Treasury and Risk Management - Doc

TREASURY AND RISK MANAGEMENT 1
TREASURY AND RISK MANAGEMENT EXAM
Student’s Name
Course
Professor’s Name
University
City (State)
Date

TREASURY AND RISK MANAGEMENT 2
Question 1
The Swiss National Bank is Switzerland`s central bank that is accountable for any
monetary policy in that country and issues Swiss currency bank notes (Munn, 1995).In 2015,the
Swiss National Bank decided to withdraw its hedging strategy. A hedging strategy is a type of
investment that would help protect finances from risky situations that would bring about losses to
the invested currency (Amadeo, 2017).The strategies help derives value from the invested stock
which happens to be the real asset.
Reasons for the Swiss National Bank de-pegging the franc
 The Euro currency was not looking good for Swiss franc to stay pegged to it.
The Euro had formed a downward curve since its main central bank was struggling to deal with
the wavering economies. At the same time, the Swiss franc looked more appealing for
investment since more people were looking for a safer place to channel their funds during the
economic turmoil. So the bank decided to de-peg the franc.
 The Swiss franc looked less risky
There was a belief that the Swiss franc is overseen by a more practical, stable regime and a
dominant bank that did not have any debt troubles that were being experienced all over the
Eurozone.
 Concern by the Swiss National Bank.
The weakening of euro and strengthening of Swiss franc caused the bank to make a choice to de-
peg as a way to manage risks through hedging strategies.
 To make the Swiss economy cheaper for its consumers.

TREASURY AND RISK MANAGEMENT 3
This would mean that the value of the Swiss currency increases within its boundaries. When the
currency had been pegged, the exchange rates were too high.
 It needed to regain its former glory in the international markets.
We see that after the Swiss franc was pegged to the Euro, the Swiss franc became greatly
overvalued. Even the bank had to increase its liquidity supply to the Switzerland money market.
Overvaluing of currency creates an unfavorable environment for the investors and exporters.
 The deflationary cycle created.
When the Swiss franc became overvalued, this reduced consumer prices as a whole. Consumers
realized this, and they started to reduce their purchasing habits waiting for the prices to lower in
the near future. When products and goods are not purchased within Switzerland, it is not good
for its local industry.
HEDGING STRATEGIES
These strategies help both the exporters and domestic firms protect their currency against
volatility and reduce any losses accrued from currency movement.
Below are hedging strategies used by exporters and domestic firms.
 Invoicing.
This type of hedging strategy shifts exchange risk to the other parties. It is characterized by
dominance in payables and receivables in the domestic currency. However, if the currency in
question is not globally accepted, it can lead to decrease in the bargaining power of the company
or reduce the customer base. Sometimes the well-accepted currency globally uses the vehicle