Lex van der Wielen, Willem van Alphen, Just Bergen
Phillip Lindow, Vasily Chekulaev Chapter from the book "Organization of International Money Management"
Publishing house "Olymp-Business"
In different holdings, different financial functions have been transferred to joint service centers. Sometimes the holding companies prefer to continue to carry out part of the work on the implementation of payment transactions. For example, they can receive invoices directly from suppliers and then forward them to an incoming and outgoing payment center. Sometimes it is more convenient to arrange for the collection of outstanding receivables at the local level.
OUTSOURCING
Centralizing certain cash management functions can provide significant savings for a company. However, at a certain point, the possibilities for saving through internal centralization are exhausted. In this case, further cost reduction can be achieved only through outsourcing of a number of functions. Payment services are currently offered by various market participants, including financial consulting agencies, accounting firms and banks.
More and more midsize companies are outsourcing some of their cash management functions to focus on core business. In some situations, outsourcing can significantly reduce overhead costs. Nevertheless, many companies are reluctant to take advantage of this opportunity, especially if they have already spent a lot of effort and money on creating their own joint service center. In addition, many companies believe that direct cash flow management of the company gives you the ability to keep your finger on its pulse. After all, a change in cash flows may be the first sign of future trouble.
The advantages and disadvantages of centralization
The benefits of centralization include:
- concentration of knowledge and experience that allows you to achieve better results with fewer staff and reduce the likelihood of error;
- linking (if possible) financial positions and cash flows, leading to higher profitability and lower costs;
- centralized procurement of financial services, allowing for volume discounts;
- tighter control over the implementation of Treasury policies.
The disadvantages of centralization are:
- deterioration of local knowledge;
- local protest against the redistribution of powers;
- reducing the attention of the holding companies to the tasks of centralized cash management;
- the complexity of the management information system (MIS) and the need for enterprise resource planning (EPR) systems.
In general, the advantages of centralization outweigh the disadvantages.
Geographic Structure of the Treasury Service
TNCs with branches around the world often open regional treasury centers in three main time zones - Asian, European and American.
These regional treasury centers handle treasury operations for all subsidiaries located in the respective time zone. Regional treasury centers are often located not in the same country as the holding company, but nevertheless are its most important divisions.
Regional centers are usually located in countries with a favorable financial and investment climate. In Europe, they can be found in cities such as Brussels, Amsterdam, Dublin, Zurich and London, which are called "financial centers". Figure 3 provides a diagram of the organizational structure of a European TNC with regional treasury centers.
Figure 3. Structure of a European holding with treasury centers
Allocation of expenses and income related to treasury operations
In the case of centralization of all or some of the treasury functions, it is necessary to determine who will bear the risk associated with their implementation and how the total costs and revenues will be distributed between the centralized treasury and the holding companies. There are two options, depending on whether the centralized treasury is a profit center or a cost center.
PROFIT CENTER
If the treasury is a profit center, then it has a profit target of its own. To achieve it, the Treasury has the right to take financial positions that are not related to the positions of the holding companies. Whether treasury discounts or markups can be applied depends on the accepted transfer pricing rules. These discounts and mark-ups must of course be determined with due regard for the opinion of the tax departments.
COST CENTER
If the treasury department does not have a profit target of its own, it is called a cost center. In some cases, the treasury is required to immediately hedge all positions held by the companies in the holding (defensive strategy). In other cases, the Treasury is allowed to postpone a required hedge or to keep some positions open (offensive strategy). In the latter case, the treasury department is sometimes referred to as a service center.
Delimitation of tasks
Having clearly delineated the tasks of the treasury department as a whole, it is necessary to precisely define the tasks of the various services within this department. The daily work of the corporation treasury consists of managing cash balances, determining positions, concluding financial agreements. In this case, the following functions are performed:
For monitoring purposes, the tasks of the different services should be delineated as clearly as possible. One of the most important organizational risk factors is an insufficiently clear distribution of responsibilities, rights and functions. Therefore, it is necessary to give completely unambiguous answers to the questions: who and what is allowed to do, and who is not; who is obliged to do what; finally, who is responsible for monitoring, authorizing and verifying?
It is especially important to distribute responsibilities between the front office and the back office. The official closing the deal should never control the final payments. Figure 4 illustrates the distribution of functions within the treasury department.
Figure 4. Sequence of operations when conducting a treasury transaction
Sometimes companies create a dedicated department between the front office and the back office called the mid office. The Mid Office takes on a number of tasks for other departments, mainly reporting positions, performance and risks.
Treasury control
Treasury deals with two main types of risk: operational and positional. The first arises from the flaws of the organization itself. Examples include faulty business practices, system errors, personnel errors, and fraud. Positional risks are explained by the presence of so-called open positions that expose the company to foreign exchange risk. To minimize these risks, the company must take certain measures.
Restrictions
To facilitate risk management, it is necessary to introduce a system of restrictions. It is necessary to clearly indicate which transactions are allowed, with which counterparties and for what maximum amount. The conclusion of transactions that do not fit into this framework requires a special permit. The system of restrictions concerns:
- the tools used;
- possible contractors;
- countries and currencies;
- officials, groups and / or departments.
TOOLS
Most companies place limits on some of the instruments that the treasurer can use to cover positions. For example, many companies prohibit the use of financial derivatives (derivatives). Derivatives are financial products whose value depends on the value of other financial products.
CONTRACTORS
The company must also indicate which parties the treasurer is allowed to deal with. Often a limit is set for a particular counterparty. This means that the total value of all transactions with this counterparty must not exceed a certain maximum.
COUNTRIES AND CURRENCIES
Often times, the Treasury department is required to comply with country and currency restrictions when conducting its trades. Typically, in addition to the currency of the country of origin, these transactions can be concluded in the currencies of the OECD countries (i.e. the most developed countries) and in the currencies of the main trading partners outside the OECD area.
OFFICERS AND DEPARTMENTS
The company must determine what transactions each officer is allowed to carry out, as well as the maximum amounts involved in those transactions. These amounts are called "transaction limits". The company should also determine for each employee (including the treasurer) whether they are entitled to carry out or approve external transactions, such as transfers of outgoing payments, foreign exchange transactions, transactions in the money market or financial derivatives, and if so, for each amount. Each operation must have its own initiator and its own person who authorizes its implementation.
Internal and positional control
Since treasury operations involve two main types of risk, a company should have two types of control - internal and positional.
INTERNAL CONTROL
Internal control is the control over the operational risks of the Treasury by an internal auditor or controller. Internal controls include retrospective reviews to ensure that all contracts are entered into and all settlements are made in compliance with applicable requirements and restrictions. In this regard, the internal auditor checks the following points:
- powers (who has the right to sign and for what maximum amount);
- authorization (who must approve what in advance);
- compliance with restrictions;
- adherence to procedures.
POSITIONAL CONTROL
Positional control aims to monitor the value of existing contracts. The treasurer is responsible for this. In this regard, the treasurer calculates short-term and long-term profit (loss) for each open position and for all positions together. To do this, he needs to draw up quite often (at least once a day) reports on all open positions. This information allows the treasurer to take timely action in case of unbalanced positions. In emergencies, the data in the reports must be refreshed several times a day.
Treasury systems
A good information system is vital for the modern corporate treasurer. In addition to the remote banking system provided by the bank, it must have a treasury information system that reflects all the company's cash flows. The most important functions of such a system are:
- collection of information about transactions;
- preparation of reports;
- information support for decision-making.
To provide accurate information, the treasury system must import it from other systems (for example, remote banking and accounts receivable / payable, payroll, etc.) and obtain it from information providers such as Reuters and Bloomberg. Most of the systems, among other things, are directly linked to the main accounting system of the enterprise. Therefore, the statements generated by the treasury system must comply with the accounting standards adopted by the company.
Figure 5 shows the most important data sources used by the treasury system, its main functions, and the purpose of the information it generates.
Figure 5. Data used and generated by the treasury system. Functions of the treasury system
Collecting information about transactions
Today, data on most transactions are entered into the treasury system by traders themselves, and the actual execution of transactions becomes possible only after their approval by the back office. This module contains information about all restrictions and selected counterparties, thus avoiding unnecessary risks such as the risk of fraud.
Report preparation
The Treasury Information System can be used to assess the results of all treasury management activities. This system should periodically provide information on interest income and the results of foreign exchange transactions. In addition, it allows you to evaluate income from deposits or other financial investments, as well as financing costs and compare these indicators with the market average. The goal is to determine how optimal the actions of the corporation treasurer were. Similarly, you can assess the effectiveness of foreign exchange transactions.
The information generated by the treasury systems also includes the most important data for company management on the current and future cash positions, as well as on positions at the interest rate and by currency.
Information support for decision-making: risk management
In most TNCs, the treasurer plays a major role in managing the company's risk. Treasurers' experience in managing risk — counterparty, foreign exchange, interest rate risk — and their knowledge of valuation techniques and risk measurement techniques enable them to do this job well. As the task of managing risk becomes more important for the treasurer, it is imperative that the treasury system helps him evaluate open positions at interest rates and by currency.
The most important concepts of risk management are:
- duration;
- value-at-risk (VaR);
- stress testing.
Duration allows one to express the sensitivity to changes in the interest rate of, say, a loan portfolio, and is defined as the relative change in market value as a result of a slight change in interest rates. Duration can be used, for example, to calculate the depreciation of a portfolio in the event of a 1% increase in interest rates. For completeness, note that the duration of the entire portfolio is approximately equal to the weighted average of the durations of its components.
In professional securities trading, interest rate changes are expressed in basis points (1 basis point = 0.01%). The decrease in the value of a portfolio due to an increase in the interest rate by 1 basis point is called the basis point value (BPV).
COST AT RISK
The analysis of the value at risk (VaR) allows you to assess the risks of any portfolio. In this analysis, the risk of a position or portfolio as a whole reflects a single indicator. The VaR method is based on the calculation of probability and shows the maximum loss, which is unlikely to be exceeded. This loss is called the exposed value of the portfolio. The VaR method is based on a model, the main determinants of which are the volatility of market variables, i.e. risk parameters. The volatilities of risk parameters are used to calculate how much the market value of a portfolio can change from the current market value. Thus, the VaR model allows you to determine the possible outcomes of changes in the fair value of the portfolio. To calculate the value of a portfolio of loans at risk, the expected change in the market interest rate is multiplied by the duration.
But which of the possible outcomes is value at risk or “potential loss”? To answer this question, all possible results obtained using this model are arranged in a certain order - from the largest possible losses and further through all the less significant losses and more significant profits to the largest profit. As it will soon become clear, the analyst is only interested in possible losses in this case. After all, it is with them that the risk is associated, and the VaR method is a tool for risk analysis. Then a certain level is chosen: say, 95% of the observations. Thus, we can identify losses exceeded only in 5% of cases.
Example
The company has a loan portfolio estimated at $ 3 billion. USA, with a duration of 4.8. There is a 95 percent chance that the maximum change in interest rates will be 20 basis points.
The cost of such a loan portfolio at risk will be:
$ 3 billion X 4.8 x 0.20 = $ 28.8 million
The VaR method can be used for more than just calculating negative changes in market value. It can also be used to calculate the negative change in interest income or loan losses. However, the principle remains the same.
VaR is a reliable indicator of potential losses under normal market conditions, i.e. the VaR method gives a loss figure that will not be exceeded 95% of the time. However, it does not show what will happen in one of the remaining 5% of cases and what losses the company will incur.
STRESS TESTING
Under normal conditions, VaR is a convenient tool for assessing portfolio risk. However, as we have seen, it is not suitable for emergencies. This is why an additional method is needed to obtain more information about the risks of a market emergency. This additional method is called stress testing.
Stress testing is the general name for a whole group of methods. Their main principle is the analysis of portfolio risks in the context of marginal changes in prices or interest rates. Stress testing determines whether a company will survive in the event of a market disaster. Most often, a stress test is performed as a scenario analysis. The treasurer must make certain assumptions about what emergencies may develop in the market. However, these anticipated changes in market conditions should not be insignificant, as in this case stress testing would give almost the same results as a VaR analysis. At the same time, the test parameters should not be too high, so as not to make the chosen scenario unrealistic and unlikely. In other words, the treasurer is obliged to select feasible adverse events that the board of directors could take seriously.
Usually, a back-office is understood as a unit whose responsibilities include internal accounting of operations performed by a company (bank).
Front-office (front-office) - departments and services of the company (bank), directly involved in the conclusion of transactions.
Refers to the amount of actual cash that a given corporation, bank or other legal entity has in its possession at a particular point on time. In general, this includes the actual cash or accounts that are held by the company. It can also include other assets that are easily converted into cash, called liquid assets, such as short-term bonds or certificates of deposits. This does not include assets that have a low degree of liquidity, such as groceries, real estate, cars, or other items that cannot be quickly and easily converted into cash.
While individuals may technically have a cash position equal to the amount of their liquid investments, the term is most often used in a business context. A company, for example, lists its cash position on its balance sheet and communicates that cash position to investors, creditors, or other interested parties. The bank must have a cash position as well.
Generally, banks are required to have a minimum set amount of cash on hand based on the amount of funds people have deposited with the bank. For example, if a brand new bank opened and 100 individuals each deposited $ 10 US Dollars (USD), the cash position required by the bank would be based on the $ 1,000 USD in the deposited funds. The bank would thus be required to have at least $ 1,000 USD in cash so that it would have the money to pay each of those people if they all came to get their money out at the same time.
For corporations, on the other hand, determining how much cash to have can be tricky. In general, the company does not want too little cash on hand. Cash is required to grow the fund's business and make purchases of supplies and services necessary to run the business. Cash can also be a sign of solvency and stability within a company. Cash, however, generates a relatively low return on investment compared to other less liquid investments, and as such, having too much cash on hand can be a downside to a company.
Investors can look at the monetary positions of various companies to determine whether to invest or not. If the company does not have what is considered an appropriate amount of cash, it can appear to be a weak investment. Striking the right balance in this way is important for a public company hoping to attract investors.
We have already determined Ford's net cash position ($ 8.35 billion) by subtracting long-term debt from the cash position. A billion dollar monetary position is bound to grab the attention of an investor. And that's why.
From 1982 to 1988, Ford stock rose from $ 4 to $ 38 after a split. During this time, I bought five million shares, my profit from them at a price
$ 38 was huge. On the other hand, a chorus of Wall Street analysts have been announcing for two years that Ford is overvalued. Many consultants have argued that this cyclical car company has sung its swan song and is on the verge of failure. I even tried to sell her shares several times.
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However, the company's annual report told me that Ford had accumulated $ 16.30 net cash per share. In other words, for every share I held, there was a $ 16.30 paper bonus representing a hidden cashback.
The bonus changed everything. It turned out that I was buying the car company not at $ 38 per share, as it was then, but at $ 21.70 ($ 38 minus $ 16.30). Analysts had expected the auto business to generate earnings of $ 7 per share for Ford. Then, at $ 38 per share, the P / E will be 5.4. and at a price of $ 21.70 - 3.1. The second P / E is attractive to both cyclical and non-cyclical companies. If Ford were a lousy company, and its latest car models were disgusting, it probably wouldn't impress me. However, Ford is a great company, and its latest models of cars and trucks have been appealing to customers.
The cash position kept me from selling Ford stock. After I made this decision, they went up in price by another 40%.
I also knew (anyone could read about this on the fifth page of the annual report, in its glossy, easy-to-read part) that in 1987 the Ford finance group - Ford Credit, First Nationwide, U.S. Leasing and others - brought $ 1.66 per share. Ford Credit, whose share was $ 1.33 per share, "posted profit growth for thirteen straight years."
If we take the typical P / E ratio of 10 for financial companies, it turns out that the value of these subsidiaries is 10 times more than $ 1.66 per share and is equal to $ 16.60 per share.
So with Ford's current stock price of $ 38, you get $ 16.30 in net cash and $ 16.60 in financial company value, and the overall auto business costs you $ 5.10 per share. In addition, the expected earnings of the auto business itself were supposed to be $ 7 per share. The question is, is investing in Ford risky? At $ 5.10, Ford stock was a boon, even though it has grown nearly 10 times since 1982.
Another company with a significant cash position is Boeing. In early 1987, her shares were selling for over $ 40, but with $ 27 in net cash, her shares were worth $ 15. In early 1988, I acquired a small stake in the company and subsequently increased it due to cash position and a record high volume of commercial orders.
Of course, the cash position does not always change the case. More often it is not enough to pay special attention to it. Schlumberger, for example, has a large cash position, but on a per share basis, it is not very impressive. Bristol-Myers' cash position of $ 1.6 billion with only $ 200 million in long-term debt looks impressive. However, with 280 million shares outstanding, a net cash position of $ 1.4 billion yields only $ 5 per share. That amount, with a share price of $ 40, means little. Now, if the stock were trading at 15.
Be that as it may, in the course of research, it never hurts an investor to check the company's monetary position (as well as the value of the related business). Who knows, you might be lucky enough to stumble upon a company like Ford.
Speaking of Ford, what is it going to do with its money? While the company is building up its cash position, assumptions about its possible use may affect the stock price. Ford is raising dividends and intensively buying back its own shares, but the company still has billions left. Some fear that Ford will throw them away for takeovers, but the company has so far been pursuing a restrained policy in this area.
Ford owns a savings and loan company and, with partners, controls Hertz Rent-A-Car. Oka offered a low price for Hughes Aerospace and therefore lost. The takeover of TRW has the potential to bring tangible synergies: it is the world's largest manufacturer of automotive parts and components with a presence in the adjacent electronics market. Moreover, TRW could become the largest manufacturer of car airbags. If Ford buys the rumored Merrill Lynch or Lockheed, will it add to the long list of diversification players?
- Cash flow statement: preparation and disclosure of information in accordance with IFRS requirements
Net cash position at the beginning of the period 100 - -3 576 767 -3 576 767 -3 576 767 -3 576 767 -2 576,031 Net cash position at the end of the period 110 -3 197 010 -1 901 247 -2 153 272 - Improvement of the financial reporting model in accordance with IFRS
If the organization has not net financial liabilities but net financial assets from which it receives net financial income, then the calculation of free cash flow from the position of financial activity is as follows - Valuation of shares and the value of commercial organizations based on the new financial reporting model
Other components of net operating assets 441 152 463 387 486 556 510 884 526 210 541 997 558 256 Net operating assets 6 636 832 7 537 208 7 914 068 8 076 091 ... 846 830 389 871 - Balancing the solvency of the enterprise and the liquidity of its financial resources
LDP's liquid cash flow or change in net credit position is an indicator of a surplus or deficit - Anti-crisis management as a tool for financial stabilization of an enterprise
From these positions, the objects of observation can be indicators such as the net cash flow, the market value of the enterprise, the level of concentration of financial transactions in high-risk areas, the capital structure ... It is based on the following key indicators of the company's net profit, revenue from product sales and the amount of equity capital If ... SWOT analyzes are usually presented graphically on the basis of a comprehensive study of the influence of the main factors using their classification according to such signs as strong and weak positions of the enterprise, opportunities and directions of their development, threats that impede the development of the enterprise In general, all methods - The specifics of the assessment of receivables and payables of an enterprise
The maturity of accounts receivable is shorter than the maturity of accounts payable, i.e. debtors' debts are converted into cash at shorter time intervals than those after which the company needs cash for the timely payment of debts to creditors, which to some extent eliminates the need to raise ... the company has a negative net credit position in all three periods, there is a total gain since the company gains from the payable - Two contours of interests in the policy of the company's financial health
Ratios Note that we are talking about the liquidity of the balance sheet and not the company, and certainly not about the position of the owner. flow rate coverage ratio ICR Interest Coverage Ratio TIE Times Interest Earned share of short-term - Assessment of the informativeness of domestic and foreign methods of factor analysis of the "net profit" indicator for substantiating the dividend policy of a joint-stock company
In P Kurnosova see row 1 of table 8 is underestimated does not reflect the real deterioration of the organization's position over time, since an imaginary decrease in net profit by only 19.71% occurs - Financial equilibrium monitoring as a component of economic security
Note that the term liquidity is multivalued; it is considered in a broad and narrow sense, distinguishing the following definitions of a company's liquidity a broad concept - balance of cash flows criterion Net cash flow NCF> 0 current structural liquidity - consistency of current assets and current ... use the following recommendations, the firm's current liquidity ratio does not roughly reflect the degree of liquidity of individual working capital positions is compared with the industry average If the deviation is significant, it is necessary to find out the reasons or the industry - On the ratio and algorithms for calculating indicators of own working capital and net working capital
It makes sense to abandon the calculation of own circulating capital, since the total size and share of equity capital in the formation of total assets is important for business entities, and it is not so important in which assets it is in fixed assets, cash receivables, etc. very ... If your own borrowed resources have merged into a single stream, then it is very difficult to differentiate them according to individual positions of the balance sheet asset 8. To assess financial stability and solvency in the short term, it is advisable to calculate the net - "Imaginary" liabilities taken into account when calculating the net assets of the organization
This position is due to the following provisions 1 in accordance with the CAAP cash or property transferred to the owners ... CAAP cash or property transferred to the owners, shareholders or founders is not an asset of the organization and, accordingly, leads to a decrease in net assets 2 It can be concluded that the property or cash funds received from shareholder owners -
From these positions, the promising goal of the investment activities of companies is to exceed the investment income over the invested investment capital ... From these positions, the promising goal of the investment activity of the companies is to exceed the investment income over the invested investment capital, which in the long term will ensure an increase in the net discounted cash income under dynamism and uncertainties in the market environment Since the net discounted monetary - The financial potential of the enterprise: concept, essence, measurement methods
Thus, from the standpoint of the totality of all income and cash inflows from the outside, the financial potential of an enterprise can be measured by the absolute ... It is a certain set of interrelated elements, for example, a subsystem for the formation and distribution of income and expenses of net profit, a system for mobilizing funds from the capital market, and so on, forming a stable unity - Formation of the financial policy of the organization, taking into account the stages of the life cycle
The spread of the values of the above indicators of the results of the organization's performance makes it possible to identify its position on the life cycle. economic profit percentage of investments and dividend payments - Management of financial flows in holding structures
As a result, the provision of the charter on the possibility of the general meeting of shareholders adopting a decision on non-payment of dividends if the company has no net profit does not indicate the obligation of the general meeting to decide on the payment of dividends when it ... A similar position is formulated in the definition of the Supreme Arbitration Court of the Russian Federation dated December 27, 2007 No. in case No.A40-52516 ... It should be noted that violation of the deadline for payment of the declared dividends and or their payment not in full are grounds for collecting interest from the company for using other people's funds for the period of delay. This conclusion was made in the Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation of 18 - Reflection of information about financial assets in financial statements in accordance with IFRS
It is also permitted to use mid-market prices as a basis for determining fair value for offset risk positions and apply the bid or ask price for net open position The price of the last transaction may be the fair value if information about active ... market transactions between knowledgeable willing parties in independent parties References to the current fair value of another largely identical instrument Cash flow discounting analysis and pricing models e.g. option pricing model Financial valuation techniques - Improving accounting and analytical support for cash flow management
- Ways of reproduction and increasing the efficiency of using the company's fixed assets
With the direct method, the net cash flow from operating activities is determined as the difference between incomes secured by real cash inflows ... - On the standard values of the coefficients in the formation of the rating assessment of the financial and economic condition of the enterprise
As for the third position of determining the list of specific ratios for specific groups, as a result of a sufficiently long time ... Cal Possibility of repayment of the most urgent and short-term obligations at the expense of cash and financial investments A1 P1 P2 Financial stability ratios Debt to ... total assets in terms of net profit Ra Efficiency of using total assets P h Ba Return on equity in terms of net income - Principles of optimization of the capital structure of an agricultural enterprise
The cost of equity capital is determined from the position of lost profit, i.e. from the point of view of alternative options for placing funds when own funds ... But since these funds are invested in their own enterprise, their price is the net profit per unit invested
When making a monetary transaction, the bank acquires 1 hard currency and sells another. In a deal with an immediate delivery of hard currency, this means investing his resources in hard currency, which he sells. Once the bank makes a position for a period, then, buying a claim in a certain currency, it perceives the promise in another currency. As a result of these transactions, 2 different currencies appear in the assets and liabilities of the bank, in currency form or in the form of obligations, the exchange rate of which changes independently among themselves, leading to the fact that, at a certain moment, it can exceed the liability, forming, or vice versa.
The correspondence of the claims and obligations of the bank, including its off-balance sheet transactions, in foreign currency characterizes its monetary transaction. If they are equal in terms of a certain hard currency, the cash position is considered closed, and if they do not coincide, it is considered open. An open cash position can be short, once and the promises for the sold currency exceed the assets and claims in it, and long, as long as the assets and claims for the purchased currency exceed the liabilities and liabilities. When long, the trader buys the base currency in anticipation of a rise in the rate. Among other things, it will be considered that there is an open long position in some foreign hard currency, since there is an asset in possession in equilibrium, denominated in this foreign currency, for example, acquired Eurobonds.
In the same way, the bank will have a long deal on the US dollar, since in the absence of funds raised in this currency, including contributions from the population, the balances on the accounts of legal entities, the bank has issued loans denominated in US dollars. In case of a short position, in anticipation of a decline in the exchange rate, the base currency is sold. Among other things, it will be considered that there is a position for sale in this hard currency, since there is a liability, for example, credit promises, denominated in dollars. For a sample with a bank, the position will become short when, in the absence of issued loans, balances on correspondent accounts nominated in hard currency, the bank has attracted funds nominated in it, for example, deposits. Subsequent to the implementation of a circulating sale for a long position or a circulating redemption for a short position, or if the assets in a certain hard currency become equal to the liabilities in the same hard currency, they say that the cash position is covered.
A short cash position can be offset by a long position if the size, time of execution of the transaction and the hard currency of these positions are similar. This principle is important, because an open cash position is associated with the risk of losing the bank, when by the episode of a counter-transaction, in other words, the purchase of the previously sold hard currency and the sale of the previously purchased hard currency, the exchange rate of this hard currency will change in an unfavorable direction. As a result, the bank will be able to either acquire the smallest required amount of hard currency on a counter-transaction than it previously sold, or it will be obliged to pay for the same required amount a larger equivalent of the previously acquired hard currency. In two versions, the bank bears the expenditure of its funds associated with a change in the monetary exchange rate. it is constantly present in the presence of open positions, both long and short.
Since an open cash position is created for certain hard currency, in the process of constant operations of the bank in the currency market, cash positions constantly appear and disappear. The change in the amount of the monetary position happens, as was noted earlier, with the help of the configuration of the amounts of liabilities and assets in hard currency. The change in assets and liabilities, moreover, happens with the help of specific current monetary transactions, and transactions associated with the movement of money.
The appearance of losses or the receipt of benefits will depend on the direction of the exchange rate configuration and on whether the bank is present in a net-long or net-short position in foreign hard currency. The net position is guided by the method of adding up all net positions taking into account the symbol, in contrast to the calculation of the monetary risk, where the position symbol is not provided. If the bank has a long transaction in the currency, the revaluation will cause profit when the hard currency rate rises, and losses, once the hard currency rate falls. And, on the contrary, a sell position will give rise to benefits when the foreign exchange rate decreases, and to losses when the foreign exchange rate increases. Banks constantly monitor the change in the monetary position, set a limit for any partner bank, assessing the monetary risk and the likely outcome in the event of its immediate full coverage at the available monetary rates. This task is complicated by the fact that the money transaction itself includes cash and urgent transactions, absolute at different times and at different rates.
The result of the monetary position is positive for the bank if it held a long deal in hard currency, the rate of which increased. But one hundred percent to realize this success is possible only when all monetary positions are closed at current rates. This operation is called the realization of benefits and traditionally occurs during periods of an intense trend in SLE, stopping its movement, and from time to time temporarily changing its dynamics in the opposite direction.
The creation of foreign exchange positions throughout the day is justified by the conduct of arbitrage money transactions in time and can be excluded by the simultaneous coverage of any transaction with a counter-transaction. But big banks resort to counter-deals exclusively in a global crisis. Maintaining long or selling positions in certain currencies for several days or weeks is regarded as monetary transactions, since if short-term arbitrage positions can be considered the result of requests from the bank's clientele, maintaining an open monetary position for a long time is a responsible action aimed at benefitting from changes in rates.
Analysis of the bank's foreign exchange position and ways of adjusting it
The work of banks in the money markets is associated with the management of assets and liabilities in foreign currency, monetary risks that arise from the introduction of different currencies during the execution of banking operations. Currency risk- this is the risk of loss or loss of benefits in the state currency associated with a negative configuration of the monetary exchange rate. In addition, risk is the possibility of losses or additional costs during the execution of a monetary transaction, stimulated by the lack of analysis of this transaction with a monetary asset, miscalculation or unforeseen situation in general. Currency risk is considered a type of monetary risk, therefore, when assessing it, the same informants are used, in fact, when assessing the single state of the bank, on the one hand, and in general, an adequate assessment of the monetary position of the bank is not possible in the absence of a separate assessment of the monetary risk.
The cash position appears on the date of the settlement of the transaction for the purchase or sale of foreign hard currency and other monetary values, as well as the date of crediting to the account, debiting from the account of profits or expenses in foreign hard currency. The designated dates also characterize the date of the reporting of the corresponding configurations of the value of the open cash position. The value of the open cash position is guided by reliable accounting information, reflecting the claim to acquire and promises to deliver funds in designated currencies both for transactions completed by settlements in real terms as of the reporting date, but also for transactions for which settlements will be completed in the future, after the reporting date ... Traditionally, the value of the monetary position is calculated in terms of hard currency for an explicit period relative to the state hard currency. In case of active participation in international operations, the bank needs to constantly keep records of open positions in the respective currencies.
These positions demonstrate, at any point in time, uncompleted transactions in a specific hard currency, regardless of the timing of the transactions. The assessment of the likely outcome of closing an open position is achieved by recalculating all amounts of long and sell positions in the national hard currency at the current rate at which transactions have every chance of being covered, taking into account the delivery time of hard currency for urgent transactions, in other words, the date of execution of the terms of the transaction. This recalculation is carried out in 2 steps: first, all positions are recalculated into the more widespread hard currency, for example, the dollar, then the dollar amounts or their total - into the national hard currency.
Factors influencing the foreign exchange position
Transactions that have a large impact on the change in the cash position include:
- receiving interest and other earnings in foreign currencies;
- payment of interest and other costs in foreign currencies;
- to purchase own funds in foreign currencies;
- conversion operations with immediate delivery of funds, no later than 2 business banking days from the date of the transaction, and their delivery for a period exceeding 2 business banking days from the date of resolution of the transaction, including transactions with foreign hard currency cash;
- urgent operations, including forward and futures transactions, settlement forwards, transactions "", options for which claims and promises appear in foreign hard currency regardless of the method and form of settlement of these transactions;
- other transactions in foreign hard currency and transactions with other monetary values, not counting precious metals, including derivative monetary instruments of the currency market, even the exchange one, if, according to the terms of these transactions, an exchange is taken into account in some form, in other words, the conversion of foreign hard currency or monetary values, not counting precious metals;
- acquired irrevocable guarantees denominated in foreign hard currency. They are included in the calculation of the open cash position from episode 1 of non-payment on the loan for which the loan was received;
- irrevocable guarantees issued, denominated in foreign hard currency. They are included in the calculation of an open cash position from the stage when, according to the target assessment of the authorized bank, it becomes possible for the beneficiary to submit claims for payment of the foreign currency amount.
Banks will try to hold long cash positions in powerful currencies, especially when they are awaiting an increase in their rate, and sell positions in weak currencies. If there are unexpected changes in monetary exchange rates: a strong hard currency will fall in price, and a weak one will rise in price, then the bank has probable spending of its funds, which it is given the opportunity not to mark, but to wait until the hard currency of a long position will rise in price again, and the hard currency of a short position will fall in price, after to close the open position with a profit.
To avoid monetary risk, it is necessary to coordinate assets and liabilities for any hard currency, also strive to form an overlapped position on any hard currency at the end of the period, or it is possible to compensate for the imbalance of assets and liabilities in foreign hard currency by the discrepancy between the amounts of sold and acquired hard currency, thereby reducing the monetary risk to zero, following the principle: a position to sell in some hard currency can be offset by a long cash position if the size, expiration date and hard currency of these positions are similar. This principle is especially important because it specifically serves as the prototype for all methods of covering monetary risk.
The value of losses or income generated by a change in the monetary exchange rate, embodied in the state hard currency, is oriented as the product of the open monetary position based on the predetermined hard currency by the change in the state hard currency exchange rate relative to this hard currency, in other words, by adjusting the value of the monetary position, one can influence the value of losses.
The bank is obliged to constantly review the state of the open cash position solely for the purpose of monitoring compliance with the open cash position limits established by the Central Bank of the state, and in order to analyze the possible spending of its funds and profits associated with maintaining an open cash position.
Methods for regulating the monetary risk of a foreign exchange position
There are 2 main ways of adjusting monetary risk - this is limitation, indispensable and voluntary. Hedging is a method of adjusting money risk based on the development of an offsetting cash position, in which there is a selective or absolute compensation of the 1st money risk with another suitable risk. Restriction is a method of adjusting the cash position based on the inevitable or voluntary limitation of the values of the bank's open cash position in accordance with the established limits.
Hedging instruments are used by banks to adjust the values of open cash positions with the goal of closing them completely, decreasing them or carrying out these operations with foreign hard currency, which will not lead to an upcoming increase in the values of the cash position in a predetermined hard currency or a group of currencies. Instruments for hedging the bank's open cash positions are: solution of various types of balancing immediate and cash transactions for the purchase and sale of hard currency; premature refusal to execute, extension of an earlier concluded transaction; resolving transactions like "swap", as well as conducting transactions that are not associated with the exchange of one foreign currency for another; offset of existing claims and obligations with one counterparty for the largest reduction in monetary transactions by means of their consolidation.
The restriction, in contrast to hedging, is used both by banks, but also by the supervising bodies and consists in voluntary, on the part of the bank, or inevitable, prescribed by the supervising body, limiting the values of the bank's open cash positions in accordance with the established limits.
The more fundamental features of the quality of the process of managing the monetary position at the bank level include: efficiency and refinement of banking information systems; skill, knowledge, professionalism and commitment of management and personnel. This process must by all means be supported by adequate banking technology and rely on a correct, reliable accounting system in a credit institution.
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