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Unit 1 Context Of Treasury > Unit 1 Context Of Treasury > Flashcards

Unit 1 Context Of Treasury Flashcards

1
Q

Role of the treasurer:

A 
Cash
Funding and liquidity
Credit
Banking relationships
Financial risk
Foreign exchange
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2
Q

Key Treasury Tasks:

A
  • identifying and evaluating financial risks
  • assisting the company’s wider risk management function
  • managing the company’s capital structure and weighted cost of capital
  • identifying appropriate risk management strategy in light of the treasury policy
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3
Q

3 main treasury roles:

A

Advisory (decentralised)
Agency (centralised)
In house bank

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4
Q

Types of treasury structure:

A
  • cost centre (efficient use of cash)
  • cost saving centre (minimise financial volatility)
  • profit centre (active approach to risk mgmt)
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5
Q

Centralised Treasury

A

Supported by:

  • Technology
  • Regulatory environment
Pros:
Single financial status
Cost saving
Control
Synergy of expertise

Cons:
Profit centre manager not in control of own finances
Understanding of local environments

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6
Q

Decentralised Treasury Structure

A

Pros:
Local autonomy
Alignment of policy with local needs
Head office costs reduced

Cons:
Duplication
Loss of economies of scale
Loss of control
Need for suitably qualified staff
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7
Q

5 major areas of treasury responsibility:

A
  1. Corporate financial management
  2. Capital markets and funding
  3. Cash and liquidity management
  4. Risk management
  5. Treasury operations and controls
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8
Q

Role of Central Banks

A
  • Supervise the market
  • Control the supply of money
  • Set domestic interest rates
  • May seek to smooth out fluctuations in currency by buying and selling across the world
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9
Q

Discount Instruments and return to investors

A

Sold at a discount to their face value. Investors achieve a return when paid at maturity they will receive the face value which is greater than the price they will have paid

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10
Q

Time value of money

A

A fixed sum of cash received today is worth more than exactly the same sum receivable in the future. Amounts held today can be invested and will be worth more than the original amount due to investment gains.

Key point: generation of returns

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11
Q

FX Pricing

A

Base currency = left

Market maker’s price = right

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12
Q

Special arrangement for corporate to transact FX with a market maker

A

Credit line

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13
Q

Components of Capital Structure

A
  1. Equity in the form of share capital

2. Borrowings in the form of loan capital

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14
Q

Nominal rate calculation

A

1+ real rate = 1+ nominal rate / 1+ inflation rate

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15
Q

Effective annual return (EAR)

A 
R = periodic interest rate
N = number of time a period fits into calendar year

EAR = (1+R ^n) -1

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16
Q

Examples of annuities

A
  • fixed rate loan interest payments
  • Pension payment
  • finance lease
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17
Q

Advantages of electronic dealing platforms vs. Telephone dealing:

A
  • no misunderstanding
  • immediate confirmation
  • competitive pricing
  • straight through processing
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18
Q

Back office Functions

A
  • ensure deals have been accurately recorded
  • ensure deals meet internal policies
  • ensure deals have been confirmed by counterparties
  • validate internal process
  • manage a deal through to settlement
  • account for the transaction
  • Control and report on dealing
  • monitor controls and provide reassurance to management that activities are properly carried out
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19
Q

Middle office

A

Generally in larger companies

Internal control and compliance

Responsibilities:

  • design of control framework
  • treasury reporting
  • systems development
20
Q

Internal Rate of Return (IRR)

A

Internal Rate of Return is the cost of capital that results in a set of cash flows having a net present value of 0

21
Q

Yield Curve

A

Summary of market yield for comparable instruments over time

22
Q

Difference between yield and interest

A

Yield is an impied return which not only takes into account interest payment but also the market value and any redemption value

23
Q

Theory of a positive yield curve

A

Market expectations - market expects that rates will rise

Liquidity preference - suggests investors demand a risk premium or compensation that increases the longer their funds are tied up

Market segmentation - suggests the yield curve at any point reflects the supply and demand for funds at any particular time point

24
Q

Par yield curve

A

Plots the rates of coupon paying bonds redeemable at par over time

Par rates can be used for determining the coupon rate on a new bond redeemable at par or the fixed leg rate of a new interest rate swap

25
Q

Key features of an FX market

A
  • Trading volumes for liquidity
  • due to number of participants and size of market profit margins are low on any individual transaction
  • increasingly technological
  • no physical market place
  • facilitate movement of capital around the world
  • globalisation of business has increased demand
26
Q

Strategic elements of risk management

A
  • which markets to enter
  • organic growth vs acquisition
  • determine which risks to avoid and which to insure against if unavoidable
  • identify financing or hedging profile
27
Q

Tactical elements of risk management ( delegated to the treasurer)

A
  • selection of counterparties
  • timing of actions in markets
  • selection of borrowing/ hedging / investment instruments
28
Q

Interest Rate Parity theory

A

Interest Rate parity links 4 market rates:
Spot FX
Forward FX
Interest rates in both currencies

Under efficient market conditions the theory predicts that the current forward FX rate can be calculated from the spot rate adjusted for the difference in Interest rates between the 2 currencies

29
Q

Examples of market takers in an FX market

A
  • Non financial corporates including importers and exporters
  • banks dealing with each other
  • pension funds
  • central banks
  • insurance companies
  • hedge funds
30
Q

General risk responses:

A

Avoid
Accept and retain
Accept and reduce
Accept and transfer

31
Q

Key Treasury objectives:

A
  1. Ensuring liquidity
  2. Cost effective funding of business activities
  3. Managing financial risks
  4. Developing a culture of sound financial practice
32
Q

Key feature of a growing perpetuity

A

Series of payments of receipts that grow at a constant periodic rate and last forever

33
Q

Real interest rate

A

Has been adjusted for the effect of inflation

34
Q

Zero coupon bond

A

A bond which pays no periodic coupons but only a redemption amount at maturity

35
Q

Key tasks of a corporate finance team

A
  • developing strategies that positively affect the value of the corporate
  • Minimising the organisations weighted average cost of capital (wacc)
  • providing a complete and accurate contribution to external reporting
  • ensuring the organisation is fairly evaluated by investors
  • Ensuring the organisation provides investors with returns in line with the risk they take on

Key responsibilities:
Arranging long-term funding
Evaluating potential mergers and acquisitions
Evaluation of potential divestment and business development

36
Q

Arbitrage

A

The simultaneous purchase and sale of assets in multiple markets in order to exploit a temporary discrepancy in prices

In money markets arbitrage could arise if a borrower could borrow currency at a favourable agreed fixed interest rate and exchange it at the spot FX rate and invest the proceeds at an agreed fixed rate to be reexchanged on maturity at a contracted favourable forward FX rate

Opportunities for arbitrage are short lived and small because markets eliminate these possibilities. This is achieved through close alignment of spot, FX and interest rates which leads to parity I.e. no risk free profit opportunities

37
Q

4 elements of risk management process

A

Identifying
Assessing
Evaluating
Managing

38
Q

Workflow process for treasury transaction

A 
Identify need for a trade
Analysis to gain pre trade authority
Deal and confirm 
Arrange settlement 
Account for it
39
Q

Reasons for outsourcing treasury activities

A

Lack of specialist skills in house
More efficient, lower cost of processing transactions
Freeing up more time for strategic decision making
Saving costs on technology

40
Q

Factors that may influence a company’s treasury department structure

A

Size and international scope
Level of financial risk
Culture of business
Degree of centralisation and need for control

41
Q

Spot FX trade

A

Settles T+2

42
Q

Eurocurrency Market

A

Is an international market where participants borrow and deposit currencies outside of their country of origin

If borrowing in this market, you would require the offer rate to determine costs

43
Q

Treasury acting as a cost centre

A

Pros:
Enables commercial decisions to be taken against reasonable certain financial background
No reason for the treasurer to take additional risk in the hope of adding value

Cons
There are few incentives for the treasurer to be innovative in approach
The company may miss out on taking opportunities where taking an acceptable level.of risk can add value to the company

44
Q

Risk management commitee

A

Subcommittee of the board
Consistency in managing risk
Integrated approach to risk taking into account the wider picture

45
Q

Maintaining Liquidity

A

Ensuring cash is in the right place at the right time to meet liabilities

Safeguarding the value of short term assets and ensuring they can be liquidated when necessary

Identifying and managing financial risks which could erode financial strength

Developing a culture of sound financial practice

Ensuring access to liquidity in order to meet all current and future liabilities via appropriate borrowing facilities

46
Q

Working capital analysis

A

Is the understanding and management of how cash is consumed and released from the business cycle. It is important to a business because as payments and receipts in transit take time to reach the cash balance. An organisation must understand what represents cash and is therefore available to meet financial liabilities

47
Q

Effective cash management activities

A 
Payments and collections
Day to day cash control
Bank account structuring
Short term investment
Short term borrowing
Cash flow forecasting
Organising trade finance

Unit 1 Context Of Treasury (1 decks)

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