Ques.no.1. Give the meaning of treasury management.

Explain
the need for specialized handling of treasury and benefits of
treasury.
Ans. - Treasury management is the planning, organising and control of
funds required by a corporate entity. Funds come in several forms: cash,
bonds, currencies, financial derivatives like future and options etc.
Treasury management covers all these and the intricacies of choosing the
right mix. Treasury management is one of the key responsibilities of the
Chief Financial Officer (CFO) of a company.
Needs for specialised handling of treasury
Treasury management should be practised as a distinct domain within the
Finance function of an organisation for the following reasons:

One of the most consistent demands on the CFO of a company is

that money must be available when needed, and this becomes a
24/7 task.
The cost of money raised for the business is probably the most
crucial metric in a company for many of its investment and
operational decisions. Hence cost of funds has to be tracked
diligently.
Internal financial management in a multi-national corporate entity
requires monitoring of several global currencies.
Globalisation of business has thrown up an unbelievable basket of
opportunities for the CFO to optimise the utilisation of funds and
minimise its costs. This requires expert handling.
With increasing financial risk shareholders have become jittery
about their holdings and need re assurance often. For a company
the Treasurer is probably the best spokes person to allay the
concerns of stockholders and other interested parties.
Benefits
Managing treasury as an expert subject has many benefits:
Valuable strategic inputs relating to investment and funding
decisions.
Close monitoring and quick effective action on likely cash surpluses
and deficits.
Systematic checks and balances that give early warning signals of
likely liquidity issues.
Significant favourable impact on the bottom line for global
corporations
through
effective
management
of
exchange
fluctuation.
Better compliance with the increasingly complicated accounting and
reporting standards on cash and cash equivalents.

Ques.no.2. Explain foreign exchange market. Write about all

types of foreign exchange markets. Explain the participants in
foreign exchange markets.
Ans. - Foreign Exchange market deals with purchase and sale of foreign
currencies. The bulk of the market is over the counter (OTC) i.e. not
through an exchange which is well regulated. International trade and
investment essentially requires foreign markets.
In India the Foreign Exchange Management Act (FEMA) 1999 is the law
relating to forex transactions and its aim is to develop, liberalise and
promote forex market and its effective utilisation.
Types of foreign exchange market:
Spot market- Spot market is a market in which a currency is
bought or sold for immediate delivery or delivery in the very near
future. Both the delivery and payment take place on the second
day. The rate quoted is called as spot rate, the date of
settlement knows as value date and transactions called spot
transactions.
Forward market- It involves contracts for delivery of foreign
exchange at a specified future date beyond the spot date and the
transaction is called a forward transaction.
Unified and dual markets- These markets are found where
there is only one market for foreign exchange transactions in a
country. They have greater liquidity, increased price discovery,
lower short-run exchange rate volatility and reliable access to
foreign exchange. In contrast, dual markets are found in
countries with multiple exchange markets.
Offshore and onshore markets- During the earlier stages of
financial development, forex market operated onshore i.e. with in
India. But after liberalisation of the economy, offshore markets
have developed and instruments based on foreign currencies
issued by Indian firms are traded in foreign markets.
Participants in foreign exchange markets
The participants in forex market are the RBI at the apex, authorised
dealers licensed by the central bank, corporate and individuals engaged in
exports and imports.
Corporate- Corporate operate in the forex market when they have
import, export of goods and services and borrowing or lending in
foreign currency.
Commercial banks- Banks trade in currencies for their clients, but
much larger volume of transactions come from banks dealing
directly among themselves.
RBI- RBI intervenes in forex market to ensure reasonable stability of
exchange rates, as forex rates impact, and in turn are impacted, by
various macro-economic indicators like inflation and growth.

Exchange brokers- They facilitate trade between banks by kinking

the buyers and sellers. Banks provide opportunities to brokers in
order to increase or decrease their selling rate and buying rate for
foreign currencies. Exchange brokers also specialise in specific
currencies that have lower demand and supply to add value to
banks. In India, many banks deal through recognised exchange
brokers.

Ques. No.3. Write an overview of risk mitigation. Explain the

processes of risk containment. Write about the tools available for
managing risks.
Ans. - Birds-eye view of risk mitigation methods and process.
Risk mitigation is handed in four ways:
a) Risk avoidance: We can withdraw from an activity perceived to
be risky, and elect not to go through with it.
b) Risk transfer: We can insure ourselves against the risk and
transfer it to another party called the insurer.
c) Risk sharing: We can disperse the risk element in an activity
and reduce its impact, by the use of derivative instruments.
d) Risk acceptance: We can build our competence and capability
to deal with the risk by detailed study, research and methods
developed specifically for the concerned activity and its risk
component.
The basic steps in a typical risk containment process are:
Establishing the context i.e. analysing the strategic and
organisational context in which risk occur.
Identifying risks i.e. defining the risks associated with business, to
have a fundamental understanding of the activities causing risk of
loss.
Quantifying risks i.e. measuring the probability, frequency and
hence the value of the risks, besides listing non-quantifiable effects
of the risks.
Formulating policy i.e. providing a framework to handle risks, with
lays down standard levels of exposure and policy guidelines for each
level.
Evaluating risk i.e. ranking the risks based on priority, and aligning
action and cost thereof with the rank.
Treating risk i.e. development and implementation of a plan with
specific methods to handle the identified risks.
Monitoring risk i.e. reviewing the methods regularly vis-a-vis their
efficacy in controlling risk, and updating methods from time to time
in keeping with changes in the organisation and the environment.
Tools available for managing risks are:
Failure Mode Effect Analysis (FMEA): This tool is used for
identifying the cost of potential failures in business. The FMEA
method is divided into three steps:
o The first step is identifying the elements causing failure.
o The second step is studying the modes of failure.
o The last step is assessing the probability and effects of failure.
Fault Tree Analysis (FTA): The tool is used as a deductive
technique to analyse reliability and safety of an organisation. It is
usually implemented for dynamic systems.

Process Decision Program Chart (PDPC ): The tool is identifies

the different levels of risk and the countermeasure tasks. The

process of planning is essential before the tool is used for measuring

risks.
Risk calculations: This method is the continuous scanning of risks
at various phases of the business, to identify the most common
ones and assigning high priority to them.

Ques.no.4. What is Interest Rate Risk Management (IRRM)? Write

the components features of IRRM. Explain the macro and micro
factors affecting interest rate.
Ans. - Interest Rate Risk is the risk

to earnings from an asset portfolio caused by interest rate changes.

to the economic value of interest-bearing assets because of changes
in interest rates.
to costs of fixed-rate debt securities from falling bank rates.
to impact of interest rates on cost of capital used by the firm as
hurdle rate for capital investment.

Components of IRRM
IRRM is broken into three parts: term structure risk, basis risk and option
risk.
Term structure risk is also called yield curve risk, this is the risk of loss
on account of mismatch between the tenures of interest-bearing monetary
assets and liabilities.
Basis risk is the risk of the spread between interest earned and interest
paid getting narrower.
Options risk is the term risk on fixed income options i.e. options based
on fixed income instruments.
Following are the features of corporate IRRM process:

Clarifying the policy with regard to interest rate risk.

Constant watch on market rate fluctuations and studying its
relevance to the firms cost of capital.
Fixing the band beyond which interest rate changes should trigger
corrective action.
Special attention to long-term fixed exposures in investments as
well as funding decisions.
Effective, unambiguous and timely reporting on IRRM to the CEO
and the Board.

Factors Affecting Interest Rate

Macro factors

Cost of living index: Increase in price levels of goods and services

over a period of time reduce real value of the rupee and push
interest rates up.

Monetary policy changes: RBI works with monetary policy to

balance the twin objectives of economic growth and price stability
for a developing economy.
Condition of economy: Whether the economy is rapidly growing
or its growth rate is declining can make a difference.
Global liquidity: Global economic environment and availability of
funds across the world does have an impact.
Foreign exchange market activity: Foreign investor demand for
debt securities influences the interest rate.

Micro factors

Micro factors, meaning factors specific to the borrower, which play a role
in the interest rate, are:

Individual credit and payment track record, credit rating

Industry in which the business is operating
Extent of leveraging of the company viz. Debt-equity ratio
Quality of prime security and collateral
Loan amount

Ques.no.5. Explain the contents of working capital. Write down

the need for working capital.
Ans. - Contents of working capital
Working capital comprises the working assets of a firm. These
assets are

In trading business for instance may have to purchase and store

products to be sold, paying for them before they can be sold and
cashed.
A company may also need to allow the customers to pay later
instead of insisting on cash at the point of delivery.
Payments in advance may be required for certain expenses like
annual insurance, deposit for renting the office, foreign currency and
tickets for foreign travel or advance fees/deposits for statutory
registrations.
And finally the business must have some idle cash and bank
balances for making spot payments.

Each of these requirements takes the form of a working asset:

The first is working asset or a current asset called inventories.

The second item is called accounts receivable.
The third set of items are
prepayments, advances and
deposits
The final item is cash & cash equivalents.

Need for working capital

A business cannot run without the need to invest in working assets like
trade receivables and inventories.

Businessman goes across to the vendor from whom he bought the

ingredients and pays for the supply, and returns home with the
balance money, which is his profit.
The cycle is repeated day after day.

All business- small, medium or big need working capital for survival and
growth. The more widespread the activity, the greater is the need. It is of
paramount importance for the financial health of a business to assess the
requirement reasonably correctly, finance is sensibly and control it
effectively and make sure the working assets keep working are current
and do not get stuck.

Ques.no.6. Explain the concepts and benefits of integrated

treasury. Explain the advantages and disadvantages of operating
treasury.
Ans. -The concept of integrated treasury works on the principle that treasury

can be a single unifying force of a companys activities in the money

market, capital market and forex market; and can help the company
derive synergy. Synergy is a powerful advantage in business because it
brings together two or more activity domains and achieves a total effect
that is greater than the sum of all the individual domains.
The Indian money is freely convertible on current account and partially
convertible on capital account.
The major functions of integrated treasury are:

Ensuring liquidity reserve

Deploying surplus funds in securities with low risk and moderate
profits
Managing multi-currency operations
Exploring opportunities for profitable placement in money market,
securities market and forex market
Managing the sum total of treasury risks with some balancing
actions as between the three markets.

The benefits of integrated treasury are:

Improved cash planning and better monitoring of the cash position

Constant watch on the impact of treasury activities on the balance
sheet
Greater financial control by integrating budgetary control and
financial information

The advantage of operating treasury:

Individuals business units to be charged a market rate for the

service provided, thereby making their operating costs more
realistic.
Treasurer is motivated to provide services as economically as
possible to make profits at the market rate.

The disadvantages are:

The profit concept is a temptation to speculate.

Management time could be wasted in arguments between Treasury
and business units over the charges for services, distracting the
latter from their main operations.

The additional administrative costs may be excessive.