WEEK 1 TUTORIAL 1

Introduction to Treasury Mgw

1. What is Treasury?

Treasury is the financial hub of any organization

Meaning, the nerve centre of any organization.
: They deal with A/L, risk and ensure there is sufficient liquidity and funds (make sure
the funds are invested in assets that will generate max returns, thus, the economic and s/h
value)
its key responsibility is the safeguarding and stewardship of its financial assets and
liabilities.
Stewardship = how do you manage A/L in the right manner?
Every organization wants to max their returns/profits. Hence, they will tend to invest in
high risk instruments. [ risk = return]
In treasury management, when you invest in your assets, must always take into
consideration about your RISK FACTOR (can you accept that kind of risk?).
The treasury departments work focuses on both the external and internal issues.
o The external issues relate to
financial markets
It constitutes of the players in the financial market.
investors
Maintain a good relationship with them
Investors = ppl who are ready to buy the bonds when you issue them
(They are ready to invest on whatever instruments you issue so that you can get
funds)
creditors
Ppl who gives you funding
financial institutions
rating agencies
They rate the , bonds (going to issue or buy - class of instruments)]
for safety requirement
i.e. AAA rated, BBB rated etc.
debt issuers
They pay coupon as revenue.
Need to know who issues the debt as you are going to invest your money.
economic conditions
Now, there is an outflow of funds from the ASIAN countries.
Thus, MYR (depreciated) against the USD...WHY?
: - excessive surplus of MYR as they sell MYR for USD
- this is bcoz they expect the USD to = opportunity to invest in US
There is a dramatic drop in China's stock market...WHY?
: China's CB set a stricter rule for margin financing (borrow to invest in stock
market)
business cycles etc.
o The internal issues relate to
managing the organizations

assets and liabilities

have different maturities, costs and revenue streams
Hence, it's important to match them
cash (at the right time, right place and right denomination)
liquidity management
Ex1: - Insufficient liquidity in 1MDB
Even though it has physical assets of RM53 billion, it doesn't have
enough cash and liquidity for the RM42 billion debt.
Ex2: - Bank in Greece
Due to its insufficient liquidity, it has to close down for 2 weeks and the
depositors are limited to withdraw at 60 Euros daily.
maximizing returns
minimizing costs, risk reduction and mitigation etc.
The treasury department is responsible for implementing financial decisions made by the
top management, the board and the ALCO of the organization.
o The positioning or sitting of the treasury department would very much depend on
the complexity of the organization.
o It could be a department by itself or could be a function within the finance or
accounting department being handled by one or two individuals.
The treasury department also services other functional areas of the organization providing
support and advisory services to the areas.
I.e.: - loan department (giving up loan)
treasury department need to support them in funding
by ensuring there is sufficient liquidity in that branches for depositors = sources of
funds when they come to withdraw their money
o Treasury plays a key role in advising alternatives, assessing and mitigating risks and
executing decisions.

2. What is a business cycle?

What funding and lending strategies would treasury department recommend to the ALCO
during the different phases of the business cycle.
ALCO (Asset Liability Community)
- every bank / financial institution
- to deliberate reports, to make and implement decisions and overseas the implementation of
decisions made by the BOD and top mgw.
According to Investopedia, a business cycle is the recurring and fluctuating levels of
economic activity that an economy experiences over a long period of time.
5-year cycle or 10-year cycle (in the past) - occurs regularly
Now, the biz cycle happens more frequently (short term).
The five stages of the business cycle are growth (expansion), peak, recession (contraction),
trough and recovery.
At one time, business cycles were thought to be extremely regular, with predictable
durations, but today they are widely believed to be irregular, varying in frequency,
magnitude and duration.

 The different phases of the business cycle would pose challenges to the treasury
department in the form of interest rate risk and price risk.
Diff phases of cycle = diff i/r
- During upswing, i/r
- During downturn, i/r

Hence, it will impact on the revenue /interest income and the value of A/L.
When i/r, value of A/L ( : discounting on the i/r) DISCOUNTING TECHNIQUES
in cost of L
Thus, what should be your strategy when i/r goes up?
i. You should invest in floating rate loans as an asset. ( i/r, revenue)
ii. Your sources of funding should be long term at fixed rate (avoid in cost)
iii. i + ii maximise returns
When i/r:
i. Invest in instruments that are long term at fixed rate (i/r, stable/sustainable revenue)
ii. Sources of funding should be short term (renew or roll-over funds at LOWER cost)
iii. i + ii maximise returns & minimise costs
***This is how to manage A/L at diff biz cycles***
to Max Rev & Min Cost
at an acceptable level of risk
with sufficient liquidity.

The diagram below explains the lending and funding strategies that would be adopted by the
treasury department during different phases of a business cycle.

3. Briefly discuss the treasury management community.

(i)

Financial institutions including banks and dealers

Financial institutions act as financial intermediaries providing various financial services and
facilitating non-financial services.
These institutions can act as principals for their own benefit or as brokers for banks, buying
and selling debt, investments and currencies, providing risk management financial products
and custodial and trustee services.
These services are provided by in-house experts.
Q: Why do you need to deal with them?
A: When you have surplus funds, you must maintain sufficient liquidity with withdrawals
for your customers and your payment.
Hence, you can also place your surplus funds in other banks as deposits so they will
pay you interest as you won't earn any revenue by keeping.
If insufficient funds, then you can sell short term financing instruments to get liquidity.

(ii)

Investment community
The external investment community is important to the bank treasury as the investment
community are the market/buyers for debt issuance, sourcing for liquidity and for
investments.
For example,
you need funds and you are issuing bonds to raise funds.
In order to do so, you need ppl to purchase your bonds.

If raising capital to common stocks, there must be ppl to subscribe your shares.

(iii)

Regulatory bodies
Regulatory bodies such as the Central Bank, Securities Commission or the APRA as in
Australia all play key roles in establishing rules, regulations, guidelines and the legal
framework for the smooth functioning of the treasury activities particularly in areas of risk
management, liquidity requirement, payment and settlement and debt issuance.

(iv)

Accounting, audit and legal experts

Accounting, audit and legal experts would provide support services on the proper keeping of
accounts, the proper dealings in the transactions and legal opinions on debt issuance and
legal requirements.

(v)

Vendors of information or infrastructure

Vendors of information will provide up to date, accurate and relevant information which is
vital to treasury activities for not only investing and divesting in the right kind of investment
instruments and securities but also for the timing of the debt issuance.
Vendors provide economic, social and market information on a timely basis for treasuries to
make fit and proper decisions.
Infrastructure providers would provide the tools and equipment such as risk management
tools, statistical software and the necessary computer hardware and software to carry out
treasury activities in an efficient , smooth and secured manner
Must get information at the right time, at the right place or you will not be able to capitalize
the opportunity. (i.e. what's happening in the market - must know information in order to
trade)

(vi)

Credit rating agencies

Credit rating agencies provide credit assessments and ratings of borrowers, financial
institutions, governments and debt issuers.
These agencies include Fitch, Standard & Poors and Moodys.