contents PAGe Foreword I-3 Recommended Reading I-5 Syllabus I-7 Chapter-heads I-11 PaPer i ChaPTer 1 : FInanCIal markets

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contents PAGe Foreword I-3 Recommended Reading I-5 Syllabus I-7 Chapter-heads I-11 ChaPTer 1 : PaPer i Treasury & InvesTmenT management FInanCIal markets 1.1 An Overview of Markets and Functions 3 1.

1 contents PAGe Foreword I-3 Recommended Reading I-5 Syllabus I-7 Chapter-heads I-11 ChaPTer 1 : PaPer i Treasury & InvesTmenT management FInanCIal markets 1.1 An Overview of Markets and Functions Classification of Financial Markets Capital Market The Money Market The Foreign exchange Markets Insurance Markets Mutual Funds Commodity Markets Role of the emerging Markets : (BRICS) Roles and Functions of Participants in the Financial Market Banks Primary Dealers (PDs) Financial Institutions (FIs) Stock exchanges Brokers 14 I-13

2 1.4.6 Investment Bankers (Merchant Bankers) Foreign Institutional Investors (Fiis) Custodians Depositories 16 Chapter 2 : Money Market 2.1 Introduction Need for the Market Participants in the Money Market Central Government State Government Public Sector Undertakings Scheduled Commercial Banks Private Sector Companies Provident/Pension Funds General Insurance Companies Life Insurance Companies Mutual Funds Non-banking Finance Companies Primary Dealers (Pds) Money Market-Instruments Call Money/Notice Money Term Money Bank Fixed Deposits (Fds) Certificate of Deposits (Cds) Commercial Paper (CP) Bill Rediscounting Scheme (Brds) Inter-bank Participation Certificates (Ibpcs) Collateralised Borrowing and Lending Obligation (Cblo) 36 I-14

3 2.4.9 Treasury Bills (T-Bills) Repurchase Agreements (Repos) 37 Chapter 3 : Capital Market 3.1 Introduction Equity Shares Preference Shares External Commercial Borrowings (Ecb) Forms of Ecb Available Routes for Raising ECB Parameters for ECBs Individual Limits Currency of Borrowing Hedging Requirements Security for Raising Ecb Additional Conditions Issuance of Guarantee Debt Equity Ratio Parking of Ecb Proceeds Parking of Ecb Proceeds Abroad Parking of Ecb Proceeds Domestically Conversion of Ecb into Equity Exchange rate for conversion of Ecb dues into equity Procedure of Raising Ecb Reporting Requirements Loan Registration Number (Lrn) Changes in Terms and Conditions of Ecb Reporting of actual Transactions Reporting on account of conversion of Ecb into equity 65 I-15

4 Foreign Currency Convertible Bonds (Fccb) Foreign Currency Exchangeable Bonds (Fceb) Refinancing of Ecb Powers Delegated to Ad category I Banks to deal with 67 Ecb cases Compliance with the Guidelines Framework for Issuance of rupee denominated bonds overseas Form of borrowing Available routes and limits of borrowing Parameters of Borrowing by issuance of rupee denominated 68 bonds Minimum Maturity Eligible Borrowers Recognised Investors All-in-cost End-use Prescriptions Exchange Rate for Conversion Hedging Leverage Ratio Other Provisions Borrowing and lending in foreign currency by an authorised dealer Borrowing in foreign currency by an authorised dealer Lending in foreign currency by an authorised dealer Global Depository Receipts (Gdrs) American Depository Receipts (Adrs) Indian Depository Receipts (IDRs) Legislations governing issue of Idrs Eligibility criteria under Idr Rules and Guidelines Intermediaries involved in issuance of Idrs Requirements for investing in Idrs When issued securities 80 I-16

5 Mechanics of operation Internal control Credit linked notes 82 Chapter 4 : Foreign Exchange (Fx) Markets 4.1 Introduction Definitions and exchange rate quotations Factors Influencing Exchange Rates Role of banks in the Indian forex market Relationship with money market operations International financial Institutions - An overview The World bank group Multilateral development bank Regional development banks Bilateral development banks and Agencies Other Regional financial institutions Correspondent Banking and Nri accounts Correspondent Banking Non-resident Indians (Nris) and Persons of Indian Origin (Pios) Risks in Foreign trade Role of Exim Bank, Rbi and Fedai Role of Export-Import Bank of India Role of Reserve Bank of India Role of Fedai Fedai Guidelines and forex valuation Fedai Guidelines and valuation Revaluation of Mirror account balances Forwards valuation 123 I-17

6 4.11 Effects of revaluation Registered foreign portfolio investors 124 Chapter 5 : Debt Markets And Fixed Income Securities 5.1 Introduction Terminologies Types of Bonds Government of India securities State Development Loans (Sdls) Other approved securities Non-Slr Securities Public Sector Undertakings (Psu) bonds Corporate Debentures Bonds and debentures Some other aspects of fixed Income Instruments Bond Dynamics Factors influencing interest rates Dynamics Discounted cash flow and time value of money Accounting Valuation 149 Chapter 6 : Interest rate quotations and market terminology 6.1 Introduction Fixed and Floating Rate of Interest Simple and compound rate of interest Yield Premium & discount 158 I-18

7 6.6 Front end and rear end Day count conventions 160 Chapter 7 : Derivatives - an Overview 7.1 Introduction Characteristics of derivatives Functions of derivatives Users of derivatives Salient points Futures Futures Contract Currency Futures Bond Futures Stock Index Futures Pricing Financial Futures Forward Contract Forward Rate Agreement (Fra) Market Conventions of Fras Pricing a forward rate agreement Salient points Swaps Pricing an Interest Rate Swap (Irs) Types of Interest Rate Swaps Salient Features of Rbi Guidelines on IrS Salient Points Options European & American Style of Options Call options Put options 185 I-19

8 7.5.4 In the money, at the money & out of the money options Covered & Naked calls Intrinsic value of an option Factors that affect the value of an option (Premium) Different pricing models for options Option Greeks Stock Index Options Options on individual Stocks Exotic Options The buyer and seller of an option Value of an Option Interest rate options Option Strategies 197 Chapter 8 : Treasury Management 8.1 Introduction Sources of profit for Treasury Treasury Operations : The Global Scenario Rbi Measures Scope and Functions of Treasury Management Nature of Treasury Assets and Liabilities Objectives of the Treasury Organisational Structure Integrated Treasury : Cost center and profit center Functions of Integrated Treasury Nature of Integration Benefits of Integration Structure of Integrated Treasury 221 I-20

9 8.6.5 Arbitrage benefit to Treasury Initiatives of Integrated Treasury 221 Chapter 9 : Liquidity Management 9.1. Objective, Sources and Deployment Cash Reserve Ratio (Crr) Computation of Dtl Statutory Liquidity Reserve (Slr) Procedure for computation of Slr Classification and valuation of approved securities for Slr Penalties Return in Form viii (Slr) Correctness of computation of Dtl to be certified by 234 statutory auditors Cost of Slr Maintenance Clearing Corporation of India Limited (Ccil) - Netting/Elimination of Exposures Products handled by Ccil are FX-clear FX-swap Network Novation and multilateral netting Margins G-secs Forex Delivery versus Payment iii (Dvp-iii) Settlement for 241 Securities Settlement Guarantee Fund (Sgf) Risk Management 242 I-21

10 Collateralized Borrowing and Lending Obligation (Cblo) Real Time Gross Settlement (Rtgs) Idrbt as Certifying Authority (Ca) Essential Components of Rtgs Types of transactions covered under Rtgs Functioning of Rtgs Indian financial network Structured Financial Messaging System (Sfms) Public Key Infrastructure (Pki) 246 Chapter 10 : Risk analysis and control 10.1 Risk analysis and control Operational risk Mitigation Financial Risks Credit Risk Liquidity Risk Market Risk Event Risk Interest Rate Risk (Balance Sheet) Risk Management : Rbi Guidelines/norms Risk Management in Banks Asset-liability Pricing Adding new Products Forex (market) Risk Open positions and gaps Gap (interest rate/swap) Risk Customer Credit Risk Settlement Risk 262 I-22

11 Country Risk Legal Risk Operational Risk and Concurrent audit 264 Chapter 11 : Front office/mid office/back office 11.1 Front-office Dealing Functions Mid-office Back-office operations Operational clarity Documentation Monitoring Settlement of Transactions Investment Accounting & Internal Controls 281 Chapter 12 : Regulations, Supervision and Compliance of treasury operations 12.1 Reserve Bank Guidelines Organizational set up The Dealing Room Extracts From Fimmda : Handbook of Market Practices Management Controls Organization of the Dealing Department Know Your Counterparty Recording of Conversations Off-Premise Dealing Dealing Hours Rate Scan 294 I-23

12 Conflicts of Interest Rotation of Dealers Confirmations Dealing procedures and principles Scope Preliminary Negotiation of Terms Firmness of Quotation Delivery of the Securities/Funds Concluding a Deal Passing of Names by Brokers Reporting of Deals on the NDS Oral Confirmations Written Confirmations Settlement of Differences Bank Holidays/Market Disruption 301 Chapter 13 : Role of Information Technology in Treasury Management 13.1 Negotiated Dealing System Other Trading Platforms/Systems Straight-Through-Processing (Stp) A Settlement B Custody 304 ANNEXURE 1 PRICE CALCULATIONS : Treasury bills 305 ANNEXURE 2 PRICE CALCULATIONS : Forex treasury 317 I-24 ANNEXURE 3 MARKET PRACTICES 350

13 ANNEXURE 4 TREASURY TERMINOLOGY 393 Chapter 1 : Paper II Risk Management Introduction to Risk Management u Background 413 u The Concept of Risk 418 u The Changing Forms of Risk 419 u Characteristics of Risk 420 u Types of Risk 420 u Non-Financial Risks 426 Chapter 2 : Risk Management Process u Introduction 430 u Sources of Risk 432 u Risk Indicators 434 u The Process 435 u Measures for Identifying and Controlling Risks 437 Chapter 3 : Setting up a Risk Organization u The Process 447 u Pre-Requisites 448 u Fundamentals 450 u Some Misconceptions 452 u Comprehensive View on Risk 454 I-25

14 Chapter 4 : Assets/Liabilities Management (ALM) u The Concept 464 u Definition From Risk Perspective 464 u Banking and Trading Book For Risk Management 465 u Interest Rate Risk in the Banking Book (Irrbb) 466 u Rate Sensitivity of Assets (Rsa) & Liabilities (Rsl) 467 u Liquidity Risk & Liquidity Gaps 468 u Interest Rate Gaps 470 u Interest Rate Gap and Variations of the Interest Margin 472 u Limitations of Interest Rate Gaps 474 u Cumulative Gap 474 u Duration Gap 474 u Duration Gap Analysis 474 u Immunisation 475 u Relationship Between Mdg And Sensitivity of Mve to Interest Rate Changes 476 u Simulation Analysis 477 u Managing Interest Rate Risk 477 u How Alm Process Differs from Market and Credit Risk Techniques 477 u Alm Governance Framework 478 u Pre-Requisites for Alm 478 u Framework of Policy 480 u Asset and Liabilities Committee (Alco) 491 u Activities of Alco 492 u Indian Context 496 I-26

15 Chapter 5 : Some Important Concepts u Risk Exposure Analysis 498 u Stress Testing 503 u The Exposure Document 505 u Role of the Board 505 u Role of the Risk Manager 506 u Role of Internal Audit 506 u Risk Based Supervision/Audit (Rbs) 507 u Open Position 507 u Currency Pairs 508 u The Players 508 u Trading Transactions 509 u Types of Prudential Risks 510 u Closing out a Position 511 u Stop-Loss Limit 512 u The Concept 512 u Setting Stop-Loss Limits 514 u Limitations 515 u Duration 516 u Modified Duration 517 u Convexity 519 u Using Convexity (C) and Dmod. 519 u Raroc (Risk Adjusted Return on Capital) 520 u Auditing Risk Management 526 I-27

16 Chapter 6 : Understanding Basel Accord and its Implications u Introduction 530 u In Retrospect 531 u Comparing two Accords 533 u Supervisory Review (Pillar 2) 541 u Market Discipline (Pillar 3) 543 u Decision Areas for Banks 545 u Basel Ii and Role of Information Technology 546 u Basel Iii & its Implications 548 u Introduction 548 I-28

CERTIFICATE COURSE ON FOREIGN EXCHANGE & TREASURY MANAGEMENT

CERTIFICATE COURSE ON FOREIGN EXCHANGE & TREASURY MANAGEMENT The Certificate Course is an advanced course on Treasury Management (including Forex Treasury) for Chartered Accountants organized by Committee