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Make the market work for you

Active market participant and considered a market maker in foreign exchange, money market and fixed income securities.

Spot Contract

A spot contract is a cash market transaction between 2 parties to buy or sell a certain amount of foreign currency against another. It is a binding obligation in which the buyer agrees to a settlement rate 2 working days from the deal agreed date.

Forward Exchange Contract

A forward exchange contract is a binding obligation between 2 parties to buy or sell a certain amount of foreign currency at a pre-negotiated rate of exchange on a future date. The forward price for a currency can be practically higher or lower than the spot price, which depends on the interest deferential of the 2 currencies.

Treasury Bills

A treasury bill is a debt instrument, which the Government of Sri Lanka issues in order to finance short-term fund requirements. On behalf of the Government of Sri Lanka, the Central Bank of Sri Lanka issues bills at a weekly auction (Wednesdays). Given the government guarantee, the default risk stands at zero. Bills are issued at a discounted price and the face value is paid at maturity (i.e., the interest is paid up-front).

Return on Investment in Treasury Bills

  • Interest Income

    A treasury bill holder will earn an interest income for the period he/she holds the bill, where the interest rate is decided at the time of purchasing the bill. Generally, given the zero default risk, the interest rates of treasury bills are comparatively higher than most of the commonly available investment opportunities.

  • Capital Gains

    Capital gains can be obtained, when bills are discounted in the secondary market, on a subsequent day, at a lower interest rate than the rate at which the bill was bought. Capital gains are free from income tax.

  • Treasury Bonds

    A treasury bond is a medium- and long-term government debt instrument, which carries half-yearly coupons at a specified rate. The bonds were introduced to Sri Lanka in a bid to develop the long-term debt market and thereby to create a yield curve. The first bond issue was held in March 1997 and since then tenures of up to 20 years have been issued.

Return on Investment on Treasury Bonds

  • Interest Income

    A treasury bill holder will earn an interest income for the period he/she holds the bond, where the interest rate is decided at time of purchase. Generally, given the zero default risk, the interest rates of treasury bonds are comparatively higher than most of the commonly available investment opportunities.

  • Capital Gains

    Capital gains can be obtained, when bonds are discounted in the secondary market, on a subsequent day, at a lower interest rate than the rate at which the bill was bought. Capital gains are free from income tax.

  • Repurchase Agreements

    Repurchase agreements (Repos) are contracts involving the simultaneous sales and future repurchase of an asset. The parties involved in the agreement can be named as follows.

  • Repurchase Agreement (Borrower)

    This is where a holder of securities sells those securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. The security "seller" in effect borrows money from the "buyer" for the period of the agreement and the terms of the agreement are structured to compensate the "lender" for this.

  • Reverse Repurchase Agreement (Lender)

    This is where an investor buys securities from a holder, with an agreement to sell them at a fixed price on a fixed date. The securities "buyer" in effect borrows money from the "seller" for the period of the agreement.

Securities that can be used for Repurchase Agreements

  • Government securities
  • Treasury bills
  • Treasury bonds
  • Corporate debt
  • Debentures – quoted/unquoted/guaranteed/un-guaranteed
  • Commercial papers – secured/unsecured/guaranteed/un-guaranteed

Derivatives

Derivatives are simply products that are derived from basis cash market products seen in the money and foreign exchange markets. They are instruments that are built on by adding various structures to underlying assets in the money market and foreign exchange market. In the foreign exchange market, the most basic of your derivative product would be the forward rate. For example, foreign exchange forward contracts, the most simple of derivative products, are derived from the underlying spot market and interest rates in the 2 currencies. Derivatives are commonly used to mitigate interest rate and exchange rate risk.

Interest Rate Swap (IRS): Hedging Interest Exposure

An interest rate swap can be used to protect against adverse interest rate movements. It enables a company to change its floating rate debt to fixed rate debt, or vice versa, without re-negotiating the underlying loan agreement.