Treasury Management

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  • Topic: Derivative, Derivatives, Interest rate swap
  • Pages : 12 (3811 words )
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  • Published : December 10, 2012
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TREASURY MANAGEMENT
Treasury management (or treasury operations) includes management of an enterprise's holdings, with the ultimate goal of maximizing the firm's liquidity and mitigating its operational, financial and reputational risk. Treasury Management includes a firm's collections, disbursements, concentration, investment and funding activities. In larger firms, it may also include trading in bonds, currencies, financial derivatives and the associated financial risk management. For non-banking entities, the terms Treasury Management and Cash Management are sometimes used interchangeably, while, in fact, the scope of treasury management is larger (and includes funding and investment activities mentioned above). In general, a company's treasury operations come under the control of the CFO, Vice-President / Director of Finance or Treasurer, and are handled on a day to day basis by the organization's treasury staff, controller, or comptroller. Bank Treasuries may have the following departments:

A Fixed Income or Money Market desk that is devoted to buying and selling interest bearing securities A Foreign exchange or "FX" desk that buys and sells currencies A Capital Markets or Equities desk that deals in shares listed on the stock market.

In addition the Treasury function may also have a Proprietary Trading desk that conducts trading activities for the bank's own account and capital, an Asset and Liability Management (ALM) desk that manages the risk of interest rate mismatch and liquidity; and a Transfer pricing or Pooling function that prices liquidity for business lines (the liability and asset sales teams) within the bank. .

In banking, asset and liability management (often abbreviated ALM) is the practice of managing risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank. This can also be seen in insurance. Banks face several risks such as the liquidity risk, interest rate risk, credit risk and operational risk.

Asset-liability management (ALM) is a strategic management tool to manage interest rate risk and liquidity risk faced by banks, other financial services companies and corporations. Banks manage the risks of asset liability mismatch by matching the assets and liabilities according to the maturity pattern or the matching of the duration, by hedging and by securitization.

Risk Management
There is nothing wrong with risk. It is the lifeblood of business and the test of entrepreneurs and managers. What matters, is how risk is handled and the culture in which the company operates. “The risk culture of a business is critical and must be established at the most senior level” (J Smith).

An effective financial risk management program requires well defined objectives, clearly stated guidelines and authority limits for managing financial risks such as exchange rate risks and interest rate risks, clear reporting lines, senior management who understand what is going on and ensure that adequate systems and controls are put in place, a good treasury department which can identify and seek to manage the risks accordingly, a good balance between delegation of responsibility and control separating the trading "front office' from the administrative and controlling "back office" and ensure that everything is subject to the "two pairs of eyes". Most importantly the risk management objectives should be in line with company objectives.

Measurement of Risk
A multinational firm with export sales and costs denominated in the home currency should exhibit exchange rate exposure. The determination of the effect of such exposures requires accurate measurement of foreign exchange risks. Exchange rate exposure is divided into three different exposures: translation exposure, transaction exposure, and operating exposure Transaction exposure refers to the possibility that a company will incur gains/losses as a result of settling at a future date, a transaction...
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