Treasury Management MN 30067

Exam for May/June 2004

Three questions to be answered at least one from each section

University calculators to be used

Show all workings

Section A

i) Why do companies need written policies and procedures concerning security when undertaking Treasury transactions and what are such procedures seeking to avoid? 15 %

ii) Describe the process involved in undertaking a foreign exchange transaction, including final settlement, indicating where security issues nay occur and the types of procedures and controls that you would like to see in place to control the risks involved. 70 %

iii) What problems may Treasury departments have in maintaining the ideal security and risk control procedures? 15 %

Q2 You are the Treasurer of an UK based international airline. You fly to over 50 different destinations including airports in Europe, Asia and North America. Your fleet is a mixture of Boeing and Airbus aeroplanes. Using the information given, your own knowledge of the airline industry and stating any assumptions that you may make about that business, answer the following questions.

i)What foreign exchange exposures do you have? Give full reasons for your answers and relate your answers to the airline business. 50 %

ii)Discuss how you might set about covering these exposures and say whether or not you would use the methods you discuss. Give reasons for your decisions and say what, if any, further information you might like to have to help you in this decision. 50 %

i)Why is cash management an important activity for a company? Illustrate your answer with reference to the cash cycle. 30 %

ii)Define float and say how, in the following example you would set about controlling it giving the pros and cons of your suggestions and indicating what savings you think you might make.

Your company (UK based) is selling goods worth £250,000,000 per annum to a number of European countries including the UK. Your terms of trade are 30 days from invoice date. You batch invoice once a month, for administrative reasons, for that months sales. Bank debt currently costs 6 %. Your average debtors figure is £47,260,273. You invoice customers in their currency and customers pay by a mixture of cheques and EFT but 75% pay by cheque. The average invoice size is £700,000 equivalent. Goods are delivered using hired transport and so tend to be delivered when a lorry is going in the right direction. You manufacture a high value, low volume and weight product. Currently you hold all your accounts, that is GBP and other currencies including the Euro, in London. You do purchase some raw materials and components from Europe. 70 %

Section B

Show all your workings.

Q 4

i)a) You are the Treasurer of an UK based group of companies. You have a subsidiary in Denmark that has forecasted a surplus cash balance for the next three months (91 days) of 970,000 DKr. Your UK subsidiary also has a surplus for the next three months of GBP 950,000. Given the information below, what is your best course of action to maximise your return for the 91 days? Assume that each subsidiary will wish to be in the same position at the end of the period as they would be if acting independently. Show any net benefit in GBP terms.

Rates

Spot GBP/DKr 11.1880 – 11.1895

3 month points 640 615

Money Market rates in UK and Denmark

Amount Deposited interest rate in GBP interest rate in DKr

0 to 499,999 4 1 23/32

500,000 to 999,999 4 1/16 1 27/32

over 1,000,000 4 3/16 1 31/32

Note. Bands relate to amounts in both GBP and DKr. DKr are on a 360 day basis.

25 %

b) What further factors would you consider before going ahead with your

recommended transaction? 5 %

ii)What factors will you bring into consideration when deciding whether to use an option or a forward to cover a foreign exchange exposure? 10 %

iii)Once you have decided that you will use an option what decisions will you have to make and what factors will you bring into account in making those decisions? 20 %

iv)You are an American Treasurer and you have decided to use an option to cover a GBP payment you have to make of GBP 1,365,000 in one months time. Today is April 29th. Given the information below

a)Will you buy puts or calls? 5 %

b)How many contracts will you buy? 5 %

c)If you buy a 1.5800 strike price, June expiry option, what will your total premium be? 5 %

d)If you exercise the option what will your effective rate be? 5 %

e)What will the underlying be for this option? 10 %

f)If on the 29th May the June option has a value of 1 cent and the spot rate is 1.5875 what will you do and what will be the effective rate that you will have attained (ignoring the original premium paid)? 10 %

Spot Rate on 29th April GBP/USD 1.5901 – 1.5911

Two month points 74 60

USD/ GBP Options (CME) GBP 62,500 cents per GBP

Strike Price Calls Puts

April 29th May June May June

157 1.80 2.44 0.26 0.88

158 1.10 1.84 0.60 1.40

159 0.58 1.34 1.14 1.90

160 0.34 1.00 1.90 2.56

Calls: 2,242 Puts: 152 Volume: 2,394. Previous days open interest: 14,082

i) What are the benefits of multilateral netting for a company? 30 %

ii)You have the following pattern of intra group payables and receivables for the

next month.

Figures in 000’s

Sub A UK

What is the annual saving that will arise from netting given the following information/

GBP/ SGD 3.0999

GBP/CHF 2.3312

EUR/GBP .6656

Float: pre netting 2 days, post netting, zero days.

Interest cost in GBP 5.5%

Cost of transfers GBP20 per transfer

iii)What issues will need to be sorted out when implementing a netting system? 30 %

i)Describe what is meant by ‘riding the yield curve’ and the risks that a bank or a company is running when they do so. 10 %.

ii)You have a GBP1,000,000 receipt due in three months time which you intend to deposit for three months

a)if the current six month interest rates are 4 7/16 – 4 5/16 and the current three month interest rates are 4 3/8 – 4 3/16, what is the forward-forward rate for the three month deposit (use the simple calculation). 10 %

b) if you have FRA quotes as follows:

Period Rate

1-44 3/32 – 4 7/32

3-6 4 ¾ - 4 7/8

6-94 7/8 – 4 15/16

what would the compensation amount be and who would pay whom if on the deposit date in three months time the actual rate was 5%? 20%

iii)You have USD 1,000,000 to invest in June for three months (90 days) and you are worried that interest rates may fall. The USD three month June futures contract (contract size USD 1,000,000) has a quote of 95.49 and the current three month rate is 4.00 %

a)What is the implied three month rate from June to September? 5 %

b)If when you reverse your position the futures quote is 95 and the market three month rate is 4.5 % what is your net gain or loss? 20 %

iv)Why would there be differences between the pricing on the forward –forward the FRA and a futures contract? 15 %

vi)What other instruments might you use in these circumstances to cover the risk? Give the benefits and problems of each and say which, in this instance you would use and why. 20 %