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Treasury risk policy is critical for all business Back  
Gerry Brown says that in a post euro environment the corporate treasurer increasingly focused attention on three key issues during 2001. The first is that treasury risk policy is a critical aspect of corporate governance for all businesses and the second is the ultimate conviction that interest rate and currency hedging must be strongly considered by the majority of companies. Finally increased liquidity offers greater opportunity, sharper pricing and an improved risk management environment for all.
As the Irish corporate treasury market continues to evolve rapidly, interest in more sophisticated forms of hedging FX and interest rate risk grows. The horrific events of September 11th and subsequent global turmoil brought home to all in treasury, the innate vulnerability of financial markets and the need for protection against adverse circumstances. For corporate treasurers, this protection takes the form of risk management.

Customer’s priorities are changing; they increasingly focus on and seek strategic risk assessment for their business. This year particularly confirmed for clients that market risk emanates from just about anywhere and that preparation is key not only to success but also survival. Increasingly customers look for interest rate derivatives to help them take advantage of low interest rates protecting against a sharp increase in future rates or hedging mechanisms to manage volatility in currency markets.

Looking back over the past year, economists continued to tell us that both the dollar and sterling are substantially over-valued. Taking a 2-3 year view, the dollar is unlikely to be able to maintain current levels, particularly against the euro. This inexplicable market behaviour makes hedging all the more important. The excuse that unforeseen external market forces adversely affect the balance sheet is no longer an acceptable rationale for a decline in company performance. With the extensive range of financial instruments available, companies in 2001 were expected to cover risk professionally and so avert disastrous results.

A key question is whether the company has established a formal treasury policy. Formerly only implemented by publicly quoted companies as part of their corporate governance statement, and now employed by a much wider selection of companies, a treasury risk management policy helps govern risk management and also helps identify the level and type of risk acceptable to a company. The highlight of the year was seeing a greater maturity in this area and the value of our corporate treasury staff as they move closer to a strategic risk management role, far more than just price makers.

The re-launch of the Ulster Bank Financial Market’s web-site - Tradergold.com - further elaborates this shift in focus with the incorporation of significant additional features. Research shows that while treasurers are eager to embrace new technology and while on-line dealing proves popular with those doing greater volume of low value transactions, telephone contact remains the preferred method of interaction with their foreign exchange dealer. Clients see telephone discussion with a financial markets expert, particularly in the current climate, as a critical and composite part of their own strategic market analysis. The web-site has evolved to provide an on-line, structured products hedging guide, incorporating an innovative risk management assessment plan and information to assist customers in formulating their risk policy and prompting key core questions.

The advent of the euro in 1999 greatly increased liquidity for Irish banks and corporates who were no longer encased by the domesticity of the punt. Now with the ability to access a greater cauldron of funds, Irish corporates have access to comkpetitive pricing of a wide range of risk management products that many heretofore could not avail of. Interest rate products such as caps, collars, floors, swaps and options offers tailored company oriented choice. In money markets, the advent of money market funds with strong liquidity, performance and security are increasingly preferred. In foreign exchange, the derivatives market has opened up for companies hedging dollar or sterling payables and receivables, often at no premium cost to the client.

With the year 2001 in mind, the watchword for 2002 is ‘be prepared’. The shareholder is more accommodating to those who anticipate and visibly demonstrate that they have contingency plans and effective risk strategies in place. No longer is this sort of preparation relegated to the odd quiet day in the office, or written in some dusty procedures manual on the back shelf - instead for the judicious corporate treasurer, it is a critical measured objective and an active part of the planning process.

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