AAT L4 Cash & Treasury Management 4

Question 1

A cash pooling arrangement in a group context:

Accepted Answer

Allows surplus cash from one entity to fund deficits in another within the group, reducing overall external borrowing and optimising interest

Answer

Cash pooling (notional or physical) allows group treasury to offset surplus cash balances against deficit balances — reducing gross borrowing, improving interest received on surpluses, and reducing interest paid on overdrafts.

Question 2

The Bank of England base rate is relevant to treasury management because:

Accepted Answer

It is the benchmark for many variable rate loans, deposits, and financial instruments — changes in base rate directly affect borrowing costs and deposit returns

Answer

The Bank of England base rate is the benchmark rate against which many floating rate instruments are priced (e.g., SONIA, which replaced LIBOR). Changes in the base rate directly affect the cost of floating rate debt and the return on deposits.

Question 3

Which of the following is a key risk in treasury operations?

Accepted Answer

Counterparty risk — the risk that a bank, financial counterparty, or deposit-taker defaults on its obligation

Answer

Counterparty risk in treasury is the risk that the other party to a financial instrument or deposit (e.g., a bank holding funds, a swap counterparty) defaults — managed through counterparty limits, diversification, and credit ratings.

Question 4

A money market fund (MMF) is suitable for investing short-term surplus cash because:

Accepted Answer

It provides diversified, highly liquid investment in short-term, high-quality instruments with immediate access to funds

Answer

MMFs invest in diversified portfolios of short-term, high-quality instruments (government securities, bank deposits, commercial paper) — providing safety, liquidity (daily access), and a return above bank deposits for short-term cash parking.

Question 5

The treasury function should operate within board-approved limits for which of the following?

Accepted Answer

Counterparty exposure limits, maximum permitted debt levels, permissible hedging instruments, and currency exposure limits

Answer

The board approves a treasury policy setting maximum limits: how much can be placed with any single counterparty, maximum debt gearing levels, what hedging instruments are permitted, and maximum open currency exposure — ensuring treasury operates within controlled parameters.

AAT Level 4 Practice Test

AAT Level 4 Practice Test

AAT L4 Cash & Treasury Management 4