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THE MAVERICKTREASURER - FEB 2017

BY:-RAHUL MAGAN

CHIEF EXECUTIVE OFFICER, TREASURY CONSULTING LLPEDITOR IN CHIEF - "THE MAVERICK TREASURER"

WWW.TREASURYCONSULTING.IN

THE MAVERICK TREASURER – FEBRAURY 2017

Treasury Consulting LLP 1 | P a g e

Welcome Readers!!

Welcome to the Feb 2017 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 Feb 2017 edition Editorial Desk would be covering important aspects of 6 International

Currencies like AUD/USD, USD/CNY, USD/PHP, USD/THB, 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 Options Strategies like Range Forwards, Seagull, Call Spreads, Put Spreads and respective.

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 Feb 2017

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

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

Treasury Consulting LLP launched his own Treasury Club – “The Mavericks” on Pan India and Asia

basis. Members would be covering Chief Executive Officers, Chief Financial Officers, Corporate

Treasurers, Private Sector Bankers, Public Sector Bankers, Financial Controllers and Officers of

Banks Oversight. Club would be 100% Practical, Professional and Knowledge forum in nature.

By: - Rahul Magan

Chief Executive Officer, Treasury Consulting LLP

Country Director, International Institute of Certified Investigation Professionals, Inc. (IICFIP)

Country Director, Association of Certified Forensic Accounting Professionals (ACFAP)

Editor In Chief – “The Maverick Treasurer”, “The Fraudster”

[email protected] , [email protected]

91-9899242978, Skype ~ Rahul5327, Twitter @ Rahulmagan8

www.treasuryconsulting.in

mailto:[email protected]




Circulation of the Magazine

During 2017 Treasury Consulting LLP Publication Desk would make sure to available both

flagship Magazines – “The Maverick Treasurer “, “The Fraudster” on all platforms like :

AMAZON

Joomag

Magzter

Readwhere

Pocketmags

Flipkart

Snapdeal

Quikr

The Maverick Treasurer

Joomag

Magzter

AMAZON

The Maverick Treasurer

TCMS

Readwhere

Pocketmags



The Maverick Treasurer (Feburary-2017) – Table of Contents

Particulars Page No

Global Economic Review by Editorial Desk 4 Australian Dollar (AUD) 5 SDR Currency ( Chinese Yuan ) 6 Valuation of Risk Off Currency (EURO) 8 Valuation of Carry Currency – Philippines Peso (PHP) 10 Thailand Bhat (THB) – Moving Towards Safe Haven Treasury Centre 11 Imminent Hike in Federal Reserve (FED) Rates 12 GDP Linked Bonds – A Primer 13 Indian Economy – Demonetization Primer 15 Indian Markets Update 17 Education Point – Total Return Swaps (TRS) 18 Forecast of Currencies ~Year 2017 ( Quarter on Quarter ) 20 Treasury Consulting LLP Trainings Academy – Trconsulting 21 Rahul Magan Professional Profile 22 Treasury Consulting LLP – You Tube Channel 23 Treasury Consulting LLP Club – “The Mavericks” 24



Global Economic Review by Editorial Desk

In our view Year 2017 would turn out to be a volatile year where by USD would rule the show.

Year 2017 would be a USD Bull Year where by all USD directs like USD/INR, USD/PHP , USD/SGD,

USD/RON, USD/CZK and others would move up while all Dollar indirect or Global Directs like

GBP/USD, EUR/USD , AUD/USD, NZD would move down.

Publication Desk would see a huge bull in Dollar Trades where by USDX or Dollar Index might

touch 110 as well. Sitting today USDX is trading at 102 and flat. The major beneficiary of rise in

USDX would be Japanese Yen whereby we expect would trade at 125 levels. Imagine a Country

who is doing Quantitative Easing since last 20 Years and sitting today both Central Government

as well as Central Bank doing large scale Monetization of National Debt amounting JPY Trillions.

Japanese Yen was all scheduled to trade at 95 levels while post 8th Nov 2016 proximity between

Japan and Trump push this to 118 levels and our Publication Desk would see this at 125 levels.

As regards Indian Rupee (INR) is concerned then we see high depreciating Indian Rupee to say

72 by Mar 2017. Impact of Demonetization, low growth in Global economy would surely shave off

at least 3% of the GDP in near term. Treasury Consulting would advise Exporters to start hedging

their Foreign Currency Receivables using Rolling Hedging Program via Options. Importers are

advised to cover their exposures at 66.80 levels using rolling hedging programs. Publication Desk

would advise both Exporters as well as Importers to cover their Foreign Currency Receivables,

Foreign Currency Payables using mix of Forwards, Options, Options Payoffs and Currency Swaps.

Last but not the least we see Euro to touch parity by Apr 2017. As European Union is getting

disintegrated henceforth future is not so good for Euro. If Euro would touch parity then Indian

Information Technologies Companies having Euro as a Foreign Currency Receivable would surely

lose. Considering Euro outlook Treasury Consulting Publishing Desk would advise Organizations

to cover their exposures using Options, Options Strategies like Range Forwards (Exporters),

Range Forwards (Importers), Seagull (Exporters), Seagull (Importers), Call Spread and Put

Spreads.

UK would also decide the future of both GBP, Euro. In that way if Article 50 would get invoked

then Euro might touch parity before April 2017. All Traders are advised to keep a strict eye on

both Euro, GBP who are turning highly volatile. At the time of writing the Magazine Euro was

trading at 1.05 while GBP was trading at 1.23 levels.

Traders should remember that this Wednesday which is 8th March 2017 UK would present his

Budget before Country as well as Financial Markets. This Budget would surely give lots of

indication about possible invoking of Article 50 and subsequent impact on both GBP, Euro.

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

Editor In Chief - “The Maverick Treasurer”, “The Fraudster”

91-9899242978, Skype ~ Rahul5327, Twitter @Rahulmagan8


http://www.treasuryconsulting.in/



Commodity Currency – Australian Dollar (AUD)

As we understand that Australian Dollar is amongst Group of those Currencies having high

implied volatility. Commodities Currencies would be facing more volatility in near term as United

States would go with huge amount of Capex which would pump up Commodities. At the same

time Australian Dollar would face the same call which they are facing long time but no concrete

reply – AUD/USD or AUD/CNY or CNY/AUD?? I suggest time has come when Australian Dollar

would go with AUD/CNY as with this they would Reverse Dollarize their Balance Sheet and also

would continue to get the status of Direct Currency Pair.

Important Points to Ponder about Australian Dollar:-

1. Australian Dollar downward bias aligned with Stronger Dollar.

2. Editorial Desk predicts Australian Dollar trading at .70 levels by Mar 2017 and .68 by June

2017. If Aussie would touch .68 then it would be a blessings for USD exporters in Australia

and doom for USD importers in Australia.

3. We expect Australian GDP to grown by 3% during 2017 as some fuelling would help booming

up Australian Dollar GDP.

4. We all understand that June 2017 Brexit would start and with this all major UK banks would

start moving out of UK and this would surely impact amongst most volatile cross which is

GBP/AUD.

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. On the Trade from China Trump relationship would surely impact Australian Dollar. In our

person opinion Australian Dollar would go with USD.

Advice for Exporters and Importers:-

Year 2017 would be very interesting year for Commodities Currencies. Editorial Desk expect a

great movement in both Australian Dollar, Canadian Dollar. We do see OIL trading at 75/Barrel

while Iron Ore would surely move up. Editorial Desk is suggesting to all Australian Exporters

Importers to have Quarterly Rolling Hedge Program in place and also start having Options in their

Portfolio which covers Australian Dollar Forwards, Options like Buy Put, Buy Call, Range

Forwards (Exporters), Range Forwards (Importers), Seagull (Exporters), Seagull (Importers),

Call Spread Bull, Call Spread Bear and Put Spreads.

Sitting today Australian Dollar is having implied Call Vols of 10% while Implied Put Vols of 12%.

Such vols would move up as China would like to cut the production of Steel, Cement which would

cut the demand of Commodities and subsequent push down in the pricing of Commodities

Currencies.

AUS/USD Spot Rate - .7670/.7672

1Y Premiums – 23 Bps

ATMF = .7693/.7695

Type of Derivative Contract Buy Call Buy Put Sell Call Range Forwards (Exporters) N/A .6750 .7890

Seagull (Exporters) .8480 .6750 .7900



SDR Currency – Chinese Yuan (RMB)

The 2017 goals were outlined by Premier Li Keqiang in a work report delivered at the start of the

National People’s Congress on Sunday. The Chinese government targets to expand its economy by

around 6.5%, with an aim to create11 million new jobs. Li’s report sounded a hopeful note by calling

for growth above the target if possible, while also reiterating the need to reduce threats to that

expansion. Regulators should have higher levels of vigilance against risks

from non-performing assets, debt defaults, shadow banking, and internet finance, Li said. The

M2 money supply growth target was lowered to about 12% from 2016’s 13%. In fact, officials have

earlier announced to adopt a “prudent and neutral” monetary policy this year to keep liquidity at an

appropriate level and avoid large injections. In late January, the PBOC raised interest rates on the

Medium-term Lending Facility (MLF), following a rise in rates on its reverse repurchase agreements

and the Standing Lending Facilities (SLF) in February.

Li’s work report also outlined objectives for tackling excess capacity by cutting 150 million metric tons

of coal capacity and reducing steel capacity by 50 million metric tons. According to the data reported

by central enterprises, China has achieved most progress on cutting over capacity in 2016. Special

attention, however, should be paid to the consistency and implementation of policies. Financial and

institutional reforms are equally important as the country’s overcapacity was caused by a confluence

of factors. They include an inefficient system to allocate capital, distorted input prices, low SOE

dividends, and local protectionism.

Acknowledging this, Li pledged to push forward with supply-side reforms and achieve new progress

in structural adjustments in key areas. The Premier also set this year’s CPI target at about 3%, fiscal

deficit target at 3% of GDP, and retail sales growth target at about 10%. As expected, no major initiatives have been announced as stability is desired before a twice-a-decade leadership transition

later this year.

Important Points to Ponder about Chinese Yuan:-

1. Currently Chinese Yuan is trading at 6.9 vs USD which is very high vs past

2. People Bank of China (PBOC) which is Chinese Central Bank is losing control over the fixings

of Chinese Yuan as now Yuan is a SDR Currency.

3. Throughout 2016 Chinese Yuan depreciated and that too at the faster pace.

4. China is facing Outward Direct Investment (ODI) which effectively means investors are

taking funds out of China however at the same time China still enjoys the status of Global

Manufacturing base.

5. China – Trump relationships would be a great concern to watch and especially when Trump

would like to consider Tokyo as an Investment Partner.

6. Chinese Central Bank PBOC is considering strategic investment via its Sovereign Wealth

Fund (SWF) Chinese Investment Corporation to create Equity Position in best known

Companies across the Globe.


Chinese Yuan is now acting as a SDR Currency of the world and with the same Chinese Central

Bank PBOC would lose all control over fixing of Chinese Yuan. We all understand that Chinese

Yuan is acting as a Non Deliverable Currency Pair where by every day based upon some formula

Chinese Central Bank would fix the Currency Pair. The same fixing would be use to settle all Non-

Deliverable Contracts having CNY as a Currency Pair. Regarding CNY Options we are going to use

Tokyo Cut. Sitting today all Non-Deliverable Currencies across the Globe would get settle using

daily fixing by their Central Banks.



We recommend Traders to hedge Chinese Yuan using Options Contracts and that too using

Options Strategies like Range Forwards, Seagull, Call Spread, Put Spread, and Knock in Knock out

Options (KIKO) though the trend is very clear Chinese Yuan would depreciates during 2017.

The following is the currency forecast of Treasury Consulting LLP for 2017:-

Currency/ Time Period Q1’17 Q2’17 Q3’17 Q4’17

Chinese Yuan Fixing by PBOC 7.10 7.15 7.20 7.40

Taking an Out of the Money Forward (OTMF) would help you having save from the probable FX

losses on Non Deliverable Forwards Contracts having CNY as a Fixing Pair.

USD/CNY Spot Rate – 6.89/6.90

1Y Premiums – 80Bps

ATMF = 7.69/7.70

Call Vols = 13 %

Put Vols = 15%

Type of Derivative Contract Buy Call Buy Put Sell Call Range Forwards (Exporters) N/A 6.54 9.50

Seagull (Exporters) 8.69 6.54 9.50



Valuation of a Risk off Currency – Euro

DXY (USD) Index retreated sharply to 101.54 last Friday from the week’s high of 102.26 the

previous day. This was in spite of Fed Chair Janet Yellen joining her colleagues in calling for a rate

increase at next week’s FOMC meeting on 15 Mar. Why? The simple argument is that the market

has already discounted the hike. The US 10Y bond yield tried and failed to break above 2.50% on

Yellen’s speech, and retreated to 2.4780%, near last Thursday’s close. Like it or not, 10Y bond

yield differentials have been important for EUR/USD and USD/JPY since the start of Trump trades

last November. For example, we noted that the EUR, which accounted for 57.6% of the DXY

weights, was lifted alongside the rise in its 10Y EU bond yield. This came a day after the CPI

estimate hit the ECB’s 2% inflation target. The European Central Bank (ECB) will, at its governing

council meeting on 9 Mar, be resisting pressure to roll back its quantitative easing (QE) program.

With core inflation stable at 0.8-0.9% (YoY) since May16, the ECB will be defending last Dec’s

decision to extend QE, at a reduced pace of asset purchases, from Apr to Dec this year. EUR/ USD

closed last Friday above 1.06 for the first time since 16 Feb. This came on the back of a strong rise

in the 10Y EU bond yield to 0.356% from 0.317% on Thursday.

Similarly, the USD also retreated against the JPY but at a lesser extent. The JPY is the second largest component of the DXY, accounting for 13.6% of its weight. But this was not the reason

why USD/JPY fell back to 113.99 last Friday, after closing at 114.38 a day earlier, at its highest

level since 27 Jan. Unlike the EUR, the USD held up better against the JPY i.e. USD/JPY was still

above last Wednesday’s close of 113.71. The 10Y JGB yield rose by a paltry 1 bps to 0.078% last

week. The Bank of Japan (BOJ) is the only central that has a yield curve control policy. It has

recently reaffirmed, on 28 Feb, its commitment to keeping the 10Y JGB yield close to 0% by

publishing a schedule of planned asset purchases. Although core inflation finally turned positive

in Jan17, it is still well below the 2% target.

At this juncture, Fed hike expectation underpins the USD but is not sufficient reason for a

meaningful appreciation. As long as bond differentials dominate exchange rates, the USD will

struggle with the fact that inflation is also rising in the Eurozone and Japan, not just in the US.

While ECB and BOJ are keeping their QE programs, Japan is the only one targeting to keep the 10Y

JGB yield close to 0%. USD bulls will need the Fed to be more confident about inflation at next

week’s FOMC meeting. If it does, USD will probably perform better against the JPY than EUR.

Important Points to Ponder about Euro:-

1. Treasury Consulting Publication Desk see Euro trading in the range of 1.05 – 1.08 in next

few months although there is a big probability of reaching to 1.03 as well.

2. On previous occasions Euro was saved by NY Hedge Funds, Institutional Investors as there

was no concern about Brexit but now we doubt NY Hedge Funds, FII would save Euro as

London is slowly losing the status of world financial centre.

3. European Central Bank (ECB) is all set to do Quantitative Easing (QE) of Euro 1.7 Trillion

which would continue in near term. In our personal opinion ECB would continue with QE till

2019.

4. We do see Growth Rate of not more than 1% in the Euro Area and would see UK grow by less

than 1% in upcoming time. Reason is pretty clear which is Brexit.

5. Higher the Quantitative Easing lower would be the rates in Europe. Sitting today Europe is

amongst countries who do have negative interest rates like Japan, Tokyo and Swiss.

6. Treasury Consulting predicts deep negative Interest rates in Europe due to Quantitative

Easing (QE) and Brexit.




As all Traders understand that both Euro and GBP and their respective crosses termed as

Volatility Gauges. At the time of writing Euro was trading at 1.05 against Dollar henceforth we

would continue to hold our opinion of having Euro Parity till Apr 2017 however at the same time

we would like to suggest all Exporters, Importers to have Seagull like Structure in place to hedge

their Foreign Currency Receivables, Payables. We do advice to take Seagull (Exporters), Seagull

(Importers) having Strike Rates at OTMF.


Euro 1 .98 .96 .96

Currencies 1M Implied Vols 3M Implied Vols 9M Implied Vols 1Y Implied Vols EUR/CHF 6.5 % 7.8 % 7.9 % 8.8 % GBP/EUR 13.9 % 12.5 % 15.0 % 14.3 % EUR/USD 12.0 % 12.0 % 12.5% 12.5%

Implied Volatility of well-known Euro Crosses.



Carry Currency – Philippines Peso (PHP)

Sitting today world is talking about Carry Currencies like Australian Dollar, Indian Rupee,

Singapore Dollar, Japanese Yen but traders tend to forget that Philippines Peso also turning out

to be a Carry Currency whereby you would get good spot rate, Forwards premiums as well as

good return in terms of investments.

There is a good chance that the current account (C/A) balance will be in a deficit this year. This is

quite a turnaround, given that the C/A was at a record high USD 11bn surplus just a few years

back in 2014. Clearly, the widening trade deficit has been the main cause. Overseas foreign

remittances growth has been stable and total remittances amounted to a record high USD 26.9bn

last year. But total trade deficit was also at a record-high USD 25bn last year, double the amount

in 2015. Export growth has fallen but import growth jumped 14% in 2016 amid the robust

domestic investment growth.

Strong investment growth is likely to be sustained this year, even if at a slower pace. Expect

import demand to remain strong as well. And at the same time, the flow of remittances may ease

amid domestic policy risks in key countries like the US and Saudi Arabia. It should be hardly

surprising if the C/A balance were to slip into the negative. Not that this is a reason to be overly

concerned though. The economy needs capital, including foreign investments, to finance its

infrastructure overhaul. Given the huge growth potential, we reckon that foreign direct

investment (FDI) inflows may continue to rise going forward.

Hence, the C/A deficit is only to be expected.

Treasury Consulting FX Desk see a huge depreciation in the Philippines Peso and would foresee

the following for Philippines Peso.


Philippines Peso (PHP) 50.40 50.80 50.60 50.75

Advice for Exporters & Importers:

Spot Rate – 50.30/32

1 Y Premiums – 90 P/92 P

ATMF – 51.20/51.24

1Y Implied Vols – 11% / 13%

Type of Derivative Contract Buy Call Buy Put Sell Call Range Forwards (Exporters) N/A 46.00 57.80

Seagull (Exporters) 57.90 46.00 58.00

There was the time when Philippines Peso Forwards were trading as Par Swaps

however sitting today they are trading at 90 P which is much higher however not as

higher as we have Indian Rupee.



Thailand Bhat – Moving towards Safe Haven Treasury Center

While the Bank of Thailand (BOT) continues to talk down the baht in a bid to lift export growth,

what has gone broadly unnoticed is the recovery in import growth over the past year. On

seasonally-adjusted terms, the monthly value of imports in Jan17 was 5% higher than Jan16.

Arguably, the stronger baht has played a part in lifting import demand. Whether or not the

upward trend in import growth will be sustained remains to be seen. Part of our concern lies in

the fact that underlying demand (both consumption and investment) remains sluggish. Consumer

confidence has continued to tick higher but it hasn’t translated into a faster pace of consumption

growth as yet. Private investment is growing at an even slower pace, without any sign of a marked

change in the near-term. As things stand, private sector demand is still growing at an annual pace

of 2.5%, way below its potential.

What is changing?

As majority of the Globe is moving towards negative Interest Thailand Central Bank is moving towards hike in the Interest Rates.

Chinese Central Bank PBOC is investing a good amount of money in Thailand which would make Thailand an Nearshore Treasury Centre

Thai would be needing a good amount of investments for longer tenor to make them

as a nearshore Treasury Centre.

Competition in Line

Sitting today we are having many developed as well as developing Treasury Centers across the Globe.

Developed Treasury Centers like Singapore offering many things like Foreign

Exchange Risk Management, Interest Rates Derivatives, Credit Derivatives, Exotic Derivatives and Clientele Derivatives.

Central Bank of Thailand have to offer everything what Developed Treasury Center Singapore is offering as to be in competition.

List of Treasury Centers – Developed

Singapore New York Japan Australia London Luxembourg Frankfurt

List of Treasury Centers – Developing

Dubai Hong Kong China Philippines

According to Treasury Consulting LLP FX Desk it would take at least 10 Years to Central Bank of Thailand if they wish to be in Developing Treasury Centres. Strategically speaking they are located at the best which could easily be turned as an Onshore Treasury Centres across the Globe and very easy to serve majority of Asian Economies.

By: Rahul Magan, Chief Executive Officer (CEO), Treasury Consulting LLP



Imminent Hike in Fed Rates

DXY (USD) Index appreciated again to 102.20 yesterday from 101.78 on Wednesday despite the

0.5-0.7% fall in benchmark US stock indices. The US 10Y bond yield also bucked the profit taking

in equities and rose to 2.4779% from 2.4526%. Fed Governor Jerome Powell joined his colleagues

in supporting a rate hike at the next FOMC meeting on 15 March. Fed Chair Janet Yellen is unlikely

to sing a different tune when she speaks tonight.

The USD’s strength was felt more against the major currencies than their emerging market

counterparts this week. Within the DXY, the CAD was worst vulnerable to renewed Fed hike

expectations, followed by the JPY and GBP. The central banks of Canada, Japan and UK have shown

no urgency to follow the Fed in raising rates. In emerging markets, Asian currencies were resilient

compared to BRIC currencies such as the ZAR and RUB. Overall, this week reminded markets that

the Fed hike expectations are still important in supporting the USD. The latest rhetoric from the

Fed is not just about a rate hike in March. The Fed also signalled the need to step up rate hikes to

remove excessive accommodation to meet its dual jobs/inflation mandate. One last thing.

Treasury Consulting LLP FX Desk estimates that Fed would hike at least 2 times during the year

and keeping Trump words during Congress address of $ 1 Trillion of Infra Spending would surely

boost USD. We estimates that DXY would move to 110 as well during the Year which would be

high $ Strength.

The more the $ would move during the Year the more pressure it would add to all 4 Directs of the

Globe like Australian Dollar, New Zealand Dollar , GBP and Euro. Traders across the Globe should

also remember that China is due for a set of devaluation in Chinese Yuan as to make Yuan

Competitive in Exports.

By: Rahul Magan, Chief Executive Officer (CEO), Treasury Consulting LLP



GDP Linked Bonds – A Primer

Policymakers and economists have been looking for ways to make it easier to manage increasing

debt burdens. This column assesses one possible solution: GDP-linked bonds that tie the size of

debt payments to an economy’s wellbeing. There are clear benefits to a government from issuing

GDP-linked bonds, but establishing investor confidence in these instruments will require a better

approach to the obstacles posed by data revisions and changes in methodology.

Gross government debt in advanced economies has surpassed 105% of GDP, up from less than

75% a decade ago. As a result, policymakers and economists have been looking for ways to make

it easier to manage these heavier debt burdens.

One prominent suggestion is that countries should issue GDP-linked bonds that tie the size of debt

payments to their economy’s wellbeing. Proponents point to two major advantages. First, these

bonds reduce the likelihood of explosive paths for sovereign debt, lowering default risk. This

would increase the maximum level of sustainable debt, and provide greater capacity for

countercyclical fiscal policies.

Second, GDP-linked bonds offer investors a low-cost way to diversify both domestically and

internationally. Within a country, bonds with payoffs tied to GDP provide exposure to fluctuations

in returns to labour as well as capital. The two are only weakly associated, with the correlation

between growth in US labour income and capital income over the last half century less than 0.2.

Internationally, a portfolio of GDP-linked bonds allows diversification of idiosyncratic, country-

specific risks.

Treasury Consulting LLP find this idea attractive, and see the expanding discussion of the viability

of GDP-linked bonds as both warranted and useful However, the practical issues associated with

GDP data revision remain a formidable obstacle to the broad issuance and acceptance of these

instruments.

How GDP-linked bonds work

Before getting to the key challenge of data revisions, let’s start with a brief description of the

technical aspects of GDP-linked bonds. The idea is that governments should sell long-term bonds

with a coupon equal to a constant fraction of nominal GDP known as “trills”, suggesting that their

annual payment be one-trillionth of a years’ nominal GDP. (For the US, that would mean a current payment in the range of $18.86.) While Shiller observes that governments would find the

stabilising properties of trills attractive, his primary focus is on their potential as a vehicle for

retirement savings. What better way to insure your standard of living in retirement than to buy a

share of your country’s (or, even better, multiple countries’) GDP?

Two types of GDP-linked bonds have been proposed. The first mimics the structure of inflation-

indexed bonds. We call these GDP-principal-indexed bonds they have a specific maturity and pay

a coupon equal to a constant fraction of a principal that is indexed to GDP. To make this concrete,

suppose that on 1 January 2015, the US Treasury issued a $100 face value bond with a 30-year

maturity and a 2% coupon. At the time of issue, the bond has a reference level for nominal GDP.

The proposal is that GDP levels be measured with a six-month lag, so the reference level is the

end-2014 vintage reading for GDP in the second quarter of 2014, namely $17,328.2 billion. At the

start of 2017, the value of the bond principal would be $106.747 for each $100 of face value, based

on the end-2016 vintage reading for GDP in the second quarter of 2016 ($18,450.1 billion), while

the coupon would be $2.13



In the alternative structure for GDP-linked bonds, the coupon is set equal to the nominal GDP

growth rate plus a fixed premium, while the principal does not vary. Treasury Consulting LLP

call these GDP-coupon-indexed bonds. To see how they work, again assume that at the

beginning of 2015 the Treasury issued a $100 face value bond. But, now, the principal is fixed and

the coupon is the sum of 2% plus the annual growth rate of nominal GDP (measured with a six-

month lag). Because nominal GDP grew by 2.51% over the year to the second quarter of 2016

(based on end-2015 vintage data), the coupon payment at the start of 2017 would be $4.51.

One difference between these two structures is the timing of payments. In the first, the bulk of

the compensation for nominal growth occurs at maturity, while in the second a larger proportion

comes with the periodic coupon payments. This difference does not affect the

government’s primary balance (that’s the government deficit or surplus excluding interest

payments) for a given debt-to-GDP ratio.

However, a key purpose of issuing GDP-linked bonds is to provide the government with a cyclical

cushion, allowing it to limit debt service when revenues are low. From this cash-flow perspective,

the two structures are quite different. To see why, suppose that the government has debt equal

to 100% of GDP during a recession when nominal GDP has fallen by 2%. With GDP-principal-

index bonds that pay a 2% coupon, the government will owe bondholders 2% of GDP. With GDP-

coupon-indexed bonds that pay a 2% premium over nominal growth, debt service will be zero.

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



Indian Economy – Demonetization Primer

Nearly four months on from India’s (Baa3 positive) decision to withdraw all INR500 and

INR1, 000 notes – approximately 86% of banknotes in circulation by value – Treasury Consulting

LLP have greater clarity on the impact of demonetization. In this report, we discuss the

implementation of demonetization and subsequent remonetisation, the impact on the economy,

and credit implications for the government, companies, banks and structured finance.

Demonetization hits bank asset quality, demand for credit; deposits to rise slightly

The slowdown in economic activity has weighed on demand for credit among retail

borrowers. This trend is likely to continue over the next few months. We also expect asset

quality to deteriorate in the current quarter, but Indian banks have sufficient buffers to

withstand the impact. More positively, banks have experienced significant deposit inflows as

a result of demonetization. However, we expect bank deposits to increase by only around 1%

to 2%, with cash remaining the dominant means of retail transactions.

Liquidity has increased, following initial implementation challenges

In November and early December 2016, implementation difficulties and uncertainty surrounding

demonetization disrupted economic activity. Households and businesses experienced material

liquidity shortages as cash was removed from the system, curbing both consumption and

investment. In late December, liquidity stabilized, and conditions began to improve in January

2017.

The Reserve Bank of India (RBI) has yet to release official data on the proportion of the withdrawn

currency notes that have been returned into the system. However, press reports on RBI Governor

Urjit Patel’s testimony to a parliamentary standing committee on finance in mid-January indicate

that about 60% (INR9.2 trillion of the INR15.4 trillion withdrawn) has been remonetized. A

recovery in the total stock of currency in public circulation, which declined from about INR17

trillion prior to demonetization to a low of INR7.8 trillion in early December 2016, before

rebounding to INR9.8 trillion in early February 2017, illustrates this incremental

improvement . We expect remonetisation to continue at a similar pace.

Demonetization likely to be credit positive for sovereign over time

We continue to believe that in the medium term demonetization will strengthen India's

institutional framework by reducing tax avoidance and corruption. It should also result in

efficiency gains through greater formalization of economic and financial activity, which would

help broaden the tax base and expand usage of the financial system. All this would be credit

positive for the sovereign.

India’s persistent fiscal deficits have resulted in a relatively large general government debt

burden (about 68% of our forecast for 2017 GDP) compared to peers. This is a key constraint on

India’s government credit profile. Given India’s low income levels and large spending

commitments on wages, social programs and infrastructure development, the debt burden is

likely to remain high for some time. Any contribution that demonetization makes toward

enhancing revenue generation, by broadening the tax base and formalizing economic activity,

would foster a strengthening of India’s credit quality. If most of the old currency notes have been

deposited into the formal banking system, as has been reported, legitimizing previously

undeclared incomes and wealth, the benefits to the government related to higher future tax



collection would most likely accrue from further measures aimed at leveraging information

obtained when notes were deposited. Such measures have yet to be detailed.

Indian auto asset-backed securities stabilizing after initial deterioration

Demonetization has proved negative for Indian auto asset-backed securities (ABS) Collection

efficiency between November 2016 and January 2017 declined to 93.4%, from an average 94.9%

in the three months to October 2016, immediately before demonetization




Indian Markets Update – 6th Mar 2017




Education Point - Total Return Swaps (TRS)

Total Return Swaps (TRS) is amongst best Credit Risk Instruments we do have. Under

TRS we do have two parties who would like to swap their exposures as to cover their

liabilities. There are multiple kinds of TRS.

TRS having only swaps of exposures

TRS having swaps of exposures + Capital Appreciation/(Depreciation)

In the former case both parties would only share their swaps and this will continue till

the time of the contract or major write off should not happen in the pool who is generating

swap income.

In later case both parties would not only share swaps but also share Capital appreciation

/ (depreciation) in the pool. Generally banks are doing such TRS.

Example: JPM Chase NY is having $ 1 Billion of Assets and generating $ 100 Mn as an

annual income while at the same time they are having GBP 2.50 Bn of Liabilities on which

they need to pay GBP 80 Mn of annual interest. At the same time we are having SCB who

is having GBP 5 Bn of Assets and generating GBP 250 Mn of Annual Income while having

$ 1.5 Bn of Liabilities who in turn pay interest of $ 80 Mn.

In normal case both JPM Chase, SCB would create strips of Forwards Contracts or Options

Contracts as to convert their $ income in GBP and vice versa respectively. In case they go

with TRS then they would be able to swap their exposures on a regular basis until

someone defaults or their pool enter into losses.

TRS having only swaps of exposures

JPM Chase $ 1 Bn Pool of

Synthetic Securities having

average tenor of 8 Yrs.

Generating pool of $ 100 Mn on

Annual Basis. Probability of

delinquency is 5% having CI 95%

SCB having GBP 5 Bn Pool of






JPM Chase

would pay $ to

SCB and receive

GBP till contract

tenor till

contract period

SCB would

receive $ from

JPM Chase and

pay GBP till

contract period

No Capital

App/ Dep to

be covered



TRS having swaps of exposures + Capital Appreciation/(Depreciation)

JPM Chase $ 1 Bn Pool of






SCB having GBP 5 Bn Pool of




Annual Basis. Probability of delinquency is 5% having CI 95%

JPM Chase

would pay $ to

SCB and receive

GBP till contract

tenor till

contract period

SCB would

receive $ from

JPM Chase and

pay GBP till

contract period

Capital Appreciation/

(Depreciation) on the

Pool having Synthetic

Securities

Capital Appreciation/

(Depreciation) on the

Pool having Synthetic

Securities

Dividend Income

+ Cap App/Dep

Dividend Income

+ Cap App/Dep



Forecast of Currencies ~ Editorial Desk

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

AUD/USD .7700 .7500 .7200 .7100

NZD/USD .7200 .7100 .7000 .6900

USD/CAD 1.3300 1.3500 1.3600 1.4000

EUR/USD 1 .9800 .9500 .9200

GBP/USD 1.2600 1.2200 1.1800 1.1600

USD/JPY 115.00 116.00 117.00 116.00

USD/INR 68.5000 69.0000 69.5000 69.5000

DXY 103 105 105 110

Gold/Oz $ 1250 $ 1100 $ 1100 $ 1000

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

Indirects and Crosses.

Notes: - EOP stands End of Period

View of Editorial Desk: - FX Markets would be facing huge volatility during 2017. 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.

All Corporates are advised to have their dedicated Corporate Risk Management Policy, Hedging

Policy which would be covering the following:-

Organizational Structure Hedging Policy Approved Hedging Instruments Hedging Entities Hedging Exposure – Foreign Currency (Receivables, Payables) Hedging Exposure – Local Currency ( Receivables, Payables ) Interest Rate Hedging Exposure - $ Swaps , Rev $ Swaps , Libor Swaps +++ Interest Rate Hedging Exposure – OIS Swaps Hedge Accounting Policy – Quantitative Hedge Accounting Hedge Accounting Policy – Qualitative Hedge Accounting



Treasury Consulting LLP – Online Trainings Academy

Treasury Consulting LLP Online Trainings Academy – Trconsulting offering following Trainings

Programs.

Financial Markets Trainings

Governance Risk & Compliance , Information Technology (IT) Trainings

ACCA Trainings

ACCA Skill Level

ACCA Professional Level

Analytics Trainings

Financial Analytics

Cash Flow Analytics

Risk Based Modelling Analytics

Basel III Analytics

Treasury Analytics

Cost Analytics

Operational Analytics Anti-Money Laundering (AML) Analytics

Business Analytics

Data Analytics

Treasury Management System (TMS) Trainings

Working Capital Risk Management

CFO Trainings

Business Valuation

Accounting Standards Trainings

International Financial Reporting Standards (IFRS)

US GAAP

IND-AS

Indian GAAP

Effective 1st April 2017 everyone would be able to download all our Trainings Courses directly

from our website. By end of 2017 Treasury consulting entering into Executive Trainings,

Leaderships Trainings covering Online, F2F, Corporate Trainings.

Software Competence of Treasury Consulting LLP: The following is the Software Competency

of Treasury Consulting LLP.

Caseware, IDEA

ACL

SPSS

Minitab

E Serve

Tableau

Enterprise Resource Planning (ERP) – SAP

Enterprise Resource Planning (ERP) – Oracle

Enterprise Resource Planning (ERP) – JP Edwards

Excel Forensics

Thomson Reuters

Bloomberg

Meta Trader 4 , Meta Trader 5



Rahul Magan Professional 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 respectively. As a Corporate Treasurer handled key Treasury Desks

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

Role Played as a Group Corporate Treasurer of EXL Service Holdings, Inc.:

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 )

Interest Rate Swaps (IRS)

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, Indian GaaP, IND-AS)

Derivatives Hedge Accounting

Treasury Management Systems (TMS) – SAP Treasury , Oracle Treasury

Global Cash Management (Cash Flow Forecasting, Cash Reporting’s)

Management Reporting's ( CEO Deck, CFO Deck , Investor Deck , Board Deck)

Now Rahul is serving as a Chief Executive Officer (CEO) of Treasury Consulting LLP which is a

Limited Liability Partnership (LLP) firm incorporated in India having multiple Business streams.

Business Streams of Treasury Consulting LLP:-

Trainings Domain

Corporate Trainings

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

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.

Corporate Presentation of Treasury Consulting LLP:

Corporate Deck -

Treasury Consulting LLP.pdf



YOU Tube Channel – “Foreign Exchange Maverick Thinkers “

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

“having more than 300 videos covering diversified topics. Sitting today our You Tube Channel is

having the following:

300 Technical Videos

2200 Subscribers

6 Million Minutes Watched

280 K Videos Reviews

6000 Likes

6000 Playlists

8000 Comments

Treasury Consulting LLP planning to have 450 Technical Videos by Dec 2017 covering all

Technical Topics.

You Tube Channel - Playlists

You Tube Channel Link - https://www.youtubecom/user/rahulmagan8/videos

Daily Motion Channel Link - http://www.dailymotioncom/rahulmagan8

Foreign Exchange Risk Management

Fixed Income Markets

Technical Analysis

Derivatives Strategies

Risk Management

Frauds - Forensics - Analytics

Treasury Regulatory

Swaps, FRA , Interest Rate Derivatives (IRS)

Business Valuation

Treasury Management Systems (TMS)

https://www.youtubecom/user/rahulmagan8/videos

http://www.dailymotioncom/rahulmagan8



Treasury Consulting Club – The Mavericks

Treasury Consulting LLP owns a Club - “The Mavericks “. 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 or

calling to us at

91-9899242978 (Handheld)

Skype ~ Rahul5327

Twitter @ Rahulmagan8

[email protected]

[email protected]

Website – www.treasuryconsulting.in Via our Brand – “ Foreign Exchange Maverick Thinkers “

Best,

Rahul Magan

Chief Executive Officer, Treasury Consulting LLP

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

Country Director, Association of Certified Forensics Accounting Professionals

Editor In Chief – “The Maverick Treasurer “, “The Fraudster “

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




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