Treasury Markets and Operations

322 Pages·2014·13.151 MB·English

by  Hong Kong Institute of Bankers

Treasury Markets and Operations

Treasury Markets
and Operations
The Hong Kong Institute
of Bankers
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Library of Congress Cataloging-in-Publication Data
ISBN 978-0-470-82757-4 (Paperback)
ISBN 978-0-470-82759-8 (ePDF)
ISBN 978-0-470-82760-4 (ePub)
Typeset in 11/14 pt, Arno Pro Regular
Printed in Singapore by C.O.S. Printers Pte. Ltd.
10 9 8 7 6 5 4 3 2 1
Contents
Preface ix
PART 1 TReAsuRy MAnAgeMenT 1
1 Treasury Management of Financial Institutions 3
Learning Objectives 3
Introduction 4
Issues in Treasury Operations 4
Treasury Controls and Measures 14
Summary 19
Key Terms 20
Study Guide 21
Further Reading 21
2 The Foreign exchange Market 23
Learning Objectives 23
Introduction 24
Basic Operation of Forex Market 24
Determining Exchange Rates 39
Forward Markets 44
Hedging the FX Exposure 56
Summary 59
Key Terms 61
Study Guide 61
Further Reading 62
vi / COnTEnTS
3 Money and Capital Markets 63
Learning Objectives 63
Introduction 64
Hong Kong Dollar Market 64
International Market 70
Bond Market 72
RMB Market 74
The Money Market Desk 76
Money Market Operations 80
Treasury Bills 87
Capital Markets: Risk and Valuations 89
Summary 96
Key Terms 97
Study Guide 98
Further Reading 99
4 Bond Market 101
Learning Objectives 101
Introduction 102
Basics of the Bond Market 102
Pricing Bonds 106
Interest Rate Risk 118
Summary 123
Key Terms 124
Study Guide 124
Further Reading 125
5 Derivatives 127
Learning Objectives 127
Introduction 128
Derivatives for Hedging 128
Credit Derivatives 143
Options 154
Trading Strategies 173
Summary 192
Key Terms 194
Study Guide 194
Further Reading 195
PART 2 TReAsuRy OPeRATIOns 197
6 Treasury Operations 199
Learning Objectives 199
Introduction 200
Contents / vii
Front Office 200
Middle Office 203
Back Office 209
Summary 213
Key Terms 214
Study Guide 215
Further Reading 215
7 Market Risk and Other Risk Measures 217
Learning Objectives 217
Introduction 218
Risk Considerations 218
Value-at-Risk 222
Basis Point Value and Hedging Market Risk 224
Managing Financial Risk 234
Summary 236
Key Terms 237
Study Guide 237
Further Reading 238
8 RMB Payments and settlements 239
Learning Objectives 239
Introduction 240
RMB Clearing and Settlement 240
Summary 247
Key Terms 248
Study Guide 248
Further Reading 248
PART 3 CAse sTuDIes 249
9 Case studies 251
Learning Objectives 251
Introduction 252
Segregation of Duties: Barings Bank 252
Settlement Risk: Herstatt Bank 258
Liquidity Risk in Position Hedging: Metallgesellschaft AG 261
Liquidity Risk: Lehman Brothers 265
Summary 270
Key Terms 270
Study Guide 271
Further Reading 271
viii / COnTEnTS
Appendix A: CMu Members 273
Appendix B: Bond Pricing 279
Return on Debt Securities 279
Bond Products 283
Index 303
Preface
Treasury Markets and Operations (TMO) and Bank Asset and Liability Management (ALM)
are the two modules within the Hong Kong Institute of Bankers’ (HKIB) curriculum of
Treasury Management. As part of the Associate of the Hong Kong Institute of Bankers
(AHKIB) Qualifications structure, the syllabuses are tailor made for learning and develop-
ment of a banking career in Hong Kong and Mainland China. Therefore, the two modules—
TMO and ALM—are closely related with one focusing on treasury market knowledge and
tools for strategic execution and the other on how the overall composition of assets and
liabilities should be formulated and managed to support the bank business model.
Why is the role of bank treasury important? Bank treasury needs to have the capa-
bility to understand the complexity of market conditions and the usage of treasury mar-
ket products to implement the ALM strategy set by the asset and liability management
committee (ALCO) and bank management. It is also closely involved in the control of a
number of key risks including market risk, interest rate risk and liquidity risk, which are
among the eight inherent risks under constant vigilance at banks and financial institutions.
This book Treasury Markets and Operations aims to equip bank treasury professio-
nals with the necessary knowledge and tools to understand the complexity of changing
market conditions and to apply their learning to manage risks and take advantage of emer-
ging opportunities. The launch of this book on treasury markets and operations is very
timely given recent developments in 2013–14, including:
• Increased market volatility in both the currency and money market, such as the further
liberalization of the CNY foreign exchange rate mechanisms, the Bank of Japan policy
on the JPY exchange rate, and the tapering of the third iteration of the Federal Reserve
program of quantitative easing and the effect on the interest rate cycle.