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.

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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.

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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.

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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]

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