Question

Explain why end users, who conduct their risk management operations in the treasury department, should not require the treasury department to be a profit center. (10 markrs)

Answer 1

The risk management is a key function that is performed by the treasury department. It also performs the functions of short-term money management where the treasury managers are responsible for raising short-term funds as well as hedging the expected inflow of funds in other currency. The major responsibility of a treasury manager however remains managing the inflow of funds and take action to protect the exposure which the company is having with reference to other currency and managing the currency exposure risk in an efficient way. The one important thing to note here is that risk management is not equivalent to profit generation but risk management is more with reference to avoiding situations where large unexpected losses can be avoided however treasury manager often face lot of criticism for the cost which is being occurred in the process of hedging your exposure and if the treasury manager has completely eliminated the exposure and then suddenly the market moved favorably so the gain is offset by the cost of hedging and again treasury manager face criticism here because if they did not have hedged the position then we would have been in a better scenario however this issue needs to be understood from the perspective of the situation where the market could have moved unfavorably and large amount of losses would have to be booked so the risk management should not be looked from the perspective of profit but it should be viewed from the perspective of risk mitigation and avoiding large unexpected losses. In order to avoid such kind of situation the management should have guidelines written as to how the company and treasury manager would manage the currency exposure, would they be willing to keep some exposure or eliminate some or they are willing to take risk and keep their position open to the market exposure.