Sir as we had mentioned in the class We have attached the ppt which contains the strategies.

. We would need your help to understand the same. Thanks

Treasury Management An integrated Approach

 Risk management through derivatives

 Off-balance sheet strategies Use of financial derivatives to hedge risks. More elegant than on balance sheet strategies due to
Lower cost ( les risk capital) Tailor made solutions Being market related products measurable more accurately Risk management more easier Reversal of strategies far more easier than on balance sheet solutions

Without Hedging

With Hedging

Main types of strategy

Firm products and option products
Firm products interest rate swaps currency swaps forward exchange contracts some second generation swaps such as delayed swaps, averaged swaps, etc. Option products classic caps and floors classic swaptions second generation caps, floors and swaptions some second generation swaps (participating swaps, profit-sharing swaps, etc.)

Types of derivatives
Classic derivatives Firm Derivatives Interest rate swaps
Currency swaps Forward Forex Asset-swaps-Issue swaps FRAS

Second generation Derivatives

Barrier caps Knock-in /Knock-out caps Binary caps Captions( options on caps) Barrier floors Knock-in/Knock-out floors Binary floors Floortions(options on floors)

Optional derivatives FRA options Caps & Floors Collars European Swaptions

Second Generation swaps

Participating swaps Extendable swaps Profit sharing swaps Second Generation swaptions

Main types of strategy

1 - Defensive and offensive strategies
Defensive strategy : cover all its risks, whether they be real risks or opportunity risks
purchases of caps or floors, which enable, for any interest period, advantage to be taken of all the favourable movements of the rates while remaining covered against unfavourable movements : most expensive instruments for cover

Strategy which involves taking risks, but only opportunity risks : neutral strategy swaps, FRAs
Strategy which involves taking risks, including real risks : offensive strategy Selling a swaption

Main types of strategy

Buying an option Selling an option Dealing a firm product

Defensive strategy Offensive strategy Neutral strategy

 Bank has raised a loan of USD 100 million for five years at floating rate basis ( 6 monthly LIBOR) Assumptions: zero carry (the difference between the rate of the loan and current short-term rates. If the short term rate is less than the rate of the loan ,then its called the carrying cost. Financial risk if short term rates rise. Expectation- Rising USD yield curve

Covering a floating rate loan- rising yield curve Strategy-I

Synthetic borrowing at a fixed rate

Initial debt

Forecast
ST rates no view LT rates no view Risk aversion -strong Payment of a premium-no Strategy: Vanilla IRS
Current LIBOR

With swap

LIBOR

Advantages: Total cover by a swap is the only instrument which enables no risk to be taken if one does not want to pay an option premium. Drawbacks: In a configuration where the yield curve is rising ,the carrying cost is high. There is an opportunity cost in case of fall in long term rates. Risk mitigation: Do a cancellable swap

Covering a floating rate loan-rising yield curve Strategy-II

:Forecast:
ST rates
Fall expected or steady rates
Synthetic borrowing at a floating arte with a maximum

Initial debt

LT ratesRise Expected

With cap With swap

Risk aversion strong Payment of a premiumyes

Strategy: Purchase of a cap

Current LIBOR

LIBOR

Advantages: The cap enables the to take advantage of low short term rates while remaining fully covered. Drawbacks: The price of the cap may be high. Risk mitigation: One could buy a cap for a shorter duration and hedge the structure with a delayed start swap or purchase of a swaption less expensive than a cap.

Covering a floating rate loan-rising yield curve Strategy-III

Forecast:
ST rates expected fall or steady rates
Synthetic borrowing at a floating rate with a minimum And a maximum

Initial debt

LT ratesNo precise forecast

With collar With swap

Risk aversion

-strong
Payment of a premium -No Strategy: Purchase of a collar Advantages:

Current LIBOR

LIBOR

Cost of carry is less than that which would have been obtained with an IRS. One can elect to pay no premium at all or to pay a premium in order to lower the ceiling rate Drawbacks: If the level of the short term rates is lower than the floor ate the cost of carry will not be zero. There is opportunity cost the rates fall This strategy is attractive when one is uncertain of the amplitude of the fall in the short term rates.

Forecast
ST ratesSteady rates or fall with limited amplitude

Covering a floating rate loan-rising yield curve Strategy-IV

Synthetic borrowing at a floating rate within two limits And at a fixed rate outside these limits

Initial debt

LT ratesNo precise forecast

Risk aversion medium

Payment of premiumNo

With participating swap

With swap

Strategy: Downward participating swap.

Current LIBOR

LIBOR

Advantages: Cost of carry is zero at the time of the transaction The participating swap is particularly well adapted to concave curves as the extra cost compared to a simple swap is small. Fall in short term rates up to the lower limits can be taken advantage of Ceiling rat is lower than that of a collar. Drawbacks: If the short term rates fall below the lower limit the synthetic debt rate will rise abruptly The fixed rate is higher than that of a vanilla swap. This strategy is attractive when one is sure of the stability of the short term rates or a fall of limited amplitude.

Forecast
ST rateexpected fall or steady

Covering a floating rate loan-rising yield curve Strategy-V

Synthetic borrowing at a fixed rate which allows part of The carry to be recovered

Initial debt

LT ratesNo precise forecast

Risk aversionstrong or medium

With profit sharing swap

Payment of premium-

With swap

No
Strategy:

Downward profitsharing swap

Current LIBOR Advantages: Reduced carry compared to a vanilla swap Drawbacks: Fixed rate higher than that of a classic swap. This strategy is half-way between an interest rate swap and a classic cap which is attractive when one is uncertain of the amplitude of the fall in rates

LIBOR

Covering a floating rate loan-rising yield curve Strategy-VI

Forecast
ST ratesRise expected ( limited amplitude) or Steady
Synthetic borrowing at a fixed rate below a limit and at a floating rate Above the limit

Initial debt

LT ratesNo precise forecast

With deactivating swap

Aversion to riskweak

With swap

Payment of a premium-No

Strategy: Upward deactivating swap

Current LIBOR Advantages: Swap rate very noticeably lower than the rate of a simple swap with yield curve rising Drawbacks: If there is a strong rise in the short term rates the position will no longer be covered This strategy is attractive when one expects stability in the short term rates or arise of limited amplitude LIBOR

Covering a floating rate loan-rising yield curve Strategy-VII

Forecast Short term rates- down Long term rates- down Risk aversion- medium or weak Payment of a premium- indifferent Strategy: Do Nothing

Covering a floating rate loan-rising yield curve Strategy-VIII

Forecast: Short term rates- down Long term rates- down Risk aversion- weak Payment of a premium- no Strategy: Sell a right to receive swaption.

Hedging techniques for an Fx.risk

View of Currency Very Bullish Very Bullish Bullish Bullish Flat Market Flat Market No View No View Bearish Bearish Very Bearish Very Bearish View of Risk Risk Averse Risk Tolerant Risk Averse Risk Tolerant Risk Averse Risk Tolerant Risk Averse Risk Tolerant Risk Averse Risk Tolerant Risk Averse Risk Tolerant Action Buy Currency Forward Buy Currency Forward Buy Currency Forward Buy ATM call Do Nothing or Buy OTM Call Do nothiing Buy ATM call Do nothing or Buy ATM call Buy OTM Call Do Nothing Do nothing or Buy FAR OTM Call Do Nothing

Thank you