Module 16

Question 1

Treasury management

Answer 1

Management of money and financial risks in a business

Question 2

Four key areas of treasury management

Answer 2

• Liquidity management
• Risk management
• Funding
• Corporate finance

Question 3

Liquidity management

Answer 3

Short term management of cash to ensure company has access to cash it needs in cost efficient manner

Question 4

Risk management

Answer 4

Understanding and quantifying the risks faced by a company eg currency risk, interest rate risk and commodity price risk management

Question 5

Corporate finance

Answer 5

Examination of a company’s financial strategies eg is capital structure appropriate

Question 6

Funding

Answer 6

Deciding on suitable forms of finance and organising suitable bank and capital market debt

Question 7

Importance, mix and volume of acitivities within each of the four functions depends on

Answer 7

Nature of the business

Question 8

Responsibility to ensure treasury department is organised appropriately to meet needs of organisation and whether centralised or decentralised

Answer 8

Board of directors

Question 9

Centralised/ decentralised =

Answer 9

Centralised = treasury based at head office effectively in house bank serving interests of group
Decentralised = prime decision making takes place at subsidiary level

Question 10

Advantages of centralised treasury department (4)

Answer 10

• Economies of scale (borrowing for lots of subsids can be arranged in bulk)
• Matching - cash surpluses in one area can be used to match cash needs in another and currency matching minimises hedging costs
• Control - standardised procedures
• Expertise - experts can be employed with knowledge of latest developments in treasury management

Question 11

Advantages of decentralised treasury department (3)

Answer 11

• Faster decision making
• Understanding of specific entity needs/ local financing opportunities
• Greater control, more motivated management

Question 12

Important that the organisation of a treasury department reflects a company’s

Answer 12

Attitude to risk

Question 13

Depending on company’s attitude to risk, treasury department can be set up in three ways

Answer 13

• Cost centre > aim to operate as efficiently as possible and hedges 100% of risk if possible
• Cost saving centre > partial hedges used and residual risk is managed within limits
• Profit centre > treasury department creates speculative positions by trading in financial instruments

Question 14

Due to increase difficulty in managing treasury functions, and to ensure effective and secure functioning..

Answer 14

Controls are required

Question 15

Unauthorised transactions risk

Answer 15

Money being misappropriated and risk of unauthorised positions

Question 16

Unauthorised transactions controls (7)

Answer 16

• Types of risks that can be accepted
• Instruments that may be used
• Level of positions allowed
• Limits for each dealer
• Must have individual to confirm/ sign off transaction
• Transactions are recorded
• Banks who are being traded with should also carry out independent checks > monitor bank mandates

Question 17

Key culture for treasury team

Answer 17

Where individuals are encouraged to rapidly admit to having made mistakes > essential

Question 18

Cultural problems controls (2)

Answer 18

• Selection process > thorough interviews and references taken up
• Appropriate training

Question 19

Systems risk

Answer 19

Risk that the manual and electronic systems for implementing transactions have inherent flaws

Question 20

Systems risk controls (6)

Answer 20

• Ensure that requirements are clearly specified
• Ensure systems department understands business sufficiently
• Initial password to enter system
• Various levels of access for different tasks
• System administrator must be external to treasury department
• Passwords for authorising payments electronically only given to authorised signatory

Question 21

Dealing by phone

Answer 21

Typically foreign exchange or interest rate products done over the telephone to take advantage of prices which may change from second to second

Question 22

Dealing by phone controls (5)

Answer 22

• Record dealers’ telephone calls
• Hard copy of deal confirmation should be produced
• Confirmation should be agreed to bank confirmation
• Bank mandates must be in place detailing who can authorise and what level
• Internal exposure limits within which the treasury team must operated

Question 23

Counterparty risk

Answer 23

The possibility that the entity to which money has been lent or to whom company is otherwise exposed will not be able to repay at maturity

Question 24

Counterparty risk controls (2)

Answer 24

• Credit limit set (responsibility of treasury not credit control)
• Limits should be reviewed annually (or preferably semi-annually as rating agencies amend ratings)

Question 25

Derivatives risks (2)

Answer 25

• Organisations do not understand nature of the instruments

- Do not control exposures properly

Question 26

Derivatives controls

Answer 26

Futures and Options Association produced Guidelines ‘Managing Derivatives Risks’ :

Board of directors - establish and approve effective policy for use of derivatives

Senior management - establish written procedures, sufficient supervision and sound risk management function

Operations - report all risks the entity is exposed to and establish credit limits