Application : Hedging and Derivatives Interest Rate Swap and Futures. Aramsri Choowongse, CFA Nopadol Prateepratana

Transcription

1 Application : Hedging and Derivatives Interest Rate Swap and Futures Aramsri Choowongse, CFA Nopadol Prateepratana

2 Presentation Outline Hedging : Basics BIBOR : Development in Derivative Market Interest Rate Swap (IRS) BIBOR Futures 2

3 Hedging : Basics 3

4 Hedge Accounting IFRS 9 Roadmap : Implemented by 2013 to replace IAS 39 BOT s Requirements Study and Gap Analysis : H2/2011 Q1/2012 System Planning : Parallel Run : 2014 Implementation : 2015 Schedule for Corporate Implementation is not yet confirmed. 4

5 Types of Hedges 1. Cash Flow Hedge (CFH) Change floating-rate profile to fixed-rate profile to reduce interest rate risk. Need to prove effectiveness of floating profile and floating index. No mark-to-market for accounting. 5

6 Types of Hedges 1. Cash Flow Hedge (CFH) Up-trend Interest Rate Cycle Corporate/State Enterprises/MoF Fixed Rate BIBOR Standard Chartered Bank (Thai) PLC BIBOR BIBOR Liabilities (Corporate Loans) (BOT/MOF Floating Rate Bonds) 6

7 Types of Hedges 1. Cash Flow Hedge (CFH) Down-trend Interest Rate Cycle Fixed Rate Corporate BIBOR Standard Chartered Bank (Thai) PLC BIBOR BIBOR Assets (Floating Rate Bond Investment) 7

8 Types of Hedges 2. Fair Value Hedge (FVH) Change fixed-rate profile to floating-rate profile to reduce interest rate risk. Need to mark-to-market both underlyings and hedges. Neutral PnL impact if 100% hedged. 8

9 Types of Hedges 2. Fair Value Hedge (FVH) Up-trend Interest Rate Cycle Corporate/Bank Fixed Rate BIBOR Standard Chartered Bank (Thai) PLC Fixed Rate Fixed Rate Asset (Fixed Rate Bonds) 9

10 Types of Hedges 2. Fair Value Hedge (FVH) Down-trend Interest Rate Cycle Fixed Rate Corporate/Bank BIBOR Standard Chartered Bank (Thai) PLC Fixed Rate Fixed Rate Liabilities (Fixed Rate Bonds) 10

11 Types of Hedges 3. Economic Hedge All kinds of hedges can be done. Need to mark-to-market. Impact on PnL. Some companies or banks might have internal guidelines that prohibits economic hedge to avoid PnL volatility. 11

12 BIBOR : Development in Derivative Market 12

13 Floating Rate Index vs. Underlying assets/liabilities How deep the floating market in Thailand? Floating Rate Index Underlying Assets/Liabilities Current Exposure (THB mio) MLR Loans to Corporates 500,000 Average rate of 4 banks Loans to MoF/State Enterprises (BBL/KTB/SCB/KTB) Loans to Retails (mortgages) - MLR/MRR 1,000,000 Corporate Debentures 2,000 Fixed Rate Deposit (6mths) Loans to Corporates 100,000 Average rate of 4 banks Loans to State Enterprises 40,000 (BBL/KTB/SCB/KTB) Loans to MoF/State Enterprises 120,000 Corporate Debenture 26,019 THBFIX Loans to Corporates 50,000 Interbank borrowing and lending (via swap market) 1m and up 500,000 Corporate Debentures 2,710 BOT BIBOR Loans to Corporates 150,000 Loans to State Enterprises - Loans to MoF 180,000 Floating Rate Bonds (BOT) 149,575 Floating Rate Bonds (MoF) 99,000 Interbank borrowing and lending (1m-9m) 44,900 13

14 Interest Rate Swap (IRS) 14

15 Interest Rate Swap (IRS) IRS: two counterparties exchange future interest rate streams. Party A pays fixed rate. Party B pays floating rate based on floating-rate index. Net payment on notional amount on payment dates. Use Convert floating-rate exposure to fixed-rate exposure, or vice versa. Lock in fixed rate (paid or received) to achieve cash flow certainty or to monetise interest rate view. Hedge basis risk through swap between two floating indices. 15

16 THB Floating Rate Indices THBFIX : Market standard floating rate index Reuters page THBFIX, 11:00 BKK time BIBOR : Bangkok Interbank Offered Rate Reuters page BOT101, 11:00 BKK time MLR : Average MLR of 4 largest local banks (BBL, KBANK, SCB, KTB) 15:00 BKK time Fixed Deposit Rate (FDR) : Average of 6-month fixed deposit rate from 4 largest local banks (BBL, KBANK, SCB, KTB) 15:00 BKK time 16

17 Interest Rate Swap (IRS) Swap BIBOR FRN into Fixed-Rate Loan BOND THB Pay Floating BIBOR Rate Pay Floating BIBOR Rate INVESTOR Receives Fixed Rate BANK 17

18 Interest Rate Swap (IRS) Swap Floating-Rate Loan into Fixed-rate Loan BOND THB Pay Floating BIBOR Rate Pay Floating BIBOR Rate COMPANY Receives Fixed Rate BANK 18

19 Interest Rate Swap (IRS) Variations Swaps against other floating rate indices (e.g. BIBOR, T-Bill rate) Accrete or amortise notional amount to match underlying exposure Add spread to floating leg In arrears swap : fixing of floating leg occurs at the end of each period Change spread on fixed or floating rate to match interest rate view or reduce carry 19

20 IRS Trading Mechanism PVCF 4% 4% 4% Bond fixed rate PVCF 3% 4% 5% 6% Expected yield 4% A B 4.5% Party A pays 4% fixed rate in the market. Market rate adjusts upward to 4.5%. 20

21 IRS Trading Mechanism PVCF 4% 4% 4% Bond fixed rate PVCF 3% 3.5% 4% 4.5% Expected yield 4% A B 3.75% Party B receives 4% fixed rate in the market. Market rate adjusts downward to 3.75%. 21

22 BIBOR Fixing BIBOR is the average of borrowing rates quoted by predetermined banks. BIBOR is derived by eliminating the top and bottom quartiles of the quotes and arithmetic-averaging the remaining quotes. BIBOR is a reference rate which is fixed at 11:00 of each working day and published by BOT at 11:15. 22

23 BIBOR Fixing 23

24 Basis Quotation Tenor FDR MLR BIBOR Bid Offer Bid Offer Bid Offer 1Y Y Y Y Y Y Y M Fix

25 IRS BIBOR Tenor IRS FDR MLR BIBOR Bid Offer Bid Offer Bid Offer Bid Offer 1Y Y Y Y Y M FIX THBFIX

26 IRS BIBOR Bid-offer spread of BIBOR IRS is wider than normal IRS. Cash BIBOR market to become more active soon. Illiquid and non-tradable cash borrowing and lending. Illiquid and sizable in future market. Banks need to allocate reserves for illiquid index. Market players run basis risk among the curve. 26

27 IRS Curve Drivers Historical rate movement Market view of future rate movement Market demand and supply 27

28 MLR vs BIBOR vs FDR 28

29 Trading Ideas Risk and Opportunity in BIBOR vs MLR : market may misprice given market demand and supply. BIBOR swap allows investors to achieve higher return than fixed rate bond BIBOR swap is a better hedge if client wants to pay fixed rate BIBOR can move faster than MLR in tightening cycle MLR fixed rate at historical high offers investment opportunity Make no sense to convert to fixed 29

30 BIBOR Futures 30

31 BIBOR Futures Eurodollar futures (ED) A future contract based on eurodollar deposits. Prices are determined by expected 3-month USD LIBOR that are expected to prevail on settlement date. Settlement price is 100 minus 3-month LIBOR fixing on settlement date. 31

32 BIBOR Futures 3-Month BIBOR Futures Underlying : 3-month BIBOR Size : 10,000,000 Baht / contract Settlement : 2 nearest quarter months (March, June, September, December) Quote : 100 Yield 1 Tick = Baht / contract Limit : % of previous-day settlement price 32

33 BIBOR Futures Trading Hours Pre-open : 9:15-9:45 Morning session : 9:45-12:30 Pre-open : 14:00-14:30 Afternoon session : 14:30-16:00 Position Limit : net 2,000 contracts of 3M BIBOR Futures on one side of the market in any contract month or all contract months combined. Last Trading Day : 3 rd Wednesday of contract month Trading on expiring series cease after 11:00 on last trading day. Final Settlement Price: 3-month BIBOR fixing at 11:00 BKT on the last trading day Cash Settlement 33

34 Hedging with BIBOR Futures Case 1 : Bank uses BIBOR futures to lock in interest rate today for future borrowing/lending. Bank buys BB3 Sep11 contract at (implied 3-month BIBOR = 3.35%). Later, 3-month BIBOR is 3.50%. Bank makes a loss of 3.35%-3.50% = 0.15% Bank loses 15 bps but can lend at a rate higher than the implied forward of 15 bps. 34

35 Hedging with BIBOR Futures Case 2 : Client uses BIBOR Futures to lock in interest rate today for future borrowing/lending. Client sells BB3 Sep11 contract at (implied 3-month BIBOR = 3.40%). Later, 3-month BIBOR is 3.50%. Client gains 3.40%-3.50% = 0.10% Client gains 10 bps to offset borrowing cost that is higher than the current implied forward of 10 bps. 35

36 BIBOR Future BIBOR Future Day DF FRA Contract Price 1M x M x M x Sep M x M x M x Dec M x M M M Example: 3M Discount factor (DF) = 3M FRA = DF DF 3MBIBOR 6MBIBOR 1 1 3M BIBOR

37 Forward Contract Forward Rate Agreement (FRA) Over-the-counter (OTC) forward contract Specify interest rate and notional amount to be paid or received on an obligation beginning at a future start date (expiration date). Similar to futures but with more customized tenor e.g. 1x4, 1x7, 3x6, 3x9, 6x12 and 12x18 37

38 Forward Contract Forward Rate Agreement (FRA) Notation Effective Date Termination Date Underlying Rate 1 x 4 T + 1M T + 4M 4-1 = 3-month LIBOR 1 x 7 T + 1M T + 7M 7-1 = 6-month LIBOR 3 x 6 T + 3M T + 6M 6-3 = 3-month LIBOR 3 x 9 T + 3M T + 9M 9-3 = 6-month LIBOR 6 x 12 T + 6M T + 12M 12-6 = 6-month LIBOR 12 x 18 T + 12M T + 18M = 6-month LIBOR 38

39 Q + A 39

40 Any other questions, please contact Rate Trading Desk Derivatives : Teerapol Rattakul (Pom) / Pichanun Aranyanark (Om) Bonds : Nopadol Prateepratana (Nop) / Pathamaporn Tankanit (Dew) Assets and Liabilities Management (ALM) Desk at and Aramsri Choowongse, CFA (Pui) Achavaphol Chabchitrchaidol, CFA (Ome) Wanthicha Kanjanaouthai, CFA (Toey) 40

41 Disclaimer This communication is made by Standard Chartered Bank (Thai) Public Company Limited, a financial institution regulated and supervised by the Bank of Thailand pursuant to the Financial Institution Business Act B.E (AD 2008) ("SCBT"). It is not directed at Retail Clients in the European Economic Area as defined by Directive 2004/39/EC neither has it been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. It is for information and discussion purposes only and does not constitute either an offer to sell or the solicitation of an offer to buy any security or any financial instrument or enter into any transaction or recommendation to acquire or dispose of any investment. The information herein may not be applicable or suitable to the specific investment objectives, financial situation or particular needs of recipients and should not be used in substitution for the exercise of independent judgment. Information contained herein, which is subject to change at any time without notice, has been obtained from sources believed to be reliable. While all reasonable care has been taken in preparing this communication, no responsibility or liability is accepted for any errors of fact, omission or for any opinion expressed herein. SCBT may not have the necessary licenses to provide services or offer products in all countries or such provision of services or offering of products may be subject to the regulatory requirements of each jurisdiction and you should check with your relationship manager or usual contact. You are advised to exercise your own independent judgment (with the advice of your professional advisers as necessary) with respect to the risks and consequences of any matter contained herein. We expressly disclaim any liability and responsibility for any losses arising from any uses to which this communication is put and for any errors or omissions in this communication. Copyright 2010 Standard Chartered Bank (Thai) Public Company Limited. All rights reserved. All copyrights subsisting and arising out of these materials belong to Standard Chartered Bank (Thai) Public Company Limited and may not be reproduced, distributed, amended, modified, adapted, transmitted in any form, or translated in any way without the prior written consent of Standard Chartered Bank (Thai) Public Company Limited.