Treasury

Question 1

What is pegging?

Answer 1

Finding the exchange rate in terms of another currency

Question 2

What is the purpose of dual exchange rate policy?

Answer 2

Attempts to separate current and capital transactions into two separate markets so to protect normal trade transactions from the destabilizing effect of capital movement.

Question 3

What is the balance of payment?

Answer 3

It records the flow of economic transactions over national boundaries for a specific period

Question 4

What are the three accounts of balance of payment?

Answer 4

1. The current account
2. The capital account
3. The official reserves

Question 5

What is the current account?

Answer 5

It records the trance of goods and services and transfer payments between countries (exports and imports)

Question 6

What is the invisibles?

Answer 6

Receipts and payments for services, includes interests, dividends, royalties, traveling expenses and financial and shipping charges

Question 7

What are transfers?

Answer 7

Remittances by employees on contract in SA and government transfer from and to foreign countries

Question 8

What is a capital account?

Answer 8

It records the movements of capital funds across country boundaries.
Movement of long terms and short term capital are disclosed separately.

Question 9

What is in the official reserve?

Answer 9

The changes in official reserve reflects the difference between current account and capital account

Question 10

What is a direct quotation?

Answer 10

Quotes exchange rate in terms of local currency. It measures how much one unit of foreign currency buys local currency.
I.e. $1= R8

Question 11

What is a buying rate also known as?

Answer 11

Bid rate

Question 12

What is the selling rate also known as?

Answer 12

Ask rate

Question 13

What is the difference between bid and ask rate (bid and ask spread)?

Answer 13

It represents the dealer’s profit margin in buying and selling currencies.

Question 14

What is the mid rate?

Answer 14

Refers to the mid point between buying and selling rate.

Question 15

What is a spot transaction?

Answer 15

Where foreign currency is purchased and paid for immediately.

Question 16

What is a forward transaction?

Answer 16

The payment or receipt of a transaction will be effected at specific time in the future but the exchange rate is fixed today.

Question 17

What is interest rate parity?

Answer 17

The forward premium or discount is determined by the relationship between relative interest rates.

Question 18

What is a foreign currency exposure?

Answer 18

It is the potential for gain or loss due to a change in the exchange rate.

Question 19

Name the three types of foreign exchange exposure.

Answer 19

1. Translation exposure
2. Transaction exposure
3. Economic exposure

Question 20

What is translation exposure?

Answer 20

The effect that a change in exchange rate will have on the record of accounting results of a company. Also known as accounting exposure.

Question 21

What is transaction exposure?

Answer 21

The potential for gain or loss which will arise when one enters into transaction whose terms are stated in foreign currency.
Hedging policy can be used to avoid this type of exposure.

Question 22

What is the economic exposure?

Answer 22

Measures the long terms real effect of a change in the exchange rate

Question 23

What is a hedging policy?

Answer 23

Technique used by a firm to protect itself against the possibility of loss due to change in exchange rate.

Question 24

What is a money market hedge?

Answer 24

The firm will enter into an offsetting loan agreement in foreign or local currency to cover the foreign currency transaction.

Question 25

What is the cost if money market hedging?

Answer 25

The interest differentials

Question 26

What is the cost of forward contract?

Answer 26

Determined by the forward premium

Question 27

What is currency option?

Answer 27

It gives a person the right but not obligation to purchase ( a call option) or sell (a put option) a specified amount of foreign currency at an agreed price which is called strike price. A company may use a currency option to hedge against foreign exchange exposure.

Question 28

What are leads and lags?

Answer 28

A firm will utilize leads and lags when a currency is expected to move in one particular direction, it will either speed up or slow down the payment or receipt in foreign currency.

Question 29

What is a future contract?

Answer 29

An obligation to buy or sell a specified amount of rands in exchange for foreign currency at certain price on a specified date. Contract size fixed R500 000

Question 30

What is the main function of the corporate treasurer?

Answer 30

1. Banking: relationship management with banks 2. Liquidity management: ensuring that cash is available for payment of creditors 3. Funding management: funding of assets by determining capital structure 4. Currency management: reducing currency risk

Question 31

What are some advantages of a profit centre?

Answer 31

1. Market related rate could be charged to business unit | 2. People is motivated to provide efficient and effective services

Question 32

What are some disadvantages of a profit centre?

Answer 32

1. Temptation with management and dealer speculation 2. Management time and effort spent 3. Administrative burden

Question 33

Should a corporate treasury be structured as a cost or profit centre

Answer 33

It should not be structured as a profit centre as it increases the risk of people wanting to speculate and make money, therefore it would be better to structure it as a cost centre as the control will be better the cost could be monitored by divisions

Question 34

Identify and discuss the different types of foreign exchange exposures that importer or exporter faces?

Answer 34

1. Interest rate risk: increase or decrease in interest rates results in additional payment or less receipt 2. Credit or default risk: changes in credit status of debtor or non payment by debtors or debtor default on payment 3. Commodity risk: changes in price of raw material 4. Gearing risk: risk of increase debt burden, threat of insolvency 5. Cash flow risk: risk of change in the cash flow or fluctuating cash flows 6. Political risks

Question 35

Discuss the risk reduction methods other than forward cover that could be employed to reduce the exchange rate risk to an acceptable level.

Answer 35

1. Internal direct methods - currency of invoice - matching receipt and payment - leads and lags - matching long term assets and liabilities - money market hedges - client diversification 2. Derivatives - currency options - foreign currency futures - currency swaps

Question 36

What are the two approaches that a South African company can use to calculate the net present value?

Answer 36

1. The home currency approach: convert all foreign currency cash flows into rand and discount at the same discount rate that is used to evaluate South African capital projects 2. The foreign currency approach: determine the required return on the foreign investment and then discount the foreign cash flows to find the NPV then convert this to rand

Question 37

What is an exchange rate risk?

Answer 37

The risk related to having international operations in a world where relative currency value changes.

Question 38

From a treasury prospective, explain what an option is?

Answer 38

An option is the right but not obligation to buy or sell at some date in the future at a predetermined price.

Question 39

Distinguish between the different characteristics and types of options contracts that are available.

Answer 39

1. Call option = right to buy from the seller at a set price 2. Put option = right to sell to the buyer at a set price 3. The option premium is payable at the date of the commencement of the agreement but the exercise price is payable in the option expiry date for a call option and the exercise price is receivable on the option expiry date for put option 4. Strike price is the contract prove payable by call option holder on expiry date and the contract price receivable by the put option holder on expiry