Treasury Markets
Treasury Markets tests how cash, FX, bonds and derivatives are priced, quoted and settled, and whether you can apply market conventions without being misled by quotation direction. Expect questions on HIBOR, money-market day counts, FX spot/forward links, yield curves and simple hedging maths.
Core rules and concepts
- Money-market instruments include interbank deposits, certificates of deposit, commercial paper and repo. Value dates and day-count conventions matter: USD money market typically uses ACT/360, while HKD conventions are often ACT/365, so confirm the currency convention before calculating.
- HIBOR is the Hong Kong dollar interbank offered rate, fixed daily for tenors from overnight to 12 months. It is a reference rate, not a risk-free rate; it embeds bank credit and liquidity premia.
- FX is quoted as base/quote. USD/HKD 7.80 means USD 1 = HKD 7.80. Standard spot settlement is T+2, with exceptions such as USD/CAD T+1.
- Forward points reflect the interest-rate differential, not a forecast. For base/quote, forward = spot x (1 + r_quote x days/year) / (1 + r_base x days/year), using the correct day-count for each currency.
- A yield curve maps tenor to yield; swaps, futures and bonds must be compared on consistent day-count and compounding bases.
Worked example
USD/HKD spot is 7.8000. USD 3-month rate is 5.00%; HKD 3-month rate is 4.00%; 90 days; ACT/360 for both. Forward = 7.8000 x (1 + 0.04 x 90/360) / (1 + 0.05 x 90/360) = 7.8000 x 1.0100 / 1.0125 = 7.7807. Because HKD yields less than USD, HKD trades at a forward premium (fewer HKD per USD). A treasurer buying USD forward pays fewer HKD than at spot; the benefit is offset by lower HKD interest.
Traps
Putting the interest rates upside down; using 365 days for a 360-day currency; treating forward points as a prediction; confusing HKD and USD day counts; ignoring value-date or business-day adjustment; assuming covered interest parity is exact when a cross-currency basis exists.