WEEK 1 – TUTORIAL 1Introduction 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 department’s 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 themInvestors = 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 requirementi.e. AAA rated, BBB rated etc.

® debt issuersThey 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 organization’s 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 fundingby 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.

♥ 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 regularlyNow, 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 riskwith 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’.

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.

3. Briefly discuss the treasury management community.

(i) Financial institutions including banks and dealersFinancial 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 communityThe 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 bodiesRegulatory 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 expertsAccounting, 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 infrastructureVendors 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 agenciesCredit rating agencies provide credit assessments and ratings of borrowers, financial institutions, governments and debt issuers. These agencies include Fitch, Standard & Poor’s and Moody’s.