AAT L4 Cash & Treasury Management 2

Question 1

A cash flow forecast is prepared to:

Accepted Answer

Predict future cash surpluses and deficits, enabling the business to arrange financing or invest surplus cash in advance

Answer

Cash flow forecasts (short-term: weekly/monthly; medium-term: quarterly/annual) predict cash inflows and outflows, enabling management to plan for shortfalls before they occur and optimise the use of surplus cash.

Question 2

Netting in treasury management refers to:

Accepted Answer

Offsetting cash flows between group companies or between a business and counterparties to reduce gross flows and currency exposure

Answer

Cash netting (or multilateral netting) offsets receipts and payments between group entities or trading counterparties, settling only the net balance — reducing transaction costs, currency conversion costs, and gross credit exposure.

Question 3

The main risk of holding excessive cash in a business is:

Accepted Answer

An opportunity cost — cash is not deployed in value-creating investments and earns only low returns

Answer

Holding surplus cash above operational needs incurs an opportunity cost: cash earns minimal returns in a deposit account when it could be invested in higher-return assets or used to reduce expensive debt.

Question 4

A bank overdraft differs from a term loan in that:

Accepted Answer

Overdrafts are repayable on demand and fluctuate with daily cash needs; term loans are for fixed amounts over fixed periods

Answer

An overdraft is flexible and repayable on demand — it fluctuates with cash flow needs and is suitable for short-term working capital. A term loan is a fixed amount borrowed for a defined period with scheduled repayments.

Question 5

Currency risk in treasury management is managed using instruments such as:

Accepted Answer

Forward exchange contracts, currency options, and currency swaps

Answer

Currency (foreign exchange) risk is managed using: forward contracts (locking in a rate), currency options (right but not obligation to exchange), currency swaps (exchanging principal in different currencies), and natural hedging (matching revenues and costs in same currency).

AAT Level 4 Practice Test

AAT Level 4 Practice Test

AAT L4 Cash & Treasury Management 2