Integrated Treasury

 Integrated Treasury in banking refers to the management of a bank’s financial assets and liabilities through an integrated system. It involves the integration of various treasury functions, such as cash management, investment management, risk management and financial reporting into a single platform.

An integrated treasury system in banking provides real time information about a bank’s cash position, liquidity and capital adequacy. It helps treasury managers make informed decisions about managing the bank’s cash flows, investments and risks. The system allows treasury managers to monitor and manage their cash balances, investment portfolios and debt levels, as well as analyze market trends and perform risk assessments.

In banking set-up, Integrated Treasury refers to integration of domestic and foreign exchange operations. A comprehensive strategy for funding the balance sheet and allocating capital across domestic, international and foreign exchange markets is known as integrated treasury. With this strategy the bank is able to maximize asset-liability management and take advantage of arbitrage opportunities.

The system may also offer modules for foreign exchange trading, trade finance and banking relationships management. Additionally, the system can integrate with other enterprises’ systems such as accounting and ERP systems, to provide a comprehensive view of the bank’s financial operations.

The integration of the forex dealing, and domestic treasury has helped the bank to overcome this unwanted situation as they consolidate outflow and inflow of money both form domestic and foreign exchange operations. In the integrated scenario, banks no longer distinguish between BDT cash flows and foreign currency cash flows.

Overall, an integrated treasury system in banking provides banks with greater visibility and control over their financial operations, enabling them to optimize their cash management and investment strategies while minimizing risks. It helps banks to maintain financial stability, comply with regulatory requirements and enhance their profitability.

Trunk Road Corporation, a global manufacturing company faced significant exposure to commodity price volatility due to its reliance on raw materials for production. To address this challenge, how can Trunk Road Corporation mitigate the impact of commodity price fluctuations, and enhance financial flexibility by using derivatives strategically:

 Trunk Road Corporation, a global manufacturing company faced significant exposure to commodity price volatility due to its reliance on raw materials for production. To address this challenge, how can Trunk Road Corporation mitigate the impact of commodity price fluctuations, and enhance financial flexibility by using derivatives strategically:

Trunk Road Corporation can mitigate the commodity price volatility and enhance financial flexibility using derivatives strategically:

Mitigating Price Volatility:

·        Hedging with futures contracts: Trunk Road Corporation can enter into futures contracts to lock in a price for their raw materials at a specific future date. This protects them from price increases above the agreed-upon price.

·        Put Options: Purchasing put options allows Trunk Road Corporation to set a minimum price for their raw materials. If the price falls below the strike price, they can exercise the option and sell the raw materials at the guaranteed price, limiting potential losses.

Enhancing Financial Flexibility:

·        Interest rate swaps: If Trunk Road Corporation has variable-rate debt, they can use interest rate swaps to convert it to fixed-rate debt. This provides predictability in their financial costs and protects them from rising interest rates.

·        Currency swaps: If Trunk Road Corporation purchases raw materials in a foreign currency, they can use currency swaps to lock in an exchange rate. This safeguards them from adverse currency fluctuations that could increase their material costs.

By implementing a combination of these strategies, Trunk Road Corporation can mitigate the financial risk associated with commodity price volatility and interest rate fluctuations. This allows for more predictable costs, improved cash flow management, and ultimately, greater financial flexibility.

 

A Bank had posted interest revenues of TK. 80 million and interest expenses from all of its borrowing of TK. 50 million. If the bank posses TK. 750 million in total earnings assets, what is the net. Interest margin of this bank?

 

A Bank had posted interest revenues of TK. 80 million and interest expenses from all of its borrowing of TK. 50 million. If the bank posses TK. 750 million in total earnings assets, what is the net. Interest margin of this bank?

The Net Interest Margin (NIM) is a measure of the difference between the net interest income generated by the banks from their earnings assets and the amount of interest paid to the Borrowers, depositors etc. It is typically expressed as a percentage. The formula to calculate the Net Interest Margin is

Net Interest Margin= {Interest Revenues – Interest Expenses)/Total Earning Assets} *100

Given,

 Interest Revenues = TK. 80 million

Interest Expenses = TK. 50 million

Total Earnings Assets = TK. 750 million

 

First calculate the net interest income:

 Net interest Income = Net interest revenue - Interest expenses

Net Interest Income = TK. 80 million - TK. 50 million = TK. 30 million

Next, Calculate the Net Interest Margin (NIM):

NIM = (Net Interest Income / Total Earning Assets)*100

NIM = (TK. 30 million / TK. 750 million) *100

NIM = 4%

Thus the Net Interest Margin (NIM) of the bank is 4%

Distinguish between Fixed and floating(flexible) exchange rate

 

Basis	Fixed (Pegged) Exchange rate	Flexible Exchange rate
Meaning	Fixed exchange rate refers to a rate which the government sets and maintains at the same level	Flexible exchange rate is a rate that variate according to the market forces.
Determined by	Government or central bank	Demand and Supply forces
Changes in currency price	Devaluation and Revaluation	Depreciation and Appreciation
Speculation	Takes place when there is rumor about change in government policy	Very common
Self-adjusting mechanism	Operates through variation in supply of money, domestic interest rate and price	Operates to remove external instability by change in forex rate.
Need for maintaining foreign reserve	Foreign reserves need to be maintained	No need for maintaining foreign reserve
Impact on BOP	Can cause deficit in BOP that cannot be adjusted	Deficit or surplus in BOP is automatically corrected.

Differences between Devaluation and Depreciation

 

Basis	Devaluation	Depreciation
Meaning	Devaluation refers to reduction in price of domestic currency in terms of all foreign currencies under fixed exchange rate	Depreciation refers to fall in market price of domestic currency in terms of a foreign currency under flexible exchange rate regime.
Occurrence	It takes place due to Government	It takes place due to market forces of demand and supply
Exchange rate system	It takes place under fixed exchange rate system	It takes place under flexible exchange rate system

What are the differences between Funded and Non-Funded Commitment in the banking sector?

 In the banking sector, funded and non-funded commitment are types of financial agreements between a bank and a borrower. The main differences between the two are as follows:

1.     Funded Commitment: In a funded commitment, the bank provides the borrower with the actual funds needed to finance the project or activities. For example, if a borrower applies for a loan to buy a house, the bank provides the funds to the borrower upon approval of the loan application. The borrower can use the funds to buy the house and then repay the loan to the bank over time, along with interest.

2.     Non-Funded Commitment: In a non-funded commitment, the bank does not provide the borrower with the actual funds needed to finance the project or activities. Instead, the bank provides a promise to provide funds later, if certain conditions are met. For example, a bank might issue a letter of credit to a borrower, which guarantees payment to a supplier once certain conditions are met, such as the delivery of goods or services.

3.     Risk: In a funded commitment, the bank takes on the risk of providing the funds to the borrower. If the borrower is unable to repay the loan, the bank may lose the funds that is provided. In a non-funded commitment, the risk is generally lower because the bank is not providing actual funds to the borrower.

4.     Fees: Banks typically charge fees for both funded and non-funded commitments, but the fees may structure differently. For a funded commitment, the bank may charge an organization fee and interest on the loan. For non-funded commitment, the bank may charge a fee for issuing the commitment, by may not charge interest until funds are provided.

 

Overall, the main difference between funded and non-funded commitments in the banking sector is that funded commitments involve the actual provision of funds, while non funded commitments involve a promise to provide funds at a later date, subject to certain conditions.

Calculate the price of the Bond? (98th)

 

Calculate the price of the Bond? Or compute the price of a 10% coupon bond with 12 years of maturity and par value of TK. 100,000.00 if the required yield is 12% .

When No. of years = 12 years

We know that

Given YTM=12%  so r = .12 coupon rate = 10%=.10 no of periods n = 12 years

FV par value = 100000.00 So c= 100000*.10 = 10000.00

=C×(1-(1+r)^(-n))/r+FV/(1+r)^n

pv=10000×(1-(1+.12)^(-12))/(.12)+ 100000/(1+.12)^12

=61944.1642+25667.35

=87611.5142

So the price of the bond is TK. 87611.5142

 

 pv=C×(1-(1+r)^(-n))/r+FV/(1+r)

PV= Present Value (Bond Price)

C = Periodic coupon payment

                                                           = Coupon rate * FV/ No of coupon payments in a year

FV= Face/Par value of the bond

r = Yield to maturity (YTM)

n= No of periods till maturity

 

Difference between Discount Yield and Bond Equivalent Yield. Which yield is used for Treasury Bond quotes in Bangladesh?

 The Discount Yield and Bond Equivalent Yield are two different methods for calculating and expressing the yield on fixed-income securities. The yield used for Treasury Bond quotes in Bangladesh is the Discount Yield. Here is a comparison of these two yield measures:

1.      Discount Yield:

   Calculation: The discount yield is calculated based on the discount between the purchase price of the security and its face value, expressed as a percentage of face value.

 

      Formula: Discount Yield = (Discount/Face Value)*(360/Days of Maturity)

   Interpretation: The discount yield represents the annualized yield on a Treasury Bond, assuming the investor holds the bond until maturity and does not receive any periodic coupon payments. It reflects the percentage return earned on the investment.

 

2.      Bond Equivalent Yield:

        Calculation: The bond equivalent yield is calculated by doubling the semi-annual yield of a bond

 

           Formula: Bond Equivalent Yield = Semi-annual Yield*2

         Interpretation: The bond equivalent is an annualized yield that considers the semi-annual coupon payments of a bond. It allows for easier comparison of yields between bonds with different payment frequencies.

For Treasury Bond quotes in Bangladesh, the Discount Yield is commonly used. The quoted yield represents the annualized discount yield, providing investors with a measure of the expected return on the Treasury Bond. This yield calculation is widely used for fixed-income securities, including government bonds, and allows for standardized pricing and comparison among different bond offerings.

It’s important to note that the specific market conventions and practices may vary between countries and markets. While the Discount Yield is generally used for Treasury Bond quotes in Bangladesh, it is always recommended to refer to the relevant guidelines, market practices, and official sources to ensure accurate and up-to-date information regarding Treasury Bond quotes and yield calculations in Bangladesh.

Difference between Spot rate and Forward rate

 

Aspect	Spot Rates	Forward Rates
Timing	Immediate delivery and settlement	Agreed upon today, settlement at a future date
Settlement	Settled “on the spot” (without two days)	Settled at a future date specified in the contract
Price	Current market price	Agreed upon price based on market expectations
Purpose	Immediate currency exchange	Hedging against future currency fluctuations
Rate Determination	Supply and demand in the spot market	Interest rate differentials and market expectations
Interest rate	Not influenced by interest rate differentials	Influenced by interest rate differentials
Exchange rate stability	Subject to immediate market fluctuations	Provides certainty against future rate movements
Liquidity	High liquidity due to immediate settlement	May have lower liquidity depending on the term
Market Participants	Speculators, travelers, short-term traders	Importers, exporters, long-term investors