An in-depth look at how banks and other financial institutions manage treasury operations

Created for banking and finance professionals with a desire to expand their management skillset, this book focuses on treasury operations in banking. It was written by the experts at the world-renowned Hong Kong Institute of Bankers, an organization dedicated to providing the international banking community with education and training.

Offers a detailed look at treasury operations and how banks manage their relationships with various markets, including foreign exchange, bond markets, and derivativesGives practitioners a thorough understanding of balance sheet management, settlement, and controlProvides bankers with the specialised knowledge they need to undertake critical reviews of treasury operations in banks, manage a wide range of treasury activities, and identify risks

The Hong Kong Institute of Bankers (The HKIB) has been serving the local banking community in the provision of education and training since 1963. In 1995, with the encouragement and support of the local banking community, the Institute declared its independence from its parent institute in UK. Now independent, the Institute is able to better serve the training needs of the bankers in the region and to reflect the importance of Hong Kong as an international financial center.
The continuous professional development program, comprised of training courses and professional examinations, has helped bank employees make advancements in their banking career, and is valued by most of them who are determined to strengthen their knowledge base.

Preface ix

PART 1 Treasury Management 1

1 Treasury Management of Financial Institutions 3

Learning Objectives 3

Introduction 4

Issues in Treasury Operations 4

Treasury Controls and Measures 14

Summary 19

Key Terms 20

Study Guide 21

Further Reading 21

2 The Foreign Exchange Market 23

Learning Objectives 23

Introduction 24

Basic Operation of Forex Market 24

Determining Exchange Rates 39

Forward Markets 44

Hedging the FX Exposure 56

Summary 59

Key Terms 61

Study Guide 61

Further Reading 62

3 Money and Capital Markets 63

Learning Objectives 63

Introduction 64

Hong Kong Dollar Market 64

International Market 70

Bond Market 72

RMB Market 74

The Money Market Desk 76

Money Market Operations 80

Treasury Bills 87

Capital Markets: Risk and Valuations 89

Summary 96

Key Terms 97

Study Guide 98

Further Reading 99

4 Bond Market 101

Learning Objectives 101

Introduction 102

Basics of the Bond Market 102

Pricing Bonds 106

Interest Rate Risk 118

Summary 123

Key Terms 124

Study Guide 124

Further Reading 125

5 Derivatives 127

Learning Objectives 127

Introduction 128

Derivatives for Hedging 128

Credit Derivatives 143

Options 154

Trading Strategies 173

Summary 192

Key Terms 194

Study Guide 194

Further Reading 195

PART 2 Treasury Operations 197

6 Treasury Operations 199

Learning Objectives 199

Introduction 200

Front Office 200

Middle Office 203

Back Office 209

Summary 213

Key Terms 214

Study Guide 215

Further Reading 215

7 Market Risk and Other Risk Measures 217

Learning Objectives 217

Introduction 218

Risk Considerations 218

Value-at-Risk 222

Basis Point Value and Hedging Market Risk 224

Managing Financial Risk 234

Summary 236

Key Terms 237

Study Guide 237

Further Reading 238

8 RMB Payments and Settlements 239

Learning Objectives 239

Introduction 240

RMB Clearing and Settlement 240

Summary 247

Key Terms 248

Study Guide 248

Further Reading 248

PART 3 Case Studies 249

9 Case Studies 251

Learning Objectives 251

Introduction 252

Segregation of Duties: Barings Bank 252

Settlement Risk: Herstatt Bank 258

Liquidity Risk in Position Hedging: Metallgesellschaft AG 261

Liquidity Risk: Lehman Brothers 265

Summary 270

Key Terms 270

Study Guide 271

Further Reading 271

Appendix A: CMU Members 273

Appendix B: Bond Pricing 279

Return on Debt Securities 279

Bond Products 283

Index 303