The Maverick Treasurer - Sep 2016 ( PDF Version )

The Maverick Treasurer – September 2016 Edition

Treasury Consulting LLP 1 | P a g e



Welcome Readers!!

Welcome to the September 2016 edition of “The Maverick Treasurer”. A Magazine which talks about

Treasury & Foreign Exchange Risk Management, Derivatives & Currency Trading, Interest Rates

Derivatives, Fixed Income Markets (Debt Markets, Money Markets, Capital Markets), Valuation of

Derivatives Instruments, Central Bank Policy Actions, Hedge Accounting (US GaaP, IFRS, IAS, Indian

GaaP, IND-AS), Guidance towards International Accounting Standards, Trading tips pertaining to

variety of assets classes covering both Onshore and Offshore Treasury Markets which in turn would

sink with Proprietary Trading Desk of “ Foreign Exchange Maverick Thinkers”

Editorial Desk of “ The Maverick Treasurer “ would always keep looking at issues which are very

sensitive in Foreign Exchange Markets and in turn would be having Financial Impact ( Balance Sheet

, Profit & Loss Account , Cash Flow Statements ) for both Exporters and Importers.

Editorial Desk of the Magazine would always try to present unseen faces of the Foreign Exchange

Markets and update Chief Executive Officers, Chief Financial Officers, Corporate Treasurers, Private

Sector Bankers, Public Sector Bankers, Financial Controllers, Officers of Banks Oversight Functions,

and Foreign Exchange Traders via Global presence of our Brand – “Foreign Exchange Maverick

Thinkers” having presence across the Globe (Covering all Electronic Platforms)

In Sep 2016 edition Editorial Desk would be covering important aspects of 6 International

Currencies like AUD/USD, NZD/USD, GBP/USD, USD/JPY, EUR/USD, and USD/INR. Editorial Desk

would be covering valuation of all 6 Currency Pairs till 1 Years period where by comparing covering

Plain Vanilla Forwards Contracts vs Options Derivatives Contracts for both Exporters and Importers

using Buy Put and Buy Call Contracts respectively.

At the same time “Financial Derivatives & Analytics “section of the Magazine would be covering

valuation of Derivatives Instruments for both Exporters as well as Importers. During Sep 2016

edition “Financial Derivatives & Analytics “would be targeting both Exporters and Importers

covering variety of derivatives which can be a part of their hedging program.

“ The Maverick Treasurer” also having exclusively Treasury Club on Pan India and Asia basis titled

“Mavericks Club” for all Chief Executive Officers, Chief Financial Officers, Corporate Treasurers,

Private Sector Bankers, Public Sector Bankers, Financial Controllers, Officers of Banks Oversight

By: - Rahul Magan

Chief Executive Officer, Treasury Consulting LLP

Country Director, International Institute of Certified Investigation Professionals, Inc.

Country Director, Association of Certified Forensic Accounting Professionals

91-9899242978, Skype ~ Rahul5327, Twitter @ Rahulmagan8



Circulation of the Magazine

Magazine is intended to circulate at following places across the Globe keeping following prices:-

India – Rs 60

Australia – AUD 10

New Zealand – NZD 10

Singapore SGD 10

Canada – CAD 10

United States – USD 10

London – GBP 15

European Union – Euro 15 ##

Tokyo – JPY 1200

Hong Kong – HKD 35

## Prices would vary from Country to Country in European Union like London, Luxembourg,

Frankfurt, Germany, Munich, France, Denmark, Sweden, Portugal, Italy, Ireland, Greece, Scotland

and respective countries of European Union.

Future Course of “The Maverick Treasurer “:-

Magazine is also hitting biggest E-Commerce Platforms like AMAZON, Alibaba, E Bay, Flipkart,

Snap deal over the time. In next 2 months of time frame “The Maverick Treasurer “would be

available on all E Commerce platforms across the Globe.

We would also be launching print version of “The Maverick Treasurer “soon within India. In next

1 Years we would be launching print version of the Magazine across all platforms across the

Globe.

Digital Marketing of the Magazine:-

Digital Marketing of the Magazine would soon start on respective platforms across the Globe. In

such platforms Magazine would be available in Digital format to all the readers.

Best,

Rahul Magan


Country Director, International Institute of Certified Forensics Investigation Professionals Inc.

Country Director, Association of Certified Forensics Accounting Professionals

91-9899242978, Skype Connect ~ Rahul5327, Twitter @ Rahulmagan8



The Maverick Treasurer (Sep 2016) – Table of Contents

Particulars Page No

Global Economic Review by Editorial Desk 5

Valuation of Currencies Australian Dollar (AUD) 6 New Zealand Dollar (NZD) 7 Swiss Franc (CHF) 8 Great Britain Pound (GBP) 9 Death of Mark to Market (MTM) Accounting – Credit Risk Adjustment 10 China to create Credit Default Market (CDS Market) 12 Deutsche is in a mess and still cooking Derivatives?? 13 Rising LIBOR – Hedging Cost for Chinese Companies 14 Fed Rates – Prospects for USD/INR Carry 15 Indian Masala Bonds – Failure or Opportunity 16 Forecast of Currencies ~Year 2017 ( Quarter on Quarter ) 17 IND-AS – Hedge Accounting as per IND-AS Upcoming Trainings Programs of “ Treasury Consulting LLP “ 18 Profile of Rahul Magan 19 Profile of Treasury Consulting LLP 19 Treasury Consulting LLP – You Tube Club 20 Treasury Consulting LLP Club – “ The Mavericks “ 21



Global Economic Review by Editorial Desk

As predicted Year 2016 turning out to be more volatile than expected. Traders across the Globe

are reshuffling their Portfolios every second day as to mitigate the impact of rising implied vols

in their portfolios. Traders would enjoy this more as this would lead to big earnings in their books

which is in sync with the great say that Volatility rises so would be the earnings of Traders.

Traders are very much concerned about VAR (Value at Risk) of their portfolio and how they would

be able to take cross hedge against such VAR number as to remain profitable for longer tenors ??

The most important topic as per Editorial Desk is NIRP (Negative Interest Rate Policy). Sitting

today more than $ 20 Trillion of Sovereign National is having NIRP. In that sense investors are

not earning rather than paying to the Sovereign. This month we had two big sessions of Central

Banks like Bank of Japan (BOJ) and Federal Reserve (FED) where by former is still saying that he

would continue with Negative Interest Rate of 10 Bps while Fed has not given any guidance of

hike in the Interest Rates.

Editorial Desk would also agree with the thoughts that if Fed would hike rates then Indian

Rupee would move towards Reverse Carry. In that sense INR may head towards sharp

depreciation as there are many currencies across the Globe who are offering highest carry like

Australian Dollar, Singapore Dollar, and Indonesian Rupiah as an Investment Carry.

The most important point is the statement by Japanese Central Bank Kuroda that Japan is having

more room for QE which makes things worse for Fixed Income Markets. Sep 2016 edition would

also cover as De facto, the real action is likely to be coming out of Tokyo, where speculation is rife

for a possible rate cut (deeper into negative territory), an extension of the ongoing asset purchase

program and above all, a possible tapering in overall purchases of long-dated bonds (JGBs) to

encourage steepening of the yield curve in Japan matched by lower yields at the shortened.

There were no surprises from the US Fed as it held rates steady in its policy meeting and appeared

to prep the markets for a rate hike in its December policy. Fed chair Janet Yellen’s comment at a

post-policy press –conference succinctly captured her stance. ‘"We judged that the case for an

increase has strengthened but decided for the time being to wait. The economy has a little more

room to run."

Advice from Editorial Desk: - Traders are advised to keep an absolute look at the volatility levels

in their Portfolio. Sitting today crosses are turning more volatile than straight Direct and Indirect

Pairs in the Foreign Exchange Markets. Central Banks left with either little or no fire power to

douse the fire of Global Recession which is round the corner so be careful mates!!

All the Best,

Rahul Magan


Founder & Chief Editor, “The Maverick Treasurer”

91-9899242978, Skype ~ Rahul5327, Twitter @Rahulmagan8

www.treasuryconsulting.in

http://www.treasuryconsulting.in/



Valuation of a Commodity Currency – Australian Dollar (AUD)

As we understand that valuation of Commodities are at historic low specially OIL. We also

understand that world financial system is dominated by five Commodities Currencies which are

Australian Dollar, New Zealand Dollar, Canadian Dollar, Russian Rubble and NOK. Over the

period one proxy Commodity Currency taken over which is Chinese Yuan or RMB. China is

always having a deep impact on the valuation of Commodities as Commodities Currencies. World

financial system tested the same number of times.

Australian Dollar is also facing lots of issues like Central Bank of Australia is now having overnight

rate of 1.5%. Australia is also following deep Accommodative Monetary Policy post deep losses

and mining business.

Arcellor Mittal has done with Impairment of $ 4.9 Billion of Intangibles in their books for the Year

2015 on Account of low Commodities prices and extreme fall in the valuation of Commodities.

Much more impairments on the way in the books of other Commodities Companies. Today OIL

Companies are sitting on huge Foreign Currency debt while the ability to payback is very less as

Cash Flows are getting hurt as not to mention OIL is trading at $ 40/Barrel.

Important Points to Ponder about Australian Dollar:-

1. Australian Dollar appreciated 7.3% between May and August 2016 in spite of several

headwinds.

2. As per S&P Australia would lose AAA Credit Ratings soon if they would continue would

Accommodative Monetary Policy. If Australian would continue with Accommodative

Monetary Policy then Australian Dollar would lose AAA Status.

3. As per Editorial Desk Australian Dollar would trade at .70 levels during H2 of 2017

henceforth Exporters are advised to cover their exposures using Options Contracts.

4. Brexit won’t have any impact on the Australian Dollar as Aussie would continue to have a

status of Carry Currency.

5. Aussie would soon decide whether to follow CNY Status who is now a part of SDR Basket or

continue with USD. Sitting today Australian Central Bank signed a Cross Currency

agreement with Chinese Central Bank PBOC.

6. Economy is also growing at annualised rate of 3% on Quarterly basis which is still highest

as regards developed world is concerned.

Advice for Exporters and Importers:-

As we understand that Commodities Prices are at Historic low while at the same time we also

understand that Forwards Premiums of all major G7 Currencies are falling specially all direct

pairs like AUD/USD, NZD/USD, GBP/USD and EUR/USD.

Editorial Desk is advising all Exporters and Importers to hedge their Exposures in their books

using mix of Forwards as well as Options Contracts. Both Exporters and Importers are advised to

hedge their Cash Flow, Fair Value and Net Investment Exposures using Options Contracts as

Forwards Premiums are almost zero for Australian Dollar till 1 Year which is very unique in

Foreign Exchange Markets as AUD is a carry Currency.



Valuation a Commodity Currency – New Zealand Dollar (NZD)

As we understand that valuation of Commodities are at historic low specially OIL. We also

understand that world financial system is dominated by five Commodities Currencies which are

Australian Dollar, New Zealand Dollar, Canadian Dollar, Russian Rubble and NOK. Over the

period one proxy Commodity Currency taken over which is Chinese Yuan or RMB. China is

always having a deep impact on the valuation of Commodities as well as Commodities Currencies.

World financial system test the same number of times.

Important Points to Ponder about New Zealand Dollar:-

1. New Zealand dollar is falling and currently trading at .6794 against a dollar.

2. Weaker CPI print for Q4 2015 and falling Fonterra dairy process alongside dovish thoughts

of RBNZ (Reserve Bank of New Zealand) not sounding well for NZD.

3. Editorial Desk is expecting Global and Domestic factors would continue to weight on NZD.

4. The RBNZ still favours a weaker currency given a direct pair and ongoing weakness in the

dairy exports. Falling NZD is good for exporters having $ Receivables while not good for

importers having $ payables as an exposure.

5. Movement in the Chinese Yuan and alongside fixing issues of CNY would continue to haunt

NZD and there is a great probability that NZD would fall down to .65 levels.

6. Markets forces like Banks and Financial Institutions are expecting to see NZD at .59 levels

till Q4 2016 however we should not forget that both Australian as well as NZD dependent

upon Commodities Valuations as well as CNY shocks.

7. Editorial Desk is having of view of shorting of NZD vs USD using Options Structures

8. Forwards Premiums are almost zero in case of NZD which effectively means that Traders

are getting spot neutral for both Australian and New Zealand Dollar.


There are lots of exporters as well as importers who are having Foreign Currency Exposures in

the books. There are many Traders who are having AUD/NZD as a cross in their books henceforth

they are bound to face the volatility so as the $ impact in the books.

Exporters are Importers are advised to hedge their Foreign Currency Receivables and Payables

using Options Contracts as both Australian and New Zealand Dollar are getting spot neutral

henceforth mix of Forwards and Options Derivatives Contracts are useful to hedge your

exposures and if required then use Options Structures as well.

Editorial Desk understand that not easy for Corporate Treasurers, Traders to hedge their

exposures using Forwards Contracts henceforth advising all Corporate Treasurers as well as

Traders to hedge their Foreign Currency Exposures using Forwards Contracts, Options Contracts

and Cost Reduction Structures. At the same time Editorial Desk also recommending to update

your Risk Management Policy (RMP) whether you are Corporate, Hedge Funds, Fixed Income, and

Interbank Trader to capture all movements in the volatility of NZD.



Valuation of a Risk off Currency – Swiss Franc (CHF)

Swiss Franc is amongst the most volatile currency pairs in the Foreign Exchange world. Swiss

Franc is largely known as an American Ally which effectively means valuation of CHF would

largely be dependent upon USD movement or movement in USD Index also known as USDX. In

the last few weeks we saw consistent decline in USDX so as the valuation of CHF. As a Trader one

should remember that CHF is also known as Risk off Currency which effectively means it would

turn more volatile when markets are turning Risk off like now a days. Editorial Desk is certainly

evaluating whether markets are facing Structural Risk Off vs Frictional Risk Off.

Important Points to Ponder about Swiss Franc:-

1. In the last few weeks Swiss Franc registered over valuation which effectively means like all

indirect Pairs are falling while Swiss Franc is at .98 levels. Traders are advised to adjust their

Portfolios as Swiss Franc would see fall in the valuations.

2. Accommodative Monetary policy by ECB would surely have an Impact on CHF in long term

however Traders need to carefully watch the same.

3. Jan 2016 marked the second occasion in less than 6 months when markets fall across the

Globe and thanks to China but Swiss Franc valuation were intact. The reason is as China

would fall USD importance to act as a safe haven Currency would rise.

4. The key factor for the break in the link between the CHF and broader global market

developments has been the evolution of Capital Flows.

5. CHF is also known as Risk Off currency which effectively means would get high volatile when

markets turn huge volatile ~ Structural vs Frictional Risk Off.

6. In a recent speech SNB vice president once again emphasized that the SNB has not been seen

as typical safe haven flows into the Swiss economy in recent months.

7. Adaptation of Negative Interest Rates by various Central banks also matters for CHF into

longer tenors.


CHF is not all about Exporters Receivables and Importers Payables but about trading positions

with or without crosses by Traders across the Globe. There are many crosses of CHF which

matters for the Foreign Exchange Markers also known as Volatility Gauges like AUD/CHF,

JPY/CHF, EUR/CHF, and GBP/CHF and respective. As Traders understand that majority of the

Currency pairs are getting spot neutral henceforth Traders are advised to place their Trades in a

best way like they should use mix of Forwards, Options, Cost Reduction Structures and respective

to hedge their exposures. Alongside Traders are advised to have a detailed look at Portfolio VAR

as well.

Currencies 1M Implied Vols 3M Implied Vols 9M Implied Vols 1Y Implied Vols EUR/CHF 6.1 % 7.5 % 7.5 % 8.6 % GBP/CHF 13.3 % 12.5 % 14.2 % 13.3 % USD/CHF 11.8 % 11.0 % 11.7 % 11.7 %

See Volatility levels in CHF (Risk off Currency or An American Ally)



European Union Currencies – Great Britain Pound (GBP)

As we understand that UK is facing the biggest question which is whether to continue with

European Union or exit?? However at the same time Growth prospects of GBP also not sounding

very good. As a Trader we can certainly see the same on valuation of Currency as well as volatility

levels in our portfolio.

There was the time when GBP was trading over 1.61 levels which effectively means 1 GBP was

equal to 1.61 $ however over the period many issues somewhat relates to Global headwinds till

Brexit took GBP to 1.22 levels or probably lower as the time would come.

Important Points to Ponder about Great Britain Pound:-

1. The near term impact on the Growth elsewhere in the EU seems relatively clear.

Heightened uncertainty after an exit vote would weigh on sentiment and spending in UK,

and add a risk premium to UK assets. As a consequence Sterling would fall which is

happening and may trade at 1.35 levels as well.

2. These developments would have negative impact for EU. As per estimates 10% decline in

Sterling means Euro would appreciated by 1.3% on trade weighted terms.

3. ECB (European Central Bank) first response statement is likely to be a statement that it is

closely monitoring the impact of the vote on financial markets and its implications on

Growth and Inflation.

4. It would not take long for ECB to intervene in stressed assets markets with variety of

liquidity provisions targeting Banks and Assets purchases however at the same time ECB

to look at its balance sheet as well before making any decision.

5. The medium term impact of Brexit is very uncertain. Much will depend on relationship

between UK and EU. Regardless of what the final relationship looks like the intervening

Month of uncertainty during the negotiations would surely have an impact on trade flows.

6. The UK overall deficit on the trade with rest of the EU is well known as it is a fact that net

migration flows have tended to see significant inflow in UK economy.

7. The UK openness and history as a financial centre has contributed to an enlarged balance

sheet relative to the flows however as UK exits would have an impact on the UK as a global

financial centre.

Advice for Exporters and Importers: - Exporters as well as Importers are advised to hedge their

Receivables as well as payables using mix of Forwards, Options and Options Structures. Traders

are advised to keep Implied Vols levels in mind while placing trades in GBP or GBP crosses.

Volatility Gauges 1M Implied Vols 3M Implied Vols 9M Implied Vols 1Y Implied Vols EUR/GBP 12.8 % 11.8% 13.2% 12.4% GBP/AUD 13.2% 13.2% 15.3% 14.7% GBP/JPY 19.5% 17.7% 18.7% 17.2%

See Volatility levels in GBP during talks of Brexit. Don’t under estimate

potential impact of Brexit on GBP.



“Death of Mark to Market (M2M) Accounting - Credit Risk Adjustment (CRA)"

As we understand that Derivatives are norm of the day and majority of the Corporations,

Banks are sitting on $ Trillions of Derivatives where by some are hedged and some are not. Day

in day out they are facing the impact of volatility pertaining to movement of Foreign Exchange in

their Books.

Every time when we close books we need to revalue these derivatives for unrealized period and

here comes Mark to Market (M2M) Accounting. Globally Banks, Corporations, Financial

Institutions, Hedge Funds are doing M2M Accounting using Financial Standards like IFRS, US

GAAP. According to Accounting Standards FAS 133, FAS 157 (US GAAP), IFRS 9, 13 (IFRS)

are offering several Hedge Accounting Methods, Valuation Hierarchies to compute M2M of the

Derivatives Instruments.

As regards Valuation Hierarchies are concerned then we are having three options:-

Mark to Market - L1 Mark to Matrix - L2 Mark to Model - L3

In majority of the cases M2M is computed using L1 where by 100% of the Inputs are markets

based and no inputs from Derivatives holder and considering the fact that FX Mkts ate facing huge

volatility henceforth valuation of the Derivatives Instruments don’t consider Implied Volatility

and even majority of the models are 100% obsolete in nature. In that sense M2M Accounting is

not going great and there is a credible doubt towards the valuation of M2M Accounting?? We think

so??

One important aspect where M2M Accounting is getting flawed is Valuation of Credit Risk which

effectively means to take the impact of Credit Risk in the books. Today no Accounting Standard

like IFRS, US GAAP offers valuation of Credit Risk while doing M2M Accounting henceforth Basel

III is stressing on Valuation Adjustments. Today we are having variety of Valuation Adjustments

which helps you measure Credit Risk like and don't forget all of them are having Earnings Surprise

Credit Valuation Adjustment (CVA) Debit Valuation Adjustment (DVA) Funding Valuation Adjustment (FVA) Collateral Valuation Adjustment (COLVA/OIS) Capital Valuation Adjustment (KVA) Margin Valuation Adjustment (MVA)

Considering the fact that more than $ 13 Trillion of Sovereign Risk is having Negative Interest

Rate Policy (NIRP). We should not forget that Banks are also facing Credit Crisis like Deutsche

Bank, Italian Banks, and US Banks. Even PIIGS are still facing Default Risk henceforth Valuation

Adjustments are very important and should not be ignored.

These Valuation Adjustments would help you getting the valuation of Credit Risk in your Books.

Sitting today all Banks across the Globe are having dedicated desks computing Impact of all

aforesaid Valuation Adjustments as per Basel III.



Impact of Valuation Adjustment is hitting P&L henceforth termed as earnings surprise for

Corporations as well Banks. Considering the same Accounting Standards are left with 2 Options

either give great stress to Valuation Adjustments and that too link the same in Other

Comprehensive Income (OCI) vs earnings surprise today or continue with present set up where

by more emphasis on M2M Accounting and no on Credit Risk.

If over the period we would continue with M2M Accounting and giving complete ignorance to

Credit Valuation then such Accounting Standards could be worthless.



China to create Credit Default Market (CDS Market)

China has given the go-ahead to the use of financial products that can protect investors against bond or loan defaults, signaling an increased willingness to let market forces deal with the rising number of companies that are not paying back debt. In that regards third biggest Interbank Bond Market in the world which is CIBM would get a great push from the Government to develop CDS Market. This would also having positive impact on the CNY especially when CNY is heading towards SDR Currency effective Oct 2016.

The move means that Chinese investors will for the first time be able to buy products such as credit default swaps known as CDS and over the period we may expect better products like First name CDS, Second name CDS, First Tigger CDS, Second Trigger CDS , Total Return Swaps (TRS), Overnight Index Swaps (OIS). , CDS with underlying also known as Assets Swaps, CDS without underlying known as Naked CDS.

The National Association of Financial Market Institutional Investors, an industry body backed by China’s central bank, announced the rollout of four different types of so-called “credit risk mitigation tools” and released guidelines for each of them in CIBM.

Take an Example: - An Investor is having shares of Lenovo having valuation of $ 100 Million sitting today and day after you are getting an announcement that Lenovo is willing to sell PC Business to Microsoft. With this Lenovo shares fell by 80% and reaching towards default. Had Investor taken CDS on Lenovo he would have saved his investments. Every CDS would have 2 parts which is Reference Obligation and Payments Obligation. In this example Reference Obligation is Lenovo Equity while Payment Obligation is Cash amounting $ 100 Million.

Following years of rapid buildup of public- and private-sector debt, China’s financial system is coming under increased strain. There have been 45 defaults totaling around 26.81 billion yuan ($4.02 billion) in China’s domestic bond market this year, already exceeding the 20 defaults worth 12 billion yuan in all of 2015.With the permission of having CDS Chinese Investors would be able to save their Investments from Defaults or Situations like Default. Across the Globe countries like United States, Japan, United Kingdom, Singapore who also acts an Offshore Treasury Centers are having developed CDS Markets so if China who is also promoting Shanghai as a Regional Treasury Center (RTC) have to have develop a great Default Swaps Markets in the Country.

As per Research available more than 40 Defaults happened in China during 2016. In the absence of a right sized CDS markets all of the investors must have lost their money.

As per Treasury Consulting LLP CDS market is also very important because it is also sinked with Fixed Income Markets of the Country. As we understand that China is having 3rd largest Bond Market in the Globe known as China Interbank Bond Market (CIBM) having size of ~$ 4 Trillion and growing.

If China to move towards size of Tokyo markets which is $ 10 Trillion, US which is of $ 15 Trillion then CDS Market is must for China.

By: - Rahul Magan, Chief Executive Officer, Treasury Consulting LLP



Deutsche Bank is in a Mess and still cooking Derivatives??

Deutsche Bank is under deep mess as it has been asked by Department of Justice (DoJ) to pay $14 billion to settle possible claims connected with the underwriting and sale of residential mortgage-

backed securities (RMBSs) between 2005 and 2007. This is much bigger than Deutsche is expecting

to pay to US Authorities.

American banks have settled with the DoJ for smaller amounts like $3.2 billion (Morgan Stanley), $16.7 billion (Bank of America) and much smaller sums with the Federal Housing Finance Agency (FHFA). Deutsche, which settled with the FHFA for $1.9 billion in 2013, insists that it will not pay anything near to what the DoJ has asked for, and it surely won’t. Citigroup, which reached an RMBS deal with the department in 2014, reportedly haggled its way from $12 billion to $7 billion.

John Cryan, the chief executive for the past 14 months, scrapped the dividend and has told

shareholders to expect nothing (and no profits) in 2016. After the shares’ latest tumble, Deutsche

trades at around a quarter of the net book value of its assets. The price of five-year credit-default

swaps (a form of insurance against default) on its senior debt is well above that paid by Europe’s other

leading banks.

Deutsche’s ratio of equity to risk-weighted assets, an important measure of a bank’s resilience, was

10.8% at the end of June, weaker than its peers’. Mr Cryan intends to raise it to 12.5% by 2018. With

risk-weighted assets of around €400 billion, that 1.7% gap works out at nearly €7 Billion.

Deutsche Bank’s notional derivatives book had huge swings in notional value between its year-end 2014 report and its “passion to perform” year-end 2015 report. Deutsche Bank did not list the notional

value of its derivatives book in its 2016 Quarterly Report.

The bank would like us to take it on faith, that the positive value of its derivatives book is €615 billion

while the net positive value of its book is around €18 billion. There is a great possibility that Deutsche

Bank is cooking Notional Valuation of Derivatives using Hedge Accounting. The biggest point to

understand here is How Deutsche Bank using respective Accounting Standards like US GAAP, IFRS.

It seems that Auditors are also playing key role in that regards??


https://www.db.com/ir/en/download/FDS_4Q2015_11_03_2016.pdf

https://www.db.com/ir/en/download/FDS_2Q2016.pdf



Rising LIBOR – Hedging Cost of Chinese Companies

Today we are living in very exciting times when Bond Traders keep guessing whether Federal Reserve would rise rates or not. Last Friday we saw biggest drop in the US Stock markets where by Traders lost the hope of having risen in the rates by Federal Reserve and subsequently UST yields started rising as Traders expecting Volatility in UST Trading.

Rise or no rise LIBOR is inching up. LIBOR is London Interbank Offered Rates. It is the rate at which one bank would go for unsecured funding to other Bank. Sitting today LIBOR is published in 5 Currencies and 15 Denominations which is ON, Spot, Tom, 1 Day till 1 Years. As Libor is getting rising so is the cost of hedging of Foreign Currency Receivables, Payables, Loans specially Syndicated Funding, Leveraged Buyouts, Structured Debt in the books of Corporates who are not yet hedged.

According to a Research published immediately during the period of LIBOR Scandal where by all US, European Banks played key role. LIBOR served as key benchmark for $ 1700 Trillion of Derivatives across the Globe. As a Trader you can very well estimate the Mark to Market (MTM) impact in the books of Banks what if Libor would move by 1 Bps which is 01%??

As per the research available in the markets Chinese Companies are having $ 685 Billion of Foreign Currency Debt in their books and majority of the portion of the debt is unhedged. Sitting today 6 Months Libor trading at 1.25% and if Fed would raise the rates then it would move up say 1.50% or would be 1.75%. Such actions by Fed would create lots of Carry opportunities for Carry Currencies like Australian Dollar, Indian Rupee, Japanese Yen, Singapore Dollar and Indonesian Rupiah. In this article we are quoting 6 Months Libor as this is used for pricing of all Interest Rate Swaps specially G7 Currencies like Principal Only Swaps (POS), Coupon Only Swaps (COS) and Cross Currency Interest Rate Swaps (CCIRS).

In this article we are taking a case as How Chinese Companies can hedge their $ liability in the books say 5 Years tenor?? We are also assuming that $ Liability is of $ 1 Billion in the books which Chinese Company would like to convert in Yuan. In nutshell we are converting $ Liability into Yuan Liability henceforth such types of Swaps often termed as “Reverse Dollarization Swaps “ in Interest Rate Derivatives Markets. Assuming Liability is taken at L+120 Bps from UBS Singapore as External Commercial Borrowings (ECB). Sitting today Yuan Spot is trading at 6.68 and 5 Years Forward Premium is Trading at 52 Bps so effectively you would be having 5 Years Outright Rate as 7.20/ $.

Step 1:- Chinese Company would hand over $ 1 Billion to local subsidiary of UBS Singapore which is UBS Shanghai at cost of 52 Bps per year. Which means every year Chinese Company would pay 52 Bps or equivalent % to UBS Shanghai on the amount $ 1 Billion * 6.68 = Yuan 6.68 Billion.

Total Interest payment would be 52 Bps/6.68 = 7.78%. This way Chinese Company would pass FX Volatility of the Principal of $ 1 Billion to UBS Shanghai.

Step 2:- This step Chinese Company would cover their Interest Rate Exposures as they are exposed to LIBOR. They would enter Coupon Only Swaps with UBS Singapore whereby they would pay fixed rate which is USD CNYIRS ~1.26% as quoted by Financial Terminals. In this if LIBOR would move up or down Chinese Company obligation is 1.26% + 1.20% (Spread) = 2.46%. We should note that Interest still to be payable in $ terms.

Combination of both Step 1 as well as Step 2 is known as Cross Currency Swaps or Full Swaps where by Chinese Company would be able to hedge their $ Liability into Yuan liability also known as Complete Reverse Dollarization Swaps. As we understand that Libor is inching up so would be the cost henceforth all Corporates across Asia are advised to hedge their Interest Rate exposures.




Fed Rates – Prospects for USD/INR Carry

Today we are going to speak about “Federal Reserve Rates and INR Reverse Carry ". As we understand that Federal Reserve Chairman Janet Yellen turning Hawkish and asking for an immediate hike of 25 Bps in Federal Funds Rates. If we look carefully then Fed vice Chair Fisher also suggested the same and most prominent Bond Trader - Bill Gross also suggesting an immediate hike of 25 Bps and 25 Bps in Dec. If this would happen then Overnight Rates of USD would move to 1% and this would be closer to Australia which is 1.5% in $ terms. Both are also termed as AAA Carry Trades.

We should also appreciate the fact that both Central Bank of Australia and Reserve Bank of India are moving towards Accommodative Monetary Policy. This way they would decrease the interest rates as to stimulate their economy. In that regards there are millions of thoughts but in our view Accommodative Monetary Policy is a big suicide. Japanese is a perfect example in that regards. They are doing QQE since last 2 decades but at the end need to depend upon Helicopter Money to stimulate their economy?? We all understand that Helicopter Money is nothing but Explicit Debt Monetization by BOJ for Govt of Japan. There are multiple reports which suggest that Helicopter Money has already started in the form of Helicopter Drops by BOJ for Govt of Japan.

This would surely create Reverse carry for USD/INR. We all understand that Indian Central Bank - Reserve Bank of India is now following Accommodative Monetary Policy henceforth there is a big pressure on RBI to cut present Repo Rates of 6.5% by at least 100 Bps to 5.5%. This would surely decrease the carry of INR for all Foreign Institutional Investors (FII), Foreign Portfolio Investors (FPI) to invest funds in India.

One more fact which matters is the growing relevance of Indonesia where in 10 Y G Sec is trading at 7.7% and Singapore who would like to increase overnight rate to 1.35 %. If this would happen then all the funds which are scheduled to India would invest in United States offering 1%, Australia 1.5%, Indonesia 7.7% and upcoming Carry Currencies like Singapore offering 1.34%.

We also need to appreciate the fact that Carry Traders needs big return and specially at that time when Japanese , Swiss , Europe is in negative and also big banks like Royal Bank of Scotland , Bank of Ireland and Deutsche is asking big clients to pay negative collateral. Sitting today we are having “Quest for Yield Hunt ".

Reserve Bank of India should be well aware of the fact that if they would reduce Repo Rate by 100 Bps to 5.5% then probability of having INR moving towards Reverse Carry is 100%. This won’t appreciate INR rather would depreciate the same as less $ would park in India. We also understand that this would also increase the reliance of Indian Corporates on External Commercial Borrowings (ECB) and there would be very less funding covering Foreign Currency Non Resident Bonds (FCNR) in India which would have reciprocal impact on both USD/INR Interest Rate Swaps (IRS) and Overnight Index Swaps (OIS)

Today Bank of Japan Governor Kuroda said there is still a big for Qualitative Quantitative Easing (QQE) in Japanese Economy however this time Negative Interest Rates would play a very important role in that regards. Keeping all the aforesaid factors Currency Traders are advised to take care of the same while making trading bets involving INR. Currency Traders are advised to have Options Structures to hedge their exposures.

By:-Rahul Magan, Chief Executive Officer, Treasury Consulting LLP



Indian Masala Bonds – Opportunities or Failures

Year 2016 Indian Regulator allows Indian Corporates to raise INR denominated funds outside India

at rate agreed between Corporate and foreign Investor. Since that day International Financial

Corporation (IFC) and HDFC Bank raised funds using Masala Bonds at an average yield of 8.40%. There

were lots of expectations from Masala Bonds but nothing great has happened. The reason is very

simple which is Yield offered by Indian Borrowers and Hedging Cost for Foreign Investors.

In this article we would be taking an example in that regards.

Assuming Infosys Technologies Limited would like to issue Masala Bonds amounting Rs 45,000 Cr in

Luxembourg Markets for 5 Years. They agreed to offer Coupon of 8.45% for 5 Years. The biggest

problem is the Yield as any Offshore Investor or Sub Account of Offshore Investor who wanted to

invest would get better Yield than Masala Bonds of Infosys Technologies Limited in Onshore Indian

Markets.

Another biggest problem is the Hedging Cost of the Masala Bonds. We need to understand that

Investor would be an Offshore Investor henceforth he would hedge the same in offshore Treasury

Centres like Singapore, NY, London, Luxembourg, Frankfurt, Australia, Tokyo. In this article we are

assuming he would hedge the same in Singapore Markets.

Sitting today USD/INR NDF Forward Premium for 1 Year is trading between 6 % - 6.5% which he

needs to pay + there would be an implication of withholding Tax of say 40 Bps on the Interest received.

In that sense he would getting the Gross Earnings of 8.45% - (6% + .4%) = 2% which excludes FX Gain/

(Loss) on the Derivatives Instruments.

There are two ways offshore Investor can hedge the exposures of Masala Bonds.

Hedging of Masala Bonds – Option A: - In this Option Sub Account of Foreign Institutional Investor

would hedge the same exposure in India. This would be termed as Reverse Dollarization Swaps

whereby he would convert $ Assets into INR Assets. The same can be done using 3 steps which are as

follows:

Principal Only Swaps (POS)

Coupon Only Swaps (COS)

Cross Currency Interest Rate Swaps (CCIRS)

First step would be heading of Principal which would be termed as Principal Only Swaps. In Principal

Only Swaps we hedge FX Volatility of the Principal like we would convert $ Assets into INR Assets.

In second step we would hedge Coupon exposure using Coupon Only Swaps. In this we would convert

Fixed to Float or Float to Fixed using USDIRS on Financial Terminals like Thomson Reuters or

Bloomberg.

Third step would be Cross Currency Interest Rate Swaps which is sum of Principal Only Swaps +

Coupon Only Swaps. We can have $ CCS or Reverse $ CCS.

Hedging of Masala Bonds – Option B: - In this option FII would hedge the exposure in Offshore

Treasury Markers whereby he would hedge the same using Non Deliverable Forwards (NDF), Non

Deliverable Options (NDO), Non Deliverable Swaps (NDS) and Non Deliverable Range Forwards

(NDRF). The difference between Option A and Option B is former is a Deliverable Market while later

is Non Deliverable Market. In former you need to settle both the legs while in later you need to only

settle FX Gains/ (Losses) and that to in $ terms.

Reserve Bank of India (RBI) is having two options in hand where by first option is to reduce the

volatility in INR and in later option allow Non Deliverable markets in India else Masala Bonds won’t

be a big success for Indian Corporates.



Forecast of Currencies ~ Editorial Desk

Currencies Q4’16 (EOP) Q1’17 (EOP) Q2’17 (EOP) Q3’17 (EOP)

AUD/USD .7600 .7600 .7700 .7800

NZD/USD .7200 .7300 .7400 .7500

USD/CAD 1.3100 1.3400 1.3400 1.3400

EUR/USD 1.0800 1.0900 1.0700 1.1000

GBP/USD 1.2200 1.2000 1.1800 1.1600

USD/JPY 104.00 105.00 106.00 107.00

USD/INR 68.0000 67.5000 67.6000 67.8000

Notes: Forecasts are done using respective models created by Editorial Desk

Notes: - EOP stands End of Period

View of Editorial Desk: - FX Markets are facing huge volatility during 2016. In that regards

Exporters are advised to hedge their forecasted receivables using Options Contracts like Range

Forwards (Exporters), Seagull (Exporters) and Buy Put Contracts.

It is always advisable to Corporate Treasurers to hedge their exposures using Seagull Contracts

when exchange pairs are getting highly volatile. Seagull contracts are nothing but the sum of Buy

Call + Range Forwards (Exporters) or Buy Put + Call Spread.

Risk Management Policies (RMP):-

We also need to understand that Risk Management Policy (RMP) of the Hedge Funds, Banks,

Trading Desks, and Corporate Treasuries plays a very important role in the Trading strategies.

As we understand that world is almost on the verge of big Neon Swan event henceforth Hedge

Funds Managers, Bankers, Traders and Corporate Treasurers need to start changing their

Hedging Strategies and start taking Options, Exotic Derivatives as to hedge their Receivables and

Payables covering Shorter and Longer tenors.

You are most welcome to connect with Treasury Consulting LLP in case you are having any

requirement covering FX markets. Our Foreign Exchange (FX) Consulting Desk advising Corporates, Banks, Financial Institutions, Hedge Funds covering variety of Derivatives exposures.



Hedge Accounting as per IND-AS (AS-109)

Currently, Indian accounting standards do not have a comprehensive framework for derivative

instruments and hedge accounting. AS 11 The Effects of Changes in Foreign Exchange Rates deals with

foreign currency forward exchange contracts including those entered into to hedge the foreign

currency risk of existing assets and liabilities. Forward exchange contracts entered into, to hedge a

firm commitment or highly probably forecast transaction, are not within the scope of AS 11.

The new Standard increases the range of economic hedges eligible for hedge accounting.

Ind AS 109 introduces a fair value option for physically settled forward commodity contracts that meet

the “own use” criteria and would otherwise be measured at cost (often nil and hence effectively off

balance sheet). This option would be a practical alternative to applying fair value hedge accounting

for entities that hedge such own use commodity contracts with financial derivatives measured at fair

value through profit or loss.

Under the new standard, the accounting treatment of option contracts designated as hedging

instruments would be less volatile in profit or loss. The new requirements apply to a variety of vanilla

and structured option contracts including those that hedge commodity price risk, interest rate risk

and foreign exchange risk.

Hedge accounting relationships would no longer have to meet the 80-125% offset criteria previously

required for prospective and retrospective effectiveness testing. Instead an entity would need to

demonstrate that an ‘economic relationship’ exists between the hedged item and hedging instrument

on a prospective basis.

This will reduce the burden of complying with the hedge accounting requirements. Under Ind AS 109,

provided the economic relationship is present at the beginning of each hedged period, come the end of the period, actual hedge ineffectiveness is measured regardless of the amount. For example, if the

hedge happens to be only 60% effective, then that is the effectiveness recorded (unlike previously

where no hedge accounting would be applied because it falls outside the 80-125% range). This change

could result in more hedging relationships qualifying for hedge accounting, especially when combined

with other changes to the requirements.

Allowing hedge accounting for risk components in non-financial items will increase the scope for

applying hedge accounting. However, greater judgement needs to be exercised when hedging risk

components that are not contractually specified. Analysis to demonstrate that the hedged risk

component is separately identifiable and reliably measurable will be necessary. Once these criteria are satisfied, the next hurdle will be to demonstrate that the hedge is expected to meet the hedge

effectiveness requirements, although these are less restrictive under the new model.

We should also agree with the thoughts that Derivatives are changing henceforth in that regards we

need a constant improvement in the Hedge Accounting Standards. As per our view we should promote

Valuation Hierarchy L3 which is Mark to Model and also AS 109 should adopt best practises of IFRS 9

and IFRS 13.



Treasury Consulting LLP – Trainings Calendar

Treasury Consulting LLP is launching various Trainings programs at Asia Pacific level covering

the following:-

Treasury Workshops

Foreign Exchange Workshops

Technical Analysis Workshops (Basic Technical Analysis)

Technical Analysis Workshops (Advanced Technical Analysis)

Frauds & Forensic Accounting

Modelling Workshops (Financial Modelling, Cash Flow , Risk Based Modelling)

Basel Accord Workshops (Basel I, II , III )

Accounting Standards (US GaaP, IFRS, Indian GaaP, IND-AS)

Workshops are getting launched in Delhi, Mumbai, Pune, Hyderabad, Bangalore, Kolkata and

Ahmedabad. At Asia Pacific level launching at Singapore, Hong Kong, Malaysia, Australia, New

Zealand, Canada, London and respective countries.

==========================================================================

==================================================================

You are most welcome to connect with us at [email protected],

[email protected], 91-9899242978, Skype Connect ~ Rahul5327

You are welcome to visit our website www.treasuryconsulting.in in that regards.

mailto:[email protected]


http://www.treasuryconsulting.in/



Rahul Magan Profile:-

Rahul served as a Corporate Treasurer of United States, India based Information Technology

Enabled Services (ITES), Information Technology (IT) Companies – EXL Service Holdings, Inc. and

HCL Technologies Limited. As a Corporate Treasurer handled key Treasury Desks like Treasury

Front Office Desks, Treasury Middle Office Desks and Treasury CFO Desks.

Role as a Corporate Treasurer covers the following:-

Onshore & Offshore Treasury Risk Management Foreign Exchange Hedging

Cash Flow Hedging Fair Value Hedging / Balance Sheet Hedging Net Investment Hedging

Foreign Exchange Risk Management Derivatives Trading, Currency Trading ( Exchange Traded Markets ) Fixed Income Markets (Money Markets, Debt Markets, Capital Markets) Treasury Wealth Management (All Assets Classes in Financial Markets) ## Trade Finance (Domestic , International , Digital Trade Finance) Treasury Accounting (IFRS, US GaaP, IAS (International Accounting Standards),

Indian GaaP, IND-AS) Global Cash Management (Cash Flow Forecasting, Cash Reporting’s) Management Reporting's ( CEO Deck, CFO Deck , Investor Deck , Board Deck) Respected roles as a Corporate Treasurer

Now Rahul served as a Chief Executive Officer (CEO) of Treasury Consulting LLP which is a Limited Liability Partnership firm incorporated in India having multiple Business streams. Business Streams of Treasury Consulting LLP:-

Trainings Domain Publication Domain Treasury Consulting – Knowledge Commerce Treasury Consulting – Analytics Desk Treasury Consulting – Foreign Exchange (FX) Consulting Desk B- Engagement Treasury Consulting – Financial Technologies (Fintech) Virtual Chief Financial Officer (CFO) Services Virtual Auditor Treasury Consulting – Asia Frauds Chapter Treasury Consulting Club – “ The Mavericks “ Treasury Consulting – Merchandise Store

Sitting today Treasury Consulting is serving clients across Asia Pacific level and also having 8 International Collaborations in place covering Asia, Africa, New York, Australia, Singapore, Hong Kong, Tokyo and Indian Markets. You are most welcome to connect with us at [email protected], [email protected], [email protected].






Treasury Consulting LLP- YOU Tube Channel

Treasury Consulting LLP owns You Tube Channel – “Foreign Exchange Maverick Traders “having

more than 215 videos covering diversified topics. Sitting today our You Tube Channel is having

over 215 videos , 1500 Subscribers , 165 K minutes watched, 4 Million Minutes watched.

We are planning to cover 300 Videos by Dec 2016, 450 by Mar 2017, 600 by June 2017 and 900

by Dec 2017.

Foreign Exchange Risk Management

Treasury Risk Management

Fixing Indexes ( Interest Rates , Non Interest Rates Fixings )

Accounting Standards ( IFRS, US GaaP, IND-AS, Indian - GaaP )

Derivatives Instruments ( Plain Vanilla, Exotic Derivatives )

Fixed Income Markets

Business Valuation

Enterprise Risk Management (ERM)

Investment Banking

Interest Rate Derivatives



Treasury Consulting Club - Launch of Maverick Club

Treasury Consulting LLP owns a Club - “The Mavericks “across all segments in Industry. The

purpose of the Club is to sync people with practical world. Club would be charging Quarterly fees

of Rs 2000 where by Club would be offering following unique facilities:-

Update on Foreign Exchange Markets

SMS covering tips on Foreign Exchange Markets

Weekly email covering all important developments in Currency & Derivatives Markets

Subscription of the Magazine “The Maverick Treasurer “along with CD of the Magazine

which would cover all aspects in Video formats.

Updates happening in Law section like Accounting Laws as well as non-Accounting Laws.

Accounting Laws covering the following :-

IFRS

US GaaP

IAS ( International Accounting Standard )

IND-AS, Indian GaaP )

Companies Act 2013 – Internal Financial Controls Internal Risk Reporting Frameworks

Sarbanes Oxley Act , Unites States

COSO Risk Management Framework

Quarterly Conference, workshop on agreed topics amongst all members.

Members are welcome Editorial Desk regarding membership of “Maverick Club” by writing to

us at [email protected], [email protected] or

[email protected] .

Best,

Rahul Magan


Country Director, International Institute of Certified Forensics Investigation Professionals Inc.

Country Director, Association of Certified Forensics Accounting Professionals

91-9899242978, Skype Connect ~ Rahul5327, Twitter @ Rahulmagan8




Documents

The Maverick Treasurer - Sep 2016 ( PDF Version )