relationships with customers. KYR is a critical component of risk management and regulatory compliance efforts within the banking industry. Here’s how KYR is applied in the banking sector.

1.     Customer Due Diligence (CDD): Banks are required to perform through customer due diligence to understand the risks associated with their clients. This involves verifying the identity of customers, assessing their financial profile, understanding their business activities or sources of funds, and evaluating the potential risk of money laundering, terrorist financing, fraud, or other illicit activities. KYR helps banks establish a comprehensive understanding of their customers’ risk profiles.

2.     Risk Categorizations: Bank categorize customers based on their risk profiles. This can include categorizing customers as low, medium, or high risk, depending on factors such as their industry, geographical location, reputation, financial stability, and compliance history. Categorization helps banks allocate appropriate resources, implement suitable risk management measures, and apply enhanced due diligence for higher-risk customers.

3.     Risk Assessment: Banks conduct risk assessments to evaluate the potential risks associated with various banking activities. This includes assessing credit risk, market risk, operational risk, liquidity risk and regulatory risk. Risk assessment processes involve analyzing the likelihood of and impact of risks and determining their significance to the bank. KYR enables banks to identify and understand the specific risks they face in their operations.

4.     Risk Mitigation and Management: Banks implement risk mitigation and management strategies to address identified risks. This includes establishing robust risk management frameworks, policies, and procedures. Banks may adopt measures such as credit risk mitigation techniques, diversification of loan portfolios, stress testing, internal controls and compliance monitoring systems. The aim is to mitigate risks, ensure regulatory compliance, and protect the bank’s financial stability.

5.     Compliance and Regulatory Requirements: Banks must adhere to regulatory requirements and compliance standards related to risk management. This includes complying with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations, data protection laws, capital adequacy requirements and prudential guidelines. KYR assists banks in understanding and fulfilling their compliance obligations, ensuring that they operate within the legal and regulatory framework.

6.     Ongoing Monitoring and Reporting: Banks continuously monitor their risks through regular reviews, internal audits, and risk assessments. They have dedicated risk management teams that monitor changes in the risk landscape, identify emerging risks and implement appropriate risk mitigation measures. Banks also maintain robust reporting mechanisms to report on their risk exposures to regulatory authorities and internal stakeholders

Overall KYR is crucial in the banking sector to identify, assess and manage risks effectively. It helps banks maintain a strong risk management culture, comply with regulatory requirements, protect their reputation, and ensure the stability and soundness of their operations.

Banks for International Settlement (BIS)

 The Bank for International Settlement (BIS) is an international financial institution that serves as a bank for central banks. It was established in 1930 and is headquartered in Basel, Switzerland. The BIS acts as a form and hub for central banks to foster international monetary and financial cooperation, and it provides various services to support central banks in their pursuit of monetary and financial stability.

 

Here are some key features and characteristics of the Bank for International Settlement:

1.     Role as a Bank for Central Banks: The BIS functions as a bank that provides financial services to central banks and international organizations. Central banks can use the BIS to conduct transactions, hold reserves, and settle international payments. It serves as a hub for central bank cooperation and acts as a counterparty in financial operations.

2.     Promoting Monetary and Financial Stability: The BIS aims to promote monetary and financial stability globally. It provides a platform for central banks to exchange information, collaborate on policy research, and discuss issues related to monetary policy, financial markets, and banking supervision. The BIS also conducts research and analysis on global financial trends and risks.

3.     International Cooperation and Collaboration: The BIS facilitates collaboration among central banks and international financial institutions. It organizes regular meetings, conferences and working groups where central bank officials can discuss policy issues, share insights and coordinate actions. The BIS also fosters cooperation in areas such as financial regulation, supervision, and the development of international financial standards.

4.     Banking and Financial Services: The BIS offers a range of financial services to central banks and international organizations. These services include the management of reserves, gold transactions, foreign exchange transactions, and the provision of short-term liquidity to central banks. The BIS also acts as a trustee and custodian for various international financial agreements and arrangements.

5.     Research and Analysis: The BIS conducts economic and monetary research on a wide range of topics. It publishes reports, working papers, and statistical publications that contribute to the understanding of global financial markets, monetary policy, and macroeconomic trends. The BIS also provides data and statistics related to international banking and financial markets.

6.     Standard Setting: The BIS plays a role in setting international standards and best practices for banking and financial regulation. It collaborates with other standard-setting bodies such as the Financial Stability Board (FCB) and the Basel Committee on Banking Supervision (BCBS), to develop guidelines and frameworks that enhance the stability and resilience o the global financial systems.

 

Overall, The BIS serves as a crucial institution for central bank cooperation, research, and the promotion of global monetary and financial stability. Its work contributes to the stability, efficiency and resilience of the international financing system.

Explain Puts and Calls in relation to Option Contract

 

In the context of options contracts, puts and calls refer to two different types of options that give the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price within a predetermined period.

1.        Put Option: A put option is a contract that gives the holder the right to sell the underlying asset at a predetermined price (known as the strike price) on or before a specified date (Known as the expiration date). Put options are typically used by traders who anticipate a decline in the price of the underlying asset. If the rice of the asset falls below the strike price, the put option becomes valuable, allowing the holder to sell the asset at a higher price. If the price remains above the strike price, the put option may expire worthless, and the holder would not exercise the option.

2.        Call Option: A call option, on the other hand, is a contract that gives the holder the right to buy the underlying asset at a predetermined price (strike price) on or before the expiration date. Call options are usually used by traders who anticipate an increase in the price of the underlying asset. If the price of the asset rises above the strike price, the call option becomes valuable, enabling the holder to buy the asset at a lower price. If the price remains below the strike price, the call option may expire worthless, and the holder would not exercise the option.

Both put and call options have several important components:

Strike Price: The price at which the underlying asset can be bought or sold if the option is exercised.

Expiration date: The date at which the option contract expires and becomes invalid.

Premium: The price paid by the option buyer to the option seller for the right to buy or sell the asset. It represents the cost of the option contract.

Option Buyer (Holder):  The individual or entity that purchases the option and holds the right to exercise it.

Option Seller (Writer): The individual or entity that sells the option and is obligated to fulfill the terms of the contract if the option buyer decides to exercise it.

Options, including puts and calls, are widely used in financial markets for various purposes including speculation, hedging and risk management. Traders and investors analyze market conditions and use these options strategically to potentially profit from price movements or protect their existing positions.

CAMELS Rating

 CAMELS Rating: CAMELS is a recognized international rating system that bank supervisory authorities use in order to rate financial institutions according to six factors represented by its acronym.

Supervisory authorities assign each bank a score on a scale. A rating of one is considered the best and a rating of five is considered the worst for each factor.

The CAMELS rating system assesses the strength of a bank through six categories. The six components of CAMELS are:

• C—Capital adequacy

• A—Asset quality

• M—Management

• E—Earnings

• L—Liquidity

• S—Sensitivity to market risk

The CAMELS rating system is no doubt an essential tool for the identification of the financial strength and weakness of a bank by evaluation of the overall financial situation of the bank for any corrective actions to be taken.