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Fiscal: This group includes budget policy planning division, industrial and
environmental division, common wealth state relationships, and social
policydivision.Macroeconomic: This group deals with economic sector of the
organisation. It includes domestic and international economic divisions,
macroeconomic policy and modelling division.
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Q.1 Explain any two major risks associated with banking organization.
[10Marks]
Answer : Treasury exposure allows treasury management to various risks in the
organisation. Following are the few treasury exposures in an organisation:
Financial exposure: The treasury management in the organisation are
disclosed to the powerful analytics that enable to measure the global treasury
operations and control financial market risks. It analyses the price and risk profile
of financial dealings on a pre-dealing basis. The exposure in foreign exchange
market is intense; hence hedging towards these risks by integrating business
exposures and treasury transactions helps an organisation to manage financial
risk and stay profitable.
Foreign exchange exposure: This occurs due to the low profits and adverse
fluctuations in foreign exchange rates. Many organisations suffer from foreign
exchange risk by making purchases or sales in foreign currency or by owning
assets or liabilities in foreign countries. Hence a relevant course of action must
be implemented to reduce exposures in business operations.
Currency exposure: It deals with future cash flows arising from domestic and
foreign currencies that involve assets and liabilities and generating revenues
which are susceptible to variations in foreign currency exchange rates. Hence the
identification of existing potential currency relationship that arises from business
activities includes hedging and other risk management activities.
Event exposure: This happens due to a sudden change in the financial market
during an investment (an event) that has a detrimental effect on the value of
that investment. It is often associated with corporate bonds.
Commodity exposure: This happens due to variations in the prices of
commodities which change the future and magnitude of market values. The
commodities depend on any production including foreign currencies, financial
instruments or any physical substances. Hence treasury management is liable to
deal with various risks like price, quantity, cost that are associated with
commodities.
Corporate risks
Corporate risks include non-financial organisational risks that arise during
challenging times in the economy. . The corporate risk varies for different
organisations based on factors like size, diversity in business activities and
sources of capital etc. According to the assumptions of Modigliani and
Miller(1958), Corporate risk is a redundant activity. It is mainly concerned with
progressive tax rate and expecting costs from financial distress. The value of an
organisation depends on the changes in exchange and interest rates, and
commodity prices. Hence the corporate risk manager quantifies the exposures
occurring in the organisation to reduce risks that hamper the financial sector.
Corporate risk is further divided into market, credit and operational risks. Credit
risk experiences less challenges compared to operational and market risks. The
operational risk occur due to certain factors like back office errors, fraud, natural
disaster etc. The organisation faces market risk with respect to commodity price
risk and foreign exchange risk.
Hidden risks
Hidden risks are related to cash and financial risk in an organisation. These risks
might harm the growth of an organisation. Hence the manager irresponsible to
identify the risk and implement relevant actions to eliminate it. Complete and
accurate exposure calculation can eliminate the hidden risks. Hidden risks are
also concerned with financial accounting. Financial risk is the probability when an
actual return on an investment is lower than the expected return. They are the
uncertainties in business leading to variations in expected profits and losses.
Uncertainties related to several risks affect the net cash flow of any business
organisation. Lower uncertainties have lower variations in net cash flow, and vice
versa.
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Q.2 What is liquidity gap and detail the assumptions of it? [10 Marks]
Q.3 Explain loan able fund theory and liquidity preference theory [10
Marks]
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