Treasury products at a glance

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• Spot Foreign Exchange
• Forward Exchange Contract
• Currency Swap
• Pula Fixed and Call Deposit
• Foreign Currency Deposit
• Structured Pula Fixed Deposits
• Fixed Income Securities (Bonds and Medium Term Notes)

Spot Foreign Exchange

Spot foreign exchange refers to the sale of one currency against the sale of another at a specified rate for settlement two business days after the deal.

A business day is defined as a day in which banks are open for business in BOTH settlement countries.

Forward Exchange Contract

A forward exchange contract is a contract arranged for the sale or purchase of an agreed amount of another currency at a specific exchange rate for settlement on a pre-agreed date in the future (longer than two business days).

The contract is such that the forward rate applies at maturity; regardless of the prevailing spot rate.

The rate of exchange is based upon the prevailing spot rate as adjusted to take account of interest rate differentials between the two currencies for the period of the contract.

The rate of exchange is based upon the prevailing spot rate as adjusted to take account of interest rate differentials between the two currencies for the period of the contract.

Advantages

No separate commissions are payable at the maturity of the forward contracts. Used extensively for hedging foreign currency exposure.

Foreign Exchange Swap

• An FX swap is a simultaneous buy and sell of a specific amount of a currency against another currency.
• It has a near "leg" (spot) and a far "leg" (forward).
• The customer will buy USD spot, ( and sell Pula to BBB), fix the USD for 91 or 14 days, then sell the USD Forward (91 or 14 days) and buy back the Pula

Example

14 days USD/BWP Swap
Amount:	P100 000 000
Spot Rate:	0.1644
Forward Rate:	0.164022
USD fixed deposit rate:	5.23%

FX gain	= spot leg - forward leg
	= (P100 000 000 @ 0.1644) - (P100 000 000 @ 0.164022)
	= $16 440 000 ­ $16 402 200
	= $37 800 @ 0.164022
	= P230 456.89

Fixed deposit gain
	= ($16 440 000 x 5.23%)(14/360)
	= $33 437.13 @ 0.164022
	= P203 857.61
Financial Gain	= P230 456.89 + P203 857.61 = P434 314.50

Advantages of a currency swap

• Yield enhancement at guaranteed effective rate of return
• Hedge against FX movements (spot and forward known)
• Principal guaranteed
• Reduced credit risk (AAA bank)
• Duration matching

Pula Fixed and Call Deposit

Funds held in safe custody by a deposit taking institution on behalf of a client. Term deposits are offered for a fixed period as may be agreed between the bank and the client. Interest is paid out at maturity together with the principal.

Advantage

• Maturity and interest structure can be tailored to meet investors' needs

Disadvantage

• The contract is held until maturity. It customer decides to terminate the contract, a cost will be levied.

Foreign Currency Fixed Deposit

A tem deposit offered for a fixed maturity and interest rate between the bank and the client. The main currencies traded at BBB are USD, GBP, EUR and ZAR. The Pula amount is converted to a foreign currency at an agreed spot rate. At maturity, the principal and the interest are paid back to the client (or paid back in BWP at the prevailing exchange rate).

At maturity the client can either rollover principal and pay interest, rollover both principal and maturity or redeem both.

• Yield enhancement at guaranteed effective rate of return
• Hedge against FX movements (spot and forward known)
• Principal guaranteed
• Reduced credit risk (AAA bank)
• Duration matching

Structured Pula Fixed Deposits

Structured credit products are used to enhance yield at a given level of risk aversion and given liquidity requirements.

Advantages:

• Tailor-made to suit individual investors
• Enhanced and secured returns on investment
• Liquidity management tool
• Working capital management

Fixed Income Securities

Fixed income refers to any type of investment that yields a regular (fixed) return.
BOND: A bond is a debt security in which the issuer owes the holders a debt and is obliged to pay a fixed coupon at regular intervals and repay the principal at maturity.
FRNs: Bonds that have a variable coupon payment, equivalent to a market reference rate (eg LIBOR +2 or BOBC + 2)

Advantages of bonds

• Considered “safe haven” for funds when risk appetite is low (diversify portfolio)
• Constant and secure return on investment
• Yield enhancement (compared to saving accounts)
• Working capital management
• Match coupon payments to cash out-flows (can also buy at different maturities)
• Safety of principal payment (Govies often considered ‘risk-free')

Disdvantages

• re-investment risk
• inflation risk
• Call ability risk
• Illiquid market in Botswana (investors 'hold-to-maturity')

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