Strategic Treasury Transformation: Embracing Data and Technology in Risk Management

Treasury teams across the globe often endure 12-hour days, tackling a myriad of challenges. While traditionally focusing on managing cash and liquidity, modern treasury teams have significantly expanded their roles. In today's interconnected economy, they must anticipate and navigate financial disruptions on the horizon. This evolution demands a rich blend of skills—from financial markets to quantitative modeling and beyond. However, despite these increased responsibilities, the resources at their disposal remain largely unchanged.

To bridge the gap between increasing demands and limited resources, contemporary treasury teams increasingly rely on a robust ecosystem that not only connects with a wider range of market participants but also cultivates a culture of risk management. By leveraging advanced data analytics and cutting-edge technologies, they are able to protect companies' resilience against various financial risks.

Take, for instance, the scenario detailed in 'The Risk in Conversion: Unveiling FX Gains and Losses.' Treasury teams easily identify and measure fluctuations arising from the foreign exchange market, with valuation and position disclosure services offered by the ecosystem. The article describes a scenario where HKD 1 million is converted into AUD 210,000 and AUD 170,000 at different times in an Australian office, yet remains a constant USD 130,000 when reported in the US. Such a stark 19% fluctuation in AUD exemplifies the kind of FX risk that keeps CFOs and boards up at night.

Facing such significant risk, treasury teams are compelled to make several critical decisions: whether to react to these fluctuations, how to minimize the costs of potential actions, and how to adapt strategies based on ongoing performance assessments.

The next three stories will showcase related decision-making processes within a risk-focused treasury team and how an ecosystem could help with automated connections to various data sources and proven data models.

Projecting Potential Losses:

Before electing a risk mitigation program, treasury teams need to first estimate potential future losses. Decision-making tools (such as Value at Risk, Estimated Shortfall, and Risk & What-if Analysis) are often offered by advanced ecosystems for this purpose.

As depicted in "FX Risk: To Act or Not to Act", the treasury team forecasted next year’s FX fluctuations based on existing market trends and proven data models. Combining the company’s 40% growth target in the region, the treasury team perceived risks on earnings are intensifying, and signaled the urgent need for more proactive risk management programs.

Optimizing Hedging Strategies:

Once the risk mitigation program is determined, treasury teams move on to the next step: determining what exposures should be managed, and at what cost. Exposure dashboards and hedging analysis are widely used in assessing and aggregating potential exposures.

"FX Risk Optimization: A Holistic Approach for Effective Hedging and Cost Efficiency" describes how treasuries could reduce hedging needs by integrating extensive data and analyzing correlations.

Ensuring Trust and Continuous Improvement:

With expensive risk mitigation programs, treasury teams hold the final responsibility of proving the performance of the program and recommending necessary adjustments to their CFO and board. Hedge accounting and dynamic reports in the ecosystem make the process both efficient and accurate.

As outlined in "Streamlining FX Performance Reporting and Accounting in Global Expansion", treasury teams strive to confirm the success of hedging programs, attribute performance to market rates versus budget rates, and advise on advanced financial tools for future efficiency. For instance, recognizing USD 7.7 million as taxable revenue in one month and verifying minimal impact on profit and loss statements in another showcases the efficacy of the hedging approach.

While this discussion has centered on managing financial risks, connectivity and transaction management with financial counterparties also play a critical role in the ecosystem. We will delve into these aspects in upcoming articles, exploring how they contribute to the transformation of strategic treasury in the digital age.

Thanks Ben Hipwell , Tariq Ahmed and Chih-Wei Tsai for your contributions to this piece.