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NMIMS Global Access
School for Continuing Education (NGA-SCE)
Course: Treasury Management in Banking
Internal Assignment Applicable for June 2024 Examination
Assignment Marks: 30
- In March 2022, major Central Banks worldwide started increasing interest rates resulting in higher Treasury Bill yields and failure of few banks in US (due to selling of Assets to meet liquidity). Explain the role Treasury Policies & ALCO for liquidity management? (10 Marks)
Answer: Treasury Policies and ALCO (Asset and Liability Management Committee) play crucial roles in liquidity management, especially in times of rising interest rates and market turmoil. Let’s break down their roles and functions in managing liquidity:
- Treasury Policies:
- Cash Management: Treasury policies outline strategies for managing cash flows, ensuring that the organization maintains adequate liquidity to meet its short-term obligations.
- Investment Guidelines: These policies establish guidelines for investing surplus cash in various instruments, such as Treasury bills, commercial paper, money market funds, and short-term deposits, while considering factors like liquidity, safety, and yield.
- Risk Management: Treasury policies also address risk management strategies, including diversification of investments, monitoring of credit risk, and stress testing to assess the impact of
- A British MNC in India want to move their Corporate Treasury to Head Office in London for better liquidity management. Explain what are the considerations when choosing the location to setup a Corporate Treasury office? (10 Marks)
Answer: When choosing the location to set up a Corporate Treasury office, several considerations need to be taken into account. Here are the key factors to consider:
- Regulatory Environment:
- Understanding the regulatory landscape is crucial. Different countries have varying regulations governing treasury operations, banking, taxation, and foreign exchange transactions.
- Considerations include compliance requirements, capital controls, tax implications, and legal frameworks related to treasury activities.
- Market Access and Connectivity:
- The chosen
- In view of settlement risk and increasing interest rates, explain the following:
- What is Herstatt risk? (5 Marks)
Answer: Herstatt risk, also known as settlement risk, refers to the risk of one party in a financial transaction failing to fulfill its payment obligations while the other party has already fulfilled theirs. This risk arises in the context of cross-border or multi-currency transactions, particularly in foreign exchange markets, where payments are made across different time zones.
Named after the German bank Bankhaus Herstatt, which collapsed in 1974, Herstatt risk gained prominence following the bank’s failure. Bankhaus Herstatt received payments in Deutsche Marks during the European morning hours but was unable to make corresponding payments in US dollars due to regulatory intervention, leading to its collapse. As a result, counterparties that had already transferred Deutsche Marks to Bankhaus Herstatt were left exposed to losses as they did not receive their expected payments in
- How Assets and Liabilities are considered Rate Sensitive? (5 Marks)
Answer: Assets and liabilities are considered rate-sensitive based on their sensitivity to changes in interest rates. Here’s how assets and liabilities are classified as rate-sensitive:
- Rate-Sensitive Assets (RSA): Rate-sensitive assets are financial assets whose values or cash flows are directly affected by changes in interest rates. These assets typically include:
- Variable-rate Loans and Securities: Assets such as adjustable-rate mortgages (ARMs), floating-rate loans, and variable-rate bonds whose interest rates reset periodically based on prevailing market rates.
- Short-term Investments: Short-term assets like cash equivalents, money market instruments, and short-term bonds that earn interest at current market rates and can be reinvested at higher rates when interest rates rise.
- Trading Securities:
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