Treasury Management (Short Notes)

FTP: A method of measuring the performance of business units, conducted by banking organizations, that determines the values that each unit contributes to profitability. ALM: A technique companies employ in coordinating the management of assets and liabilities so that an adequate return may be earned. It involves 3 specific risks e.g. Interest rate risk, foreign exchange risk and liquidity risk; Conducted by ALCO. Interest Rate Swap: An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps often exchange a fixed payment for a floating payment that is linked to an interest rate (most often the LIBOR). Duration Gap: The difference between the duration of assets and liabilities held by a financial entity. It is used to measure their risk due to changes in the interest rate. Asset (Stored) liquidity management: storing liquidity in the form of holding of liquid assets predominantly in cash and marketable security. When liquidity is needed, selected asset are sold for cash until all the banks demand for cash are met. Borrowed liquidity management: Borrowing enough immediately spendable funds to cover all anticipated demand for liquidity. Hot money liability: Deposits and other borrowed funds that are very interest sensitive or that management is sure will be withdrawn during the current period. Deposit composition ratio: Demand deposit/ time deposit. Where demand deposit are subject to immediate withdrawal via check writing, while time deposit have fixed maturities with penalties for early withdrawals. It measures how stable a funding base each bank possesses. Upscale target pricing: The setting of prices and fees on deposit accounts in an effort to attract those customers who hold high balances and purchase other bank services. Cyclical component: It represents positive or negative deviations from total expected deposits and loans depending upon the strength and weakness of the economy in the current year. (Trend + seasonal). Seasonal components: It measures how deposits and loans are expected to behave in any given week or month due to seasonal factors, as compared to the most recent year deposit or loan level. Duration: Duration is a value-weighted measure of the maturity of a security or other income generating asset that takes into consideration the amount and timing of all cash flows expected from the assets. Interest Sensitive Gap: The interest sensitivity gap is the difference between interest-sensitive assets and interestsensitive liabilities maturing or repricing within a specific time interval. CMO: A CMO (collateralized mortgage obligation) is a bond backed by home mortgages. A type of mortgage-backed security that creates separate pools of pass-through rates for different classes of bondholders with varying maturities, called tranches.

Jamal Hossain Shuvo

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Treasury Management (Short Notes)

Boiler room: It is a type of broker abuse in which high-pressure salespeople use banks of telephones to call lists of naive investors in order to peddle speculative, even fraudulent, securities. The securities might be seasoned issue or new issue, are touted with exaggerated claims of their probability of succeeding. Poor pills: Floor broker deliberately execute security at a disadvantageous price on behalf of customer order. Hedging: A risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities. In effect, hedging is a transfer of risk without buying insurance policies. VAR: A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over a specific time frame within a given confidence interval. It is measured in three variables: the amount of potential loss, the probability of that amount of loss, and the time frame. Variation margin: Variation Margin is additional amount of deposit you need to make to your trading account in order to maintain sufficient money for loss deduction after significant losses have taken place. Basis Swap: A basis swap is an interest rate swap which involves the exchange of two floating rate financial instruments. This is usually done to limit interest-rate risk that a company faces as a result of having differing lending and borrowing rates. Treasury operation: Treasury management (or treasury operations) includes management of an enterprise's holdings, with the ultimate goal of maximizing the firm's liquidity and mitigating its operational, financial and reputational risk. Treasury Management includes a firm's collections, disbursements, concentration, investment and funding activities. Stripped securities: Stripped securities are securities that have been transformed from a principal amount with periodic interest coupons into a series of zero-coupon bonds, with the range of maturities matching the coupon payment dates and the redemption date of the principal amount. Dilution: A reduction in the ownership percentage of a share of stock caused by the issuance of new stock. When the number of shares outstanding increases, each existing stockholder will own a smaller, or diluted, percentage of the company, making each share less valuable. Vulnerable fund: Customer deposits of which substantial portions perhaps 25 or 30 percent will probably be removed from the bank sometimes during the current period of time. Stable fund: often called core deposit or liabilities. Funds that management considers most unlikely to be removed from the bank. Trend component: Bank can estimate by constructing a trend line using as reference points year end, quarterly or monthly deposit and loan totals established over at the last 10 years. Scalper: A trading strategy that attempts to make many profits on small price changes. A person trading in the equities or options and futures market who holds a position for a very short period of time in an attempt to profit from the bid-ask spread. T-bill: A short-term debt obligation backed by the U.S. government with a maturity of less than one year. ALCO: A risk-management committee in a bank or other lending institution that generally comprises the seniormanagement levels of the institution. Jamal Hossain Shuvo Page 2

Treasury Management (Short Notes)

Out of Money option definition: A call option with a strike price that is higher than the market price of the underlying asset, or a put option with a strike price that is lower than the market price of the underlying asset. An out of the money option has no intrinsic value, but only possesses extrinsic or time value. Asset Management: Asset management refers to a banking strategy where management has control over the allocation of bank assets but believes the banks sources of funds (principally deposits) are outside its control. Liability Management: Liability management is a strategy of control over bank liabilities by varying interest rates offered on borrowed funds. Fund Management: Funds management combines both asset and liability management approaches into a balanced liquidity management strategy. Gap Management: Gap management involves determining the maturity distribution and the repricing schedule for a bank's assets and liabilities. Basis Risk: the risk that changes in interest rates will cause interest-bearing deposit liabilities to re-price at a different rate than interest-bearing assets, creating an asset liability Mismatch. Plain Vanilla Swap: The most basic type of forward claim that is traded in the over-the-counter market between two private parties, usually firms or financial institutions. Wholesale fund: Wholesale funding is a method that banks use in addition to core demand deposits to finance operations and manage risk Swap Spread: The difference between the negotiated and fixed rate of a swap. The spread is determined by characteristics of market supply and creditor worthiness. Runoff cash flow: Runoff cash flow refers to assets that are prepaid before maturity or liabilities that are withdrawn before maturity. Dealing: The business of buying and selling on the Stock Exchange, commodity markets or currency markets Risk indexes: Categories of risk used to calculate fundamental beta, including (1) market variability, (2) earnings variability, (3) low valuation, (4) immaturity and smallness, (5) growth orientation, and (6) financial risk. Operational risk: Probability of loss occurring from the internal inadequacies of a firm or a breakdown in its controls, operations, or procedures. European option: An option that can only be exercised at the end of its life, at its maturity. Refinancing risk: refinancing risk is the possibility that a borrower cannot refinance by borrowing to repay existing debt. The risk that an early unscheduled repayment of principal on mortgage-backed securities (MBS) will occur when the underlying mortgages are refinanced by borrowers.

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