CTP Module 4

FRAs are very popular with short-term borrowers who are trying to fix today the effective interest rate they will have to pay at a future date. A corporation may use such an arrangement to lock in an interest rate today for future working capital financing scheduled in six months. Unlike an interest rate future, FRAs require no margin accounts. 4. Forward rate agreement (FRA)

A treasury professional needs to borrow funds at a fixed rate based on LIBOR to pay for seasonal temporary payrolls and repay the loan using proceeds from accounts receivable. The funds will be needed 6 months from now, but since LIBOR is currently low and expected to rise before then, which of the following can be used to lock in the interest rate without needing to exchange principal or have a margin account? 1. Interest rate cap 2. Eurodollar contract interest rate future 3. Fixed-floating interest rate swap 4. Forward rate agreement (FRA)

Bank account and financial services authority policies are essential for providing the appropriate delegation of authority regarding opening, closing and managing accounts. Two of the key items are delegation of authority allowing Treasury to manage financial service provider relationships and delegation of authority to open and close bank accounts. 2. Delegation of authority

What is specifically necessary in a bank account and financial services authority policy that will allow Treasury to manage financial service provider relationships or open and close bank accounts? 1. Surrender of authority 2. Delegation of authority 3. Attestation of authority 4. Retention of authority

For most global companies, International Accounting Standard (IAS) 21 (The Effects of Changes in Foreign Exchange Rates) provides guidance for determining the impact of changing FX rates on translating financial statements from one currency to another. In the United States, the prevailing guideline is ASC Codification Topic 830: Foreign Currency Translation. In both cases, the general approach is to try to insulate the effects of translation gains and losses from earnings for the period by placing those changes into special equity accounts. 4. Place changes in special equity accounts

What general approach does IAS 21 and ASC Topic 830: Foreign Currency Translation follow to insulate the effects of translation gains and losses from earnings for the period? 1. Book gains and losses in comprehensive income and the effective portion in current period income 2. Place changes in special debt accounts 3. Book gains and losses in net income and the effective portion in comprehensive income 4. Place changes in special equity accounts

ERM helps to ensure effective reporting and compliance with laws and regulations, and helps avoid damage to the entity's reputation and associated consequences. It also helps an entity achieve its goals while prudently managing the unexpected. When examining an organization's overall enterprise risk, there are many types of risk that must be considered. The important risks to consider are: •Market risk (including financial risk) •Credit risk •Liquidity risk •Operational risk •Legal and regulatory compliance risk •Business risk •Strategic risk •Reputation risk 4. Enterprise risk management (ERM)

What is it called when treasury professionals work together with others in the organization to manage not only financial risk as a component of market risk, but also credit and liquidity risks, operational risks, legal and regulatory compliance risks, and business, strategic and reputation risks? 1. Risk profile 2. Payment systems risk (PSR) 3. Managing systemic risk 4. Enterprise risk management (ERM)

A Window Forward is a variation on the standard forward contract. In a window forward, rather than settling on a specific date, the forward allows settlement during a given period or "window" of time. This type of forward allows some flexibility in dealing with potential production or legal delays but will typically cost more than a standard forward since the counterparty does not know exactly when the contract will settle and will typically price on the worst case scenario. 4. Window forward

Which instrument can an organization use if it wants to use a currency forward to settle a foreign currency invoice in about nine months but needs some flexibility because there are often legal delays involved with the underlying transaction? 1. Average rate forward 2. Standard forward contract with standard ISDA Master Agreement 3. Standard forward contract with negotiated ISDA Master Agreement 4. Window forward

There should be different levels of reporting depending on the goals. For example, in a large organization with a significant investment portfolio, daily investment summaries may be prepared by the treasury or investment unit. These are intended to provide financial managers (e.g., controller, vice president of finance, director of treasury and treasurer) with basic information about the daily portfolio composition, related interest rates and maturities. Any breaches of investment limits and how those breaches were remedied should also be reported as quickly as possible. 3. As quickly as possible, also saying how the breach was remedied.

How should breaches of investment limits in an investment portfolio be reported? 1. Immediately to internal auditing only as this is control failure evidence. 2. Weekly once the breach has been remedied and a prevention plan exists. 3. As quickly as possible, also saying how the breach was remedied. 4. Daily at the regular reporting time, also saying who caused the breach.

A more significant source of internal risk than defalcation stems from unintentional, not intentional, actions by employees. Examples include employee errors in data entry or reentry as well as transposition or deletion of numbers. 3. Data entry errors

Of the following, which is considered the MOST significant source of internal risk? 1. Defalcation 2. Employment law liability 3. Data entry errors 4. Loss of key personnel

The question relates to a type of arbitrage referred to as covered interest arbitrage. In this case an investor takes advantage of differences in the interest rates in two different currencies by using a forward contract (discussed later in this chapter) to eliminate any exposure (cover) to changes in the currencies. The investor can deposit the euros for six months to earn €5,500 = (1.1%/2) * €1,000,000. Converting the euros to dollars at the current spot rate results in $1,307,700 = €1,000,000 * 1.3077, which when invested at 1.2% for six months returns $1,315,546 = $1,307,700 * 1.006, which when converted back to euros is €1,010,404 = $1,315,546/1.3020. The difference between these rates it the increase in revenue: €10,404 - €5,500 = €4,904. 3. €4,904

The current spot exchange rate is 1.3077 $/€ and the six-month forward exchange rate is 1.3020 $/€. An investor has €$1,000,000 to invest. If the current euro deposit rate is 1.1% and the dollar deposit rate is 1.2% for six months. What increase in revenue (if any) can be gained if the investor invests in a covered forward and converts the euros to dollars at the current spot rate and then invests at the dollar deposit rate, not counting any fees charged for the forward? 1. (€500) 2. €500 3. €4,904 4. €9,808

Futures trading requires a margin account that is marked-to-market on a daily basis using the closing price of the previous business day. They typically are closed out prior to maturity, and they are traded on an organized exchange. 1. I, II and III

True statements about financial futures contracts include which of the following? I.An investor's margin account must be covered at the end of the day. II.Futures typically are closed out at maturity. III.Futures contracts are traded on an organized exchange. 1. I, II and III 2. II and III only 3. I and III only 4. I only

The organization would need to purchase two currency futures to settle the entire invoice, so the initial margin required is $2,205 x 2 = $4,410. Change in Contract Value = (1.3625 - 1.3383) x 250,000 = $6,050. $4,410 + $6,050 = $10,460. 4. $10,460

A U.S. importer must pay an invoice for EUR250,000 in 90 days. They purchase the necessary currency futures using the available contracts in the table below, based on the rate of EUR/USD 1.3383. If the rate were EUR/USD 1.3625 at the end of the first day of the contract, what is the new value on the margin account after marking-to-market? Currency Pair Contract Size Margin Required EUR/USD EUR125,000 $2,205 USD/JPY JPY12,500,000 $2,700 GBP/USD GBP62,500 $1,485 USD/CHF CHF125,000 $1,350 USD/CAD CAD100,000 $1,755 1. $1,640 2. $5,230 3. $8,255 4. $10,460

The firm will pay the counterparty JPY31,500,000 from local yen currency that it has obtained from its Japanese investment. Calculated as: 0.063 x JPY1,000,000,000 x (180/360) = JPY31,500,000. The counterparty will pay the firm USD351,124. Calculated as: 0.065 x USD10,803,803 x (180/360) = USD351,124. Since the firm issued USD debt at 7.1%, the semi-annual interest payment to the creditors is USD383,535. Calculated as: (0.071) x (USD10,803,803) x (180/360) = USD383,535. Since the firm will receive USD351,124 every six months under the terms of the swap, the net interest payment will be determined as a combination of the USD equivalent of the semiannual yen cost plus the net USD amount (i.e., JPY31,500,000 + USD32,411). Note that the USD only answer is incorrect because the exchange rate at the end of 6 months is not provided. 4. JPY31,500,000 + USD32,411

A US firm needs to borrow JPY1 billion for 5 years to acquire a controlling share in a Japanese firm. The US firm enjoys better interest rates for borrowing in the US market so it enters into a currency swap with a Japanese counterparty. Because the exchange rate is USD/JPY 92.56, the firm borrows USD10,803,803 at a fixed rate of 7.1%. The counterparty pays the firm JPY1 billion with semiannual payments in Yen owed to the counterparty at a fixed rate of 6.3%. The firm pays the counterparty USD10,803,803 and the Japanese counterparty will make semiannual payments in USD to the firm at a fixed rate of 6.5%. Using a 360-day year basis, what is the amount of the net interest payment the US firm will make each time interest is due? 1. JPY63,000,000 + USD383,535 2. JPY31,500,000 + USD33,724 3. USD372,731 4. JPY31,500,000 + USD32,411

1) Profit on contract = $60 - $50 = $10 profit. 2) Net gain after option premium cost = $10 - $3 = $7. 3. Exercise the option and gain $7

A call option for a company has an exercise price of $50. The stock is currently trading at $60. At maturity, what should an investor who paid $3 for the option do? 1. Not exercise the option and lose $13 2. Not exercise the option and lose $3 3. Exercise the option and gain $7 4. Exercise the option and gain $10

When the option is at-the-money, the underlying asset is selling for the strike price, so the option premium of $1/unit would be the loss. 1. -$1/unit

A call option with a $40 strike price is purchased when the underlying asset is selling for $37 per unit. The premium paid is $1. If the option is at-the-money, what would be the profit or loss? 1. -$1/unit 2. $0/unit 3. $1/unit 4. $2/unit

The company could do all of the choices except enter into an interest rate floor agreement, because its debt is fixed. 2. Enter into an interest rate swap to convert the debt's fixed rate to a floating rate 3. Enter into a forward rate agreement on the long-term debt with the same maturity date as the investment 4. Purchase a call option on the 30-year Treasury bond, with the option expiring on the maturity date of the investment

A company has an interest rate exposure as a result of an imbalance between its floating interest rate on short-term investment, which is pegged to the 91-day T-bill, and its long-term debt, which is based on fixed rate 30-year Treasury bonds. To hedge the rate on the debt portion, the company could do which of the following? Select all that apply. 1. Enter into an interest rate floor agreement 2. Enter into an interest rate swap to convert the debt's fixed rate to a floating rate 3. Enter into a forward rate agreement on the long-term debt with the same maturity date as the investment 4. Purchase a call option on the 30-year Treasury bond, with the option expiring on the maturity date of the investment

VaR is typically calculated at the 1%, 2.5% or 5% level. At the 5% level, the value at risk is equal to 1.65 times the standard deviation of change in the currency. Value at 5% VaR (95% Confidence) = Total Currancy X (Mean - 1.65 X Standard Deviation) = $700,000,000 X (0 - 1.65 X $0.006) = $700,000,000 X -$0.0099 = -$6,930,000 2. $6,930,000

A company with a foreign exchange exposure value of $700,000,000 in its euro position has a mean value for one trading day of plus or minus zero from that value and a euro/dollar investment has a standard deviation of $0.006. What is the value at 5% value at risk (VaR) (95% confidence)? 1. $3,990,000 2. $6,930,000 3. $8,232,000 4. $9,786,000

Excess or umbrella insurance is designed to supplement basic or primary liability coverage. Policies generally pay after the primary policy's limits have been exhausted. 1. Umbrella insurance

A company's liability insurance covers a maximum of $400,000 in claims. However, the company is judged against in a liability suit for $600,000. Which of the following types of insurance would have helped the company cover the entire judgment? 1. Umbrella insurance 2. Fidelity bonds 3. D&O insurance 4. Casualty insurance

In financial risk management, approaches such as using derivatives or balance sheet hedges create a financial position (either a derivative instrument or a balance sheet item) that offsets the risk from an ongoing business process. A balance sheet hedge matches exposed liabilities against exposed assets and is referred to as asset and liability management. 2. Mitigate the risk

A process of asset and liabilities management that matches exposed liabilities against exposed assets is which of the following methods of handling risk? 1. Keep the risk 2. Mitigate the risk 3. Avoid the risk 4. Transfer the risk

Sensitivity analysis examines the impact of a change in the value of a variable on a selected outcome measure such as net cash flow, assuming that all other variables are held constant. Sensitivity analysis is used to alter the value of a single variable in a spreadsheet or computer model to see how a change in that variable affects the outcome, which is operating profit in this example. 2. Sensitivity analysis

A risk assessment tool determines which of several different variables has the most controllable influence on operating profit. Each time the tool is applied, one variable is used and all other variables are held constant. Which of the following tools is this? 1. Monte Carlo simulation 2. Sensitivity analysis 3. Scenario analysis 4. Value-at-risk

The formalization of policies and procedures is one way for an organization to inform employees, agents, contractors and vendors of the expected behavior related to certain specific treasury activities. Policies and procedures are often used as training tools to help document the organization's best practices and expectations. 2. Policy and procedure statement

A treasury employee takes it on herself to discuss several problems she is having with a banking relationship. However, her manager and the bank itself become offended because bringing up these issues now threatens to get in the way of a major new loan agreement. Furthermore, the manager feels that she should be the sole contact with the bank. Which of the following would help prevent a recurrence of this event? 1. Training session on treasury ethics 2. Policy and procedure statement 3. Terminating the offending employee 4. Code of conduct statement

Three critical factors determine an operational risk management strategy for an organization: culture, technology and guidelines for the board of directors. 2. cost.

All of the following are critical factors in determining a risk management strategy for an organization EXCEPT 1. guidelines for the board of directors. 2. cost. 3. culture. 4. technology.

Diversification is clearly one of the most important tools an investment manager possesses to protect the organization from the risks to which it is exposed. Diversification approaches include: •Allocation by asset class (e.g., fixed-income, equity, cash), or among a variety of investment management firms (e.g., 25 percent with Company A, and 75 percent with Company B) •Holding a certain percentage of foreign securities so the company can minimize the impact that movements in a specific currency may have on the portfolio (e.g., the U.S. dollar weakens by five percent against the euro) •Limits on investments in issues from the same organization to a certain percentage of the total portfolio (e.g., 10 percent of the portfolio). •Limits on investments from specific issuers and/or instruments in order to limit concentration risk (e.g., invest up to $10 million in 4. requiring all investments use the same investment management firm.

All of the following are elements an investment manager should consider when ensuring adequate diversification EXCEPT 1. allocating holdings among fixed-income, equity and cash asset classes. 2. holding a set percentage of foreign securities. 3. limiting investments in issues from the same organization. 4. requiring all investments use the same investment management firm.

When organizations implement contingency plans, the focus is often on the business supply chain, ensuring that supplier linkages and production resources are restored, and that customer service is maintained. While these are important factors, the business supply chain functions only as long as the related cash and information flows of the organization also continue. The financial supply chain (purchase-to-pay cycle) is crucial to financial viability following a disaster. The treasury area plays a pivotal role in managing the organization's financial supply chain, through working capital management practices and by ensuring adequate liquidity sources. 3. supplier linkages, production resources and customer service.

All of the following are important aspects of an effective disaster recovery program for the financial supply chain EXCEPT 1. financial institutions, market information providers and financial markets. 2. internal and external networks such as computers, telecommunications, utilities and vendor support services. 3. supplier linkages, production resources and customer service. 4. treasury staff, computer systems, policies, procedures, processes and office facilities.

Risk management reduces the adverse effects of actual and potential accidental losses through cost-effective techniques by either preventing such losses from occurring (i.e., risk control) or financing the recovery from any losses that do occur (i.e., risk financing). In addition to loss prevention and risk financing costs, the possibility of accidental losses imposes administrative costs on an organization. Disaster recovery costs occur after a disaster has occurred and are therefore not a part of the cost of risk mitigation or risk transfer. 2. disaster recovery costs.

All of the following are part of the overall costs of mitigating or transferring risks EXCEPT 1. loss prevention. 2. disaster recovery costs. 3. risk financing. 4. administrative costs.

An organization must monitor each material risk exposure and the frequency with which it does this depends on the level of risk. For example, the frequency may be shortened or lengthened if the underlying asset's volatility increases or decreases, or if management's risk tolerance changes. An increase in management's risk tolerance would indicate that the risk exposure could be monitored less frequently. 1. management's risk tolerance increases.

All of the following are reasons why a risk exposure should be monitored more frequently EXCEPT 1. management's risk tolerance increases. 2. the risk exposure has increased likelihood of losses. 3. the risk exposure materiality is rated as high. 4. the underlying asset's volatility increases.

Speculation is not usually a treasury objective. The policy should instead delineate the mitigation techniques and products that may be used. 1. delineating the speculation techniques and products that may be used.

All of the following should be part of an organization's risk management policy for determining risk tolerance EXCEPT 1. delineating the speculation techniques and products that may be used. 2. contain a concise statement of risk management goals. 3. summarizing the process for monitoring performance under the strategies. 4. identifying the types of exposures to be managed.

The selection of financial service providers that are capable of assisting a company with international operations is a critical aspect of the global treasury management process and increased challenges fall primarily into the area of increased foreign exchange (FX) risk, cash flow complexity and tax issues. Derivatives are complex and not always easy to understand, analyze, apply, account for and report. In considering the use of derivatives, a treasury professional must also consider the added cost of tax, regulatory and reporting requirements related to the use of these instruments which may dilute their value. Accordingly, many treasury professionals seek the advice of outside experts. 2. derivative complexity.

All of the following tend to be greater challenges in international/global treasury management than in domestic treasury management and require use of legal and/or financial service provider expertise with international experience EXCEPT 1. foreign exchange (FX) risk. 2. derivative complexity. 3. cash flow complexity. 4. tax issues.

A knowledgeable and independent board of directors is one of the best protections against managerial malfeasance. Most risk management experts agree that the best approach is to develop a culture that promotes individual responsibility and is supportive of educated risk taking. Another important characteristic is the willingness on the part of senior management to admit to a lack of sufficient information where applicable. 1. a board of directors with close ties to management.

All of the following will help prevent managerial malfeasance EXCEPT 1. a board of directors with close ties to management. 2. a culture of individual responsibility. 3. encouraging an atmosphere of educated risk taking. 4. management's willingness to admit to information gaps.

Funding liquidity risk relates primarily to an organization's ability to raise necessary cash to meet its obligations as they come due. It is often linked to the ability to raise capital (both short- and long-term) in a timely manner, and it typically is managed by holding marketable securities or open (i.e., available) lines of credit. An example of liquidity risk would be a corporation with an active commercial paper program, which generally requires that they must continually roll over this commercial paper. This program exposes the company to considerable funding liquidity risk, as many factors can affect the ability to refinance the commercial paper, such as a reduction in the credit rating of the company, narrowing spreads in short-term credit markets or a deterioration in the credit markets themselves. 1. Funding liquidity risk

An inability to refinance or roll over commercial paper when needed due to a reduction in the credit rating of the company is what type of risk? 1. Funding liquidity risk 2. Asset liquidity risk 3. Credit risk 4. Interest rate risk

An investment policy should specify the level of interest rate exposure that the organization is willing to accept in the investment portfolio. This exposure horizon is a function of both the organization's risk philosophy and the total interest rate exposure already present in other areas of the organization. 1. III and IV only

An interest rate exposure horizon for an investment policy is a function of which of the following? I.Organization's diversification procedures II.Current market interest rates by credit rating III.Organization's risk philosophy IV.Total interest rate exposure already present in other areas of the organization 1. III and IV only 2. II and III only 3. I and II only 4. I and IV only

Futures contract pricing on a 1-year T-bill is generally defined as 100 minus the promised interest rate. In this scenario the predetermined futures rate is 1.75%, so the contract is on a predetermined price of 98.25 (100 - 1.75). Since the actual rate on a 1-year T-bill is 2.25, or 100 - 2.25 = 97.75, the holder of the long position (i.e., the one who bought the futures contract) will be paid by the seller of the contract the difference between the contracted rate and the actual rate, or the sum of 98.25 - 97.75, which equals 0.5 per unit of the contract. 3. The holder of the long position will pay the counterparty 0.5 per unit of the contract

An interest rate futures contract on a 1-year T-bill has a price of 98.25. If at the end of that year the actual rate on the 1-year T-bill is 2.25%, which of the following will occur between the buyer and seller of this contract? 1. The holder of the long position will pay the counterparty 1.0 per unit of the contract 2. The holder of the short position will pay the counterparty 0.5 per unit of the contract 3. The holder of the long position will pay the counterparty 0.5 per unit of the contract 4. The holder of the short position will pay the counterparty 1.0 per unit of the contract

A put option gives the contract owner the right, but not the obligation, to sell (put) the underlying asset to the contract writer at a fixed price through the delivery date. 2. buy a put option.

An investor who wants to hedge the possibility of a fall in the price of an asset could 1. sell a financial futures contract. 2. buy a put option. 3. buy a call option. 4. buy an interest rate cap.

A significant source of internal operational risk is related to employees, which could be caused by intentional or unintentional actions of employees. Security measures may include biometric devices such as handprints, thumbprints and retinal scanning for physical access to facilities or key equipment. Physical security is especially important for financial institutions, utilities and defense contractors. Procedures for board behavior must be outlined clearly in trading policies and guidelines, as well as remain subject to regular review and monitoring by auditors. These procedures are especially important to companies with defense contracts, sensitive research work, etc., as secrets require procedures. 1. Guidelines for the board of directors 2. Physical and electronic security risk 3. Employee risk

An organization has numerous defense contracts. Which of the following relate specifically to the ability of the organization to keep this work secret? Select all that apply. 1. Guidelines for the board of directors 2. Physical and electronic security risk 3. Employee risk 4. Counterparty risk

The total of all costs from both actual and potential losses constitutes an organization's cost of risk from losses. The total cost is often difficult to estimate. However, experts can assist organizations with this process by helping to identify the break-even point between the costs of insurance and the costs of uninsured losses for an organization. 1. the total of all costs from both actual and potential losses.

An organization's cost of risk from losses is 1. the total of all costs from both actual and potential losses. 2. the break-even point between the costs of insurance and the costs of uninsured losses for an organization. 3. the cost of all insurance and related administrative costs. 4. the cost of all uninsured losses for an organization.

At $39 per unit, the put option will break even, as this covers the premium paid. Therefore, a price of $38 per unit will produce a profit of $1 per unit. 2. $38/unit

If a put option with a $40 strike price is purchased when the underlying asset is selling for $44 per unit and a premium of $1 per unit is paid, what price must the underlying asset be at for the exercise of the option to produce a profit? 1. $37/unit 2. $38/unit 3. $39/unit 4. $46/unit

Segregation of duties is the concept of having more than one individual involved in a process to complete a task, which significantly reduces the risks from fraud and human error. The general risk of intentional employee fraud is typically referred to as defalcation risk, while the specific case of theft of money, securities or property by an employee is known as fidelity risk. Legal and regulatory/compliance risk and external theft risk are external risks, while segregation of duties is a control primarily intended to reduce internal risks. 2. Human error risk 4. Fidelity risk

Proper segregation of duties significantly reduces which of the following risks? Select all that apply. 1. External theft risk 2. Human error risk 3. Legal and regulatory/compliance risk 4. Fidelity risk

Less variability in expected future cash flows increases a firm's value in three ways: •The company's probability of financial distress decreases because the firm can assess costs and revenues more accurately. •Greater predictability in future cash flows makes the company more attractive to shareholders. •The company gains an enhanced borrowing advantage in credit markets because lenders view the firm as being less risky. The use of derivatives may have an immediate impact on cash flow that is either favorable or unfavorable. Speculation of any form increases risk and would reduce relative borrowing advantage in credit markets. 4. Use hedging to reduce the variability in expected future cash flows

In which of the following ways can an organization gain an enhanced borrowing advantage in credit markets? 1. Avoid short-position speculation in favor of long-position speculation 2. Avoid hedging to reduce price and counterparty risks 3. Use derivatives because they produce a favorable, immediate impact on cash flow 4. Use hedging to reduce the variability in expected future cash flows

A combination of an interest rate cap and an interest rate floor is called an interest rate collar. The cap establishes a maximum borrowing rate, thereby protecting the company against higher interest rates, while the floor sets a minimum borrowing rate. 1. Floors 4. Caps

Interest rate collars include the combination of which of the following? Select all that apply. 1. Floors 2. Futures 3. Swaps 4. Caps

If internal or external auditors do not review investments for compliance with the policy, companies should assign the responsibility for investment policy compliance measurement to a specific person or unit outside the policy-related functional area. This approach clearly represents a best practice, as it ensures objectivity in the review process and does not rely on internal or external audit resources that may have other responsibilities that take precedence over compliance testing 1. I, II or IV only

Investment policy reviews should be conducted by which of the following designated person(s)? I.Internal auditors II.External auditors III.Non-audit employee(s) within the policy related area IV.Non-audit employees(s) outside the policy related area V.Treasury manager(s) responsible for investment approvals 1. I, II or IV only 2. I, II, III, or V only 3. V only 4. I or II only

Investment safety is usually viewed from the perspective of preservation of principal, as well as credit quality and price volatility. Liquidity is usually a separate objective from safety. 2. liquidity.

Investment safety objectives are usually viewed from the perspective of all of the following EXCEPT 1. credit quality. 2. liquidity. 3. price volatility. 4. preservation of principal

Once a policy has been developed, it should be reviewed as part of a four-level formal approval process including treasury department review by senior treasury staff, review by other functional areas such as accounting, accounts receivable and legal, review by internal audit and/or a compliance group and final approval by the board of directors (or appropriate board committee) or, for policies with less of an impact, only at a designated executive level. 1. Review by functional area managers outside treasury 2. Review by board of directors, board committee or executives 3. Review by senior treasury staff 5. Review by internal audit and/or a compliance group

Once a treasury policy has been developed, which of the following should be part of the formal approval process? 1. Review by functional area managers outside treasury 2. Review by board of directors, board committee or executives 3. Review by senior treasury staff 4. Review by the general public 5. Review by internal audit and/or a compliance group

In practice, there is a netting procedure and only the difference is settled. If LIBOR is 2.25%, then Party B pays Party A as follows: [(0.0225 + 0.0300) - 0.0500] x $20M = $50,000. 1. Party B pays Party A $50,000.

Party A has taken the fixed side and Party B has taken the floating side of a 5-year fixed-floating interest rate swap with a notional value of $20 million. The reference rates are 5.0% on the fixed side and LIBOR + 3.0% on the floating side. If at the end of the first year, if LIBOR is 2.25%, which of the following occurs? 1. Party B pays Party A $50,000. 2. Party A pays Party B $1,000,000 and Party B pays Party A $1,050,000. 3. Party B pays Party A $1,000,000 and Party A pays Party B $1,050,000. 4. Party A pays Party B $50,000.

The avoid the risk approach may involve a company deciding not to enter into a certain line of business, or utilize a particular business or manufacturing process due to the risks involved. 1. Avoid the risk

Selecting a good, but perhaps second choice software product from a known and stable provider rather than a superior product from a new and untested provider is doing which of the following in relation to technology risk? 1. Avoid the risk 2. Mitigate the risk 3. Transfer the risk 4. Keep the risk

Regulatory compliance including money laundering, trade and corruption regulations policies cover activities needed to comply with regulatory requirements that exist in a growing number of countries. Issues include: •Statement of policy and required compliance •Sub-contractor and vendor compliance requirements •Compliance monitoring •Audit requirements •Exception management •Disciplinary processes 1. Regulatory compliance including money laundering, trade and corruption regulations

Subcontractor and vendor compliance requirements are key issues for which type of organizational policy to ensure they are effective? 1. Regulatory compliance including money laundering, trade and corruption regulations 2. Investment valuation and impairment policies 3. Bank account and financial services authority policies 4. Corporate payment card policy

The risk of a merger or acquisition of a particular supplier may result in disruptions in critical supplies or services. The trend toward outsourcing treasury functions has increased this aspect of operational risk significantly. Suppliers providing substandard products is a supplier risk, not a trend. 1. Outsourcing and risk of mergers

Supplier risk has been significantly increased by which of the following trends? 1. Outsourcing and risk of mergers 2. Lengthened supply chains 3. Suppliers providing substandard products 4. Increased use of electronic treasury information systems

As a general guideline, Topic 820-10: Fair Value Measurements offers some updated guidance on valuation of derivative instruments, especially in volatile or illiquid markets. Topic 815: Derivatives and Hedging requires the following disclosures: •A discussion on the company's objectives and strategies for using derivatives •The current fair market value of the company's derivative positions •Any contingent, credit-related features of the company's derivative positions •Locations and amounts of derivatives in a company's financial statement FASB does not address commodity exposure such as delivery costs. 1. delivery costs.

The Financial Accounting Standards Board (FASB) addresses all of the following accounting issues for derivatives EXCEPT 1. delivery costs. 2. locations of derivatives on financial statements. 3. fair market value. 4. company strategy for using derivatives.

As a general guideline, Topic 820-10: Fair Value Measurements offers some updated guidance on valuation of derivative instruments, especially in volatile or illiquid markets. With respect to improving the transparency of information disclosure relating to the use of derivatives and hedging, Topic 815: Derivatives and Hedging is the prevailing guideline for U.S. companies (with updates to International Financial Reporting Standards [IFRS] essentially matching these guidelines). 3. valuation and disclosure.

The primary issues addressed by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) regarding derivative instruments are 1. exposure monitoring and control. 2. valuation and capital gains treatment. 3. valuation and disclosure. 4. exposure monitoring and capital gains treatment.

Like interest rate risk and FX risk, commodity price risk can be managed using forwards, futures, swaps, options or combinations of these derivative instruments. Consider the following example. In an oil swap, two parties would agree on a notional principal expressed in barrels of oil (not dollars). Similar to currency or interest rate swaps, the parties make regular settlements on the basis of fixed and floating oil prices. 1. Commodity exposure swap

Which of the following BEST describes when two parties agree on a notional principal expressed in cords of lumber and then make regular settlements on the basis of fixed and floating lumber prices? 1. Commodity exposure swap 2. Commodity exposure future 3. Interest rate swap 4. Interest rate future

Scenario analysis usually starts with a base case—an expected value for each input variable affecting the final value. People within the firm who are most familiar with each variable are asked to provide estimates of the highest and lowest possible values for those variables. Overall best- and worst-case scenarios can then be constructed to assess the range of possible outcomes for net cash flow or another value of interest. Sometimes, scenario analysis is formalized by asking those who supply best- and worst-case values for the variables to provide a subjective probability distribution to accompany their estimates. 2. Scenario analysis

Which of the following asks knowledgeable employees to provide estimates of the highest and lowest values for variables in their purview, sometimes asking them to provide subjective probability distributions with the estimates? 1. Value-at-risk 2. Scenario analysis 3. Sensitivity analysis 4. Monte Carlo simulation

Platform and vendor selection risks include such issues as after-sale installation and support or even the risk that a vendor may no longer be in business. For example, a treasury information system vendor may offer a product that is suitable for an organization, but the vendor's stability and long-term viability may be questionable. It is sometimes preferable to purchase a good but perhaps second choice software product from a known and stable provider rather than a superior product from a new and untested provider. 4. A suboptimal software product from a known and stable provider

Which of the following choices of software products would offer the least operational risk? 1. A superior product at a good price from a vendor with a poor reputation for service and support 2. A superior but very new product that still has a number of bugs 3. An average product at a great discount because the vendor has a steadily declining stock value 4. A suboptimal software product from a known and stable provider

Complex spreadsheet models mixed with formula protection are often difficult to monitor and audit with respect to reliability and may provide an avenue for potential mistakes, file corruption or employee fraud. While spreadsheets may be appropriate for some treasury functions if proper controls are in place, critical treasury functions, especially those related to the payment/settlement process, should be performed on treasury systems or bank-provided payment systems rather than on spreadsheets. 2. Performing critical treasury functions on treasury systems rather than on electronic spreadsheets

Which of the following controls would help reduce both risk of internal fraud and the occurrence of unintentional errors? 1. Training the sales force to reduce occurrence of false performance claims related to the products being sold 2. Performing critical treasury functions on treasury systems rather than on electronic spreadsheets 3. Providing guidelines for avoiding excess or insufficient capacity 4. Selecting a software vendor with many years of proven experience

The correct answer is describing the euro, a currency that can be managed using mainstream risk management instruments and techniques. Although FX exposures in major economies can be addressed using mainstream risk management instruments and techniques, the same is not necessarily the case with emerging markets. In particular, exotic currencies have unique characteristics that often impede more commonplace approaches to controlling FX risk. The characteristics of exotic currencies include the following: •Illiquidity •Volatility •Reduced transparency •Limited derivative availability •Capital controls •Heightened carrying risk •Pricing distortions •Limited risk-sharing options •Minimal internal hedging alternatives •Transfer risks 4. Currency that has externally controlled monetary policy and single-currency, cross-border pooling

Which of the following currencies is MOST LIKELY to be able to have its risks managed using mainstream risk management instruments and techniques? 1. Currency that has transfer risks and volatility 2. Currency that has reduced transparency, capital controls and pricing distortions 3. Currency that has illiquidity, limited-risk sharing options and heightened carrying risk 4. Currency that has externally controlled monetary policy and single-currency, cross-border pooling

Treasury policies and procedures provide a framework for the design of treasury workflows and controls that support an organization's operational, financial and treasury management objectives. 2. Policy and procedure statement

Which of the following describes this statement: "To minimize foreign exchange exposure, all investments must be denominated in the functional currency of the entity making the investment."? 1. Footnote disclosure statement 2. Policy and procedure statement 3. Code of conduct statement 4. Management discussion and analysis statement

Because the event is unlikely, a high deductible would save the organization significant funds on the cost of the insurance premium. Because the event could occur multiple times in the same period, a deductible set on an aggregate basis would place a limit on the potential liability the organization could face even though the price of this limit is a higher annual premium. 4. Insurance with a high deductible set on an aggregate basis

Which of the following insurance policy deductibles would be BEST for insuring an unlikely event that, if it occurs at all, has a high probability of occurring multiple times in the same period? (Assume that the policies are otherwise the same except in terms of their pricing relative to the deductible limits.) 1. Insurance with a low deductible set on an aggregate basis 2. Insurance with a low deductible set on a per-occurrence basis 3. Insurance with a high deductible set on a per-occurrence basis 4. Insurance with a high deductible set on an aggregate basis

A derivative instrument is a financial product that acquires its value by inference through a formulaic connection to another asset. Four basic types of derivative securities are forwards, futures, swaps and options. 2. Repos

Which of the following is NOT an example of a financial derivative? 1. Options 2. Repos 3. Swaps 4. Forwards

The behavior of managers cannot be regulated by declaration, but assigning specific duties and documenting the assignment to designated managers establishes the organization's position regarding responsibilities, provides a baseline for acceptable behavior and may designate penalties in the event of violations. 1. The behavior of managers cannot be regulated by declaration through policies and procedures

Which of the following is a practical obstacle to the success of using treasury policy and procedure statements? 1. The behavior of managers cannot be regulated by declaration through policies and procedures 2. Staff will view the policies and procedures as threatening their ability to succeed 3. There is no way of enforcing violations of the policies and procedures 4. Policies and procedures cannot be implemented without a company ethics administrator staff position

Tax issues surrounding the use of hedges are complex and errors in the accounting treatment of hedge transactions can be very costly. If improper accounting treatment is used or documentation does not meet tax authority requirements, then the organization may not be able treat the gains/losses from derivative holdings as an offset to operational gains/losses. This could result in a significantly higher tax liability from hedging activities. 4. Significantly higher tax liability from hedging activities

Which of the following is a risk that treasury professionals face if they apply improper accounting treatment to a hedge transaction? 1. Violation of the ISDA Master Agreement 2. Margin calls on improperly recorded futures contracts 3. Violation of the code of conduct established in the Dodd-Frank Act 4. Significantly higher tax liability from hedging activities

The policies and procedures for collections and concentration must include provisions to accommodate exceptions. For example, when a customer requests a new payment alternative, the policy should dictate the appropriate procedure for obtaining exception approval. This can be as simple as obtaining the designated senior manager's written consent, or it may require a more formal approval. Documented segregation of duties would require the person making the request to obtain written approval from a second party with the proper authority. 3. Exceptions should be allowed but there should be some documented segregation of duties involved

Which of the following is correct for the specific guidelines related to handling exceptions to collection and concentration policies and procedures? 1. Exceptions should not be allowed 2. Exceptions should be allowed but a more formal approval process than just a senior manager's written consent is necessary 3. Exceptions should be allowed but there should be some documented segregation of duties involved 4. Exceptions should be allowed and a senior manager's verbal consent is sufficient

Reputation risk is the risk that customers, suppliers, investors and/or regulators may decide that you have a bad reputation and decide not to do business with you. For financial institutions, this type of risk is especially important and is specifically covered under Basel guidelines. In some areas, financial institutions are also under increasing pressure to demonstrate their ethical, social and environmental responsibilities. This type of risk also relates to how companies react to unexpected events that can impact their reputation and ultimately their future. 3. Reputation risk

Which of the following is important for all organizations but is so important for financial institutions that it is covered under Basel guidelines and these institutions are also facing increased pressure to demonstrate ethical, social and environmental responsibilities? 1. Business risk 2. Strategic risk 3. Reputation risk 4. Legal and regulatory compliance risk

Managing a company's risk helps to reduce the variability of both a company's future cash flows and profitability, which consequently increases the company's value. Hedging enables treasury to smooth uneven cash flows and forecast financial results with greater confidence. 2. Hedging

Which of the following is the most common method companies use to lower the volatility of future cash flows and consequently lower their perceived investment risk? 1. Speculation 2. Hedging 3. Matching 4. Arbitrage

Given the importance of controls to the treasury area, the treasury policies development process should build in the desired controls for each area. As control requirements change over time in response to new developments and technology, so should the related policies and procedures. 4. New technology can cause control requirements to change

Which of the following is true of controls used in treasury operations? 1. Audit workpaper retention policies can vary from no retention to indefinite retention 2. Treasury roles and responsibilities are organizational assignments rather than controls 3. Policies and procedures should be kept separate from internal controls 4. New technology can cause control requirements to change

The relationship among the spot, forward and money markets is known as interest rate parity. As long as FX and interest rate markets are efficient, it is not possible to take money from one country, invest in another country's money market, return it to the original country and generate a higher rate of return than could have been earned in the original country's money market. If an advantage to investing in another country's money market exists, then it will be eliminated quickly because exchange rates adjust to the cross-border money flows created by investors as they attempt to capture the advantage. Thus, the difference observed between spot and forward market rates is not a prediction of the future movement of the spot rate; rather, it represents an adjustment of the exchange rate that gives economic recognition to the difference between short-term interest rates in the two countries. 2. When an advantage to investing in another country's money market exists, it will be eliminated quickly because exchange rates adjust to the cross-border money flows created by investors as they attempt to capture the advantage

Which of the following is true of efficient FX and interest rate spot and forward market rates? 1. Large institutional investors can be fast enough to take money from one country, invest in another country's money market, return it to the original country and generate a higher rate of return than could have been made in the original country 2. When an advantage to investing in another country's money market exists, it will be eliminated quickly because exchange rates adjust to the cross-border money flows created by investors as they attempt to capture the advantage 3. When the interest rate structure between two countries is the same, this is referred to as interest rate parity 4. The forward market rate is a forecast prediction of what the spot market rate should be at that time

Portfolio performance should be evaluated against established benchmarks to measure and validate the success of an organization's investment practices in meeting the objectives stated in the policy. The benchmarks selected should be consistent with the company's agreed-upon goals and should be based on investment vehicles permitted by the investment policy. Common benchmarks include yields on U.S. Treasury securities, which include Treasury bills (as a very short-term reference), Treasury notes, Treasury bonds and 30-day commercial paper. Indices of a particular segment of the market may also be used as benchmarks. 4. Performance measurement benchmarks should be based on those investment vehicles permitted by the investment policy

Which of the following is true of how performance measurement and reporting should be handled in an organization's investment policy? 1. Companies that use foreign investment instruments only need to report on the impact of currency movements after the gains or losses have been realized through a sale 2. Investment policies should provide some degree of flexibility in methods used to calculate returns on portfolios 3. Breaches of investment limits should be primarily reported in weekly or monthly performance reports 4. Performance measurement benchmarks should be based on those investment vehicles permitted by the investment policy

Regardless of whether a company outsources certain functions/processes, or whether it offshores, onshores or nearshores, the need for proper control of the process will still be critical to the success of that effort. 3. Proper control of each process is critical to the success of that effort

Which of the following is true of outsourcing and offshoring? 1. There is a growing belief in the U.S. that both are likely to continue increasing in frequency 2. Each involve granting third-party control over a part of operations or administration 3. Proper control of each process is critical to the success of that effort 4. Neither are appropriate when the processes deal with sensitive information

In the identify issues and conduct analysis stage, the issues relating to the proposed policy will be identified and analyzed. If membership on the development team includes all of the affected areas, then the chances of creating a policy that will be accepted by those affected will be very good. 4. When identifying issues relating to the proposed policy, it is important to have team representation from all affected areas

Which of the following is true of the first three steps of the policy and procedure development process for the treasury organization? 1. When drafting the policy, it is important to restrict the draft to the development team until it has been approved 2. When in the pre-development stage, it is important to start with end users rather than immediately involving senior management 3. When drafting the policy, it is important to indicate how to implement each rule 4. When identifying issues relating to the proposed policy, it is important to have team representation from all affected areas

Given the increasingly litigious business environment, a significant source of external operational risk is potential lawsuits or other legal actions instigated by customers, trade partners, or governmental agencies and regulations. Insurance may be used to mitigate this risk in some cases, including surety or breach of contract loss (e.g., a contractor's failure to perform) or liability loss including lawsuits from injured customers. 4. Legal and regulatory/compliance risk

Which of the following risks is MOST LIKELY to be able to be reduced using risk transfer strategies? 1. Financial institution risk 2. Price risk 3. Counterparty risk 4. Legal and regulatory/compliance risk

If net cash flow is being simulated as the final outcome measure, then historical experience is used to develop a range of outcomes and associated probability distributions for each variable in the set of variables that have a material impact on net cash flow. In each simulation run, the computer software selects a value for each variable derived from its probability distribution, assembles the values obtained and produces a net cash flow number. A probability distribution for net cash flow emerges over the course of the many runs. 3. Monte Carlo simulation

Which of the following starts with historical experience to determine probability distributions for multiple variables, then runs multiple tests using different amounts for each variable, and results in a probability distribution for a final outcome measure? 1. Sensitivity analysis 2. Scenario analysis 3. Monte Carlo simulation 4. Value-at-risk

Difference in conditions (DIC) insurance does not provide additional limits of coverage for basic property perils as does an umbrella policy over liability insurance. DIC insurance is often purchased to fill voids in policies purchased overseas and to insure property in transit. 1. Difference in conditions insurance

Which of the following types of insurance is designed to fill a gap in insurance, such as earthquake coverage not on the main policy? 1. Difference in conditions insurance 2. Casualty insurance 3. Business interruption insurance 4. Umbrella insurance

Generally, operational risks are defined as the risk of direct and indirect losses resulting from external events that impact an organization's operations, or inadequate and failed internal processes, people and systems. Operational risk can be a significant cause of financial loss. In many operational risk disasters, a single employee has been responsible for staggering losses, which could have been prevented by appropriate oversight and controls. 3. Operational risk

Which of the following types of risk can come from both internal and external sources and can sometimes be caused by a single employee? 1. Commodity price risk 2. Foreign exchange (FX) risk 3. Operational risk 4. Interest rate risk

Replacing paper-based payments with electronic payments can help to reduce potential check fraud. There are, however, potential fraud issues related to using electronic payments. 1. Replacing paper-based payments with electronic payments

Which of the following would help reduce the risk of check fraud? 1. Replacing paper-based payments with electronic payments 2. Foreign expropriation of treasury operations in underdeveloped countries 3. Use of spreadsheets with formula protection for critical applications 4. Use of armored car services and automated store safes