Objectives of LectureObjectives of Lecture
Introduce the Role of the Introduce the Role of the TreasurerTreasurer
Discuss:Discuss: External FX Management External FX Management StrategiesStrategies
Internal FX Management Internal FX Management StrategiesStrategies
Readings:Readings:
Buckley:Buckley: Chapter 10Chapter 10 Chapter 11Chapter 11 Chapter 32 - 32.3 to 32.5Chapter 32 - 32.3 to 32.5
Centralise or DecentraliseCentralise or Decentralise
Centralise:Centralise: Take Decisions at “Group” LevelTake Decisions at “Group” Level Maybe CheaperMaybe Cheaper Maybe more EfficientMaybe more Efficient
Decentralise:Decentralise: Take Decisions at “Subsidiary Take Decisions at “Subsidiary Company” LevelCompany” Level
Maybe more in Line with Maybe more in Line with Devolved Management Devolved Management ResponsibilityResponsibility
Enter – The TreasurerEnter – The Treasurer
Internal BANKER:Internal BANKER: NOT AccountantNOT Accountant
Job is to Make Best Use of Job is to Make Best Use of Internal and External Banking Internal and External Banking Facilities and TechniquesFacilities and Techniques
Profit Centre or Cost CentreProfit Centre or Cost Centre
The Treasurer – Job DescriptionThe Treasurer – Job Description
Identify Exposure:Identify Exposure: Transaction ExposureTransaction Exposure Translation ExposureTranslation Exposure Commercial / Economic ExposureCommercial / Economic Exposure
Manage ExposureManage Exposure Manage CashManage Cash
Transaction ExposureTransaction Exposure
Arises from Changes in Spot Arises from Changes in Spot RateRate
Affects:Affects: Sales RevenueSales Revenue Cost of SalesCost of Sales OverheadOverhead CostCost
A Threat to the Profit & Loss A Threat to the Profit & Loss AccountAccount
Transaction ExposureTransaction Exposure
We Export Washing Machine to We Export Washing Machine to Switzerland:Switzerland:
Spot Rate CHF 1.90 = GBP 1Spot Rate CHF 1.90 = GBP 1 Sales Price = GBP 200 = CHF Sales Price = GBP 200 = CHF 380380
Costs Total GBP 170Costs Total GBP 170 Profit = GBP 30Profit = GBP 30
Transaction ExposureTransaction Exposure
If Spot Rate Becomes CHF 2.20 = If Spot Rate Becomes CHF 2.20 = GBP 1:GBP 1:
Sales Revenue = CHF 380 = Sales Revenue = CHF 380 = GBP 172.72GBP 172.72
Costs = GBP 170.00Costs = GBP 170.00 Profit = GBP 2.72Profit = GBP 2.72 Profit Falls by c. 91%Profit Falls by c. 91%
Translation ExposureTranslation Exposure
Arises from Changes in Spot Arises from Changes in Spot RateRate
Arises from Holding:Arises from Holding: AssetsAssets LiabilitiesLiabilities
A Threat to the Balance SheetA Threat to the Balance Sheet
Translation ExposureTranslation Exposure
Purchase Office Block / Service Centre Purchase Office Block / Service Centre for CHF 2,000,000for CHF 2,000,000
Spot Rate CHF 1.90 = GBP 1:Spot Rate CHF 1.90 = GBP 1: Value is GBP 1,052,630Value is GBP 1,052,630
2 years Later:2 years Later: Value is Still CHF 2,000,000Value is Still CHF 2,000,000 Spot Rate is CHF 2.20 = GBP 1Spot Rate is CHF 2.20 = GBP 1 Value is GBP 909,090Value is GBP 909,090 Translation Loss is GBP 143,540Translation Loss is GBP 143,540
Commercial / Economic Commercial / Economic ExposureExposure
Arises from Changes in Spot RateArises from Changes in Spot Rate Results in a Gain / Loss of MarketResults in a Gain / Loss of Market Note Difference between Concept Note Difference between Concept
of:of: Commercial ExposureCommercial Exposure Economic ExposureEconomic Exposure
““Threat to Long-Term Cash Flow”Threat to Long-Term Cash Flow”
Commercial / Economic Commercial / Economic ExposureExposure
We Export Washing Machine to We Export Washing Machine to Switzerland:Switzerland:
Our Price is GBP 200Our Price is GBP 200 At CHF 1.90 = GBP 1:At CHF 1.90 = GBP 1:
Our Price is CHF 380Our Price is CHF 380 German Competitor Sells at CHF German Competitor Sells at CHF
420420
Commercial / Economic Commercial / Economic ExposureExposure
Spot Rate Changes to CHF 2.25 Spot Rate Changes to CHF 2.25 =GBP 1=GBP 1
EUR / CHF Spot Rate UnchangedEUR / CHF Spot Rate Unchanged Our Price Changes to CHF 450Our Price Changes to CHF 450 German Co’s Price Still CHF 420German Co’s Price Still CHF 420
Internal TechniquesInternal Techniques
NettingNetting MatchingMatching Leading & Lagging BalancesLeading & Lagging Balances Determining Currency of InvoiceDetermining Currency of Invoice
NettingNetting Netting End of Period Balances:Netting End of Period Balances:
Same CurrencySame Currency Parallel CurrencyParallel Currency
Simple Example:Simple Example: A Owes B USD 10,000,000A Owes B USD 10,000,000 B owes A USD 8,000,000B owes A USD 8,000,000
Net Debt is from A to BNet Debt is from A to B Net Debt is USD 2,000,000Net Debt is USD 2,000,000
Real Life Examples much more Real Life Examples much more ComplicatedComplicated
Parallel CurrencyParallel Currency Currencies Closely Linked in their Market Currencies Closely Linked in their Market
PerformancePerformance 2 year Chart - Spot Rate Euro (EUR) v. Danish Krone 2 year Chart - Spot Rate Euro (EUR) v. Danish Krone
(DKK)(DKK)
MatchingMatching
Matching Inflows and Outflows Matching Inflows and Outflows of Same Currencyof Same Currency
Dates of Individual Receipts / Dates of Individual Receipts / Payments AlteredPayments Altered
Simple Example:Simple Example: A is due to Receive EUR 1,000,000 A is due to Receive EUR 1,000,000 on 25 JAN 10on 25 JAN 10
A is due to Pay EUR 1,000,000 on A is due to Pay EUR 1,000,000 on 05 FEB 1005 FEB 10
Leading and LaggingLeading and Lagging
Speeding Up (Leading) Speeding Up (Leading) Settlement of Receipt / PaymentSettlement of Receipt / Payment
Slowing Down (Lagging) Slowing Down (Lagging) Settlement of Receipt / PaymentSettlement of Receipt / Payment
Normally on Inter-Company Normally on Inter-Company Items:Items:
Can Also be on External Items Can Also be on External Items (Risky)(Risky)
Leading and LaggingLeading and Lagging
Useful in Countries with Volatile Useful in Countries with Volatile RatesRates
Some Governments Often Some Governments Often Impose Fixed Payment DatesImpose Fixed Payment Dates
Can also be used for Tax Can also be used for Tax Planning:Planning:
Shifting Revenues / CostsShifting Revenues / Costs
Leading and LaggingLeading and Lagging A (Co. in Ruritanian) has to pay 10 m. A (Co. in Ruritanian) has to pay 10 m.
Ruritanian Pesos (RUP) in one MonthRuritanian Pesos (RUP) in one Month Current Spot Rate RUP 10 = GBP 1Current Spot Rate RUP 10 = GBP 1 Current Value GBP 1,000,000Current Value GBP 1,000,000 Exp. 10% Devaluation of RUP within Exp. 10% Devaluation of RUP within
Month (New Rate RUP 11 = GBP 1)Month (New Rate RUP 11 = GBP 1) Expected Value GBP 909,090Expected Value GBP 909,090 Pay now (Lead) and Save GBP 90,910Pay now (Lead) and Save GBP 90,910
Determining Invoice CurrencyDetermining Invoice Currency
Do not Invoice in Weak Currency:Do not Invoice in Weak Currency: Use Strong CurrencyUse Strong Currency Prices in Russia Quoted in USD Prices in Russia Quoted in USD not Russian Roubles (RUR)not Russian Roubles (RUR)
Could Invoice in Strong Currency Could Invoice in Strong Currency to take Advantage of Currency to take Advantage of Currency GainsGains
External TechniquesExternal Techniques
Forward MarketsForward Markets Currency Futures MarketsCurrency Futures Markets Currency Options MarketsCurrency Options Markets Currency SwapsCurrency Swaps Factoring Foreign Debts:Factoring Foreign Debts:
Selling Invoice to Factor (Bank)Selling Invoice to Factor (Bank)
Back to ExposureBack to Exposure
A Company only has ONE net A Company only has ONE net Exposure per CurrencyExposure per Currency
Treasurer’s Job to Manage thisTreasurer’s Job to Manage this
Cost ControlCost Control
Use Internal Techniques Use Internal Techniques Whenever Possible:Whenever Possible:
Replace External TechniquesReplace External Techniques CheaperCheaper Offsets Cost of TreasurerOffsets Cost of Treasurer Contributes to ProfitContributes to Profit
Information FlowsInformation Flows
Treasurer Needs Information on:Treasurer Needs Information on: Cash Balances:Cash Balances:
In ALL CurrenciesIn ALL Currencies Cash Flows Through TradingCash Flows Through Trading Cash Requirements for Capital Cash Requirements for Capital ExpenditureExpenditure
Information Report CycleInformation Report Cycle
Some Information Needed Daily:Some Information Needed Daily: Cash BalancesCash Balances Cash ExpectedCash Expected Cash RequiredCash Required
Other Reporting Frequencies:Other Reporting Frequencies: Capital Expenditure RequirementsCapital Expenditure Requirements
Behavioural IssuesBehavioural Issues
Given Need for:Given Need for: ResponsibilityResponsibility AccountabilityAccountability ControlControl
How do you Exercise Central How do you Exercise Central Control ?Control ?
Behavioural IssuesBehavioural Issues
Answer - PersuasionAnswer - Persuasion Treasurer’s Rates Always BestTreasurer’s Rates Always Best Treasurer’s Costs Always LowestTreasurer’s Costs Always Lowest What is in Company’s Interest is What is in Company’s Interest is
also in Subsidiary’s Interestalso in Subsidiary’s Interest