Short-Term International Asset and Liability Management Ing. Jana Šimáková, Ph.D. simakova@opf.slu.cz •Management of an enterprise's holdings, with the ultimate goal of managing 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 •Company's treasury operations comes under the control of the CFO, Vice-President / Director of Finance or Treasurer, and is handled on a day-to-day basis by the organization's treasury staff, controller, or comptroller Treasury Management Short-Term International Asset and Liability Management •Determine the firm’s overall financial goals • •Manage the risks of domestic and international transactions • •Arrange financing for domestic and international trade • •Consolidate and manage the financial flows of the firm • •Identify, measure, and manage the firm’s risk exposures Functions of the Modern Treasury Division Short-Term International Asset and Liability Management Treasury in Corporate Organizational Structure Short-Term International Asset and Liability Management Treasury Areas of Responsibility (2017) Short-Term International Asset and Liability Management •Identify the firm’s core competencies and potential growth opportunities • •Evaluate the business environment within which the firm operates • •Formulate a comprehensive strategic plan for turning the firm’s core competencies into sustainable competitive advantages • •Develop robust processes for implementing the strategic business plan Setting Financial Goals and Strategies Short-Term International Asset and Liability Management Treasury Priorities over the Next Two Years (2017) Short-Term International Asset and Liability Management •???Why Treasury Goes for Centralization??? Questions and Applications Short-Term International Asset and Liability Management •Globalization –Operating in multiple countries increases the number of company accounts, currencies used, customers and suppliers, which in turn creates complexity, exacerbates fragmentation and decreases transparency. –Through treasury centralization, companies hope to gain better overview of their cash and liquidity positions. – Why Treasury Goes for Centralization? (1) Short-Term International Asset and Liability Management •Cost savings –Centralization can drive technology consolidation, with multiple systems replaced by a single treasury technology platform or at least more integrated solutions. –It can also simplify bank relationships, reducing bank charges and lowering the cost of managing bank relationships. Why Treasury Goes for Centralization? (2) Short-Term International Asset and Liability Management •Technology –Technology innovations improve a centralized treasury’s ability to handle large volumes of activity across the business. •such as mobile, cash pooling, web platforms and straight through processing –Technologies can also drive down treasury’s workload, creating opportunities to provide further business value. Why Treasury Goes for Centralization? Short-Term International Asset and Liability Management Treasury: From „Execution Factory“ to Strategic Resource Short-Term International Asset and Liability Management •Exporters must assure themselves of timely payment • •Importers must assure themselves of timely delivery of quality goods • •Geographic and cultural distances involved in international trade are greater than in domestic trade • •Trade disputes span several legal jurisdictions Managing International Trade Short-Term International Asset and Liability Management •Trade documentation reduces risk exposures –Commercial invoice –Packing list –Certificate of origin –Shipper’s export declaration –Export license –Bill of lading –Dock receipt –Warehouse receipt –Inspection certificate –Insurance certificate •Freight forwarders (shippers) can coordinate the logistics of trade Managing the Risks of International Shipments Short-Term International Asset and Liability Management •Cash in advance –Buyer pays for goods prior to shipment –Buyer provides the financing •Open account –Seller delivers goods and bills buyer under agreed-upon payment terms –Receivables can be discounted or factored (sold); long-term receivables can be sold to a forfeiter •Countertrade - exchange of goods or services not involving cash –Counter purchase –Offset –Delivery and payment depends on the terms of trade • International Payment Methods Short-Term International Asset and Liability Management •Documentary credits –A letter of credit (L/C) issued by the buyer’s bank guarantees payment upon receipt of trade documents –In some countries, letters of credit can be discounted or used as collateral for new borrowings –Other countries do not follow this practice •Documentary collections –Seller draws a draft (trade bill or bill of exchange) payable to itself on the buyer. –Sight drafts: payable on demand –Time drafts: payable at a specified future date •Trade acceptances: drawn on and accepted by buyer •Banker’s acceptances: accepted by a commercial bank International Payment Methods Short-Term International Asset and Liability Management The Risks of International Payment Methods Short-Term International Asset and Liability Management Seller’s perspective Highest risk Lowest risk Buyer’s perspective Most advantageous Least advantageous Open account Draft Letter of credit Cash in advance •Cash management –Multinational netting –Forecasting funds needs • •Managing relations between operating divisions and external partners –Credit management –Transfer pricing –Determination of hurdle rates on new investments Managing Multinational Cash Flows Short-Term International Asset and Liability Management •Anticipating and responding to changes in exchange rates • 1.Identify the distribution of future exchange rates 2.Estimate the sensitivity of revenues and expenses 3.Determine the desirability of hedging 4.Evaluate hedging alternatives 5.Monitor the position and reevaluate • A Five-Step Currency Risk Management Program Short-Term International Asset and Liability Management •Risk management should complement the overall business plan Setting a Risk Management Policy Short-Term International Asset and Liability Management •Forward parity • E[Std/f] = Ftd/f • •Interest rate parity • E[Std/f] = S0d/f [(1+id)/(1+if)]t • •Relative purchasing power parity • E[Std/f] = S0d/f [(1+pd)/(1+pf)]t Market-Based Exchange Rate Forecasting Short-Term International Asset and Liability Management •Technical analysis –Uses the recent history of exchange rates to predict exchange rates • •Fundamental analysis –Uses macroeconomic data to predict exchange rates – •Econometric analysis –Application of advanced econometric tools on estimation of theoretically-based approaches to exchange rate determination Model-Based Exchange Rate Forecasting Short-Term International Asset and Liability Management •Determine at the highest level of policy and decision making the scope of involvement in derivatives activities • •Value derivatives at market, at least for risk management purposes • •Quantify market risk under adverse market conditions, perform stress simulations, and forecast cash investing and funding needs • •Assess credit risk arising from derivatives activities based on measures of current and potential exposure against credit limits G30 Global Derivatives Study Group Short-Term International Asset and Liability Management •Establish market and credit risk management functions with clear authority, independent of the dealing function • •Authorize only professionals to transact and manage the risks, as well as to process, report, control, and audit derivatives activities • •Establish management information systems to measure, manage, and report the risks of derivatives activities • •Voluntarily adopt accounting and disclosure practices for international harmonization and greater transparency G30 Global Derivatives Study Group Short-Term International Asset and Liability Management THANK YOU FOR YOUR ATTENTION J