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Why Preparing for the Hike Into the Financial VOLUME 4, ISSUE 1 SPRING/SUMMER 2010 a Strategic Treasurer newsletter Treasury Vision: Why preparing for the hike into the financial wilderness Of Roadmaps is no time to take risks! and Waypoints Credit Spreads in Valuation | 4 SWIFT & eBAM | 10 Developments in Treasury Technology | 13 Special Report: New Research Sheds Light on Money Fund Risk Factors Contents. Treasury 3 | Treasury Vision: Of Roadmaps and Waypoints Leadership Update A Strategic Treasurer 4 | An Introduction to the Use of Credit Spreads in Fair Valuation Newsletter Financial Risk Management 500 Westpark Drive, Suite 110 Peachtree City, GA 30269 5 | New Research Sheds Light on Money Fund Risk Factors +1 678.466-2220 Sponsored Content 7 | Achieving Visibility to Your Liquidity Subscriptions Relationships, Hedges, & Counterparties For a free subscription, visit www.StrategicTreasurer.com/ 9 | SWIFT Benefits: Options and Considerations for Corporations Newsletter Sponsored Content To unsubscribe, send your 10 | SWIFT and Electronic Bank Account Management name, organization, and Treasury Technology -- SWIFT mailing address to TreasuryUpdate@ 13 | Developments in Treasury Technology StrategicTreasurer.com Technology Column Advertising: For information and rates, Is it Time to Invest in Your Mind? contact: TUSales@ Read The Strategic Treasurer: A Partnership for Corporate Growth StrategicTreasurer.com Hear what leading Treasurers are saying: +1 678.466-2220 “…will become a tattered book on many treasurers’ bookshelves…” Mission Statement Tim Hart, treasurer Treasury Update, a resource First National Bank of Nebraska for Treasury professionals, is published bi-annually to raise “…I appreciate the void Craig is filling with awareness of key Treasury his book…He offers practical methods with items, issues, and events; assist immediate application.” with tactics and strategies; George Zinn, vice president and corporate and enable Treasurers and treasurer, their organizations to be more Microsoft Corporation resilient, effective, and efficient. “…No treasurer faced with managing through the dynamic years ahead will want this book far from his or her fingertips.” Copyright © 2010 by Strategic Richard Moss, senior vice president finance Treasurer. All Rights Reserved. and treasurer Reproduction by any means in whole or part without permission Hanesbrands, Inc. is strictly prohibited. The information contained in this “…captures the essence of what it takes to be newsletter has been prepared a strategic treasurer and valuable business by Strategic Treasurer unless partner. It is an extremely practical resource otherwise noted. We make no representations, express or implied for anyone seeking to learn more about the as to its accuracy or completeness. strategic, technical, and operational aspects of Opinions expressed herein are leading a successful treasury organization.” Author, Craig Jeffery subject to change without notice. John Tus, vice president and treasurer Founder & Managing Partner This is a newsletter meant for Honeywell International, Inc. Strategic Treasurer informational purposes. It should not be construed as offering legal, Available through www.TreasuryBook.com and wherever books are sold. financial, or other advice. Volume 4, issue 1 • spring/summer 2010 Treasury Vision: Of Roadmaps and Waypoints The Big Bang is for Theorists, not Treasurers. Leadership ny good Treasurer must be direction is north, and you can use Finding water sources is also crucial, A a visionary. Being able to it in combination with your map to as faucets aren’t conveniently located see what the future looks like and determine the direction you ought on trees, and no one can carry all having the ability to describe it to go—but make sure it isn’t one of of the water they need for an entire in aspirational terms (the ‘I have those cheap compasses charged in the weekend. a dream…’), is more than just an wrong direction. The compass by itself Below are examples of situations that emotional plea. It is the required first won’t tell you where you are, but it is can arise on a hike, along with their step in the journey to being a strategic a useful tool nonetheless. However, a analogous examples for reaching Treasurer with a strategic Treasury Global Positioning System (GPS) can Treasury’s future state. department. Beyond the rah-rah aspects of vision, a fair amount of Minimalistic Map Use. Bringing real work is required, although this only the maps you ‘need’ on a trip should not be taken as a minimization appears to be a good idea for saving of what is required to establish and space and money. However, if you socialize the vision for Treasury. arrive at your planned water stop—a mountain stream—and discover it Map/Compass/GPS Analogy. If you is completely dried up, your route take a group on a planned weekend may need to be altered. Not having hike (versus a Friday afternoon hike a contiguous map in your backpack on which you got lost and wandered may mean you must completely alter for the entire weekend), several key your route and miss the great vista. activities and tools to optimize the However, if you had packed the extra opportunity for success are required. map, you might be able to see a bigger While success can be different for tell you where you are (you may have stream only a half click away that various groups and people, let us loaded the waypoints into it, which would get you back on track, with assume “success” means you get where is a best practice) and track your only a one-hour delay, and still see the you intend to go at the approximate progress and distance in an extremely great vista. A similar situation emerges time you expect to arrive, while fairly accurate manner. The GPS will with Treasury. Having a clear roadmap closely following the planned route. provide two coordinates which can to where you are taking Treasury and Of course, lack of life-threatening be referenced on your maps—if you ensuring you have allowed enough injuries or loss of possessions also brought the right ones—to provide flexibility in your set of roadmaps to adds to the level of success you hope further confirmation of your location alter your trip without throwing away to achieve. in relation to your trip plan. all of your planning are both vital. One of the required tools for this Waypoints (or interim steps). On Unfamiliarity with Using the Tools. hike to be successful is the right set a short hike, loading in waypoints In the backwoods, whenever you see of maps. This map set should contain may be a bit too much work or even someone unwrap their GPS for the your starting and ending points as unnecessary. However, in unfamiliar first time and insert the batteries, well as your route. Additionally, territory, loading them is very a barely audible ‘are you kidding’ you will mark waypoints along the useful. Backtracking for six tenths comment might escape your lips. To path, such as a favorite camping of a mile (one kilometer, or click) is depend on a tool you haven’t used—or spot, a scenic view, or a water stop. less disheartening than discovering may only use on this one trip—and Knowing and seeing these waypoints you followed another trail that haven’t tested can be quite dangerous. confirms you are on the right path. veered off and took you three hours Typically, there isn’t a GPS Help Your compass indicates which off course. Kiosk out in the woods with a helpful 3 (continued on page 11) An Introduction to the Use of Credit Spreads in Fair Valuation Financial Risk Management redit, or default, risk refers to risk in derivatives is complicated by the derivatives by changes to accounting C the risk [or possibility] that fact that the future is uncertain—the principles, namely FAS157 (Fair Value the issuer of a fixed income security, derivative’s value can move in the Measurements), which have impacted [a corporate bond, for example], may company’s favor (a positive value) and how companies value their derivatives default, (i.e., the issuer will be unable out of the company’s favor (a negative used in hedging. to make timely principal and interest value) over time. The current market payments on the security.) Credit risk value of the derivative only represents The issue of fair valuation is an is gauged by quality ratings assigned the potential gain/loss today and ongoing hot topic. Given that, this by rating [agencies].” (Fabozzi F. The does not account for future changes article focuses on the choice of the handbook of fixed income securities. credit spread(s), with an overview of the mechanics used for adjusting 3rd ed. p. 33.) This risk impacts the “In light of the confusion, the fair value of hedge instruments net yield—the “credit spread”—of a practitioners have endured a corporate bond over the “risk-free” rate for both the company’s as well as number of challenges in fair of government bonds. As pointed out the counterparty’s credit. It also valuing their derivative hedge by Fabozzi, investors in corporate debt, highlights some of the implications of however, are more concerned with instruments specifically related to these credit adjustments to FAS133 changes in the “perceived” credit risk the credit adjustment component.” (Accounting for Derivative Instruments of an issuer rather than with the actual and Hedge Activities). It is simply an risk of default since the perceived in value. It is no longer safe to assume overview, and is not intended to be risk impacts the valuation of their that your hedges are secure, given the a comprehensive “white paper.” The investment through the adjustment of fact that you deal with only highly reader may be referred to other sources the credit spread. As other investors rated counterparties and are diversified for information on specific topics.
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