CORPORATE TREASURY RISK MANAGEMENT

Transcription

1 CORPORATE TREASURY RISK MANAGEMENT YON VALTCHEV APRIL 2015

2 TOPICS 2 Evolving Focus of Treasury - Risk Management Breakdown of Financial Risks Drivers of Financial Risks Selecting Hedging Strategies Portfolio Risk Management

3 TREASURER S EVOLVING ROLE Pre-crisis focus Narrow operational and support focus on cash and liquidity Post Financial Crisis Focus Focus on Risk Management and Strategic Planning 3 Core Functions Increased Responsibilities Funding Working Capital Funding Cash & Liquidity FX Risk Cash & Liquidity Insurance Investor Relations Interest Rate Risk FX Risk Interest Rate Risk Corporate Finance Credit Risk Commodity Risk

4 RISK BREAKDOWN

5 RISK BREAKDOWN Business Risk 5 Strategic Risk Financial Risk Operational Risk Market Risk Credit Risk Liquidity / Solvency Interest Rates Country Funding FX Industry Liquidity Commodities Issuer Counterparty

6 COMMON RISK MANAGEMENT CONCERNS 6 Where does my exposure come from and how large it is? Am I sensitive to the changes of this exposure? Should I hedge? What are the available hedging strategies? At what level and how much should I be hedging? Should I be concerned about counterparty risk? What are the Pros and Cons of Clearing vs. paying-away CVA? Can I apply Hedge Accounting on my hedges?

7 CREDIT & COUNTERPARTY RISK Credit Exposure 7 Risk Measurement Credit Ratings / Score Cards Credit Spreads Future Exposure (EPE/ENE) Key Financial Ratio Risk Mitigation Collateralization / Third Party Guarantee Diversification Risk Based Pricing (CVA) Covenants and Triggers Credit Risk Hedging Cleared Instruments Netting Agreement

8 DRIVERS OF FINANCIAL RISK RATES & CREDIT CASE

9 DRIVERS OF INTEREST RATE EXPOSURE 9 Swap curve underlying instruments (ICVS) Swap forwards (FWCM)

10 SHORT END & LONG END OF THE CURVE 10 IR probabilities by FOMC dates (short end of the curve) (WIRP) Bond Yields Survey (long end of the curve) (BYFC)

11 CREDIT EXPOSURE DRIVERS 11 Financial leverage & Earnings volatility Credit Rating & Outlook Financial Metrics & Ratios

12 CREDIT MONITORS 12 Top-down credit monitor Cross Asset Monitor: CDS, Equity, Credit Ratings

13 HEDGING STRATEGIES

14 Future Exposure // Current Exposure INTEREST RATE EXPOSURE HEDGING STRATEGIES Interest Rate Exposure Hedging Strategies 14 Hedging Strategy Pros Cons Long/Short Treasuries & Gov Bonds On the run Treasuriesmost liquid instruments Off-the-runs are less liquid than the on-the-runs Interest Rate Swaps Customizable. Could be perfect hedge. CCP clearable or OTC Close out calculation subject to negotiation. Exposed to swap spread. Subject to CVA charge Eurodollar Futures Very liquid up to 2Y Requires active management, rolling. Subject to Initial & Variation Margin Treasury Futures Very Liquid Limited tenors, could result in duration mismatch Options (Caps/Floors/Swaptions) Cost known upfront. Depending on market conditions it might be "cheaper" solution Option termination value subject to negotiation Treasury lock / bond forward / reverse repo Liquid - most banks will do markets. Cost known upfront Limited Tenors. Possibility of duration mismatch Forward / Starting Swaps Fully Customizable Might introduce swap spread basis. Termination value subject to negotiation Options (Caps/Floors/Swaptions) Cost known upfront. Depending on market conditions it might be "cheaper" solution Option termination value subject to negotiation

15 CREDIT EXPOSURE HEDGING STRATEGIES Credit Exposure Hedging Strategies 15 Hedging Strategy Pros Cons Sovereign Bonds Liquid instruments in developed markets Shorts might be subject to oversight Corporate Bonds w/ different tenor/securitization In some cases liquid instruments in most developped markets Spotty Liquidity. Shorts might be subject to oversight CDS In some case exhibit better liquidity than bonds (negative bond basis). Transparent standart terms. Standard Refence Obligation (SRO) Limited universe of active CDS market. Subject to counterparty risk Index CDS (CDX IG/HY) Diversified exposure. Very liquid and transparent pricing. Deep market. Standard terms & trades electronically. Removes Counterparty risk Diversified Exposure with limited tenors Peer Bonds In some cases liquid instruments in most developped markets Spotty Liquidity. Shorts might be subject to oversight Equity Derivatives It works to a degree for High Yield issuers Not a good strategy for Investment Grade and Distressed Debt

16 HEDGING MARKET EXPOSURE: GM BOND CASE STUDY 16 Hedging Credit and IR Risk (HGBD) HR per instrument (futures / treasuries) (FIHR)

17 HEDGING STRATEGY: LIQUIDITY 17 Daily Volume Open Interest Avg Daily Volume Avg Hist Vol at Time Current Volume

18 COUNTERPARTY RISK MANAGEMENT - IRS CASE

19 COUNTERPARTY RISK: SWAP CASE 19

20 CREDIT CHARGES: CVA/DVA 20 CVA/DVA/ Bilateral Running Spread Bilateral Calculation Bilateral credit charge DVA adjusted MTM

21 21 POTENTIAL FUTURE EXPOSURE EPE & ENE SPOT AND FORWARD CVA, PFE

22 INTEGRATED TREASURY RISK MANAGEMENT 22

23 QUANTIFYING MARKET & CREDIT RISK

24 QUANTIFYING EXPOSURES Financial Risk 24 VAR Analysis Greeks Scenario Analysis Historical VAR Duration / Key Rate Risk (DV01, CS01) What If / Factor Stress Expected Shortfall / Tail Risk Convexity Scenario Analysis Marginal & Incremental VAR Historical Events

25 MARKET RISK: KEY RATE BUCKETING

26 MARKET RISK (SHOC): STRESS-TESTS

27 VALUE-AT-RISK: MARS 27

28 HISTORICAL VAR: EXPECTED SHORTFALL, IMPLICIT CORRELATIONS

29 CREDIT RISK EVALUATION 29 Counterparty Risk Cleared Swaps: Initial Margin (LCH/CME) Margin Optimization: by portfolio netting (Uncleared) OTC Swaps 0% collateral: CVA / PFE - Min Threshold - Min Transfer Amt Partial collateral - CSA Shopping for Foreign Banks - Risky Curve Discounting 100% collateral (Stringent CSAs)

30 COMPARING CVA CHARGES 30 Assume 5yr Swap with NPV = $1MM Collateral Posting Frequency CVA Peak Exposure No Collateral 110,248 1,016,972 Quarterly with 10K Threshold 8,038 88,735 Quarterly 7,391 78,338 Daily Collateral 3,133 28,349

31 COMPARING CVA CHARGES 31

32 COMPARING CVA CHARGES: QUARTERLY COLLATERAL POSTING 32

33 OIS DISCOUNTING: TO REFLECT RETURN ON COLLATERAL 33

34 INITIAL MARGIN OPTIMIZATION 34

35 REGULATION & ELECTRONIC TRADING 35 Regulation: Swap Trading Mandatory Clearing Mandatory Reporting Electronic Venue: SEF FCM (Bank) Clearinghouse (LCH/CME)

36 ALLQ: SWAPS ELECTRONIC TRADING SEF -> FCM -> CLEARING

37 ANNEX: CORE TREASURY TOOLS

38 ANNEX: TREASURER CORE FUNCTIONALITY (1) 38 General BPS Bloomberg Resource Center docs, videos workflows Corporate Finance & Capital Structure LEAG Overview of top underwriters FIW /COMB Bond portfolio pricing, performance, relative value LOAN / COV - Loan Monitor & covenant information TDH Historical liquidity (spread to bench, trade volumes) DES Instrument & Issuer description, schedules, covenants NIM - New issue monitor NIA New issue analytics DDIS Debt distribution profile for Corp & Sovereign CRV/CRVF Curve construction & Curve depository YAS Yield and Spread analysis WACC - Weighted Average Cost of Capital CAST Capital Structure FA Financial analysis EQRV Equity Relative Value FIRV Fixed Income Relative Value QMGR Quote manager IMGR Inventory & pricing CACS Corporate actions calendar MA / PEM Mergers & Acquisitions, Private Equity portals CF Company filings Credit Analysis & Risk Management WCDS World CDS monitor FICM Fixed Income Credit Market SOVR/SRSK Sovereign Credit Risk Monitors DRSK Market vs. Model Default Risk & Probabilities DRAM Bloomberg s Default Risk Ranking CDSW Credit Default Swap Valuation CDSV CDS term structure Interest Rates Analysis & Risk Management RRRA/BSR/FPA Repo /Treasury Lock/ Bond Forward SWPM Interest Rates Derivatives Pricing Engine WIRP Short term interest rates probabilities ICVS Swap Curve Builder FWCM Forward Curve Matrix FXFA FX-Interest Rate Arbitrage WIR World Interest Rate Futures Monitor WS World Swaps Monitor VCUB / NSV Volatility Surface XCF Cross-Currency Funding / Spread Matrix Foreign Exchange WCR World Currency Rates FXFC - FX Forecasts FXFM FX Rate Forecast Model FXEX FX Exposure Capture OMST- Most Active options strikes and sizes FRD FX Forward Calculator FXIP FX Information Portal HWIZ Hedging wizard SDRV Options & NDF transaction volumes Commodities FDM Commodities Fundamentals CPLY Commodity playbook by commodity type CFVL Commodity fair value CCRV Commodity curve analysis OVML - Option and Forward Analytics (FX/Commodities) GAS / AGS/ OIL / MINE Nat Gas/ Agri / Oil / Metals tools

39 ANNEX: TREASURER CORE FUNCTIONALITY (2) 39 Counterparty Analysis & Risk Management CVA Credit Valuation Analysis CRPR Credit Ratings and Outlook Profile CCA Credit Comparable Analysis RATC Ratings Change SPLC Supply Chain Analysis Portfolio Risk Management & Valuation Tools MARS Multi-Asset Risk & Valuation System BVLI Bloomberg Valuation Portal Hedge accounting HEFF Hedge Accounting Effectiveness Testing Forecasting Tools ECFC Economic Forecasts FXFC FX Forecasts BYFC Bond Yield Forecasts BDVD Dividend Forecasts LEAD Leading Economic Indicators CPFC Commodity Price Forecast Monitors MMR Money market rates monitor CENB / FED Central Banks SOVM/USSW/BTMM/PX1 Sovereign debt monitors DMMV/EMMV Developed/Emerging markets monitors FCON Financial conditions monitors OMON Options monitor GV / HGV / SKEW Volatility analytical tools OVDV Volatility surface WCR World currency rates IFMO Inflation monitor Electronic Trading & Hedging Analysis ET/ FIT/ FXGO / TSOX Electronic trading portal & tools FIT/RFQ/RFQC Trading quotes for Rates, FX & Commodities RUNZ / IMGR / QMGR Dealer pricing, inventory and quotes CTM Futures contract table menu SDR/ SDRV Swap Data Repository: transaction transparency BEMS Bloomberg Execution Management System News & Market Intelligence BI Industry, sector and company analysis TNI Advanced news search TOP Top news READ Most read news CN Company specific news FIRS - Economic, industry and markets insight FFM Functions for the market practical applications Search Engines SRCH Security search CSCH Convertible search LSRC Loan search EQS Equity Screening Investor Relations IR Investor Relations EE Earnings Estimate IP Investor Profile HDS Company Ownership CAST Capital Structure AGGD Debt Holders Documentation, Libraries & MS XL Tools DRVD Derivatives documentation center XLTP MS Excel template library FLDS Bloomberg data field search DLIP Structured derivatives

40 THANK YOU YON VALTCHEV