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August/Fall
2012
Master
of Business Administration - MBA Semester 4
Subject
Code – MF0016
Subject
Name – Treasury Management
4
Credits
(Book
ID: B1311)
Assignment
Set- 1 (60 Marks)
Note: Each
question carries 10 Marks. Answer all the questions.
Q.1 Explain
how organization structure of commercial bank treasury facilitates in handling
various treasury operations. [10 Marks]
Answer : Treasury Organisation
The treasury organisation
deals with analysing, planning, and implementing treasury functions. It deals
with issues of profit centre, cost centre etc. The organisations managing
interfaces with treasury functions include intragroupcommunications, taxation,
recharging, measurement and cultural aspects.
Structure
of treasury organisation
Figure depicts the structure of treasury organisation which is
divided into five groups.
Fiscal: This group includes budget policy planning division,
industrial and environmental division, common wealth state relationships, and
social policydivision.Macroeconomic: This group deals with economic sector of
the organisation. It includes domestic and international economic divisions,
macroeconomic policy and modelling division.
Revenue: This
group is concerned with the taxes in an organisation. It includes business tax
division, indirect tax, international and treaties division, personal and
income division, tax analysis and tax design
division. Markets: This group mainly deals with selling of products in the competitive
market. It includes competition and consumer policy, corporations and financial
services policy, foreign investments and trade policy division. Corporate
services: This group deals with overall management of the treasury organisation.
It includes financial and facilities division, human resource division, business
solutions and information management division.
Treasury
as a profit centre
The implementation of
treasury in the organisation gains profits in several aspects rather than
considering it as a cost centre. It helps in providing market rates to the
individual business units for the services provided and thereby making
operating costs more realistic. The treasurer is motivated to ensure that more
services are provided to make profits in market rate. Organisations also
experiences the following disadvantages when considering treasury as a profit centre:
Profit is a tempting factor to speculate as it sometimes encourages the
organisation to invest in wrong direction that brings depreciation in economy as
well growth of organisation. Most of the time is duly spent in arguing with
business units with respect to charges over services. There may be excessive
additional administrative costs.
Centralised
and decentralised treasury management
Most of the multinational organisations face huge challenges in managing
transactions globally. As the organisation expands geographically, it is difficult
to access and track accurate and timely cash flow information. As the
technology has been adversely developed, the need for centralising treasury has
evolved; theoretically centralisation allows the treasurers to exercise greater
control over operating organisations. The process of centralisation consists of:
Providing centralised foreign exchange and interest rate risk management
Dealing with cash management Providing fully centralised treasury including
incoming and outgoing payments Centralising business treasury functions
enhances the organisation to build economies of scale and rationalise costs
during acquisition. Centralisation helps to achieve low cost debts, increase
investment returns, reduce financial risks and ensure liquidity across the organisation.
Decentralisation refers to the challenges of producing overall view of cash
position and exposure to risk on a timely basis. Since the organisation contains
various recording and reporting information methods, it will be difficult to
construct a global risk position while combining information from different
sources. In such cases it is impossible to make strategic decisions without
access to timely and accurate information during the periods of economic
volatility. In a decentralised environment, the company allows its subsidiaries
to manage their own payables and payment processes. A lack of standardisation
across subsidiaries and automation can lead to risks in transactions like
incorrect payments and data redundancy.
Treasury
management in banks
In recent days, most of the Indian banks have classified their
business into two primary business segments like treasury operations
(investments) and banking operations (excluding treasury).
The
treasury operations in banks are divided into:
Rupee treasury: The rupee treasury carries out various rupee based
treasury functions like asset liability management, investments and trading. It
helps in managing the banks position in terms of statutory requirements like cash
reserve ratio, statutory liquidity ratio according to the norms of the Reserve
Bank of India (RBI). The various products in rupee treasury are:= Money market
instruments Call, term, and notice money, commercial papers, treasury bonds,
repo, reverse repo and interbank participation etc.= Bonds Government
securities, debentures etc= Equities Foreign exchange treasury: The banks
provide trading of currencies across the globe. It deals with buying and
selling currencies. Derivatives The banks make foundation for Over the Counter
(OTC). It helps in developing new products, trading in order to lay off risks
and form apparatus for much of the industries self-regulation. The role of
policies in strategic management was described in this section. The next
section deals with inter-dependency between policy and strategy.
Q.2 Bring
out in a table format the features of certificate of deposits and commercial
papers. [10 marks]
Q.3
Critically evaluate participatory notes. Detail the regulatory aspects on it.
[10 Marks]
Q.4 What
is capital account convertibility? What are the implications on implementing
CAC? [10 Marks]
Q.5 Detail
domestic and international cash management system [10 Marks]
Q.6
Distinguish between CRR and SLR [10 Marks]
August/Fall 2012
Master
of Business Administration - MBA Semester 4
Subject
Code – MF0016
Subject
Name – Treasury Management
4
Credits
(Book
ID: B1311)
Assignment
Set- 2(60 Marks)
Note: Each
question carries 10 Marks. Answer all the questions.
Q.1
Explain any two major risks associated with banking organization. [10Marks]
Answer : Treasury exposure allows treasury management to various
risks in the organisation. Following are the few treasury exposures in an organisation:
Financial
exposure: The treasury management in the organisation are disclosed to the
powerful analytics that enable to measure the global treasury operations and
control financial market risks. It analyses the price and risk profile of
financial dealings on a pre-dealing basis. The exposure in foreign exchange
market is intense; hence hedging towards these risks by integrating business
exposures and treasury transactions helps an organisation to manage financial
risk and stay profitable.
Foreign
exchange exposure: This occurs due to the low profits and adverse
fluctuations in foreign exchange rates. Many organisations suffer from foreign
exchange risk by making purchases or sales in foreign currency or by owning
assets or liabilities in foreign countries. Hence a relevant course of action must
be implemented to reduce exposures in business operations.
Currency
exposure: It deals with future cash flows arising from domestic and foreign
currencies that involve assets and liabilities and generating revenues which
are susceptible to variations in foreign currency exchange rates. Hence the
identification of existing potential currency relationship that arises from
business activities includes hedging and other risk management activities.
Event exposure: This happens due to a sudden change in the
financial market during an investment (an event) that has a detrimental effect
on the value of that investment. It is often associated with corporate bonds.
Commodity
exposure: This happens due to variations in the prices of commodities which
change the future and magnitude of market values. The commodities depend on any
production including foreign currencies, financial instruments or any physical
substances. Hence treasury management is liable to deal with various risks like
price, quantity, cost that are associated with commodities.
Need for
risk management
Risk management helps in minimising the failure of business
activities which are based on finance or performance in the organisation. It is
the responsibility of the organisation to manage risk effectively and overcome hindrances
affecting the overall growth of the organisation. Hence risk management is
required in the organisation for the following purposes:
•To identify the risk in business activities and establish a plan
to manage risk and minimise the negative effects.
• To improve the efficiency of strategic and business plans, and effective
use of resources among the stakeholders in the organisation.
•It helps in increasing the ability to deliver products to the customers
within the stipulated time and reduce the production cost.
•It helps to control the negative political, economic, and
financial factors which may harm an organisations growth.
• To overcome sensitive internal environment, social or safety
issues or regulatory and licensing conditions available in most of the
organisations.
•To focus on internal audit process and robust contingency
planning.
Corporate
risks
Corporate risks include non-financial organisational risks that
arise during challenging times in the economy. . The corporate risk varies for different
organisations based on factors like size, diversity in business activities and
sources of capital etc. According to the assumptions of Modigliani and
Miller(1958), Corporate risk is a redundant activity. It is mainly concerned with
progressive tax rate and expecting costs from financial distress. The value of an
organisation depends on the changes in exchange and interest rates, and
commodity prices. Hence the corporate risk manager quantifies the exposures
occurring in the organisation to reduce risks that hamper the financial sector.
Corporate risk is further divided into market, credit and operational risks. Credit
risk experiences less challenges compared to operational and market risks. The
operational risk occur due to certain factors like back office errors, fraud,
natural disaster etc. The organisation faces market risk with respect to
commodity price risk and foreign exchange risk.
Hidden
risks
Hidden risks are related to cash and financial risk in an organisation.
These risks might harm the growth of an organisation. Hence the manager irresponsible
to identify the risk and implement relevant actions to eliminate it. Complete
and accurate exposure calculation can eliminate the hidden risks. Hidden risks
are also concerned with financial accounting. Financial risk is the probability
when an actual return on an investment is lower than the expected return. They
are the uncertainties in business leading to variations in expected profits and
losses. Uncertainties related to several risks affect the net cash flow of any
business organisation. Lower uncertainties have lower variations in net cash
flow, and vice versa.
Q.2 What
is liquidity gap and detail the assumptions of it? [10 Marks]
Q.3
Explain loan able fund theory and liquidity preference theory [10 Marks]
Q.4
Explain various sources of interest rate risk [10 Marks]
Q.5 Detail
Foreign exchange risk management and control procedure [10 Marks]
Q.6
Describe the three approaches to determine Vary [10 Marks]
Nice Post. Management Levels and Management Skills to be discuss
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