Topic 2: Multinational Firms & Treasury Department Flashcards
What is a multinational corporation?
It is a firm that has been incorporated in one country and has production and sales in other countries
What is the treasury department responsible for?
Cash management and exposure management
What is the role of financial managers at MNCs?
Learn to
1) manage foreign exchange risk and political risks using proper tools and instruments
2) to deal with (take advantage of) market imperfections, and benefit from the expanded investment and financing opportunities.
What is the functions of Corporate Treasury?
- Cash Management
- Exposure & Risk Management
What are the objectives/goals of corporate treasury?
- Ensure efficient utilisation and conservation of cash resources
- Ensure the company has adequate liquidity to meet all cash payment obligations
- Ensure the effective management of the company’s funds to maximise return and minimise cost
What is “Transaction Exposure”?
When a company faces contractual cash flows (eg. receivables or payables) that are fixed in foreign currencies.
What is “Economic Exposure”?
Effect of unexpected currency fluctuations on a company’s future cash flows - substantial market value/budgetary impact on a company - far-reaching effects and is long-term in nature
What is “Translation Exposure”
Impact of exchange rate changes on a firms consolidated financial statements.
(- The company may have to convert their payables/receivables from another currency to the domestic currency in order to report them in its financial statements.)
(- The conversion of currency will have an impact on the company’s financials.)
What is “Long Exposure” in foreign exchange exposure?
When a company is expecting to receive foreign currency in the future
What is “Short Exposure” in foreign exchange exposure?
When the company has to make payments in the foreign currency sometime in the future.
What is FX Exposure Netting?
(Bilateral netting)
Reduce the number of Foreign Exchange Transactions and only pay the net amount.
How many areas are there in a Bank Treasury?
3
- Front Office
- Middle Office
- Back Office
What is the purpose of the front office?
In charge of sales and trading
What is the purpose of the Middle Office?
Support the front office, monitor overall risk, and ensure the front office calculates profit and loss correctly.
What is the purpose of the back office?
Provide administrative services. Includes Operations & Technology. (to make sure that everything runs smoothly)
What are the main functions of bank treasury? (4)
- Cash Management
- Exposure Management
- Intermediary
- Profit Centre
Within the main function of a bank treasury, what is Cash management?
- Support deposits & Loans
- Ensure smooth running of trading activities
- ensure sufficient liquid assets
(Prevent Bank Run)
Within the main function of a bank treasury, what is Exposure management/
To prevent Credit risk.
Within the main function of a bank treasury, what is an Intermediary
Bank acts as an intermediary in te foreign exchange and money markets on behalf of customers
Within the main function of a bank treasury, what is Profit Centre
Make money for the bank thru:
1. Margins/Spread (difference in lending and borrowing rates)
- Arbitrage (Price diff between 2 or more markets on same product)
- Speculation (trading on own account in view of the market)
What are the risks associated with Treasury Activities? (5)
- Market/Price Risk
- Credit Risk/ Counterparty Risk
- Liquidity Risk
- Settlement risk ( for bank treasury)
- Operational Risk
What is Market/Price Risk?
The risk is that trading positions taken by the bank may generate losses from changes in the price of the asset bought or sold. (eg. Changes in interest rates or exchange rates)
What is Credit Risk/ Counterparty Risk?
Risk that the counterparties the bank trades with may not be able to repay their debts
(That a counterparty to a transaction is not able to fulfil its contract obligations.)
- Mitigation: Limit the amount for different customers (counterparty limit)
What is liquidity risk?
- Risk that the bank does not have enough funds to meet all claims.
Reason:
The bank makes mainly long-term loans, but most of its customer deposits are short-term.
What is settlement risk?
- Risk that arises from non-simultaneous exchange of payments.
- Risk that a counterparty does not deliver security or its value in cash as per agreement when the security was traded after the other counterparty or counterparties have already delivered security or cash value as per trade agreement.
What is Operational Risk?
Risk that losses occur due to day-to-day operating errors and/or fraudulent activities of traders in the dealing room
What are the Risk Control Measures?
- Trading Limits (3)
- Control of dealing
- Control of Operational Risk (5)
Under Risk Control Measures, what are the Trading limits?
- Position Limits (max position)
- Stop Loss limits (max loss)
- Counterparty Limits
Under Risk Control Measures, what is Control of dealing?
Back office plays an important part in reducing and minimising operational risk arising from unauthorized or fraudulent trading.
(check-ing the work of front office)
Under Risk Control Measures, what is Contol of operational risk
- Monitoring adherence to limits
- Check to ensure details are correct
- Prompt reconciliation of records
- Appropriate division of responsibilities
- Other measures
