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Subject Code & Name Mf0016 Treasury Management: Assignment
Subject Code & Name Mf0016 Treasury Management: Assignment
Q1 Give the meaning of treasury management. Explain the need for specialized handling of
treasury and benefits of treasury.
Ans Treasury Management 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 futures and options etc. Treasury management covers all these and the intricacies of
choosing the right mix. According to Teigen Lee E, “Treasury is the place of deposit reserved for
storing treasures and disbursement of collected funds”. Treasury management is one of the key
responsibilities of the Chief Financial Officer (CFO) of a company.
Q2 Explain foreign exchange market. Write about all the types of foreign exchange markets.
Explain the participants in foreign exchange markets.
Ans Foreign Exchange Market Foreign Exchange market (forex 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.
Banks act as intermediaries and perform currency exchange transactions by quoting purchase and
selling prices. 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. The rate quoted is called as
‘spot rate’, the date of settlement known as ‘value date’ and the transactions called
‘spot transactions’.
The forward market involves contracts for delivery of foreign exchange at a specified
future date beyond the spot date and the transaction is called a ‘forward transaction.’
The rate that is quoted at the time of the agreement is called the forward rate and it is
normally quoted for value dates of one, two, three, six or twelve months.
Unified and dual markets – Unified 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. within 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
The participants in forex market are the RBI at the apex, authorised dealers
(ADs) licensed by the central bank, corporates and individuals engaged in
exports and imports.
Corporates – Corporates 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 linking the
buyers and sellers. Banks provide opportunities to brokers in order to
increase or decrease their selling rate and buying rate for foreign
currencies
Q3 Write an overview of risk mitigation. Explain the processes of risk containment. Write
about the tools available for managing risks.
Ans Mitigation of Risks
It is important that an organisation is not only aware of the risks before it impacts their bottom
line, but has well-laid action plans to meet the risks and mitigate its adverse impact.
Risk Mitigation – An Overview Here is a bird’s-eye view of risk mitigation methods and processes
that will help you to appreciate the details of the subject that you will be studying in this and the 4
units that follow this unit.
Risk mitigation can be 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.
Processes for risk containment
The basic steps in a typical risk containment process are:
Establishing the context i.e. analysing the strategic and organisational context in which
risks 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, which 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
Tools available for managing risks
Risk management tools do analysis and implementation of methods for mitigating
risks. The major tools available for risk are:
Failure Mode Effects Analysis (FMEA): This tool is used for identifying the cost
of potential failures in business. This method can be applied during analysis
and design phases of new business to identify the risk of failure.
Fault Tree Analysis (FTA): The tool is used as a deductive technique to
analyse reliability and safety of an organisation.
Process Decision Program Chart (PDPC): The tool identifies the different levels
of risk and the countermeasure tasks. The process of planning is essential
before the tool is used for measuring risks.
Q5 Explain the contents of working capital. Write down the need for working capital
Ans Contents of working capital
A 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 factory that
produces and sells products has to store raw materials and finished goods,
besides having some unfinished materials under process.
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.
Need for working capital
Can a business run without the need to invest in working assets like trade receivables
and inventories? Let us study the following case.
Pachai is a vendor of pani-puris in a makeshift stall of his own at the end of the
street in which he lives.
Every morning he goes to the market and buys the ingredients to make pani-
puris for the day, estimating the quantity based on anticipated sales. He buys
more in the weekends, naturally.
He does not pay for the material as he buys on credit.
Through the day he does the processing of the pani-puris to the stage needed,
and at 4 pm sets up the stall and runs it till 8 30 p.m.
As he sells the pani-puris he collects cash, and at 8.30 or earlier,depending
upon the demand, he sells his day’s produce completely.
He 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.
Here is a businessman who, you might say, does not require working capital at all: no
idle cash, no deposits, no receivables and no inventories. But this is an extreme case
under ideal conditions.
Q6 Explain the concepts and benefits of integrated treasury. Explain the advantages and
disadvantages of operating treasury as a profit center.
Ans Concept and Benefits of Integrated Treasury The concept of integrated treasury works on the
principle that Treasury can be a single unifying force of a company’s 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. Thus a decision
related to money market instruments, for example, is taken after reviewing possible forex actions
that could enhance the benefit of the decision. The Indian rupee is freely convertible on current
account and partially convertible on capital account. This has made it possible to take a combined
approach to a treasury issue.
The major functions of integrated treasury are as follows:
Ensuring liquidity reserve
Deploying surplus funds in securities with low risk and moderate profits
Managing multi-currency operations
Exploring opportunities for profitable placements 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
Treasury products – Banks sell risk management products and structure loans to business
organisations along with forex services In order to reduce the interest rate or exchange risk. These
can be bought by large organisations. Example – ABC Company buys a forward rate agreement
from the treasury and fixes the interest rate on a commercial paper and they plan to issue this
commercial paper after three months. In order to reduce the interest cost of the company, the
treasury offers currency swap for rupee credit loan into USD loan.
The advantages of operating treasury as a profit center than as a cost center are:
Individual business units can be charged a market rate for the service provided, thereby
making their operating costs more realistic.
The treasurer is motivated to provide services as economically as possible to make profits at
the market rate.
The disadvantages of operating treasury are:
The profit concept is a temptation to speculate. For example, the treasurer might swap
funds from the currencies that are expected to depreciate and risk the company cash
values.
Management time could be wasted in arguments between Treasury and business units
over the charges for services, distracting the latter from their main operations.
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