Technical Guide on Internal Audit of Treasury ... - CAalley.com

<strong>Technical</strong> <strong>Guide</strong> on Internal Audit of Treasury Function in Banks
(v)
Options
It is a contract between the bank and its customers in which the customer has
the right to buy/sell a specified amount of underlying asset at fixed price within
a specific period of time, but has no obligation to do so. In this contract, the
customer has to pay specified amount upfront to the counterparty which is
known as premium. This is in contrast to the forward contract in which both
parties have a binding contract. This is a facility offered to customers to enable
them to book forward contracts in cross currencies at a target rate or price.
This facility helps the customers to encash the currency movements in late
European market, New York market and early Asian market
(vi)
Forward Rate Agreement (FRA)
A Forward Rate Agreement (FRA) is an agreement between the bank and a
customer to pay or receive the difference (called settlement money) between an
agreed fixed rate (FRA rate) and the interest rate prevailing on stipulated future
date (the fixing date) based on a notional amount for an agreed period (the
contract period). In short, this is a contract whereby interest rate is fixed now for
a future period. The basic purpose of the FRA is to hedge the interest rate risk.
For example, if a borrower is going to borrow FC loan for 6 months at LIBOR rate
after 3 months, he can buy an FRA whereby he can fix interest rate for the loan.
Capital Market
2.4 Funds are also invested through:
a) Investment in units of Mutual fund- Mutual Fund is a trust that
pools the savings of a number of investors who share a common
financial goal. Each scheme of a mutual fund can have different
character and objectives. Mutual funds issue units to the investors,
which represent an equitable right in the assets of the mutual fund.
b) Investment in Equity IPO – These are securities which were not
previously available and are offered to the investing public for the
first time.
Regulatory Framework for Capital Markets in India
2.5 In India, the capital market is regulated by the Capital Markets
Division of the Department of Economic Affairs, Ministry of Finance. The
division is responsible for formulating the policies related to the orderly
growth and development of the securities markets (i.e., share, debt and
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