Essay about treasury questions

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Section A
1.

most derivative losses can be attributable to a failure in operating procedures.

most of the events which have been of specific concern to group treasurers have been so called derivatives disasters. Most of the failures have been caused by a deficiency of fundamental controls or controls which are inadequate for the contracts being entered into.

2.
a).
When carefully considered and chosen, derivatives actually reduce risk and can potentially increase company/shareholder value. Corporate directors and senior management should not only permit inclusion of derivatives in any treasury management strategy, but also should embrace derivatives as a means of ensuring stable cash flow for debt service, liquidity and broad business investment. There are some key factors that can illustrate why a hedging policy is critical to the success of a company.
Constant change in the global economy, resulting in the need to reduce overall organizational risk and uncertainty to stabilize earnings.
In order to reduce the risks, hedging policy becomes very important. It can make a company get stabilize earnings.
The need to generate an adequate and stable supply of cash and equivalents for short-term financial management.
Using hedging strategies, the company can get enough cash to support its financial management.
Stable cash flows reduce risk and help ensure an adequate and affordable supply of long-term investment capital.
Using hedging strategies, stable cash flows are generated, which can reduce risks. Moreover, the stable cash flows can make the company get enough money to support their long-term investment.
Increased interest rate volatility, resulting in the need for steps to protect the organization from adverse consequences of such volatility.
Using hedging strategies, the volatility of interest rate will increase, it can protect the company where there is an adverse consequence occurred.
Increased availability of standardized derivatives instruments creating greater opportunities and costs.
Hedging strategies can create more opportunities and costs for the company, it can increase the chance of success of the company.
Growing impact of advanced technology on competition and decision making.
If other companies use hedging strategies, and this company does not use it, it will get less information when they make a decision. The company will become less competitive and just can use less advanced technology.
Lack of formal training on derivatives use for many treasury managers, including a lack of adequate coverage of related introductory topics in the college curriculum.
Because a lot of treasury managers do not know much knowledge about the hedging strategies, which leads companies cannot run very well and often get some losses. For instance, the managers of London & Westcountry Estates didn't understand RBS hedging product, which results in the collapse of the company. This can illustrates that using hedging strategies is very important for a company to succeed.

b)
The policy is the rule book. Treasury policy sets the standards which must be met by treasury, clearly identifies the various authority levels the Board is prepared to delegate to management, identifies the major financial risks the organization faces and lays out approved methods by which these risks may be managed without seeking further Board approval. The policy of each company is unique to each company. Even so, there are some key components that should be included in a hedging policy for a company.
Define the company objectives.
It is important to identify the main objectives of the company. This may include ensuring adequate funding at an effective price and other critical objectives, minimizing foreign exchange risk within the policy guidelines. Those statements encourage treasury to keep their eye on the main game and assist non-treasury people in understanding exactly what the treasury is trying to do.
Define the
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