Description
derivatives in the Indian Debt Market, Interest rate swaps, NSE futures and forward rate agreements. It also explains overnight index swaps.
?
Interest Rate Swaps
N S E Futures Forward Rate Agreements (FRA’s)
?
?
?
Swaps :
?
Interest Rate Swaps
? Exchange of a stream of cash flows for another stream ? A contract to exchange ? Over an agreed period ? Two streams of interest amounts ? Based on two different basis ? On a notional amount
?
Notional amount
? no movements of principal amounts
?
? ?
Settled as per agreements ; generally at the time of each floating rate reset periods Opposing payments are netted out Off-balance sheet item – lower capital requirements
? ?
A 10.75% Libor+0.50% B 10.00% Libor+0.25% A borrows @ L+0.50 and swap10.25% for L+0.25 B borrows @ 10.00% and swap L+0.25% for 10.25 A 10.25 L+0.25 B
L+0.50 10.00
?
?
Net Cost ? A: (L+0.50) + 10.25 - (L+0.25) = 10.50% ? B: 10.00 + (L+0.25) - 10.25 = L+0.00% Both save 0.25%
?
Swap Trading or Warehousing:
A
10.30
Bank
L+0.25
L+0.30
B
L+0.50 10.00
10.25
Both save 0.20% and Bank gets 0.10%
?
Hedging
?
Speculation
? If interest rates are expected to go down ? Liability – move from fixed to floating ? Assets move from floating to fixed ? Interest rate expected to go down ? Payer of floating / receiver of fixed ? Interest rates expected to go up ? Payer of fixed / receiver of floating
?
OIS (Overnight Index Swap)
Money market Swaps (upto years maturity) Term Swaps (more than two years maturity)
?
?
?
? ? ? ? ? ?
Floating rate linked to a Call Money Index ? NSE Overnight Mibor or Reuters O/N Mibor Fixed rate negotiated Flexilble tenor Floating Interest compounded Settled at maturity Difference paid / received Need for OIS ?
? The inherent interest rate risk on the balance sheets of banks and PD’s
?
Interest Rate Futures (N) (FUTINT)
? Notional T-Bills (NSE TB91D) ? Notional 10 year Bonds
? Coupon – NSE 10Y06 ? Non-Coupon - NSE 10YZC
? ? ? ?
Maturity last Thursday of each month Lot Size : 200 Contract 2 lacs Settlement @ days price
The Need: – To hedge the uncertainty of interest rate levels in the future – Either a requirement of funds or a necessity to
invest at a future date at a required level of rates
– A promise to lend at a future date at rates fixed today or need to utilize future cash flows at certain desirable rates – Re-pricing of Assets / Liabilities at future dates
?
The Product:
? FRA is a contract whereby two parties agree to Exchange the difference between the market rate of interest on the contract’s effective date and the pre-arranged fixed rate struck on the date of execution of the FRA contract
?
Principal amounts are not involved – only loss due to increase of rates is compensated or gain due to decrease in rates is taken away.
? ?
Example: 3 / 9 m 8% FRA for Rs 5 crs After three months
? Contract to “Deposit” Rs 5 crs after 3 months for 6 months @ 8 % p.a. ? If 6m rate = 8% - no action ? If 6m rate < 8% - Seller of FRA gives the difference in interest amounts (loss) to the buyer ? If 6m rate > 8% - Buyer of FRA has to give the seller the difference in interest amounts (gain) ? No loss but no gain either
?
?
Buyers position remains unchanged
?
? ?
?
? ? ?
If an investment is to be made – sell an FRA No Fee is paid up-front FRA protects against adverse rate movements Since only the difference is received / paid, FRA can be used for hedging the bank’s position FRA helps the bank to lock in the spread FRA can be used to fill the gaps FRA can be used such that the cost of raising a liability or the earning on assets is locked-in
Liquidity Matrix
1-14d 14-28d 1-3m 3-6m 6m-1yr 1-3yrs 3-5yrs >5yrs Capital Deposits Borrowings Others OUTFLOW Cash etc Investment Loans&Adv Lendings INFLOW MISMATCH
`
Interest Rate Sensitivity Gaps
1m Capital Deposits Borrowings Others LIABILITIES Cash etc Investment Advances Lendings Assets FRA/Swap GAPS 1-3m 3-6m 6m-1y 1-5yr >5yr Non-Sen
doc_285936552.pptx
derivatives in the Indian Debt Market, Interest rate swaps, NSE futures and forward rate agreements. It also explains overnight index swaps.
?
Interest Rate Swaps
N S E Futures Forward Rate Agreements (FRA’s)
?
?
?
Swaps :
?
Interest Rate Swaps
? Exchange of a stream of cash flows for another stream ? A contract to exchange ? Over an agreed period ? Two streams of interest amounts ? Based on two different basis ? On a notional amount
?
Notional amount
? no movements of principal amounts
?
? ?
Settled as per agreements ; generally at the time of each floating rate reset periods Opposing payments are netted out Off-balance sheet item – lower capital requirements
? ?
A 10.75% Libor+0.50% B 10.00% Libor+0.25% A borrows @ L+0.50 and swap10.25% for L+0.25 B borrows @ 10.00% and swap L+0.25% for 10.25 A 10.25 L+0.25 B
L+0.50 10.00
?
?
Net Cost ? A: (L+0.50) + 10.25 - (L+0.25) = 10.50% ? B: 10.00 + (L+0.25) - 10.25 = L+0.00% Both save 0.25%
?
Swap Trading or Warehousing:
A
10.30
Bank
L+0.25
L+0.30
B
L+0.50 10.00
10.25
Both save 0.20% and Bank gets 0.10%
?
Hedging
?
Speculation
? If interest rates are expected to go down ? Liability – move from fixed to floating ? Assets move from floating to fixed ? Interest rate expected to go down ? Payer of floating / receiver of fixed ? Interest rates expected to go up ? Payer of fixed / receiver of floating
?
OIS (Overnight Index Swap)
Money market Swaps (upto years maturity) Term Swaps (more than two years maturity)
?
?
?
? ? ? ? ? ?
Floating rate linked to a Call Money Index ? NSE Overnight Mibor or Reuters O/N Mibor Fixed rate negotiated Flexilble tenor Floating Interest compounded Settled at maturity Difference paid / received Need for OIS ?
? The inherent interest rate risk on the balance sheets of banks and PD’s
?
Interest Rate Futures (N) (FUTINT)
? Notional T-Bills (NSE TB91D) ? Notional 10 year Bonds
? Coupon – NSE 10Y06 ? Non-Coupon - NSE 10YZC
? ? ? ?
Maturity last Thursday of each month Lot Size : 200 Contract 2 lacs Settlement @ days price
The Need: – To hedge the uncertainty of interest rate levels in the future – Either a requirement of funds or a necessity to
invest at a future date at a required level of rates
– A promise to lend at a future date at rates fixed today or need to utilize future cash flows at certain desirable rates – Re-pricing of Assets / Liabilities at future dates
?
The Product:
? FRA is a contract whereby two parties agree to Exchange the difference between the market rate of interest on the contract’s effective date and the pre-arranged fixed rate struck on the date of execution of the FRA contract
?
Principal amounts are not involved – only loss due to increase of rates is compensated or gain due to decrease in rates is taken away.
? ?
Example: 3 / 9 m 8% FRA for Rs 5 crs After three months
? Contract to “Deposit” Rs 5 crs after 3 months for 6 months @ 8 % p.a. ? If 6m rate = 8% - no action ? If 6m rate < 8% - Seller of FRA gives the difference in interest amounts (loss) to the buyer ? If 6m rate > 8% - Buyer of FRA has to give the seller the difference in interest amounts (gain) ? No loss but no gain either
?
?
Buyers position remains unchanged
?
? ?
?
? ? ?
If an investment is to be made – sell an FRA No Fee is paid up-front FRA protects against adverse rate movements Since only the difference is received / paid, FRA can be used for hedging the bank’s position FRA helps the bank to lock in the spread FRA can be used to fill the gaps FRA can be used such that the cost of raising a liability or the earning on assets is locked-in
Liquidity Matrix
1-14d 14-28d 1-3m 3-6m 6m-1yr 1-3yrs 3-5yrs >5yrs Capital Deposits Borrowings Others OUTFLOW Cash etc Investment Loans&Adv Lendings INFLOW MISMATCH
`
Interest Rate Sensitivity Gaps
1m Capital Deposits Borrowings Others LIABILITIES Cash etc Investment Advances Lendings Assets FRA/Swap GAPS 1-3m 3-6m 6m-1y 1-5yr >5yr Non-Sen
doc_285936552.pptx