MF-0016 Treasury Management Q1.Consider yourself as CFO, describe the functions that cash handling and discuss how you will formulate the policy cash? Years. Treasury functions: Treasury functions act as custodian of money and other valuables. It helps to maintain proper records of cash transactions in an organization. It also provides relevant and reliable information to current and potential investors in an organization. Traditional functions: Traditional Treasury functions mainly focus on fundraising and cash management in an organization. In 1990, the treasury functions are defined as all operations work on variety of currencies which requires a description and the Department of suitable work. Functions in evolution: The upgrade of the financial markets has changed the old economy to the new economy in the intellectual organizations. Improvements in manufacturing, resources and staff encouraged to work with new information and financial capital. Treasury functions are culled because of new technologies and web-based tools. The functions of cash flows from operating activities generate cash flows that are related to business net income plus depreciation and amortization less net additions to net working capital. The basic requirement to create business value is to make a good investment in long-term assets. Policy formulation Treasury Treasury policy is a key element of internal controls by providing cash transactions flows. He oversees the day-to-day business activities and describes the relationship between internal service organization and banks. This policy guides the work and settings for employees. 1) Priorities in treasury functions of: Enterprises Treasury daily interactions with other groups of companies to explain liquidity and treasury policies and provide relevant roles for employees in the current and planned activities. 2) Liquidity planning: planning of liquidity focuses on the conversion of investment in the business for more liquid assets. the liquidity planning is based on the financial planning of the organization. It is important to consider diversification to maximize flexibility and reduce overall risk. 3) Portfolio Management: Portfolio management is the process of making decisions based on investments and policies of the organization. It includes investments related to the objectives, asset allocation and performance of balancing risks. 4) Planning for Growth: Cash management focuses on growth in the financial sector. Responsibility for growth returns to the Director of Treasury. The planning team with the direction of the Head of Treasury analysis finances up-comes with specific strategies.
Q.2 The NCDEX trading system provides a fully automated based on futures contracts based on-line monitoring at the national level and the monitoring mechanism screen trading. Discuss explain the concept of commodity co mmodity markets, the role of regulator and players? Years. concept of commodity market: the market for commodities refers to the market in which the products are marketed. It consists of agreements for the purchase and sale of goods at a specified price on a specified date. Products include oil, gold, ag ricultural products. The main terminal market commodities are in London, New York and Chicago.
In India, the product market consists of the retail and wholesale. It facilitates multi products within and outside the country as needed exchange. The Indian commodity market reformed because of the global expansion of business opportunities. The demand for commodities on the domestic and global market is estimated to grow four times next five years. futures contract refers to transferable standardized swap negotiated offering commodity, currency, bonds, or stock index at a specified future date at a fixed price. futures contract obligations are during transactions. The seller and the buyer unlimited risk experience with the model symmetrical gain. The money gained or lost by each of the parties are equal and opposite to the future. So by making a trade gap, taking delivery or exchange of goods at a later date, the futures contract can be closed. Regulating commodity markets: Regulators of commodity markets are usually various government commissions to address the trading of products on the market. In India, the Commission futures market (FMC) acts as a regulator for the commodity market. It is headquartered in Mumbai and holds a regulatory authority which is overseen by the Department of Consumer Affairs. The government is in a process of introducing new contracts (Regulation) Amendments to empower FMC. This helps regulators to introduce new products such as options. Where stakeholders, including farmers benefit from price discovery and price risk management. Players on the market commodity: the commodities market is a form of trading various products worldwide. This is why some people are involved to exchange these products. The different types of players products are: • Advertisements - This group includes the production, processing, or merchandising of a product. Commercials are the most trade on commodity markets. • Large Speculators - It includes a group of investors to pool their money to reduce risk and increase gain. Large speculators consist of fund managers make investment decisions for the overall group of investors. • Small speculators - This group includes individual products traders trading for their own account or through brokers.
Q.3 consider yourself a CEO of an automobile company in India, What tools will you take to reduce the risks arising in the production process? Years. Risk Management: Risk management enables organizations to reduce risk levels to meet profit targets. It deals with the analysis of the p ossibility that future events may affect the growth of the organization. The organization is aware of various risks in the business operations. Therefore, these risks are defined so that it provides a basis for measuring the level of risk and implement appropriate methods to mitigate it. Process Risk Management acts as an internal part of business planning. The process of risk management is generic steps to guide the organization to achieve success with risk management. The basic steps of the process of risk management are:
Establish the context - This is the process of analyzing the strategic and organizational context in which risks occur. This helps in planning the implementation of appropriate measures to mitigate the risks arising. Risk Identification - The organisms are associated to various risks that hinder the achievement of goals. It is important to define the type of risks related to business operations. Risk quantification - It consists in measuring the probability and frequency o f risks. It also includes assessing the consequences of the risks that occur. The consequences may involve economic, political and social factors that lead to risks. Develop a policy - the policy formulation provides a framework for managing risk. It offers standard levels of exposure to protect cash flow of the organization. framing of the policy depends on the objectives of the organization and its level of risk tolerance. Risk Assessment - It involves the process of risk classification according to the level of tolerance. In this, the organization will be able to prioritize the risk category and the consequences and the overall cost to mitigate the risk. Risk Treatment - This process involves the development and implementation of a plan with specific methods to manage the risks identified taking into account the priorities of the strategic and operational risks, and consequences involved. Monitoring and Risk Assessment - Methods to manage risks are monitored regularly because of the changing levels of investment in the environment.
The tools available to manage risk: The tools of risk management analysis and forecasts of the implementation of various methods to mitigate the risks. It includes several models and systems that improve the correlation of risks and returns through investment and portfolio management process support. The main tools for risk management are: • Failure Mode Effects Analysis (FMEA) • Decision Process Graph program (GCPs) • The risk calculations Q.4 Suppose you are the CEO of MS Bank Corporation. Your bank is facing a risk of interest rates, which affected its operations significantly. Analyze the factors that affect the level of market interest rates? Years. Interest rate risk (IRR): The risk of interest rates is due to the variation of unconditional level of interest that changes the values of the investment rate. These changes affect inversely titles but can be reduced through diversification and hedging techniques. The rise in interest rates reduces the value of bond prices. The management and Board of Directors have the responsibility for managing interest rate risk. It is important for senior management to u nderstand the nature and degree of risk, interest rate and overall business strategies. Most banks are having interest rate risk with many banking produ cts. The different types of products / credit facilities offered:
The volatility risk - There is the risk arising in the future price of the asset. The holder of an option experiencing volatility of the underlying asset on the basis of the current market situation. The risk rate level - It refers to interest rates that fluctuate to varying degrees over a period of time. The probability that the change in the level of interest rates depends on the investment period. During the period of investment due to market conditions and regulatory implications, it is possible to restructure the levels of interest rates. This restructuring allows organizations to maintain assets and liabilities according to their maturity periods. reinvestment risk - It occurs when the interest income from an investment does not provide the same rate of return in reinvestment. There is therefore an opportunity to reinvest cash flows at a lower rate of return. Price risk - There is the risk occurring in the future due to lower prices of a security such as bonds or physical commodities. Changes in market prices resulting in a loss of an asset. Call / Put risk - When evaluating bond funds include Call / Put option. The two options for risk experiences fluctuations in interest rates. The call option g enerally works when there is lower interest rates. This affects banks that invest in bonds such as cash flows are reinvested at lower price levels. Similarly, the option wo rks at higher interest rates. This creates an increase in additional costs with bond issues. The risk of real interest rates - It is due to the dissimilarity between the nominal changes in interest rates and fluctuations in inflation. The inflation factors play an important role in the assessment of costs. It affects the income or ex penses of the assets and liabilities of the bank.
Q.5 The Treasury manages the funds of the bank, it automatically surrounds liquidity risk and interest rate. Discuss the relationship between the Treasury and ALM? Years. Cash Management: Cash management is the process of planning, organizing and managing the assets of the organization, negotiation, corporate bonds, foreign exchange, financial futures contracts, the associated risks, options, derivatives and payment systems. It manages all financial aspects, including internal and external funds for businesses, complex strategies and procedures of corporate finance to maximize interest and currency flows. It helps in planning and implementing communication programs to improve investor confidence in the organization. Asset-liability management (ALM) ALM refers to the strategic balance with risk due to changes in rates, exchange rates of interest and the liquidity position of the organization. Risk, credit risk and contingency are the roots of the ALM. During the post-liberalization period, India has experienced rapid growth in the industry that still inspired growth in fundraising. Changes in the sources and characteristics of the funds have been remarkable increase in the demand for funds. Where this is reflected in the profile of the organization and exposure limits in the structure of interest rates for deposits and advances, etc.
The relationship between cash and ALM • The balance sheet of a bank contains huge market risk and credit risk. In general, banking is limited to accepting deposits and granting loans to borrowers. But treasury department of a bank operating in the financial markets, banking and connecting the basic functions and operations market. Therefore, it is the responsibility of the Treasury to identify and examine the market risk. • Treasury is also exposed to market risk while trading forex and securities markets. It is sometimes easier to manage cash aggregates risk, especially for d erivatives such as options that can be economic only marketable size. • Many loan products are replaced with treasury products as the market develops. For example, the installation of capital is replaced with paper. It is possible to exchange cash income and, therefore, banks can generate cash when needed. It is much easier for treasury products to monitor and manage the risks involved in the movement of exchange rates and interest rates. • Imbalances in the assets and liabilities can no t be ignored as the physical movements of assets and liabilities are not possible. We must also realize that the bank s are making profits on asymmetries. So it is not recommended to completely remove the balance sheet mismatch. Treasury uses derivatives to bridge the gap between the liquidity and interest rate sensitivity.
Q.6 ALM addresses the strategic review, which involves many risks due to changes in exchange rates and liquidity position, interest rates in the organization. Discuss how the ALM contributes to risk management balance? Years. Asset Liability Management: Asset Liability Management (ALM) is a dynamic process of planning, organization and control of assets and liabilities which includes features such as volumes, maturities, yields and costs of assets and liabilities in order to maintain the liquidity and net interest income (NII). ALM manages the strategic review, which involves various risks due to changes in exchange rates and liquidity position, interest rates in the organization. In the post liberalization in India, there has been a rapid growth in the industrial sector, which has strengthened the requirements for fundraising activities. This rapid growth was the need to implement the organization. Therefore, the functions newly adopted are reflected in the profile and the boundaries and structure of interest deposits and advances exposure of the organization rates. The main advantages of ALM include: • Make business decisions more effectively during the exposure to the organization. • Produce an integrated approach to financial decisions for different types of assets and liabilities. • Provide the right decisions for the organization over the complexity that occur in the financial markets. ALM helps to manage the balance of risks as follows: Balance is the outline of the financial situation of a company at a given time. A report consists of three main components which are assets, liabilities and net equity. Basically, a balance is established at the end of the financial year the company after checking
accounts, but it can also be produced at the end of the specified period due to certain critical conditions. In a balance sheet, assets are included in liabilities as a single unit and equity as the other unit, but there must be a balance between the two. Assets on the balance sheet include current assets such as inventory, accounts receivable, cash, prepaid expenses and so on, the long-term assets such as property and equipment, investment property and assets intangibles such as intellectual property and other financial assets. Liabilities include accounts payable, warranty provisions or court d ecisions, financial liabilities such as promissory notes, corporate bonds, the deferred tax liabilities, taxes and so on. ALM manages the balance sheet operating within the parameters of regulatory risk to an acceptable level of profitability. The Board of the Bank has overall responsibility for risk management and the appointment of a committee (ALCO). It manages the balance on a regular basis, manages the balance by selecting the productive assets and resources of funding and monitors risk factors.
