Treasury Finance and Development Banking: A Guide to Credit, Debt, and Risk

336 Pages·2013·8.09 MB·English

by  Biagio Mazzi

Treasury Finance
and Development
Banking
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Treasury Finance
and Development
Banking
A Guide to Credit, Debt, and Risk
Biagio Mazzi
Cover Design: Wiley
Copyright ⃝C 2013 by Biagio Mazzi. All rights reserved.
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Library of Congress Cataloging-in-Publication Data:
ISBN 978-1-118-72912-0 (Hardcover)
ISBN 978-1-118-72942-7 (ebk)
ISBN 978-1-118-72936-6 (ebk)
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
To Eglantine, Edmondo, Albertine, and Leopoldo
Contents
List of Figures xiii
List of Tables xvii
Acknowledgments xix
Introduction xxi
I.1 Treasury, Funding, and the Reasons behind This Book xxi
I.2 Funding Issues as Credit and Pricing Issues xxiii
I.3 Treasury Finance and Development Banking xxv
I.4 The Structure of the Book xxvi
CHAPTER 1
An Introductory View to Banking, Development Banking, and Treasury 1
1.1 A Representation of the Capital Flow
in a Financial Institution 2
1.2 Lending 3
1.3 Borrowing 7
1.4 Investing and ALM 10
1.5 The Basic Structure of a Traditional Financial Institution 12
1.5.1 Private and Public Sides 12
1.5.2 Sales and Trading Desks 13
1.5.3 The Treasury Desk 14
1.6 Development Banking 17
1.6.1 The Different Types of Development Institutions 17
1.6.2 The Structure of a Development Bank 19
CHAPTER 2
Curve Construction 21
2.1 What Do We Mean by Curve Construction? 22
2.2 The Instruments Available for Curve Construction 24
2.2.1 Discount Bonds and Cash Deposits 24
2.2.2 Interest Rate Futures and Forward Rate Agreements 26
2.2.3 FX Forwards 28
vii
viii CONTENTS
2.2.4 Interest Rate Swaps 30
2.2.5 Basis Swaps 34
2.2.5.1 Tenor Basis Swaps 34
2.2.5.2 Cross Currency Basis Swaps 35
2.3 Using Multiple Instruments to Build a Curve 37
2.4 Collateralized Curve Construction 42
2.4.1 The Evolution of the Perception of Counterparty
Credit Risk 42
2.4.1.1 Overnight Index Swaps 43
2.4.2 Discounting in the Presence of Collateral 46
2.4.2.1 Collateral in a Foreign Currency 47
2.4.3 Clearing, the Evolution of a Price, and the Impact
of Discounting 48
2.4.4 The Special Case of AAA-Rated Institutions 52
2.5 Numerical Example: Bootstrapping an Interest Rate Curve 55
2.5.1 The Short End of the Curve: Deposits and FRAs 56
2.5.2 The Long End of the Curve: Interest Rate Swaps 58
2.5.3 Interpolation and Extrapolation 62
CHAPTER 3
Credit and the Fair Valuing of Loans 67
3.1 Credit as an Asset Class 67
3.1.1 The Underlyings 69
3.1.2 Credit Default Swaps 71
3.2 A Brief Overview of Credit Modeling 75
3.2.1 Hazard Rates and a Spread-Based Modeling
of Credit 78
3.2.2 The Bootstrapping of a Hazard Rate Curve 81
3.2.3 Different Quotations and Different Currencies 84
3.3 Fair Value of Loans and the Special Case of
Development Institutions 88
3.3.1 The Argument around the Fair Valuing of Loans 88
3.3.2 Prepayment Option and the Case of
Development Institutions 91
3.4 Numerical Example: Calculating the Fair Value of a Loan 95
CHAPTER 4
Emerging Markets and Liquidity 101
4.1 The Defnition of Emerging Markets 101
4.2 The Main Issues with Emerging Markets 103
4.2.1 Liquidity 103
4.2.2 Maturity 108