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Treasury Management in Financial Institutions

(TMFI)

For AIBB

First Edition: September 2023

Second Edition: March 2024
Third Edition: June 2024

Do not copy or share this material; the author worked hard on it and holds the copyright.

Edited By:

Mohammad Samir Uddin, CFA

Chief Executive Officer
MBL Asset Management Limited
Former Principal Officer of EXIM Bank Limited
CFA Chartered from CFA Institute, U.S.A.
BBA, MBA (Major in finance) From Dhaka University
Qualified in Banking Diploma and Islami Banking Diploma
Course instructor: 10 Minute School of 96th BPE
Founder: MetaMentor Center, Unlock Your Potential Here.

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Table of Content

SL Details Page No.

1 Module A: Introduction to Treasury 4-12
2 Module B: Money Market 13-19
3 Module C: Foreign Exchange Management 20-27
4 Module D: Asset Liability Management 28-36
5 Module E: Derivatives 37-42
6 Module F: Fixed Income 43-51
7 Module G: Risk Management 52-61
8 Short Note 62-77
9 Previous year Question 78-84

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Syllabus
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? Interbank Money Market - Participants, Money Market Instruments - Call
Money (Overnight), Repo, Reverse Repo, Interbank Repo, SWAP, Treasury Bills and Treasury Bonds.

Module C: Foreign Exchange Management

 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

 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). ALCOFormation, 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.

Module E: Derivatives
 Forward contract, Futures contract, Options, Investment Derivatives, Commodity Derivatives, Credit
Derivatives.

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

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

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Module A:
Introduction to Treasury
Q-01. What is Treasury Management? Objectives of Treasury Management?
Or, what are the objectives of the Treasury Department of a bank? BPE-97th.
Treasury Management is the specialized function within a business or financial institution responsible for
managing the organization's liquidity, funding, risk, and financial assets. Essentially, it acts as the financial hub
of an organization, overseeing cash flow, optimizing financial resources, and strategizing for financial growth
and stability. Treasury Management encompasses a range of activities such as investment management, risk
assessment, cash management, and capital raising, among others.
The primary objectives of Treasury Management are to ensure liquidity, minimize financial risks, and optimize
financial performance. It aims to have adequate cash on hand to meet operational and strategic needs while
avoiding excessive idle funds. Risk management, especially concerning foreign exchange and interest rates, is
another crucial objective to protect against financial uncertainties. Additionally, treasury management seeks
to enhance profitability through strategic investments and capital allocation while adhering to compliance and
governance standards. Overall, it seeks to support the organization's financial operations efficiently and
effectively.

Q-02. What are the functions of treasury management?

1. Liquidity Management: Ensures adequate cash reserves are available to meet the bank's obligations
and customer withdrawals.
2. Asset-Liability Management: Manages the balance between the bank's assets and liabilities to
optimize returns and mitigate risks.
3. Foreign Exchange Management: Handles currency exchange activities, managing risks associated
with currency fluctuations.
4. Interest Rate Risk Management: Utilizes financial instruments to hedge against the adverse effects of
interest rate changes on the bank's profitability.
5. Capital Adequacy: Ensures compliance with regulatory requirements for capital reserves to support the
bank's risk profile.
6. Investment Operations: Manages the bank's investment portfolio to generate income, while adhering
to policy constraints and risk tolerances.
7. Funds Transfer Pricing: Allocates costs and revenue to various business units within the bank for
internal accounting and performance evaluation.
8. Regulatory Compliance: Monitors and ensures compliance with various financial regulations,
including reporting and disclosure requirements.
9. Operational Risk Management: Identifies and mitigates risks arising from operational errors, system
failures, or fraud.

Q-03. Describe about the nature and the benefits of integrated treasury.
Or, What are the benefits of it? BPE-96th.
The integrated treasury in a bank is a centralized unit that combines various treasury functions like trading,
risk management, and asset-liability management into a single, cohesive framework. This holistic approach
allows for a more streamlined and effective management of a bank's financial resources.
Benefits:
1. Efficiency: Centralization enables quick decision-making and eliminates redundancy.
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2. Risk Mitigation: Integrated risk assessment allows the bank to make informed decisions, reducing
exposure to various financial risks such as currency fluctuations and interest rate changes.
3. Cost Savings: Lower operational costs due to reduced need for multiple software and manpower across
departments.
4. Compliance: Simplifies the complexity involved in regulatory compliance by consolidating various
functions, making it easier to meet industry standards and guidelines.
5. Strategic Advantage: Provides a comprehensive view of the bank's financial position, which aids in
strategic planning and resource allocation.
6. Customer Satisfaction: Improves service delivery as funds can be managed more effectively to meet
customer needs.
7. Competitive Edge: Advanced integrated systems can provide real-time data and analytics, giving the
bank a competitive advantage in the marketplace.
8. Profit Maximization: Efficient capital allocation and risk management can lead to better returns on
investments.

Q-04. Briefly describe the functions of Integrated Treasury. BPE-96th.

The function of integrated treasury management involves several key responsibilities simplified as follows:
1. Reserve Management and Investment: Handling cash reserve and statutory liquidity requirements,
and building an investment portfolio for optimal returns.
2. Liquidity and Funds Management: Balancing the bank's liabilities to fund its assets, analyzing cash
flows, and advising on funding strategies.
3. Asset Liability Management (ALM): Optimizing the size and growth of the balance sheet and pricing
assets and liabilities according to set guidelines.
4. Risk Management: Managing market risks related to both assets and liabilities, including interest rate
fluctuations and asset-liability mismatches.
5. Transfer Pricing: Efficiently allocating the bank's funds across various markets while ensuring
competitiveness in rates.
6. Derivative Products: Creating and offering products like interest rate swaps to manage risks and
enhance client services.
7. Arbitrage: Maximizing profits by exploiting price differences in different markets for the same assets.
8. Capital Adequacy: Ensuring the quality of assets and monitoring profitability through metrics like
Return on Assets (ROA).

Q-05. What are the key components of an integrated treasury structure?

An integrated treasury structure comprises four main components:
1. Front Office: Comprising dealers and traders who execute buying and selling transactions with external
parties like banks, brokers, and customers.
2. Mid Office: Responsible for independent risk monitoring, measurement, and analysis, reporting directly
to top management and providing risk assessments to the Asset Liability Committee (ALCO).
3. Back Office: Handles accounting, settlement, and reconciliation tasks, ensuring adherence to internal
and regulatory procedures.
4. Audit Group: Independently audits daily operations of the treasury department to ensure compliance
with established processes.
This structure enables banks to manage risk, optimize arbitrage opportunities, and maintain operational
efficiency within their treasury functions.

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Q-06. Define Money Market. Briefly describe the products of money market/ What are the common
money market Instruments.
Or, Briefly describe money market instruments available in Bangladesh. BPE-96th.
The money market is a sector of the financial market in which financial instruments with high liquidity and short
maturities, usually less than one year, are traded. The primary purpose of the money market is to provide a
mechanism for the short-term borrowing and lending of money, often to meet immediate cash flow needs.
Products of Money Market:
1. Treasury Bills: Government-issued short-term debt instruments with maturities ranging from a few
weeks to a year.
2. Commercial Paper: Short-term unsecured promissory notes issued by corporations to meet immediate
cash needs.
3. Certificates of Deposit (CDs): Time-bound deposits offered by banks with a fixed interest rate.
4. Repurchase Agreements (Repos): Short-term borrowing, usually overnight, where a security is sold
with an agreement to buy it back later at a higher price.
5. Money Market Funds: Mutual funds that invest in short-term, high-liquidity debt instruments.
6. Banker's Acceptance: A short-term credit investment guaranteed by a bank.

Q-07. How do you calculate the liquidity in the money market for a particular month in Bangladesh?
What is the money market liquidity condition in Bangladesh. BPE-96th.
To calculate the liquidity in the money market for a particular month in Bangladesh, one would typically look
at key financial metrics and indicators reported by financial institutions and the Bangladesh Bank. These
indicators include the call money rate, which is the overnight interest rate at which banks borrow from each
other, and the amount of borrowing from the Bangladesh Bank's facilities such as repo and liquidity support
facilities.
In recent months, the money market liquidity condition in Bangladesh has been under strain. The call money
rate reached 9.57% in January 2024, the highest average rate in 12 years. This high rate indicates a significant
liquidity crisis, as banks are borrowing more from each other and the central bank to meet their short-term
liquidity needs. The Bangladesh Bank's repo rate currently stands at 8%, reflecting efforts to manage this
liquidity situation.
Additionally, the overall liquidity in the banking sector has decreased. For example, the volume of excess
liquidity in the banking system dropped from Tk 269 billion in June 2022 to Tk 54.30 billion by November
2023. This decrease has been more severe for Islamic banks, with their excess liquidity plunging to only Tk 1.83
billion by November 2023.
These factors combined suggest that the liquidity crisis in Bangladesh's money market is due to a combination
of slow deposit growth, a high volume of non-performing loans, and policy rate hikes by the Bangladesh Bank
aimed at controlling inflation.

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Q-8. Distinguish between the money market and FX market.
Criteria Money Market FX Market (Foreign Exchange Market)
1.Nature Deals in short-term debt instruments Involves trading of currency pairs
2.Example Treasury Bills, Commercial Paper USD/EUR, GBP/JPY
Currency conversion for trade, hedging, or
3.Purpose To fulfill short-term liquidity needs
speculation
4.Market Banks, Corporations, Individual Traders,
Banks, Mutual Funds, Corporations
Participants Governments
Highly regulated (central banks,
5.Regulation Less regulated, mostly over-the-counter (OTC)
financial institutions)

Q-09. What do you understand by foreign exchange market? Describe the factors that influence the
exchange rates in the market. BPE-97th. BPE-98th.
The Foreign Exchange Market, commonly known as the Forex or FX market, is a decentralized global
marketplace where currencies are traded. Unlike other financial markets, the Forex market doesn't have a
centralized location; it operates 24/7 through a network of banks, corporations, and individual traders.
Factors influencing foreign exchange rates include:
1. Interest Rates: Higher interest rates usually strengthen a country's currency as they offer lenders higher
returns, attracting foreign investment.
2. Economic Indicators: Metrics such as GDP growth, employment rates, and inflation can influence a
country's currency value.
3. Political Stability: Countries that are politically stable are considered less risky, attracting foreign
investment and strengthening the currency.
4. Market Sentiment: Psychological factors like investor perception, rumors, or geopolitical events can
also affect currency value.
5. Trade Balances: A country exporting more than it imports usually sees an appreciation in its currency
value.

Q-10. Why do we need foreign exchange market? BPE-97th.

The foreign exchange (Forex) market is crucial for several reasons:
1. Facilitates International Trade and Investment: By enabling the exchange of currencies, it supports
global trade and investment by allowing businesses to convert profits from foreign sales into their
domestic currency.
2. Determines Exchange Rates: It helps establish the value of currencies, which fluctuates based on
supply and demand dynamics, influencing global trade competitiveness.
3. Hedging Against Risk: Companies and investors use the Forex market to hedge against potential losses
caused by fluctuations in currency values, protecting their investments and financial planning.
4. Liquidity and Accessibility: Being the largest financial market globally, it offers significant liquidity,
allowing large volumes of currencies to be traded without significantly affecting exchange rates,
ensuring efficient transactions.
5. Supports Speculation: Traders can speculate on currency movements to generate profits, contributing
to the market's depth and liquidity.
Overall, the Forex market is indispensable for supporting international economic activities, managing risk, and
facilitating global financial stability.

Q-11. Define ALM (Asset Liability Management) and its importance?

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Asset-Liability Management (ALM) is a strategic approach to balancing the assets and liabilities of financial
institutions, such as banks, to mitigate risks related to liquidity gaps and interest rate changes. In essence, ALM
aims to ensure that an organization can meet its financial obligations when they come due, without incurring
unacceptable losses.
Importance:
1. Risk Mitigation: ALM helps in identifying, measuring, and managing various types of financial risks,
including interest rate risk and liquidity risk.
2. Profitability: By optimizing the use of assets and effectively managing liabilities, ALM can enhance
profitability.
3. Regulatory Compliance: ALM is often a regulatory requirement, ensuring that financial institutions
maintain adequate levels of liquidity and capital.
4. Strategic Planning: It enables organizations to plan for growth and capital needs by assessing financial
structures and projecting future asset and liability balances.
5. Competitive Edge: Institutions with robust ALM practices are better positioned to compete effectively
in the financial market, as they are less exposed to unforeseen market shocks.

Q-12. What are the advantages and disadvantages of asset liability management? BPE-98th.
Advantages:
1. Risk Management: ALM effectively mitigates various financial risks, such as liquidity risk and interest
rate risk, safeguarding an institution's financial stability.
2. Regulatory Compliance: Employing ALM strategies helps financial institutions meet regulatory
requirements, avoiding penalties and maintaining market trust.
3. Strategic Planning: ALM provides valuable insights for long-term strategic planning, including capital
allocation and growth opportunities.
4. Profit Maximization: ALM helps institutions to align their asset and liability portfolios optimally,
thereby enhancing profitability.
5. Competitive Advantage: A well-executed ALM strategy provides a competitive edge, as the institution
is better equipped to handle market volatility.
Disadvantages:
1. Complexity: ALM involves complex models and assumptions, which if incorrect, can lead to
inaccurate risk assessment.
2. Cost: The implementation of ALM software and the need for specialized staff can be costly.
3. Short-Term Focus: There's a risk of focusing too much on short-term adjustments at the expense of
long-term objectives.
4. Market Limitations: ALM cannot fully account for unpredictable market events or drastic economic
changes, leaving some level of risk.
5. Data Quality: Effective ALM requires high-quality, up-to-date data; poor data quality can impair the
effectiveness of ALM strategies.

Q-13. What are the major objectives of macroeconomics? Write a brief definition of each of these
objectives. Explain carefully why each objective is important.
1. Economic Growth: The aim is to increase the nation's output (GDP). Growth is crucial for job creation
and improving living standards.
2. Full Employment: This objective seeks to ensure that all who are willing and able to work have jobs.
Employment directly impacts income levels and quality of life.

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3. Price Stability: Macroeconomics aims to control inflation or deflation to keep prices stable. Price
stability maintains the purchasing power of money and fosters business investment.
4. Balance of Payments: Achieving a balanced relationship between exports and imports is key for
financial stability and international relations.
5. Income Redistribution: This involves modifying the distribution of income to reduce inequality,
usually through taxation and welfare policies.

Q-14. Describe Macroeconomic Accounts in brief? What are the major components of macroeconomic
accounts?
Macroeconomic accounts are statistical measurements that capture various aspects of a nation's economy. The
three main accounts are the National Income and Product Accounts, the Balance of Payments Accounts, and the
Flow of Funds Accounts. The National Income and Product Accounts, including Gross Domestic Product
(GDP), gauge overall economic performance. The Balance of Payments Accounts detail a country's economic
transactions with the rest of the world, including trade and capital flows. The Flow of Funds Accounts track the
financial assets and liabilities of the different sectors within the economy. These accounts are essential for
policy-making and economic analysis.
Macroeconomic accounts encompass four primary categories:
1. National Income and Product Accounts: These accounts quantify a nation's economic performance,
measuring GDP, national income, and expenditures to provide insights into overall economic health.
2. Government Financial Account: This account tracks government revenues, expenditures, and debt
levels, crucial for understanding fiscal policy impacts on the economy.
3. Balance of Payments Account: This account records a country's transactions with the rest of the world,
including exports, imports, and financial flows, aiding in assessing international economic relationships.
4. Monetary Accounts: These accounts detail money supply, banking system reserves, and central bank
operations, essential for monitoring monetary policy effectiveness and inflationary pressures.
Together, these macroeconomic accounts provide a comprehensive view of a country's economic activities,
helping policymakers, analysts, and businesses make informed decisions.

Q-15. If the CPI were 300 in 2020 and 315 in 2021, what would the inflation rate be for 2021?
The Consumer Price Index (CPI) is commonly used to calculate the inflation rate from one period to another.
The formula for calculating the inflation rate using CPI is:

In this case, the CPI for the earlier year (2020) is 300, and the CPI for the later year (2021) is 315.
Substituting these values into the formula, we get:

The inflation rate for 2021 would be 5%.

Q-16. What is balance of payment account? Write a brief note on BOP account.
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The balance of payments (BOP) account is a comprehensive record of a country's economic transactions with
the rest of the world over a specific period, typically a year. It captures all financial inflows and outflows,
providing insights into a country's external economic position. The BOP is divided into two main components:
1. Current Account: Records trade in goods and services, income from abroad (like dividends and
interest), and current transfers. A surplus indicates the nation earns more from exports than it spends on
imports, while a deficit shows the opposite.
2. Capital and Financial Account: Chronicles investments and financial transactions, like purchases of
foreign assets or domestic assets by foreigners.
Together, these accounts should theoretically balance out, meaning the inflows and outflows should cancel each
other out when combined. Any discrepancy is termed as a "statistical discrepancy". A persistent BOP imbalance
can have implications for a country's currency value, monetary policy, and economic health.

Q-17. Describe the types of government transactions.

Government transactions can be broadly categorized into two types: revenue transactions and expenditure
transactions.
1. Revenue Transactions:
 Taxation: Includes income tax, corporate tax, sales tax, and other forms of direct and indirect
taxes.
 Non-Tax Revenue: Includes earnings from public enterprises, fees, fines, and grants.
 Borrowing: Loans from domestic or international sources, including bond issuance.
2. Expenditure Transactions:
 Capital Expenditure: Investments in infrastructure, education, health, and other long-term
assets.
 Current Expenditure: Regular operational costs, including salaries of public servants,
pensions, and welfare schemes.
 Transfer Payments: Includes unemployment benefits, subsidies, and social security payments.
Another important component is the Contingent Liabilities, which are potential future payments, such as
guarantees or insurance claims, that the government may have to honor.
Overall, these transactions are critical in shaping a nation's fiscal policy and have direct implications on
economic health and public welfare.

Q-18. Distinguish between the money market and the capital market. BPE-98th.
Aspect Money Market Capital Market
1.Nature of Deals with short-term debt securities and Deals with long-term debt and equity securities.
Instruments financial instruments.
2.Participants Includes banks, financial institutions, Involves corporations, investors, and
corporations, and governments. governments issuing and trading securities.
3.Risk and Typically, lower risk with lower returns Higher risk and potential for higher returns due
Return compared to capital market. to longer investment horizon.
4.Purpose Provides short-term liquidity and financing Raises long-term funds for business expansion,
for immediate needs. projects, and investments.
5.Examples Treasury bills, commercial papers, Stocks, corporate bonds, government bonds with
certificates of deposit (CDs). longer maturities.

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Q-19. What are the three pillars on which the Asset Liability Management (ALM) process rests?
The ALM process rests on three pillars:

1. ALM Information System: This includes the Management Information System ensuring availability,
accuracy, adequacy, and timeliness of information crucial for decision-making.
2. ALM Organisation: It encompasses the structure, responsibilities, and the level of involvement of top
management in overseeing ALM activities.
3. ALM Process: This involves defining risk parameters, identifying risks, measuring them accurately,
managing risks effectively, and establishing risk policies and tolerance levels to maintain financial
stability and align with strategic goals.

Q-20. What are the key Macroeconomic Performance Indicators?

Macroeconomic Performance Indicators include:

1. Gross Domestic Product (GDP): Measures the total market value of goods and services produced
within a country over a specific period, indicating economic output.
2. Unemployment Rate: Represents the percentage of the labor force that is unemployed and actively
seeking employment, reflecting economic health and labor market conditions.
3. Inflation Rate: Indicates the rate at which the general price level of goods and services rises, measured
typically by the Consumer Price Index (CPI), influencing purchasing power and economic stability.
4. Fiscal Policy: Involves government revenue and expenditure decisions impacting overall economic
activity and GDP.
5. Monetary Policy: Managed by central banks to influence money supply, interest rates, and economic
growth through banking and credit mechanisms. These indicators collectively assess a country's
economic performance, guiding financial strategies and policy decisions.

Q-21. What are the classifications of government transactions in the Government Financial Accounts?
Government transactions in the Government Financial Accounts are classified into five groups:
1. Revenue: Includes all non-repayable receipts, divided into current (tax and non-tax revenue) and capital
(receipts from sale of capital assets).
2. Grants: Unrequited, non-repayable receipts from other governments or international institutions.
3. Expenditure: Non-repayable payments for current or capital purposes, distinguishing between requited
payments for production and unrequited transfers for redistribution.
4. Net Lending: Transactions involving claims upon other sectors for public policy purposes, including
loans, repayments, and equity transactions.
5. Financing: Represents the balance of revenue, grants, expenditure, and net lending, involving
government's financial assets and liabilities managed for financial purposes rather than public policy.

Q-22. What are the classifications of items in the Balance of Payments (BOP) Account?
Items in the Balance of Payments (BOP) Account are classified into two main categories:
1. Current Account: Includes transactions related to goods, services, incomes, and unrequited transfers.
This encompasses visible exports and imports, travel, transportation, investment income, and unilateral
transfers.
2. Capital Account: Covers transactions involving financial assets and liabilities, including changes in
reserve holdings. It details direct and portfolio investments, other capital flows, and reserve assets such

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as monetary gold, SDR allocations, and IMF positions. Reserves are primarily held by central
authorities and sometimes by deposit money banks under government control.

Q-23. What are the main components of the Monetary Accounts as detailed in the integrated financial
surveys?
The Monetary Accounts are structured into three levels:
1. Monetary Authorities (MA) Accounts: These include assets like foreign reserves and claims on the
public sector, and liabilities such as reserve money and government deposits.
2. Deposit Money Banks (DMB) Consolidated Balance Sheet: This level consolidates assets such as
reserves and loans to the private sector, and liabilities like demand deposits and capital accounts.
3. Monetary Survey: This presents aggregated financial data from both MAs and DMBs, focusing on
categories such as money (currency and demand deposits), quasi-money (savings deposits), and various
types of credits and claims. This survey is crucial for monetary analysis and policy formulation, offering
insights into the money supply and financial system liquidity.

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