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At the end of the session you will be able to Explain general banking operation Demonstrate general understanding on IB products Foreign Exchange Securities Commodities Derivatives

Why do Banks exist?

To Provide Financial products and Services

Who are clients

Deutsche Bank Citibank ABN Amro


Deutsche Asset Management Fund Managers Multinational Small / Mid size firms

High Street Banking (Chase Bank) US Only High Net Worth Individuals (Millionaires / Billionaires)

Banking as a Whole
One of the worlds leading

Major provider of financial services

including corporate finance, cash management, & credit

Comprises of five national business

Commercial Banking

investment banks

Investment Bank

Services provided: Advice on

segments: Middle Market Banking, Mid-Corporate Banking, Commercial Real Estate, Asset Based Lending and Commercial Leasing

Retail Financial Services


Treasury and Securities Services

corporate strategy and structure, raising and placing capital, making markets in financial instruments and offering sophisticated risk management services

Includes Auto Finance,

Consumer Banking, Home Finance, Insurance and Small Business Banking

Provides mutual fund, insurance

& home finance and workplace banking products to consumers and small businesses

Asset and wealth Management

Global leader in transaction

Card Services

processing and information services to wholesale clients

Three Businesses: Institutional

Trust Services, Investor Services(WSS) and Treasury Services

Provides investment & wealth management

Delivers credit card and other related

services to institutional investors, high net worth individuals & retail customers
Provides personalized advice and solutions to

payment products to cardholders and merchant outlets

Aims to be the preferred payment card in

wealthy individuals

existing customers wallets and to increase access to new customers

International Banking Locations

North America

Latin America


Asia Pacific

Banking and Banking operations

Bank is a commercial institution licensed as a receiver of deposits. Banks are mainly concerned with making and receiving payments as well as supplying short-term loans to individuals. Exists to help you make the most of your money Assist you with your monetary requirements and promote savings How do they do it ?? By offering different products and Services Banking Services

Deposits E.g. Savings Current Fixed Short Term E.g. Overdraft



Capital Market E.g. DP

Long Term E.g. Auto Loan Home Loan

Retail E.g. DDs Lockers Bill Pay

Institutional E.g. Bank Guarantee Trade Finance

Custodian Merchant Banking Debenture Trustees

Fund based activities, greater market risk Fee based activities, lesser market risk

Role of Banks

Intermediary role between lenders and borrowers Lenders Deposits funds with Banks Liability products (Liability for Banks) Borrowers Borrows funds from Banks Asset Products (Assets for Banks)

Different types of Banks

Types of Banks Central Bank (RBI)

Commercial Banks

Non Banking Finance Companies (NBFCs)

Term Financial Institutions

Public Sector E.g. SBI PNB BOB

Private Sector E.g. HDFC Bank UTI Bank ICICI Bank

Foreign E.g. Citibank ABN Amro HSBC

Cooperative Banks

Regional Rural Banks

State Finance Corporations (SFCs)

Indian Financial Institutions E.g. IFCI NABARD SIDBI



Primary Credit Societies

Broad Categories
Retail Banking Whole Sale Banking

Activities of a Bank

Accepting deposits from Public Lending money to public Remittances/Collection Business Keeping valuables in safe custody Government business Acting as trustee Treasury services Capital Market activity


Capital Markets Overview

Markets A place where exchange of goods and services happen Capital Market
Place where capital (fund) requirements of the issuers are

met; i.e. Issuers (Corporate, Government, etc) raise funds

Trades in these markets are for debt, equity securities or

other instruments
Organized, as they are governed by regulatory bodies

[Securities & Exchange Board of India, RBI]


Financial Markets


Capital Markets intermediaries

Regulator Underwriters Merchant Banker / Investment Bank JPM Brokers Exchanges Custodians Banks Depositories Depositary Participants R & T Agents Market Participants

Capital Markets Regulators

SEBI Securities Board of India SEC Securities & Exchange commission (USA) FSA Financial Services Authority (UK)


Capital Markets intermediaries

Who underwrites the issue in case of under-subscription; takes the

stock in its books

Merchant Banker / Investment Bank An underwriter or agent for corporations and municipalities issuing securities Maintain broker/dealer operations mostly, maintain markets for previously issued securities Offer advisory services to investors Large role in facilitating mergers and acquisitions, private equity placements and corporate restructuring Do not accept deposits from and provide loans to individuals (Investment Banks, especially)


Capital Markets intermediaries

An individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor. The role of a firm when it acts as an agent for a customer and charges the customer a commission for its services.

Amarket in which securities, commodities, options, or futures are traded. Although you will mostly trade stocks through a broker NSE, BSE, NYSE, NASDAQ, LSE


Capital Markets intermediaries

An agent, bank, trust company, or other organization which holds and safeguards an individual's, mutual fund's, or investment company's assets for them.

An organization, usually a corporation, chartered by a state or federal government, which does most or all of the following: receives demand deposits and time deposits, honors instruments drawn on them, and pays interest on them; discounts notes, makes loans, and invests in securities; collects checks, drafts, and notes; certifies depositor's checks; and issues drafts and cashier's checks.


Capital Markets intermediaries

An institution which facilitates the clearing of securities between the stock exchange & depository participants; holds assets in electronic form on behalf of ultimate beneficiaries

Depository Participant
Any institution like a bank that maintains the dematerialized

accounts of beneficiaries, provides services of settling securities traded on the exchange; Agent of Depository

Registrar and Transfer Agents

maintain the records of members (shareholders) for the issuer company


Capital Markets intermediaries

Market Participants
Various persons / entities that indulge in buying & selling Examples: Qualified Institutional Buyers Foreign Institutional Investors, Foreign Venture Capital Domestic Institutional Investors - Banks, Financial Institutions, Insurance Companies, Mutual Funds, Venture Capital Non - Institutional - High Net worth Clients (E.g. NRI, HUF, Government & Private Corporate bodies) Retail Individual Investors


Primary and Secondary Capital Markets

Primary Market Sell (float) new stocks and bonds to the public for the first time. In the primary market the security is purchased directly from the issuer Secondary Market Secondary market is where investors trade among themselves. An investor purchases a security from another investor rather than the issuer. Auction market forms a part of this market.


Banking Treasury Products

Foreign Exchange
What is an FX trade How does it work Why are banks in the in the FX Market


Products: Foreign Exchange

Definition: Buying (or selling) of a currency and paying for it with another at an agreed price (exchange rate) for settlement on an agreed date

Complete the grid of descriptions using the following words 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Payment Instructions Receiving / receipt Instructions Currencies 2 Counterparties Broker Value date Booked the right way round Amount Exchange rate Trade Date 22

Products: Foreign Exchange

Explanation Has to be two of these for the exchange to be possible A numerical figure that shows the value of the trade The price of one currency expressed in another The day the trade will settle. i.e. the funds will be debit / credit from / to your account Shows which currency we are paying and receiving. Helps to arrange a trade on behalf of others The entities involved in the trade The day the deal was agreed Where we are receiving our currency to? Where are we paying the currency to?

Component Currencies Amount Exchange rate Value date Booked Right Way Round Broker 2 Counterparties Trade Date Receipt Instructions Payment Instructions


Different Trades
Spot trade: Value date = trade date + 2 Cash trade: value date = trade date Tom trade: Value date = trade date +1 Forward trade: Value date = trade date + 3(or more)

Products: Foreign Exchange

Gear Box Supplier USA

BMW now need to pay in USD but only have a EURO account The Solution: Do a Foreign Exchange Trade
Contact Citibank: Want to Buy $5,000,000. Will pay for it in EUROs. JPMorgan will ask what date they want the currency (Value Date) JPMorgan will advise the Exchange rate. (How much will $5mio cost in EURO) Rate is 1.27 (Euro 1 = $1.27)

Supplies gear boxes at agreed price. BMW need to pay in USD

BMW need to import gearboxes that have been made in the US. Cost $5,000,000


Pay USD 5,000,000 to BMW (for Gear Box Supplier)


Pay EURO 3,937,008.


Microsoft USA
Sell GBP 1 M Rec $1.9 M

Citibank USA

sell 1.7M USD

buy GBP1M

Microsoft speculates that GBP price will increase from $1.7 to 1.9 in 3 months time

Contact JPMorgan: Want to Buy GBP 1,000,000.


Will pay for it in JPMorgan will ask what date they want the currency (Value Date) JPMorgan will advise the Exchange rate. (How much will GBP5mio cost in USD) Rate is 1.7 (GBP 1 = $1.7)



What currencies do you know?

Have a name: Eg United States Dollar, Japanese Yen Have a 3 figure code Eg, USD and JPY


Price of a currency
Factors that affect the price of a currency -Economic e.g. Interest rate, inflation rate - Political Strong currency Weak currency


For personal requirement For business requirement For speculation


Products: Commodities

What are Commodities? Commodities Categories Example of a trade


Products: Commodities
What are Commodities?

Review cards and put them into 4 categories Put a name to the 4 categories


Products: Commodities

Banks trade in Commodities just as they do in currencies.

Commodities are split Into 4 groups:

Energy e.g. Gas, Oil Base Metals e.g. Copper, Aluminium Precious Metals e.g. Gold, Silver Soft Commodities e.g. Coffee, Sugar, paper


Products: Commodities
What Precious metals do banks trade in?


Gold Silver Platinum Palladium

(In place of currency codes the chemical elements of the metal are used to identify the metal) 33

Products: Commodities

Watch maker requires gold to manufacture watches Finds a company selling gold Agrees how much Gold Agree on the price Agree on Delivery

SWISS Tonys Gold watch Company

Pay $300,000 Deliver Gold


Want to buy 1,000 oz Price is $300 per oz Total Price is $300,000


Products: Commodities

Use depositories


Un allocated


Products: Bonds

Bond Trades
What is a Bond? How does it work? What role does JPMorgan play?


Our Products: Bonds

What is a Bond?
A certificate of debt (usually interest-bearing) that is issued by a government or corporation in order to raise money

The issuer is required to pay a fixed sum annually until maturity and then a fixed sum to repay the principal Effectively it is a loan. The company who receives the money, issues a Bond with terms and conditions stating when they will pay back interest and principle amount to the lender of the money (Investor)


Products: Bonds
Key Terms of a Bond

Face Value
Nominal Amount What the Bond is worth when redeemed at maturity


Amount of interest paid to Bond Holder during the life: (e.g. 5% = 5% of Face Value of investment) Date for coupon payments. Usually 6 monthly (does depend on terms of issuance)

Maturity amount is paid back to the investor. Date the principle

Who Issued Issuer the Bond. (Received the money)

Activity: Lets Look at a practical example.


Products: Bonds
Conceptual Example

Pay $1,000,000

Receives Bond

Bond Issuer
e.g. A Corporation or Government Makes regular payments (Coupons)


Bond maturity pay back $1m


Products: Bonds
Conceptual Example

Pays $1,000,000
Big Company Ltd Investor(s)

Issues Bond(s) to Investors

1. Big Company Ltd want to buy Small Company Inc. In order to do so it needs to raise capital. The purchase price is $1,000,000

2. Raising capital: In this example, Big Company A looks to borrow money

3. Raising capital: It borrows money by issuing a BOND.

4.Raising capital: An Investor buys the bond. (can be a bank, corporation, Individual etc etc)

5. End Result Big Company Ltd can now finance its purchase of Small Company Inc and will pay the Investors back. How much depends on the bond (loan) terms. 40

Small Company Inc

Products: Bonds
Conceptual Example

Paid $1,000,000

Big Company Ltd

Coupon payments made every 6 months for term of bond 10 Year Bond = 20 payments


Pay back principle amount (e.g. $1,000,000) at maturity

Coupons of 5% are paid semi annually by Big Company to Investors.

Investors hold the Bond until Maturity


Products: Bonds
Role of banks in bonds


EURO 5 M Bonds




Bond Market

Issue Bonds into the market Want to start design and produce a new model car Estimate they need EURO 5 million to do this They chose to raise this capital by issuing a Bond BMW Contact JPMorgan and appoint them as Lead Manager on Bond Issue JPMorgan Pay BMW EURO 5 Million and receive Bonds
Investors Bond Buyer

Receive Bonds Pay cash

Receive Bonds

Receive Bonds Pay cash Pay cash Investors Bond Buyer

Investors Bond Buyer


Products: Equities

Equity Trades
What is an Equity trade? How does it work? What role does JPMorgan play?


Products: Equities
Big Company is now looking to expand its operation again and needs to raise cash in order to do this. The company decides it will raise the cash by selling shares Will Issue IPO. It uses a bank to advise how to do this

Big Company Ltd



Products: Equities
Bank will: Assist with company valuation Can under-write shares Advise on timing Advise on how much of company to sell
Advertise the IPO Potential investors contact bank and register their interest

Big Company Ltd




Products: Equities
Secondary Market
Investor Investor Investor

Stock Exchange
Current Share holders


(Including Stock Brokers) Investor





Products: Equities
Secondary Market
Investor Investor Investor

Stock Exchange
Big Company Ltd


(Including Stock Brokers) Investor





Products: Equities
How do banks participate in the Equities market?
Client A, wants to buy shares in Big Company Ltd They contact JPMorgan with the details of their requirements JPMorgan trader contacts Stock Exchange. Wants to Buy 500 shares

Client A


JPMorgan and Stock Broker agree price and terms through the Stock Exchange

Stock Exchange

Current Shareholder

Stock Broker

A price will be agreed 20 per share

Through Stock Exchange JPMorgan will source a seller of the Shares. 48

Products: Equities
What are we looking to confirm?
Share name Number of shares Price of share Buying or Selling Currency paying Trade date Value date Payment details Big Company Ltd 500 EURO 20 Buying Shares EURO 13th October 2005 15th October 2005 (T +2) Where to pay shares and cash to (from both parties)



Products: Settling through clearing house

Payments: How do they get made?
JPMorgan BNP Frankfurt
The trade will then settle across the Kassenverein Central Depository. Delivery versus Payment (DVP)

JPMorgan and Client send instructions to their Agents. Details of the trade and when to settle Trades can settle over a central depository

Before Payment Central Depository e.g. Kassenverein

JPMorgan a/c
Current Shareholder a/c

Share A/C 500 500

EURO Cash a/c

10,000 10,000

After Payment
The Shares are now transferred to JPMorgans a/c within Kassenverein They will hold shares on behalf of their client Original Big Company Share Holder, now has 10,000

Current Shareholder

Citibank Frankfurt


Types of Shares
Ordinary Share These shares give the investor the right to a dividend, if declared. Should the company go into liquidation, then holders of this class of share holds the lowest priority of repayment.

Deferred Ordinary share- These give shareholders additional voting rights or the right to higher dividends. Often these shares will not qualify for dividend until a particular date has been reached or the company profit has reached a pre- determined.

Golden Shares These shares are designed to allow the shareholders the right to a casting vote. In cases of privatization, the government often held golden shares. This allowed them to have the casting vote if required, as a form of control, during take-over bids or other serious matters. These shares are normally used in UK.

Preference Shares These shares form part of the share capital of the company. They pay fixed dividend and in the event of liquidation they hold preference


Bonds Vs Equities


Products: Derivatives

Derivative Trades
What is a Derivative? How does it work? What role does JPMorgan play?


Products: Derivatives
A security, such as an Option or Futures contract, whose value depends on the performance of an underlying product. Derivative in itself is not a product, it does however rely on an underlying product for its market value.

For this course we will look at 3 derivative examples

Futures Options Single Currency Interest Rate Swap


Products: Derivatives

What is a Future? How does it work?


Products: Derivatives
Definition Standardised exchange-traded contract to buy or sell a commodity at an agreed price for settlement or delivery on an agreed future date

How does it work


Products: Derivatives
UK Potato Farmer Has crop of potatoes Ready to sell in 6 months

What can happen in the 6 months before the potatoes are ready?

Potato Supplies worldwide except UK could fail In 5 months time there is a scare about effect of potatoes on health Supply remains stable with no impact on current prices


Products: Derivatives
What can happen in the 6 months before the potatoes are ready?

Risks: Crop could fail

Price movement

Controls: Insurance
Agree buyer now at agreed price (Future trade)


Products: Derivatives

UK Potato Farmer

Agree to sell potatoes

Futures Exchang e

Agree to buy potatoes


Farmer enters into a Futures contract

Future Contract

Using the Futures Exchange Finds a buyer for potatoes Agrees a price Agrees a delivery date
Seller: UK Potato Farmer Buyer: Supermarket Product: Grade A Potatoes Price: 5 / sack Quantity: 5,000 Sacks Delivery: 5th June 2005 Total Price: 25,000


Products: Derivatives
Futures June 5th 2005
Farmer will deliver potatoes to Supermarket through Exchange Supermarket will pay Farmer through Exchange Farmer has guaranteed income (providing crop doesnt fail insurance would cover this)

This agreement means the Farmer has an obligation to deliver potatoes on this date and Supermarket has an obligation to pay farmer the agreed price. All this happens via Exchange

Products: Derivatives

What is an Option? How does it work?


Products: Derivatives

The buyer has the right, but not the obligation to buy or sell the underlying product at an agreed price on an agreed date The buyer pays a premium to the seller have this right.

Lets look at an FX Option

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Products: Derivatives
FX Option
Big Company has ordered a supply of computer components from CRUUK (Computer R Us UK)

Big Company USA

What needs to happen To Pay for this order Big Company will have to do a Foreign Exchange trade. They need to buy GBP 1,000,000 (to pay CRUUK) And pay for it with USD

Have to pay 1,000,000

Deliver Computer Components in 3 months

Computer R Us UK will deliver the computer equipment in 3 months time This will cost Big Company Ltd GBP 1,000,000. in 3 months

Computer R Us UK (CRUUK)

Page 45-49 in Workbook

Products: Derivatives
FX Option What choices does Big Company Ltd have?

Buy the s via a forward FX trade (arrange today value 3 months) Buy the s in 3 months spot trade (exchange rate unknown until 3 months) Do an FX Option

Page 45-49 in Workbook

Products: Derivatives
FX Option

Big Company Ltd decide to use an FX Option


Want to know state of cash flows (now and future) FX Option will limit any exchange rate movements

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Products: Derivatives
FX Option
How does it work? Big Company (USA)
Bought By On January 5th 2004 Big Company contact JPMorgan
To have this right but not obligation Big Company pay JPMorgan a premium

The FX Option
Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP: Put: USD: 1,000,000 1,500,000

Big Company agree to buy an FX Option from JPMorgan. This Option gives them the right but NOT the obligation to use this trade on the delivery date

Strike Price 1.5 Expiry Date 5th March 2004 Delivery date 7th March 2004 Premium: $5000

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Products: Derivatives
FX Option
Big company now have the right to use [exercise] this trade for settlement on March 7th What are the key dates?
Expiry Date: Date that Big Company have to decide whether to exercise the Option Delivery Date: Date that transfer of funds would occur if Big Company Ltd exercise this Option

The FX Option
Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP: Put: USD: 1,000,000 1,500,000

Strike Price 1.5 Expiry Date 5th March 2004 Delivery date 7th March 2004 Premium: $5000

Other FX Option Components

Call: Currency that the buyer of the Option would receive Put: Currency that the buyer of the Option would sell Strike: Exchange Rate that would be used if Option is exercised 67

Page 45-49 in Workbook

Products: Derivatives
FX Option
How do Big company know whether to exercise the Option?

The FX Option
Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP: Put: USD: 1,000,000 1,500,000

On 5th March
Look at current FX [Spot] rate If they used the spot rate (Not the Option Strike rate) how much would it cost to buy the 1,000,000? Would it be cheaper to use the Spot rate and let the Option expire or Use the Option because the spot price in market would cost more in USD. Lets look at possible choices Big Company Could make

Strike Price 1.5 Expiry Date 5th March 2004 Delivery date 7th March 2004 Premium: $5000

Page 45-49 in Workbook

Products: Derivatives
FX Option
To buy 1,000,000 on Spot Market

The FX Option
Buyer: Big Company Seller: JPMorgan FX Option Details Call: GBP: Put: USD: 1,000,000 1,500,000

5th March
If SPOT Rate

RATE 1.3 1.7

Would COST in USD $1,300,000 $1,700,000

Exercise Option NO YES

If SPOT Rate

Strike Price 1.5 Expiry Date 5th March 2004 Delivery date 7 March 2004

To Buy 1,000,000. using the FX Option would cost:?

Premium: $5000

Big Company bought the Option 3 months ago So wouldnt know what the rates would be today. Buying the Option limits the cost of the Computer purchases to a maximum of $1,500,000. (plus the $5000 premium) 69

Page 45-49 in Workbook

Products: Derivatives
FX Option: To buy 1,000,000

In, At or Out Of the Money?

$1,700,000 Cost in USD $1,500,000

In the Money

At the Money


Out of the Money


1.5 Foreign Exchange Spot Rate


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