Risk EN
Risk Management
Depending on the industry and company size, various risks need to be taken into account when safeguarding liquidity, e.g. the
- Liquidity risk as the danger of the company itself becoming insolvent
- Interest rate risk: financing becomes more expensive than expected
- Currency risk: the values of imports and exports change due to exchange rate fluctuations
- Credit risk: sales revenues or credit commitments fail to materialize
Measures to reduce or eliminate such risks are taken in Cash, Treasury and Risk Management, and in medium-sized companies these departments often consist of only two to three people. This makes it all the more important to use a software solution that helps maintain an overview of all financial transactions and cash flows, whether locally or globally.
Trinity TMS provides effective support in classifying, quantifying and reducing the financial risks mentioned above.
“With Trinity, we use a highly reliable private cloud-based treasury management system worldwide that ensures full transparency regarding the current liquidity status, short-term cash management and long-term liquidity planning.”
Veronika Fichtner, Head of Corporate Finance & Treasury, LEDVANCE GmbH
Contents
Currency Risk
In global trade, companies often deal with foreign currencies and cannot enforce invoicing in EUR. The development of the exchange rates of various currencies is often difficult to predict and thus poses a number of risks for multinational companies dealing with them.
To reduce currency risks, you therefore conclude hedging transactions with banks or other counterparties in accordance with corporate policy guidelines. Hedge ratios are often defined for this purpose, which can be used as simple guidance when optimizing the hedging ratio for specific currencies.
A treasury management system supports the corporate treasury manager in identifying foreign exchange risks, hedging them, and in ongoing monitoring and documentation. The goal of these activities is usually to minimize losses from exchange rate fluctuations by concluding suitable hedging transactions at low transaction costs.
“The clearly structured and always up-to-date overview of the group’s global foreign currency risk lets our management and me sleep better than before.”
Holger Schulz, Head of Treasury, TMD Friction Holdings GmbH
Trinity TMS Functions at a Glance
- Display of company-wide foreign currency positions
- Relieving subsidiaries of foreign exchange management
- Maturity monitoring
- Entry and mapping of FX transactions (spot, forward, NDF, options, etc.)
- Extended documentation by attaching documents or linking to a DMS
- Valuation based on automatically imported and historized exchange rates
- Current hedge status through comparison with the specified hedge ratio
- Determination of FX exposure/foreign exchange risk
- Connection to online trading platforms (e.g. 360T, FXAll)
- Separation of front/(middle)/back office, four-eyes principle
- Trader, currency and loss risk limits
- Simulation of various exchange rate developments
- Settlement via defined standing instructions
- FX netting
- Automated matching (e.g. via Finastra, Broadridge)
- Automatic account assignment and posting of cash flows and valuations
Benefits
Maximum Transparency and Risk Reduction
- Up-to-date overview of company-wide FX risk positions
- Improved assessment of the impact of individual currencies
- Optimized exchange rate hedging through comparison with the hedging policy
- Currency-differentiated planning and simulation
- Flexible pivot analysis and evaluations
- Limit monitoring
Time and Cost Savings
- Display of currency effects and losses to be avoided
- Optimization of hedging by avoiding over-hedging
- Savings on transaction costs through FX netting
Process Optimization
- Straight-through processing possible from the conclusion of hedging transactions to posting in the ERP
Audit Compliance:
- Clear presentation of all FX positions, cash flows and hedges
- Full traceability at any time through audit trail and historization of market data
- Individual authorization profiles for users in the front/middle/back office
- Four-eyes principle
- Automated workflows based on predefined rules
Interest Rate Risk
Interest is the (market) price for money lent. If a company borrows money from a bank at a fixed interest rate, calculating the interest payable for the fixed period is straightforward, and the risk of suffering losses due to interest rate changes remains with the creditor of the claim. Variable interest rates, where the rate on the borrowed money changes over time, therefore appear cheaper at first glance. For short-term financing, a company may be able to accept small interest rate increases, but for long-term investments nobody wants costs to spiral out of control. If agreeing on a fixed interest rate for the planned period is too expensive, fluctuations caused by interest rate changes can be reduced or even offset by various hedging instruments. Common examples include interest rate swaps, in which variable interest payments are exchanged for fixed ones without having to change the original financing.
Similar to foreign exchange management, interest rate hedging transactions are concluded with banks or other counterparties in accordance with corporate policy guidelines. In addition to the pure transaction costs of the interest rate derivative, its suitability with regard to matching maturities and volumes, the risk of counterparty default and other aspects must be considered.
The treasury management system supports the corporate treasury manager in identifying interest rate risks, hedging them, and in ongoing monitoring and documentation. The goal of these activities is usually to minimize losses resulting from interest rate fluctuations by concluding suitable hedging transactions at low transaction costs.
Trinity TMS Functions at a Glance
- Display of company-wide interest rate transactions and hedges
- Centralized interest rate risk management possible
- Maturity monitoring
- Entry and mapping of interest rate derivatives (swaps, caps, floors, forward rate agreements, swaptions, cross currency swaps, etc.)
- Extended documentation by attaching documents or linking to a DMS
- Valuations including credit/debit value adjustment (CVA/DVA)
- Automatically imported and historized interest rates and yield curves
- Separation of front/(middle)/back office, four-eyes principle
- Trader, currency and loss risk limits
- Simulation of various interest rate developments
- Settlement via defined standing instructions
- Automatic account assignment and posting of cash flows and valuations
Benefits
Maximum Transparency and Risk Reduction
- Up-to-date overview of company-wide interest rate risk positions
- Optimized interest rate hedging worldwide
- Valuation (e.g. DCF)
- Flexible pivot analysis
- Limit monitoring
Time and Cost Savings
- Optimization of hedging by avoiding over-hedging
- Savings on transaction costs through the use of suitable interest rate derivatives
Process Optimization
- Straight-through processing possible from the conclusion of hedging transactions to posting in the ERP
Audit Compliance
- Full traceability at any time through audit trail and historization of transaction and market data
- Individual authorization profiles for users in the front/middle/back office
- Four-eyes principle
- Automated workflows based on predefined rules
“The clearly structured and always up-to-date overview of the group’s global foreign currency risk lets our management and me sleep better than before.”
Dr. Andreas Neeb, Senior Manager Treasury, LEDVANCE GmbH
Commodity Price Risk
In the manufacturing industry, raw materials have always played an important role in planning a company’s liquidity. Companies like to buy them when these so-called commodities are cheap, but can usually only store a certain quantity of them until processing – whether for reasons of space or because the raw materials are perishable.
For continuous production, the supply chain must be secured, and to ensure that the buyer is not completely at the mercy of price fluctuations, long-term contracts with conditions as stable as possible are negotiated. This is not possible for all goods and cannot always be maintained permanently. Force majeure such as pandemics, supply bottlenecks caused by embargoes or natural disasters have shown how quickly optimized supply chains in a globalized economy can be severely disrupted.
To survive, companies must find new sources and accept prices that can put considerable strain on their liquidity. If the search for alternative suppliers takes too long, sales may even be lost because end customers switch to other producers. It therefore makes sense to include the effects of commodity price fluctuations in liquidity planning.
Not only the typical storable raw materials such as metals, agricultural products and fuels must be considered, but also energy, auxiliary and operating materials – in particular gas, electricity and water – and individual production components (e.g. microprocessors).
As different as the individual commodities may be, due to their price fluctuations they form the underlying of derivative financial instruments used to hedge volatility. These are very similar to the hedging instruments used in the foreign exchange area (forwards and swaps) and are supplemented by standardized futures contracts.
Even if the purchasing department uses special systems for procuring raw materials, energy and other basic components to monitor the supply chain, the associated payment flows must be taken into account in financial planning.
A treasury management system supports the corporate treasury manager in identifying commodity price risks and hedging them. The goal of these activities is to contain the volatility of purchase prices by concluding offsetting financial instruments at low transaction costs.
Trinity TMS Functions at a Glance
- Display of cash-effective commodity futures contracts
- Entry and mapping of commodity derivatives (forwards, options, etc.)
- Consideration of exchange, purchase quantity and strike price
- Extended documentation by attaching documents or linking to a DMS
- Maturity monitoring
- Definition of commodities similar to foreign currencies
- Current hedge status through comparison with the specified hedge ratio
- Determination of the exposure
- Separation of front/(middle)/back office, four-eyes principle
- Simulation of various price developments
- Settlement via defined standing instructions
- Automatic account assignment and posting of cash flows
Benefits
Maximum Transparency and Risk Reduction
- Overview of company-wide price risks and hedges
- Improved assessment of the impact of individual commodity price changes
- Optimized basis for decision-making in liquidity management
- Differentiated planning and simulation
- Flexible pivot analysis and evaluations
Time and Cost Savings
- Improved liquidity planning through risk limitation
- Rapid identification of losses/interim financing to be avoided
- Optimization of the hedging strategy by avoiding over-hedging
Audit Compliance
- Clear presentation of all positions, cash flows and price hedges
- Full traceability at any time through audit trail and historization of prices
- Individual authorization profiles for users in the front/middle/back office
- Four-eyes principle
- Automated workflows based on predefined rules
Best Practice
Since planning and safeguarding liquidity is the most important task of a company’s finance department, Trinity has published several blog posts on best practice in this area:
