CAIIB BFM Module C — Treasury Operations Explained in Plain Language

Treasury operations is the topic that turns "I'll just clear CAIIB" into "wait, what's a forward rate agreement?" mid-revision. For a working banker who's never sat at a treasury dealing desk, BFM Module C — Treasury — can feel like learning a second language: spot, forward, swap, futures, options, hedging, arbitrage, NDF, OIS, FRA, IRS, currency derivatives, money market, capital market, repo, reverse repo.

This article translates BFM Module C into branch-banker English. By the end you'll be able to read the textbook explanations of treasury operations without flinching, and you'll have the formula-and-mental-model toolkit to crack the high-frequency exam questions.

What treasury actually does

A bank's treasury department has three core jobs:

1. Manage the bank's own balance sheet liquidity — making sure the bank has the right cash positions for daily settlement, SLR compliance, RBI window borrowings.
2. Generate profit via proprietary trading — taking positions in money markets, fixed income, foreign exchange, derivatives to earn spreads and capital gains.
3. Provide treasury services to customers — forex remittances for importers/exporters, hedging products (forward contracts, options), money-market investments for corporates.

The three jobs map roughly to three desks — ALM (asset-liability management), proprietary trading, and corporate treasury — though structures vary by bank.

Money market — the short-term funding arena

The money market deals in instruments of less than 1-year maturity. Memorise the main instruments:

• Call Money / Notice Money / Term Money — overnight (Call), 2-14 days (Notice), 15-365 days (Term) interbank lending.
• Treasury Bills (T-Bills) — short-term GoI borrowing. Maturities: 91-day, 182-day, 364-day. Sold at discount, redeemed at face. No interest paid; discount = yield.
• Commercial Paper (CP) — unsecured short-term debt issued by corporates with high credit rating. Maturity 7 days to 1 year.
• Certificates of Deposit (CD) — short-term unsecured deposit certificates issued by banks. Maturity 7 days to 1 year.
• Repo / Reverse Repo — short-term collateralised borrowing/lending between banks (and RBI). The G-Sec is sold with an agreement to repurchase at a higher price; the difference is the interest cost.
• TREPS (Tri-Party Repo Settlement) — modern, exchange-settled repo platform. Replaced CBLO in 2018.

Exam favourite: "T-Bill of face ₹100, 91-day maturity, issued at ₹98.50. What is the discount yield?" Plug into yield = (Face − Price) / Price × (365 / Days) × 100 = (1.50/98.50) × (365/91) × 100 ≈ 6.10%. Memorise the formula structure; the math is mechanical.

Forex market — currency in plain language

Two core concepts you must internalise:

Spot rate — the rate at which currency is exchanged for settlement on T+2 (two business days after the deal). Quoted in pairs (e.g. USD/INR = 84.50 means 1 USD = 84.50 INR).

Forward rate — the rate at which currency will be exchanged for settlement on a future date (1-month, 3-month, 6-month, 12-month forward). Forward rate is derived from spot rate adjusted for interest rate differentials between the two currencies.

Forward = Spot × (1 + Domestic Interest Rate)^t / (1 + Foreign Interest Rate)^t

If forward > spot, the foreign currency is at a forward premium; if forward < spot, it's at a forward discount.

Forex transaction types:

• Spot — T+2 settlement.
• Cash / Ready — same-day settlement.
• Tom — T+1 settlement.
• Forward — future date settlement.
• Swap — buying spot + selling forward (or vice versa) simultaneously.

The exam loves "calculate forward premium/discount" questions. Memorise: Forward Premium/Discount % = (Forward Rate − Spot Rate) / Spot Rate × (12 / Months Forward) × 100

Derivatives — the four-instrument toolkit

Four derivative instrument families dominate BFM Module C:

1. Forward contracts — OTC, customisable. Buyer/seller agree on a future price now, settle later.
2. Futures — exchange-traded, standardised. Same logic as forwards but on a stock/commodity exchange.
3. Options — buyer has the right (but not the obligation) to buy (call option) or sell (put option) at a strike price. Seller has the obligation if assigned.
4. Swaps — two parties exchange cash flows. Interest Rate Swap (IRS): one party pays fixed, other pays floating. Currency Swap: similar but cross-currency.

Options terminology to memorise: Call (right to buy), Put (right to sell), Strike Price, Premium, In-the-money / At-the-money / Out-of-the-money, Long / Short positions, European (exercisable only at expiry) vs American (any time).

The 4 option-position payoff diagrams appear regularly in the exam — long call, short call, long put, short put. Draw all 4 once on a piece of paper, memorise the shapes, and any payoff question becomes recognition rather than recall.

Hedging — what corporates actually use

A bank's corporate treasury desk sells hedging products to its importer / exporter clients. The three most common:

• Forward contract — exporter sells dollars forward to lock in INR receivable. Eliminates downside FX risk but caps upside too.
• Currency option — buyer pays premium upfront for the right to convert at a fixed rate. Protects downside, lets upside ride. Costlier.
• Currency swap — borrower converts foreign-currency loan obligations into INR cash flows over the loan tenor.

The exam tests "which instrument suits which scenario" — drill these scenario-questions on a CAIIB BFM chapter mock.

RBI's role in treasury markets

RBI is both regulator AND participant in domestic treasury markets:

• OMO (Open Market Operations) — RBI buys/sells G-Secs to inject/absorb liquidity.
• LAF (Liquidity Adjustment Facility) — daily repo and reverse-repo operations to keep call money rates near the policy corridor.
• MSF (Marginal Standing Facility) — emergency overnight borrowing at a rate above repo.
• SDF (Standing Deposit Facility) — RBI's reverse-repo replacement; the floor of the policy corridor.
• Forex intervention — RBI buys/sells USD in the spot market to manage rupee volatility.

Memorise the current values on iibf.store's live RBI rates page before the exam morning.

Exam tactics for BFM Module C

1. Memorise the formula structures. T-Bill yield, forward rate, forward premium %, option payoff. The math is plug-and-chug if you know the structure.
2. Internalise the instrument map. Money market vs capital market vs derivatives. Each maturity range has its instruments; don't mix them up.
3. Draw the option payoff diagrams once. Long call (J-shaped right), short call (mirror), long put (J-shaped left), short put (mirror). Spatial memory makes recall fast.

Frequently Asked Questions

Final Word

BFM Module C looks intimidating because the language is alien — but the underlying concepts compress into a small number of memorable patterns. Money market instruments, forex rate calculations, derivative payoffs, RBI's policy corridor — master these four and you've covered the bulk of Module C marks.

Open a free CAIIB BFM chapter mock tonight and attempt 15 Treasury questions. Score 65%+ on first attempt and you're well-positioned. Pair with our Risk Management deep-dive for full BFM coverage.

All CAIIB chapter PDFs, video classes, and mock tests are free on iibf.store's CAIIB course.