MF0016 – TREASURY MANAGEMENT

 

 The treasury organisation deals with analysing, planning, and implementing treasury functions. It deals with issues of profit centre, cost centre etc. The organisations managing interfaces with treasury functions include intragroupcommunications, taxation, recharging, measurement and cultural aspects.

 

Figure depicts the structure of treasury organisation which is divided into five groups.

 

Fiscal: This group includes budget policy planning division, industrial and environmental division, common wealth state relationships, and social policydivision.Macroeconomic: This group deals with economic sector of the organisation. It includes domestic and international economic divisions, macroeconomic policy and modelling division.

Revenue: This group is concerned with the taxes in an organisation. It includes business tax division, indirect tax, international and treaties division, personal and income division, tax analysis and tax design division. Markets: This group mainly deals with selling of products in the competitive market. It includes competition and consumer policy, corporations and financial services policy, foreign investments and trade policy division. Corporate services: This group deals with overall management of the treasury organisation. It includes financial and facilities division, human resource division, business solutions and information management division.

 The implementation of treasury in the organisation gains profits in several aspects rather than considering it as a cost centre. It helps in providing market rates to the individual business units for the services provided and thereby making operating costs more realistic. The treasurer is motivated to ensure that more services are provided to make profits in market rate. Organisations also experiences the following disadvantages when considering treasury as a profit centre: Profit is a tempting factor to speculate as it sometimes encourages the organisation to invest in wrong direction that brings depreciation in economy as well growth of organisation. Most of the time is duly spent in arguing with business units with respect to charges over services. There may be excessive additional administrative costs.

Most of the multinational organisations face huge challenges in managing transactions globally. As the organisation expands geographically, it is difficult to access and track accurate and timely cash flow information. As the technology has been adversely developed, the need for centralising treasury has evolved; theoretically centralisation allows the treasurers to exercise greater control over operating organisations. The process of centralisation consists of: Providing centralised foreign exchange and interest rate risk management Dealing with cash management Providing fully centralised treasury including incoming and outgoing payments Centralising business treasury functions enhances the organisation to build economies of scale and rationalise costs during acquisition. Centralisation helps to achieve low cost debts, increase investment returns, reduce financial risks and ensure liquidity across the organisation. Decentralisation refers to the challenges of producing overall view of cash position and exposure to risk on a timely basis. Since the organisation contains various recording and reporting information methods, it will be difficult to construct a global risk position while combining information from different sources. In such cases it is impossible to make strategic decisions without access to timely and accurate information during the periods of economic volatility. In a decentralised environment, the company allows its subsidiaries to manage their own payables and payment processes. A lack of standardisation across subsidiaries and automation can lead to risks in transactions like incorrect payments and data redundancy.

In recent days, most of the Indian banks have classified their business into two primary business segments like treasury operations (investments) and banking operations (excluding treasury).

Rupee treasury: The rupee treasury carries out various rupee based treasury functions like asset liability management, investments and trading. It helps in managing the banks position in terms of statutory requirements like cash reserve ratio, statutory liquidity ratio according to the norms of the Reserve Bank of India (RBI). The various products in rupee treasury are:= Money market instruments Call, term, and notice money, commercial papers, treasury bonds, repo, reverse repo and interbank participation etc.= Bonds Government securities, debentures etc= Equities Foreign exchange treasury: The banks provide trading of currencies across the globe. It deals with buying and selling currencies. Derivatives The banks make foundation for Over the Counter (OTC). It helps in developing new products, trading in order to lay off risks and form apparatus for much of the industries self-regulation. The role of policies in strategic management was described in this section. The next section deals with inter-dependency between policy and strategy.

 

 

 

 

Q.2 Bring out in a table format the features of certificate of deposits and commercial papers. [10 marks]

 

 

Answer : Treasury exposure allows treasury management to various risks in the organisation. Following are the few treasury exposures in an organisation:

Financial exposure: The treasury management in the organisation are disclosed to the powerful analytics that enable to measure the global treasury operations and control financial market risks. It analyses the price and risk profile of financial dealings on a pre-dealing basis. The exposure in foreign exchange market is intense; hence hedging towards these risks by integrating business exposures and treasury transactions helps an organisation to manage financial risk and stay profitable.

Foreign exchange exposure: This occurs due to the low profits and adverse fluctuations in foreign exchange rates. Many organisations suffer from foreign exchange risk by making purchases or sales in foreign currency or by owning assets or liabilities in foreign countries. Hence a relevant course of action must be implemented to reduce exposures in business operations.

Currency exposure: It deals with future cash flows arising from domestic and foreign currencies that involve assets and liabilities and generating revenues which are susceptible to variations in foreign currency exchange rates. Hence the identification of existing potential currency relationship that arises from business activities includes hedging and other risk management activities.

 Event exposure: This happens due to a sudden change in the financial market during an investment (an event) that has a detrimental effect on the value of that investment. It is often associated with corporate bonds.

Commodity exposure: This happens due to variations in the prices of commodities which change the future and magnitude of market values. The commodities depend on any production including foreign currencies, financial instruments or any physical substances. Hence treasury management is liable to deal with various risks like price, quantity, cost that are associated with commodities.

 

Risk management helps in minimising the failure of business activities which are based on finance or performance in the organisation. It is the responsibility of the organisation to manage risk effectively and overcome hindrances affecting the overall growth of the organisation. Hence risk management is required in the organisation for the following purposes:

•To identify the risk in business activities and establish a plan to manage risk and minimise the negative effects.

• To improve the efficiency of strategic and business plans, and effective use of resources among the stakeholders in the organisation.

•It helps in increasing the ability to deliver products to the customers within the stipulated time and reduce the production cost.

•It helps to control the negative political, economic, and financial factors which may harm an organisations growth.

• To overcome sensitive internal environment, social or safety issues or regulatory and licensing conditions available in most of the organisations.

•To focus on internal audit process and robust contingency planning.

 

Corporate risks include non-financial organisational risks that arise during challenging times in the economy. . The corporate risk varies for different organisations based on factors like size, diversity in business activities and sources of capital etc. According to the assumptions of Modigliani and Miller(1958), Corporate risk is a redundant activity. It is mainly concerned with progressive tax rate and expecting costs from financial distress. The value of an organisation depends on the changes in exchange and interest rates, and commodity prices. Hence the corporate risk manager quantifies the exposures occurring in the organisation to reduce risks that hamper the financial sector. Corporate risk is further divided into market, credit and operational risks. Credit risk experiences less challenges compared to operational and market risks. The operational risk occur due to certain factors like back office errors, fraud, natural disaster etc. The organisation faces market risk with respect to commodity price risk and foreign exchange risk.

 

Hidden risks are related to cash and financial risk in an organisation. These risks might harm the growth of an organisation. Hence the manager irresponsible to identify the risk and implement relevant actions to eliminate it. Complete and accurate exposure calculation can eliminate the hidden risks. Hidden risks are also concerned with financial accounting. Financial risk is the probability when an actual return on an investment is lower than the expected return. They are the uncertainties in business leading to variations in expected profits and losses. Uncertainties related to several risks affect the net cash flow of any business organisation. Lower uncertainties have lower variations in net cash flow, and vice versa.

 

 

 

 

 

Q.6 Describe the three approaches to determine Vary [10 Marks]

 

 

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