Treasury Management Flashcards
is the act of managing a company’s daily cash flows and larger-scale decisions when it comes to finances.
It can provide governance over a company’s liquidity, establish and maintain credit lines, optimize investment returns, and strategize the best use of funds.
Treasury Management
refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price.
Liquidity
occurs where cashflows into the banking system persistently exceed withdrawals of liquidity from the market by the central bank.
Surplus Liquidity
is a financial situation characterized by a lack of cash or easily-convertible-to-cash assets on hand across many businesses or financial institutions simultaneously.
Liquidity Crisis
is the transfer of non-core activities/functions to a third party provider, so the corporate treasury department can focus on the essential strategic tasks where they add unique value.
Treasury Outsourcing
Factors to be considered in the selection of the Outsourcing Provider/Partner/Agent:
Minimizing the Risks from Outsourcing
ensuring the service provider has no access to the funds of the company;
setting up clear policy and authorities, limiting funds transfers and bank mandates to accounts in the name of the company
ensuring segregation of treasury duties and responsibilities
Treasury Management Critical Responsibilities:
Asset Liability Management
Funds Transfers Pricing
Trading and Hedging
Integration/Projects
Portfolio Management
concerns the blend of assets and liabilities that sit on a balance sheet and the subsequent mismatches between tenor, currency, and interest rate (cost).
Asset Liability Management
is the process of costing a balance sheet and then setting the requisite prices for asset creators or liability gatherers to pay or earn for their respective tasks.
Funds Transfer Pricing
these risk management strategies can range up from Foreign Exchange FX) spot trades to long-term interest rate swaps.
Trading and Hedging
refers to a useful tool for integrating acquisitions into the company, or for spearheading IT transformation initiatives
Integration/Projects
are financial asset management of the company, investing spare cash that sits on the balance sheet to generate a return.
Portfolio Management
is the possibility of losing money on an investment or business venture.
Financial Risk
is the process of identifying, assessing and controlling threats to an organization’s capital and earnings.
Risk Management
Four Ts in Risk Mitigation
Transferring Risk
Tolerating Risk
Treating Risk
Terminating Risk
can be achieved through the use of various forms of insurance, or the payment to third parties who are prepared to take the risk on behalf of the organization.
Transferring Risk
is where no action is taken to mitigate or reduce a risk. This may be because the cost of instituting risk reduction or mitigation activity is not cost-effective or the risks of impact are at so low that they are deemed acceptable to the business.
Tolerating Risk
is a method of controlling risk through actions that reduce the likelihood of the risk occuring or minimize its impact prior to its occurrence. Also there are contingent measures that can be developed to reduce the impact of an event once it has occurred.
Treating Risk
is the simplest and most often ignored method of dealing with risk. It is the approach that should be most favored where possible and simply involves risk elimination. This can be done by altering an inherently risky process or practice to remove the risk.
Terminating Risk
refers to the level of fluctuation the market is currently experiencing.
Market Volatility
Impact of Market Volatility
What drives stock price volatility?
- Political and economic factors
- Industry and sector factors
- Company performance
is a line that plots yields
(interest rates) of bonds having equal credit quality but differing maturity dates.
Yield Curve
Types of Yield Curve
Normal
Inverted
Flat
up-sloped yield curve indicates yields on longer-term bonds may continue to rise, responding to periods of economic expansion.
Normal Yield Curve
instead slopes downward and means that short-term interest rates exceed long-term rates.
Inverted Yield Curve
is defined by similar yields across all maturities. A few intermediate maturities may have slightly higher yields, which causes a slight hump to appear along the flat curve.
Flat Yield Curve
refers to the risk investors of fixed-income instruments (such as bonds) experience from an adverse shift in interest rates. Yield curve risk stems from the fact that bond prices and interest rates have an inverse relationship to one another.
Yield Curve Risk
is a financial derivative that allows an investor to swap or offset their credit risk with that of another investor.
Credit Default Swap
Uses of Credit Default Swap
Hedging
Aribitrage
Speculation
is an investment aimed at reducing the risk of adverse price movements.
Hedging
is the practice of buying a security from one market and simultaneously selling it in another market at a relatively higher price, therefore benefiting from a temporary difference in stock prices.
Arbitrage
An investor can buy an entity’s credit default swap believing that it is too low or too high and attempt to make profits from it by entering into
a trade.
Speculation
