Cash & Treasury Management Flashcards

The difference between economic exposure (operating exposure) and transaction exposure is:

Answer: Transaction exposure relates to specific identified foreign currency transactions; economic exposure is the broader long-term impact of exchange rate changes on the company's competitive position and future cash flows

Transaction exposure is specific and identifiable (a known invoice or commitment); economic exposure is broader — the long-term effect of exchange rate changes on competitiveness, pricing, costs, and future cash flows, which is harder to quantify and hedge.

An organisation with significant floating-rate borrowings should consider which hedging strategy to manage interest rate risk?

Answer: Entering into a pay-fixed, receive-floating interest rate swap to convert the floating rate exposure to a fixed rate

A pay-fixed, receive-floating swap converts the floating-rate liability to a fixed-rate cost: the company pays a fixed rate to the swap counterparty and receives a floating rate in return, which offsets the floating rate payments on the underlying loan.

The Gordon Growth Model is used in treasury to value:

Answer: Equity investments — estimating the present value of expected future dividends growing at a constant rate

The Gordon Growth Model (dividend discount model) values equity as D1/(Ke − g), where D1 is the next dividend, Ke is the required equity return, and g is the constant dividend growth rate — relevant to treasury when valuing equity investments.

In treasury risk management, a VaR (Value at Risk) measure estimates:

Answer: The maximum expected loss on a portfolio over a given time horizon at a given confidence level, under normal market conditions

VaR is a statistical measure quantifying the maximum potential loss on a portfolio over a specified period (e.g., 1 day, 10 days) at a given confidence level (e.g., 95%, 99%) under normal market conditions.

Financing a long-term investment with short-term borrowing creates which risk?

Answer: Refinancing (rollover) risk — the borrowing may not be renewable at maturity, or may only be available at much higher rates

Using short-term debt to fund long-term assets creates refinancing risk: when the short-term debt matures, the business may be unable to renew it (e.g., in a credit crunch) or may only do so at significantly higher interest rates.

Which of the following would be reported as a financing activity in a statement of cash flows?

Answer: Repayment of a long-term bank loan

Repayment of a long-term bank loan is a financing activity — it reduces the principal of a financial liability. Purchases of assets are investing activities; tax and operating items are operating activities.