CHAPTER ONE

International Treasury Management

 Introduction
 Treasury generally refers to the funds and revenue at
the disposal of the bank and day to day management of
the same.
 The treasury acts as the custodian of cash and other
liquid assets.
 The art of managing, within the acceptable level of
risk, the consolidated fund of the firm optimally and
profitably is called Treasury management.
 Treasury management 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.
 The treasury department is responsible for a
company’s liquidity.
 The treasurer must monitor current and projected cash
flows and special funding needs:
o to correctly invest excess funds, or
o be prepared for additional borrowings or capital raises.
 The department must also safeguard:
o existing assets, which calls for the prudent investment of
funds,
o against excessive losses on interest rates and foreign
exchange positions.

 The treasurer needs to monitor the internal processes

and decisions that cause:
o changes in working capital and profitability,
o while also maintaining key relationships with investors and
lenders.
 Role of treasury department
o Cash forecasting
o Working capital management
o Cash management
o Investment management
o Treasury risk management
o Management advice
o Credit rating agency relations
o Bank relationships
o Fund raising
o Credit granting
o Other activities
Cash forecasting

o The accounting staff generally handles the receipt and

disbursement of cash, but the treasury staff needs to
compile this information from all subsidiaries into
short - range and long -range cash forecasts.
o These forecasts are needed for investment purposes,
so the treasury staff can plan to use investment
vehicles that are of the correct duration to match
scheduled cash outflows.
o The staff also uses the forecasts to determine when
more cash is needed, so that it can plan to acquire
funds either through the use of debt or equity.
o Cash forecasting is also needed at the individual
currency level, which the treasury staff uses to plan
its hedging operations.
Working capital management

o A key component of cash forecasting and cash

availability is working capital, which involves
changes in the levels of current assets and current
liabilities in response to a company’s general level of
sales and various internal policies.
o The treasurer should be aware of working capital
levels and trends, and advise management on the
impact of proposed policy changes on working capital
levels.
Cash management

o The treasury staff uses the information it obtained

from its cash forecasting and working capital
management activities to ensure that sufficient cash is
available for operational needs.
o The efficiency of this area is significantly improved
by the use of cash pooling systems.
Investment management

o The treasury staff is responsible for the proper

investment of excess funds.
o The maximum return on investment of these funds is
rarely the primary goal.
o Instead, it is much more important to not put funds at
risk, and also to match the maturity dates of
investments with a company ’ s projected cash needs.
Treasury risk management

o The interest rates that a company pays on its debt

obligations may vary directly with market rates,
which present a problem if market rates are rising.
o A company’s foreign exchange positions could also
be at risk if exchange rates suddenly worsen.
o In both cases, the treasury staff can create risk
management strategies and implement hedging tactics
to mitigate the company’s risk.
Management advice

The treasury staff monitors market conditions constantly,

therefore they provide the important information for the
management team when they want to know:
o about interest rates that the company is likely to pay on
new debt offerings,
o the availability of debt, and
o probable terms that equity investors will want in exchange
for their investment in the company.
Credit rating agency relations

o When a company issues marketable debt, it is likely

that a credit rating agency will review the company’s
financial condition and assign a credit rating to the
debt.
o The treasury staff responds to information requests
from the credit agency’s review team and provides it
with additional information over time.
Bank relationships

 The treasurer meets with the representatives of any

bank that the company uses to discuss the company’s:
o financial condition,
o the bank’s fee structure,
o any debt granted to the company by the bank,
o and other services such as foreign exchange transactions,
hedges, wire transfers, custodial services, cash pooling, and so
forth.
 A long - term and open relationship can lead to some
degree of bank cooperation if a company is having
financial difficulties, and may sometimes lead to
modest reductions in bank fees.
Fund raising

 A key function for the treasurer is to maintain

excellent relations with the investment community for
fund-raising purposes.
 This community is composed of the:
o sell side: which are those brokers and investment bankers
who sell the company’s debt and equity offerings to the buy
side
o buy side: which are the investors, pension funds, and other
sources of cash, who buy the company’s debt and equity
 While all funds ultimately come from the buy side,
the sell side is invaluable for its contacts with the buy
side, and therefore is frequently worth the cost of its
substantial fees associated with fund raising.
Credit granting

o The granting of credit to customers can lie within the

purview of the treasury department, or may be handed
off to the accounting staff.
o This task is useful for the treasury staff to manage,
since it allows the treasurer some control over the
amount of working capital locked up in accounts
receivable.
Other activities

o If a company engages in mergers and acquisitions on

a regular basis, then the treasury staff should have
expertise in integrating the treasury systems of
acquirees into those of the company.
o For larger organizations, this may require a core team
of acquisition integration experts.
o Another activity is the maintenance of all types of
insurance on behalf of the company.
o This chore may be given to the treasury staff on the
grounds that it already handles a considerable amount
of risk management through its hedging activities,
o so this represents a further centralization of risk
management activities.
 Ultimately, the treasury department ensures that a
company has sufficient cash available at all times to
meet the needs of its primary business operations.

 Generally, the treasury department occupies a central

role in the finances of the modern corporation.
 Most banks have whole departments devoted to
treasury management and supporting their clients'
needs in this area.
 In a small company, there is no treasury department at
all, nor is there a treasurer.
 Instead, treasury responsibilities are handled by the
accounting department and are under the supervision
of the controller.
 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.
 The treasurer usually reports directly to the CFO, and
may also be asked to deliver occasional reports to the
board of directors or its various committees.
Bank Treasuries may have the following departments:
o A Fixed Income or Money Market desk that is devoted to
buying and selling interest bearing securities
o A Foreign exchange or "FX" desk that buys and sells
currencies
o A Capital Markets or Equities desk that deals in shares
listed on the stock market.
Functions of treasury dep’t in the international
business

The treasury performs several functions pertinent to

international operations:
o Determine the MNC’s overall financial goals and financial
strategy.
o Manage domestic and international trade.
o Finance domestic and international trade.
o Consolidate and manage the financial flows of the firm.
o Identify, measure, and manage the firm’s exposures to
financial risks, particularly its currency risk exposures
 Treasury Management Objectives

o Maintaining Liquidity
o Optimizing Cash Resources
o Establishing and Maintaining Access to Short-Term
Financing
o Maintaining Access to Medium- and Long-Term Financing
o Maintaining Shareholder Relations
o Managing Risk
o Coordinating Financial Functions and Sharing Financial
Information
 Treasury Centralization
 Given the very large amounts of funds that the
treasury incorporates into its transactions, it is critical
that all procedures be performed precisely as planned
and incorporating all controls.
 Procedural oversight is much easier when the treasury
function is highly centralized and progressively more
difficult when it is distributed over a large number of
locations.
Centralization is easier, because:
o transactions are handled in higher volumes by a smaller number
of highly skilled staff
o better management oversight,
o the internal audit staff can review operations in a single location
more easily
o treasury activities frequently involve complicated terminology
that is incomprehensible to non-treasury specialists,
o the presence of an enterprise resources planning (ERP) system
that has been implemented throughout a company
 An ERP facilitate all of the information needed to
derive cash forecasts and foreign exchange positions
can be derived from a single system.
 If a company has many subsidiaries, each of which
uses its own ERP or accounting system, then it
becomes increasingly difficult for a centralized
treasury staff to access information.
 Instead, it may make more sense to assign a small
treasury staff to each subsidiary that is an expert in
using the local system to extract information.
Treasury Services
a) Bank Treasury: The treasury department of a bank
is responsible for balancing and managing the daily
cash flow and liquidity of funds within the bank.
 The department also handles the bank's investments
in securities, foreign exchange, asset/liability
management and cash instruments.
b) Government Treasury: is a department which carries
out the functions related to finance and taxation for state
governments and central governments.
 It is an executive agency, with the primary
responsibilities of promoting economic prosperity and
ensuring the financial security of a country.
c) Corporate Treasury: Corporate treasury manages a
company's cash flows in the most efficient and profitable
fashion possible.
 It also involves forecasting future needs for funding and
seeking the best alternatives for obtaining it.
 Cash managers are the subcategory of corporate treasury
personnel who focus on:
o balancing incoming payments with outgoing payments
o seek appropriate investment opportunities for excess cash

 Corporate treasury personnel work in close concert with

outside investment bankers.
Management of treasury related financial risks

 Risk management is a central responsibility of the

multinational treasury.
 Treasury risk management relates to the management of
risks arising from foreign exchange, interest rate and
commodity prices.
 Risks unique to corporations with multinational
operations are currency risks and foreign political risks.
 The treasury is in the best position to manage these
risks.
o The interest rates that a company pays on its debt
obligations may vary directly with market rates.
o A company’s foreign exchange positions could also
be at risk if exchange rates suddenly worsen.
o In both cases, the treasury staff can create risk
management strategies and implement hedging tactics
to mitigate the company’s risk.
 International financial markets

1. Foreign exchange Market: allows for the exchange

of one currency for another.
 The foreign exchange market should not be thought of
as a specific building or location where traders
exchange currencies.
 The spot and forward foreign exchange markets are
over-the-counter (OTC) markets.
 Trading occurs around the clock.
 Foreign exchange dealers serve as intermediaries
Spot Market: is the market for the immediate exchange.
 Commercial transactions in the spot market are often
completed electronically
 The spot markets for heavily traded currencies such
as the euro, the pound, and the yen are extremely
liquid.
Forward Market: involves contracting today for the future
purchase or sale of foreign exchange.
 enables a firm to lock in the exchange rate at which it
will buy or sell a certain quantity of currency on a
specified future date.

2. International Money Markets: is a market where short

term funds transferred from surplus units funds to deficit
units.
 International money market securities are exposed to
exchange rate risk.
3. International Credit Market: MNCs also have
access to medium-term funds through banks located in
foreign markets.
 Loans of one year or longer that are extended by
banks to MNCs or government agencies in Europe are
commonly called Eurocredits or Eurocredit loans,
which are transacted in the Eurocredit market.
 Borrowers usually prefer that loans be denominated
in the currency of their primary in which they receive
most of their cash flows, which eliminates the
borrower’s exchange rate risk.
 However, the loan’s interest rate depends on the
currency in which the loan is denominated.
4. International Bond Markets: facilitates the flow of
funds between borrowers who need long-term funds and
investors who are willing to supply long-term funds.
 The yield of a newly issued bond varies among
countries because of differences in the demand and
supply of funds.
5. International Stock Markets: MNCs can attract
funds from foreign investors by issuing stock in
international markets.
 The stock offering may be more easily digested when
it is issued in several markets.
 Moreover, issuing stock in a foreign country can
enhance the firm’s image and name recognition there.
 The stocks of some MNCs are widely traded on
numerous stock exchanges around the world.
 The stock is denominated in the currency of the
country where it is placed.
 Discussion Questions
1. Explain why an MNC may invest funds in a financial
market outside its own country.
2. Explain how the appreciation of the Australian dollar
against the U.S. dollar would affect the return to a
U.S. firm that invested in an Australian money
market security.
End of Chapter One