Corporate Treasury and Cash Management

433 Pages·2004·1.54 MB·English

Corporate Treasury
and Cash
Management
Robert Cooper
CORPORATE TREASURY AND CASH MANAGEMENT

Corporate Treasury
and Cash
Management
ROBERT COOPER
© Robert Cooper 2004
All rights reserved.No reproduction,copy or transmission of this publication may be
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First published 2004 by
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ISBN 1–4039–1623–3
This book is printed on paper suitable for recycling and made from fully managed
and sustained forest sources.
A catalogue record for this book is available from the British Library.
Library of Congress Cataloging-in-Publication Data
Cooper,Robert,1945 May 11 –
Corporate treasury and cash management / Robert Cooper.
p. cm.– (Finance and capital markets series)
Includes bibliographical references and index
ISBN 1–4039–1623–3 (cloth)
1.Cash management.2.Risk management.3.Corporations–Finance.I.Title.II.Series.
HG4028.C45C5785 2004
658.15’244–dc22
2003062317
Editing and origination by
Curran Publishing Services,Norwich
10 9 8 7 6 5 4 3 2 1
13 12 11 10 09 08 07 06 05 04
Printed and bound in Great Britain by
Anthony Rowe Ltd,Chippenham and Eastbourne
Contents
List of Figures x
List of Tables xiii
Acknowledgements xvi
PART I RISK MANAGEMENT 1
1 Risk Management:Introduction 3
Introduction 3
Why Manage Financial Risk? 3
Principal Treasury-Related Financial Risks 4
Management of Financial Risks 10
Enterprise Risk Management 20
2 Treasury Policies for Debt,Foreign Exchange and
Interest Rate Exposure Management 25
Introduction 25
Debt Management 25
Foreign Exchange Risk Management 29
Interest Rate Risk Management 36
Case Study 38
Solution 43
3 Debt Capacity 55
Introduction 55
Debt Versus Equity 55
The Impact of Debt on Financial Returns to Shareholders 57
Debt Equity Structure: Theory 60
v
vi CONTENTS
Financial Ratios 65
Debt Capacity: Conclusion 69
Case Study 70
Solution 73
PART II FINANCING ALTERNATIVES 75
4 Bank Finance 77
Introduction 77
Forms of Bank Finance 77
Aspects of Syndicated Revolving Facilities 82
Advantages and Disadvantages of Bank Finance 89
Documentation 91
Specialist Financing 95
Case Study: Acquisition Finance 96
Solution 98
5 Bond Valuation and Credit Ratings 102
Introduction to Bond Valuation 102
Credit Ratings 111
6 The Bond Markets 120
Introduction 120
Advantages/Disadvantages of Bond Markets 120
The Pricing of Corporate Bonds 122
Bond Markets: General 124
Issuing a Public Bond: Eurobond 125
Medium-Term Note Programmes 132
Private Placements 135
Choice of Market 137
Case Study 141
7 Specialist Financings:Asset Securitization 145
Introduction 145
Principles of Asset Securitization 145
Why Securitize? 153
Should a Company Securitize Assets? 155
Developments in Securitization 157
Summary 160
Case Study: Lease Securitization 160
Solution 162
CONTENTS vii
PART III THE USE OF DERIVATIVES TO MANAGE RISK 167
8 An Outline of Options 169
Introduction 169
ABasic Introduction to Options 169
Exotic Options 177
9 Foreign Exchange (FX) Markets and Derivatives 180
Spot Foreign Exchange 180
Forward Foreign Exchange 185
Foreign Exchange Swaps 189
Foreign Currency Options 194
Use of Options for Corporate Purposes 199
Exercises 200
Solutions 204
10 Interest Rate Risk Derivatives and Their Use in
Managing Financial Risk 209
Interest Rate Swaps 209
Interest Rate Options (IRO) 215
Exotic Options 218
Swaption 221
The Effective Use of Derivatives 223
Long-Term Cross-Currency Swaps 224
Exercises 227
Solutions 231
11 Zero-Coupon Interest Rates ,Forward–Forward Rates,
Counterparty Exposure for Derivatives and Contracts
for Derivatives 238
Zero-Coupon Rates and Forward–Forward Rates 238
Valuing Interest Rate Swaps 248
Counterparty Exposure 249
Contractual Terms for Derivative Contracts 252
Summary 256
12 Risk Management Summary and Use of Derivatives 257
Summary 257
Specific Considerations 258
Examples of Other Derivatives 260
Conclusion 262
viii CONTENTS
PART IV CASH AND LIQUIDITY MANAGEMENT 263
13 Domestic Payment and Collection Instruments and
Domestic Clearing 265
Cash Management 265
Domestic Collection and Payment Instruments 266
How Payments Clear 268
Clearing in the United States 275
Clearing in Other Countries 280
Some Techniques for Managing Payments and Receipts 281
Case Study 282
Solution 284
14 International Payments and Receipts 286
Correspondent Banking 286
SWIFT(the Society for Worldwide Inter-Bank
Financial Telecommunications) 287
Foreign Currency Accounts 291
International Payment Methods: Non-Electronic 293
International Payments: Electronic 298
15 Pooling and Cash Concentration and Intercompany Netting 300
Pooling and Cash Concentration 300
Netting 312
Case Study 316
Solutions 317
16 Liquidity Management 321
Introduction 321
Cash Forecasting 323
Interest Rate Derivatives 328
The Management of Cash Surpluses 330
Instruments for Managing Liquidity Surpluses 333
Instruments for Managing Liquidity Shortages 337
Interest Calculations 341
Case Study 342
Solutions 344
CONTENTS ix
PART V MANAGING THE TREASURY DEPARTMENT,
TREASURY SYSTEMS,TAX AND ACCOUNTING 349
17 Managing the Treasury Function 351
Introduction 351
Internal Controls 355
Centralize or Decentralize Treasury? 359
Bank Relations 363
Performance Measurement 366
Outsourcing 369
Case Study 371
Solution 372
18 Treasury Systems 375
Treasury Management Systems 375
Electronic Banking (EB) Systems 378
19 Tax and Accounting 384
General 384
Appendix:LIBOR Fixings 388
Glossary 389
Index 410
Spreadsheets 416