UNIT 3:

Corporate Treasury
Advisory Services

3.1 The Function of Corporate

Treasury Management

3.1.1 Corporate versus Bank

Treasuries

Unlike corporate treasuries, bank treasuries are profit centres. In

other words, bank treasuries aim to make profits. A banks treasury
is a business unit and is trading oriented. For example, a bank
treasury quotes foreign exchange transactions against current
market prices and earns the spread between the bid (buy) and ask
(sell) rate. Any open position on a financial instrument is the
investment asset or liability of the bank.
In corporations, treasury activities and exposure are complementary
to the main business. All financial positions of a corporate treasury
should be secondary to the main business, such as manufacturing,
importing and exporting. For instance, an oil producer in the Middle
East exporting to the US will naturally have financial exposure on oil
prices and the US dollar. The creation of the financial exposure is
not to gain trading profit from oil and US dollars but is merely
complementary to the normal operating cycle of the oil production.

3.1.2 Treasury Advisory Services

in Corporate Banking

Banks provide many banking services to help corporations achieve

their treasury functions. For instance, banks help corporations invest
their short-term surplus funds, provide them with short-term credit
facilities for liquidity purposes, provide them with long-term loans for
business development, and underwrite their debts, equities and
market financial derivatives for the purpose of hedging their risks.
Currency exchange is one of the first services that banks offered to
customers. A bank traded one form of currency, such as US dollars,
for another such as Euro or Japanese yen in return for a service
fee. Today, only the largest banks carry out trading in foreign
currency, because of the risks involved and the expertise required
when carrying out such transactions.
There is an increasing trend for corporate treasurers to call for cash
management services from banks. In cash management, banks
handle cash collections and disbursements for a business, and
invest any temporary cash surpluses in short-term interest-bearing
instruments until cash is needed to pay bills

3.2 Cash and Liquidity

Management

3.2.1

Liquidity Management
Services

Unlike corporate treasuries, bank treasuries are profit

centres. In other words, bank treasuries aim to make
profits. A banks treasury is a business unit and is trading
oriented. For example, a bank treasury quotes foreign
exchange transactions against current market prices and
earns the spread between the bid (buy) and ask (sell)
rate. Any open position on a financial instrument is the
investment asset or liability of the bank.
Banks can help corporations improve liquidity in many
ways. The liquidity management services provided by
banks can be categorized into investing idle cash and
procuring funds.
Cash investment services
Fund procurement services

3.2.2 Cash Management

Services
Cash management products offered by banks
have broadened from account balance reporting
and electronic funds transfer to include lockbox,
in-country collection services, bulk payments
and cash concentration systems.
There are probably four stages in cash
management:
1 collection of cash,
2 collation of balances,
3 management of balances, and
4 dissemination of funds.

3.2.3 Challenges in Offering

Cash Management Services

One of the major challenges for banks to provide cash management

services is the commitment to invest in information technology. In order to
reduce operational time and cost, corporations try to work with a bank that
has the capability to interface with their own back office systems. This
means that the banks cash management system must be technologically
up-to-date so that it can seamlessly integrate into the corporations system.
Another challenge is the capability for banks to provide local and regional
knowledge on unwritten local market practices and the ambiguity of the
regulatory environment. This is particularly important if the corporations are
operating in emerging markets in which regulations are not well established.
Only a bank with a good branch network covering specific regions can help
corporations structure domestic and cross-border cash management
solutions to save time and cost.
Obviously, banks can play many roles relating to cash and liquidity
management in corporations. Depending on the domestic environment,
banks cash and liquidity management services could vary from country to
country.

3.3 Capital Management

3.3.1 Cost of Capital

When banks advise firms on how to finance their
business, it is necessary to analyse the cost of
new capital. In a broad sense, capital is all
sources of fund such as loans, bonds and
equities. In a narrow sense, it is long-term funds,
including:
Equities
Retained earnings
Preference shares
Long-term bank loans
Long-term bonds
Convertible bonds
Convertible preference shares

3.3.2 Capital Structure

Factors influencing capital structure:
Maturity matching
Nature of assets and earnings
Control
Risk
Cost
External constraints

3.4 Financial Risk

Management Objectives

3.4.1 Risk Identification

The following are some examples of financial risk
exposure that corporations can encounter:
Stock market risk
Commodity risk
Exchange rate risk
Interest rate risk
Credit rating risk
risk (or political risk)

3.4.2 Risk Measurement

According to the Basel Committees work, the basic
principles of risk management related to the risk
measurement process include:
Risk measures must identify and address all major
sources of risk.
Risk measurement processes must be reasonable
and transparent, with the underlying assumptions
used to quantify risk understood by those relying
on the measures.
The risk measures must consider possible
breakdown of key assumptions, particularly the
liquidity of markets, on the measured results.

3.5 Financial Risk Hedging

Techniques

3.5.1 Currency Risk

There are three major types of
currency risk:
Transaction exposure
Translation exposure
Economic exposure

3.5.1 Currency Risk

Internal hedging techniques
Currency of billing
Matching
Leading and lagging
External hedging techniques
Hedging with forward contracts
Hedging with currency futures
Hedging with currency swaps
Hedging with currency options

3.5.2 Interest Rate Risk

Internal hedging techniques
Matching
Refinancing
External hedging techniques
Hedging with interest rate futures
Hedging with interest rate swaps
Hedging with interest rate options