Master of Business Administration- Semester 4 MA 0042/MF 0016 TREASURY MANAGEMENT (4 credits) (Book ID: B1311) ASSIGNMENT- Set 1 Marks

60 Note: Each Question carries 10 marks. Answer all the questions. Q1. Explain treasury management, its need and benefits and treasury exposure. - (10 Marks) (350-400 words) Ans:- Treasury management is the process of planning, organising and managing the organisations holdings, tradings, corporate bonds, currencies, financial futures, associated risks, options, derivatives, and payment systems. It handles all the financial matters including external and internal funds for business, complex strategies, and procedures of corporate finance to optimise interest and currency flows. It helps in planning and executing communication programmes to enhance investors confidence in the organisation. Treasury management is important for the following reasons: The development in technology, breakdown of exchange controls, unpredictable changes in interest and exchange rates, and globalisation of businesses requires treasury management. To actively manage financial environment, organisations require treasury management that provides the ability to undertake business opportunities and their exposure to risks. The expanding range of hybrid capital instruments like convertible preference issued with respect to subsidiary registration of the government need treasury management to select the appropriate businesses in the various circumstances. It provides the caliber to develop appropriate skills in achieving economies of scale, lower borrowing rates and netting-off balances. Few benefits of treasury management are: Implementation of treasury management in the organisation increases sales of the products. It helps in providing confident employees who work effectively in the organisation. It enhances better guidelines and methods to manage risks especially in the areas like foreign currency, and helps in maintaining banking relationships in the organisation. The treasury management model helps in identifying risks based on changes in the business conditions and operations, and implements relevant methods to reduce the risk. The forecasted cash flow exposures can be derived from the historical data. In banking organisations, it helps to optimise asset and debt performance while minimising the needs for external funding. The financial sector in the organisation will be able to analyse a variety of data which include funds, transactions, foreign exchange rates, market data and third party information. Treasury Exposure: Following are the few treasury exposures in an organization: Financial exposure The treasury management in the organization is disclosed to the powerful analytics that enable to measure the global treasury operations and control financial market risks. Foreign exchange exposure This occurs due to the low profits and adverse fluctuations in foreign exchange rates. 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. Event exposure This happens due to a sudden change in the financial market during an investment that has a detrimental effect on the value of that investment. Commodity exposure This happens due to variations in the prices of commodities which change the future and magnitude of market values. Q2. Classify various money market instruments - (10 Marks)(350-400 words) Ans:- Money market instruments take care of the borrowers short term needs and provide the required liquidity to the lenders. The types of money market instruments are treasury bills, commercial papers and certificate of deposits, bills of exchange, repo and reverse repo. Treasury Bills (T-Bill) A treasury bill is a money market instrument. It is also known as T-Bills. It is a promissory note issued by the Central Government of India t a discounted value to meet its short term requirements. Until 1950, it is issued by Central Government. RBI issues T-Bills on behalf of the Central Government of India. They are issued by tender or tap. T-Bills are highly liquid because they are guaranteed by the Central Government. These bills can be used as claims against the government as they do not require any acceptance or endorsement. Commercial Papers (CPs) Commercial Papers (CPs) is a type of instrument in money market and it was introduced in Jan 1990.CPs is a short term unsecured promissory note issued by large corporations. They are issued in bearer forms on a discount to face value. It issued by the corporations to raise funds for a short term. The maturity period ranges from 30 days to one year. CPs is negotiable by endorsement and delivery. They are highly liquid as they have buy back facility. Certificates of Deposits (CDs) Certificate of deposits (CDs) is a short term instrument issued by commercial banks and financial institutions. it is a document issued for the amount deposited in a bank for a specified period at a specified rate of interest. the concerned bank issues a receipt which is both marketable and transferable in the market. Bill of Exchange Bill of exchange is a financial instrument which is traded in bill market. According to the Indian Negotiable Instruments Act, 1881,it is a written instrument containing an unconditional order, signed by the maker directing a person to pay a certain amount of money only to or to the order of the bearer of the instrument. Repo and Reverse Repos Repo is ma money market instrument. It is a transaction in which individuals sell their securities to another person with an agreement to repurchase it at a specified date and interest rate. The transaction is repo from the viewpoint of the seller. A reverse repo is a transaction of cash in which the lender purchases an asset from the borrower as a guarantee to get the loan repaid at the agreed interest on a specific date. It is the same transaction of repo but from the viewpoint of the lender. In other words, it is a repo transaction for the borrower, but the same transaction is a reverse repo for the lender. Q3. What are the features of ADRs and GDRs? - (10 Marks) (350-400 words) Ans:- Following are the features of ADRs and GDRs:* Assured liquidity due to presence of market makers. * Convenience to investors as ADRs are quoted and pay dividends in US dollars and they trade exactly like other US securities.

* Cost effectiveness due to elimination of the need to customize underlying securities in India. * Overseas investors will not be taxed in India in respect of capital gains on transfer of ADRs to another nonresident outside India. * The identity of ADR/GDR holders is kept confidential since they are freely transferable. * Quick settlement of ADRs/GDRs due to the existence of international systems like Euroclear and Cedel in Europe and the Deposirory Trust Company in the US. * ADRs/GDRs are designated in foreign currency, which is acceptable to global investors. * Global investors/holders of ADRs/GDRs dont need to be registered with SEBI. * GDR holders do not have voting right. * It has less exchange risk as compared to foreign currency loan. * GDR investors may cancel his receipt by advising the depository. * ADRs are easy and cost efficient methods to buy shares in foreigh companies. * ADRs save mony by reducing administration coxts and avoiding foreign taxes on the transaction. ADRs/ GDRs are excellent means of investment for NRIs and foreign nationals who want to invest in India. By buying these, they can invest directly in Indian companies without going through the harassment of understanding the rules in Indian financial market. Q4. Describe ERM and classify the differences between futures and forwards contracts - (10 Marks) (350-400 words) Ans:- Enterprise risk management (ERM) in business includes the methods and processes used by organizations to manage risks and seize opportunities related to the achievement of their objectives. Forwards Contract: A forward contract is the simplest of the Derivative products. It is a mutual agreement between two parties, in which the buyer agrees to buy a quantity of an asset at a specific price from the seller at a future date. The Price of the contract does not change before delivery. These type of contracts are binding, which means both the buyer and seller must stay committed to the contract. This means they are bound to deliver or take delivery of the product on which the forward contract was agreed upon. Forwards contracts are very useful in hedging. Important Characteristics of Forwards Contracts: 1. They are Over the counter (OTC) contracts 2. Both the buyer and seller are bound by the contractual terms 3. The Price remains fixed Limitations of Forwards contracts: 1. Lack of centralized trading. Any two individuals can enter into a forwards contract 2. Lack of Liquidity 3. Counterparty risk- The case where in either the buyer or seller does not honour his end of the contract. Futures Contract: A futures contract is an agreement to buy or sell an asset at a certain time in the future at a specific price. The Contractual terms of the futures contracts are very clear. The Futures market was designed to solve the shortcomings in the forwards contracts. Unlike forwards, futures are traded in organized exchanges. They also use a clearing house that provides the necessary

protection to both the buyer and the seller. The price of the futures contract can change prior to delivery. Hence, both participants must settle daily price changes as per the contract values. Characteristics of Futures contract: 1. They are traded in organized exchanges 2. Credit risk is eliminated with the margin system. Both parties deposit a portion of the contract with the clearing house. 3. Both the buyer and seller are bound by the contract terms and are expected to honour their end of the contract. Q5. Explain the process of risk management and various tools involved in managing risks - (10 Marks) (350-400 words) Ans:- The process of risk management consists of generic steps in order to guide the organization to achieve success with managing exposures. The basic steps of risk management process are: Establishing the context It is the process of analysing the strategic and organizational context under which the risks occur. Identifying risks The organizations are associated with variety of risks that hinders in achieving the targets. Quantifying risks It consists of measuring the probability and frequencies of the risks. Formulating policy The formulation of policy provides a framework to handle risks. Evaluating risk It involves the process of ranking the risks based on tolerance level. Treating risk This process involves development and implantation of a plan with specific methods to handle the identified risk by considering strategic and operational risk priorities, stakeholders involved and the consequences. Monitor and review risk The methods applied to manage risks are monitored regularly due to the changing environment in the investment levels. Following are the various tools for managing risks: Failure Mode Effects Analysis (FMEA) This tool is used for identifying the cost of potential failures in the business operations. Process Decision Program Chart (PDPC) The tool identifies the different levels of risk and the countermeasure tasks. The process of planning is essential before the tool is used for measuring risks. Risk Calculations This method of managing risk includes the process of continuous scanning of the risk at various phases in the business operations. Risk exposure The probability of the risk occurrence and total loss to the organization provides the overall exposure of specific risl. Risk reduction leverage (RRL) The value of the return on investment of countermeasures is obtained. RRL = Reduction in Risk Exposure / cost of countermeasure Insurance

It is the most common risk management tool used in organizations. The insurance can be applied to any physical property like equipment in the organization in order to recover from the loss occurred due to damages. Fault Tree Analysis (FTA) The tool is used as a deductive technique to analyse the reliability and safety in the organization. Q6. Explain the framework for measuring and managing the liquidity risks. - (10 marks) (350-400 words) Ans:- The earlier section dealt with the risk associate with the liquidity, now let us focus on the measurement of liquidity. The framework for measuring and managing the liquidity risk can be divided into three dimensions. They are: Measuring and managing net funding requirements Net funding requirement (NFR) of an organization depends on the liquidity situation of IISF that relates to their clients, also calculating the cumulative net excess over the time interval for th liquidity taxation. This analysis is nothing but constructing a maturity ladder and then calculating a cumulative net excess or shortage of funds at particular maturity dates. Managing market access Some liquidity management techniques are important not because of influence on the assumptions used during construction of the maturity ladders, but due to their direct involvement to increase the banks liquidity. To check the sufficient changes in liabilities banks need to inspect the level of confidence on individual funding sources. In addition a bank should understand and evaluate the use of inter company financing for its individual business offices. To build a strong relation with providers of funding, banks can offer a line of defense in a liquidity problem. The addition of loan sale clauses in loan documentation and the rate of using the asset sales markets are two possible indicators of the banks ability to perform asset sales under unfavorable scenarios. Contingency planning An effective contingency plan should address the following major issues:Have a strategy to handle crisis. Have back up facilities to access cash in emergency. The degree to which these issues have been solved determines the approach of the bank and how well it can perform during the time of crisis. A banks ability to face NFR also helps in determining the status of the bank and its previous contingency plans.