Aci Dealing Certificate Workshop: Facilitated by Andre Kurten

TTC 2013
ACI DEALING
CERTIFICATE
WORKSHOP
Facilitated by
Andre Kurten

TTC 2013
The examination consists of a single paper of 2 hours duration divided into the following 9
topic baskets:
Section 1 - Basic Interest Rate Calculations - 6 questions - 6 marks
Section 2 - Cash Money Market - 6 questions - 6 marks
Section 3 - Cash Money Market Calculations - 6 questions - 6 marks
Section 4 - Foreign Exchange - 12 questions - 12 marks
Section 5 - Foreign Exchange Calculations - 6 questions - 6 marks
Section 6 - FRAs, Money Market Futures & Swaps - 12 questions - 12 marks
Section 7 - Options - 6 questions 6 marks
Section 8 - Asset and Liability Management - 8 questions - 8 marks
Section 9 - Principles of Risk - 8 questions - 8 marks
Section 10 - The Model Code - 20 questions - 20 marks
Total maximum score 90 marks
The overall pass level is 60% (54 marks), assuming that the minimum score criteria for each of
the topic baskets is met.
There is a minimum score criteria of 60% for the Model Code section and 50% for each of the
other topic baskets.
(extract form the ACI website June 2013)
You may use any financial (or scientific) calculator in the examination as long as it is not TEXT
PROGRAMMABLE. Alternatively the Microsoft on-screen calculator is available on the test
screen. Our recommendation is the programmable HP17BII calculator as formulae for the
exam can be programmed into this calculator saving valuable time when writing the exam.
Examination Procedure
TTC 2013
The Financial Markets
Where is the market?
Location
Primary and secondary market
Participants in the market
Intermediation
disintermediation
TTC 2013
GOVERNMENT

FIRMS

HOUSEHOLDS

FINANCIAL
INTER-
MEDIARIES
HOUSEHOLDS

FIRMS

GOVERNMENT

SURPLUS
UNITS
DEFICIT
UNITS
INTERMEDIATION
FUNDS
FUNDS FUNDS
INSTRUMENTS INSTRUMENTS
INSTRUMENTS
DISINTERMEDIATION
The Financial System
TTC 2013
Markets are where traders and brokers, are involved
Traders work for banks, stockbrokers, Central banks
Inter-dealer brokers act as agents facilitating trades
between market participants
Market has evolved significantly in the last 30 years
Products traded include:
Currencies
Bonds
Money Market Assets
Commodities
Equities
Derivatives
The Market Development
TTC 2013
Formerly known as the Association Cambiste Internationale
Established in 1955 to bring together forex traders in major
centre's
Its offices are based in Paris
Over 14,000 members in 79 countries
Four regions the Americas, Asia Pacific, Europe, and Middle
East/Africa
Mission Statement to be regarded within the business community, financial
services industry and by the authorities and media, as the leading association
representing the interests of the financial markets and to actively promote the
educational and professional interests of the financial markets and industry
ACI has a council of Presidents
AACI has an executive committee
The ACI Financial markets Association
TTC 2013
The ACI Model Code updated in 2013
It contains best practice for ethics and code of conduct as
well as best practice for dealing and operations in the OTC
financial markets
It does not deal with legal matters or technicalities
It aims to set out the manner and spirit in which business
is conducted
The committee for Professionalism - CFP is an ACI body
that is willing to arbitrate disputes between market
participants where all avenues have been exhausted to try
and resolve the dispute between themselves.
The Role of the ACI
TTC 2013
Basic Interest Rate
calculations
Section 1
TTC 2013
To understand the principles of the time value of money. To be
able to calculate short-term interest rates and yields, including
forward-forward rates, and to use these interest rates and yields
to calculate payments and evaluate alternative short-term
funding and investment opportunities. Candidates should know
what information is plotted in a yield curve, the terminology
describing the overall shape of and basic movements in a
curve, and the classic theories which seek to explain changes in
the shape of a curve. They should also know how to plot a
forward curve and understand the relationship between a yield
curve and forward curves.

One question basket 6 questions
Section Objectives
TTC 2013
Day Base Conventions
NOTE: Not all currencies calculate interest using the same day
base convention.
Domestic money markets use:
ACT/365 or ACT/360
The 365 day base currencies referred to in the exam are
GBP,AUD, NZD, HKD, SGD. All other currencies given in
the exam use a 360 day base convention.
NOTE: Euroyen is the only exception which is ACT/365
ACT refers to the actual number of days in the investment
period. You will always be given the days, but NOT the day
base in the exam.
Since 1999 USD Treasury bonds, Euro Denominated
Treasury bonds, GBP Treasury bonds all use ACT/ACT
convention for accrued interest calculations.
TTC 2013
Benchmark Rates
London Interbank Offered Rate LIBOR is calculated by the
BBA (British Bankers Association) and is a mean (average) of
all the rates collected from the 16 reference banks and
published by 11h00 UK time (GMT). This rate applies to ALL
currencies traded in London.
EURIBOR is the EUR Interbank Offered Rate calculated by
the EBA (European Bankers Association) and is a mean of all
the rates collected from the 57 reference banks (47 from
European countries) and published by 11h00 Central European
Time (CET).
NB: All these benchmarks are quoted to at
least 2 decimal places, but not more than 5.
TTC 2013
Overnight Index Benchmarks
NOTE: All these benchmarks are WEIGHTED AVERAGE
RATES unlike LIBOR and EURIBOR which are simple
average rates

Sterling Overnight Index Average (SONIA) for GBP
Euro overnight index average (EONIA) for EUR
Fed Funds Effective rate for USD
TOIS for CHF . This is a Tom/next rate not an overnight rate
TONAR Tokyo overnight average rate for Japanese Yen

These rates are used for fixing overnight index swaps OISs in
each of the respective currencies.
TTC 2013
Rates format and basis points
Fractions
Most rates in the exam will be expressed as a
fraction. Therefore they will quote a rate as
4.% which is 4.25%. To calculate the decimal
divide the numerator by the denominator for
example, % is 3 divided by 4 which is 0.75%.
Basis points
1 basis point is 0.01% or 0.0001 as a decimal.
TTC 2013
interest Principal Value Future + =
Simple Interest Calculations
Interest Earned, Future Value, Present Value,
Yield or Holding period return
( )
(
+
=
base day days x rate 1
Value Future
lue Present va
100 x days actual base day x principal initial interest Yield =
base day days x rate x principal earned Interest =
100 x
count day
basis day
x 1 -
inception at Amount
maturity at Amount
Yield
(
|
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.
|
\
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=
or
TTC 2013
Exercises Simple Interest
1. Invest USD 5,000,000 at 2.50% for 273 days What interest
is due?

2. You invest GBP 1,000,000 at 3.50% for 180 days. What do
you receive back (capital and interest) at maturity?

3. You invest EUR at 2.75% for 60 days and receive 1,025,000
back at maturity. What amount of EUR did you originally
invest?

4. You received 75,000 in interest on EUR5,000,000 invested
for 180 days. What yield did you receive on your
investment?
TTC 2013
Bond and Money market basis
Given a 360 day rate (Bond basis) calculate the
equivalent 365 day (Money Market Basis) rate

Given a 365 day (Money Market Basis) rate
calculate the equivalent 360 day (Bond basis) rate
365 360 x Rate Basis Bond Basis Market Money =
360 365 x Rate Basis Market Money Basis Bond =
TTC 2013
Bond and MM basis - Explained
A bond will pay a round amount of interest as its coupon.
Therefore a $100,000 bond with an annual coupon of 5% will
pay $5,000 in interest at the end of the year (irrespective of the
number of days in the year).
However, a $100,000 money market deposit at 5% for a year
with actual days of 365 will pay interest calculated as follows:
100,000 x 0.05 x 365 360 = $5,069.44
Therefore the a 5% interest rate would offer you a better return
in the money market than the bond market because of the more
favourable day base convention in the money market. The
Money market equivalent of a 5% Bond rate will be LOWER
than 5%.
NB: The MM basis rate will always be LOWER than its
BB Rate equivalent
TTC 2013
1 -
2
rate annual - semi
1 rate annual
2
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+ =
4.704% or 0.04704 1 -
2
0.0465
1
2
=
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\
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.
|
\
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+
Convert semi-annual to annual rate
Formula given in exam
Convert a semi-annual rate of 4.65% to an annual
equivalent:
TTC 2013
( ) | | 2 x 1 - rate annual 1 rate annual Semi + =
( ) | | 4.65% or 0.046499 2 x 1 - 0.04704 1 = +
Formula given in exam
Convert an annual rate of 4.704% to a semi- annual
equivalent:
Convert annual to a semi-annual rate
TTC 2013
Rate
Maturity
Classic or Normal Yield Curve
Yield Curves
This yield curve is gently upward sloping. A positive yield curve is steeply
upward sloping. The Liquidity preference theory is used to explain a
classic yield curve. A positive yield curve would be explained by the
interest rate expectations theory
TTC 2013
Rate
Maturity
Inverse or Negative Yield Curve
Yield Curves
The Interest rate expectations theory is used to explain an
inverse yield curve.
TTC 2013
Humped Yield Curve
Rate
Maturity
Yield Curves
The Market segmentation theory is used to
describe a humped yield curve.
TTC 2013
Rate
Maturity
Flat Yield Curve
Yield Curves
TTC 2013
Interpolation
You may be required to do straight-line interpolation in
the exam. This is finding a rate between two points
given the rates around that point. The assumption is
that it falls on a straight line between the two rates
given.
For example. Given the 3 month (90 day) rate of
3.50% and the 6 month (180 day) rate of 4.10%
calculate the 4 month (120 day) rate.
4.10-3.50 = 0.60. this is the amount by which the rate
increases on a straight line basis between 3 and 6
months. Divide 0.60 by 3 = 0.20. this is the rate
increase per month. Add 0.20 to 3.50 = 3.70% which is
the 4 month (120 day) rate.
TTC 2013
Push EXIT key until this menu appears

choose SOLVE and the menu below will appear

Choose NEW and the then start typing your equation using the alpha
characters and the numerals and brackets
The equation must have an equal number of these brackets ( as those
brackets) otherwise the equation will be rejected
Once you have completed typing the equation, push EXIT key until it asks
you if you want to save the equation push YES and then CALC. If the
formula is accepted, it will show you the formula menu. If it is unsuccessful,
it will beep you and return to the formula for editing.
Menu steps Program the HP 17 BII
FIN BUS SUM TIME SOLVE CURRX
DELET NEW EDIT CALC
TTC 2013
HP17BII Programmable calculator
Go to the solve function and follow the prompts to type in these formulae
Forward forward pricing for FRAs
FRA=((1+(LRxLDDB100))(1+(SRxSDDB100))-1)x(DB(LD-SD)x100)
Settlement amount of FRA
FRASET=(DAYSx(LIB-FRA)xAMTDB100) (1+(LIB100xDAYSDB))
Secondary market price for CDs
CD=FVx(1+(IDDBxCR100)) ((1+(RDDBxMR100))
Forward Points for forward FX
PIPS=(SPTx((1+(QCxDY100DBQ))(1+(BCxDY100DBB)))-SPT
Simple interest Present value formula
PV=FV(1+(IRxDAYSDB100))
Discount to yield
YLD=DR(1-(DR100xDAYSDB))
Effective rate
EFF=((1+(R1100xD1DB))x (1+(R2100xD2DB))x(1+(R3100xD3DB))x
(1+(R4100xD4DB))-1)x(DB(D1+D2+D3+D4)x100
Formula programming
TTC 2013
Forward forward pricing for FRAs
FRA = forward forward rate LR = long rate LD = long days SR= short rate SD= short
days DB = day basis
Settlement amount of FRA
FRASET= FRA settlement amount DAYS = days in the forward period LIB = LIBOR
(or equivalent FRA= FRA rate AMT= notional DB = day basis
Secondary market price for CDs
CD = Secondary market proceeds FV = face value ID = initial days DB = day basis CR
= coupon rate RD= remaining days MR= market yield
Forward Points for forward FX
PIPS= Forward points SPT = Spot QC= quoted currency interest rate DY = days
DBQ= day basis for quoted currency BC= base currency interest rate DBB= Day basis
for base currency
Simple interest Present value formula
PV= present value FV= future value IR= interest rate DAYS = days in period DB= day
basis
Discount to yield
YLD= true yield DR= pure discount rate DAYS= days DB= day basis
Effective rate
EFF= annual effective rate R1 = rate 1 D1 = days in period 1 DB= day basis R2, R3
etc same as for R1 and D1
Formula abbreviations
TTC 2013
Cash Money Market
and Calculations
Section 2
TTC 2013
To understand the function of the money market, the
differences and similarities between the major types of cash
money market instrument and how they satisfy the
requirements of different types of borrower and lender. To
know how each type of instrument is quoted, the quotation,
value date, maturity and payment conventions that apply
and how to perform standard calculations using quoted
prices. Given the greater inherent complexity of repo, a good
working knowledge is required of its nature and mechanics.

Two question baskets 6 theory and 6
calculations
Section Objectives
TTC 2013
Interest-Bearing or YIELD Instruments
Deposits-call and term
Certificates of Deposit (CDs)
Discount Instruments
Treasury Bills
Bankers Acceptances referred to as eligible bills
in the UK. (GBP denominated)
Promissory Notes
Commercial Paper
Not all these instruments are issued by banks, and all are
unsecured. However Treasury Bills are seen as risk free as they
are issued by Governments
Money Market Instruments
TTC 2013
Deposits made between banks and financial
institutions
Why do banks deal with each other in the
Interbank market?
How do we distinguish between a domestic
currency and a euro currency?

Interbank Deposits
TTC 2013
Maturities in the Money Market
Trading days must be working days in the centre
where the funds are cleared
Periods of trading deposits:
Up to 4 weeks are classified as short dates
from 1 month to 1 year is classified as fixed dates
Over 1 year in medium term
Domestic deposits trade out of today or tomorrow,
whereas euro deposits usually trade out of spot.
Month end deposits will mature on the last dealing
date of the month and this is known as the end-end
convention.
Turn of the month is a deal done out of the last
working day of the month maturing on the first working
day of the next month.
TTC 2013
Quotation of prices
Prices in the money market are ALWAYS quoted
as percentages per annum, either in decimals or
fractions
Two sides to every price BID and OFFER
Difference between bid and offer is known as the
SPREAD.
Most centers use Bid/Offer for cash.
NB: London market uses Offer/Bid for cash in other
words Bid/offer for assets.
5.25/5.15
Bid for assets
Offer for cash
Offer for assets
Bid for cash
TTC 2013
Dealing on prices
Whenever you are quoted an interest rate or price
by the market, you will ALWAYS borrow (buy) at the
higher price and lend (sell) at the lower price.
When YOU are quoting a price to a customer they
will always borrow (buy) from you at the higher
price and lend (sell) to you at the lower price.
If the market quote for USD deposits is 5.25/15
then you would borrow at 5.25 and lend at 5.15.
This principle is VERY IMPORTANT as many
questions will test your ability to identify the side on
which you are dealing as part of the question.
TTC 2013
Discount Instruments
Issued at a discount to Face value
Has no coupon rate
Face value repaid at maturity date
Fixed maturity date
To compare the return on discount
instruments with interest bearing
instruments, you need to convert the
discount to a yield
Bankers acceptances (eligible Bills are
often referred to as two name paper)
TTC 2013
Discount Instrument Calculations
To calculate the discount or purchase price of
a discount instrument you need:
The face value
The discount rate
The days to maturity
The day count convention i.e. 365 or 360

The purchase price is the face value minus
discount
TTC 2013
Discount Paper ACI Formulas
To calculate the discount
basis day
days
x rate discount x value face discount of amount =
|
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.
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\
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=
basis day
days
x rate discount - 1 x Value Face
proceeds market secondary
To calculate consideration or purchase price
NB: To calculate the purchase price of the DISCOUNT
instrument you can simply deduct the discount amount
from the face value
TTC 2013
Converting a Discount rate to a Yield
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=
basis day
days
x rate discount - 1
rate discount
yield true
Converting a Yield to a Discount Rate
(not required for the exam)
|
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\
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\
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+
=
basis day
days
x yield 1
Yield
rate discount
or
100 x
days actual ion x considerat
basis day amount x discount
or 100 x
days actual x value face
basis day amount x discount
TTC 2013
Treasury Bill Exercise
A USD Treasury bill with a face value of 100
is issued at a discount rate of 9.25% p.a. for
90 days

Calculate the discount amount
Calculate the purchase price
calculate the equivalent yield

TTC 2013
Certificate issued in bearer form mostly
immobilized and held by custodians
Has a fixed maturity - usually up to Five years,
but liquid up to one year
Has a fixed interest rate - the Coupon rate
Interest paid at maturity
Tradable - secondary market
Unsecured like normal deposits
Only issued by banks
Certificates Of Deposit
TTC 2013
Trading CDs 1
Issued at face value (denominated in millions)
Traded in Secondary Market at current market rates

To calculate secondary market price you need:
Face value or Par value of CD
Coupon or issue rate
Yield (Current rate at which CD is traded)
Days from issue to maturity
Days from settlement to maturity
TTC 2013
Trading CDs ACI formulas
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+
=
basis day
maturity
to issue from days
x rate coupon 1 x value face
PROCEEDS MATURITY
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\
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.
|
\
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+
=
basis day
maturity left to days
x yield 1
proceeds maturity
PROCEEDS MARKET SECONDARY
days
Basis Day
x 1 -
price purchase
proceeds sale

RETURN PERIOD HOLDING
(
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\
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=
NB: This Formula not given in exam
TTC 2013
CD Exercise
Give the following information:
Face Value = $1m
Issue Rate = 6.50% p.a.
Full tenure = 180 days
Remaining tenure = 60 days
Yield = 6.00%
Date convention = ACT/360
1. Calculate the maturity proceeds of the CD
2. Calculate the consideration of the CD in the
secondary market
3. Calculate the holding period return for the
investor
TTC 2013
Solution to CD exercise
500 032, $1, =

360
180
x
100
6,50
+ 1 x 000,00 000 $1
VALUE MATURITY
(
|
.
|
\
|
23 1,022,277.
1.01
1,032,500

360
60
x
100
6.00
1
1,032,500
PROCEEDS MARKET SECONDARY
=
=
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\
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+
6.68%
100 x 120 360 x 0.022277
100 x
120
360
x 1 -
00 1,000,000.
23 1,022,277.

RETURN PERIOD HOLDING
=
=
(
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TTC 2013
Calculating the profit/loss on CD
When calculating the profit or loss on a CD, you need to
consider the difference between the original purchase price plus
the accrued interest to date of disposal against the consideration
received at sale.
In our example accrued interest is:
1,000,000 x 0.065 x 120 360 = 21,666.67
The dirty price received at sale was 1,022,277.23
Subtract the accrued interest from the dirty price:
1022,277.23 21,666.67 = 1,000,610.56 clean price
Subtract the original purchase price from the clean price:
1,000,610.56 1,000,000 = $610.56 profit.
This makes sense because the HPR is HIGHER than the
original yield expected.
TTC 2013
Yield to Discount
Some discount instruments are quoted as a yield to
maturity, but are discount instruments.
The purchase price is calculated in the same way as CD
consideration by using the present value calculation. Here
we use the face value as the maturity value.
Euro currency commercial paper ECP and GBP
(Sterling) Treasury Bills are traded on a true yield rather
than a straight discount.
Please note that GBP Treasury Bills are issued for
91,182,or a maximum of 364 days.
US domestic commercial paper USCP trades on a
straight discount and cannot be issued for more than 270
days.
TTC 2013
Yield to discount Exercise
A 91 day Sterling Treasury Bill with a
face value of GBP 10m is quoted at a
yield of 6.75% p.a.

calculate the purchase price (secondary
market proceeds)

calculate the discount rate on the bill

TTC 2013

.53 $9,834,497
91/365) x (0.0675 1
m 10
Days/365) x (Yield 1
Value Face
Price Purchase
=
+
=
+
=
Exercise 4 - Solution
100 x
6.638%
365
91
x 0.0675 1
0.0675
Rate Discount
=
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+
=
TTC 2013
The Repo Market - 1
Repo is short for repurchase agreement
One party lends securities (usually Government
bonds) in return for borrowing funds
The lender of money has a SECURED deposit,
which usually attracts a lower interest rate than normal
money market deposits
The two main transaction types are:
All in or Classic Repo one transaction two legs.
This can be a fixed dated or done on a call basis
referred to as open-ended.
Sell/Buy Back two separate deals one spot and
one forward. This CANNOT be open-ended.
TTC 2013
The Repo Market - 2
The repo can either be special where a specific bond is
required or General collateral - GC where any acceptable
bond can be given as collateral. GC repo rates are usually
higher than special repo rates.
The lender of bonds (repo) bears the MARKET RISK on
the bond during the life of the repo.
The lender of cash (reverse repo) bears the CREDIT
RISK during the repo.
Under a classic repo there can be substitution (GC not
special) of bonds, haircut and margining during the repo,
whereas under a sell/buy back, substitution and margining
is unusual by can be done by cancelling the buy back leg
and entering a new transaction with the new details.
TTC 2013
Repo
seller
Repo
buyer
At inception - settlement date
bond
Cash
Repo
seller
Repo
buyer
At Maturity
Cash plus repo interest
Bond
The Repo structure
The party providing collateral at inception is known as the repo or the repo
seller and the party providing cash is known as the reverse repo or repo
buyer.
TTC 2013
The All in or classic Repo - 1
One party sell bonds (the repo) to another (the reverse
repo) while simultaneously agreeing to repurchase them
on a future date at a specified price.
If you do the repo (lend bonds), you BORROW cash on
the offer side of the market quote
If you do the reverse (borrow bonds), you LEND cash at
the bid.
The sale and repurchase price are the same except for
the repo interest which is simply added to obtain the
amount of money due on expiry. This is why a classic repo
is considered to be ONE transaction with two legs.
Any coupons paid during the life of the repo which is paid
to the buyer by the issuer, must be paid back to the seller
immediately.
TTC 2013
The collateral is exchanged for cash at an agreed rate of
interest for a fixed period or it can be open ended
An initial margin may be charged by the LENDER of cash.
The lender of cash may take collateral which exceeds the value
of the amount of cash loaned. This is referred to as the
haircut.
Margin calls during the life of the repo ensure the cash lender
that the value of the security never falls below the current value
of cash advanced. The current value is calculated as the cash
lent plus the interest earned to date.
Margin calls can be provided either in the form of additional
security or the cash equivalent by the repo seller.
BOTH the REPO and the REVERSE REPO are subject to
margin calls during the life of the repo.
TTC 2013
Factors influencing the size of the margin are:
The longer the term of the repo the greater the chance of
default
The longer the collateral has to maturity, the greater the
change in the collateral value because of a change in
interest rates.
The creditworthiness of the counterparty providing
collateral
The liquidity of the collateral
The legal agreement (or lack thereof) covering the
transaction.
Flat basis is a repo done with no margin.
TTC 2013
Delivery under a classic repo
Delivery of security needs to be considered. The
collateral (bonds) can be held in custody by the repo seller.
The danger under this arrangement is that the collateral
may be used twice to raise cash. This is known as double
dipping.
A tri-party repo is one where both counterparts use the
same custodian. Segregated accounts will be opened by
the custodian for the express purpose of the repo
transaction. This kind of repo allows comfort to the buyer
as no double dipping can occur and is subject to a legally
binding agreement signed by all three parties.
TTC 2013
Sell/Buy Back
Two separate bond market transactions; a sale (purchase) in
the spot market and a purchase (sale) in the forward market
Repo rate not explicit, but is implied in the forward price
The right to any coupon during the life of the repo accrue to
the BUYER of the securities. It will be refunded to the SELLER
in the buyback price.
Because full title passes in the spot leg from SELLER to
BUYER, ISMA documentation does not apply (although most
counterparties will have ISMA/GMRA agreements in place with
each other)
Margining is unusual with these repos and is usually done by
repricing the repo
Sell/buy backs CANNOT be open ended
TTC 2013
Calculating the haircut
Fixed bond amount calculate the start money
Bonds market value (dirty price) divided by (100 plus the
haircut)
Example
-Dirty price 995,000
-Haircut 2%
995000/102%
= $975,490.20 cash against bond value at start of repo
Fixed cash amount calculate the bond value at start
Cash amount x (100 plus the haircut)
Example
-Cash $1m
-Haircut 2%
1,000,000 x 102% = 1,020,000 bond value at start of repo
TTC 2013
Dealing the repo rate
1. when doing the REPO (lending or selling bonds), you are borrowing
cash, so you would deal on the OFFER side of the repo rate
2. when doing the REVERSE REPO (borrowing or buying bonds), you are
lending cash, so you would deal on the BID side of the repo rate
3. The repo done Tom/Next or overnight is 1 day. One week and spot/week
are 7 days and two weeks is 14 days.
You need to answer 5 questions when facing a Repo calculation question:
1. Am I doing the repo or reverse repo?
2. How long is the repo term?
3. What is the repo rate and am I borrowing or lending cash?
4. What is the collateral worth?
5. Is there a haircut?
Repo rate 1.75/80

When doing the reverse Repo
you deal at the bid
When doing the Repo
you deal at the offer
TTC 2013
Classic Repo Example
FLAT BASIS REPO
A bank wishes to place out USD50 million Eurodollar bonds (doing the repo).
The bond has a coupon of 5,50% and mature on 12/04/2015. The repo rate
is 6.50/6.60 for 7 days. The bond collateral value is $51,633,700.
By doing the repo, you are going to borrow funds at 6.60%
Determine repo interest and final consideration
$51,633,700 x 0.066 x 7/360 = 66,263.25 repo interest (MM convention)
51,633,700 + 66,263.25 = $51,699,963.25 final cash (Buy back price)

REPO WITH HAIRCUT (using the same details as above)
If there was a 2% haircut on the repo, then the start money would be
different.
51,633,700/102% = $50,621,274.50 is the start money

Determine the repo interest and final consideration
$50,621,274.50 x 0.066 x 7/360 = 64,963.97 repo interest
$50,621,274.50 + 64,963.97 = $50,686,238.47 final cash (buy back price)
TTC 2013
Foreign Exchange

Section 4
TTC 2013
To understand and be able to apply spot exchange rate quotations. To
understand basic spot FX dealing terminology and the role of
specialist types of intermediary. To recognise the principal risks in spot and
forward FX transactions. To calculate and apply forward FX rates, and
understand how forward rates are quoted. To understand the relationship
between forward rates and interest rates. To understand time options. To
be able to describe the mechanics of outright forwards, FX swaps and
forward-forward FX swaps, explain
the use of outright forwards in taking currency risk and explain the use of
FX swaps in rolling spot positions, hedging outright forwards, creating
synthetic foreign currency assets and liabilities, and in covered interest
arbitrage. To display a good working knowledge and understanding of the
rationale for NDFs. To be able to recognise and use quotes for precious
metals, and demonstrate a basic
understanding of the structure and operation of the international market in
precious metals.
Two question baskets 12 theory and 6 calculations
Section Objectives
TTC 2013
Forex Jargon
Value date - the date when delivery takes place on a currency
deal
Spot date - two business days after deal date
Bid- the rate at which the price maker is willing to buy the
BASE Currency
Offer - the rate at which the price maker is willing to sell the
BASE Currency
Spread - the price makers margin between the bid and offer
price
Direct quote - 1 unit of USD in relation to quoted currency e.g.
USD/JPY = 114.25/75
Indirect quote- 1 unit of currency other than the USD in
relation to USD e.g. EUR/USD 1.3925/45.
NOTE: The currencies quoted indirectly against the USD are
the EUR,GBP, AUD, NZD. All others are quoted directly.
TTC 2013
Forex Jargon
Reciprocal quote- if USD/HKD = 7.2500 then the reciprocal
rate is 1/7.25 = HKD/USD 0.1379
Forward exchange rate - the rate agreed today for the
exchange of one currency for another at some date in the
future other than spot
Swap - a purchase for value one date with a simultaneous
sale for a different value date
(Sale With A Purchase)
Outright - the purchase or sale of forex for a future value
date
Overnight O/N - rolling out a position from today into
tomorrow
tom/next T/N - rolling out a position from tomorrow into the
spot date
Spot Next S/N - rolling out of spot into the next day
TTC 2013
Dealing in Spot FX Markets
Consider how you would deal in your own currency
against the USD or other major currencies
Always look at what you are doing in the base currency
If you have a QUOTED currency amount, you will
DIVIDE by the exchange rate to get the BASE currency
amount
If you have a BASE currency amount, you will MULTIPLY
by the exchange rate to get the QUOTED currency
amount
NOTE: As a market user receiving several quotes:
You buy the base currency at the LOWEST offer
You sell the base currency at the HIGHEST bid
TTC 2013
Cross rates
An exchange rate which is derived from two other
quoted exchange rates is called a cross rate. (The
stronger currency usually becomes the base
currency in a cross quote)
EXAMPLE: Deriving a cross rates by using two
dollar based or direct quotes.
Given the following calculate the CHF/HKD
exchange rate:
1USD = HKD 7.2500
1USD = CHF 1.5000
TTC 2013
We can deduce mathematically therefore that
CHF 1.5000 = HKD 7.2500
To find out how many HKD = 1CHF we need to
divide both sides by 1.5000 (to arrive at 1CHF on
the left-hand side)
1.5000/1.5000 = 7.2500/1.5000
1CHF = HKD4.8333
or CHF/HKD= 4.8333
There are some simple rules which help!!!
Cross rates
TTC 2013
TWO DIRECT (OR INDIRECT) QUOTES
Cross and divide (divide high number by low number).
For example to determine the CHF/HKD given
USD/HKD= 7.2515/7.2545

USD/CHF = 1.5030/1.5050
BID = 7.2515/1.5050 = 4.8183
OFFER = 7.2545/1.5030 = 4.8267
CHF/HKD =4.8183/4.8267 (spread is 84 points)
Rules for cross rates
TTC 2013
A DIRECT AND INDIRECT QUOTE (different base
currency)
Straight down and Multiply
For example to determine the GBP/HKD given
USD/HKD= 7.2515/7.2545

GBP/USD = 1.4030/1.4050
BID = 7.2515x1.4030 = 10.1739
OFFER = 7.2545x1.4050 = 10.1926
GBP/HKD=10.1739/10.1926 (spread is 187 points)
Rules for cross rates
TTC 2013
Cross Rate Exercise
1. Given the following calculate the
GBP/HKD exchange rate:

USD/HKD 7.7550/75
GBP/USD 1.8325/35

2. Given the following calculate the
HKD/JPY exchange rate:

USD/HKD 7.7550/75
USD/JPY 114.25/30
TTC 2013
Forward foreign exchange
Forward foreign exchange is used to hedge against
adverse currency movements
Forward exchange rates can be quoted for any
currency pair.
Both spot and forward exchange rates are
influenced greatly by current expectations of future
events
Arbitrage will occur where quoted forward points
move too far away from the implied fair value forward
points
Interest rate parity theorem The forward points
are equal to the difference between the interest rates
of the two currencies for the period of an investment.
TTC 2013
AN EXAMPLE (positive Points)
Assume that the exchange rate (SPOT) between USD
and CHF is 1.25 (USD 1 = CHF 1.25). Let us also
assume that the interest rate for one year in USD is 3%,
and the interest rate for CHF for one year is 5%
USD 1 CHF 1.25
CHF 1.3125
3% 5%
USD1.03
1 YR
Using the information given:
The USD/CHF one year
forward rate is:
1.3125 1.03 = 1.2743
The forward points are:
1.2743 - 1.25 = 0.0243
OR
243 Points
TTC 2013
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= Spot -

BCDB
days x BCIR
1
TCDB
days x TCIR
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x Spot Points Forward
Where:
TCIR = terms currency interest rate
BCIR = base currency interest rate
TCDB = terms currency day base
DCDB = base currency day base
Forward FX formula
TTC 2013
points 246 or 0.0246
1.2500 - 1.2746
1.2500 -
1.030417
1.050694
x 1.25
1.2500 -

360
365 x 0.03
1
360
365 x 0.05
1
x 1.2500 Points Forward
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Forward FX formula example
Using the info from the previous example:
TTC 2013
AN EXAMPLE (Negative Points)
Lets assume that the exchange rate (SPOT) between USD and
CHF is 1.2500 (USD 1 = CHF 1.25). Let us also assume that
the interest rate for one year in USD is 5%, and the interest rate
for CHF for one year is 1%.
USD 1 CHF 1.25
CHF 1.2625
5% 1%
USD1.05
1 YR
Using the information given:
The USD/CHF one year
forward rate is:
1.2625 1.05 = 1.2024
The forward points are:
1.2024 - 1.2500 = - 0.0476
OR
negative 476 Points
TTC 2013
Forward FX Positive points
NOTE: The higher interest rate currency will be at a
forward discount to the lower interest rate currency.
Where the base currency interest rates are lower than
the variable currency, then the variable currency is
trading at a discount to the base currency in the forward
market. The points will then be POSITIVE.

Positive points benefit the seller of the base currency on
the forward dates and points would be described as in
your favour.
TTC 2013
Forward FX- negative points
NOTE: The lower interest rate currency will be at a
forward premium to the higher interest rate currency.
Where the base currency interest rates are higher than
the variable currency, then the variable currency is
trading at a premium to the base currency in the forward
market. The points will then be NEGATIVE.
Negative points can be identified when the bid is
HIGHER than the offer in the price quoted. This is a
common question type in the exam, so check the points
before you do the calculation.
Negative points benefit the buyer of the base currency
on the forward date.
TTC 2013
How do we know if points are
Negative or positive?
Base currency
Interest rates
Points Positive
Quoted currency
Interest rates
Points Negative
Base currency
Interest rates
Quoted currency
interest rates
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or not.
It is cheaper to buy the discount currency in the forward market.
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TTC 2013
Change in forward points
The forward points will change because of two factors:
A change in the spot but this will not change the points
significantly unless the move is big.
A change in the interest rates of the two currencies This
will have a much more significant effect on the forward
points.
Question: how will the points change when:
1. USD I/rates are higher than EUR I/rates and EUR
rates fall?
2.USD I/rates are higher than JPY I/rates and USD rates
fall?
3. GBP I/rates are higher than USD I/Rates and USD
rates fall?
TTC 2013
Calculating forward points given the spot and
outright: Bid Offer
3 month Outright = 179.07 179.42
minus
Spot GBP/JPY = 181.31 181.62

Forward points = -2.24 -2.20
OR
224 220
Points are NEGATIVE (bid higher than offer). GBP
interest rates are therefore higher than JPY interest
rates. JPY Premium and GBP discount.
TTC 2013
This is a transaction with one leg for a forward date
other than spot. These transactions are usually
referred to as Forward Exchange Contracts - FECs
For example, a exporter in the South Africa has
USD receivables in 3 months and wishes to secure
a rate today for delivery in 3 months time. The bank
quotes 3-month bid at 2000 pips and the spot is
9.0000. The customer will receive 9.2000 for his
USD in 3 months time irrespective of the prevailing
spot. The bank in turn will use the FX swap market
and the spot market to hedge the customer deal. In
this example, the bank will buy and sell 3 months
and sell USD/ZAR spot.
Outright Forward Exchange
TTC 2013
Banks offer outright foreign exchange contracts to
their customers on the following basis:
1. Fixed dated This is the most common form of FX
outright forward contract. This is a contact where the
customer can only take up the contract on the expiry
date. The customer can however shorten or extend this
contract through the use of a FX swap at their own cost.
2. Time options this is an FX outright contract where the
customer has flexibility on the drawdown date of the
contract. Time options can be offered in two ways:
a. Partly optional This is a contract which can be drawn
down only after a certain time has elapsed but must be
taken up by the expiry date.
b. Fully optional this is a contract that can be taken up at
anytime from inception but must be taken up at expiry.
FX time Options
TTC 2013
If the contract is partly optional, the customer will sell the base currency to
the bank at the bid side of the points for the start of the forward period which
will be added to the bid of the spot. If they wish to buy the base currency,
they pay the offer side of the points for the full term of the contract added to
the offer of the points.
If the contract is fully optional, the customer will sell the base currency to the
bank at the bid side of the spot. If they wish to buy the base currency, they
pay the offer side of the points for the full term of the contract added to the
offer side of the spot.
Example
Spot USD/ZAR is 8.5075/85
1-mth points 200/210
2-mth points 425/435
3 mth points 550/570
a. A 3-month partly optional contract where the contract can be taken up
after 1 month would be quoted as USD/ZAR 8.5275/8.5655 ( bid:
8.5075+0.0200 offer: 8.5085+0.0570).
b. A 3-month fully optional contract where the contract can be taken up at
anytime in the 3 months would be quoted as USD/ZAR 8.5075/8.5655 ( bid:
8.5075 offer: 8.5085+0.0570).
FX time Options - Pricing
TTC 2013
This transaction involves TWO legs namely
A spot leg AND a forward leg.
Assuming the dealer wants to buy USD against the
CHF 3 months, he will then sell and buy. This means
he will sell USD/CHF in the spot market and buy the 3
months USD/CHF with the same counterparty
simultaneously. Deals are usually interbank.
The spot price is agreed immediately between the
buyer and seller when the deal is done and the points
are added to the spot. (if the points are negative, then
the forward rate will be LOWER than the spot). The
spot agreed is usually the mid rate of the current
bid/offer.
Forward exchange swaps
TTC 2013
Cross forward fx - An Example
USD/NOK spot is 7.8350/60
USD/NOK 3 mth Fwd pts 340/380

GBP/USD spot is 1.5400/05
GBP/USD 3 mth Fwd pts 70/65
Step1- calculate 3 mth fwd for each
currency pair
3 month USD/NOK outright
7.8350 7.8360
+0.0340 +0.0380
7.8690 7.8740
3 month GBP/USD outright
1.5400 1.5405
-0.0070 -0.0065
1.5330 1.5340
Step 2 calculate the cross
GBP/NOK 3 mth outright
(Direct and indirect quote use
straight down and multiply rule
stronger currency is the base)

USD/NOK 7.8690 7.8740

GBP/USD 1.5330 1.5340

GBP/NOK 12.0632 12.0787
3mth outright

TTC 2013
Forward Forward swaps
This is a Fx Swap starting at a future date other than spot.
For example, a dealer wants to do a FX Swap for 3 months
starting in 3 months time. This is described as a 3x6 swap.
RULE: Take the far bid and subtract the near offer to get the
fwdfwd bid and take the far offer and subtract the near bid to
get the fwd fwd offer.
An example A dealer wants to buy the 3s and sell the 6s
USD/CHF 3 mth Fwd pts 80/85
USD/CHF 6 mth Fwd pts 140/145
Spot is 1.7500
He buys 3 months at 1.7500 + 0.0085 = 1.7585
And sells 6 months at 1.7500 + 0.0140 = 1.7640
He has sold the 3x6 at 55 points.
The 3 x 6 bid/offer is 55/65. (use the rule to check)
TTC 2013
A Typical Bank Forward Points Quote Page
EUR/USD FORWARDS

Period Bid Offer
O/N 2 3
T/N 3.5 4
S/N 1.5 2
1WK 10 11
1MTH 40 43
2MTH 80 85
3MTH 115 118
6MTH 220 230
9MTH 310 320
1YR 405 410
NOTE:
Always assume 4 decimal places
after the big figure when using
forward points. (except for JPY
where 2 decimal places apply) The
11 points in the 1 week will be
written as 0.0011. Where a comma
appears in the quote then any
figures after the comma are extra
decimal places. The 1.5 points in
the S/N is then written as 0.00015
Where point are shown as PAR it
means they are zero.
TTC 2013
NDFs are currency contracts for difference CFDs. Like
FRAs are to interest rates, so NDFs are to foreign
exchange rates.
They are traded in countries where there is no formal
forward exchange market or an illiquid forward market.
They can be used for hedging and speculation.
They are like forward outright FX deals where a future rate
of exchange is agreed between the parties but only the
DIFFERENCE between the exchange rate fixing at expiry
and the NDF contract rate is settled in foreign currency.
If at fixing the prevailing exchange rate is higher that the
NDF rate, then the seller pays the buyer the difference. If
the prevailing exchange rate is lower, then the buyer pays
the seller.
There is never an obligation to take or make delivery of the
notional contract amount.

NDFs - Non-Deliverable Forwards
TTC 2013
3-month NDF in USD/CNY at 6.2500.
Notional principal USD 10 million
2 scenarios in 3 months time:
1. USD/CNY fixes at 6.2600.
Difference of 100 pips on USD 10m is CNY100,000.
Settlement occurs in USD so 100,000/6.2600 = USD
15,974.44 seller pays the buyer.
2. USD/CNY fixes at 6.2300.
Difference of 200 pips on USD 10m is CNY200,000.
Settlement occurs in USD so 100,000/6.2300 = USD
32,102.73 Buyer pays the seller.
If this contract was used to hedge, the hedgers effective
exchange rate will be the NDF rate provided they can
procure the additional USD at the fixing rate in the spot
market

NDF Example
TTC 2013
Value tomorrow theoretical price convention
switch the points-change the sign-add to spot
For example:
The spot rate USD/HKD is 7.2500/7.2515
The T/N points are 25/26
What is the theoretical bid/offer rate for tomorrow?
7.2500 7.2515
+ +
-0.0026 -0.0025
Tom price for USD/HKD = 7.2474/7.2490
TTC 2013
The precious metals market
ISO codes for precious metals
Gold XAU
Platinum XPT
Palladium XPD
Silver XAG

The four major gold coins traded are: Kruger Rand, American Eagle,
British Sovereign all have a gold purity of 22 carats or 0.9167.
The Canadian Maple leaf with a purity of 24 carats or 0.9999

The LIBOR Rate for gold is the GOFO rate. This is the lending rate for
gold loans in the London market

LOCO account is the equivalent of a Nostro account for gold.

There may be questions on the above points in the foreign exchange
section in the exam. Read the section in the study guide for more detail.
TTC 2013
Forward Interest
Rates, FRAs, Futures,
and Swaps
Section 4
TTC 2013
To understand the mechanics of and how to use
money market interest rate derivatives to hedge
interest rate risk.
Section Objectives
TTC 2013
Hedging
Direct hedges e.g. Forward cover
Indirect hedges e.g. Currency hedges for motor
manufacturers
Speculation
Gearing or leverage (the main cause of large
derivative losses)
Big market moves
Simulation
Creating a synthetic portfolio
Arbitrage
To take advantage of mispricing between markets

Derivatives Why Use Them?
TTC 2013
Forward forward interest rates are prices
which pertain today to deposit periods
commencing in the future
Forward forward rates
What is the rate
for this period?
Lend for six months
Short funds for 3 months Borrow funds for 3 months
0 3 6
TTC 2013
The forward forward
pricing Formula
( ) | |
( ) | | ( ) SD - LD
DB
X 1 -
SR X SD/DB 1
LR X LD/DB 1
FR
(
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=
Where
FR = forward rate
LR = long rate
SR = short rate
SD = short days
DB = day base
LD = long days
TTC 2013
Calculate the fair value for a USD 3-month
LIBOR Interest rate starting in 3 months time
(a 3x6) given the following information:

-6-month LIBOR rate (LR) = 4% (0.04)
-3-month LIBOR rate (SR) = 3.50% (0.035)
-SD =90 days
-LD =180 days
-DB = 360

3-Month LIBOR forward interest rate
TTC 2013
3-Month LIBOR forward interest rate
|
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time months 3 in rate month 3 a for p.a. 4.461%
100 x
90
360
x 1
00875 . 1
02 . 1

100 x
90 180
360
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(1
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360
180 04 . 0
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FR
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x
TTC 2013
Lend 1m @ 4% for 180 days results in interest payable of
$20,000 (1mx0.04x180/360)
Borrow 1m @ 3.5% for 90 days results in interest receivable
of $8,750 (1mx0.035x90/360)
Difference in interest is $11,250 (20,000 8,750)

To calculate the fair value interest rate for the remaining 90
days, the rate calculated must utilize the capital plus interest
after the first 90 days to achieve the amount repayable at the
end of 180 days.
Calculated as follows:
Checking the formula An example
period forward 3x6 day 90 the for p.a. 4.461%
100 x
90
360
x
1,008,750
11,250
=
TTC 2013
This is the rate at which the forward period borrowing or
lending must be done to breakeven.
In other words:
If I borrowed (long cash) for 3 months at 3.50% and lent
for 6 months (short cash) at 4.00%,
Then,
4.461% is the rate at which I must borrow cash for 3
months in 3 months time (3x6) to breakeven on my money
market book.
This forward forward rate calculation is the methodology
applied to identify the interest rates for mismatches in the
money market books of a bank and is the basis for FRA
pricing.
What does this forward rate mean?
TTC 2013
Forward Rate Agreements
Definition
An FRA is an agreement between two parties, a
Buyer and a Seller that sets (fixes) the level of an
interest rate for a specific time in the future on a notional value.
For example 3 months starting 6 months from now.
In 6 months time the FRA rate will be compared to the 3 month
market benchmark such as EURIBOR or LIBOR and the
DIFFERENCE will be settled based on the notional principal.
FRAs are therefore referred to as CFDs (contracts for
difference).
FRAs are the ideal short-term derivative to hedge
mismatches in the money market funding book of a bank.
FRA prices are derived using the forward forward model.
TTC 2013
Contract amount:- The Notional Principal Amount e.g. R50m used in the
settlement calculation
Contract currency:- The currency in which the contract amount is
denominated
Contract rate:- The fixed interest rate agreed under the FRA agreement
Dealing (transaction) date:- The date on which the FRA deal is struck and
the FRA rate is agreed
Fixing date:- The date when the reference rate is determined (could be
different to the settlement date)
Settlement (value) date:- The date on which the notional borrowing or
lending commences and the date on which settlement on the FRA is made
Maturity date:- The date on which the notional borrowing or lending
matures
FRA - Terminology
TTC 2013
FRA - Terminology
Forward period:- The number of days between the settlement and the
maturity date of the FRA
Reference rate:- The market-based interest rate used on the fixing date to
determine the settlement amount payable/receivable e.g. 3 month LIBOR

Settlement amount:- The amount paid by one party to the other on the
settlement date of the agreement, based on the difference between the
contract rate and the reference rate, calculated on the notional amount of the
FRA. Interest is usually paid in arrears, but the settlement on the FRA is paid
at the start of the interest period (settlement date on the FRA). The
settlement is therefore discounted or net present valued by using LIBOR
fixing rate.

TTC 2013

NOTE: Fixing and settlement are on the SAME DAY in
domestic FRA markets e.g. GBP FRAs in London fix
and settle on the SAME DAY.
Foreign currency FRAs settle T+2 e.g. USD FRAs in
London fix TWO working days before settlement occurs.
FRA - Diagram
Contract period
(FRA can be closed out)
Forward period
(notional borrowing period)
Deal Date
when FRA rate
is agreed
Fixing Date
when benchmark
is determined
Settlement Date
when net payment
is made
Maturity Date
nothing
happens here!
TTC 2013
Buying or Selling an FRA
The Buyer of the FRA
The buyer of an FRA is a potential future borrower and exposed to
interest rates rising (short cash in the forward period)
Buying the FRA is like borrowing money at a fixed rate for a future
period.
The buyer will receive the difference between the FRA and the 3 month
LIBOR at fixing if the LIBOR rate is ABOVE the FRA rate, and pay if the
LIBOR rate is BELOW the FRA rate.

The Seller of the FRA
The seller of an FRA is a potential future investor, and is exposed to
rates falling (long cash in the forward period)
Selling the FRA is like lending money at a fixed rate for a future period.
The seller will receive the difference between the FRA and the 3 month
LIBOR at fixing if the LIBOR rate is BELOW the FRA rate, and pay if the
LIBOR rate is ABOVE the FRA rate.
TTC 2013
Buying an FRA to hedge
Borrower has a USD 50m floating rate loan priced at 3-month LIBOR. She
thinks rates will rise in the next three months.
Market rates today
3-mth LIBOR 5.75%
3X6 FRA 6.00%
Transactions today
Borrows at 5.75% FOR 90 days
Buys 3x6 FRA at 6.00%
3 months time
2 scenarios 3-month LIBOR fixes at 6.25% or 5.75%
Scenario 1
Repays loan and borrows 50m at current LIBOR 6.25%
LIBOR is above FRA rate so receives difference 0.25%
Therefore effective cost of funding 6.00% for 3 months
Scenario 2
Repays loan and borrows 50m at current LIBOR 5.75%
LIBOR is below FRA rate so pays difference 0.25%
Therefore effective cost of funding 6.00% for 3 months
NOTE: IRRESPECTIVE of LIBOR rate borrowing cost is 6.00%
Borrows and
buys FRA
t
3 6
Borrowing
matures
Fixes FRA and
borrows again
3x6 FRA period
TTC 2013
Selling an FRA to hedge
A large bank needs to lend USD 100m for 6 months in 6 months time linked
to LIBOR. They think interest rates will fall in the next 6 months. They want to
lock in the investment rate for that period today.
FRA rate today
6X12 FRA 4.25%
Transactions today
Sells 6x12 FRA at 4.25%

6 months time
2 scenarios 6-month LIBOR fixes at 3.75% or 4.50%
Scenario 1
Invests 100m at current 6-month LIBOR 3.75%
LIBOR is below FRA rate so they receive the difference 0.50%
Effective return on investment is 4.25% for 6 months (3.75 + 0.50)
Scenario 2
Invests 100m at current 6-month LIBOR 4.50%
LIBOR is above FRA rate so they pay the difference 0.25%
Effective return on investment is 4.25% for 6 months (4.50 0.25)
NOTE: IRRESPECTIVE of LIBOR rate their return is 4.25%
Sells FRA
t
6 12
Investment
matures
Fixes FRA and
invests cash
6x12 FRA period
TTC 2013
The agreement is a reciprocal compensation
agreement between the two counterparts

If at settlement the reference rate > FRA rate,
then
the Seller pays compensation to the Buyer

If at settlement the reference rate < FRA rate,
then
the Buyer pays compensation to the Seller
Forward Rate Agreements - Summary
TTC 2013
Calculation of Settlement Amount
( i
L
- i
F
) x N x

B
d
B
Settlement

Amount

=
1 + i
L
x
d
Where:
i
L
= reference interest rate (LIBOR)
i
F
= contract (FRA) rate
N = notional principal amount
d = actual number of days in the forward period
B = day count convention
(e.g. 360 for USD, 365 for GBP)

TTC 2013
Calculation of Settlement Amount
(0.0625

- 0.05375) x 90/360 x 50,000,000

Settlement
Amount
=
1 + 0.0625 X 90/360
Example
FRA USD 50million (B or day base is 360)
FRA rate 5.375%
3-month USD LIBOR Fixed at 6.25%
FRA period 90 days
= 109,375/1.015625
= 107,692.31 paid by FRA seller to buyer
TTC 2013
A future contract is a standardised contract between two
parties to exchange a standard quantity of a specified
underlying asset on a predetermined future date at a price
agreed today, traded on an organised Exchange guaranteed
by the exchange
The price of a futures contract can be divided into three
main elements:
-The spot price of the underlying asset
-The financing cost which includes storage and
insurance cost for the underlying asset in certain cases
-Cash flow generated by the underlying asset (if any)
Futures Contracts - A Definition
TTC 2013
Given the following calculate the future price of gold
-The current gold price is $865 per ounce.
-The 1-year financing cost is 5%p.a. and
-The storage and insurance cost is $5 p.a.
The futures price= $865+($865 x 0.05)+$5 = $913.25

NOTE: this is the fair value or no arbitrage futures
price (ignoring transaction cost).
The 1-year gold futures contract may well trade above
(contango) or below (backwardation) the spot price.
Pricing Futures - An Example
TTC 2013
Short Term Interest Rate Futures Price
The formula used for pricing short term interest rate
is the forward-forward pricing formula. This method
applies to FRA and STIR futures fair value interest
rates.
However, unlike FRAs, STIR futures are quoted as
a PRICE rather than an interest rate
The price is arrived at by deducting the interest rate
from 100
For example, a rate of 3,75% will be 100 3.75 =
96.25
Futures prices can be quoted to 3 decimal places
96.255 which = 3.745%
TTC 2013
Interest Rate Futures Specifications
3-month Euronext Eurodollar futures are quoted as price and
have a nominal value of $1,000,000. Minimum tick 0.5 or 0.25
for near contract on CME
3-month Euronext Eurosterling futures are quoted as price
and have a nominal value of 500,000. Minimum Tick 0.5
3-month Euroyen futures are quoted as price and have a
nominal value of 100,000,000 Minimum Tick 0.5
3-month Euronext EUR futures are quoted as price and have
a nominal value of 1,000,000 Minimum Tick 0.5
3-month Euronext Euroswiss futures are quoted as price and
have a nominal value of CHF 1,000,000 Minimum Tick 1
Contract months are known as IMM (International Monetary
Market) months. March, June, September and December. The
near month contract is the most liquid.
TTC 2013
Tick values
3-month USD, CHF, and EUR futures have a full tick value of
25 of the contract currency. For every 1 point move in price
(0.01%), the contract value will change by 25. (1m x 0.01% x 3
12).
3-month GBP futures have a full tick value of 12.50.
(500,000 x 0.01% x 3 12)
3-month JPY futures have a full tick value of 2500. (100m
x 0.01% x 3 12).
A tick is usually also used to described as the MINIMUM
price movement allowed on a contract. It has become common
however that contracts trade in half ticks or in the case of the
Eurodollar contract on the CME in
1
/
4
ticks on the near
contract. A half tick would be denoted in the price as 0.005 and
quarter ticks by 0.0025. for example or 95.4275 would indicate
that the contract price includes a quarter tick.
TTC 2013
Initial Margin is the amount that is put up to open a futures
position on an exchange and will be held by the exchange
until the contract expires or is closed out. This is usually
sufficient to cover a single day loss on an open position.
The exchange determines the amount of initial margin
required.
Variation margin is payable (receivable) daily in cash based
on the contracts revaluation through a process called
marking-to-market (M-T-M). The mark to market price is
usually determined by an weighted average price calculated
using prices (usually the last 5 trades) traded during a
period prior to the close of the trading day.
Settlement and trading is guaranteed by the exchange and
margins are usually payable between 10h00 and 12h00 on
the day following the trade or mark-to-market.
Margining and settlement
TTC 2013
Calculating variation Margin
Near 3-mth Euro$ futures Price M-T-M Margin due or
(owing) in USD
Buy 20 contracts 94.50 94.65 7,500
Buy 50 contracts 94.55 94.65 12,500
Sell 50 contracts 94.60 94.65 (6,250)
Buy 20 contracts 94.55 94.65 5,000
Sell 30 contracts 94.65 94.65 0
Long10 contracts at 94.65 Margin due
to you
18,750
Note that the exchange MTM each trade, but settles the net amount due at the end
of the day. Although 170 contracts were traded, Initial margin will only be required
on the OPEN position at the end of the trading day i.e. on 10 contracts.
TTC 2013
STIR Futures vs FRAs
FUTURES
Buy futures if you
believe rates will FALL
Sell futures if you
believe rates will RISE
FRAs
Sell FRAs if you
believe rates will FALL
Buy FRAs if you
believe rates will RISE
Note: Buying FRAs is the same as selling futures
Selling FRAs is the same as buying futures
SO
To hedge a long FRA position BUY futures
To hedge a short FRA position SELL futures

THIS SLIDE IS IMPORTANT TO REMEMBER!!!!
TTC 2013
An interest rate swap (IRS) can be defined as an exchange of
one set of cash flows for another based on a notional principal
amount or an exchange for differences on a given set of cash
flows.
The concept of a basic IRS is very similar to that of an FRA.
The difference is that the FRA is applied to a single period cash
flow, and a swap is applied to cash flows over a longer period
of time.
The important concept to remember is that the buyer of an
IRS (also known as the Fixed rate payer) is protected against
rising interest rates and the seller (the Fixed Rate receiver) is
protected against declining interest rates.
Interest Rate Swaps - IRSs
TTC 2013
Typical Reuters IRS Screen
Period Bid Offer
1 Yr 5.75 5.80
2 Yr 5.80 5.85
3 Yr 5.85 5.90
4 Yr 5.87 5.92
5 Yr 5.90 5.93
Term of
swap
Price at
which the
bank will
pay fixed
Price at
which the
bank will
receive
fixed
Reset quarterly against
3-monthLIBOR
Reset quarterly against
3-month LIBOR
Absolute quotation Spread quotation
Basis points
added to current
government
bond price to
arrive at
absolute swap
rate
Current
government
bond price
Period Bid Offer Govn
1 Yr +2 +7 5.73%
2 Yr +4 +9 5.76%
3 Yr +3 +8 5.82%
4 Yr +1 +6 5.86%
5 Yr +3 +6 5.87%
TTC 2013
Plain vanilla swap This is a fixed for floating rate swap with a
fixed notional value for the life of the swap. This is by far the
most common IRS done.
Accreting swap - A swap, which has a notional value that
increases over the life of the swap.
Amortizing swap - A swap, which has a notional value that
decreases over the life of the swap.
Rollercoaster swap - A swap, which has a notional value that
increases and decreases during the life of the swap.
Basis swap A swap where one floating rate is swapped for
another floating rate. An example would be a 6-month LIBOR
against 3-month LIBOR swap.
Interest Rate Swaps Structures
TTC 2013
The Swap Mechanism
A PAYS fixed to B
PARTY A PARTY B
A RECEIVES floating from B
The rates exchanged can be a fixed rate for a floating rate or
floating for floating rate.
The counterparties will only exchange the difference between
the rates based on a Notional Principal amount
There will always be a start date, expiry date, fixing dates, and
settlement dates agreed on the swap
Day count convention is calendar rolls modified following -
CRMF
TTC 2013
Coupon or Plain Vanilla Swaps
Over 75% of all swaps are plain vanilla
Fixed rate vs. floating rate cash flows
Notional Principal amount never exchanged
Principal is constant for the life of the swap
Reference index - JIBAR, LIBOR, etc.
3Month is the most common benchmark
Swaps subject to ISDA documentation. ISDA = International
Swap and Derivatives Association
Fixing in advance with Settlement in arrears
Settlement is done on a netting basis which reduces the
counterparty risk
Payer, receiver quotation convention
Absolute Vs. spread quotation in overseas markets

TTC 2013
Settlement calculation
1 year Plain vanilla IRS fixed against 3 mth LIBOR
Start date
First fixing
Second fixing
Settlement of
first fixing
0 6 9 12 3
Third fixing
Settlement of
second fixing
Fourth fixing
Settlement of
third fixing
Settlement of
fourth fixing
Swap matures
The swap has a notional principal of USD 50 million
The fixed rate is 5.75% on the swap
The first 3month LIBOR fix is 5.25% done on the start date of the swap
i.e. at 0 on the timeline above.
Amount to be paid on second fixing is calculated as follows:
50,000,000 x (0.0575-0.05250) x 90/360 = $62,500 paid by the buyer (fixed
rate payer) to the seller (floating rate payer) on the second fixing date.
This process is repeated over the life of the IRS
TTC 2013
Overnight Index Swap (OIS)
an OIS is a fixed/floating interest rate swap
floating leg is a daily overnight or tom/next reference rate
floating leg interest is compounded daily
the interest difference is exchanged as a single amount at
maturity of the swap
settlement is made net with no exchange of principal
Sterling Overnight Index Average (SONIA) is the benchmark in
GBP
Euro overnight index average (EONIA) used for EUR
overnight index swaps
Fed Funds Effective rate used for USD overnight index swaps
All overnight index rates are weighted average rates unlike
LIBOR and EURIBOR which are simple averages.
TTC 2013
Cross Currency Interest Rate Swap
Differs from a normal IRS in that there is an exchange of
principal and the interest rates swapped are in TWO
DIFFERENT CURRENCIES.
This exchange of principal can be done at the start of the
swap, but there MUST ALWAYS be an exchange of principal
at the end of the swap.
The spot rate used for the principal exchange at expiry of the
CIRS is ALWAYS the same as the spot which was prevailing
at inception (and which may have been used at inception).
These swaps can be floating for floating and are referred to
as a basis swap and are the most common currency swap.
They can also be fixed for floating
They are the ONLY swap which can offer fixed for fixed.
These swaps are used primarily to hedge long term Foreign
Exchange exposure.
TTC 2013
Options
Section 5
TTC 2013
To understand the fundamentals of options. To
recognise the principal classes and types, and
understand the terminology, how they are quoted in
the market, how their value changes with the price
of the underlying asset and the other principal
factors determining the premium, how the risk on an
option is measured and how they are delta hedged.
To recognise basic option strategies and
understand their purpose.
Section Objectives
TTC 2013
An option is a contract that gives the holder (or
buyer) of the option the right, but not the
obligation to buy (or sell) a specified quantity
and quality of a certain asset within a specified
period or on a specific date, at a price agreed
when the contract was entered into. For this
right, the buyer pays a premium and the seller
is obliged to honour the contract if called on to
do so by the holder.
Definition of an Option
TTC 2013
-A Call option gives the holder the right but not the
obligation to buy the underlying asset at some time
in the future.

-A Put option gives the holder the right but not the
obligation to sell the underlying asset at some time
in the future.

NOTE: Options can either be American - exercisable
at any time up to expiry- or European -exercisable
only at expiry. Options can also be styled Asian or
Bermudan (see workbook for definition)
Types of Option Contracts
TTC 2013
-The premium of an option is payable when the option is
traded. For currency options, the premium is payable value
spot. For caps and floors the premium can be paid at the start
or over the life of the option.
-The exercise price of the option is known as the STRIKE
price.
-When buying options the most you can lose is the premium.
NOTE: The CREDIT RISK on a long option position can be
GREATER than the premium paid.
-Selling options carries far greater risk than buying options.
-Only options which are in-the-money will be exercised at
expiry
-Out-the-money options expire worthless
Options Characteristics
TTC 2013
Option status Call option Put option
In-the-money Spot price > strike price Spot price < strike price
At-the-money Spot price = strike price Spot price = strike price
Out-the-money Spot price < strike price Spot price > strike price

The value of an option is the premium which someone is
prepared to pay for the option.
Intrinsic value represents the money you would make
between the exercise price and the market price if you were
to exercise the option you are holding immediately Intrinsic
value can only be POSITIVE.
Time value reflects the amount of premium in excess of the
intrinsic value that someone would be prepared to pay in the
hope that the option will be worth exercising before it expires
Valuing Option Contracts
TTC 2013
The further out-of-the-money the exercise price,
the cheaper the option
The longer the time to expiry, the more expensive
the option is
The fair value price of an option is dependent on:
the strike price
the term of the option
the underlying asset price (spot)
the prevailing risk free interest rate
the volatility of the underlying asset price
The pricing model used is usually based on the
Black and Scholes options pricing model.
Pricing Option Contracts
TTC 2013
Call values Put values when
Rise Fall Price of underlying rise
Fall Rise Price of underlying fall
Rise Rise Volatility rises
Fall Fall Volatility falls
Fall Fall Time to expiry reduces
Rise marginally Fall marginally Interest rates rise
Fall marginally Rise marginally Interest rates fall
Valuing Options
TTC 2013
Profit

Loss

0

E

Premium

SHORT CALL

B

Asset price

Profit

Loss

0

E

Premium

LONG CALL

B

Asset price

Option Contract Expiry Profiles
E = exercise price
B = breakeven

LONG CALL
Limited downside risk with
unlimited profit potential
SHORT CALL
Unlimited downside risk with
limited profit potential
TTC 2013
Option Contract Expiry Profiles
Profit

Loss

0

E

Premium

SHORT PUT

B

Asset price

Profit

Loss

0

E

Premium

LONG PUT

B

Asset price

E = exercise price
B = breakeven

Buy a put when you expect a fall in the underlying market price
LONG PUT
Limited downside risk with limited
profit potential between
breakeven and zero
SHORT PUT
Limited downside risk between
breakeven and zero
with limited profit potential

TTC 2013
Profit
0
Loss
E
Short Straddle Expiry Profile
Sell both a call and put option with the same strike price, notional value,
and expiry date
Expect very low volatility during the life of the strategy
Maximum profit = premium earned, with unlimited downside
ATM Straddles are delta neutral
TTC 2013
Profit
0
Loss
E
Long Straddle Expiry Profile
Buy both a call and put option with the same strike price, notional value,
and expiry date
Expect volatility to be high during the life of the strategy
Maximum loss = premium paid, with unlimited upside
ATM Straddles are delta neutral
TTC 2013
Option short Strangle
Sell a call and a put with different strike prices same expiry date
and notional amount.
This is a strategy to benefit from low volatility
Profit
0
Loss
Asset Price
A B
TTC 2013
Profit
0
Loss
Asset Price
Option Long Strangle
Buy a call at and a put with different strike prices same
expiry date and notional amount.
This is a strategy to benefit from high volatility
A B
TTC 2013
E
A synthetic long asset position
Spot Asset Price
Long Call
Short Put
Loss
Profit
Synthetic
Long asset
0
Long call + Short put with same strike, notional, and expiry =
SYNTHETIC LONG ASSET POSITION
In theory the price of ATM puts and calls have the same premium and therefore the cost of
constructing a synthetic long asset should have little or no premium cost.
TTC 2013
E
A synthetic short asset position
Long put + Short call with same strike, notional, and expiry =
SYNTHETIC SHORT ASSET POSITION
In theory the price of ATM puts and calls have the same premium and therefore the cost of
constructing a synthetic short asset should have little or no premium cost.
Spot Asset Price
short Call
Long Put
Loss
Profit
Synthetic
short asset
0
TTC 2013
Delta
Delta measures the change in the option premium (price)
resulting from a change in the price of the underlying asset
The term delta neutral refers to the fact that the option writer
or buyer has sold (or bought) the exact proportion of
underlying asset to neutralize the effect that the underlying
price has on the option premium, all other factors remaining
the same.
Delta on long calls ranges between 0 and +1 and you SELL
the underlying to delta hedge
Delta on short calls ranges between 0 and -1 and you BUY
Delta on long puts ranges between 0 and -1 and you BUY
Delta on short puts ranges between 0 and +1 and you SELL

The Option Greeks
TTC 2013
Delta hedging is done to neutralize the change in the option
premium value.
For options that are at the money (ATM), the delta is usually
0.50 (50%). This means for a 1c move in the market, the
premium should change by 0.5c. To delta hedge a short
ATM USD/CHF call option in 10m USD, the dealer would
need to BUY 5m USD to be delta neutral. The effect is that
as the option goes in the money the option value would
increase and the option writer would be losing money but
because he has bought 5m USD, he will make money on
this position, thus neutralizing the loss on the option. If the
option goes out of the money, the option writer will make
money on the option, but lose on the delta hedge.
Dealers who trade an options curve will use delta hedging
as they are looking to make money from the volatility of
price and not the direction of price.
Delta Values - 1
TTC 2013
As call options go in the money, the holder (buyer) would needs to
sell the underlying to remain delta neutral. They are getting long of
the underlying through the option. The delta would range between
+0.50 and +1. The opposite is true for the person who has written
the call as they would be getting short of the underlying so their
delta would range between
-0.50 and -1 and they would need to buy the underlying to remain
delta neutral.
As put options go in the money, the holder (buyer) would needs to
buy the underlying to remain delta neutral. They are getting short
of the underlying through the option. The delta would range
between -0.50 and -1. The opposite is true for the person who has
written the put as they would be getting long of the underlying so
their delta would range between +0.50 and +1. they would need to
sell the underlying to remain delta neutral.
Delta Values- 2
TTC 2013
Gamma
Gamma measures the change in the delta
resulting from a change in the price of the
underlying asset
Gamma ranges between 0 and 1. The gamma will
be most sensitive to change when the option strike
is at-the-money close to expiry. Gamma exposure
can only be offset by buying or selling) options
opposite to those already bought (or sold).
The Option Greeks
TTC 2013
Theta
Theta measures the change in the option premium
resulting from a change in the time to expiry of the
option
The decay of time will result in the option loosing
value, all other factors remaining equal.
Time value decays slowly at first and then
increases as the option approaches expiry.
Theta is positive for options writers and negative for
option buyers.
The Option Greeks
TTC 2013
Vega
Vega measures the change in the option premium
resulting from a change in the volatility of the
underlying asset price
The more volatile the underlying asset price, the
more likely the option will expire in the money. So if
volatility increases, the value of the option will also
increase, all other factor remaining equal.
Volatility measures change but not the direction of
prices
The Option Greeks
TTC 2013
Rho
Rho measures the change in the option premium
resulting from a change in the risk free interest rate
Rho is the least important of the Greeks. If the
underlying asset is extremely sensitive to the
change in interest rates, then the option value will
change, all other factors remaining constant.
The Option Greeks
TTC 2013
Interest Rate Options
CAPS
A Cap is an agreement whereby the buyer buys the
right to pay a predetermined fixed rate (strike rate)
on a notional principal amount if LIB|OR rises
above the strike rate. (used by borrowers)

FLOORS
A Floor is an agreement whereby the buyer buys
the right to receive a predetermined fixed rate
(strike rate) on a notional principal amount if LIBOR
falls below the strike rate. (used by lenders)

TTC 2013
Interest Rate Options
COLLARS
A Collar is the simultaneous purchase of a cap (floor) and sale
of a floor (cap) with different strike rates, same notional value
and expiry date.
This can be used by both lenders and borrowers where they
reduce the cost of a hedge by limiting the upside benefit.
Borrowers collar BUY the cap and SELL the floor. Lenders
collar BUY the floor and SELL the cap.
Borrowers are guaranteed a worse case rate - the strike on
the cap - and will limit the benefit of a favourable market move
- the strike on the floor.
Lenders are guaranteed a worse case rate - the strike on the
floor - and will limit the benefit of a favourable market move -
the strike on the cap.
TTC 2013
Currency Options
Characteristics

A currency option is described as at the money
when it has a strike price EQUAL to the forward
exchange rate.
A Call on one currency is a Put on the other
currency.
For example, a USD/ JPY call option is a Call on
USD and a Put on JPY.
Currency option premiums are payable value spot
after the deal date as a percentage of the base
currency notional amount.
TTC 2013
Principles of Asset
and Liability
Management
Section 6
TTC 2013
To understand the fundamentals of Asset & Liability
Management as a practice of managing and hedging risks that
arise due to mismatches between the asset side and the
liability side of the balance sheets of a
bank. To explain how main risk factors like funding and
liquidity risk, market risk (FX, Interest Rate, Equity,
Commodity, etc.), credit risk, leverage risk, business
risk and operational risk are interrelated and how they affect
the balance sheet of a financial institution. To describe
common risk management and hedging techniques which
help control these effects and to understand how these
techniques are used to set up a state-of-the-art ALM
approach.

Section Objectives
TTC 2013
ALM Incorporates the modern techniques used in
profitability and risk management of commercial
banks. These involve the following:

Creating shareholder wealth
Profit centre management
Risk-adjusted performance management
Pricing of credit risk and loan provision
The management of interest rate and liquidity risks

As competition is reducing bank margins, the need for more
precise information and a complete asset and liability
management system is becoming an absolute necessity.
What is ALM?
TTC 2013
The ALCO comprises the CEO and heads of business
units in Credit, retail, corporate and Treasury.
The ALM team or ALCO (asset and Liability Committee)
controls profit and risk. They primarily consider the
Interest rate risk created by the mismatch of the asset
and liability maturities of the banks balance sheet.
What is the function of the ALM team?
Banks invest in 5 main assets:
1. Reserves with the central bank
2. Loans
3. Interbank loans
4. Bonds
5. Fixed assets
Banks have 3 main
sources of funds:
1. Deposits from clients
2. Interbank deposits
3. Shareholders equity
TTC 2013
1. Board and senior management oversight of interest rate
risk
2. Adequate risk management policies and procedures
3. Risk measurement and monitoring
4. Internal controls
5. Information for supervisory authorities
6. Capital adequacy
7. Disclosure of interest rate risk
8. Supervisory treatment of interest rate risk in the banking
book
These guidelines set by the Basel committee have prompted a
significant evolution in systems used by banks for
managing interest rate risk, which have gradually become
more comprehensive and accurate.
Principals of the BASEL Committee
TTC 2013
There are five key variables driving ROE

ROE
Return on equity
Earnings on assets (EOA)
Margin (EOA COD)
Operating expenses (OE)
Leverage (debt/equity)
Tax (t)
Leverage (debt/equity) can have a major impact on the ROE of a bank,
so banks could be tempted to increase debt while leaving equity
unchanged. Central banks are aware of this danger and therefore control
the level of debt to equity through the imposition of capital adequacy
regulations.
TTC 2013
The Basel accord is the main capital adequacy
structure that bank supervisors use.
Basel covers aspects of capital, risk weighting of
assets and the required capital ratio to meet the banks
product mix. The basic Capital Adequacy Directive -
CAD - sets the minimum capital required at 8% of total
risk-weighted assets. (This is known as the Cooke
Ratio)
The three pillars of the BASEL Accord:
1. Minimum Capital Requirements
2. The Supervisory Process
3. Market Discipline
Capital Adequacy
TTC 2013
Refers to the adequacy of a banks capital in relation to risk arising from:
Assets (loans, negotiable paper)
Dealing operations
Off-balance sheet transactions
Other business risk
Equity Capital enables a bank to bear risk and absorb unexpected
losses
Regulatory Capital Prescribed by the regulatory
authorities in the country. This is split into two main categories
namely Tier 1 (core) and Tier 2.
Economic capital this is the amount of capital needed to
cover the risk being faced by a bank (usually in excess of
Regulatory Capital). This is the capital specifically allocated to
a branch of a bank. It can also be defined as capital at risk
(CaR) and can be measured using VaR
Capital Adequacy under Basel II
TTC 2013
Three tiers of capital:
Tier 1 (going concern capital) common equity capital, declared reserves, current
years audited profits.
Under BASEL III there are new targets for capital.
The common equity in Tier 1 must be a minimum of 4.50% with a 2.50% conservation
buffer making a total of 7.00%
Tier 1 capital must be a minimum of 6.0% with a conservation buffer of 2.50% making
Tier 1 total 8.50%. Total capital must be 8% with a 2.50% conservation buffer making a
total of 10.50%
Tier 2 (gone concern capital) comprises undisclosed reserves of the bank and
subordinated term debt with a maturity of 5 years or longer , certain reserves and
general provisions. Tier 2 capital can NEVER be more than 100% of tier 1 capital.
Tier 3 Bonds issued to support the trading book of a bank and no longer used.
NOTE: Under BASEL III certain Tier 2 capital will go from being bonds to common
equity if the banks capital ratio falls below a certain level. These are referred to as
CoCos (contingent convertibles). Gone concern capital is where the Tier 2 bonds lose
their status and become common stock if the bank goes into liquidation.
Types of Capital
TTC 2013
Risk weighted assets
Capital Adequacy
Credit Risk
Trading Risk
Operational Risk
Credit Risk Weighting
Two approaches: standardized approach which relies on
external ratings; that is ratings given by rating agencies such
as Moodys and Standard and Poor or Fitch-IBCA
The second approach which has received the most attention
all over the world is the Internal Rating Based (IRB) approach
(available under two options: foundation or advanced)
We will examine each approach; the Standardised approach
and the foundational approach for IRB.

TTC 2013
The Standardized approach is one where a weighting will be
related to the riskiness of the transaction, as identified by the
rating of external rating agencies.
AN EXAMPLE
AAA - AA
-
A
+ -
A
-
BBB
+
- BBB
-
and below
Corporate 20% 50% 100%

A loan made to a A
+
would be rated at 50% therefore a loan of
$100 would attract capital of 8% x ($100 x 50%) = $4

Under Basel I this loan would have simply had a risk weighting
of 100% and attracted capital of $8.

Remember unrated loans STILL attract a weighting of 100%

Standardized Approach
TTC 2013
In the IRB approach, the banks have to calculate the probability of
default of a corporate client over a 1-year time horizon. That is
lending to a client today, what is the likelihood of default by the
borrower in one years time? This probability of default is referred to
as the PD.
NOTE: to apply the IRB approach you need two pieces of
information: the PD and the maturity of the loan.
With retail loans (small amounts), a similar PD can be calculated for
a portfolio of loans. Basel Committee of Bank Supervision (BCBS)
formula to calculate the capital charge contains the following factors:
1. The probability of default (PD)
2. The exposure at default (EAD)
3. The loss given default (LGD)
Also; Effective maturity (M)
M = maturity; b(PD) = maturity adjustment
R = correlation between defaults
Internal Ratings-Based (IRB) Approach
TTC 2013
Securitization is where bonds are issued which have the backing of an
income producing asset, typically bank debt in the form of long-term debit
instruments such as mortgages or short-term debt instruments, such as
credit card receipts.
This is a popular way of banks freeing up capital and transferring credit risk.
There are usually different classes of bonds issued in a single securitisation
based on the credit of the underlying securitised asset.
Issuing Bank
Bond Market Trust or SPV
Balance sheet
Assets against which the
bonds are issued
Frees up capital
Removes assets
Issues bonds of differing
classes based on the
underlying credit
Credit risk mitigation - Securitisation
TTC 2013
Credit risk mitigation- credit derivatives
Credit derivatives are a relatively new phenomenon, and have
really only become prominent in the mid to late 90s
A credit derivative is a privately negotiated contract whose
value is derived from the credit risk of a bond, bank loan, or
some other credit instrument. Credit derivatives allow the
market participant to separate default risk from the other forms
of risk, such as interest rate and currency risk
Three basic structures
Credit Default Swap CDS this bases the payoff on a
specific credit event, such as a bond down grading or
default. .
A total return swap - Links a stream of payments to the
total return on a specific asset.
Credit spread options - Ties the payoff to the credit
spread on a specific bank loan or bond.
TTC 2013
Credit Derivative triggers
The standard ISDA documentation for credit swaps defines a set of credit
events which trigger the Credit Derivative. A credit event could be one of the
following:
Payment default on an agreed-upon public or private debt issue (the
reference asset)
Debt rescheduling
A filing for bankruptcy
Or some other specified event to which the two parties agree.
As a general rule, the credit event must be an objectively measurable event
involving real financial distress; technical defaults are usually excluded. The
reference credit is usually a corporation, a government, or some other debt
issuer or borrower to which the credit protection buyer has some credit
exposure.
The contract will contain a materiality clause which will:
-Call for a significant move of the reference credits underlying stock or bond
price
-Ensure that the market recognizes the credit event for what is
-Prevent an unnecessary trigger due to a default caused by legal questions

TTC 2013
Remember operational risk refers to losses incurred due to human
or systems error.
The standardized approach this is straight forward:
The capital charge is simply a multiple of the gross revenue of an
activity, averaged over the last three years.
Gross revenue is the sum of net interest margin and non-interest
income (such a fee charged).
The capital charge under this method is the same for all banks
irrespective of their operational control processes.
The Advanced Measurement Approach (AMA) under this
approach, the banks themselves estimate statistically what could be
the worst operational losses, for a confidence level of 99.9%. This
requires estimation of two factors:
The number (frequency) of operational losses over a years, and the
potential magnitude of these operational losses
Operation Risk Weighting
Standardized Approach and Advanced
Measurement (AMA) approach
TTC 2013
Gap concept
Interest rate risk is identified as the possible changes in net
interest income . The gap is a concise measure of the interest
rate risk that links changes in market interest rates to
changes in the net interest income (NII)of the bank. The gap
over a given period is defined as the difference between the
amount of rate sensitive assets and rate sensitive liabilities.
A positive gap is one where rate sensitive assets exceed
rate sensitive liabilities.
A negative gap is one where rate sensitive liabilities exceed
rate sensitive assets.
A positive gap benefits from rising interest rates
A negative gap benefits from falling interest rates.
Interest rate risk management
TTC 2013
Liquidity Coverage Ratio - LCR
The Basel II rules insist that a bank maintains a high liquidity coverage ratio.
This rule requires banks to have enough cash or near-cash to survive a 30-
day market crisis.
Net Stable Funding Ratio NSFR (1 year time horizon)
This ratio is applied to reduce the banks dependency on short-term funding
and is longer term in nature to limit over-reliance on short-term wholesale
funding.
Stress testing
These are tools used to identify and manage situations which can cause
extra-ordinary losses. They can be based on the following:

1. Replication of the strongest market shocks which occurred in the past
2. Statistical measures with extreme multiple of historical volatility
3. Subjective assumptions such as a 100BP move up or down in the Yield
Curve
Basel III liquidity risk
TTC 2013
The main aims of internal funds transfer pricing system:
1. To transfer interest rate risk from the various units in the bank to one
central unit usually the Treasury. The Treasury can correctly evaluate
and manage this risk and where necessary apply the relevant hedging
policies
2. To evaluate the actual profitability of this activity by assigning interest
rate risk management to a single centralized unit
3. To remove the need for each division from dealing with the funding of
their loans or the investment of surplus deposits
4. To provide a more accurate assessment of the contribution of each
operating unit to the banks overall profitability.
The bank can either apply a single internal transfer rate -
ITR (usually a floating benchmark like LIBOR) or it can
apply multiple ITRs reflective of the maturity profile of
deposits and loans.
Funds Transfer Pricing
TTC 2013
Principles of
Risk
Section 7
TTC 2013
To understand why risk is inherent in banks business models
and why effective risk management is a key driver for banks
success. Candidates will be able to describe major risk
groups: credit, market, liquidity, operational, legal, regulatory,
and reputation risk. They will understand the significance of
risk groups for different banking businesses and units.
Candidates will also get an overview about methods and
procedures needed to manage these risk types and extend
their understanding to different risk/return profiles of
shareholders, regulators and debt providers.


Section Objectives
TTC 2013
Volatile exchange rates and interest rates together with a
market environment that has become increasingly complex,
makes risk management within the treasury a vital function.
Treasury risk management staff must have a trading
background or at least some technical skill to deal with the risk
control function within the treasury. Lack of expertise can result
in losses.
Segregation of duties and reporting is also vital within the
treasury environment
A professional standards review in addition to the
conventional audit is also recommended to review the conduct
of treasury officers
Treasury Risk
TTC 2013
Default Risk (counterparty risk) - Exposure to the
likelihood or possibility that a counterparty to an outstanding
transaction my not be able to settle due to bankruptcy or
liquidation. Such a loss leads to the product of the exposure at
default (EAD) and the loss given default (LGD).
Country Risk - Caused mainly by a currency crisis where
borrowers are unwilling or unable to settle outstanding
transactions. Political and economic factors play an important
role in the assessment of country risk. There are many reports
generated by industry bodies detailing current economic and
political events within countries.
Settlement Risk - Usually the risk that payment is effected
on a currency transaction without the receipt of payment in turn
from the counterparty to the transaction. In currency settlement
this risk is referred to as HERSTATT RISK. CLS Bank is the
safest way to mitigate settlement risk
Credit Risks - 1
TTC 2013
Replacement risk
This is the cost of replacing a deal which is in default. For
example, if you enter into a deal to purchase currency at a
forward date and the counterpart to the trade cannot deliver,
you can cancel the deal and enter into a new deal to replace the
exiting deal. Any price over and above the original price paid is
the replacement cost. So you will only lose money if there was a
positive unrealized P&L. The only time the full capital amount is
at risk is when delivery has already been effected and cannot
be revoked. The process of marking-to-market allows a bank to
assess the replacement risk on all outstanding deals on an
ongoing basis. Close out netting is the commonly used netting
where a counterparty is in default.
Credit Risks - 2
TTC 2013
Good credit assessment
Credit limits imposed and monitored by
management
By counterparty
By industry
By country
Credit enhancement Credit Derivatives
Default management ISDA and ICMA
documentation
Termination clauses used in the IRS market
Payment netting bilateral and multilateral

Minimum Control Standards
For Credit Risk
TTC 2013
Currency Risk (exchange rate risk) - The cost of closing
out open foreign exchange positions in currencies to which the
treasury is exposed. This can be as a result of FX or FX
derivative positions. A common benchmark for controlling risk in
this area is the maximum loss permissible for one day on open
positions. Real time feeds help to monitor the intra day risk on
open positions. Different currency exposure may result from
Transaction exposure spot or forward transaction losses
money due to a change in the exchange rate
Translation exposure - value of foreign assets or profits of
multinational company due to a devaluation of currency
Economic exposure - business profits affected by a change
in the exchange rate for exporters or importers
Market Risks
TTC 2013
Interest Rate Risk
Exposure to the changes in interest rates for interest rate
products such as bonds, FRAs, IRSs, caps, floors, and Interest
rate futures. Banks also consider the risk of yield curve
changing relative to the mismatch between assets and
liabilities. Liquidity ladders should be managed to gauge
mismatches and monitor the banks liquidity position.
NB a vital risk which needs to be carefully managed!!
Equity Risk the risk that a market position is sensitive to
equity market performance (stocks, stock index futures, options)
Commodity risk the market value of a position is
sensitive to commodity price changes
Volatility risk a market position is sensitive to the volatility
of prices in FX, interest rate, equity and commodity markets
Market Risks
TTC 2013
Transaction approval
Measurement
Regular marking to market of open positions
Gap analysis for interest rate exposure
Risk identification using Value at Risk modeling (VaR)
Risk reporting
Risk system development good revaluation
Limit approval
Timeous inputting of deals
Matching of hedges with the hedged instrument
For Market Risk
TTC 2013
Value at Risk VaR is a method of assessing
market risk characterised by three key elements:
1. It indicates the MAXIMUM potential loss that a
position or portfolio can suffer
2. Within a certain confidence level (lower than 100%)
3. Limited to a certain time horizon that the position
will remain constant

Basel Accord recommends a 99% confidence level
over a 10 day holding period using historical data
of no less than 12 months.
Measuring Market Risk - VaR
TTC 2013
The models most often used to measure VaR are:
1. Variance covariance method
2. Monte Carlo simulation
3. Historical simulation
Limitations of the VaR
1. It assumes normal distribution of prices
2. It requires an explicit volatility and correlation estimate
3. It assumes a linear payoff hypothesis
4. It provides no measure of the excess loss if the actual loss
is greater than the expected loss. One of the ways to
overcome this is to apply another risk measure referred to
as the Expected Shortfall.
Expected shortfall - is defined as the expected value of all
losses in excess of VaR.
Value at Risk Models
TTC 2013
Market risk and credit risk are only limited by the
imposition of LIMITS.
Credit limits these are used to control credit risk
and are set OUTSIDE of treasury. A dealer must
strictly keep within the limits set. Credit limits will be
set by counterparty, market sector, and country.
Dealing limits these are limits used to control
market risk. Limits will be set per instrument, currency,
dealer, desk, and dealing room.
LIMITS DO NOT CHANGE unless management adjust
them.

Dealing Room Limit Structures
TTC 2013
Legal Risk - Caused by ineffective contracts which result in the inability to enforce
them. Before dealing with a client, banks should be clear that all the necessary
documentation is in place.
Reputational risk - This is the risk arising from negative perception on the part of
customers, counterparties, shareholders, investors or regulators that can adversely
affect a banks ability to maintain existing, or establish new, business relationships
and continued access to sources of funding.
Reputational risk may give rise to credit, liquidity, market and legal risk all of which
can have a negative impact on a banks earnings, liquidity and capital position.
Regulatory Risk - Caused by the banks non-compliance with regulation, reporting
and compliance required by the financial authorities and or the Central Bank. The
consequence can be the imposition of fines or in the worse case, the withdrawal of
the financial institutions license to operate.
Specific risk - is a risk that affects a very small number of assets. This is
sometimes referred to as "unsystematic risk". In a balanced portfolio of assets there
is a spread between general market risk and risks specific to individual components
of that portfolio. An example would be the risk of one bond in a portfolio losing value
because of a downgrade of the issuer.
Systemic risk - is the risk of collapse of an entire financial system or entire
market, as opposed to risk associated with any one individual entity, group or
component of a system. It can be defined as "financial system instability, potentially
catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial
intermediaries. Often referred to as a knock-on effect.
Other Risks
TTC 2013
This is broadly defined as the likelihood of a loss, as
measured by the value of the loss, on the transaction
processed. This is a risk which is CONTROLLABLE by
the bank.
Causes may be as a result of:
Lack of proper procedures
No segregation of duties
Lack of internal controls
Insufficient systems
Manual interventions
Payment authorizations
Unskilled or shortage of staff
Capacity
Disaster recovery policies
Operational Risk
TTC 2013
Timeous transaction processing
Constant Position reconciliation
Timeous input and confirmation
Good Cash management
Security for environment and systems
Proper customer service
Policy and procedure adherence everyone must
understand the mechanics of the transactions
Strictly controlled database management
Good control and management on the introduction of new
products
Good management information systems / exceptions
reports
For Operational Risk
TTC 2013
Basic documentation is necessary to
establish:
The business to be conducted
The limits on deal/transaction size
Who the authorised dealers are that
can bind the company
Who the authorised signatory/s are on
the confirmations
Basic documentation
TTC 2013
ISDA - International Swap and Derivatives
Association documentation covers all treasury
instruments except Repos
GMRA - Global Master Repurchase Agreement -
encompassing the International Capital Market
Association ICMA (previously ISMA) and The Bond
Markets Association - TBMA
ICOM international Currency Options Market
(Previously LICOM)
FEOMA Foreign Exchange and Options Master
Agreement
Documentation in current use
TTC 2013
What is payment netting?
An example would be where two banks have a
large volume of treasury transactions
outstanding. The net pay and receive amounts
for each could be much reduced if these were
netted off against each other.
Other forms of netting are usually applied when
there is default by a counterparty and open
positions exist. The main reason is to prevent
cherry picking by the liquidators
Netting
TTC 2013
Bilateral netting of payments
Agreed between two parties and they enter into
a contract. Very easy to implement from a legal
and systems point of view.
ONE PAYMENT, PER COUNTERPARTY, PER
CURRENCY, PER DAY

Standardised documentation has been set up for OTC
derivatives contracts by industry bodies such as the
International Swap and Derivatives Association (ISDA)
and ICMA (International Capital Market Association)
Netting-2
TTC 2013
Multilateral netting is much more complex and is
easiest to understand when examining the structure of
a CLEARING HOUSE.
ONE PAYMENT, PER CURRENCY, PER DAY
There are several participants in the netting process
and there is normally a redistributing of default risk.
Continuous linked settlement (CLS) is the most
effective initiative to deal with settlement or default
risk.
Netting-3
TTC 2013
Netting by novation is a netting arrangement where the
existing contracts are netted out and cancelled and replaced by
a single new (nova) contract
Close out netting is applied by an area outside of treasury in
the instance of a bankruptcy. All open positions are marked to
market and a single payment is made to settle all outstanding
commitments. This is usually the type of netting applied in ISDA
and ISMA documentation in the case of a bankruptcy.

Payment netting does not however reduce BIS capital
adequacy guidelines, but does reduce the number of payments
required
Netting-4
TTC 2013
Internal recon's position keeping
External recons Nostro accounts
Position keeping electronic with manual
adjustments where required
reconciliation is based on exception
reporting.
Problems are investigated and swiftly handled
to avoid loss or interest penalties
Reconciliation's
TTC 2013
Nostro account is our foreign exchange account held with
an overseas correspondent bank e.g. from London Bank
perspective, their USD account held with Citibank NY

Vostro account is a local currency account held on behalf of
an overseas client bank e.g. from Citibank NY perspective, the
London Bank USD account held with themselves. Sometimes
also referred to as a Loro account.

Note: A Nostro and Vostro account are the same account.

A Loco account is an account for gold in London. It can be
described as a nostro account for gold.
Nostro and Vostro accounts
TTC 2013
Three main factors that help streamline STP:
Front-end (dealing) data capture
SSIs
Immediate matching of confirmations
Together with Automated payment systems, these
have become the building blocks that have taken the
concept of STP from theory to practice. Deals can
now go from initiation to settlement without ANY
manual intervention.
Straight Through Processing
TTC 2013
Continuous linked settlement
CLS eliminates the settlement risk in cross currency payment
instruction settlement through CLS Bank linking the local
central bank Real Time Gross Settlement (RTGS) systems.
This occurs during a five-hour window of their overlapping
business hours: in this window, settlement instructions for a
particular date are settled and funds are requested to be paid
in and are paid out by CLS Bank.
CLS Bank is based in New York and is a multi-lateral netting
system for currency settlement.
Only currencies which are part of CLS can settle through the
system.
Only counterparties in countries which are part of CLS can
use the system.
Currency pair and counterparty determine whether a deal can
settle through CLS.

TTC 2013
The ACI
Model Code
Section 10
TTC 2013
For candidates to have a thorough knowledge of
the provisions of the Model Code and market
practices, with particular emphasis on high
standards of integrity, conduct and professionalism
as well as the monitor and
control mechanisms to be introduced to protect
individuals and their institutions from undue risks
and resultant losses.
Please note that the exam is now based on the new
Model Code
Section Objectives
TTC 2013
Introduction to the Model Code - 1
The model code was authored by the ACI. It was
constructed with reference to a number of existing
local codes in affiliated countries, Central Banks of
some OECD countries, the FSA, and other regulators.
The objective was to establish a universal code
which would transcend the customs and practices of
the individual countries and produce a code which
promotes ethics and a code of conduct expected of
participants in dealing in the markets covered by the
ACI financial markets association irrespective of the
centre in which deals are being concluded.
TTC 2013
The code does not deal with legal matters or
technicalities, but it aims to set out the manner and
spirit in which business is conducted.
Regulators have accepted the model code as the
basis for the conduct and ethics of its dealers,
brokers, and treasury operations staff.
A party who has a dispute with another
counterparty which remains unresolved, can
present a request for arbitration to the ACI
Committee For Professionalism the CFP. The
CFP ruling is not legally binding, but does offer
aggrieved parties a professional ruling on the
dispute.
Introduction to the Model Code - 2
TTC 2013
1. After hours/off premises dealing proper management
guidelines should be in place to control the process of off-
site or after hours dealing.
2. Stop loss orders a clear understanding of these
conditions and ramifications should be reached between
the two parties before a stop loss order is given or
accepted. It is very difficult to definitively determine the
market highs and lows in the case of a dispute on the
trigger of a stop loss order.
3. Position parking this is often done to disguise the risk
on a position. The ACI says that this practice should be
forbidden.
Chapter 1
Business Hours and Time-Zone related issues
TTC 2013
1. Entertainment and gifts managements role is to control the
nature of gifts offered and accepted. Entertainment should not be
offered nor accepted where the host is not present.
2.Gambling betting between market participants this should be
strongly discouraged.
3.Personal account trading proper controls should be in place to
avoid conflicts of interest with the dealers job.
4. Customer relationship, advice and liability because of the
complex nature of some products it is incumbent on the dealer to
ensure the customer understands the deal.
5. Confidential information - RESPECT confidential information. Dont
front run orders! Dont place an order with a broker to find out who
the counterparty is so as to make direct contact to conclude a deal.
Dont pressure the broker to give you information which is improper
for them to divulge by threatening to cut off business if they refuse.
Chapter 2
Personal conduct issues
TTC 2013
1. Confirmations - confirmations should be sent out as soon
as possible after the deal. Brokers should confirm all
transactions to both counterparties immediately by an efficient
and secure means of communication.
2. Verbal confirmations regular verbal check of deals done is
good practice. At least one near the end of the day is
recommended.
3. Payment instructions the use of SSIs is strongly
recommended by the ACI.
4. Netting once again the ACI recommends that where
practical, payment netting should be used to reduce settlement
risk.
Chapter 3
Back Office, Payments, and Confirmations
TTC 2013
1. Disputes and mediation arise mainly due to failure of dealers to
use clear and unambiguous language. Management of both parties
should take prompt action to resolve or settle the issue quickly and
fairly with a high degree of integrity and mutual respect
2. Differences between principals where a disputed deal can result
in a loss it is recommended that one party (preferably with the
agreement of the other) square the position ASAP.
3.Difference with brokers and the use of points where a broker
quotes a price that is unsubstantiated, the bank is entitled to stick
the broker. Any difference between the price proposed and the actual
deal price must be made good by the broker. It is bad practice to
insist on a deal at the original price or to refuse a brokers cheque or a
reduction in the brokerage bill for the difference.
Chapter 4
Disputes, Differences, Mediations and Compliance
TTC 2013
1.Authorisation and responsibility for dealing activity
management should clearly set out, in writing, the
authorizations and responsibilities within which the dealing and
support staff should operate. It is the responsibility of
management to ensure that all employees are adequately
trained and aware of their own and their firms responsibilities.
2.Terms and documentation the use of standard terms and
conditions contained in standardized documentation such as
ISDA and ICMA is strongly recommended.
3.Qualifying and preliminary procedures
4. Telephone recording
5. Use of mobile phones
6. Dealing room security
Chapter 5
Authorization, Documentation and Call Taping
TTC 2013
1. Role of brokers and the dealer/broker relationship the
choice of brokers is the responsibility of senior management at
the bank. Brokers are to act purely as agent.
2. Brokerage to be agreed in writing between the both the
management of the bank and the brokerage. Failure to pay
brokerage bills promptly is not considered good practice. 3.
Passing of names by brokers brokers should not divulge the
names of principles prematurely, and certainly not until satisfied
that both sides display serious intent to transact. Dealers should
inform brokers, wherever possible, about names they cannot
see for whatever reason
4. Name switching used to close a deal where limits are a
problem for the two original banks.
Chapter 6
Brokers and Brokerage
TTC 2013
1. Dealing at non-current rate and rollovers using historical or non-
current rates should be avoided. Where it is necessary to do so, it
should be fully documented. It is highly unethical for one party to hold
another to an erroneously agreed rate when the quotation is
demonstrably and verifiably a big figure or more away from the
prevailing market rate.
2. Consummation of a deal broker calls off as bank hits the price =
NO DEAL DONE. Broker hits the bank as the bank calls off = DEAL
DONE! Holding brokers unreasonably to a price is viewed as
unprofessional and should be discouraged by management. Under no
circumstance should brokers inform dealers that a deal has been
concluded when in fact it has not.
3. Dealing reciprocity informal reciprocity arrangements are
unenforceable. However dealers should show integrity and honour.
Chapter 7
Dealing Practice
TTC 2013
4. Dealing quotations, firmness, qualification and reference the
market participants must ensure that they make it clear whether
the prices they are quoting are firm or just indicative. Brokers
prices should be firm in a marketable amount unless otherwise
stated. Dealers MUST take their prices off with brokers if they no
longer want to deal at the price shown. Brokers have a
responsibility to assist dealers by checking with them whether their
prices are still firm. Where a price is dealt on, then all other prices
in that currency and market are cancelled and the broker will need
to firm up all the bids or offers in that market.
If you cannot do a name offered, the broker can propose another
acceptable name if offered quickly. It is bad practice to revise a
price once dealt on if the name does not work.
Chapter 7
Dealing Practice (continued)
TTC 2013
1. Dealing using a connected broker where a banker has a
share in a broking firm it should be openly declared.
Chapter 9
14 General Risk Management Principles
The professional dealer must not only understand and manage
the market risk pertaining to a trading position, but should also
be aware of the credit, legal, liquidity and operational risks
related to the business.
1. Promote the highest standard of conduct and ethics
2. Ensure senior management involvement and supervision
3. Organizational structure ensuring independent risk
management and controls
Chapter 8
Dealing Practice for Specific Transactions
TTC 2013
4. Ensure the involvement of a thoroughly professional management
in all administrative processes
5. Provide appropriate systems and operational support
6. Ensure timely and accurate risk management
7. Control market risk exposure by assessing maximum likely
exposure under various market conditions
8. Always recognize importance of market and cash flow liquidity
9.Consider impact of diversification and risk return profiles
10. Accept only the highest standard and most rigorous client
relationship
11. Clients should understand transactions
12. Risk management based on sound legal foundations.
13. Ensure adequate expertise in the support area of risk taking
14. USE JUDGEMENT AND COMMON SENSE!!
Chapter 9
General Risk Management Principles
TTC 2013
Your Top Five
Take-Outs
Shukriah!

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