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Transcript of Banking presentation
1
Objectives
At the end of the session you will be able to
•Explain general banking operation
•Demonstrate general understanding on IB products
• Foreign Exchange
• Securities
• Commodities
• Derivatives
2
Why do Banks exist?
• To Provide Financial products and Services
3
Who are clients
Banks
Corporate
Individuals
Deutsche Bank
Citibank
ABN Amro
Deutsche Asset Management
Fund Managers
Multinational
Small / Mid size firms
High Street Banking (Chase Bank) US Only
High Net Worth Individuals (Millionaires / Billionaires)
4
Banking as a Whole
Clients
Includes Auto Finance, Consumer Banking, Home Finance, Insurance and Small Business Banking
Provides mutual fund, insurance & home finance and workplace banking products to consumers and small businesses
One of the world’s leading investment banks
Services provided: Advice on corporate strategy and structure, raising and placing capital, making markets in financial instruments and offering sophisticated risk management services
Provides investment & wealth management services to institutional investors, high net worth individuals & retail customers
Provides personalized advice and solutions to wealthy individuals
Global leader in transaction processing and information services to wholesale clients
Three Businesses: Institutional Trust Services, Investor Services(WSS) and Treasury Services
Major provider of financial services including corporate finance, cash management, & credit
Comprises of five national business segments: Middle Market Banking, Mid-Corporate Banking, Commercial Real Estate, Asset Based Lending and Commercial Leasing
Delivers credit card and other related payment products to cardholders and merchant outlets
Aims to be the preferred payment card in existing customers wallets and to increase access to new customers
Investment Bank
Treasury and Securities Services
Card Services
Asset and
wealth Management
Retail Financial Services
CommercialBanking
5
International Banking Locations
North America
Latin America
EMEA Asia Pacific
6
Banking and Banking operations
Bank is a commercial institution licensed as a receiver of deposits. Banks are mainly concerned with making and receiving payments as well as supplying short-term loans to individuals.
Exists to help you make the most of your money
Assist you with your monetary requirements and promote savings
How do they do it ??
By offering different products and ServicesBanking Services
Deposits Loans Services Capital Market
Short Term Long Term Retail Institutional
Fund based activities, greater market risk
Fee based activities, lesser market risk
E.g.
Savings
Current
Fixed E.g.
Overdraft
E.g.
Auto Loan
Home Loan
E.g.
DDs
Lockers
Bill Pay
E.g.
Bank Guarante
e
Trade Finance
E.g.
DP
Custodian
Merchant Banking
Debenture
Trustees
7
Role of Banks
Intermediary role between lenders and borrowers
• Lenders – Deposits funds with Banks• Liability products (Liability for Banks)
• Borrowers – Borrows funds from Banks• Asset Products (Assets for Banks)
8
Different types of Banks
Types of Banks
Central Bank (RBI)
Non Banking Finance
Companies (NBFCs)
Commercial Banks Term Financial Institutions
State Finance Corporations
(SFCs)Indian Financial
Institutions
E.g.
IFCI
NABARD
SIDBI
Public Sector
Private Sector Foreign Co-
operative Banks
Regional Rural BanksE.g.
SBI
PNB
BOB
E.g.
HDFC Bank
UTI Bank
ICICI Bank
E.g.
Citibank
ABN Amro
HSBC
State/Central Private
Primary Credit
Societies
9
Broad Categories
•Retail Banking
•Whole Sale Banking
10
•Accepting deposits from Public
•Lending money to public
•Remittances/Collection Business
•Keeping valuables in safe custody
•Government business
•Acting as trustee
•Treasury services
•Capital Market activity
Activities of a Bank
11
Capital Markets Overview
Markets – A place where exchange of goods and services happen
Capital Market
•Place where capital (fund) requirements of the issuers are met; i.e. Issuers (Corporate, Government, etc) raise funds
•Trades in these markets are for debt, equity securities or other instruments
•Organized, as they are governed by regulatory bodies [Securities & Exchange Board of India, RBI]
12
Financial Markets
13
Regulator
Underwriters
Merchant Banker / Investment Bank – JPM
Brokers
Exchanges
Custodians
Banks
Depositories
Depositary Participants
R & T Agents
Market Participants
Capital Markets intermediaries
14
SEBI – Securities Board of India
SEC – Securities & Exchange commission (USA)
FSA – Financial Services Authority (UK)
Capital Markets – Regulators
15
Underwriter
•Who underwrites the issue in case of under-subscription; takes the stock in its books
Merchant Banker / Investment Bank
•An underwriter or agent for corporations and municipalities issuing securities
•Maintain broker/dealer operations mostly, maintain markets for previously issued securities
•Offer advisory services to investors
•Large role in facilitating mergers and acquisitions, private equity placements and corporate restructuring
•Do not accept deposits from and provide loans to individuals (Investment Banks, especially)
Capital Markets intermediaries
16
Brokers•An individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor.
•The role of a firm when it acts as an agent for a customer and charges the customer a commission for its services.
Exchanges
•A market in which securities, commodities, options, or futures are traded.
•Although you will mostly trade stocks through a broker
•NSE, BSE, NYSE, NASDAQ, LSE
Capital Markets intermediaries
17
Custodian
An agent, bank, trust company, or other organization which holds and safeguards an individual's, mutual fund's, or investment company's assets for them.
Bank
An organization, usually a corporation, chartered by a state or federal government, which does most or all of the following: receives demand deposits and time deposits, honors instruments drawn on them, and pays interest on them; discounts notes, makes loans, and invests in securities; collects checks, drafts, and notes; certifies depositor's checks; and issues drafts and cashier's checks.
Capital Markets intermediaries
18
Depositories
An institution which facilitates the clearing of securities between the stock exchange & depository participants; holds assets in electronic form on behalf of ultimate beneficiaries
Depository Participant
Any institution like a bank that maintains the dematerialized accounts of beneficiaries, provides services of settling securities traded on the exchange; Agent of Depository
Registrar and Transfer Agents
maintain the records of members (shareholders) for the issuer company
Capital Markets intermediaries
19
Market Participants
Various persons / entities that indulge in buying & selling Examples:
•Qualified Institutional Buyers
•Foreign Institutional Investors, Foreign Venture Capital
•Domestic Institutional Investors - Banks, Financial Institutions, Insurance Companies, Mutual Funds, Venture Capital
•Non - Institutional - High Net worth Clients (E.g. NRI, HUF, Government & Private Corporate bodies)
•Retail Individual Investors
Capital Markets intermediaries
20
Primary Market
Sell (float) new stocks and bonds to the public for the first time. In the primary market the security is purchased directly from the issuer
Secondary Market
Secondary market is where investors trade among themselves. An investor purchases a security from another investor rather than the issuer. Auction market forms a part of this market.
Primary and Secondary Capital Markets
21
Banking Treasury Products
Foreign Exchange
• What is an FX trade
• How does it work
• Why are banks in the in the FX Market
22
Products: Foreign Exchange
Definition: Buying (or selling) of a currency and paying for it with another at an agreed price
(exchange rate) for settlement on an agreed date
Complete the grid of descriptions using the following words
1. Payment Instructions
2. Receiving / receipt Instructions
3. Currencies
4. 2 Counterparties
5. Broker
6. Value date
7. Booked the right way round
8. Amount
9. Exchange rate
10. Trade Date
23
Products: Foreign Exchange
Explanation
Has to be two of these for the exchange to be possible
A numerical figure that shows the value of the trade
The price of one currency expressed in another
The day the trade will settle. i.e. the funds will be debit / credit from / to your account
Shows which currency we are paying and receiving.
Helps to arrange a trade on behalf of others
The entities involved in the trade
The day the deal was agreed
Where we are receiving our currency to?
Where are we paying the currency to?
Trade Date
Receipt Instructions
Payment Instructions
2 Counterparties
Broker
Booked Right Way Round
Value date
Exchange rate
Amount
Currencies
Component
24
Different Trades
• Spot trade: Value date = trade date + 2
• Cash trade: value date = trade date
• Tom trade: Value date = trade date +1
• Forward trade: Value date = trade date +
3(or more)
25
Products: Foreign Exchange
Example
BMWMunich
Gear Box Supplier
USA
Citibank
Supplies gear boxes at agreed price.
BMW need to pay in USD
BMW need to import gearboxes that have been made in the US.
Cost $5,000,000
BMW now need to pay in USD but only have a EURO account
The Solution: Do a Foreign Exchange Trade
Contact Citibank:
Want to Buy $5,000,000.
Will pay for it in EURO’s.
JPMorgan will ask what date they want the currency (Value Date)
JPMorgan will advise the Exchange rate. (How much will $5mio cost in EURO)Rate is 1.27 (Euro 1 = $1.27)
Pay EURO 3,937,008.
Pay USD 5,000,000 to BMW (for Gear Box Supplier)
26
Speculation
Example
JPMC
Microsoft
USA
Microsoft speculates that GBP price will increase from $1.7 to 1.9 in 3 months time
Contact JPMorgan:
Want to Buy GBP 1,000,000.
Will pay for it in
JPMorgan will ask what date they want the currency (Value Date)
JPMorgan will advise the Exchange rate. (How much will GBP5mio cost in USD)Rate is 1.7 (GBP 1 = $1.7)
sell 1.7M USD
buy
GBP1M
Citibank
USA
Sell GBP 1 M
Rec $1.9 M
27
Currencies
What currencies do you know?
Have a name:
Eg United States Dollar, Japanese Yen
Have a 3 figure code
Eg, USD and JPY
28
Price of a currency
• Factors that affect the price of a currency
-Economic e.g. Interest rate, inflation rate
- Political
• Strong currency
• Weak currency
29
WHY FX
• For personal requirement
• For business requirement
• For speculation
30
Commodities
What are Commodities?
Commodities Categories
Example of a trade
Products: Commodities
31
Products: Commodities
What are Commodities?
Review cards and put them into 4 categories
Put a name to the 4 categories
32
Banks trade in Commodities just as they do in currencies.
Commodities are split Into 4 groups:
• Energy – e.g. Gas, Oil
• Base Metals – e.g. Copper, Aluminium
• Precious Metals – e.g. Gold, Silver
• Soft Commodities – e.g. Coffee, Sugar, paper
Products: Commodities
33
What Precious metals do banks trade in?
XAU
XAG
XPT
XPD
Gold
Silver
Platinum
Palladium
(In place of currency codes the chemical elements of the metal are used to identify the metal)
Products: Commodities
34
Example:
SWISS Tony’s Gold
watch Company
JPMorgan
Watch maker requires gold to manufacture watches
Finds a company selling goldAgrees how much Gold
Agree on the price
Agree on Delivery
Want to buy 1,000 oz
Price is $300 per oz
Total Price is $300,000
Deliver Gold
Pay $300,000
Products: Commodities
35
Products: Commodities
Settlement
• Use depositories
• Allocated
• Un allocated
36
Products: Bonds
Bond Trades
What is a Bond?
How does it work?
What role does JPMorgan play?
37
What is a Bond?
Our Products: Bonds
A certificate of debt (usually interest-bearing) that is issued by a government or corporation in order to raise money
The issuer is required to pay a fixed sum annually until maturity and then a fixed sum to repay the principal
Effectively it is a loan. The company who receives the money, issues a Bond with terms and conditions stating when they will pay back interest and principle amount to the lender of the money (Investor)
38
Products: Bonds
Key Terms of a Bond
• Face Value
• Coupon
• Maturity
• Issuer
Nominal Amount
What the Bond is worth when redeemed at maturity
Amount of interest paid to Bond Holder during the life: (e.g. 5% = 5% of Face Value of investment)
Date for coupon payments. Usually 6 monthly (does depend on terms of issuance)
Date the principle amount is paid back to the investor.
Activity: Lets Look at a practical example.
Who Issued the Bond. (Received the money)
39
Bond Issuere.g. A Corporation or
GovernmentInvestor
Pay $1,000,000
Receives Bond
Makes regular payments (Coupons)
Bond maturity pay back $1m
Products: Bonds
Conceptual Example
40
Big Company Ltd
Small Company Inc
1. Big Company Ltd want to buy Small Company Inc.In order to do so it needs to raise capital.The purchase price is $1,000,000
2. Raising capital:In this example, Big Company A looks to borrow money
3. Raising capital:It borrows money by issuing a BOND.
4.Raising capital:An Investor buys the bond. (can be a bank, corporation, Individual etc etc)
Products: Bonds
Conceptual Example
Investor(s)
Pays $1,000,000
Issues Bond(s) to Investors
5. End Result
Big Company Ltd can now finance its purchase of Small Company Inc and will pay the Investors back. How much depends on the bond (loan) terms.
41
Big Company Ltd Investor(s)
Investors hold the Bond until Maturity
Coupons of 5% are paid semi annually by Big Company to Investors.
Products: Bonds
Pay back principle amount (e.g. $1,000,000) at maturity
Conceptual Example
Paid $1,000,000
Coupon payments made every 6 months
for term of bond
10 Year Bond = 20 payments
42
Role of banks in bonds
Products: Bonds
BMWBMW
Want to start design and produce a new model car
Estimate they need EURO 5 million to do this
They chose to raise this capital by issuing a Bond
BMW Contact JPMorgan and appoint them as Lead Manager on Bond Issue
JPMorgan Pay BMW EURO 5 Million and receive Bonds
Issue Bonds into the market
Investors
Bond Buyer
Investors
Bond Buyer
JPMorganJPMorgan
Example
EURO 5 M
Bonds Bonds
EURO 5 MBond
Market
Pay cash Pay cash Pay cash
Receive Bonds
Receive
Bonds
Receive
Bonds
Investors
Bond Buyer
43
Products: Equities
Equity Trades
What is an Equity trade?
How does it work?
What role does JPMorgan play?
44
Products: Equities
Big Company Ltd
Big Company is now looking to expand its operation again and needs to raise cash in order to do this.
The company decides it will raise the cash by selling shares
Will Issue IPO.
Bank
It uses a bank to advise how to do this
45
Big Company LtdBank
Products: Equities
Bank will:
• Assist with company valuation
• Can under-write shares
• Advise on timing
• Advise on how much of company to sell
Advertise the IPO
Potential investors contact bank and register their interest
Investors
46
Current Share holders
Investor
Investor
Investor
Investor
Investor
InvestorInvesto
rInvesto
r
Products: Equities
Secondary Market
Stock Exchange(Including
Stock Brokers)
47
Investor
Investor
Investor
Investor
Investor
InvestorInvesto
rInvesto
r
Products: Equities
Stock Exchange(Including
Stock Brokers)
Big Company Ltd
Secondary Market
48
Products: Equities
How do banks participate in the Equities market?
Client A
Client A, wants to buy shares in Big Company Ltd
JPMorgan(JPMSL)
They contact JPMorgan with the details of their requirements
Stock Exchange
JPMorgan trader contacts Stock Exchange.Wants to Buy 500 shares
Current Shareholder
Stock Broker
JPMorgan and Stock Broker agree price and
terms through the Stock Exchange
Through Stock Exchange JPMorgan will source a seller of the Shares.
A price will be agreed
€20 per share
49
Share name
Number of shares
Price of share
Buying or Selling
Currency paying
Trade date
Value date
Payment details
Products: Equities
What are we looking to confirm?
Big Company Ltd
500
EURO €20
Buying Shares
EURO
13th October 2005
15th October 2005 (T +2)
Where to pay shares and cash to
(from both parties)
Activity
50
Products: Settling through clearing house
Payments: How do they get made?
JPMorgan
Current Shareholder
BNP Frankfurt
Citibank Frankfurt
JPMorgan and Client send instructions to their Agents.
Details of the trade and when to settle
Share A/C EURO Cash a/c
JPMorgan a/c
Current Shareholder a/c
The trade will then settle across the Kassenverein Central Depository.
Delivery versus Payment (DVP)
€10,000
€10,000500
500
Trades can settle over a central depository
Before Payment
After PaymentThe Shares are now transferred to JPMorgan’s a/c within KassenvereinThey will hold shares on behalf of their client
Original Big Company Share Holder, now has €10,000
Central Depository
e.g. Kassenverein
51
Types of Shares
• Ordinary Share – These shares give the investor the right to a dividend, if declared. Should the company go into liquidation, then holders of this class of share holds the
lowest priority of repayment.
• Deferred Ordinary share- These give shareholders additional voting rights or the right to higher dividends. Often these shares will not qualify for dividend until a particular date has been reached or the company profit has reached a pre- determined.
• Golden Shares – These shares are designed to allow the shareholders the right to a casting vote. In cases of privatization, the government often held golden shares. This allowed them to have the casting vote if required, as a form of control, during take-over bids or other serious matters. These shares are normally used in UK.
• Preference Shares – These shares form part of the share capital of the company. They pay fixed dividend and in the event of liquidation they hold preference
52
Differences
• Bonds Vs Equities
53
Derivative Trades
What is a Derivative?
How does it work?
What role does JPMorgan play?
Products: Derivatives
54
Products: Derivatives
Definition
A security, such as an Option or Futures contract, whose value depends on the performance of an underlying product.
Derivative in itself is not a product, it does however rely on an underlying product for its market value.
For this course we will look at 3 derivative examples
• Futures
• Options
• Single Currency Interest Rate Swap
55
Futures
What is a Future?
How does it work?
Products: Derivatives
56
Products: Derivatives
Futures
Definition
Standardised exchange-traded contract to buy or sell a commodity at an agreed price for settlement or delivery on an agreed future date
How does it work
57
Products: Derivatives
Futures
UK PotatoFarmer
UK PotatoFarmer
• Has crop of potatoes
• Ready to sell in 6 months
What can happen in the 6 months before the potatoes are ready?
• Potato Supplies worldwide except UK could fail
• In 5 months time there is a scare about effect of potatoes on health
• Supply remains stable with no impact on current prices
58
Products: Derivatives
Futures
What can happen in the 6 months before the potatoes are ready?
Risks:
• Crop could fail
• Price movement
Controls:
• Insurance
• Agree buyer now at agreed price (Future trade)
59
Products: Derivatives
Futures
Futures
Exchange
Supermarket
Supermarket
UK PotatoFarmer
UK PotatoFarmer
Farmer enters into a Futures contract
Using the Futures Exchange
Seller: UK Potato Farmer
Buyer: Supermarket
Product: Grade A Potatoes
Price: £5 / sack
Quantity: 5,000 Sacks
Delivery: 5th June 2005
Total Price: £25,000
Future Contract
Agree to sell potatoes
Agree to buy potatoes
Finds a buyer for potatoes
Agrees a price
Agrees a delivery date
60
Products: Derivatives
Futures
June 5th 2005
• Farmer will deliver potatoes to Supermarket through Exchange
• Supermarket will pay Farmer through Exchange
• Farmer has guaranteed income (providing crop doesn’t fail – insurance would cover this)
This agreement means the Farmer has an obligation to deliver potatoes on this date and Supermarket has an obligation to pay farmer the agreed price. All this happens via Exchange
61
Products: Derivatives
Options
What is an Option?
How does it work?
62
Products: Derivatives
The buyer has the right, but not the obligation to buy or sell the underlying product at an agreed price on an agreed date
The buyer pays a premium to the seller have this right.
Definition
Let’s look at an FX Option
Options
Page 45-49 in Workbook
63
FX Option
Products: Derivatives
Big Company USA
Big Company USA
Computer R Us UK(CRUUK)
Computer R Us UK(CRUUK)
Big Company has ordered a supply of computer components from CRUUK (Computer R Us UK)
Computer R Us UK will deliver the computer equipment in 3 months time
This will cost Big Company Ltd GBP 1,000,000. in 3 months
What needs to happen
To Pay for this order Big Company will have to do a Foreign Exchange trade.
They need to buy GBP 1,000,000 (to pay CRUUK)
And pay for it with USD
Have to pay
£1,000,000
Deliver Computer
Components in 3
months
Page 45-49 in Workbook
64
FX Option
Products: Derivatives
What choices does Big Company Ltd have?
• Buy the £’s via a forward FX trade (arrange today value 3 months)
• Buy the £’s in 3 months – spot trade (exchange rate unknown until 3 months)
• Do an FX Option
Page 45-49 in Workbook
65
FX Option
Products: Derivatives
Big Company Ltd decide to use an FX Option
Why?
• Want to know state of cash flows (now and future)
• FX Option will limit any exchange rate movements
Page 45-49 in Workbook
66
FX Option
Products: Derivatives
How does it work?
Buyer: Big Company
Seller: JPMorgan
FX Option Details
Call: GBP: 1,000,000
Put: USD: 1,500,000
Strike Price 1.5
Expiry Date 5th March 2004
Delivery date 7th March 2004
Premium: $5000
Big Company (USA)
Big Company (USA)
JPMorganJPMorgan
On January 5th 2004
Big Company contact JPMorgan
Big Company agree to buy an FX Option from JPMorgan.
This Option gives them the right but NOT the obligation to use this trade on the delivery date
The FX OptionBought By
To have this right but not obligation Big
Company pay JPMorgan a premium
Page 45-49 in Workbook
67
FX Option
Products: Derivatives
Buyer: Big Company
Seller: JPMorgan
FX Option Details
Call: GBP: 1,000,000
Put: USD: 1,500,000
Strike Price 1.5
Expiry Date 5th March 2004
Delivery date 7th March 2004
Premium: $5000
Big company now have the right to use [exercise] this trade for settlement on March 7th
The FX OptionWhat are the key dates?
Expiry Date:
Date that Big Company have to decide whether to exercise the Option
Delivery Date:
Date that transfer of funds would occur if Big Company Ltd exercise this Option
Other FX Option Components
Call:
Currency that the buyer of the Option would receive
Put:
Currency that the buyer of the Option would sell
Strike:
Exchange Rate that would be used if Option is exercised
Page 45-49 in Workbook
68
Products: Derivatives
FX Option
Buyer: Big Company
Seller: JPMorgan
FX Option Details
Call: GBP: 1,000,000
Put: USD: 1,500,000
Strike Price 1.5
Expiry Date 5th March 2004
Delivery date 7th March 2004
Premium: $5000
The FX Option
How do Big company know whether to exercise the Option?
On 5th March
• Look at current FX [Spot] rate
• If they used the spot rate (Not the Option Strike rate) how much would it cost to buy the £1,000,000?
• Would it be cheaper to use the Spot rate and let the Option expire or…
• Use the Option because the spot price in market would cost more in USD.
Lets look at possible choices Big Company Could make
Page 45-49 in Workbook
69
Buyer: Big Company
Seller: JPMorgan
FX Option Details
Call: GBP: 1,000,000
Put: USD: 1,500,000
Strike Price 1.5
Expiry Date 5th March 2004
Delivery date 7th March 2004
Premium: $5000
The FX Option
Products: Derivatives
FX Option
RATE WouldCOST in USD
To buy £1,000,000 on Spot Market
1.3
1.7
Exercise Option
If SPOT Rate
If SPOT Rate $1,300,000
$1,700,000
5th March
To Buy £1,000,000. using the FX Option would cost:?
$1,500,000
NO
YES
Remember: Big Company bought the Option 3 months ago So wouldn’t know what the rates would be today. Buying the Option limits the cost of the Computer purchases to a maximum of $1,500,000. (plus the $5000 premium)
Page 45-49 in Workbook
70
‘In’, ‘At’ or ‘Out Of’ the Money?
Cost
in
USD
Foreign Exchange Spot Rate
1.3 1.5 1.7
$1,700,000
$1,500,000
$1,300,000
Products: Derivatives
FX Option: To buy £1,000,000
Out of the Money
At the Money
In the Money
Page 45-49 in Workbook