The document discusses various aspects of treasury management in corporates. It covers topics like maintaining liquidity, managing financial risks, cash management, and tools to optimize cash flows. Cash management involves planning, forecasting, and controlling cash receipts and payments. It aims to determine the optimal level of cash balances through models like Baumol's model and Miller-Orr model. Tools like lockboxes, concentration banking, and netting can help speed up collections and reduce transaction costs.
This material takes a pragmatic look at how the risks in the Treasury operations of a Bank can best be managed. It identifies the risks in the treasury function of a bank and highlights the need for an ERM approach for optimality.
This presentation broadly covers Mumbai University MMS Semester IV - Elective - Treasury Management.
It starts with History; factors leading to modern treasury management; main objectives; Integrated treasury; departments of treasury - Front, Middle and Back office.
www.abhijeetdeshmukh.com
This material takes a pragmatic look at how the risks in the Treasury operations of a Bank can best be managed. It identifies the risks in the treasury function of a bank and highlights the need for an ERM approach for optimality.
This presentation broadly covers Mumbai University MMS Semester IV - Elective - Treasury Management.
It starts with History; factors leading to modern treasury management; main objectives; Integrated treasury; departments of treasury - Front, Middle and Back office.
www.abhijeetdeshmukh.com
This presentation provides a highlight of the key issues in the management of Market Risk. It touches briefly some of the elements of the Basel 2 Accord with respect to Market Risk
Interest rate risk management for banks under Basel II, presentation by Christine Brown, Department of Finance , The University of Melbourne, Shanghai, December 8-12, 2008
This presentations chalks out in detail information about ALM in Indian Bank. It starts with the basics of Balance sheet; applicability of ALM in real life; Evolution and then starts with main topics of ALM like structured statement; Liquidity risk, its management; currency risk and finally ends with Interest Risk management.
Links to Video’s in the ppt
Balance Sheet
http://www.investopedia.com/terms/b/balancesheet.asp
NII/NIM
http://www.investopedia.com/terms/n/netinterestmargin.asp
www.abhijeetdeshmukh.com
Fixed Income securities- Analysis and Valuation. Very useful for CFA and FRM level 1 preparation candidates. For a more detailed understanding, you can watch the webinar video on this topic. The link for the webinar video on this topic is https://www.youtube.com/watch?v=r9j6Bu3aUNI
This presentation provides a highlight of the key issues in the management of Market Risk. It touches briefly some of the elements of the Basel 2 Accord with respect to Market Risk
Interest rate risk management for banks under Basel II, presentation by Christine Brown, Department of Finance , The University of Melbourne, Shanghai, December 8-12, 2008
This presentations chalks out in detail information about ALM in Indian Bank. It starts with the basics of Balance sheet; applicability of ALM in real life; Evolution and then starts with main topics of ALM like structured statement; Liquidity risk, its management; currency risk and finally ends with Interest Risk management.
Links to Video’s in the ppt
Balance Sheet
http://www.investopedia.com/terms/b/balancesheet.asp
NII/NIM
http://www.investopedia.com/terms/n/netinterestmargin.asp
www.abhijeetdeshmukh.com
Fixed Income securities- Analysis and Valuation. Very useful for CFA and FRM level 1 preparation candidates. For a more detailed understanding, you can watch the webinar video on this topic. The link for the webinar video on this topic is https://www.youtube.com/watch?v=r9j6Bu3aUNI
MODERN MONEY: The way a sovereign currency “works”DevinDSmith
Presentation by L. Randall Wray at the conference: Central Banks, Financial Systems, and Economic Development, Banco Central de la Republica Argentina in Buenos Aires, Argentina on 10/2/2012
This 3-day event will bring together CFOs, Finance Directors, Treasury Managers, Dealers, Risk Managers, Audit professionals to bring ideas together on building global brands for their treasury functions. The dates are 7-9 April 2014 in Johannesburg.
Imagine the Possibilities: An All-in-One Treasury and Risk Management SolutionReval
A recent Aberdeen 2014 Excellence in Financial Management Survey confirms that the top two pressures facing organizations today are increased financial risk and an inability to accurately forecast cash flows. But without proper insight into current and future cash balances it becomes difficult for business leaders to make decisions that will help to grow the business.
An all-in-one treasury and risk management (TRM) provides total visibility into cash, liquidity and risk in a single solution to run day-to-day operations, and sophisticated analytics so that treasury teams, procurement and business units can deliver against business objectives.
Join Nick Castellina, Research Director, Aberdeen Group and Ryan Heaslip, Senior Solutions Consultant, Reval as they present the results of the 2014 Excellence in Financial Management Survey and discuss the benefits of an integrated treasury and risk management workflow.
Company Profile PT Sarana Multi Infrastruktur Indonesia dalam Bahasa Indonesia. PT Sarana Multi Infrastruktur atau PTSMI adalah perusahaan BUMN di Indonesia yang bertujuan untuk meningkatkan pembangunan infrastruktur di Indonesia melalui program kerjasama antara pemerintah dan swasta. PTSMI berperan sebagai katalis dalam hal pembiayaan proyek infrastruktur. Selain itu, PTSMI juga menyediakan konsultasi dan perencanaan bagi perusahaan yang membutuhkan.
US Economic Outlook - Being Decided - M Capital Group August 2021.pdfpchutichetpong
The U.S. economy is continuing its impressive recovery from the COVID-19 pandemic and not slowing down despite re-occurring bumps. The U.S. savings rate reached its highest ever recorded level at 34% in April 2020 and Americans seem ready to spend. The sectors that had been hurt the most by the pandemic specifically reduced consumer spending, like retail, leisure, hospitality, and travel, are now experiencing massive growth in revenue and job openings.
Could this growth lead to a “Roaring Twenties”? As quickly as the U.S. economy contracted, experiencing a 9.1% drop in economic output relative to the business cycle in Q2 2020, the largest in recorded history, it has rebounded beyond expectations. This surprising growth seems to be fueled by the U.S. government’s aggressive fiscal and monetary policies, and an increase in consumer spending as mobility restrictions are lifted. Unemployment rates between June 2020 and June 2021 decreased by 5.2%, while the demand for labor is increasing, coupled with increasing wages to incentivize Americans to rejoin the labor force. Schools and businesses are expected to fully reopen soon. In parallel, vaccination rates across the country and the world continue to rise, with full vaccination rates of 50% and 14.8% respectively.
However, it is not completely smooth sailing from here. According to M Capital Group, the main risks that threaten the continued growth of the U.S. economy are inflation, unsettled trade relations, and another wave of Covid-19 mutations that could shut down the world again. Have we learned from the past year of COVID-19 and adapted our economy accordingly?
“In order for the U.S. economy to continue growing, whether there is another wave or not, the U.S. needs to focus on diversifying supply chains, supporting business investment, and maintaining consumer spending,” says Grace Feeley, a research analyst at M Capital Group.
While the economic indicators are positive, the risks are coming closer to manifesting and threatening such growth. The new variants spreading throughout the world, Delta, Lambda, and Gamma, are vaccine-resistant and muddy the predictions made about the economy and health of the country. These variants bring back the feeling of uncertainty that has wreaked havoc not only on the stock market but the mindset of people around the world. MCG provides unique insight on how to mitigate these risks to possibly ensure a bright economic future.
how can I sell pi coins after successfully completing KYCDOT TECH
Pi coins is not launched yet in any exchange 💱 this means it's not swappable, the current pi displaying on coin market cap is the iou version of pi. And you can learn all about that on my previous post.
RIGHT NOW THE ONLY WAY you can sell pi coins is through verified pi merchants. A pi merchant is someone who buys pi coins and resell them to exchanges and crypto whales. Looking forward to hold massive quantities of pi coins before the mainnet launch.
This is because pi network is not doing any pre-sale or ico offerings, the only way to get my coins is from buying from miners. So a merchant facilitates the transactions between the miners and these exchanges holding pi.
I and my friends has sold more than 6000 pi coins successfully with this method. I will be happy to share the contact of my personal pi merchant. The one i trade with, if you have your own merchant you can trade with them. For those who are new.
Message: @Pi_vendor_247 on telegram.
I wouldn't advise you selling all percentage of the pi coins. Leave at least a before so its a win win during open mainnet. Have a nice day pioneers ♥️
#kyc #mainnet #picoins #pi #sellpi #piwallet
#pinetwork
Empowering the Unbanked: The Vital Role of NBFCs in Promoting Financial Inclu...Vighnesh Shashtri
In India, financial inclusion remains a critical challenge, with a significant portion of the population still unbanked. Non-Banking Financial Companies (NBFCs) have emerged as key players in bridging this gap by providing financial services to those often overlooked by traditional banking institutions. This article delves into how NBFCs are fostering financial inclusion and empowering the unbanked.
The European Unemployment Puzzle: implications from population agingGRAPE
We study the link between the evolving age structure of the working population and unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.
where can I find a legit pi merchant onlineDOT TECH
Yes. This is very easy what you need is a recommendation from someone who has successfully traded pi coins before with a merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi network coins and resell them to Investors looking forward to hold thousands of pi coins before the open mainnet.
I will leave the telegram contact of my personal pi merchant to trade with
@Pi_vendor_247
Financial Assets: Debit vs Equity Securities.pptxWrito-Finance
financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. These financial assets are used for collection of huge amounts of money for business purposes.
Two major Types: Debt Securities and Equity Securities.
Debt Securities are Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset.
• The first type of Debit securities is BONDS. Bonds are issued by corporations and government (both local and national government).
• The second important type of Debit security is NOTES. Apart from similarities associated with notes and bonds, notes have shorter term maturity.
• The 3rd important type of Debit security is TRESURY BILLS. These securities have short-term ranging from three months, six months, and one year. Issuer of such securities are governments.
• Above discussed debit securities are mostly issued by governments and corporations. CERTIFICATE OF DEPOSITS CDs are issued by Banks and Financial Institutions. Risk factor associated with CDs gets reduced when issued by reputable institutions or Banks.
Following are the risk attached with debt securities: Credit risk, interest rate risk and currency risk
There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.
Common Stock: These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made.
Preferred Stock: Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument
<a href="https://www.writofinance.com/equity-securities-features-types-risk/" >Equity securities </a> as a whole is used for capital funding for companies. Companies have multiple expenses to cover. Potential growth of company is required in competitive market. So, these securities are used for capital generation, and then uses it for company’s growth.
Concluding remarks
Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.
The secret way to sell pi coins effortlessly.DOT TECH
Well as we all know pi isn't launched yet. But you can still sell your pi coins effortlessly because some whales in China are interested in holding massive pi coins. And they are willing to pay good money for it. If you are interested in selling I will leave a contact for you. Just telegram this number below. I sold about 3000 pi coins to him and he paid me immediately.
Telegram: @Pi_vendor_247
What website can I sell pi coins securely.DOT TECH
Currently there are no website or exchange that allow buying or selling of pi coins..
But you can still easily sell pi coins, by reselling it to exchanges/crypto whales interested in holding thousands of pi coins before the mainnet launch.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and resell to these crypto whales and holders of pi..
This is because pi network is not doing any pre-sale. The only way exchanges can get pi is by buying from miners and pi merchants stands in between the miners and the exchanges.
How can I sell my pi coins?
Selling pi coins is really easy, but first you need to migrate to mainnet wallet before you can do that. I will leave the telegram contact of my personal pi merchant to trade with.
Tele-gram.
@Pi_vendor_247
how to sell pi coins in all Africa Countries.DOT TECH
Yes. You can sell your pi network for other cryptocurrencies like Bitcoin, usdt , Ethereum and other currencies And this is done easily with the help from a pi merchant.
What is a pi merchant ?
Since pi is not launched yet in any exchange. The only way you can sell right now is through merchants.
A verified Pi merchant is someone who buys pi network coins from miners and resell them to investors looking forward to hold massive quantities of pi coins before mainnet launch in 2026.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
2. TREASURY MANAGEMENT
Treasury Management (or treasury operations) 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
22/18/2016
3. IN CORPORATES
To maintain the liquidity of business
Develops and executes all capital market activity
Manages the financial risks of the company
Implementing company’s optimal capital structure
To provide quick finance to Company
32/18/2016
6. SIGNIFICANCE OF CASH MANAGEMENT
• Cash – “Life blood of a business”
Motives of holding cash
Transactions Motive
Precautionary Motive
Speculative Motive
62/18/2016
7. CASH PLANNING
Cash Planning is a technique to plan and control the use of cash
Cash Forecasting and Budgeting
Cash budget is the most significant device to plan for and control cash
receipts and payments
Cash forecasts are needed to prepare cash budgets
72/18/2016
9. METHODS OF CASH BUDGETING
92/18/2016
• Receipts and Payments Method
Shows timing and magnitude of expected cash receipts and payments over
forecast period
Advantages:
It gives a complete picture of all the items of expected cash flows.
Limitations:
Its reliability is reduced because of the uncertainty of cash forecasts
It fails to highlight the significant movements in the working capital
items
10. 2/18/2016 10
Month Month Month
Balance b/d ( 1 )
Receipts
Cash Sales
Credit Sales
Bank Loans
Other Receipts
Total Receipts ( 2 )
Payments
Cash and Credit Purchases
General and Admin Expenses
Tax payments
Interest payments
Dividends
Investment in short term securities
Total Payments ( 3 )
Net Cash Flow ( 2 - 3 )
11. ADJUSTED NET INCOME METHOD
• Adjusted Net Income Method
This method involves tracing of working capital flows
It is also called as the Sources & Uses approach
It generally has 3 sections: Sources, Uses & Adjusted cash balance
Objectives:
To project company’s need for cash at a future date
To show whether company can generate funds internally
2/18/2016 11
12. 2/18/2016 12
Year Year Year
Cash beginning of year
Sources of Cash
Net Income
Non cash charges
Increase in Borrowing
Sale of equity shares
Miscellaneous
Total ( 1 )
Uses of Cash
Capital Expenditures
Increase in Current Asset
Repayment of borrowings
Dividends Payments
Total ( 2 )
Surplus/ Deficit ( 1 – 2 )
13. Advantages:
It highlights the movements in the working capital items, and thus helps to
keep a control on a firm’s working capital
Limitations:
It fails to trace cash flows, and therefore, its utility in controlling daily cash
operations is limited
2/18/2016 13
15. FLOAT
Float : Difference between the available balance and book balance of company
Float Time is the time between a customer initiating a payment and the company
being informed that it has obtained value at the bank
Types of Float:
Payment or Disbursement Float
Availability or Collection Float
Net Float
152/18/2016
16. 2/18/2016 16
• Cheques issued by a firm creates Disbursement Float
Eg : Bharat Company
• On 1st April it pays 1 million by cheque to one of its suppliers
• Disbursement Float = Firm’s available balance – Firm’s book balance
= Rs 1 million
On 31st March
Book Balance Rs. 4 million
Bank Balance Rs. 4 million
On 1st April
Book Balance Rs. 3 million
Bank Balance Rs. 4 million
17. 2/18/2016 17
• Cheques received by a firm creates Collection Float
Eg : Bharat Company
• On 1st May it receives a cheque for 1.5 million from customer
• Collection Float = Firm’s available balance – Firm’s book balance
= Rs -1.5 million
On 30th April
Book Balance Rs. 5 million
Bank Balance Rs. 5 million
On 1st May
Book Balance Rs. 6.5 million
Bank Balance Rs. 5 million
18. 2/18/2016 18
• Net Float = Disbursement Float + Collection Float
Disbursement float > Collection float.
Positive Float, Available balance > Book Balance
Disbursement float < Collection float
Negative Float, Available balance < Book Balance
If the company has a positive net float, it may issue more cheque amounts, even
though the balance as per its book is lower.
So, a company that has a positive net float at a point of time can effectively use and
manage the float in such a way that it can maintain a smaller cash balance.
19. SPEED UP COLLECTIONS
• Collection Time
192/18/2016
Customer
mails the
cheque
Company
receives the
cheque
Company
deposits the
cheque
Cash
available
Mailing
Time
Processing Availability
delay
20. SPEED UP COLLECTIONS
Concentration banking
Company asks its customer in a particular area to send payments to a local branch
office rather than to the corporate HQ
2/18/2016 20
Clients pay in
Local branch
office instead
Company’s HQ
Deposit cheque
into Local bank
A/c
Surplus Funds are
transferred to
Concentration
A/c
21. SPEED UP COLLECTIONS
Lock boxes
Customers are advised to mail their payments to special post office boxes
called lockboxes, which are attended to by local collecting banks, instead of
sending them to corporate headquarters
• Cuts down the mailing time
• Reduce the processing time
• Shortens availability of delay
2/18/2016 21
23. 2/18/2016 23
Avg. number of daily payments to Lock Box 150
Avg. size of payments Rs. 1200
Rate of Interest per day 0.02 %
Saving in Mailing time 1.2 days
Saving in Processing time 0.8 day
Thus, the Lock Box would increase the collected balance by:
150 (payments per day) * Rs. 1200 (Avg. Payment) * (1.2 + 0.8) days saved = Rs.360,000
Invested at 0.02% per day, gives a daily return of:
0.0002 * Rs. 360,000 = Rs. 72
If bank charges 0.26 per check , i.e. 0.26 * 150 = Rs. 39 per day
Net gain is Rs.72 – Rs. 39 = Rs. 33
Favorable to have Lock Box
24. SPEED UP COLLECTIONS
Electronic Fund Transfer
• Online based transaction from one bank account to another
• Reduces the time taken to carry out a transaction
• RTGS and NEFT
• Wire transfer for International transactions (SWIFT)
2/18/2016 24
25. OPTIMUM CASH BALANCE
Enough in order to make payments when needed
Additional cash for unexpected requirements
Two Models for Optimum Cash Balance
Under certainty –
Baumol’s model
Under uncertainty -
Miller-Orr model
252/18/2016
26. BAUMOL’S MODEL
William J. Baumol developed a model (The transactions Demand for Cash : An
Inventory Theoretic Approach) which is usually used in Inventory
management & cash management.
It Trade off between opportunity cost or carrying cost or holding cost &
Transaction cost
As such firm attempts to minimize the sum of the holding cash & the cost of
converting marketable securities to cash
262/18/2016
27. 2/18/2016 27
The firm is able to forecast its cash needs with certainty
The firm’s cash payments occur uniformly over a period of time
The opportunity cost of holding cash is known and it does not change over
time
The firm will incur the same transaction cost whenever it converts securities
to cash
Baumol’s Model–Assumptions
28. F = The fixed cost of selling securities to raise cash
T = The total amount of new cash needed
K = The opportunity cost of holding cash: this is the interest rate.
If we start with $C, spend at a
constant rate each period and
replace our cash with $C when
we run out of cash, our average
cash balance will be
2
C
The opportunity cost of
holding is
2
C
K
C
2
2/18/2016 28
29. F = The fixed cost of selling securities to raise cash
T = The total amount of new cash needed
K = The opportunity cost of holding cash: this is the interest rate.
As we transfer $C each period
we incur a trading cost of F each
period. If we need T in total
over the planning period we
will pay $F, T ÷ C times.
The trading cost is F
C
T
2/18/2016 29
30. C*
Size of cash balance
F
T
K
C
C2
costTotal
Opportunity
Costs
K
C
2
F
T
C
Trading
costs
The optimal cash balance is found where the opportunity
costs equal the trading costs
F
K
T
C
2*
2/18/2016 30
31. Limitations :
The model assumes the firm has a constant disbursement rate
The model assumes there are no cash receipts during the projected
period
Treasurers may want a ‘safety stock’ for cash
2/18/2016 31
32. THE MILLER-ORR MODEL
The firm allows its cash balance to wander randomly between upper and lower
control limits.
The models answers the following questions:
When should transfers be effected between marketable securities and cash?
What should be the magnitude of these transfers?
Assumptions:
There is no underlying trend in cash balance over time
The optimal values of LL and RP depend not only on the fixed and opportunity
costs but also on the degree of likely fluctuations in cash balances
33. LL – Set By Management
RP =
3 3𝑏𝜎2
4𝐼
+ LL
UL = 3RP – 2LL
2/18/2016 33
35. NETTING
A process where instead of settling each separate transaction, the
company creates a netting center
This acts like a clearing house that adds & subtracts the various
amount of inter subsidiary payables & receivables
At the end of month, each subsidiary pays or collects one net
payment from the netting center.
352/18/2016
36. BILATERAL NETTING: AN EXAMPLE
Consider a U.S. MNC with three divisions and the
following foreign exchange transactions:
$10 $35 $40$30
$20
$25
$60
$40
$10
$30
$20
$30
362/18/2016
37. BILATERAL NETTING: AN EXAMPLE
Bilateral Netting would reduce the number of foreign exchange
transactions as follows; Examine U.S and Canadian affiliate
$10 $35 $40$30
$20
$25
$60
$40
$10
$30
$20
$30
372/18/2016
38. BILATERAL NETTING: AN EXAMPLE
Bilateral Netting: U.S. and Canada net out at $10
$10 $35 $40$30
$25
$60
$40
$10
$10
$20
$30
382/18/2016
39. BILATERAL NETTING: AN EXAMPLE
Bilateral Netting: Canadian and U.K. affiliates.
$10 $35 $40$30
$25
$60
$40
$10
$10
$20
$30
392/18/2016
40. BILATERAL NETTING: AN EXAMPLE
Bilateral Netting: Canadian and U.K. affiliates net out
at $10
$10 $35 $10
$25
$60
$40
$10
$10
$20
$30
402/18/2016
41. BILATERAL NETTING: AN EXAMPLE
Bilateral Netting: U.K. and German affiliates.
$10 $35 $10
$25
$60
$40
$10
$10
$20
$30
412/18/2016
42. BILATERAL NETTING: AN EXAMPLE
Bilateral Netting: U.K. and German affiliates net out
at $10
$10 $35 $10
$25
$60
$40
$10
$10
$10
422/18/2016
43. BILATERAL NETTING: AN EXAMPLE
Bilateral Netting: U.S. and German affiliate.
$10 $35 $10
$25
$60
$40
$10
$10
$10
432/18/2016
44. BILATERAL NETTING: AN EXAMPLE
Bilateral Netting: U.S. and German affiliate net out at
$25.
$25 $10
$25
$60
$40
$10
$10
$10
442/18/2016
45. BILATERAL NETTING: AN EXAMPLE
Bilateral Netting: U.S. and U.K. affiliate.
$25 $10
$25
$60
$40
$10
$10
$10
452/18/2016
46. BILATERAL NETTING: AN EXAMPLE
Bilateral Netting: U.S. and U.K. affiliate net out at $20.
$25 $10
$25
$20
$10
$10
$10
462/18/2016
47. BILATERAL NETTING: AN EXAMPLE
Bilateral Netting: German and Canadian affiliates.
$25 $10
$25
$20
$10
$10
$10
472/18/2016
48. BILATERAL NETTING: AN EXAMPLE
Bilateral Netting: German and Canadian affiliates net
out at $15
$25 $10
$15$20
$10
$10
482/18/2016
49. BILATERAL NETTING
Before bilateral netting:
Total funds (gross) to be moved: $350
With bilateral netting:
Total funds (net) to be moved: $90
This is a reduction of $260 in foreign exchange transactions.
492/18/2016
50. MULTILATERAL NETTING: AN EXAMPLE
Consider simplifying the bilateral netting with
multilateral netting: Start with the bilateral amounts.
$25 $10
$15$20
$10
$10
502/18/2016
51. MULTILATERAL NETTING: AN EXAMPLE
U.K. affiliate owes the German affiliate $10; the
German affiliate owes U.S. $10.
$15 $10
$15$20
$10
$10
$10
512/18/2016
52. MULTILATERAL NETTING: AN EXAMPLE
Thus, the U.K. affiliate nets its payment to the U.S. of
$10.
$15 $10
$15$20
$10
$10
522/18/2016
53. MULTILATERAL NETTING: AN EXAMPLE
U.K. net payment of $10 to U.S. is combined with the
$20 it owes.
$15 $10
$15$20
$10
$10
532/18/2016
54. MULTILATERAL NETTING: AN EXAMPLE
U.K. affiliates owes $30 to U.S.
$15 $10
$15$30
$10
542/18/2016
55. MULTILATERAL NETTING: AN EXAMPLE
Consider Canadian and German affiliates.
$15 $10
$15$30
$10
552/18/2016
56. MULTILATERAL NETTING: AN EXAMPLE
Canadian affiliate owes German affiliate $15 and the
German affiliate owes the U.S. $15.
$15 $10
$15$30
$10
562/18/2016
57. MULTILATERAL NETTING: AN EXAMPLE
Canadian affiliate nets its payment to the U.S. of $15;
total Canadian affiliate payment to U.S. $25.
$10
$15
$30
$10
572/18/2016
58. MULTILATERAL NETTING: AN EXAMPLE
Consider Canadian and U.K. affiliate
$10
$15
$30
$10
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59. MULTILATERAL NETTING: AN EXAMPLE
U.K. affiliate owes Canadian affiliate $10; Canadian
affiliate owes U.S. $10.
$10
$15
$30
$10
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60. MULTILATERAL NETTING: AN EXAMPLE
U.K. affiliate nets its payment to the U.S. of $10.
$10
$15
$30
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61. MULTILATERAL NETTING: AN EXAMPLE
Combine this $10 with the $30 the U.K. affiliate owes
the U.S.
$10
$15
$30
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66. Decrease in the expenses associated with moving funds internationally
Decrease in the number of foreign exchange transactions (also reduces costs)
Reduction in intra-company float (wire transfers can take up to 5 days)
Financial rewards
Favorable foreign exchange rates due to consolidation of several smaller payments to one
large payment
Reduces administration cost
Control advantages
Forces tighter control over information on transaction between subsidiaries
Reduces time spent on administration & simplifies the reconciliation process
Benefits of Netting
662/18/2016
67. Cash in excess of operating requirement may be held for
two reasons
To meet fluctuations in working capital
As a buffer to meet unpredictable financial needs
Selecting Investment Opportunity
Safety
Maturity
Marketability
Investing Surplus cash
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68. INVESTING OF SURPLUS CASH
Instruments Safety Maturity
Treasury Bills Safe 91 days & 364 days
Commercial Papers Risky
Min 7 days & Max 1
year from date of issue
Certificates of
Deposits
Safe 7 days to 1 year
Bank Deposits Safe Min 14 days
Inter-corporate
deposits
Risky Min 1 day, Max 1 year
Money market
mutual funds
Risky 15 days
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72. WORKING CAPITAL MANAGEMENT
• Working capital management is the management of the short-term investment and financing of
a company.
• Working capital management is to do with management of all aspects of both current assets
and current liabilities, so as to minimize the risk of insolvency while maximizing return on
assets
GOALS:
• Adequate cash flow for operations
• Most productive use of resources
• Satisfy maturing short term debt
2/18/2016 72
73. DETERMINANTS OF WORKING CAPITAL
• Nature of the business
• Sales and demand conditions
• Manufacturing policy
• Credit policy
• Availability of credit
• Operating efficiency
• Price level changes
• Growth and expansion plan
2/18/2016 73
74. CLASSIFICATION OF WORKING CAPITAL
• There are two possible interpretations of working capital concept
KINDS OF
WORKING CAPITAL
ON THE BASIS OF TIME
OPERATING CYCLE CONCEPT
ON THE BASIS OF CONCEPT
BALANCE SHEET CONCEPT
2/18/2016 74
75. BALANCE SHEET CONCEPT
• There are two interpretations of working capital under the balance sheet concept
BALANCE SHEET
CONCEPT
GROSS WORKING
CAPITAL
NET WORKING
CAPITAL
GROSS WORKING CAPITAL
= TOTAL CURRENT ASSETS
NET WORKING CAPITAL
= CURRENT ASSETS –
CURRENT LIABILITIES
2/18/2016 75
77. ON THE BASIS OF TIME
OPERATING CYCLE
CONCEPT
REGULAR WORKING
CAPITAL
PERMANENT OR
FIXED WORKING
CAPITAL
TEMPORARY OR
VARIABLE WORKING
CAPITAL
SPECIAL WORKING
CAPITAL
SEASONAL WORKING
CAPITAL
RESERVE WORKING
CAPITAL
2/18/2016 77
78. PERMANENT WORKING CAPITAL
It is the minimum level of current assets that the firm maintains
Permanent Working Capital can be further divided into:
Regular working capital:
It is the minimum amount of liquid capital required to keep up the circulation of the capital from cash
to inventories to receivables and back again to cash.
Reserve margin or cushion working capital:
It is extra capital required to meet unforeseen contingencies that may arise in future.
ON THE BASIS OF TIME
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79. TEMPORARY OR VARIABLE WORKING CAPITAL
It is the extra working capital required to support the changing production and
sales activities of the firm
Variable Working Capital can be further divided into:
Seasonal working capital:
It refers to liquid capital needed during the particular season.
Special working capital:
It is that part of the variable capital which is needed for financing special operations
2/18/2016 79
80. DIFFERENCE BETWEEN PERMANENT & TEMPORARY WORKING
CAPITAL
Amount Variable Working Capital
of
Working
Capital
Permanent Working Capital
Time
2/18/2016 80
82. DANGERS OF INSUFFICIENT WORKING CAPITAL
Full utilization of fixed assets is not possible
Difficulty in the Maintenance of Machinery
Decrease in Credit Rating
Non utilization of favourable opportunities
Decrease in Sales
Difficulty in distribution of dividends
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83. DANGERS OF EXCESSIVE WORKING CAPITAL
Excessive Inventory
Excessive Debtors (liberal Credit policy)
Adverse effect on profitability
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87. FINANCING NEEDS OVER TIME
Fixed Assets
Permanent Current Assets
Total Assets
Fluctuating Current Assets
Time
$
2/18/2016 87
88. MATCHING APPROACH TO ASSET
FINANCING
Fixed Assets
Permanent Current Assets
Total Assets
Fluctuating Current Assets
Time
$
Short-term
Debt
Long-term
Debt +
Equity
Capital
2/18/2016 88
89. CONSERVATIVE APPROACH TO ASSET
FINANCING
Fixed Assets
Permanent Current Assets
Total Assets
Fluctuating Current Assets
Time
$
Short-term
Debt
Long-term
Debt +
Equity
capital
2/18/2016 89
90. AGGRESSIVE APPROACH TO ASSET FINANCING
Fixed Assets
Permanent Current Assets
Total Assets
Fluctuating Current Assets
Time
$
Short-term
Debt
Long-term
Debt +
Equity
capital
2/18/2016 90
92. COMPARING THE THREE STRATEGIES OF WORKING
CAPITAL FINANCING
FACTORS CONSERVATIVE AGRESSIVE MATCHING
LIQUIDITY HIGH LOW BALANCED
PROFITABILITY LOW HIGH BALANCED
RISK LOW HIGH BALANCED
ASSET UTILIZATION LOW HIGH MODERATE
WORKING CAPITAL HIGH LOW MODERATE
2/18/2016 92
94. WHAT IS RISK?
Risk is the potential that a chosen action or activity (including the
choice of inaction) will lead to a loss (an undesirable outcome)
Damodaran says, risk includes not only "downside risk” but also
"upside risk" (returns that exceed expectations)
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95. CORPORATE RISKS
• Business
Risks-
Sales
Marketing
Manufacturing
Competition
Reputation
• Market Risks
Foreign
Exchange
Interest Rates
Commodity
Equity
Inflation
Liquidity Risks
Funding Risks
Long Term v/s
Short Term
Capital
Credit Risks
Commercial
Counterparty
Settlement
Operational Risks
Systems
Controls
Regulatory
Frauds
Weather
Natural disasters
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96. Definition
It is the identification, assessment, and prioritization of risk
followed by coordinated and economical application of
resources to minimize, monitor, and control the probability
and/or impact of unfortunate events or to maximize the
realization of opportunities.
Risk Management
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99. HEDGING
Hedging is the act of reducing your risk of losing money in the future.
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100. BENEFITS OF HEDGING
Hedging as a strategic resource
Capital raising capability
Lowering distress costs
Lowering tax liabilities
Hedging as a tool for corporate governance
1002/18/2016
104. TRANSACTION EXPOSURE
∆ in FE rate ∆ in outstanding obligations
Hits the P&L a/c, profitability takes a hit
Initiate the
deal
Negotiation
Modifying or
accepting the
deal
Final
delivery
date
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106. The Net Positive Transaction Exposure indicates strengthening of the
domestic currency against the foreign currency and depreciation of
the foreign currency makes it profitable.
The Net Negative Transaction Exposure indicates strengthening of
domestic currency against the foreign currency and appreciating of
the foreign currency makes it profitable.
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107. STRATEGIES FOR TRANSACTION EXPOSURE
Hedging
Currency invoicing
Exposure netting
Leading & lagging
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110. LEADING & LAGGING
Indian Manufacture has today $1million for import material and to
receive $1million from export order
1USD = 60 INR
Expecting rupee to appreciate (eg
59)
Expecting rupee to depreciate(eg 61)
Payments – delay the payment (lagging) Payments- prompt payments (leading)
Receipts-immediate receipt (leading) Reciepts- delay the receipt (lagging)
1102/18/2016
111. EXPOSURE NETTING
XYZ CO.
(CANADA)
US
SUPPLIER
A CO.
(Europe)
B CO.
Pay $10million
Receive
Euro
5million
Receive
1million
CHF
The company’s net currency exposure is USD 2.15 million (i.e. USD 10
million – [(5 x 1.35) + (1 x 1.10)]
1112/18/2016
112. TRANSLATION EXPOSURE
Four Methods to translate foreign currency to home currency:
Current/Non-Current Method: All current assets and current liabilities are translated
at current exchange rate
Monetary/ Non-Monetary Method: All monetary assets and liabilities are translated
at current exchange rate
Temporal Method: Same as Monetary/Non-Monetary method BUT inventory may be
translated at current exchange rate IF it is shown at market value
Current Rate Method: All balance sheet and income statement items are translated at
current exchange rate
1122/18/2016
113. TATA UK (Parent company) has a subsidiary in US
Tata invests $5,00,000 in its subsidiary in US (USD/EUR=1)
On the year end closing date the $ (USD/EUR=2)
Instead of 5,00,000 euros only 2,50,000 euros are translated (5,00,000/2)
EXAMPLE
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114. ECONOMIC EXPOSURE
Unexpected currency fluctuations on a company’s future cash flows and
market value
Long term in nature
Substantial Impact
Difficult to quantify
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118. CASE STUDY
• Oil refinery XYZ ltd needs 1,00,000 barrels of crude oil in 3 months.
• Current market price is $44.20/barrel
• Crude oil futures $44.00/barrel
100 contracts of 1000 each: 100 x 1000
=1,00,000 barrels
Total cost =$44,00,000
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119. SCENARIO #1: CRUDE OIL SPOT PRICE ROSE BY
10% TO USD 48.62/BARREL ON DELIVERY DATE
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120. SCENARIO #2: CRUDE OIL SPOT PRICE FELL BY 10% TO USD
39.78/BARREL ON DELIVERY DATE
1202/18/2016