throughcentralization, can provide value-added processing and expertise to the sub-
sidiary without absolving the subsidiary from responsibility of aiding in the effective
management of currency exposures. The international treasury is a combination in-
ternal consultant, banker, and parent.
Concentrationis the effective use of techniques for handling the everyday and not
so everyday currency transaction and exposure management needs of the firm as a
whole. Techniques such as netting of cross-border currency cash flows can signifi-
cantly reduce the frequency of transactions, allowing fewer and larger individual cur-
rency purchases and hedge purchases. The economies of scale are appreciable, and
the increased control results in better company-wide reporting, forecasting, and sub-
sequent management of cash flows by currency in the short to medium term.
The components to the design and implementation of an international currency
management program in the multinational involves
- Establishing risk management guidelines (exposure identification, list of au-
thorized instruments, required minimum or maximum hedge coverage) - Separation of front-office and back-office roles, responsibilities, and personnel
- Position monitoring and performance measurement
Treasury today is expected to take a much more proactive role in the management
of the firm’s multinational cash flows. This concerns not only the more efficient use
of cash as a whole, but in the management of the currency of denomination of those
cash flows within the multinational—all in the context of adding value to the inter-
nal and external customer. Once the currency risk management system within the
multinational is designed, management and control of operations is critical to its suc-
cess. Many of the derivative-related fiascos in recent years are traceable to nonexist-
ent or inadequate specification of procedures and controls or simply management dis-
cipline in the implementation of risk management. Recent surveys indicate that still
over 20 percent of major multinationals have no formal controls over treasury oper-
ations.
(a) Risk Management Guidelines. Senior management of the firm, from the treasurer’s
office to the chief financial officer, to the senior management group, to board and audit
committee, must establish clear and simple guidelines by which currency risk manage-
ment must abide.^11 (For a detailed treatment of this subject, see Chapter 6.)
These guidelines should include the requirements for exposure identification, al-
lowable instruments for use, and required exposure coverage. Exposure identifica-
tion, the specification of which types of exposures are to be managed (backlogs, bal-
ance sheet-related, translation, economic exposures, foreign currency-denominated
bids, anticipated exposures, etc.) is fundamental to control of a risk management pro-
5 • 16 INTERNATIONAL TREASURY MANAGEMENT(^11) PricewaterhouseCoopers’ recent treasury survey indicated varying degrees of formal controls in
treasury operations among major multinational firms. Foreign currency exposure management seems to
be actually controlled more often than interest rate risk management. Among survey respondents, 87 per-
cent indicated currency transaction exposure management controls, 63 percent on translation exposure
management, and 43 percent on economic exposure management. Interest rate risks, however, were not
as diligently watched. Only 74 percent of survey respondents indicated explicit controls over interest rate
risk management, while investment management was explicitly controlled by over 84 percent of the
firms.