CRPTSYMGMT: Exam Tips

Question 1

How to calculate equivalence in fixed vs floating rates for issuance, and vice versa

Answer 1

Fixed Rate = Swap Spread (costs) + SWAP (ie fixed for floating) + FRN rate (ie BBSW + x)

Floating Rate = Swap Spread (costs) + SWAP (ie fixed for floating) MINUS Fixed Rate

Question 2

How can Treasury add value to broader company? (13)

Answer 2

1. Major contracts
2. Acc/Payable terms
3. Acc/Receivable
4. Provision of guarantees
5. Expansion into new countries & areas of risk
6. Lease vs buy decision
7. Economic and price forecasting for corporate planning
8. Market and competitor analysis
9. CF modelling (incl sensitivity analysis)
10. Insurance risk mgmt.
11. Pension fund mgmt.
12. Statutory fund mgmt.
13. Operational risk mgmt

Question 3

List the ways to use derivatives to help secure required funding for oil exploration company

Answer 3

1. Remove commodity price risk by locking in price of oil based on production profile
2. Remove FX risk by locking in any FX revenue or cost
3. Remove interest rate risk by locking in interest rates on any debt
4. Remove commodity price risk by locking in the price on any major inputs to the production process

This could / would turn the business into a MARGIN operation, this makes profit regardless of the point of cycle.

Question 4

Difference between FRA and interest rate futures

Define basis risk

Answer 4

BASIS RISK arises when the underlying and the hedge instrument are not perfectly aligned therefore gains / losses do not perfectly offset.

1. Contract size
2. Dates
3. Quality / grade
4. Location (commodity issue)
5. Customisable vs standardised
6. Credit risk
7. Margin calls
8. Liquidity

Question 5

AWA Case: list control weaknesses that were identified as part of the investigation & legal case

Answer 5

1. No internal limits
2. Deals not recorded in company accounting system
3. Open positions as high as $850m
4. Positions were wrong way round
5. Transactions executed on bulk basis, did not tie back to underlying
6. Historical rate rollovers used
7. Many positions had very high mark to market losses
8. Koval confirmed own deals
9. Deal tickets were missing from some transactions
10. Banks warned mgmt of high losses being rolled over
11. Management: didn’t understand trading activity and losses
12. Management: lack of oversight.
13. Illegal trades concealed by Koval
14. Koval provided false info to auditors
15. Internal controls poor
16. Quality of internal audit poor
17. Weaknesses in internal controls identified by external auditors not reported to board.

Question 6

What complications / challenges do companies face when operating on a global basis?

Answer 6

1. Complexity of bank account structure
2. Availability of bank balances and statements
3. Sheer number of bank accounts
4. Company structure
5. Multiple time zones / currencies
6. In-country restrictions
7. Multiple currency forecasting
8. Systems
9. Quality of data

Question 7

Explain LIBOR / BBSW / FX scandals at high level…

Answer 7

LIBOR

• major b/m for lending / swaps, underpins $350tn in derivs
• banks admitted to manipulating rates for profit
• Citigroup trader Tom Hayes found guilty of rigging, sentenced to 14 years.

BBSW

• 350bn loans / bonds priced off BBSW, plus IRS & CCIRS
• Dec 2013, UBS voluntarily disclosed manipulation. ASIC imposed $1m penalty
• early 2014; BNP disclosed that Sing based traders contacted Sydney traders to influence the set. $1m penalty by ASIC
• BBSW now calculated electronically rather than by submission

FX

• Global investigation of rigging of daily FX rate fixings
• Front running of client orders
• Sharing information on open positions
• Fines USD 10bn across various banks

Question 8

Impact of recent LIBOR / BBSW / FX scandals (8)

Answer 8

1. Increased interest cost or decreased investment returns
2. Adverse FX movement
3. Potential for breach of covenants
4. Decrease in creditworthiness
5. Banks cutting services
6. Decreased volume in FX market
7. Decrease in market information provided to clients by banks
8. P/L gains & losses due to restatement of exchange rates or interest rates

Question 9

Actions to be taken to mitigate impact of LIBOR / BBSW / FX scandal (13)

Answer 9

1. Be aware of the risks & impacts
2. Change banks, deal with more banks
3. Compensation
4. Tender of pricing transparency
5. Check for involvements before including banks in dealing panels
6. Move to exchange traded instruments
7. Widen banking panel
8. Lobby regulators for reform
9. Acknowledge it & do nothing
10. Smooth / flatten repricing profile
11. Minimise FX exposure - natural hedge
12. Access to systems for pricing transparency
13. Peer contact for transparency or use of industry bodies

Question 10

Options available if you have excess cash (5)

Answer 10

1. buy back
2. special dividend
3. invest in business
4. leave in cash
5. liquidity management

Interested parties: Investor relations; Treasury
Assess by looking at IRR