Chapter 25 - Function Of The Treasury

Question 1

What is the role of the treasury ?

Answer 1

Large companies will have departments for treasury and its role is

1. Manage short term cash

Usually if multiple locations, rather than putting there short term cash in there own short term investments to gain interest, head office will pool it all together

2. Manage risk (usually foreign currency)

If large global company that has offices from different cities in different countries. Then head office can better coordinate to payments and receipts between offices to best utilise the FX differences

Question 2

What are money market instruments ?

Answer 2

1. Certificates of deposits (CDs) - these are deposits with a bank for a fixed period
2. Treasury bills - short term borrowing with governments with fixed maturity dates. They do not pay interest (zero coupon) but on instead offered at discount on par
3. Commercial Paper - similar to treasury bills in that no interest but are offered by large corporations with excellent credit rating
4. Eurodollar deposits - these are time deposits for fixed periods carrying fixed interest in dollars with banks that are outside the US
5. Repurchase agreements (repo) - a way to borrow money, the borrower sells securities to the lender together with agreement to buy back the securities at a later date for higher price
6. Derivatives - these are financial products whose value comes from the price of a particular money market instrument