TREASURY MANAGEMENT TOOLS AND TECHNIQUES

Definition:

Treasury management (or treasury operations) includes management of an enterprise's or government’s financial holdings like bonds, currencies, financial derivatives, stocks and many other securities.

All banks have departments devoted to treasury management, as do larger corporations. For non-banking entities, Treasury Management and Cash Management are sometimes used interchangeably. The treasury operations come under the control of CFO of the concern or the Vice-President / Director of Finance.

It is necessary to understand and appreciate the three distinct roles Treasury is

expected to play:

a. Liquidity Management: Treasury is responsible for managing short term

funds across currencies, and also for complying with reserve requirements (e.g. CRR)

b. Proprietary Positions: Treasury may trade in currencies, securities and other financial instruments, including derivatives, in order to contribute to Bank’s profits

c. Risk Management: Treasury will aid Management on one hand and Bank’s clients on the other hand, in managing market risk, using derivative instruments.

 These multiple roles necessitate Treasury to manage an ALM Book for internal risk management, a Merchant Book for client-related currency and derivative

transactions, and a Trading Book for managing its proprietary positions. ALM Book also includes traditional role of Treasury in liquidity management.

In an open economy, exchange rates are further influenced by macro-economic factors like relative inflation, GDP growth rate, stock markets and commodity markets. Treasury operates in markets which are almost free of credit risk, and hence requires very little capital allocation.

Secondly, the treasury activity is highly leveraged – the risk capital allocated to Treasury may range between 2% to 5% of the size of transactions handled, hence the return on capital is quite high. Treasury may do transactions similar to the ones done for the customers in forward market – buy forward and sell forward – without investing funds in actual purchase and sale of currency
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