Corporate-TreasuryMedium

3 min read · 515 words

What the seat actually does

Every seat on the sell-side of this map is ultimately selling to somebody, and for a company that somebody is the treasurer. This seat sits inside a business rather than a bank: it makes sure there is cash where it is needed, raises what the company needs, and hedges the exposures the operating business creates.

A hedge here is not a position. A bank's desk hedges to flatten a risk it took on purpose; a treasury hedges a risk the business produced by selling things in another currency or borrowing at a floating rate. That is why treasury policy is written down, approved by a board, and deliberately unexciting — the aim is a known cash flow, not a good trade.

• Liquidity — cash, facilities, and the forecast that says whether either is enough.
• Funding — bank debt, commercial paper, bonds through a DCM desk.
• Hedging — FX forwards, swaps, and commodity exposure where the business has it.
• Bank relationships, which is where the cheap loan and the fee business meet. See corporate lending from the other side.

A day, and where it goes

• The cash position, by entity and currency, and what has to move before cut-off.
• The forecast, which is always wrong and is useful anyway because the error is what is being managed.
• Exposures — what the business booked that changes the hedge.
• Covenants and headroom, which constrain everything else the company can do.

What it is measured on

• Liquidity headroom — cash and undrawn facilities against what could plausibly be needed.
• Cost of funds, and the maturity profile behind it.
• Volatility of the reported result from currency and rates, which is what the hedging policy exists to reduce.
• Forecast accuracy, because everything above depends on it.

What it touches on this site

• The instruments — FX forwards, interest rate swaps, commercial paper and money market funds.
• The mechanism — hedging, and hedged against unhedged.
• Who sells to this seat — transaction banking, sales and the DCM desk.
• When it goes wrong — 1993, where the hedge was economically right and produced margin calls the company could not fund.

How it goes wrong

• A hedge that is right and unfundable. The gains arrive later than the margin calls, which is a liquidity failure rather than a hedging one.
• Hedging the accounting rather than the exposure, or the reverse, and being surprised at the reporting date.
• Trapped cash. A consolidated balance that cannot legally move to where it is needed.
• Treasury drifting into trading. A view taken because the market looked wrong is a position the board never approved.

Concepts to master

• A hedge has a cash flow profile of its own, and it rarely matches the exposure's timing. See margin and collateral.
• Liquidity is about timing and location, not about the total.
• Covenants constrain the company long before a lender ever enforces anything.
• The cost of funding is a curve — see the yield curve.