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TREASURY MANAGEMENT
IN FINANCIAL INSTITUTIONS
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Associate of the Institute Of Bankers, Bangladesh

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Prepared For: Prepared By:

The Institute Of Bankers, Mr. Md. Saidul Alam Rajan
Bangladesh (IBB) Executive Officer
International Division
 Treasury Management in Financial Institutions (TMFI)
Full Marks: 100
Module A: Introduction to Treasury

 Meaning and function of Integrated Treasury, Nature of Integration, Money Market , Foreign
Exchange Market , Relationship between Money Market and Foreign Exchange Market, Guidelines of
Asset Liability Management.

Module B: Money Market

 Demand and Time Liabilities (DTL), Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR),
why and how CRR and SLR maintained? Inter bank Money Market - Participants, Money Market
Instruments - Call Money (Overnight), Repo, Reverse Repo, Inter bank Repo, SWAP, Treasury Bills
and Treasury Bonds.

Module C: Foreign Exchange Management

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 Foreign Exchange Markets, Foreign Exchange Rate Calculations and Uses, Foreign Exchange Quote
Conventions, Assessment Risk to Exposures, Foreign Exchange Trading.

Module D: Asset Liability Management

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 Liquidity Management, Tools of Liquidity Management- Liquidity Coverage Ratio (LCR), Net Stable
Funding Ratio (NSFR), ADR / IDR, Wholesale Borrowing Limit (WB), Structural Liquidity Profile
(SLP) , Maximum Cumulative Outflow (MCO), Liquidity Contingency Plan (LCP). ALCO-
Formation, Responsibilities, ALM desk, ALCO Papers, Structure and functions of Front Office, Mid
Office & Back office, Balance Sheet and Capital Planning , Transfer pricing of Assets & liabilities .
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Module E: Derivatives
 Forward contract, Futures contract, Options, Investment Derivatives, Commodity Derivatives, Credit
Derivatives.
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Module F: Fixed Income

 Fixed Income Market, Fixed Income Investments, Bond Pricing-Yield to maturity, Duration and
convexity, Primary and secondary market of Govt. Securities, DIBOR, Primary Dealer Activities.

Module G: Risk Management

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 Risks Factors in Bank, Interest rate risk and exchange rate Risk management, Risk Management
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Limits and Reporting, Implication of BASEL-iii and Risk Management of Capital market Exposures.

References:
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1. Frank J. Fabozzi, The Handbook of Fixed Income Securities, McGraw Hill 6th Edition.
2. Basic Treasury, Citibank Training & Development Center, Self Instruction Series
3. Introduction to Foreign Exchange, Citibank Training & Development Center. Self Instruction Series
4. Frank J. Fabozzi CFA and Martin L. Leibowitz, Fixed Income Analysis, CFA Institute Investment
Series
5. Interest Rates, Citibank Training & Development Center, Self Instruction Series
6. John C Hull, Options, Futures & Other Derivatives, Prentice Hall, 7th Edition.

7. Introduction to Risk Management, Training & Development Center, Self Instruction Series

8. Timothy M. Weithers, Foreign Exchange: A Practical Guide to the FX Markets, Wiley Finance.

9. Edwin J. Elton, Martin J. Gruber, Stephen J. Brown, William N. Goetzmann; Modern Portfolio
Theory and Investment Analysis
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INTRODUCTION TO TREASURY
Meaning and function of Integrated Treasury, Nature of Integration, Money

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Market , Foreign Exchange Market , Relationship between Money Market and
Foreign Exchange Market, Guidelines of Asset Liability Management.
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1. What is Treasury Management? What are the functions of treasury management?
Answer: Treasury management is the process of managing an organization's financial resources in
order to achieve its strategic and operational objectives. It consist of a wide range of activities,
including cash management, funding and investment management, trade finance, risk
management, and working capital management.
Functions of Treasury Management:
 Cash Management: It ensures that there are an effective collection and payment
system in the organization.
 Liquidity Management: Cash flow analysis and working capital management act as
the most important tool for treasury management, to achieve its strategic goals.

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 Transaction Management: It helps businesses in conducting their financial
transactions such as payments, receipts, and investments.
 Risk Management: It enables businesses to monitor and manage financial risks
associated with their business operations.

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 Debt Management: The debt management function of treasury management helps
to track and manage debt obligations.
 Compliance: The compliance function of the management system helps companies
to meet regulatory requirements and all financial reporting standards.
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Cash
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Management

Liquidity
Compliance
Management
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Treasury
Management
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Debt Transaction
Management Management

Risk
Management

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Module A: Introduction to Treasury
2. What are the Benefits of Treasury Management in a Business?
Answer: Treasury management has various benefits for companies. There are several key benefits
of treasury management, which include:
 Efficiency: It helps to reduce mistakes and saves time by helping in cash management, risk
management and transaction management.
 Transparency: It provides real-time transparent information about a businesses’ cash
position.
 Better Risk Management: Treasury management can also help you reduce risk by
carefully managing an organization's exposure to foreign exchange and interest rate risks.
 Greater Control: With the help of a treasury management system, organizations can

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achieve greater control over their financial resources.
 Time: It helps businesses to save time on unnecessary business activities and allow them
to streamline their operations.
 Increased profitability: By reducing risk and improving cash flow, treasury management
can help increase an organization's profitability.

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3. Define integrated treasury. Describe about the nature and the benefits of
integrated treasury.
Answer: Integrated treasury refers to a complete approach to supporting the balance sheet and
allocating capital across domestic, international, and foreign exchange markets. Integrated TMS
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can help banks to automate basic tasks such as recording and reconciliation. The integrated
treasury of a bank is structured in three parts: the front office, the middle office and the back office.
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Nature of Integrated Treasury: An integrated treasury typically refers to a financial

management approach where various treasury functions are combined into a unified
system. This includes activities such as cash management, risk management, liquidity
management, and financial planning. The nature of integrated treasury lies in its ability to
streamline operations, enhance efficiency, and provide a holistic view of an organization's
financial position. This integrated approach enables better decision-making and risk
mitigation within the realm of treasury management.
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Independent Forex Role Independent Investment Role Integrated Role

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Merchant Dealing Funds Management ALM

Corporate FX Trading Liquidity CRR/SLR Management SWAP Management
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Proprietary Trading SLR / Non-SLR Investments Overseas Borrowing Investment

Derivatives Dealing Securities Trading Arbitrage
Equities Trading Derivatives Dealing

By replacing manual processes with advanced automations, integrated treasury management solutions
simultaneously reduce the risk of human error and save time, time that treasury managers can, instead,
devote to more pressing, higher value tasks. Furthermore, having access to accurate, up-to-date
information enables treasury managers to better assess risk and engage in data-driven decision-making.
With phased liberalization on capital account convertibil­ity, there will be scope for banks with integrated
treasury to structure multi-currency balance sheets and take advantage of strategic positioning.

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Module A: Introduction to Treasury
4. What are the role and functions of an integrated treasury?
Answer: An integrated treasury acts as a center of arbitrage and hedging activities. It seeks to
maximize its currency portfolio and free transfer of funds from one currency to another in order to
remain a proactive profit center.
The major functions of integrated treasury are:
Reserve Management and Investment:
 Fulfilling CRR/SLR commitments
 Assembling a roughly balanced investment portfolio to maximize yield and
duration

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Liquidity and Funds Management:
 Analyzing of major cash flows arising out of asset-liability transactions
 Providing a balanced and well-diversified liability base on the funds of the various
assets in the balance sheet of the bank

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 Providing policy inputs of the bank on funding mix (currency, tenor and cost) and
yield expected in credit and investment.
Asset Liability Management:
 ALM requires pricing the assets and liabilities in addition to figuring out the ideal
balance sheet size and growth rate.
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Risk Management:
 Integrated treasury manages all market risks associated with a bank’s liabilities and
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assets.
Market risk for assets:
 Unfavorable change in interest rates
 Increasing levels of disintermediation
 Securitization of assets
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 Emergence of credit derivatives

Transfer Pricing:
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 Integrated treasury unit provides an idea of the bank/s overall funding needs as well
as direct access to various markets
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Derivative Products:
 For the purpose of hedging a bank's own exposures, the Treasury can create Interest
Rate Swap (IRS) and other currency-based/cross-currency derivative products.
Arbitrage:
 Treasury units of banks undertake arbitrage by simultaneous buying and selling of
the same type of assets in two different markets in order to make profit less risky.
Capital Adequacy:
 This function is concerned with the quality of the assets, and Return on Assets
(ROA) is a crucial metric for gauging the effectiveness of the funds that have been
allocated.

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Module A: Introduction to Treasury
5. What are the benefits of Integrated Treasury Management?
Answer: The basic objective of integration is to improve portfolio profit­ability, risk-insulation
and synergize banking assets with trading assets. An integrated treasury acts as a center of arbitrage
and hedging activities. It seeks to maximize its currency portfolio and free transfer of funds from
one currency to another in order to remain a proactive profit center. The purpose of the integration
is efficient utilization of funds, cost effective sourcing of liability, proper transfer pricing, availing
arbitrage opportunities, on-line and off-line exchange of information be­tween the money and
forex dealers. It provide a single window service to customers, effective MIS, improved internal
control, minimiza­tion of risks and better regulatory compliance. Integrated Treasury facilitate
liberalization on capital account convertibility which will be a scope for banks with integrated
treasury to structure multi-currency balance sheets and take advantage of strategic positioning.

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6. Discuss the Structure of Integrated Treasury Management.
Answer: The treasury branch is operated by the front-office, mid-office, back office and audit
group. The dealers and traders found in the front office.

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Front Office: The front office in any treasury is primarily responsible for the trade
execution and liquidity management of the bank. A treasury in a bank normally has a
Money Market (MM) desk, a Foreign Exchange (FX) desk, a Capital Market (CM) desk
and a Derivative desk, characterized by product types.
Mid Office: A middle office is a department within a financial services institution. The
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middle office supports the front office by processing transactions negotiated by the front
office personnel to ensure that transactions are booked and fulfilled appropriately.
Back Office: The back office administers and supports the front office; its main functions
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are to:
 Confirm treasury transactions in a timely manner;
 Settle deals when due;
 Perform bank reconciliations in order to ensure all funds have moved as
expected;
 Account for transactions;
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 Provide all necessary reporting where no middle office exists; and

 Supervise the functionality and controls established within the TMS.
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Module A: Introduction to Treasury
7. What is Money? Discuss the function of money.
Answer: The word "money" itself is used to describe the universally accepted medium of
exchange, unit of account, and store of value in economic transactions. It represents the currency
or legal tender used within a particular country or region. It must possess six characteristics:
divisible, portable, acceptable, scarce, durable, and stable in value.
Types of Money:
 Fiat money: The notes and coins backed by a government.
 Commodity money: A good that has an agreed value.
 Fiduciary money: Money that takes its value from a trust or promise of payment.
 Commercial bank money: Credit and loans used in the banking system.
Function of Money: Money has taken many forms through the ages, but money

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consistently has three functions: store of value, unit of account, and medium of exchange.
Modern economies use fiat money-money that is neither a commodity nor represented or
"backed" by a commodity.
8. Define Money Market. What are the common money market instruments?

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Describe briefly.
Answer: The money market involves the purchase and sale of large volumes of very short-term
debt products, such as overnight reserves or commercial paper. An individual may invest in the
money market by purchasing a money market mutual fund, buying a Treasury bill, or opening a
money market account at a bank. A money market is a suitable location for people, banks,
businesses, and governments to temporarily store their cash. The goal of money markets is to make
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it simple and affordable for businesses and governments to access liquid funds.
Money Market Instruments:
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Treasury Commercial Certificate Banker's

Call Money Repos
Bills Papers of Deposits Acceptance

 Call Money: Call money is one of the most liquid instruments. Money borrowing
and lending take place over phone calls, emails, and faxes at the call rate in the
absence of an organized market.
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 Treasury Bills: Treasury Bills are issued by a country’s central bank on behalf of
its government. These do not pay interest but do allow for capital gains. Due to the
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government's backing it is considered one of the safest investments. The tenure of

Treasury bills is generally from 14 days to 364 days.
 Commercial Papers: It functions as a promissory note created by a business or
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organization to raise short-term capital. However, these are unsecured in nature.

CPs come with an average maturity of two odd months and don’t come with
separate interests.
 Certificate of Deposits: A certificate of deposit is a type of time deposit with the
bank. It only can be issued by the bank. It has a fixed maturity date and cannot be
withdrawn before maturity.
 Repos: Repo is a repurchase agreement with very short-term in nature. Tenure
ranges from overnight to a month, while the securities can be directly transferred
without the credit risk.
 Banker's Acceptance: In the financial industry, this popular money market
product is exchanged. With a signed promise of future repayment, a loan is issued
to the designated bank after a banker's acceptance.
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Module A: Introduction to Treasury
9. Define Foreign Exchange Market. Discuss the benefits of foreign exchange market.
Answer: The foreign exchange market or Forex market is the platform where different currencies
are traded. It is an over-the-counter (OTC) market with no central marketplace. Different types of
Forex markets, such as the spot market, swap market, forward market, options market, futures
market etc.
Benefits of Foreign Exchange Market:
Liquidity Hour market Transaction costs Global financial market
Hedge with
Leverage Direct Trading Nobody owns the market
forex
Volatility Go long or short Forex market hours Access tools to help you trade

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Low costs No commission Good for beginners Globalized marketplace
Various currency fluctuations
Transparency Anytime trading Trade around the clock
and options

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10.Describe the factors that influence the FX market.
Answer: There are several factors that contribute to a currency's exchange rate. Here are some of
the top factors that can affect an exchange rate:
 Balance of Payments Position: A country with a trade imbalance usually sees downward
pressure on its foreign exchange rate.
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 Future Currency Value Speculation: Speculators buy or sell currencies when they see
profitable opportunities.
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 Domestic Political and Economic Circumstances: Foreign exchange rates often suffer
from weakening economic conditions and inflation.
 Intervention by the Central Bank: To alter the value of their own currency, central banks
may buy or sell different currencies.
11.Distinguish between the money market and FX market.
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Answer:
Money Market FX Market
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Platform
Foreign exchange trading Short-term capital lending market
• A spot trading market • Short-term credit market
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• A forward trading market • Short-term securities market

Business Models
• Adjustment trading market • Discount market

Currency
Involves one type of currency. Dealing with two different currencies
Utilization

• Exchange of various currencies Finance both the short-term funding

Purpose
• Reduce the risk of exchange rate surplus and deficit.

Earnings Exchange gain from buying and selling

Interest rates on deposits and loans
of foreign currency

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Module A: Introduction to Treasury
12.Define Asset Liability Management System. Briefly Discuss the Asset Liability
Management system process.
Answer: Asset and liability management (ALM) is a practice used by financial institutions to
mitigate financial risks resulting from a mismatch of assets and liabilities. By strategically
matching of assets and liabilities, financial institutions can achieve greater efficiency and
profitability while also reducing risk. The ALM process rests on three pillars:

ALM Information System

• Management Information System
• Information availability, accuracy, adequacy
and expediency

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ALM Organisation
• Structure and responsibilities

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• Level of top management involvement

ALM Process
• Risk parameters
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• Risk identification
• Risk measurement
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• Risk management
• Risk policies and tolerance levels

13. What Is an Asset-Liability Committee (ALCO)? Briefly discuss the duties and
responsibilities of ALCO.
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Answer: An asset-liability committee (ALCO), also known as surplus management, is a

supervisory group that coordinates the management of assets and liabilities with a goal of earning
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adequate returns. By managing a company's assets and liabilities, executives are able to influence
net earnings, which may translate into increased stock prices.
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Duties of ALCO:
 Describing the current outlook for interest rates and offering a prediction for how
they will go in the future.
 Giving an assessment of the state of interest rates at the moment and a forecast for
the future.
 Monitoring the market risk levels of the FI by making sure the different risk-limits
the Board has set are followed
 Determining the desired maturity profile and mix of the assets and liabilities
 Product pricing for both - assets as well as liabilities side
 Deciding the funding strategy for the source and mix of liabilities or sale of assets
 Reviewing the outcomes of the previous meetings and the status of the decisions
being implemented.

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Module A: Introduction to Treasury
14.Mention the key roles and responsibilities of ALM desk.
Answer: The scope of ALM function can be described as follows:
 Liquidity risk management: Indicates the danger, both present and future, that the bank
won't be able to pay its bills on time without it having a negative impact on its finances.
 Management of market risks: Market risk, or systematic risk, affects the performance of
the entire market simultaneously. Market risk may arise due to changes to interest rates,
exchange rates, geopolitical events, or recessions.
 Trading risk management: It is the process of weighing the amount of your possible
losses against the initial profit potential on each new position within the financial markets.
 Funding and capital planning: It is a dynamic and ongoing process considering both

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short- and longer-term capital needs of a bank and coordinated with the banks' overall
strategy and planning cycles.
 Profit planning and growth projection: Profit planning and forecasting enables a
comparison between projected costs and spends, and the actual costs that your business is
incurring.

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15.What are the advantages and disadvantages of asset liability management?
Answer: By strategically matching assets and liabilities, financial institutions can achieve greater
efficiency and profitability while reducing risk. The downsides of ALM involve the challenges
associated with implementing a proper framework.
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It is important to identify both benefits and limitations of a financial concept of asset liability
management system so that it can be implemented in the business and used to its optimum capacity
to achieve maximum results.

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Module A: Introduction to Treasury
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MONEY MARKET
Demand and Time Liabilities (DTL), Cash Reserve Ratio (CRR), Statutory Liquidity

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Ratio (SLR), why and how CRR and SLR maintained? Interbank Money Market -
Participants, Money Market Instruments - Call Money (Overnight), Repo,
ReverseRepo, Interbank Repo, SWAP, Treasury Bills and Treasury Bonds.
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1. What is money? What are the functions of money?
Answer: The word "money" itself is used to describe the universally accepted medium of
exchange, unit of account, and store of value in economic transactions. It represents the currency
or legal tender used within a particular country or region. It must possess six characteristics:
divisible, portable, acceptable, scarce, durable, and stable in value.
Function of Money: Money has taken many forms through the ages, but money
consistently has four functions: store of value, unit of account, medium of exchange and
money as a standard.
 Money as a Medium of Exchange: Money facilitates transactions of goods
and services as a medium of exchange. Producers sell their goods to

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wholesalers in exchange of money. Wholesalers, in turn, sell their goods to
the retailers and the retailers sell these goods to the consumers in exchange
for money.
 Money as a Unit of Account: Money as a Unit of Account because it
fulfills the three conditions of being divisible, fungible, and countable or

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measurable. Money is divisible in the sense that it can be subdivided into
smaller units such as the Taka being divided into paisa. Money is also
fungible. Fungible means that the units that makeup something are not
unique, but all the same. Money is countable, because each legal tender note
having the same value or whichever numerical value is written on it.
 Money as a Standard of Deferred Payment: Money as a standard of
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deferred payment means that the standard of payment is contracted to be
made at some future date. This is possible because value of money remains
more or less constant and has the merit of general acceptability.
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 Money as a Store of Value: Money as a store of value means that money

is used as a widely accepted currency that holds its value over time. People
can earn money, save it, and then spend it later on, knowing that the value
has been stored over time.
2. Briefly explain the demand for money.
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Answer: In monetary economics, the demand for money is the desired holding of financial assets
in the form of money: that is, cash or bank deposits rather than investments. As per John Maynard
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Keynes there are three motives behind the demand for money:
 Transactions Motive: Individuals are assumed to hold money because it is a medium of
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exchange that can be used to carry out current everyday transactions.

 Precautionary Motive: People hold additional money as a cushion against unexpected
needs. Precautionary money balances come in handy if you are hit with an unexpected bill,
say for major car repair or hospitalization.
 Speculative Motive: One reason people keep money is for speculative purposes, as it can
be utilized as a store of wealth. If a stock market crash seemed imminent, the speculative
motive for demanding money would come into play; those expecting the market to crash
would sell their stocks and hold the proceeds as money.
The demand for money explains the desire of people for a definite amount of money. Money is
needed to manage transactions, and the value of transactions decides the money people want to
keep.

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Module B: Money Market
3. Define bank liabilities. Describe the two types of bank liabilities with examples.
Answer: Bank liabilities refer to a debt or financial obligation of the bank, such as interest owed
to other banks and other debts owed. Examples of liabilities for a bank include distribution
payments to customers from stock, interest paid to customers for savings and fixed deposits. In
monetary analysis, only a two-fold classification of bank deposits:
Demand Deposits or Demand Liabilities: Demand deposits or liabilities are defined as
deposits payable on demand through Cheque or otherwise. It is only demand deposits
which serve as a medium of exchange. They are the obligations that a bank must fulfill
immediately. Demand Liabilities include:
Current deposits Balances in past-due fixed deposits

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Unclaimed deposits Credit balances in the Cash Credit account
Cash certificates Deposits held as security payable on demand
Recurring deposits. The demand liabilities portion of savings bank deposits
Margins held against letters of credit/guarantees

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Time Deposits or Time Liabilities: It refers all other deposits which are not payable on
demand and on which cheques cannot be drawn have fixed term to maturity. They are the
debts that a bank must pay off after a certain amount of time.
Gold deposits Cumulative and recurring deposits
Fixed deposits Deposits maintained as security not repayable immediately
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Cash certificates Margin held against letters of credit if not repayable
Staff security deposits immediately
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4. What is CRR and what are the components of cash reserve.

Answer: CRR AKA Cash Reserve Ratio is the percentage of a commercial bank's total deposits
that it must maintain in cash with the central bank of that country. Banks are allowed to maintain
cash reserve with local currency (Taka) only. CRR is the amount that the bank has, which cannot
be invested anywhere or given as loans to the borrowers.
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Components of Cash Reserve:

 The maintained cash reserve for the day will be calculated by adding
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together the day-end balances of the Taka current accounts held with
various BB offices.
 The balance that is kept in this manner must be unchecked in every way.
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 Both the maintained amount and excess of cash reserve will be computed
after deducting the surplus portion of the balance.
Formula for Cash Reserve Ratio:
CRR= Reserve Requirement / Deposits
CRR for Bangladesh Bank:

Cash Reserve Ratio

Traditional Banking 4%
Islamic Banking 4%

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Module B: Money Market
5. What is SLR? Why and how is it maintained?
Answer: Statutory Liquidity Ratio or SLR is the minimum percentage of deposits that a
commercial bank has to maintain in the form of liquid cash, gold or other securities. Statutory
Liquidity Ratio acts as a reserve. It is calculated by dividing the total value of the bank's time
liabilities and net demand by the percentage value of its liquid assets. Increasing the SLR will
control inflation in the economy while decreasing the statutory liquidity rate will cause growth in
the economy.
Importance of SLR:
 To monitor the growth of bank credit.
 To guarantee commercial banks' solvency.

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 To compel banks to buy bonds and other types of government securities.
 To stimulate demand and growth.
Components for Statutory Liquidity Reserve:
 Liquid Assets: These assets can be readily converted into cash. Gold,
treasury bills, government-approved securities, government bonds, and cash

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reserves are liquid assets.
 Net Demand: The net demand of a commercial bank depends on on-
demand liabilities like demand draft, current deposits, overdue fixed deposit
balance, etc.
 Time Liabilities: Time liabilities refer to long-term deposits, where banks
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need to repay their customers upon maturity. Fixed deposit accounts, staff
security deposits, savings bank deposits, certificates of deposits, investment
deposits, and call money market borrowings are time liabilities.
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Formula for Statutory Liquidity Ratio:

Liquid Assets
Statutory Liquidity Ratio = � � × 100
(Net Demand + Time Liabilities)
SLR for Bangladesh Bank:
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Statutory Reserve Ratio

Traditional Banking 13%
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Islamic Banking 5.5%

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Guidelines for use of Foreign Currency for SLR:

 If there is credit balance in Foreign Currency Clearing Account Banks may
use it for SLR.
 No interest will be paid on the used portion of foreign currency.
 Forex Reserve and Treasury Management Department (FRTMD) of BB
will credit interest on the balance held in the account as usual.
 After getting the certificate from Department of Off-site supervision (DOS)
about the FC used in SLR FRTMD will adjust the interest amount.
 Any false information provided on the amount of foreign currency used for
SLR purposes will result in a penalty equal to twice the interest already
credited for the false information, as well as the interest already credited
being reversed.

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Module B: Money Market
6. Discuss CRR and SLR for Offshore Banking Operation.
Answer: Banks shall be required to maintain Cash Reserve Ratio (CRR) and Statutory Liquidity
Ratio (SLR) for the liabilities arising from the Offshore Banking Operation (OBO. Banks have to
calculate the following components of demand and time liabilities for the calculation of required
cash reserve and statutory liquidity reserve for OBO:
Liabilities of OBO:
 Customer Deposit
 Deposit from Banks (Outside Bangladesh)
 Borrowing from Banks (Outside Bangladesh)
 Deposit from Financial Institutions (Outside Bangladesh)

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 Borrowing from Financial Institutions (Outside Bangladesh)
 Other payable Liabilities (Excluding domestic intra-bank and interbank
OBO to OBO transactions)
Foreign Currency of CRR:
 To meet the daily minimum needed cash reserve arising from OBO solely,

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banks may use all or part of the available credit amount from the FC
Clearing Account held with Bangladesh Bank (BB) for the entire biweekly.
The foreign currency to be used shall have to be burden less in every aspect.
NOSTRO Account balance for SLR:
 Banks may also use credit balance of NOSTRO Accounts maintained with
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correspondence banks to fulfill the SLR requirement stemming from OBO
only.
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Calculation of daily Excess Reserve (ER):

 For banks having both DBO and OBO, the amount of daily excess reserve
will be determined using the following formulas:
Unencumbered Current A/C Balance with BB - Biweekly Requirement cash for DBO = X
Bi-weekly Req. cash reserve for OBO - Unencumbered FC used for daily cash reserve from FC
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Clearing a/c with BB = Y

From (i) and (ii) above -
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I. If X = 0 or X = -ve than ER = 0
II. If X = +ve, Y = +ve, and X>Y than ER = X-Y
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III. If X = +ve, Y = +ve and X<Y than ER = 0

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Module B: Money Market
7. Briefly describe the products of money market.
Answer: The money market involves the purchase and sale of large volumes of very short-term
debt products, such as overnight reserves or commercial paper. An individual may invest in the
money market by purchasing a money market mutual fund, buying a Treasury bill, or opening a
money market account at a bank. A money market is a suitable location for people, banks,
businesses, and governments to temporarily store their cash. The goal of money markets is to make
it simple and affordable for businesses and governments to access liquid funds.
The following is a list of the typical products sold in the money market. Rates listed thereon must
reflect market dynamics and adhere to all risk limitations and wholesale borrowing and lending
guidelines.

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Call money /Overnight Deal: Call money refers to deposits or borrowings made overnight
that mature automatically the next working day.
Short Notice Money: It refers to transactions involving money that last longer than
overnight but less than 14 days.

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Term Money: It is the borrowing/lending of funds for periods from 15 days up to 1 year
at an agreed interest rate among the banks and NBFI‘s.
Repo/Reverse Repo: Repurchase agreements are contracts between two banks or a bank
and the central bank.
Government Security: A tradable asset issued by an independent government is a
R
government security. It accepts the government's debt responsibility.
 Short-term Security is called Government T-bills
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 Long-term security is called Government T-bonds

Commercial Paper: Commercial paper is an unsecured promissory note with a specified
maturity of no more than 270 days.
SWAP: A simultaneous exchange of identical amounts of one currency for another with
two separate value dates is known as a foreign exchange swap
T

Call Money
O

Short Notice
SWAP
Money
N

Money
Commercial
Paper Market Term Money

Government
Security
• Government T-
Repo/Reverse
Bills Repo
• Government T-
Bonds

Page 5 of 5
Module B: Money Market
 LE
FOREIGN EXCHANGE MANAGEMENT
Foreign Exchange Markets, Foreign Exchange Rate Calculations and Uses, Foreign

SA
Exchange Quote Conventions, Assessment Risk to Exposures, Foreign Exchange
R Trading.
FO
T
O
N
1. Define exchange rate? What are the reasons for exchange rate fluctuations?
Answer: An exchange rate is a rate at which one currency will be exchanged for another currency
and affects trade and the movement of money between countries. Exchange rates are impacted by
both the domestic currency value and the foreign currency value.
Exchange Rate Fluctuation: Exchange rates are constantly moving, based on supply and
demand. Whether one currency is in higher demand than another, depends on the perceived
value of owning it, either to pay for goods and services, or as an investment. Currency
fluctuations are a natural outcome of floating exchange rates, which is the norm for most
major economies. Numerous factors influence exchange rates, including a country's
economic performance, the outlook for inflation, interest rate differentials, capital flows

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and so on. Ten (10) Factors that influence currency exchange rates:
 Inflation: If inflation is lower the purchasing power of the BDT would
increase relative to other currencies. If inflation is higher purchasing power
decreases.

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 Interest rates: Governments and Central Banks have the authority to
influence exchange rates by increasing interest rates. Higher the interest rate
the more attractive the currency offer is to foreign investors.
 Government Debt/Public: Debt influences currency value and exchange
rates because a country with higher debt is less likely to draw foreign
R
investment, which in turn leads to inflation.
 Political Stability: The value of a country's currency and exchange rates
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are impacted by its level of political stability since a country with more
political disturbance is less likely to attract foreign investment.
 Economic Recession: Economic downturns make a country less desirable
to foreign investors. Interest rates frequently decline during recessions,
which reduces the demand for local currency abroad.
T

 Terms of Trade: A greater demand for a country’s exports means an

improvement in terms of trade resulting in rising revenues and,
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consequently, an increased demand for that country’s currency. This will

naturally increase the value of that currency.
 Current account deficit: Countries therefore with lower current account
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deficits will tend to have stronger currencies than those with higher deficits.
 Confidence and speculation: Investors would demand more of a currency
if they believe it will increase for whatever reason. It may cause a sudden
increase in the demand for domestic currencies relative to the demand for
foreign currencies.
 Government intervention: Governments and Central Banks have the
monetary authority to intervene to stabilize a currency by formulating trade
policies, printing more money, or increasing and decreasing interest rates.
 The stock markets: When the stock market is underperforming, a lack of
confidence means foreign investors will take their funds back to their own
currencies.
Page 1 of 6
Module C: Foreign Exchange Management
2. Describe foreign exchange markets with examples.
Answer: The foreign exchange market or forex market is the market where currencies are traded.
The forex market is the world's largest financial market where trillions are traded daily. It is the
most liquid among all the markets in the financial world. The Foreign Exchange Market has its
own varieties. The foreign exchange market features different modes of trading, and they are
embodied as follows:
The Spot Market: In this market payment
made to the buyers and the sellers as per the current
exchange rate and trades which usually take one or
two days to settle the transactions.

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 Example: For example, if the quoted
exchange rate for EUR/USD was $1.2354, then
that is also the spot rate. This figure shows that you
would have to spend $1.2354 in order to buy €1.00.
The Forward Market: In the forward

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market two parties make an agreement to do a trade
at some future date, at a defined price and quantity.
 Example: The business meets with the
supplier, and agrees to pay USD $500,000 in 3
months from now. The current GBP / USD
R
exchange rate at the time of the deal is GBP £1.00
= USD $1.32. ABC Factory therefore expects to
pay GBP £378,788 for the equipment.
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The Futures Market: The futures market is similar to the forward market, in that there is
an agreed price at an agreed date. This removes the risk found in other markets.
 Example: buying a Euro FX future on the U.S. exchange at 1.20 means the
buyer is agreeing to buy euros at $1.20 USD. If they let the contract expire, they
are responsible for buying 125,000 euros at $1.20 USD.
T

Option Market: An option is a contract that allows an investor to buy or sell an instrument
that is underlying like a security, ETF, or even index at a determined price over a definite
O

period of time. Buying and selling ‘options’ are done in this type of market.
 Example: You would buy a GBP/USD put option if you thought USD would
N

rise in value against GBP. In this scenario, your losses would be covered at the
cost of your options premium, while your potential profit would be infinite. You
can also sell forex put options if you believe the base currency will rise against
the quote.
Swap Market: A swap is a kind of conditional arrangement in which the liabilities or cash
flows from two distinct financial instruments are traded between two parties. The spot
currency is swapped against the forward currency.
 Example: Party A is Canadian and needs EUR. Party B is European and needs
CAD. The parties enter into a foreign exchange swap today with a maturity of
six months. They agree to swap 1,000,000 EUR, or equivalently 1,500,000
CAD at the spot rate of 1.5 EUR/CAD.

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Module C: Foreign Exchange Management
3. Describe the types of Merchant (Buying-Selling) foreign exchange rates with
examples.
Answer: Exchange rate sheet shows conversion rates of different currencies. Different types of
foreign exchange rates with their uses are briefly described here:
TT & OD (Telegraphic Transfer and On Demand) rate: This rate is used for outward
remittance from one country to another. The T.T & O.D selling rate is used for Mail Transfer or
Telegraphic Transfer (TT rate) and issuance of Foreign Currency Demand Draft & Travelers
Cheques (OD rate).
B.C. Rate: Bills Selling Rate This rate is to be used for all transactions which involve handling of
document by the bank: for example, payment against import bills.

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TT Clean Rate: This rate is derived by adjusting Telex charges with the Spot/Cash rate of FCs.
The rate will be 1.00 taka less than the BC rate.
TT Doc Rate: This rate is applicable for the instruction to pay a sum of money to a certain person

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on presentation of some documents. As compared to BC, this will be 1.10 taka less.
OD Sight Export Bill Rate: This rate is applies to purchase or negotiate sight export bills. Since
there is time gap between the payment to the exporter and receipt of foreign currency in the
NOSTRO account, the banker deducts transit margin from TT rates. So, this rate is lower than TT
clean buying rate.
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OD Transfer Rate: For transactions involving the purchase of personal cheques, Pay Orders,
drafts, traveler's cheques, etc. When buying a draft of this kind, the bank pays right away but is
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refunded at the foreign banks a few days later when the drawee pays for the draft documents.
Cash Foreign Currency Rate: This exchange rate is applicable for buying and selling of cash
notes of US Dollar, Euro and Great Britain Pound.
Standard Mid Rates: The middle rate is the exchange rate halfway between a currency's bid and
ask rates. The middle rate is calculated using the midpoint of the bid and ask rates.
T

Indicative Rates: An indicative rate is a reasonable estimate of a currency's current market price
that is provided by a market maker to an investor upon request. However, this rate is not able to
O

be dealt on, hence the word indicative.

Card Payment Rates: This rate is applied for BDT payments against credit card outstanding in
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USD.
Forward Rates: The forward purchasing and selling rate set by the bank is applied to commercial
and corporate transactions where BDT is the quoted currency.
NFCD/RFCD Rates: Interest rates for NFCD/ RFCD accounts of different tenors are also
provided in the exchange rate sheets.
LIBOR rates: LIBOR, the acronym for London Interbank Offer Rate, is the global reference rate
for unsecured short-term borrowing in the interbank market. It acts as a benchmark for short-term
interest rates. It is used for pricing of interest rate swaps, currency rate swaps as well as mortgages.
The Secured Overnight Financing Rate (SOFR), which will replace LIBOR on June 30, 2023, will
be phased out starting in 2021.

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Module C: Foreign Exchange Management
4. Explain the advantages and disadvantages of forex markets.
Answer:

Advantages Disadvantages
Fewer rules than in other
markets
High Risky transactions
Low strict standards or Lack of Monitoring
regulations Authority
No clearing houses and
Risk of High Losses

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no central bodies
No traditional fees or Have less residual
commissions returns than others
Lack of transparency in
No Buy Sell Limits
the FX market

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Does not have full
Market is open 24/7
control over trade
Have a limited view of
Easy Entry and Exit
information

5. What are the major foreign exchange risks? Explain with examples.
R
Answer: Foreign exchange risk refers to the losses that an international financial transaction may
incur due to currency fluctuations. Fundamentally, there are three types of foreign exchange
exposure banks’ face:
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Transaction risk: The risk a business takes on while doing financial transactions across
borders is known as transaction risk. Transaction risk is caused by the interval between a
transaction and its settlement. Forward contracts and options can be used to reduce
transaction risk.
 Example: A Canadian business with operations in China wants to deposit CNY
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600 in profit into its CAD account. If the currency rate was 1 CAD for 6 CNY
at the time of the transaction and it drops to 1 CAD for 7 CNY before settlement,
the expected receipt would be CAD100 (CNY600/6) rather than CAD86
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(CNY600/7).
Economic risk: Economic risk, often called forecast risk, is the possibility that an
organization's market value will be negatively influenced by its exposure to currency rate
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instability that cannot be avoided. Geopolitical instability and/or governmental rules

frequently result in this kind of risk.
 Example: local furniture importers could pose a financial risk to a Canadian
furniture company that sells locally, particularly if the Canadian dollar
unexpectedly gains strength.
Translation risk: Translation risk, often called translation exposure, is the risk posed by a
local headquartered company doing business abroad while reporting its financial
performance in that nation's currency.
 Example: Translation risk arises, for instance, when a parent firm that reports
in Canadian dollars manages a Chinese subsidiary and converts the latter's
financial performance, which is reported in Chinese yuan, into Canadian
dollars.
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Module C: Foreign Exchange Management
6. What are the steps involved in forex trading? Describe briefly.
Answer: Currency trading may be challenging and risky. Forex trading is mostly uncontrolled in
various regions of the world. Banks from all across the world trade with one another in the
interbank market. Trading forex is similar to equity trading. Here are some steps on the forex
trading journey:
Learn about forex: Forex trading is a unique project that calls for specific understanding.
Forex trading involves a wide range of factors, including economic indicators, political
events, and market sentiment, all of which can impact currency prices. The key benefits of
learning Forex trading is the ability to understand the market and make informed decisions
about when and how to trade.

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Set up a brokerage account: Brokerage accounts are used for day trading to earn short-
term profits, as well as investing for long-term goals. Most brokerage accounts also provide
a way to earn a decent yield on none invested cash. Only a broker can provide you access
to currency buy/sell operations. A broker maintains your brokerage account and acts as the
custodian for the securities you own in your account.

SA
Develop a trading strategy: A trading strategy will guide how you will enter and exit
trades in the markets in a manner that enhances profitability and reduces risk exposure. A
trading strategy can be based on technical analysis or fundamental analysis. With a trading
plan, we are able to know if we are headed in the right direction. You'll have a framework
to measure your trading performance. And just like a GPS, we are able to monitor this
R
continually. This allows us to trade with less emotion and stress.
Always be on top of your numbers: Always review your positions at the end of the day
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once you start trading. A daily accounting of trades is already offered by the majority of
trading software. Make sure that we have enough money in our account to execute future
trades and that there are no open positions that need to be filled.
Cultivate emotional equilibrium: Beginner forex trading is difficult since there are a lot
of unknowns and emotional ups and downs. It's crucial to maintain emotional stability
through wins and losses in your trading and to avoid getting carried away by your trading
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positions. Maintain discipline when it comes to closing out your investments.

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N

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Module C: Foreign Exchange Management
7. Explain the basic forex trading strategies.
Answer: A trading strategy will guide how you will enter and exit trades in the markets in a manner
that enhances profitability and reduces risk exposure. A trading strategy can be based on technical
analysis or fundamental analysis. A long trade and a short trade are the two most fundamental
types of forex transactions. Depending on the duration and numbers for trading, trading strategies
can be categorized into four further types:

Scalping: Scalpers aim to make small profits from very short-term price movements, often
holding positions for seconds to minutes.
 Time Horizon: Ultra-short-term.

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 Objective: Cumulate small gains throughout the day.
Day Trading: Day traders open and close positions within the same trading day, avoiding
overnight exposure to market movements.
 Time Horizon: Short-term (minutes to hours).

SA
 Objective: Capitalize on intraday price fluctuations.
Swing Trading: Swing traders hold positions for a few days to weeks, aiming to capture
"swings" in price trends.
 Time Horizon: Short to medium-term (days to weeks).
R
 Objective: Profit from short to medium-term market trends.
Position Trading: Position traders hold positions for an extended period, ranging from
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weeks to years.
 Time Horizon: Long-term.
 Objective: Capitalize on major, long-term market trends.
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O
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Page 6 of 6
Module C: Foreign Exchange Management
 LE
ASSET LIABILITY MANAGEMENT
Liquidity Management, Tools of Liquidity Management- Liquidity Coverage Ratio

SA
(LCR), Net Stable Funding Ratio (NSFR), ADR / IDR, Wholesale Borrowing Limit (WB),
Structural Liquidity Profile (SLP) , Maximum Cumulative Outflow (MCO), Liquidity
Contingency Plan (LCP). ALCO Formation, Responsibilities, ALM desk, ALCO Papers,
Structure and functions of Front Office, Mid Office & Back office, Balance Sheet and
Capital Planning , Transfer pricing of Assets & liabilities .
R
FO
T
O
N
1. Define liquidity management? Why it is important to manage the liquidity
efficiently?
Answer: Liquidity management is the strategy an organization works to refine, expand and secure
its liquidity. The main task is to ensure the liquidity of the company at all times and to make sure
that there is always enough money available to pay the company's bills and make investments
without facing a liquidity crisis.
Efficiently managing liquidity is crucial for various reasons, and it plays a fundamental role in the
overall financial health and stability of individuals, businesses, and financial markets. Here are
some key reasons why managing liquidity is important:
 It ensures that businesses can maintain smooth operations without disruptions.

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 Failure to manage liquidity effectively can lead to default and financial instability.
 Efficient liquidity management allows businesses and individuals to take advantage of
investment opportunities

SA
 It helps organizations to overcome challenges without resorting to distress sales or
insolvency.
 Maintaining good liquidity can positively impact creditworthiness, leading to lower
borrowing costs.
 Efficient liquidity management instills confidence among investors, creditors, and
stakeholders
R
 Maintain a certain level of liquidity to ensure solvency and protect depositors.
 Effective liquidity management helps mitigate market risks by ensuring the ability to buy
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or sell assets when needed.

 A strong liquidity profile positively influences credit ratings, making it easier and more
cost-effective to access capital markets.
In summary, managing liquidity efficiently is essential for sustaining day-to-day operations,
seizing opportunities, responding to emergencies, maintaining financial stability, and instilling
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confidence among stakeholders. It is a critical aspect of overall financial management and risk
mitigation.
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N

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Module D: Asset Liability Management
2. What is contingency funding plan? What are the essential characteristics of a
CFP?
Answer: Contingency funding planning (CFP) serves as an action plan detailing the steps to take
during liquidity shortfalls, while liquidity stress testing simulates extreme but acceptable scenarios.
A contingency funding plan needs to be prepared by keeping in mind that enough liquidity is
available to meet the funding requirements in a liquidity crisis situation.
Essential characteristics of a CFP:
 The CFP should identify financial resources for contingent demands and
evaluate their sufficiency.
 The CFP should distinguish between bank-specific and general market

LE
liquidity situations, and have appropriate responses to each situation.
 The CFP should define responsibilities and decision-making authority so
that all personnel understand their role during a problem situation.
 The CFP should identify the sequence that the bank will mobilize and
commit key sources of funds for contingent needs.

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 The CFP should address implementation issues such as procedures the bank
should use to obtain emergency funds or release funds from one use to
transfer to another.
 The CFP should identify other actions necessary in the event of an
unexpected contingency.
 The CFP should assess the potential for funding erosion by source of funds
R
under different scenarios.
 The CFP should assess the potential liquidity risk posed by other activities,
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such as asset sales and securitization programs.

Elements of a typical Contingency Funding Plan (CFP):
T

Details of
Purpose of the Action Plan
Contingency Critical Contact
O

Management Information
team
N

Contingency
Brief Summary
Management
of Regulations
Team (CMT)

Trigger Events
Elements Contingency
Liquidity
of a CFP Sources

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Module D: Asset Liability Management
3. Define LCR and NSFR? Explain these with examples.
Answer:
Liquidity Coverage Ratio (LCR): The liquidity coverage ratio is the requirement
whereby banks must hold an amount of high-quality liquid assets that's enough to fund
cash outflows for 30 days. The LCR is a type of stress test designed to predict shocks to
the market and ensure that financial institutions have enough capital reserves to bear
temporary fluctuations in liquidity. The minimum acceptable value of Liquidity Coverage
Ratio is 100 percent. The calculation of the LCR requires three important quantities to be
defined:
A. Total value of stock of high quality liquid assets

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B. Total cash outflows, next 30 days (stressed scenario)
C. Total cash inflows, next 30 days (stressed scenario)
Formula for Calculating LCR is as follows:
High quality liquid asset amount (HQLA)

SA
LCR = Total net cash flow amount
× 100%

Example: Let’s assume bank ABC has high-quality liquid assets worth $55 million and
$35 million in anticipated net cash flows, over a 30-day stress period:
 The LCR is calculated by $55 million / $35 million.
R
 Bank ABC's LCR is 1.57, or 157%, which meets the requirement under Basel III.
Net Stable Funding Ratio (NSFR): The net stable funding ratio is a liquidity standard
FO

requiring banks to hold enough stable funding to cover the duration of their long-term
assets. The Net Stable Funding Ratio seeks to calculate the proportion of Available Stable
Funding ("ASF"), via equity and certain liabilities, over Required Stable Funding ("RSF")
via the assets. The minimum acceptable value of this ratio is 100 percent and long-term is
mainly defined as more than one year. The calculation of the NSFR requires two quantities
to be defined:
T

A. Available stable funding (ASF) and

B. Required stable funding (RSF).
O

Equation of NSFR is as follows:

NSFR = Available Stable Funding (ASF)

> 100%
N

Required Stable Funding (RSF)

Example: Bank Alpha's required stable funding is $35,000,000.00 and the ASF of Bank
Alpha is $41,750,000.00. Thus, Bank Alpha's NSFR is $41,750,000 / $35,000,000 =
119.29%.

Page 3 of 6
Module D: Asset Liability Management
4. Define ALCO. Briefly explain the responsibilities of ALCO.
Answer: An asset-liability committee (ALCO) is a supervisory body that makes sure the business
is making enough money by monitoring the management of assets and liabilities. By identifying
and safeguarding a company's assets and liabilities, executives can influence net earnings, and this
can lead to better stock prices.
Responsibilities of ALCO: The major responsibilities of ALCO are defined as follows:
 Make sure the measurement and reporting methods used by the bank
appropriately reflect the levels of market risk and liquidity.
 Monitor the structure and composition of bank‘s assets and liabilities
 Identify balance sheet management issues that are leading to

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underperformance
 Decide on the major aspects of balance sheet structure
 Provide respond to significant, actual and expected increases and decreases
in required funding

SA
 Review maturity profile and mix of assets and liabilities
 Articulate interest rate view of the bank and decide on balance sheet strategy
 Approve and periodically review the transfer pricing policy of the bank
 Evaluate market risk involved in launching of new products
 Review deposit-pricing strategy, and
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 Review contingency funding plan for the bank
5. What are the key agendas of ALCO meeting?
FO

Answer: The committee shall sit at least once in a month to discuss various aspects of ALM. The
presence of all the members or his/her representative is mandatory in every meeting. The key
agenda of ALCO meetings should be at least, but not limited to, the following:
 Review of actions taken in previous ALCO and the status of implementation
 Review of monthly changes in various key parameters
T

 Overall fund position including loanable funds, maintenance of CRR and

SLR, LCR and NSFR position, Structural Liquidity Profile, etc.
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 Review of Asset position

 Review of Liability position
N

 Foreign exchange related asset and liability position

 Economic and Market Status and Outlook
 Liquidity Risk related to the Balance Sheet
 Review of the price / interest rate structure
 Off-balance sheet position
 Capital Market Investment position
 Investment in associates
 Leverage Ratio
 Stress Test, VaR (Value at Risk) analysis, Gap Analysis and others with
proper interpretation.
 Actions to be taken by whom and by when
Page 4 of 6
Module D: Asset Liability Management
6. Define ALM desk. Briefly explain the responsibilities of ALM desk.
Answer: ALM desk executes the strategies of the Asset Liability Management Committee for
effective management and monitoring of various balance sheet gaps. The ALM desk is responsible
for day to day management of the market risk and liquidity risk of the bank.
Responsibilities of ALM desk:
 To oversee the growth and sustainability of assets and the liabilities.
 To manage and oversee the overall activities of Money Market.
 To manage liquidity and market risk of the bank.
 To understand the market dynamics
 To Provide inputs regarding market views

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 To suggest proper balance sheet movement
 To keep records of ALCO meetings
 To oversee the execution of the decisions made during ALCO meetings
7. Define ALCO Paper. Briefly explain the Contents of the ALCO Paper.

SA
Answer: The ALCO paper lays out forecasted results based on anticipated future rate movements
and how they will affect the proposed risk management strategies. A separate observation from
RMD regarding market and liquidity risk shall also be included in the ALCO paper. The Treasury
Department will be responsible to present the paper incorporating all necessary information,
analysis and suggestions from the related Departments including its own opinion, if necessary, on
the related issues.
R
Contents of the ALCO Paper:
 Confirmation of Minutes of last
FO

meeting
 Review of the action items of the
previous meetings
 Review of Economy and Markets
 Review of Balance Sheet and
Liquidity Limits
T

 Review of the Status of Regulatory

Compliance
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 Top 10 Depositors List

 Top 10 Borrowers List
 Capital Maintenance
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 Details of Loans and Deposits

Movement
 Loans and Deposit Projections
 Trend of Lending Rates and
Deposit Rates

Page 5 of 6
Module D: Asset Liability Management
8. What are the functions of treasury front office, mid office and back office?
Answer: The treasury functions are performed by three distinct office under separate supervision
such as front office, back office and mid-office. Functions of these offices are as follows:
Functions of Treasury Front Office:
 Statutory requirement management
 Optimization of risk return
 Funding of the Balance Sheet at optimum prices
 Proposing interest rate matrix to the ALCO
 Proposing various investment options to the ALCO
 Propose Balance Sheet strategy to the ALCO

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 Quotation of various foreign exchange and interest
rates to customers
 Dealing in forex for position covering as well as for
own account trading
 Funding activities through various derivatives

SA
 Provide structured treasury solutions to customer
 Remain vigilant for any arbitrage opportunities
 Marketing activities for future business growth
 Estimate daily P&L and work with reporting unit
 Record/maintain all foreign exchange and money market positions
 Check for differences with system generated or back-office reports
R
 Sending dealing information to Back Office
 Performing money market activities
 Securities / fixed income trading
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Functions of Treasury Mid Office:

 Limits monitoring and managing limit
 Adherence to various internal as well as regulatory policies
 Minimization of all risks
 Management of various foreign exchange and money market positions
 Monitoring & management of various cash flows and cash positions
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 Rate appropriateness function for all deals done

 Proposals/ renewals for various internal limits
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 Monitor for trader‘s adherence to various internal and regulatory limits

 Monitor for trader‘s adherence to various counterparty limits
 Monitor and manage all balance sheet gaps
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 Report any occurrence of crossing limit

 Various internal and regulatory reporting
Functions of Treasury Back Office:
 Input, verification and settlement of deals
 Receiving and sending of deal confirmation certificates
 Preparation of currency positions
 Report to traders prior to commencement of day's dealings
 Reconciliation of currency positions
 Revaluation of all foreign exchange positions at a pre-determined frequency
 Managing discrepancies and disputes
 Daily calculation for adherence to statutory maintenance
 Claim /pay good value date effect of late settlements

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Module D: Asset Liability Management
 LE
DERIVATIVES
Forward contract, Futures contract, Options, Investment Derivatives, Commodity

SA
Derivatives, Credit Derivatives.
R
FO
T
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N
1. Define derivatives. What are the advantages and disadvantages of derivatives?
Answer: Derivatives are financial contracts whose value is derived from a primary asset or set of
principal assets. Stocks, bonds, currencies, commodities, and market indexes are among the
frequently used assets. The fundamental idea behind using derivative contracts is to make money
by making predictions about how much the primary asset will be worth in the future.
Advantages of Derivatives: Derivatives can be a useful tool for businesses and investors
alike. Derivatives exert a significant impact on modern finance because they provide
numerous advantages to the financial markets:
 Hedging risk exposure: Derivatives helps in hedging risks against unfavorable
price movements. For example, the forward contract permits the buyer and seller

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to agree on a specific date in the future to complete their deal; therefore,
safeguarding the trade against risk.
 Arbitrage advantage: Investor can have an arbitrage advantage by buying a
commodity at a cheap price in one market and selling it at a higher price in another

SA
market.
 Market efficiency: Derivatives helps in getting a fair share of the economic value
of principal assets. These contracts also enhance market efficiency by protecting it
against market volatility.
 Access to unavailable assets or markets: With derivatives, customers can
purchase funds at lower and more favorable rates of interest compared to direct
R
borrowings. It helps buyers and sellers in reaching out to difficult assets and
markets.
 Cost efficiency: Furthermore, buying derivatives on margin allows traders to buy
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them with borrowed money. Due to this, they are even more affordable.
Disadvantages of Derivatives: The main drawbacks of derivatives include counterparty
risk, the inherent risks of leverage, and the fact that complicated webs of derivative
contracts can lead to systemic risks. Most derivatives are also sensitive to the following:
 High risk: Due to their extreme volatility, derivatives carry a high risk of
T

significant losses. They run a high natural risk as a result.

 Speculative features: Because derivatives are so dangerous and unpredictable,
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irrational speculation could result in significant losses.

 Counter-party risk: Unlike an exchange, OTC lack a measure of diligence.
Therefore, there is a counterparty risk when traded OTC fails to undergo a due
N

diligence process.
Derivatives are usually leveraged instruments, and using leverage cuts both ways. While it can
increase the rate of return, it also makes losses mount more quickly.

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Module E: Derivatives
2. What are the risks associated with derivatives. Briefly describe those.
Answer: Like any investment instrument, there are varying levels of risk associated with
derivatives. The risk levels of derivatives are determined by combining an assessment of the
market risk to which all investments are exposed to the counterparty risk and the liquidity risk of
the companies in which the money is invested, and the interconnection risk among different
derivatives.

Operational Reputation
Legal Risk
Risk Risk

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Foreign
Liquidity
Credit Risk Exchange
Risk
Rates Risk

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Interest
Market Risk Price Risk
Rate Risk

Legal Risk: Four issues arise under the legal risk:

 Bankruptcy and insolvency
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 Documentation;
 Capacity and authority; and
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 Legality and enforceability.

Credit Risk: Derivatives are vulnerable to credit risk, which is the chance that an obligor
would breach a contract, so jeopardizing earnings or capital.
Market risk: Market risk refers to the unfavorable movements in the level or volatility of
market prices. Market risk results from exposures to changes in the price of the underlying
cash instrument and to changes in interest rates.
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Price Risk: Price risk is an extension of the market risk. Price risk is the risk to earnings
or capital arising from changes in the value of portfolios of financial instruments.
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Operational Risk: Operational risks are the risks associated with human error, systems
failures, or inadequate procedures and controls.
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Liquidity Risk: The danger to earnings or capital associated with an organization's

incapacity to pay its debts on time and avoid suffering intolerable losses is known as
liquidity risk.
Reputation Risk: A market participant might lose clients or general reputation in the
market if it does not deal fairly with them or does not properly manage its business.
Foreign Exchange Rates Risk: Foreign exchange rates are very volatile. Foreign
exchange rates risk in derivatives is the risk to earnings arising from movement of foreign
exchange rates.
Interest Rate Risk: The evaluation of interest rate risk must consider the impact of
complex liquid hedging strategies or products, and also the potential impact on fee income
that is sensitive to changes in interest rates.

Page 2 of 4
Module E: Derivatives
3. Who are the major participants in the derivative markets?
Answer: Each type of individual will have an objective to participate in the derivative market.
Based on their trading motives we can divide them into the following categories:
Hedgers: Hedging is a
strategy that tries to limit risks in
Hedgers financial assets. To reduce the risk of
any unfavorable price fluctuations, it
makes use of financial instruments or
market techniques. Hedgers use the
Participants futures markets to avoid risk,

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protecting themselves against price
Arbitrageurs
in Speculators changes.
derivatives
market Speculators: Speculators are
sophisticated investors or traders who

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purchase assets for short periods of
time and employ strategies in order to
Margin profit from changes in its price.
traders Speculators are important to markets
because they bring liquidity and
assume market risk.
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Arbitrageur: An arbitrageur is a type of investor who attempts to profit from market
inefficiencies. These inefficiencies can relate to any aspect of the markets, whether it is
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price, dividends, or regulation. The most common form of arbitrage is price.

Margin traders: Margin trading, a stock market feature, allows investors to purchase more
stocks than they can afford. Investors can earn high returns by buying stocks at the marginal
price instead of their market price. Here the investors is called margin traders.
4. Briefly describe the types of derivatives with illustrations.
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Answer: Margin traders: Margin trading, a stock market feature, allows investors to purchase more
stocks than they can afford. Investors can earn high returns by buying stocks at the marginal price
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instead of their market price. Here the investors is called margin traders. The most common
derivative types are futures, forwards, swaps, and options.
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Futures: A futures contract, or simply futures, is an agreement between two parties for the
purchase and delivery of an asset at an agreed-upon price at a future date.
Forwards: A forward contract, often shortened to just forward, is a contract agreement to
buy or sell an asset at a specific price on a specified date in the future.
Options: Options are derivative contracts that grant the purchaser the right to purchase or
sell the underlying asset at the designated price for a predetermined amount of time.
Swap: swap is a derivative contract in which one party exchanges or swaps the values or
cash flows of one asset for another. Of the two cash flows, one value is fixed and one is
variable and based on an index price, interest rate, or currency exchange rate.

Page 3 of 4
Module E: Derivatives
5. Differentiate between future contract and forward contract.
Answer:

CHARACTERISTICS FUTURES CONTRACT FORWARDS CONTRACT

A futures contract is a standardized A forward contract is an
contract, traded on exchange, to buy agreement between two parties
or sell underlying instrument at to buy or sell underlying assets
Meaning certain date in future, at specified at specified date, at agreed rate
price. in future.

Structure Standardized contract Customized contract

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Counterparty Risk Low High
Customized/depends on the
Contract size Standardized/Fixed
contract term

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Regulation Stock exchange Self-regulated
Collateral Initial margin required Not required
Settlement On daily basis On maturity date

6. What is interest rate swap and how it works?

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Answer: An agreement between two parties to swap one stream of interest payments for another
over a predetermined amount of time is known as an interest rate swap. Swaps are derivative
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contracts and trade over-the-counter.

An interest rate swap fixes the cost of interest on a loan with a variable rate, using a benchmark
interest rate like the Secured Overnight Financing Rate. The borrower and the lender trade interest
payments in order to accomplish this. With an interest rate swap, the borrower still pays the
variable rate interest payment on the loan each month. This is decided for a lot of loans based on
T

the relevant benchmark plus a credit spread. Then, the borrower makes an additional payment to
the lender based on the swap rate. The swap rate is determined when the swap is set up with the
O

lender and is unchanging from month to month. Finally, the lender rebates the variable rate amount,
so that ultimately the borrower pays a fixed rate.
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Page 4 of 4
Module E: Derivatives
 LE
FIXED INCOME
Fixed Income Market, Fixed Income Investments, Bond Pricing-Yield to maturity,

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Duration and convexity, Primary and secondary market of Govt. Securities, DIBOR,
Primary Dealer Activities.
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FO
T
O
N
1. What are the key features of a fixed income securities? Briefly describe the types
of fixed income securities.
Answer: Fixed income broadly refers to those types of investment security that pay investors fixed
interest or dividend payments until their maturity date. At maturity, investors are repaid the
principal amount they had invested.
Key Features:
 Investors can expect a constant amount of cash flows from assets and securities in
the fixed income category, typically in the form of dividends or fixed interest.
 Government and corporate bonds are the most popular types of fixed-income
products.
 In many fixed income instruments, investors receive their interest back along with

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their original investment amount when the securities mature.
 If a corporation files for bankruptcy, fixed-income investors often receive their
payouts ahead of regular stockholders.
Types of Fixed Income Products:

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 Treasury bills (T-bills): Treasury bills (T-bills) are short-term fixed-income
securities that mature within one year that do not pay coupon returns.
 Treasury notes (T-notes): Treasury notes (T-notes) come in maturities between
two and 10 years, pay a fixed interest rate, and are sold in multiples of $100.
 The Treasury bond (T-bonds): The Treasury bond (T-bonds) are similar to the T-
note except that it matures in 20 or 30 years.
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 Treasury Inflation-Protected Securities (TIPS): It protects investors from
inflation. The principal amount of a TIPS bond adjusts with inflation and deflation.
 A municipal bond: A municipal bond is similar to a Treasury since it is
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government-issued, except it is issued and backed by a state, municipality, or

county, instead of the government, and is used to raise capital to finance local
expenditures.
 Corporate bonds: It comes in various types, and the price and interest rate offered
largely depends on the company‘s financial stability and its creditworthiness.
 Junk bonds: Junk bonds also called high-yield bonds are corporate issues that pay
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a greater coupon due to the higher risk of default.

 A certificate of deposit (CD): It is a fixed income vehicle offered by financial
O

institutions with maturities of less than five years.

 Fixed-income mutual funds (bond funds): Bond funds, or fixed-income mutual
funds, like Vanguard's, make investments in a range of bonds and debt securities.
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 Asset-allocation or fixed income ETFs: These funds target specific credit ratings,
durations, or other factors. ETFs also carry a professional management expense.

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Module F: Fixed Income
2. What are the pros and cons of a fixed income security and risks associated with
Fixed Income?
Answer:

•Steady income stream of fixed returns

Fixed •More stable returns than stocks
•Higher claim to the assets in
Income Pros bankruptcies
•Government and FDIC backing on some

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•Returns are often lower than other
Fixed investments
•Credit and default risk exposure
Income Cons •Susceptible to interest rate risk

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•Sensitive to Inflationary risk

Risks Associated with Fixed Income:

 Risks Associated with Fixed Income: Although there are many benefits to fixed
R
income products, as with all investments, there are several risks investors should
be aware of before purchasing them.
 Interest Rate Risk: If interest rates increase, bond prices fall (and vice versa).
FO

 Inflation Risk: If the rate of inflation outpaces the income from the bond, the actual
returns are lower.
 Credit Risk: If the issuer defaults on its debt obligations, the investors might not
receive the original principal back (or only a portion of the full value).
 Liquidity Risk: If an investor attempts to exit their fixed income security but is
unable to find an interested buyer in the market, a lower offer might have to be
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accepted to sell the investment.

 Reinvestment Risk: Reinvestment risk is the risk that an investor will not be able
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to reinvest the cash flows from their fixed-income securities at the same interest
rate as their original investment.
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Page 2 of 5
Module F: Fixed Income
3. Define Bond Pricing. Mention the characteristics of bond pricing in different
markets. What are the reasons for change in the price of a bond?
Answer: Bond pricing is a method to calculate the present value of the expected future returns,
earnings, or cash flow from a bond investment. An investor who invests in a debt instrument such
as a bond uses the valuation method to determine whether the cost of the bond is worth the returns
over time.
Characteristics of Bond Pricing in the primary market:
 A bond with a higher coupon rate will be priced higher
 A bond with a higher par value will be priced higher
 A bond with a higher number of periods to maturity will be priced higher

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 A bond with a higher yield to maturity or market rates will be priced lower
Characteristics of Bond Pricing in the secondary market:
 Creditworthiness of issuing firm
 Liquidity of bond trade

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 Time to next payment
Reasons for the Change in the Price of a Bond: The price of a bond will change because
of one or more of the following reasons:
 A change in the level of interest rates in the economy
 A shift in the bond's price as it approaches maturity, selling for less than face value
but maintaining the necessary yield constant.
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 A change in the required yield due to changes in the Treasuries spread.
 A Change in the issuer's realized credit quality.
 The price of the bond will change as the factors that affect the value of the rooted
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options change.
4. From an investor‘s point of view, what considerations must be made before
investing in a perpetual bond?
Answer: Investing in perpetual bonds requires careful consideration, as these bonds have unique
features that distinguish them from traditional bonds. Here are some key considerations for
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investors:
 Liquidity: Less liquid bonds may be harder to sell, and investors may face
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challenges in getting fair prices.

 Asset quality and capital management of the issuer: Increasing NPL and weak
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capital management will reduce the distributable profit which ultimately reduces
the probability of providing coupon income.
 Corporate Governance: Good corporate governance and status as well exposure
of the Board of Directors is important.
 Issuer Creditworthiness: To determine the danger of default, look up the issuer's
credit rating with respectable credit rating firms.
 Interest Rate Risk: Perpetual bonds are sensitive to changes in interest rates. If
interest rates rise, the value of the perpetual bond may fall, and vice versa.
 Repayment date risk: The issuer has the full discretion to cancel the distributions/
payments of the bonds.
 Capital market exposure: Currently, these instruments are not listed but will later
have capital market exposure once it is listed in the capital market.

Page 3 of 5
Module F: Fixed Income
5. Discuss the steps that need to be taken by the regulator before investing in a
perpetual bond.
Answer: Considering the nature of the perpetual bond, scheduled banks and NBFIs are likely to
be the major investors. The following should be resolved immediately to fully subscribe to these
instruments:
 Ensure individual participation: The investor may facilitate individual
investment by making regulations that allow perpetual bonds worth Tk. 10,000.00
orTk.100, 000.00 to be issued.
 Sinking fund issue: Bonds issued with sinking funds are lower risk since they are
backed by the collateral in the fund, and therefore carry lower yields.

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 CIB reporting issue: It's crucial to have accurate and up-to-date information to
understand the specifics of any problem and its potential impact on credit reporting
for perpetual bonds.
 Capital market exposure: The perpetual bonds may be listed in the capital market
and expose bank investments to capital market risks.

SA
6. Define primary dealers and their objectives? Also state the roles and
responsibilities of a PD.
Answer: A primary dealer is a bank or other financial institution that has been approved to trade
securities with a national government. A bank or financial institution must meet specific capital
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requirements before it can become a primary dealer.
Objectives of Primary Dealer:
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 To promote voluntary holding of government securities among a broad investor

base, facilitate price discovery and turnover, and improve liquidity and depth in the
securities market.
 To develop underwriting and market making capabilities for government securities
amongst the market participants.
 To facilitate efficient liquidity management, and open market operations of
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monetary policy management.

Roles and responsibilities of a PD:
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 Market Making: Market making by primary dealers helps in maintaining an active

secondary market for government securities.
 Underwriting Government Debt: This underwriting function helps the
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government in raising funds at competitive interest rates and ensures a successful

auction process.
 Information Flow: Primary dealers act as a crucial source of information flow
which helps the central bank in making informed policy decisions and allows
market participants to stay updated on market trends and developments.
 Collateral Management: Primary dealers often serve as counterparties to provide
eligible government securities as collateral in exchange for short-term funding from
the central bank.
 Market Development: Primary dealers play a significant role in the development
of new financial products and trading mechanisms, which enhance market
efficiency and attract a diverse set of investors.
Page 4 of 5
Module F: Fixed Income
7. State some measures that the regulators can take to keep the deposits in banking
system.
Answer: Regulators can implement various measures to foster confidence in the banking system
and encourage individuals and businesses to keep their deposits within the system. Here are some
measures:
 Reassuring depositors that their funds are protected in the event of a bank failure.
 Regular audits and transparent reporting can build trust in the banking sector.
 Implement practical rules to make sure banks have enough capital.
 Restricting certain activities to take corrective measures to protect depositors.
Conduct regular stress tests to examine the banks' ability to adverse economic conditions.

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
 Ensure effective communication of information about the stability of the banking system.
 Establish and enforce a strong legal framework that protects the rights of depositors.
 Implement liquidity management measures to ensure that banks have access to sufficient

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liquidity to meet their obligations.
 Implement measures to prevent and detect fraudulent activities within the banking system.
 Promote financial literacy and education to help depositors understand the banking system
 Implement stable and consistent interest rate policies that provide reasonable returns on
deposits.
 Invest in technology and cybersecurity measures to protect against cyber threats.
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8. Briefly describe the government security markets in Bangladesh.
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Answer: Government securities market of Bangladesh is consist of tradable and non-tradable

securities. Non-tradable securities include National Savings Certificates i.e. Sanchayapatras and
Sanchaya bonds which are only for retail investors. However, the key components of the
government securities market in Bangladesh include:
 Treasury Bills (T-bills): Treasury Bills are short-term debt instruments issued by
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the government with maturities typically ranging from 91 days to one year. They
are issued at a discount and redeemed at face value upon maturity.
O

 Treasury Bonds: Treasury Bonds are long-term debt instruments with maturities
exceeding one year. These bonds pay periodic interest, and the principal is repaid
at maturity.
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 Savings Certificates: Savings Certificates are a popular form of small savings

instrument issued by the government. They are designed to attract savings from the
general public and offer fixed interest rates over specific tenures.
 Islamic Government Securities: Bangladesh also has an Islamic government
securities market, where Shariah-compliant instruments, such as Sukuk (Islamic
bonds), are issued to cater to investors who adhere to Islamic financial principles.
Government securities are government debt issuances used to fund daily operations, and special
infrastructure and military projects. Government securities are considered to be risk-free as they
have the backing of the government that issued them. Investors in government securities will
either hold them to maturity or sell them to other investors on the secondary bond market.

Page 5 of 5
Module F: Fixed Income
 LE
RISK MANAGEMENT
Risks Factors in Bank, Interest rate risk and exchange rate Risk management, Risk

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Management Limits and Reporting, Implication of BASEL-iii and Risk Management
of Capital market Exposures.
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FO
T
O
N
1. Briefly describe the importance of risk management and the risk management
process.
Answer: Risk management is the process of identifying, assessing and controlling threats to an
organization's capital, earnings and operations. These risks comes from a variety of sources,
including financial uncertainties, legal liabilities, technology issues, strategic management errors,
accidents and natural disasters.
Importance of risk management: A successful risk management program helps an
organization consider the full range of risks it faces. Risk management also examines the
relationship between different types of business risks and the falling impact they could
have on an organization's strategic goals. However, some major benefits are state here:

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Crucial for Informed Decision Safer Work Demonstrates Improved
Planning Making Environment Leadership Communication
Financial Improved Employee Ensures Reduced Prevents

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Savings Engagement and Compliance with Uncertainty Reputational
Productivity Regulations Damage

Risk management process: Any organization shall follow the process for risk analysis of
a project or any other investment or operation which is discussed as below:
 Identification of Risk: The First step
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comes as identifying the risk and
recognize the outcome of the projects
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and the number of ways such as risk

involved in the process.
 Analyzing the Risk: After identifying
risk, it’s likely to understand and assess
the extent of risk and nature of risk.
T

 Evaluating the Risk: Risk analysis

tools helps to estimate the capacity of
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risk that may happen and helps to

decide whether to accept such risk or
not.
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 Treat the Risk: In this step risk management try to treat or resolve the issue by modifying
any changes required in the project.
 Review the Risk: As the risk is uncertain at any point in time, reviewing risk is essential
to evaluate risk time to time to avoid any future disturbance.
Risk Analysis can be referred to as identifying the different possible threats that can occur in the business
or the project and then estimating the likelihood of materializing these threats. Risk management is a
broader concept that includes risk analysis, and it can be referred to as the process of continuous
identification, analysis, evaluation, and monitoring of the risk and then systematically applying the
policies, practice, and resources of management to control and mitigate adverse effects of those potential
losses.

Page 1 of 3
Module G: Risk Management
2. How can you mitigate interest rate risk?
Answer: The interest rate risk can be mitigated through various hedging strategies. These strategies
generally include the purchase of different types of derivatives. Unhedged investments are now
riskier as interest rates start to increase. The market is beginning to feel more inclined to hedge.
There are four regularly employed hedging strategies for businesses that are exposed to high
interest rate risk:
Swap: A swap is a contract in which one stream of interest payments in the future is
exchanged for another. To increase or decrease vulnerability to shifts in interest rates these
often entail switching from a fixed interest rate to a variable rate, or vice versa.
Cap: A limitation on interest rates sets a maximum limit for interest payments. A call

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option is the right to purchase assets at a predetermined price on or before a specific date.
Floor: Using put options, which are contracts to sell assets on a predefined date at a fixed
price, with the ability to establish a minimum interest rate.
Collar: One tool for hedging against changes in interest rates is an interest rate collar. By
purchasing an interest rate cap and simultaneously selling an interest rate floor, it shields a

SA
borrower from rising rates and creates a floor on dropping rates.
Many companies keep about half of their debt at floating rates and hedge between 50% and 60%
of their exposure to changes in interest rates. Because of their neutral position, they can benefit
from lower interest rates.
3. What are the key principles of Basel III?
R
Answer: The Basel Committee on Banking Supervision (BCBS) created the Basel III accord, a
collection of financial reforms, with the intention of enhancing risk management, regulation, and
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oversight in the banking sector.

Key Principles of Basel III:
 Minimum Capital Requirements: The Basel III accord increased banks' minimum
capital requirements from 2% to 4.5% of common equity, with an additional 2.5%
buffer capital requirement. The Tier 1 capital requirement increased from 4% to 6%,
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with implementation postponed until January 1, 2022. This change can help banks
manage financial stress and dividend payments.
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 Leverage Ratio: Basel III introduced a non-risk-based leverage ratio to limit risk-
based capital requirements. Banks must have a leverage ratio above 3%, with the
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Federal Reserve setting 5% for insured companies and 6% for Systematically Important
Financial Institutions (SIFIs).
 Liquidity Requirements: Basel III introduced two liquidity ratios: Liquidity Coverage
Ratio and Net Stable Funding Ratio. The Liquidity Coverage Ratio mandates banks to
hold enough highly liquid assets to withstand a 30-day stressed funding scenario,
increasing by 10% annually until 2019. The Net Stable Funding Ratio addresses
liquidity mismatches.
Banks must maintain 7% capital reserve to avoid financial distress, reducing profitability. They
may lower loans and hold more capital against assets, reducing balance sheet size. Most banks will
try to maintain a higher capital reserve to cushion themselves from financial distress.

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Module G: Risk Management
4. What is Risk Reporting? Explain the types of Risk reporting.
Answer: Risk reporting is a method of identifying risks tied to or potentially impacting an
organization's business processes. The identified risks are usually compiled into a formal risk
report, which is then delivered to an organization's senior management or to various management
teams throughout the organization.
Types of Risk Reporting: Risks can vary so widely from one another, there are several
different types of risk reporting. Some of the more common risk reporting types include:
 Project Risk Reporting: This is the lowest level of risk reporting, and it deals with
risks like disruptions to the supply chain or fluctuations in raw material prices that
could have an impact on a specific project.

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 Program Risk Reporting: A program risk report generally covers any project-level
risks or other risks that are significant enough to have a negative effect on the entire
program.
 Portfolio Risk Reporting: This is often a summary of all program-level risks for the

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whole portfolio or set of programs that an organization has.
 Business Risk Reporting: This is used for major risks that have the capacity to impact
the entire organization.
Project
Risk
Reporting
R
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Business Risk Program

Risk Reporting Risk
Reporting Reporting
Types
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Portfolio
Risk
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Reporting

5. Explain Risk Management of Capital Market Exposures.

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Answer: Risk management essentially occurs when an investor or fund manager analyzes and
attempts to quantify the potential for losses in an investment, such as a moral hazard, and then
takes the appropriate action to meet their objectives and risk tolerance. Market exposure represents
the amount an investor can lose from the risks unique to a particular investment or asset class. It
is a tool used to measure and balance risk in an investment portfolio. Capital risk can be a result
of unfavorable asset prices or a business's investment in a flawed project. Enterprise risk
management helps financial firms manage uncertainty and associate risk with opportunity. Firms
invest in risk management systems to measure, monitor, mitigate, and report risk. As markets
become more open and deregulated, firms must update their systems to remain competitive. The
boom in complex structured products has impacted risk management.

Page 3 of 3
Module G: Risk Management
 SHORT NOTE
Introduction to Foreign Exchange
Money Market

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Treasury Management
• Integrated Treasury • The Payment System • NFCD/RFCD Rates
• Money Market • Demand for Money • Direct Quotation

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• FX Market • Liabilities of • Indirect Quotation
• Macroeconomic Offshore Banking • Bid-Ask Rate
Equilibrium Operation • SOFR
• Quasi-money • Govt. Security • LIBOR Rate
• Balance of Payment • Repo-Reverse Repo
R
FO

Asset Liability
Derivatives Fixed Income
Management
• Advance to Deposit • Hedging • Coupon
Ratio (ADR) • Speculation • Par value
• Wholesale Borrowing • Commodity • Zero-coupon bond
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• Maximum Cumulative Derivatives • Duration & convexity

Outflow (MCO) • Credit Derivatives • Primary Market
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• ALCO Paper • Swap • Secondary Markets

• Transfer Pricing • Interest Rate Swap • DIBOR
• Yield to Maturity • Primary Dealer
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• Risk factors in banks

Risk • Credit Risk
Management • Liquidity Risk
• Treasury Risk
INTEGRATED TREASURY
Integrated treasury refers to a complete approach to supporting the balance sheet and allocating capital
across domestic, international, and foreign exchange markets. Integrated TMS can help banks to automate
basic tasks such as recording and reconciliation. The integrated treasury of a bank is structured in three
parts: the front office, the middle office and the back office. An integrated treasury typically refers to a
financial management approach where various treasury functions are combined into a unified system. This
includes activities such as cash management, risk management, liquidity management, and financial
planning. The nature of integrated treasury lies in its ability to streamline operations, enhance efficiency,
and provide a holistic view of an organization's financial position. This integrated approach enables better
decision-making and risk mitigation within the realm of treasury management. By replacing manual

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processes with advanced automations, integrated treasury management solutions simultaneously reduce
the risk of human error and save time, time that treasury managers can, instead, devote to more pressing,
higher value tasks. Furthermore, having access to accurate, up-to-date information enables treasury
managers to better assess risk and engage in data-driven decision-making. With phased liberalization on
capital account convertibility, there will be scope for banks with integrated treasury to structure multi-

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currency balance sheets and take advantage of strategic positioning.

MONEY MARKET
The money market involves the purchase and sale of large volumes of very short-term debt products, such
as overnight reserves or commercial paper. An individual may invest in the money market by purchasing
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a money market mutual fund, buying a Treasury bill, or opening a money market account at a bank. A
money market is a suitable location for people, banks, businesses, and governments to temporarily store
their cash. The goal of money markets is to make it simple and affordable for businesses and governments
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to access liquid funds. Unlike a capital market where long-term securities are exchanged, here the trade’s
investments range from a day, three months, 365 days, etc. Due to high transaction value, market investors
are largely insurance companies, governments, NBFCs, banks, credit institutions, etc. Retail investors
invest using money market funds and accounts. A money market provides easily available cash to
businesses, institutions and governments for day-to-day operations. For example, businesses borrow short-
term loans available in the market to fulfill daily business needs such as uninterrupted electricity, timely
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wage payments, etc.

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FOREX MARKET
The foreign exchange market or Forex market is the platform where different currencies are traded. It is
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an over-the-counter (OTC) market with no central marketplace. Different types of Forex markets, such as
the spot market, swap market, forward market, options market, futures market etc. The market’s main
participants are international banks, central banks, commercial companies, investment management firms,
retail foreign exchange traders, and non-bank foreign exchange companies. It is the largest financial
market in the world. It is live 24 hours on working days, pointing to the market’s highly liquid nature.
Like every other market scenario, the supply and demand forces significantly influence and determine the
foreign exchange rates for every currency. Forex trading occurs in pairs where the first listed currency is
purchased while the second listed currency is sold. Then the price at which one currency is exchanged for
the other currency discloses the foreign exchange rate. The FX markets are decentralized; any central
platform does not represent them. Professional traders and speculators utilize complex techniques to gain
from the swings in the foreign exchange rate.

Page 1 of 13
SHROT NOTE
MACROECONOMIC EQUILIBRIUM
Macroeconomic equilibrium is the state of the economy when the quantity of goods and services supplied
in an economy equals the quantity of goods and services demanded in an economy. It is the price at which
the supply of a product is aligned with the demand, so that the supply and demand curves intersect. This
equilibrium is used by economists and governments to evaluate and direct a country's economic
performance. Its major types include full employment, recessionary, inflationary, neoclassical, stagnation,
long-run, and short-run equilibriums. A macroeconomic short-run equilibrium is reached when total
supply and total demand are equal. In contrast, long-run macroeconomic equilibrium represents the point
where total demand meets total supply after all long-term adjustments are made. The equilibrium point
indicates ideal price and output levels, influencing production, inflation control, and efficient resource
utilization.

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QUASI-MONEY
Near money, sometimes referred to as quasi-money or cash equivalents, is a financial economics term

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describing non-cash assets that are highly liquid and easily converted to cash. Financial analysts view near
money as an important concept for testing liquidity. Analysts utilize the phrase "near money" to describe
and measure the liquidity and nearness of financial assets. Near money can also be important in all types
of wealth management as its analysis provides a barometer for cash liquidity, cash equivalents conversion,
and risk. Examples of near money assets include savings accounts, certificates of deposit (CDs), foreign
currencies, money market accounts, marketable securities, and Treasury bills (T-bills). In general, near
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money assets included in near money analysis will vary depending on the type of analysis. In general,
"near moneys" refers to the entirety of an entity's near money. The proximity of nearby currencies will
differ based on the real cash conversion times. The costs associated with transactions or withdrawal
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penalties may also have an impact on near money.

BALANCE OF PAYMENT
The formula for the balance of payments is a summation of the current account, the capital account, and
the financial account balances. The term balance of payments refers to recording all payments and
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obligations of imports from foreign countries vis-à-vis all payments and obligations of exports to foreign
countries. The balance of payments formula is the record of total economic transactions between two
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countries or one country and the rest of the world’s economies. It gives the policymakers an idea about
the economic condition and financial health of the country. The formula for balance of payments also
gives them an idea regarding the relationship of the country with other economies of the world. The three
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main components of the concept are the current account, capital account, and financial account. The
current account deals with the trading of goods and services which include cars, food, machines, financial
consulting and services, investments, gifts, grants, etc. The capital account deals with the disposal and
acquisition of assets that are non-financial in nature, like patents, trademarks etc. The financial account is
related to changes in country’s holding in foreign currency and gold, investment in securities like bonds
and stocks, foreign direct investment, etc. The concept of balance of payments is very important because
it reflects whether the country has enough funds to pay for its imports. It also demonstrates whether the
country has enough production capacity that its economic output can pay for its growth. Usually, it is
reported on a quarterly or yearly basis. Thus, it is a very important tool that can be used to evaluate the
economic exchange and interaction made by a country with its neighbors. It helps the country to become
self-sufficient and strong and make a prominent place for itself in the global world.

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THE PAYMENTS SYSTEM
The payments system is a set of institutional arrangements that transfer purchasing power between sender
and receiver in exchange. An efficient payment system should allow for convenience, expeditious, safe,
and low costs for the economy and sender as well as receiver. Currency is the best means of payment for
small local payments, while checking deposits and bank drafts are popular for large out-of-town payments.
Telegraphic transfers, money orders, postal orders, and indigenous bankers are also used for foreign
payments. The banking system plays a dominant role in the organization and running of the payments
system, mobilizing savings and allocating credit. The speed of payments also plays a crucial role in
efficient resource utilization and production. The organization and running of the payments system
involve costs for sender and receiver also in the economy.

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DEMAND FOR MONEY
In monetary economics, the demand for money is the desired holding of financial assets in the form of
money: that is, cash or bank deposits rather than investments. Money is needed to manage transactions,

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and the value of transactions decides the money people want to keep. The current price level, the current
interest rate, and the real gross domestic product determine the amount of money that is demanded. John
Maynard Keynes' liquidity preference theory explains why individuals hold money. He identified three
motives behind this demand: transaction, precautionary, and speculative. Transactions are driven by the
need for money for everyday transactions, which is proportional to income. Precautionary motives are
based on future transactions, which are proportional to income. Speculative motives involve money as a
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store of wealth, with interest rates playing a significant role in decision-making. As interest rates rise,
speculative demand for money decreases, and vice versa.
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OFFSHORE BANKING UNIT

Off shore banking means international banking business involving foreign currency denominated assets
and liabilities and is kept separate from domestic banking business. An off shore bank is a bank located
outside the country of residence of the depositor, typically in a low tax authority that provides financial &
legal advantages. An offshore banking unit (OBU) is a bank shell branch, located in another international
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financial center. For instance, an offshore banking unit could be a London-based bank with a branch
located in Dhaka. Local monetary authorities and governments do not restrict OBUs' activities; however,
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they are not allowed to accept domestic deposits or make loans to residents of the country, in which they
are physically situated. Overall OBUs can enjoy significantly more flexibility regarding national
regulations. These offshore banking units may also provide legal guidance to ensure compliance with both
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the offshore jurisdiction's laws and their home country's laws to avoid legal or regulatory issues.

GOVERNMENT SECURITY
Government securities are government debt issuances used to fund daily operations, and special
infrastructure and military projects. They guarantee the full repayment of invested principal at the maturity
of the security and often pay periodic coupon or interest payments. The government securities market in
Bangladesh consists of tradable and non-tradable instruments, including Treasury Bills, Treasury Bonds,
Savings Certificates, and Islamic Government Securities. These instruments are used to fund daily
operations, infrastructure, and military projects. They are considered risk-free as they have the backing of
the government. Non-tradable securities include National Savings Certificates and Sanchaya bonds for
retail investors. Government securities are also issued to adhere to Islamic financial principles.

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REPO-REVERSE REPO
Repo is the mechanism through which the central bank lends money to commercial banks keeping the
treasury bills as security. It is an instrument of monetary policy. Whenever banks have any shortage of
funds they can borrow from the central bank. Repo Rate is the rate at which the commercial banks of a
particular country borrow money from that country’s central bank as and when required. Increase in repo
rate leads to increased cost of borrowing for commercial banks which is passed on to customers. This
leads to slowing down of borrowing activity in the market, due to which economy as a whole slows down,
thus controlling inflation.
Reverse repo is the mechanism through which the central bank borrows money from commercial banks.
Due to excess liquidity in the market, Central Bank may start borrowing funds from commercial banks.

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The rate at which the Central Bank borrows money from the other commercial banks of the country is
known as reverse repo rate. Increase in reverse repo rate leads to increased lending activities by banks and
decreased money flow in the markets, due to which inflation gets controlled.

NFCD/RFCD RATES

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NFCD (Non Resident Foreign Currency Deposit) Account is an interest bearing time deposit account for
Non Resident Bangladeshis which can be opened with foreign currency for a period of 1/3/6/12 months.
The accounts are in the nature of term deposits maturing after one month, three months, six months and
one year with option for auto renew. The accounts can be maintained in US dollar, pound sterling, Euro.
Accounts may be opened against remittances in other convertible currencies after conversion of those. On
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the other hand, RFCD (Resident Foreign Currency Deposit) is a Deposit account for resident Bangladeshis
which can be opened with foreign currency brought at the time of their return from abroad. Only Resident
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Bangladeshis can open this account. Interest rates for NFCD/ RFCD accounts of different tenors are also
provided in the exchange rate sheets.

DIRECT QUOTATION
The price quotation method, also known as the direct quotation method, expresses a quote in terms of
local money, describing the relationship between one unit of the local currency and the foreign currency.
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This approach suggests that the quotation rate and the value of the local currency are inversely related.
For example, a direct quotation of USD/JPY would suggest that roughly 143 units of Japanese Yen can
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be exchanged for 1 unit of the United States Dollar. This quote suggests that roughly 143 units of Japanese
Yen can be exchanged for 1 unit of United States Dollar. The two rates provided are bid and ask rates i.e.
the different rates at which the market maker is willing to buy and sell the currency. The direct quote
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method is one of the most widely used quotation methods across the world.

INDIRECT QUOTATION
The direct quotation approach expresses a quote in terms of foreign money, based on one unit of foreign
currency. This method has a direct relationship with the local rate, as the value of the home currency
increases if the quote does. An example is EUR/USD: 0.875/79, where EUR is the domestic currency and
the bid ask rate represents the exchange rates. The usage of indirect currency quotation is extremely rare.
It is only in the Commonwealth countries like United Kingdom and Australia that the indirect quotation
method is used as a result of convention.

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BID-ASK RATE
A two-way price quotation that represents the best possible price at which a security can be sold and
bought at a specific moment is referred to as "bid and ask". A buyer's maximum price that they are willing
to pay for a share of stock or other security is represented by the bid price. The least amount a seller will
accept for the identical security is represented by the ask price. When a seller is prepared to sell for the
highest price or when a buyer is prepared to accept the best offer on the market, a trade or transaction
happens. The difference between bid and ask prices, or the spread, is a key indicator of the liquidity of the
asset. In general, the smaller the spread, the better the liquidity. The ask price is generally greater than the
bid price. While bid prices are generally lower than ask prices, in instances when demand is great, bid

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prices can be higher than ask prices.

SECURED OVERNIGHT FINANCING RATE (SOFR)

The Secured Overnight Financing Rate (SOFR) is a benchmark interest rate for dollar-denominated

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derivatives and loans that replaced the London Interbank Offered Rate (LIBOR). SOFR is based on
transactions in the Treasury repurchase market and is preferable to LIBOR since it is based on data from
observable transactions rather than estimated future borrowing rates. The daily SOFR is based on
transactions in the Treasury repurchase market, where investors offer banks overnight loans backed by
their bond assets. In the world of derivatives trading, benchmark rates like the SOFR are crucial. This is
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especially true for interest-rate swaps, which allow businesses and other parties to manage interest-rate
risk and speculate on changes in borrowing costs. The move to the SOFR is expected to have the greatest
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impact on the derivatives market. However, it should also play an important role in consumer credit
products including some adjustable rate mortgages and private student loans as well as debt instruments
such as commercial paper.

LONDON INTERBANK OFFERED RATE (LIBOR)

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The London Interbank Offered Rate (LIBOR) was a benchmark interest rate at which major global banks
lent to one another in the international interbank market for short-term loans. LIBOR was administered
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by the Intercontinental Exchange, which asks major global banks how much they would charge other
banks for short-term loans. The rate was calculated using the Waterfall Methodology, a standardized,
transaction-based, data-driven, layered method. LIBOR was the average interest rate at which major
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global banks borrow from one another. It was based on five currencies including the U.S. dollar, the euro,
the British pound, the Japanese yen, and the Swiss franc, and served seven different maturities
overnight/spot next, one week, and one, two, three, six, and 12 months. Currently, only the overnight, one-
, three-, six-, and 12-month USD LIBOR rates and the three-month GBP LIBOR rate are published. There
was a downside to using the LIBOR rate. Even though lower borrowing costs may be attractive to
consumers, it does also affect the returns on certain securities. Some mutual funds may be attached to
LIBOR, so their yields may drop as LIBOR fluctuates. LIBOR has been subject to manipulation, scandal,
and methodological critique, making it less credible today as a benchmark rate. LIBOR has been replaced
by the Secured Overnight Financing Rate (SOFR) on June 30, 2023.

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ADVANCE TO DEPOSIT RATIO (ADR)
The advances to deposits ratio measures loans (advances) as a percentage of deposits. A ratio of 100% or
less shows that the bank is funding all its loans from deposits rather than relying on wholesale funding.
Also called LTD ratio (loans to deposits). The advances to deposits ratio (ADR) is used to assess a bank's
liquidity by comparing a bank's total loans to its total deposits for the same period. The ADR is expressed
as a percentage. If the ratio is too high, it means that the bank may not have enough liquidity to cover any
unforeseen fund requirements. Conversely, if the ratio is too low, the bank may not be earning as much as
it could be. To calculate the advances to deposit ratio, divide a bank's total amount of loans by the total
amount of deposits for the same period. Typically, the ideal advances to deposit ratio is 80% to 90%. An

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advances to deposit ratio of 100% means a bank loaned one dollar to customers for every dollar received
in deposits it received. This provides insight into how much risk a bank has taken on and if it would be
able to meet its liquidity requirements in a market crunch. Too high of an LDR indicates a bank may have
difficulty meeting its obligations while too low of an LDR would indicate a bank is not using its deposits

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efficiently.

WHOLESALE BORROWING
Wholesale banking also refers to the borrowing and lending between institutional banks. This type of
lending occurs on the interbank market and often involves extremely large sums of money. WB covers
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call borrowing, Short Notice Deposit from banks and financial institutions, placement received with
maturity less than 12 months, commercial papers/similar instruments and overdrawn NOSTRO-accounts.
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The maximum two deviations from the wholesale banking limit—not exceeding 90% and 110% of the
eligible capital for Non-PD and PD banks, respectively—should be limited to 80% and 100%,
respectively, of the bank's eligible capital on a biweekly average basis. Until it is determined for the
following quarter, the eligible capital determined under Basel III for any given quarter will be applicable.
The above limit shall be considered as an aggregate limit for banks having dual businesses.
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MAXIMUM CUMULATIVE OUTFLOW (MCO)

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MCO reflects the maximum cumulative outflow against total assets in a maturity bucket. MCO up to one
month bucket should not be greater than the sum of daily minimum CRR plus SLR. For example, at the
present rate of CRR and SLR, the MCO should be 16.50% (3.50% CRR+13.00% SLR) for conventional
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banks. The Shariah based banks, due to higher ADR and Short nature of their investment are also allowed
MCO at the same level. MCO in the other maturity buckets should be prudently fixed by the BODs
depending on bank's business strategy. The board should take utmost care in setting these ratios as they
have significant impact on bank's business strategy. Conventional banks having Islamic banking operation
should prepare combined SLP and MCO for better understanding of the overall position of the bank.

The formula for determining maximum cumulative outflow in one month bucket is:
Total outflow up to one month + Total OBS up to one month
MCO = Total inflows + net NOSTRO account balance + Available foreign currency balance with
BB

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ALCO PAPER
An ALCO paper is required to be presented at every meeting of the ALCO, with the Treasury Department
responsible for incorporating all necessary information, analysis, and suggestions from related
departments. The paper should cover key elements such as the confirmation of the last meeting's minutes,
review of action items from previous meetings, review of the economy and markets, review of balance
sheet and liquidity limits, review of regulatory compliance status, top 10 depositors and borrowers, capital
maintenance, details of loans and deposits movement, monthly projections of loans and deposits for the
next 3-6 months, and the trend of lending and deposit rates. The Treasury Department ensures that
decisions taken against each issue are carefully noted and preserved for a reasonable time, not less than 3

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years. The paper should also include a separate observation from the RMD regarding market and liquidity
risk. The top 10 depositors and borrowers are listed in the top 10 list, and the capital maintenance is
compared to future expected capital requirements. The paper also includes details of loans and deposits
movement, monthly projections, and the trend of lending and deposit rates.

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TRANSFER PRICING
Funds Transfer Pricing (FTP) is crucial in a bank as it provides a basis for the exchange of funds between
different business units. Without FTP, it would be difficult to measure profitability as deposits and loans
vary among business units. FTP is an internal allocation and measurement mechanism for determining the
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pricing of incremental loans and deposits, as well as the profit contribution of various lending and
borrowing units. It is a management decision tool that helps identify strengths and weaknesses in different
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business units and helps create an internal market for liquidity. By charging for fund transfers through
FTP, the Treasury can determine the net interest income of different business units. Fund transfer pricing
assigns a fixed pricing to a product, with Treasury acting as the price assignor. Treasury pools surplus
funds from business units, prices them, and sells them to deficit units at different rates. This retains market-
based and prepayment/encashment risks for each product. If additional capital is raised, Treasury buys the
capital fund at the appropriate rate.
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YIELD TO MATURITY
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Yield to Maturity refers to the expected returns an investor anticipates after keeping the bond intact till
the maturity date. The yield to maturity measures the value of the bond at the end of its bond term. In other
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words, a bond’s expected returns after making all the payments on time throughout the life of a bond.
Yield to maturity is considered a long-term bond yield but is expressed as an annual rate. Yield to maturity
is the total rate of return that will have been earned by a bond when it makes all interest payments and
repays the original principal.

Foreign
Introduction to Money Asset Liability
Exchange
Treasury Market Management
Management

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HEDGING
Hedging is an insurance-like investment that protects you from risks of any potential losses to your
finances. The purpose is to eliminate or reduce the risk by balancing the possible loss. By hedging, one
can minimize trade-related benefit while also reducing trade risk. Taking an opposite position in a linked
security serves as a hedge, reducing the risk of any unfavorable price swings. It can be done through
various financial instruments such as forward contracts, futures, options, etc. The purpose of hedging is
to protect against downside risk, stabilize cash flows, and preserve the value of assets or investments.
Hedging is commonly used by individuals, companies, and institutional investors to manage risks
associated with currency fluctuations, interest rate changes, commodity price movements, and more.

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Hedging is essential because it allows individuals and businesses to mitigate the potential impact of
adverse price movements on their portfolios or operations. By hedging, investors can reduce the volatility
of their investments and protect against potential losses.

SPECULATION

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In finance, speculation is the purchase of an asset with the hope that it will become more valuable shortly.
It can also refer to short sales in which the speculator hopes for a decline in value. The act of engaging in
a financial transaction with a high potential for loss but also with a high potential for gain is referred to as
speculation. Many speculators pay little attention to the fundamental value of a security and instead focus
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purely on price movements. Trading high-risk assets with the potential for significant gains is known as
speculation, but it also entails emotional discipline, effective risk management strategies and a solid
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understanding of market dynamics. Speculative trading is a major part of the stock market, accounting for
a significant portion of the daily trading volume. It usually involves buying and selling stocks to profit
from short-term price fluctuations rather than focusing on the long-term fundamental value of a company.
Although speculative trading may seem tempting to investors looking for rapid returns, it's important to
approach it carefully and fully educate oneself in order to maximize gains and prevent losses.
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COMMODITY DERIVATIVES
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Commodity derivatives are financial tools that allow an investor to invest in a commodity and make a
profit without actually owning it. They can be traded on the market or used as exchange-traded derivatives.
In essence, a derivative is a contract between a buyer and a seller, where they both agree to buy/sell the
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underlying asset at a specific price on a specific date in the future. The value of the contract changes
depending on how the underlying asset performs. Derivatives are used to manage risk, allowing a party to
lock in a price in advance to protect against price changes. Investors use derivatives to speculate on future
price movements of the primary asset with the aim of making a profit from these price fluctuations. There
are a number of different derivative structures, each enabling investors to take a slightly different position
or manage specific risk in a different way. Commodity trading is typically best suited for people with a
higher risk tolerance and/or longer time horizon because commodity prices are typically more volatile
than those of stocks and bonds. Before adding commodities and their derivatives to their portfolio, they
need to be familiar with the tactics involved in trading these assets, as with other high-risk, high-reward
trading options.

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CREDIT DERIVATIVES
A credit derivative is a contract whose value depends on the creditworthiness or a credit event experienced
by the entity referenced in the contract. A joint contract that is privately owned and negotiated and
exchanged over-the-counter (OTC) between creditor/debtor is credit derivative. These enable the creditor
to shift to a third party all or part of the risk associated with a debtor's default. This third party accepts the
risk in return for payment, known as the premium. In all cases, the price of a credit derivative is driven by
the solvency of the party or parties involved. A qualifying credit event, such as a default, missing interest
payment, credit fall, or bankruptcy, will frequently cause a credit derivative to be activated. In the case of
a credit derivative, the price derives from the credit risk of one or more of the primary assets. All derivative

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products are insurance products, especially credit derivatives. Derivatives are also used by speculators to
bet on the direction of the principal assets. Despite being a security, the credit derivative is not a physical
asset. It is a contract instead. Without actually transferring the original entity, the contract permits the
transfer of credit risk associated with a core entity from one party to another. Credit derivatives are

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essential tools in modern finance, offering ways to manage, hedge and speculate on credit risk.

SWAP
A swap is a derivative contract through which two parties exchange the cash flows or liabilities from two
different financial instruments. Although the instrument can be nearly anything, most swaps involve cash
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flows based on a notional principle amount, such as a loan or bond. Usually, the principal does not change
hands. Each cash flow comprises one leg of the swap. One cash flow is generally fixed, while the other is
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variable and based on a benchmark interest rate, floating currency exchange rate, or index price. The most
common kind of swap is an interest rate swap. Swaps are personalized over-the-counter (OTC) contracts
that are mostly made between financial institutions or enterprises. Such a swap can be used for risk
management, to get money at a better rate than rate from other sources, or to speculate on future variations
in the exchanged cash flows. The regulation of swaps is aimed at ensuring that financial instruments are
traded in a fair and transparent manner, and to reduce the risk of systemic financial failure. The specific
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regulations that apply to swaps internationally vary by jurisdiction.

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INTEREST RATE SWAP

An interest rate swap is an agreement between two parties to exchange one stream of interest payments
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for another, over a set period of time. Interest-rate instruments, such as derivatives, can protect against
interest rate risk by adjusting the price of an underlying asset. Loans can be granted with fixed or variable
interest rates, and businesses can transfer their loans to fixed or variable rates. Interest-rate swaps can be
used to convert high fixed-rate debt to lower variable-rate debt, ensuring both parties receive the fixed and
floating rates. Interest rate swaps can exchange fixed or floating rates to reduce or increase exposure to
fluctuations in interest rates. Interest rate swaps are sometimes called plain vanilla swaps, since they were
the original and often the simplest such swap instruments. Usually, interest rate swaps exchange fixed-
rate payments for floating-rate payments, or the other way around, and are used to manage exposure to
fluctuating interest rates or to get a lower borrowing rate.

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COUPON
A coupon is the interest payment received by a bondholder from the date of issuance until the date of
maturity of a bond. Coupons are normally described in terms of the "coupon rate", which is calculated by
adding the sum of coupons paid per year and dividing it by the bond's face value. The term "coupon"
originally refers to actual detachable coupons affixed to bond certificates. Bonds with coupons, known as
coupon bonds or bearer bonds. They are not registered, meaning that possession of them constitutes
ownership. To collect an interest payment, the investor has to present the physical coupon. The bond issuer
decides on the coupon rate based on the market interest rates, which change over time, causing the value
of the bond to increase or decrease. However, the bond's coupon rate is fixed until maturity. Therefore,

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bonds with higher coupon rates can provide some safety against rising market interest rates.

ZERO-COUPON BOND
An accrual bond, often referred to as a zero-coupon bond, is a financial security that does not bear interest

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but rather trades at a significant discount, which results in a profit when the bond matures and is redeemed
for its full face value. Certain bonds are issued with no coupons from the beginning, while other bonds
become zero-coupon instruments when a financial institution removes the coupons and repackages them.
Zero-coupon bonds are more prone to market fluctuations than coupon bonds as they guarantee the full
payment at maturity. A zero-coupon bond's interest is charged interest, which means that rather than being
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an established interest rate, it is an estimate of the bond's interest rate. The investor's return is calculated
on Zero-coupon bonds as the difference between the purchase price and the par value. The investor
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receives payment in the amount of the capital invested plus interest at a set rate, compounded
semiannually. Zero-coupon bonds can be issued from a variety of sources, including the U.S. Treasury,
state and local government entities, and corporations. Most zero-coupon bonds trade on the major
exchanges. With the bond's deep discount, an investor can put up a small amount of money that can grow
over time.
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PRINCIPAL/PAR VALUE
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Principal, also known as par value or face value in the bond market, is the amount of money the issuer
will return to bondholders at maturity. The principal is separate from the interest payments the bond issuer
makes to the bondholder. The stock's face value as specified in the company charter frequently differs
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from the share price that is actually traded on the open market. For a bond or other fixed-income
instrument, face value is essential since it establishes the maturity value and the taka amount of coupon
payments. Par value is the face value of a bond and determines a bond or fixed-income instrument's
maturity value as well as the dollar value of coupon payments. The market price of a bond may be above
or below par, depending on factors such as the level of interest rates and its credit status. A stock's par
value is often unrelated to the actual value of its shares trading on the stock market. Par value is required
for a bond or a fixed-income instrument and defines its maturity value and the value of its required coupon
payments.

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DURATION & CONVEXITY
Fixed-income investments use two strategies to control risk exposure: duration and convexity. Duration
measures bond sensitivity to interest rate fluctuations, while convexity measures the relationship between
interest rate changes and bond yield. Duration helps investors calculate the average maturity of a bond's
promised cash flow, enabling better portfolio management. Duration is a key property of fixed-income
securities, affecting price volatility. Portfolio managers can adjust portfolio composition to match duration
with anticipated interest rate levels using interest rate projections. Duration helps investors calculate the
average maturity of a bond's promised cash flow, enabling better portfolio management. Convexity
demonstrates how the duration of a bond changes as the interest rate changes. Fixed-income investments

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use two strategies to control risk exposure: duration and convexity. Duration measures bond sensitivity to
interest rate fluctuations, while convexity measures the relationship between interest rate changes and
bond yield. Duration helps investors calculate the average maturity of a bond's promised cash flow,
enabling better portfolio management. Duration is a key property of fixed-income securities, affecting

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price volatility. Portfolio managers can adjust portfolio composition to match duration with anticipated
interest rate levels using interest rate projections. Convexity is used to measure a portfolio's exposure to
market risk.

PRIMARY MARKET
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The primary market is where newly created securities, such as shares or bonds, are offered to raise funds
for operations, expansion plans, or policies. These securities are bought directly from the issuer, often
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through underwriters who assist in the first public offering (IPO). Price instability is higher in primary
markets, but underwriters can limit risk using short-term price stabilization techniques. The primary
market is where securities are created. It's in this market that firms sell or float new stocks and bonds to
the public for the first time. A primary market's principal unique feature is that its securities are bought
directly from issuers, rather than being acquired "second-hand" via investors or prior buyers. It is here that
newly issued bonds and company stock are offered for sale to investors. They are marketed by the
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businesses, governments, or other organizations that are issuing them; frequently, investment banks assist
in this process by underwriting the new issues, determining their price, and managing their introduction.
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SECONDARY MARKET
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The secondary market provides investors and traders with a place to trade securities after they are put up
for sale on the primary market. Investors trade securities on the secondary market with one another rather
than with the issuing entity. Through massive series of independent yet interconnected trades, the
secondary market drives the price of securities toward their actual value. The secondary market provides
liquidity to the financial system and allows smaller traders to participate. The stock market and over-the-
counter markets are types of secondary markets. Secondary markets are important for several reasons.
First, they provide liquidity to investors. Having a centralized location allows trades to take place with a
large number of traders while ensuring that the value of securities isn't lost as investors buy and sell
securities. It also gives small traders a chance to participate in the market.

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DIBOR
The Dhaka Interbank Offered Rate (DIBOR) was established in 2010 by Dr. Atiur Rahman, then governor
of the Bangladesh Bank. It is administered by the Bangladesh Foreign Exchange Dealers' Association
(BAFEDA) and calculates the weighted average of rates submitted by member banks. DIBOR establishes
the benchmark interest rate for short-term loans and floating rate notes at a given maturity date. All
interbank rates aim to provide transparency, sustainability, and a useful barometer of confidence and trust
between active institutions and the broader financial market. The requirements placed on member banks
in relation to DIBOR are quite simple. They must submit submissions that accurately reflect their
assessment and that are genuinely of the opinion that the rate they have submitted will not unfairly benefit

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the submitter. Since DIBOR is still in its early stages, it needs to be properly tended to and supervised in
order to develop into a benchmark rate that can be relied upon.

PRIMARY DEALER

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A primary dealer is a bank or other financial institution that has been approved to trade securities with a
national government. A bank or financial institution must meet specific capital requirements before it can
become a primary dealer. Primary government securities dealers sell the Treasury securities that they buy
from the central bank to their clients, creating the initial market. Primary dealers bid for government
contracts competitively and purchase the majority of Treasury bills, bonds, and notes at auction. They are
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required to submit meaningful bids at new Treasury securities auctions. Primary government securities
dealers must also maintain at least a 0.25% market share. Broker-dealers applying for a spot in the primary
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dealer system must register with the Securities and Exchange Commission (SEC) or the Financial Industry
Regulatory Authority (FINRA). A primary dealer must submit accurate reports of their Treasury dealings
on a weekly basis. In addition, primary dealers are asked to respond to regular Fed surveys measuring
market sentiment, economic expectations, and opinions about monetary policy measures.

RISK FACTORS IN BANK

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Risk factors are statements about potential risks a company faces that could negatively impact its business,
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financial condition, and results of operations. They are often used as an insurance policy to mitigate
litigation and liability risk. Risk factors are often included in prospectuses and periodic reports, providing
investors with management's views on potential risks and their impact on the company's business and the
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value of company securities. Risk management is the practice of planning for unexpected expenditures
and mitigating the impact of changing financial environments on a company's cash flow objectives. Risk
managers assess potential risks, determine their impact, and inform leadership on risk measurement and
implementation. Within Corporate Treasury, the two most prominent areas of risk management are foreign
exchange (FX) risk and interest rate risk. Other types of risk include commodity, credit, liquidity, and
operational risk. The risks facing modern banks exceed simple financial considerations or whether the
markets are rising or falling. Identity theft and data breaches, mishandling consumers, or sidestepping
regulations can all land a bank in hot water.

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CREDIT RISK
Credit risk is the probability of a financial loss resulting from a borrower's failure to repay a loan. Credit
risk refers to the risk that a lender may not receive the owed principal and interest, which results in an
interruption of cash flows and increased costs for collection. Lenders can mitigate credit risk by analyzing
factors about a borrower's creditworthiness, such as their current debt load and income. Financial
institutions face different types of credit risks—default risk, concentration risk, country risk, downgrade
risk, and institutional risk. Consumer credit risk can be measured by the five Cs: credit history, capacity
to repay, capital, the loan's conditions, and associated collateral. Consumers who are higher credit risks
are charged higher interest rates on loans. Even if it's impossible to predict who will miss payments, credit

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risk can be effectively assessed and managed to decrease the impact of a loss. Lenders and investors
receive interest payments from the borrower or issuer of a debt obligation as recompense for taking on
credit risk.

LIQUIDITY RISK

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Liquidity risk refers to how a bank's inability to meet its obligations threatens its financial position or
existence. Liquidity risk refers to the risk a company faces in unable to meet short-term obligations, such
as employee salaries. Institutions manage their liquidity risk through effective asset liability management
(ALM). To mitigate this, a robust cash flow forecast is crucial. If liquidity issues arise, banks may offer
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short-term credit, asset sales, extended payment terms, or prepayments can be considered. Financial
institutions and organizations are vulnerable to this risk, which can have a substantial effect on their
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operational and financial stability. Market liquidity risk and funding liquidity risk are the two primary
characteristics that commonly define liquidity risk. Market liquidity risk is related to an entity's incapacity
to carry out transactions at the going rate because of disruptions or insufficient market depth. Funding
liquidity risk, on the other hand, relates to the possibility of not being able to secure enough money to pay
for obligations. Liquidity risk's consequences emphasize how crucial proactive management is to
maintaining operations' continuity and financial stability.
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TREASURY RISKS
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Treasury risk management is the practice of mitigating money-related risks in organizations, such as those
in liquidity, investments, FX and interest exposures, and payments. The risk involved in managing an
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organization's assets, which can include everything from money market instruments to stock trading, is
known as Treasury Risk. The risk connected to an organization's capacity to turn an asset or security into
cash in order to avert a loss is commonly referred to as liquidity and capital risk. It involves examining
risks posed by treasury activities and developing appropriate response plans ahead of time to reduce
potential downsides. This typically includes activities such as cash flow forecasts, structured debt
repayments, hedging investments, liquidity planning, and setting up treasury policies. Treasury risk
management may also involve treasury audits to ensure that financial positions are accurately reported.

Derivatives Fixed Income Risk Management

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