Treasury: profit or cost centre?

Article Abstract:

The choice of treasury operations, whether as a profit center or as a cost center, should not be based simply on the manner of operations but on the approach that is most suitable to the style and structure of a company. Financial risk is a critical factor in these considerations and as such the proper controls should be placed in the selected approach. Profit centers are mistakenly associated with financial risk. It must be pointed out though that the risk a company encounters is the same, regardless of whether a profit- or cost-centered approach is used, whenever a treasurer authority exceeds its prescribed limits. Profit centers can be operated at minimal risk when operations are limited to hedging transactions. Transactions undertaken using a centralized system and the option of unit operations to retain their independence make the profit center a favorable approach.

Usage, Finance departments, Profit centers

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Special purpose derivative vehicles

Article Abstract:

Special purpose derivative vehicles (SPDVs) are increasing in popularity as a tool for mitigating credit risk. Several financial institutions have already developed an SPDV to achieve the targeted AAA rating, while many others are considering or planning to create their own. So far, three types of SPDV structures have been created. These are the joint ventures, separately capitalized vehicles (SCVs) with a continuation structure and SCVs with a termination structure. In a typical joint venture, a derivatives operator hooks up with another stronger company to improve its rating and, if possible, its profile. In SCVs, market risk is transferred to a parent by mirror transactions and credit exposure to the parent is collaterized, with SCV capital covering customer credit risk. SCVs may have either a continuation structure or a termination structure.

Evaluation, Derivatives (Financial instruments)

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Managing foreign exchange: to hedge or not to hedge

Article Abstract:

Corporate management of the impact of foreign exchange fluctuations requires considering hedging strategies in managing transaction and translation exposures as well as through reporting of financial exposures. Any hedging process must consider timing and the degree of hedging selectivity appropriate to the risk. Transactions are probably the best exposures to be hedged, because they have a direct impact on cash and profit gains and losses. Hedging of translations can generate cash movement, though there is not typically an immediate gain or loss. Financial department reporting of possible foreign exchange exposures promotes consideration and control of those risks.

Analysis, Foreign exchange, Corporations

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