Treasury Management Chapter 3

The risk that exchange rate fluctuations will negatively impact a company's financial results or value.

The risk of losses due to exchange rate changes affecting import/export costs.

The risk of a company's assets being valued lower due to exchange rate fluctuations.

The risk of a company's production location becoming less competitive due to factors like higher labor costs or a strong currency.

Managing the risk of unfavorable interest rate movements impacting a company's financial performance.

The risk that a change in interest rates will negatively affect a company's operating results.

Managing the various risks associated with a company's financial operations, including interest rates and foreign exchange.

The practice of controlling the interest rate and foreign exchange risks of a company.

Companies are under greater pressure to generate profits for their shareholders, pushing them to set aggressive profit targets and minimize financial losses.

Treasury departments are expected to neutralize the impact of adverse interest rate and currency fluctuations, while also controlling treasury costs and maximizing income from surplus cash.

Banks and investors scrutinize a company's balance sheet, demanding optimal ratios. Treasurers are responsible for optimizing key ratios like debt to equity and long-term debt to short-term debt, through active working capital management.

Companies are increasingly aware of financial risks, driven by regulatory changes and corporate governance practices. This awareness discourages treating treasury as a profit center, as risky financial decisions could harm the company's overall balance.

The treasury function encompasses several fields, including cash management, financial risk management, corporate finance, and other functions like investor relations, bank relations, insurance, tax, and pension funds.

Clearly defining the scope of treasury tasks is crucial, especially in areas like corporate finance and insurance, where the treasury's role might overlap with other departments.

Cash Management involves efficiently managing the company's cash flows - gathering, holding, and spending cash to optimize liquidity and minimize costs.

Functions involving the initiation, execution, and approval of treasury transactions, including trading, investment, and funding activities.

Functions responsible for processing and settling treasury transactions, ensuring accuracy and compliance, and maintaining records.

A department that acts as an intermediary between front-office and back-office, often tasked with position reporting, performance monitoring, and risk analysis.

Risks arising from internal organizational weaknesses or failures, including procedural errors, system malfunctions, human mistakes, and fraud.

Risks associated with the company's exposure to fluctuations in exchange rates due to open positions in foreign currencies.

A system that establishes limits on treasury transactions, specifying permissible counterparties, transaction types, and maximum amounts.

The separation of duties between front-office and back-office functions, aimed at reducing the risk of fraud and error.

A form of operational risk arising from intentional or unintentional misrepresentation or manipulation of financial information.

A specific restriction on the type of financial instruments the treasury department can use. This restriction often prevents the use of complex and risky instruments, like derivatives.

A specific limit on the amount of business transactions allowed with a single counterparty. This helps control exposure to potential risk from any one party.

Restrictions on the currencies and countries with which the treasury department can conduct transactions. This helps manage currency risk and regional exposures.

A clear hierarchy of transaction authority within the treasury department. This specifies which individuals can approve transactions of different sizes and types.

A system of internal controls to ensure that treasury operations comply with established procedures, guidelines, and limits. It involves retrospective checks and audits.

Evaluating the overall exposure and risk of the treasury department's current financial positions. This involves analyzing market positions, derivative holdings, and other financial instruments.

Risks resulting from the day-to-day operational processes of the treasury department, such as errors in data entry or incorrect execution of transactions.

Risks arising from changes in market conditions, such as interest rate fluctuations, currency movements, or changes in creditworthiness of counterparties.

The sensitivity of a portfolio's value to changes in interest rates. It expresses the percentage change in value for a small change in interest rates.

A method used to measure the potential losses of a portfolio with a certain probability. It expresses the maximum potential loss that won't be exceeded with that probability.

A simulation that tests the portfolio's performance under extreme market scenarios.

The treasurer's role in risk management focuses on managing counterparty, currency, and interest rate risks.

Treasury systems provide reports on current and future liquidity, as well as interest and currency positions.

Treasury systems assist in valuing open interest rate and currency positions, which is crucial for risk management.

Periodic assessments of interest income, foreign exchange results, and deposit/investment revenues help evaluate the treasurer's performance against market averages.

The treasurer's expertise in valuation and risk measurement techniques makes them well-suited for risk management roles.

The change in market interest rates is multiplied by the duration of a loan portfolio to calculate the VaR.

VaR can be applied to measure potential losses in various financial aspects, such as market values, interest income, and credit losses.

VaR provides a good estimate of potential losses under typical market conditions, but it doesn't account for extreme events that could result in significantly larger losses.

Stress testing relies on scenario analysis, where the treasurer sets specific assumptions to simulate extreme market conditions.

Stress testing examines whether a company can survive and operate effectively during a market breakdown.