Banking Treasury Management 2 — Questions and Answers
Question 1: Which instrument is primarily used by a corporate treasury to hedge against rising interest rates on a floating-rate loan?
- Interest rate swap (pay fixed, receive floating) (Correct answer)
- Currency forward contract
- Commodity futures contract
- Equity put option
Correct answer: Interest rate swap (pay fixed, receive floating)
An interest rate swap where the company pays a fixed rate and receives floating converts its floating-rate exposure to a fixed cost, hedging against rate increases.
Question 2: What is the primary purpose of a cash concentration structure in treasury management?
- To segregate funds by legal entity for regulatory compliance
- To pool subsidiary balances into a master account to maximize investable cash (Correct answer)
- To convert foreign currency receipts into USD daily
- To fund payroll accounts automatically each pay period
Correct answer: To pool subsidiary balances into a master account to maximize investable cash
Cash concentration (zero-balance or target-balance accounts) sweeps subsidiary funds into a master account, giving treasury centralized control and larger investable balances.
Question 3: A bank's Asset-Liability Committee (ALCO) is most concerned with managing which risk?
- Credit default risk on individual loans
- Net interest margin sensitivity to rate changes (Correct answer)
- Foreign exchange translation risk
- Operational risk from system failures
Correct answer: Net interest margin sensitivity to rate changes
ALCO focuses on net interest margin (NIM) and the bank's overall interest rate risk exposure arising from mismatches between asset and liability repricing.
Question 4: Under the Basel III Liquidity Coverage Ratio (LCR) framework, what is the required minimum LCR for large internationally active banks?
- 80%
- 90%
- 100% (Correct answer)
- 120%
Correct answer: 100%
Basel III requires large banks to maintain an LCR of at least 100%, meaning high-quality liquid assets must cover 30-day net cash outflows under a stress scenario.
Question 5: Which term describes the risk that a counterparty defaults between the trade date and the settlement date of a foreign exchange transaction?
- Liquidity risk
- Herstatt risk (settlement risk) (Correct answer)
- Basis risk
- Reinvestment risk
Correct answer: Herstatt risk (settlement risk)
Herstatt risk (also called settlement or delivery risk) arises when one party delivers currency before receiving the reciprocal payment, exposing it to counterparty default.
Question 6: A treasury analyst calculates the Days Sales Outstanding (DSO) to be 65 days against a target of 45 days. What is the most direct remedy?
- Extend supplier payment terms to free up cash
- Accelerate collections through earlier invoicing and stricter credit terms (Correct answer)
- Issue commercial paper to cover the shortfall
- Increase the cash conversion cycle target
Correct answer: Accelerate collections through earlier invoicing and stricter credit terms
High DSO means customers are paying slowly, so tightening credit terms, offering early payment discounts, and accelerating invoicing directly reduces DSO.
Question 7: Which type of yield curve slope is historically associated with an expectation of economic recession?
- Steep upward-sloping (normal) curve
- Flat curve
- Inverted (downward-sloping) curve (Correct answer)
- Humped curve
Correct answer: Inverted (downward-sloping) curve
An inverted yield curve, where short-term rates exceed long-term rates, has historically been one of the most reliable predictors of upcoming economic recessions.
Banking Treasury Management 2
Which instrument is primarily used by a corporate treasury to hedge against rising interest rates on a floating-rate loan?