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DEALING ROOM OPERATIONS

MANAGEMENT

TREASURY MARKETING UNIT


NEW DELHI
SBA

DEALING 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 customers 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.

SBA

DEALING 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

SBA

INTER 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
SBA

INTER BANK MARKET

READY AND FORWARD RATES


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

SBA

TYPE OF TRANSACTIONS

SPOT TRANSACTIONS
TOM TRANSACTIONS
CASH TRANSACTIONS
FORWARD TRANSACTIONS

SBA

CURRENCY QUOTES

RIC
BID
INR=45.75
JPY=118.75
GBP=1.7215
EUR=1.1770
AUD=.7580
XAU=480.00

ASK
NAME TIME
45.80
SBTM
12.20
118.78 BOTQ
12.21
1.7220 NWBL
12.20
1.1775 BNPP
12.22
.7585 CBAS
12.21
480.50 ABCL
12.18

HIGH LOW
45.87 45.72
118.90 118.50
1.7250 1.7200
1.1778 1.1740
.7590 .7545
482.00 479.00

BUY LOW SELL HIGH


SBA

Inter Bank Deal

SBTM:
CIBY:
SBTM:
CIBY:
SBTM:

CIBY:

USD/INR 2
72/74
MINE
OK DONE
To reconfirm at 45.74 I buy USD 2 mio
My USD to SBI N York chipsuid 230542
value 25/1105
All agreed. My INR to my Mumbai
Tx deal n bifn.

SBA

EXCHANGE RATE MECHANISM

EXCHANGE RATE IS THE CONVERSION


RATE OF ONE CURRENCY IN TERMS OF
OTHER CURRENCY

SBA

WHY DO WE NEED EXCHANGE RATES

INTERNATIONAL BUSINESS REQUIRES CROSS


BORDER PAYMENTS.
DIFFERENT COUNTRIES HAVE DIFFERENT
CURRENCIES.
IMPORTER/EXPORTER REQUIRE PAYMENT IN THEIR
RESPECTIVE CURRENCIES.

SBA

WHAT FACTORS AFFECT


EXCHANGE RATE MOVEMENTS

POLITCAL
ECONOMIC
SPECULATIVE

SBA

POLITICAL FACTORS

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

SBA

ECONOMIC FACTORS

GROWTH RATE OF ECONOMY


INTEREST RATES
BOP POSITION
MOVEMENT OF CAPITAL
PURCHASING POWER PARITY
CENTRAL BANK INTERVENTION

SBA

SPECULATIVE FACTORS

BUYING/SELLING BY BANKS IN ORDER


TO MAKE MONEY
SPECULATIVE ACTIVITES BY
CORPORATES/ INVESTEMT HOUSES
MAILY IN INTERNATIONAL MARKETS

SBA

OTHER FACTORS AFFECTING EXCHANGE RATE

Interest Rates

Terrorism

Exchange Rate

Inflation

Capital Flows

Oil Prices

SBA

ROLE OF CENTRAL BANK

AVOIDING EXCESS VOLATILITY


VERBAL INTERVENTION
ACTUAL SALE/PURCHASE

SBA

DEMAND OF FOREX

IMPORTS
INVISIBLES
CAPITAL OUTFLOWS
FIIs
LOAN REPAYMENTS
FCNR REPAYMENTS
RBI

SBA

SUPPLY OF FOREX

EXPORTS
INVISIBLES
CAPITAL INFLOWS
FIIs
ECB
LOANS
RBI

SBA

CLASSIFICATION OF TRANSACTIONS

BREAK-EVEN
SUPER FINE
VERY FINE
FINE
FULL REMUNERATION

SBA

AUTHORITY STRUCTURE FOR CONCESSIONAL RATE

A+++
A++
A+
A

CMC
DGM/AGM of the
branch or controller
if incumbency is CM
or lower

BREAK-EVEN RATE
25% of usual margin
to be included
50% of usual margin
75% of usual margin
to be included

SBA

Broad areas of Risk associated with


business..

Foreign Exchange
Interest Rate

SBA

Post Liberalization

Deregulation has made markets more


efficient
Cost of efficiency:
Higher volatility in Interest rates and
Exchange rates

SBA

Why manage these risks?

One of the fundamental requirement for any


business is MONEY
With increased volatility management of the
financial risks is necessary to gain competitive
advantage

SBA

When to hedge?

The timing depends on your

INTEREST RATE VIEW


EXCHANGE RATE VIEW

SBA

SBA

SBA

Treasury Products for managing the Risks


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

SBA

FORWARD 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

SBA

REASONS FOR DIFFERENCE IN SPOT AND


FORWARD RATES

INTEREST RATE DIFFERENTIAL


BETWEEN THE RESPECTIVE
CURRENCIES.
DEMAND AND SUPPLY
BASED ON THIS THE FORWARD RATE
CAN BE AT PREMIUM OR DISCOUNT

SBA

Advantage Forward Contract

Simple
Easy to use
Liquid
Transparent

SBA

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

SBA

ILLUSTRATION

47
FWD SALE
CONTRACT

46

PROFIT

45
FORWARD
CONTRACT

FORWARD44
USD/INR

43
42

LOSS

41
SBA

$/INR FORWARD PREMIUM

C/T
T/S
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun

0.10
0.10
0.0
3.00
5.00
7.00
9.0
11.0
12.0
14.0
16.0

0.15
0.15
1.00
4.00
6.00
8.00
10.0
12.0
14.0
16.0
17.0
SBA

USD/JPY SWAP POINT

JPYON=
JPYTN=
JPYSN=
JPYSW=
JPY1M=
JPY3M=
JPY6M=
JPY9M=
JPY1Y=
JPY2Y=

-1.08
-1.01
-1.10
-7.12
-29.21
-96.35
-198.29
-302.13
-405.10
-803.00

-0.88
-0.96
-1.05
-7.02
-29.01
-95.75
-197.09
-300.62
-402.10
-797.00

SBA

Other Risk Mitigating


Instruments

Options
Forward Rate Agreements
Swaps

SBA

Some Thumb Rules ..

Return is only half the equation


Trust your common sense
Seek and give transparency
Seek experience
Know what you do not know
Communicate

Appreciate that rewards and risks go hand in


hand
Better to be appx right than precisely wrong
Be clearly understood and also understand
fully
Business is managed by people not products
See what assumptions are being made in
product
Discuss risks openly

SBA

SBA