Question 1. Give the meaning of treasury management.

Explain the
need for specialized handling of treasury and benefits of treasury.
Answer:
Treasury management: is the administration of a company's cash
flow as well as the creation and governance of policies and procedures
that ensure the company manages risk successfully.
Treasury management (or treasury operations) includes management
of an enterprise's holdings, with the ultimate goal of managing the
firm's liquidity and mitigating its operational, financial and reputation
risk.
Treasury
Management
includes
a
firm's
collections,
disbursements, concentration, investment and funding activities. In
larger firms, it may also include trading in bonds, currencies, financial
derivatives and the associated financial risk management.
Bank Treasuries may have the following departments:
[a]A Fixed Income or Money Market desk that is devoted to buying and
selling interest bearing securities.
[b]A Foreign exchange or "FX" desk that buys and sells currencies
[c]A Capital Markets or Equities desk that deals in shares listed on the
stock market.
Need & Benefits of Treasury:

Risk management, Promotes competition resulting in better

quality products and services.

Reduces margin and more efficient allocation/ intermediate

interest rates to align with global interest rates differential to reflect
in foreign exchange forward rates.

Improves quality and number of financial assets as a result of

greater liquidity and deeper market.

Avoids inducements for tax evasion

opportunities for diversion/distribution of risk.

and

capital

flight

The treasury is usually encouraged to offer services as

economically as possible, to check that the profit is made at the
market rate. For example, managing hedging activities for a
subsidiary.

The individual business units of an entity can usually be charged

at a market rate for the services offered, making their operating costs
more realistic.

Question 2: Explain foreign exchange market. Write about all

the types of foreign exchange markets. Explain the
participants in foreign exchange markets.
Answer:
FOREIGN EXCHANGE MARKET: A foreign exchange market refers to
buying foreign currencies with domestic currencies and selling foreign
currencies for domestic currencies. Thus it is a market in which the
claims to foreign moneys are bought and sold for domestic currency.
Exporters sell foreign currencies for domestic currencies and importers
buy foreign currencies with domestic currencies.
According to Ellsworth, "A Foreign Exchange Market comprises
of all those institutions and individuals who buy and sell foreign
exchange which may be defined as foreign money or any liquid claim
on foreign money". Foreign Exchange transactions result in inflow &
outflow of foreign exchange.
TYPES OF FOREIGN EXCHANGE MARKET:
Foreign Exchange Market is of two types retail and wholesale market.
1.
Retail Market The retail market is a secondary price maker.
Here travellers, tourists and people who are in need of foreign
exchange for permitted small transactions, exchange one currency for
another.
2. Wholesale Market The wholesale market is also called interbank
market. The size of transactions in this market is very large. Dealers
are highly professionals and are primary price makers. The main
participants are Commercial banks, Business corporations and Central
banks. Multinational banks are mainly responsible for determining
exchange rate.
3.

Other Participants or Sub Markets

a)
Brokers Brokers have more information and better knowledge
of market. They provide information to banks about the prices at which
there are buyers and sellers of a pair of currencies. They act as
middlemen between the price makers.
b)
Price Takers Price takers are those who buy foreign exchange
which they require and sell what they earn at the price determined by
primary price makers.

PARTICIPANTS I DEALERS IN FOREIGN EXCHANGE MARKET:

Foreign exchange market needs dealers to facilitate foreign exchange
transactions. Bulk of foreign exchange transaction are dealt by
Commercial banks & financial institutions. RBI has also allowed private
authorized dealers to deal with foreign exchange transactions i.e.
buying & selling foreign currency. The main participants in foreign
exchange markets are
1.
Retail Clients Retail Clients deal through commercial banks
and authorized agents. They comprise people, international investors,
multinational corporations and others who need foreign exchange.
2.
Commercial Banks Commercial banks carry out buy and sell
orders from their retail clients and of their own account. They deal with
other commercial banks and also through foreign exchange brokers.
3.
Foreign Exchange Brokers Each foreign exchange market
center has some authorized brokers. Brokers act as intermediaries
between buyers and sellers, mainly banks. Commercial banks prefer
brokers.
4. Central Banks Under floating exchange rate central bank does
not interfere in exchange market. Since 1973, most of the central
banks intervened to buy and sell their currencies to influence the
rate at which currencies are traded. From the above sources
demand and supply generate which in turn helps to determine
the foreign exchange rate.

3. Write an overview of risk mitigation. Explain the

processes of risk containment. Write about the tools
available for managing risks.
Definition : Risk management is the identification, assessment,
and prioritization of risks followed by coordinated and
economical application of resources to minimize, monitor, and
control the probability and/or impact of unfortunate events or to
maximize the realization of opportunities. Risk managements
objective is to assure uncertainty does not deviate the endeavor
from the business goals.
details:
[a]Risk mitigation planning is the process of developing options
and actions to enhance opportunities and reduce threats to
project objectives.
[b]Risk mitigation implementation is the process of executing
risk mitigation actions.
[c]Risk mitigation progress monitoring includes tracking

identified risks, identifying new risks, and evaluating risk process

effectiveness throughout the project.
Process of Risk Containment:
1. Risk Assessment: This is the process to identify and assess the
degree of risk.
[a]Risk Identification: Create checklist for action items, do a decision
driver and assumption analysis, decomposition of the requirements.
[b]Risk Analysis: Various tools for it are Performance Analysis, Cost
analysis, decision analysis, Quality Factor analysis is used for risk
analysis.
[c]Risk Prioritization: All risk may not be addressed for time,
administration and cost constraints. Risk Exposure, Risk Leverage and
compound risk reduction.
2. Risk control:
[a]Risk management Planning : There are various risk mitigation
actions that can be used to either subvert the risk or to reduce the
impact. It includes Buying (investment decisions) information, Risk
avoidance, Risk transfer, Risk Reduction, Risk Plan Integration.
[b]Risk Resolution: By developing Prototypes & simulation, specifying
Analysis and confirming to standards/benchmarks and adequate
staffing and product management.
[c]Risk Monitoring: Controlling of action plan is important for risk
management process. Creating and tracking Milestone, top 10
tracking, Risk review and doing corrective actions.
Tools for risk management:
Capital asset pricing model Used to determine the appropriate
required rate of return of an asset, if that asset is added to an already
well diversified portfolio, based on non-diversifiable risk.
Altova-MetaTeam A tool providing the framework required for
managing risk management activities, as discussed in ISO 31000 and
the PMBOK. A broadly applicable overview of this approach is available.
EPRI Risk and Reliability Workstation (CAFTA) Widely used tool
to create and quantify core damage frequency numbers at American
commercial nuclear power plants.[2]
Event chain methodology - A method of managing risk and
uncertainties affecting project schedules
Probabilistic risk assessment (PRA, also called Probability
Consequence or Probability Impact Model) Model based upon
single-point estimates of probability of occurrence, initiating event
frequency, and recovery success (e.g., human intervention) of a
specific consequence (e.g., cost or schedule delay).

RIMS Risk Maturity Model - The Risk Maturity Model for enterprise
risk management. The RMM is an umbrella framework of content and
methodology that detail the requirements for sustainable and effective
enterprise risk management. The RMM model consists of twenty-five
competency drivers for seven attributes that create ERMs value and
utility in an organization. The 7 attributes are: an ERM-based approach,
ERM process management, risk appetite management, root cause
discipline, uncovering risks, performance management, and business
resiliency and sustainability. The model was published by the Risk and
Insurance Management Society and developed by Steven Minsky, CEO
of Logic Manager in collaboration with the RIMS ERM Committee. The
Risk Maturity Model is based on the Capability Maturity Model, a
methodology founded by the Carnegie Mellon University Software
Engineering Institute.
RiskAoA A predictive tool used to discriminate between proposals,
choices, or alternatives, by expressing risk for each as a single number,
so a proposal's trade-space between cost, scheduled time and risk
from its desired characteristics can be compared instantly. RiskAoA and
variations of PRA are the only approved tools for United States
Department of Defense Military Acquisition.
Risk Radar Enterprise (RRE) - Web based application for enterprisewide program and/or project level Risk Management. RRE enables
effective management and communication of project Cost, Schedule,
Technical and Performance risk in one or many projects within a
common flexible and scalable enterprise framework.
Risk register A project planning and organizational risk assessment
tool. It is often referred to as a Risk Log.
Systems Analysis Programs for Hands-on Integrated Reliability
Evaluations (SAPHIRE) A probabilistic risk and reliability
assessment software tool.

4. What is Interest Rate Risk Management (IRRM)? Write the

components and features
of IRRM. Explain the macro and micro factors affecting interest
rate.
Interest rate risk is the risk that arises for bond owners from
fluctuating interest rates. How much interest rate risk a bond has
depends on how sensitive its price is to interest rate changes in the
market. The sensitivity depends on two things, the bond's time to
maturity, and the coupon rate of the bond.

Components and features of IRRM:

1. Real Risk-Free Rate - This assumes no risk or uncertainty, simply
reflecting differences in timing: the preference to spend now/pay back
later versus lend now/collect later.
2. Expected Inflation - The market expects aggregate prices to rise,
and the currency's purchasing power is reduced by a rate known as the
inflation rate. Inflation makes real dollars less valuable in the future
and is factored into determining the nominal interest rate (from the
economics material: nominal rate = real rate + inflation rate).
3. Default-Risk Premium - What is the chance that the borrower won't
make payments on time, or will be unable to pay what is owed? This
component will be high or low depending on the creditworthiness of
the person or entity involved.
4. Liquidity Premium- Some investments are highly liquid, meaning
they are easily exchanged for cash (U.S. Treasury debt, for example).
Other securities are less liquid, and there may be a certain loss
expected if it's an issue that trades infrequently. Holding other factors
equal, a less liquid security must compensate the holder by offering a
higher interest rate.
5. Maturity Premium - All else being equal, a bond obligation will be
more sensitive to interest rate fluctuations the longer to maturity it is.
Macro and Micro factors for interest rates:
1. Inflation : If inflation in the UK is relatively lower than elsewhere,
then UK exports will become more competitive and there will be an
increase in demand for Pound Sterling to buy UK goods. Also foreign
goods will be less competitive and so UK citizens will buy less imports.
Therefore countries with lower inflation rates tend to see an
appreciation in the value of their currency.
2. Interest Rates: If UK interest rates rise relative to elsewhere, it will
become more attractive to deposit money in the UK. You will get a
better rate of return from saving in UK banks, Therefore demand for
Sterling will rise. This is known as hot money flows and is an
important short run factor in determining the value of a currency.
Higher interest rates cause an appreciation.
3. Speculation: If speculators believe the sterling will rise in the
future, they will demand more now to be able to make a profit. This
increase in demand will cause the value to rise. Therefore movements
in the exchange rate do not always reflect economic fundamentals, but
are often driven by the sentiments of the financial markets. For
example, if markets see news which makes an interest rate increase
more likely, the value of the pound will probably rise in anticipation.

4. Change in Competitiveness: If British goods become more

attractive and competitive this will also cause the value of the
Exchange Rate to rise. This is important for determining the long run
value of the Pound. This is similar factor to low inflation.
5. Relative strength of other currencies: In 2010 and 2011, the
value of the Japanese Yen and Swiss Franc rose because markets were
worried about all the other major economies US and EU. Therefore,
despite low interest rates and low growth in Japan, the Yen kept
appreciating.
6. Balance of Payments: A deficit on the current account means that
the value of imports (of goods and services) is greater than the value
of exports. If this is financed by a surplus on the financial / capital
account then this is OK. But a country who struggles to attract enough
capital inflows to finance a current account deficit, will see a
depreciation in the currency. (For example current account deficit in US
of 7% of GDP was one reason for depreciation of dollar in 2006-07)
7. Government Debt: Under some circumstances, the value of
government debt can influence the exchange rate. If markets fear a
government may default on its debt, then investors will sell their bonds
causing a fall in the value of the exchange rate. For example, Iceland
debt problems in 2008, caused a rapid fall in the value of the Icelandic
currency.
For example, if markets feared the US would default on its debt, foreign
investors would sell their holdings of US bonds. This would cause a fall
in the value of the dollar. See: US dollar and debt
8. Government Intervention : Some governments attempt to
influence the value of their currency. For example, China has sought to
keep its currency undervalued to make Chinese exports more
competitive. They can do this by buying US dollar assets which
increases the value of the US dollar to Chinese Yuan.
9. Economic growth / recession: A recession may cause a
depreciation in the exchange rate because during a recession interest
rates usually fall. However, there is no hard and fast rule. It depends on
several factors. See: Impact of recession on currency.

5.

Explain the contents of working capital. Write down the need for
working capital?
Answer:
Working capital means the difference between current assets and
current liabilities. Working capital has below contents. Both in terms
of short term assets and short term liabilities.

Definition:
1. account receivables: this is part of current short term assets.
Examples are cash flow from clients, interest payments and asset
liquidation etc.
2. inventory: sales inventory is items present in the stock which
are ready to be given to supply chain department.
3. accounts payable: these are the company debt loan accounts,
Need And Importance Of Working Capital
Working capital is the life blood and nerve center of business. Working
capital is very essential to maintain smooth running of a business. No
business can run successfully without an adequate amount of working
capital. The main advantages or importance of working capital are as
follows:
1. Strengthen The Solvency
Working capital helps to operate the business smoothly without any
financial problem for making the payment of short-term liabilities.
Purchase of raw materials and payment of salary, wages and overhead
can be made without any delay. Adequate working capital helps in
maintaining solvency of the business by providing uninterrupted flow of
production.
2. Enhance Goodwill
Sufficient working capital enables a business concern to make prompt
payments and hence helps in creating and maintaining goodwill.
Goodwill is enhanced because all current liabilities and operating
expenses are paid on time.
3. Easy Obtaining Loan
A firm having adequate working capital, high solvency and good credit
rating can arrange loans from banks and financial institutions in easy
and favorable terms.
4. Regular Supply Of Raw Material
Quick payment of credit purchase of raw materials ensures the regular
supply of raw materials fro suppliers. Suppliers are satisfied by the
payment on time. It ensures regular supply of raw materials and
continuous production.
5. Smooth Business Operation
Working capital is really a life blood of any business organization which
maintains the firm in well condition. Any day to day financial
requirement can be met without any shortage of fund. All expenses
and current liabilities are paid on time.
6. Ability To Face Crisis

Adequate working capital enables a firm to face business crisis in

emergencies such as depression.

Q6. What are the functions and benefits of integrated

treasury? Explain the advantages and disadvantages of
operating treasury?
Ans:- Let us first understand the concepts and benefits of integrated
treasury management.
Treasury function was restricted to fund or liquid management. Fund
management includes maintaining adequate cash balances to meet
the daily requirements, implementing the surplus funds in other
operations, sourcing the funds to even the gaps in cash flow. The
treasury departments in banks are responsible to meet the Cash
Reserve Requirement (CRR) and invest the funds in securities under
Statutory Liquid Ratio (SLR). Treasury basically deals with short-term
cash flows(less than one year), but investment in some securities
exceeds more than one year.
Integrated treasury came into existence as a result of financial reforms,
the most important being the deregulation of rupee and partial
convertibility of rupee. Rupee is freely convertible on current account.
Due to the relaxations of RBI in Foreign Direct Investment (FDI), rupee
is now partially convertible on capital account. Banks are permitted a
larger limit in terms of their net worth, and overseas borrowing and
lending. The functions of integrated treasury are not restricted to
traditional functions.
The major functions of integrated treasury are as follows:

Performing reserve management, which involves meeting CRR

and SLR obligations.

Deploying surplus funds in securities which have low risk and

earn profits.

Performing global cash management.

Providing effective and efficient merchant services.

Improving the profit by exploring market opportunities in money

market, securities market and forex market.

Assisting the banks in Asset-Liability Management (ALM).

Managing market risk for the entire bank.

Treasury is the back bone of the financial institutions and banks.

Integrated treasury helps banks and financial institutions to effectively

manage the resources and comply with the regulatory requirements.
The benefits of integrated treasury are as follows:

Improves cash planning and monitors the cash position of the

organisation.

Prepares the financial statement and other financial reports for

analysis, financial control and budgeting.

Allows greater financial control by integrating budget and budget

execution data.

Enhances the quality of data for budget execution.

Advantages and disadvantages of operating treasury:

1. No need for treasury skills to be duplicated throughout the group.
One highly trained central department can assemble a highly skilled
team, offering skills that could not be available if every company had
their own treasury.
2. Necessary borrowings can be arranged in bulk, at keener interest
rates than for smaller amounts. Similarly bulk deposits of surplus funds
will attract higher rates of interest than smaller amounts.
3. The group's foreign currency risk can be managed much more
effectively from a centralized treasury since only they can appreciate
the total exposure situation. A total hedging policy is more efficiently
carried out by head office rather than each company doing their own
hedging.
4. One company does not borrow at high rates while another has idle
cash.
5. Bank charges should be lower since a situation of carrying both
balances and overdraft in the same currency should be eliminated.
6. A centralized treasury can be run as a profit center to raise
additional profits for the group.
7. Transfer prices can be established to minimize the overall group tax
bill.
8. Funds can be quickly returned to companies requiring cash via direct
transfers.
9.Lower is the level of autonomy for the groups and more dependence
on centralization.
10. Local operating units may feel left out and without proper timely
assistance from authority.
11. Treasuries staff must be well qualified and well paid.
12. Low volume of international Forex transaction for a small company
make the profit center approach unviable. So cost center approch is

adapted.
13. A treasury involved in speculation must in control by board and
stakeholders or it may increase risk exposure.
14. Profit booking at treasuries must be under legal norms. Finance
director must review the operations on day to day basis for stopping
illigal profit booking.
15. Hedging using currency and interest rate options leaves an upside
potential which could be realised if the rate moves in the company's
favour.