Treasury Managment Flashcards
(85 cards)
1
Q
What are the 4 main activities of Treasury Managment?
A
- Accounting, budgeting & financial reporting
- Borrowing and lending
- Cash flow forecasting and management
- management of financial risk
2
Q
What are 8 treasury managment instruments or techniques that organisations may be involved with?
A
- Borrowing
- Investments
- Equities and related investment
- gilt-edged and related securities
- Asset and liability management
- Banking services
- Investment and debt management services
- Advisory, consultancy and broking services
3
Q
What is a gilt-edged security?
A
A bond issued by the uk government as a means to raise long term borrowing. They are low risk investments.
4
Q
What is maturity matching in terms of asset and liability management?
A
This is a method of financing where assets are financed by an instrument of similar maturity.
5
Q
What is an advantage of maturity matching?
A
It helps maintain liquidity.
6
Q
What are investment management services?
What are debt management services?
A
- An external investment manager invests an organisations surplus funds on their behalf
- A specialist external service employed to manage and collect an organisations debt
7
Q
What are 4 advantages of outsourcing the treasury management function?
A
- Can quickly acquire treasry management skills not already in-house.
- Can acheieve more efficiency in treasury management operations, for example through lower cost processing of transactions
- Savings in keeping up with technological advances
- Freeing up more time for strategic tasks
8
Q
What are 4 disadvantages of outsourcing the treasury management function?
A
- Reduced control
- The performance of the contractor may be sub-standard
- May reduce staf moral
- information given to external providers may be less secure.
9
Q
What is the shared services approach to treasury management?
A
When a number of organisations group together to provide one service for all of the organisations. They share this service.
10
Q
How are savings created by shared services?
A
- Creation of economies of scale
- Collaboration to approach the market effectively
- Standardising on the use of best practice processes
11
Q
How can shared services improve the standard of service?
A
- Providing more reliable and consistent management information
- Better management controls
- Gives professionals the time and information needed to provide the better value service.
12
Q
What 8 main types of risk may an organisation face to its treasury management?
A
- Liquidity risk
- Interest rate risk
- Exchange rate risk
- Credit and counter party risk
- refinancing risk
- legal and regulatory risk
- Fraud, error and corruption
- Market risk
13
Q
What is the nature of liquidity risk?
A
Cash is not available when needed
14
Q
When can liquidity risk materialise?
A
When interest rates rise.
15
Q
What are the possible management controls for liquidity risk?
A
- Cash flow management
- Diversification into long and short term investments
16
Q
What is the nature of interest rate risk?
A
Additional costs or loss of income due to changes in rates.
17
Q
When can interest rate risk materialise?
A
When interest rates change.
18
Q
What are some possible management controls for interest rate risk?
A
- Diversification of borrowing by Investing in fixed or variable
- Use of derivatives - swaps, caps, collars
19
Q
What is the nature of exchange rate risk?
A
A change in exchange rate effects returns or costs.
20
Q
When can exchange rate risk materialise?
A
When exchange rates change.
21
Q
What is a possible management control for exchange rate risk?
A
- Diversifying borrowings and investments
22
Q
What is the nature of credit risk?
A
Default by the borrower
23
Q
What is a possible management control for credit risk?
A
Use of approved lending lists
24
Q
What is the nature of refinancing risk?
A
High interest rates increase costs of refinancing.
25
When does refinancing risk materialise?
When interest rates rise.
26
What are possible management controls for refinancing risk?
* Forecasting of interest rates
* Spreading maturity of loans out
27
What is the nature of legal and regulatory risk?
Risk of breaching powers or other regulatory or legal requirements.
28
What are possible management controls for legal and regulatory risk?
* Training of staff
* Standing orders
* financial instructions
29
What is the nature of fraud, error and corruption risk?
The financial or reputational loss from fraud, error or corruption.
30
What is the nature of market risk?
Interest rates rise causing a fall in the value of fixed rate interest investments.
31
When does market risk materialise?
When interest rates rise.
32
WHat are possible management controls for market risk?
* Good cash flow management
* reducing long term exposure to the markets
33
What are possible management controls to fraud, error and corruption?
* Segregation of duties
* Authorisation
* Supervisory
34
What 5 techniques can be used to quantify the financial risk to an organisation?
1. Sensitivity analysis
2. Simulation
3. Stress testing
4. Scenario Planning
5. Value at risk
35
What is stress testing?
It is a form of sensitivity analysis that organisations use to determine the ability of an organisation to deal with an economic crisis. They will ask questions such as " What would happen if interest rates were to risk by 2%?" and use simulation software to view the impact.
36
What is the Value at risk technique?
A statistical estimate of a potential financial loss for a given period, probabilities and a premeditated level of confidence.
37
If a treasurer tells a director that "with a 95% confidence interval, the value at risk is £20,000" what is the probability that the loss is greater than £20,000?
5%
38
How do we calculate value at risk?
1. Calculate the mean outcome
2. Calculate the standard deviation
3. Calculate the confidence interval
39
Looking at the normal distribution table, what is the confidence interval if we want to be 95% confident of a potential loss?
1.645
40
Looking at the normal ditribution table, what is the confidence interval if we want to be 90% confident of a potential loss?
1.28
41
What is the Value at risk formula if the expected potential outcome is:
A: lower than the mean
B: Higher than the mean
A: VaR = Mean outcome - (Confidence interval x standard deviation)
B: VaR = Mean outcome + (confidence interval x standard deviation)
42
If standard deviation is given monthly, how do we convert this to annual standard deviation?
X Square root 12
43
What are the 4 T's to managing risk?
1. Transfer
2. Tolerate
3. Treat
4. Terminate
44
What does it mean to terminate a risk?
To remove the risk by discontinuing the activities that generate it.
45
What are 3 examples of transfering risk?
* Insurance
* Forward contracts
* Currency options
46
What is a Credit Default Swap (CDS)?
A form of insurance policy aganist debtors defaulting on their debt.
47
A credit default swap is sold by
A: The borrower
B: The Lender
C: A Financial institution will to insure
D: Any of the options
C: A financial institution willing to insure.
48
What is a finacial derviative?
A financial instrument which dervies its value from some form of underlying asset or liability. Eg Debt
49
A swap is a form of financial derivative. What is the transaction of a swap?
It is an exchange of interest rate commitments, where a fixed rate is swapped for a variable one.
50
What is a Forward Rate Agreement?
An agreement between 2 parties that determines the rate of interest to be applied to possible but not yet existent future loan.
51
What is the pupose of a Forward rate agreement?
To enable someone to borrow or lend money in the future at a guaranteed interest rate.
52
What is the financial derivative an "option"?
It is the right but not the obligation to carry out a transaction at a price set today for some time in the future.
53
What are the 2 purposes of financial derivatives?
1. To protect against fluctuations in interest rates
2. As a means to make speculative profits on the financial markets.
54
A fixed rate agreement is proposed at £500,000 3-6 FRA @3%.
1.When does the agreement start?
2.When will the loan be repaid?
3.What is the SONIA fixed at?
1. In 3 months
2. In 6 months
3. 3%
55
Organisation A takes out a FRA with organisation B at 3% on its £100,000 1 year loan agreed at sonia +1%. Before the FRA becomes active sonia rises to 3%. Who pays what to who?
B pays to A £1,000 over the year.
| As interest rates rose above FRA, B pays difference between FRA and effe
56
What are 3 advantages of a FRA?
1. The borrower is protected against interest rate fluctuations
2. They are flexible and can be arrange for any amounts and duration
3. Low arrangement costs
57
What is an interest rate future?
It is a standardised FRA that is for a specified amount and period. It generates a cash profit in the event of an adverse movement on interest rates.
58
What is an advantage of an Interest rate future over a normal fixed rate agreement?
They can be can be traded at any time on financial markets.
59
A company issues 10 year 5% debentures with par value £100. At some point during the term, national interest rates increase, meaning the market value of the debenture decreases to £70. What is the investment yield on the debenture after the interest rate increase?
5/70= 7.14% Yield
60
An investment held over a longer period of time will generally:
A: Pay a lower yield
B:Pay a higher yield
C: The yield will not change
B: Pay a higher yield as the risk is higher the longer the investment is held.
61
Why may a yield curve be inverted?
| Ie the investment pays more in the short term than long term?
1. There may have been a short term increase in interest rates.
2. There may be a shortfall in the supply of short term investments in comparision to demand
3. An expectation of a fall in inflation
62
What can a flat yield curve be an early warning sign too?
That the market is moving into a reccession.
63
What is a humped yield curve caused by?
Expectations of a higher short term interest rate to come.
64
What is a trough yield curve caused by?
Expectations of a lower short term interest rate to come.
65
What is arbitrage?
The process by which profits are generated by buying an asset in one market and selling it to another where the market price is higher.
66
What is the objective of managing transaction risk?
To fix the £ sterling value of a future transaction.
67
What are the 2 main internal methods of managing transaction risk?
1. To only transact in your own currency.
2. To match revenues and costs in the same overseas currency so that the risk is only on the difference between revenue and costs. Ie the profit
68
How can a forward contract help manage transaction risk?
It transferes the transaction risk to the bank as the user of the contract agrees to buy or sell a predetermined amount of foreign currency at a predetermined date from a bank.
69
What is a forward rate?
Not a Forward rate agreemeny
A fee paid to a bank/financial institution for a forward contract. Ie. the premium paid to fix the exchange rate in a forward contract.
70
How do you calculate a forward rate?
Take the spot rate and then add the forward discount and dectuct the forward premium.
71
What is a synthetic forward?
A synthetic forward has the same end result of a forward contract but is achieved without the need of a bank to fix the rate.
72
What are the 4 steps for a synthetic forward receipt?
1. Borrow enough foreign currency so that the amount owed in N months equals the expected receipt.
2. Sell the foreign currency for sterling
3. Deposit the sterling for n months during which time it accumulates interest
4. Withdraw the deposited sterling and repay the foreign loan with the receipt from the customer.
73
What are the 4 steps for a synthetic forward payment?
1. Borrow sterling to pay for the deposit
2. Buy foreign currency with the sterling borrowed in step 1
3. Deposit enough dollars so that the amount accumulated in N months equals the amount you will owe to your supplier
4. Pay your supplier with the deposited foreign currency and repay your sterling loan.
74
What is a Synthetic Agreement for Forward Exchange (SAFE)?
It is like a Forward contract except no currency is actually exchanged. Instead counterparties agree to settle up a profit or loss based on the exchange rate movement.
75
An organisation needs to fix an exchange rate on a transaction. They find a willing counter party who will compensate for any loss on exchange movements but will also take any profit on echange movements. What type of contract is this?
A: A forward contract
B: A synthetic forward contract
C: A synthetic agreement for forward exchange
D: A forward rate agreement
C: A synthetic agreement for forward exchange.
76
A synthetic agreement for forward exchange is always settled in?
A: Pound sterling
B: Dollars
C: Home currency of the party fixing the rate
D: Home currency of the party guaranteing the rate
B: Dollars
77
What is a Futures contract?
It is a contract to buy or sell a standard amount of one currency for another.
78
Why is a futures contract considered a derivative?
Its underlying value is dervived from the pound sterling.
79
What are you agreeing to if you buy a sterling futures contract?
To buy £62,500 for dollars on the maturity date.
80
What are you agreeing to if you sell a sterling futures contract?
To sell £62,500 for dollars on the maturity date
81
What are the steps to a Futures Contract?
1. Determine what contract is needed
2. Do we buy or sell the futures?
3. How many contracts?
4. What is the tick value
5. Spot outcome of the receipt
6. Outcome of the futures
82
What is meant by Tick value?
Tick value is the smallest measurable rate in exchange movements. Ie 0.0001
| It is always in dollars.
83
What are 3 advantages of a Futures contract?
1. Transaction costs are low
2. Exact date of payment or receipt does not have to be known as contract can be closed out early
3. Low counterparty risk due to exchange trading.
84
What are 3 disadvantages of a futures contract?
1. They are less tailored than an over the counter instrument like Forwards
2. There is a narrow range of currencies available and usually have to use dollars as a base currency.
85
What is a Syntheric Agreement for forward exchange? (SAFEs)
It is exactly the same as a forward agreement except no currency is actually exchanged. The counter parties settle a profit or loss based on the exchanghe rate movement.
