Treasury Managment Flashcards
What are the 4 main activities of Treasury Managment?
- Accounting, budgeting & financial reporting
- Borrowing and lending
- Cash flow forecasting and management
- management of financial risk
What are 8 treasury managment instruments or techniques that organisations may be involved with?
- 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
What is a gilt-edged security?
A bond issued by the uk government as a means to raise long term borrowing. They are low risk investments.
What is maturity matching in terms of asset and liability management?
This is a method of financing where assets are financed by an instrument of similar maturity.
What is an advantage of maturity matching?
It helps maintain liquidity.
What are investment management services?
What are debt management services?
- An external investment manager invests an organisations surplus funds on their behalf
- A specialist external service employed to manage and collect an organisations debt
What are 4 advantages of outsourcing the treasury management function?
- 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
What are 4 disadvantages of outsourcing the treasury management function?
- Reduced control
- The performance of the contractor may be sub-standard
- May reduce staf moral
- information given to external providers may be less secure.
What is the shared services approach to treasury management?
When a number of organisations group together to provide one service for all of the organisations. They share this service.
How are savings created by shared services?
- Creation of economies of scale
- Collaboration to approach the market effectively
- Standardising on the use of best practice processes
How can shared services improve the standard of service?
- Providing more reliable and consistent management information
- Better management controls
- Gives professionals the time and information needed to provide the better value service.
What 8 main types of risk may an organisation face to its treasury management?
- 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
What is the nature of liquidity risk?
Cash is not available when needed
When can liquidity risk materialise?
When interest rates rise.
What are the possible management controls for liquidity risk?
- Cash flow management
- Diversification into long and short term investments
What is the nature of interest rate risk?
Additional costs or loss of income due to changes in rates.
When can interest rate risk materialise?
When interest rates change.
What are some possible management controls for interest rate risk?
- Diversification of borrowing by Investing in fixed or variable
- Use of derivatives - swaps, caps, collars
What is the nature of exchange rate risk?
A change in exchange rate effects returns or costs.
When can exchange rate risk materialise?
When exchange rates change.
What is a possible management control for exchange rate risk?
- Diversifying borrowings and investments
What is the nature of credit risk?
Default by the borrower
What is a possible management control for credit risk?
Use of approved lending lists
What is the nature of refinancing risk?
High interest rates increase costs of refinancing.
When does refinancing risk materialise?
When interest rates rise.
What are possible management controls for refinancing risk?
- Forecasting of interest rates
- Spreading maturity of loans out
What is the nature of legal and regulatory risk?
Risk of breaching powers or other regulatory or legal requirements.
What are possible management controls for legal and regulatory risk?
- Training of staff
- Standing orders
- financial instructions
What is the nature of fraud, error and corruption risk?
The financial or reputational loss from fraud, error or corruption.
What is the nature of market risk?
Interest rates rise causing a fall in the value of fixed rate interest investments.
When does market risk materialise?
When interest rates rise.
WHat are possible management controls for market risk?
- Good cash flow management
- reducing long term exposure to the markets
What are possible management controls to fraud, error and corruption?
- Segregation of duties
- Authorisation
- Supervisory
What 5 techniques can be used to quantify the financial risk to an organisation?
- Sensitivity analysis
- Simulation
- Stress testing
- Scenario Planning
- Value at risk