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Treasury Flashcards

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1
Q

What is pegging?

A

Finding the exchange rate in terms of another currency

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2
Q

What is the purpose of dual exchange rate policy?

A

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

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3
Q

What is the balance of payment?

A

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

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4
Q

What are the three accounts of balance of payment?

A
  1. The current account
  2. The capital account
  3. The official reserves
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5
Q

What is the current account?

A

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

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6
Q

What is the invisibles?

A

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

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7
Q

What are transfers?

A

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

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8
Q

What is a capital account?

A

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

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9
Q

What is in the official reserve?

A

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

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10
Q

What is a direct quotation?

A

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

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11
Q

What is a buying rate also known as?

A

Bid rate

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12
Q

What is the selling rate also known as?

A

Ask rate

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13
Q

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

A

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

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14
Q

What is the mid rate?

A

Refers to the mid point between buying and selling rate.

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15
Q

What is a spot transaction?

A

Where foreign currency is purchased and paid for immediately.

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16
Q

What is a forward transaction?

A

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

17
Q

What is interest rate parity?

A

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

18
Q

What is a foreign currency exposure?

A

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

19
Q

Name the three types of foreign exchange exposure.

A
  1. Translation exposure
  2. Transaction exposure
  3. Economic exposure
20
Q

What is translation exposure?

A

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

21
Q

What is transaction exposure?

A

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.

22
Q

What is the economic exposure?

A

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

23
Q

What is a hedging policy?

A

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

24
Q

What is a money market hedge?

A

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

25
Q

What is the cost if money market hedging?

A

The interest differentials

26
Q

What is the cost of forward contract?

A

Determined by the forward premium

27
Q

What is currency option?

A

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.

28
Q

What are leads and lags?

A

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.

29
Q

What is a future contract?

A

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

30
Q

What is the main function of the corporate treasurer?

A
  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
31
Q

What are some advantages of a profit centre?

A
  1. Market related rate could be charged to business unit

2. People is motivated to provide efficient and effective services

32
Q

What are some disadvantages of a profit centre?

A
  1. Temptation with management and dealer speculation
  2. Management time and effort spent
  3. Administrative burden
33
Q

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

A

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

34
Q

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

A
  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
35
Q

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

A
  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
36
Q

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

A
  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
37
Q

What is an exchange rate risk?

A

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

38
Q

From a treasury prospective, explain what an option is?

A

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

39
Q

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

A
  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

Finance (12 decks)

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