Banking Treasury Management 3 — Questions and Answers
Question 1: A company uses a notional pooling arrangement across its European subsidiaries. What is the key benefit compared to physical cash concentration?
- Funds are legally transferred to eliminate intercompany loans
- Interest is calculated on the net pool balance without moving funds, preserving legal entity cash (Correct answer)
- It eliminates the need for foreign exchange hedging entirely
- It reduces the company's total tax liability across all jurisdictions
Correct answer: Interest is calculated on the net pool balance without moving funds, preserving legal entity cash
Notional pooling offsets balances mathematically for interest calculation purposes without physically moving funds, avoiding intercompany loan documentation and preserving subsidiary autonomy.
Question 2: What does a positive Economic Value of Equity (EVE) sensitivity to a +200 bps rate shock indicate?
- The bank's net interest income will increase by 200 basis points
- Rising rates increase the present value of equity, meaning assets reprice faster than liabilities (Correct answer)
- The bank is liability-sensitive and will benefit from falling rates
- The bank has no exposure to interest rate risk
Correct answer: Rising rates increase the present value of equity, meaning assets reprice faster than liabilities
Positive EVE sensitivity to rising rates means asset values hold better than liability values under the shock, indicating the bank is asset-sensitive in present-value terms.
Question 3: Which money market instrument is an unsecured, short-term obligation issued by a highly rated corporation to fund working capital?
- Treasury bill
- Certificate of deposit
- Commercial paper (Correct answer)
- Repurchase agreement
Correct answer: Commercial paper
Commercial paper is an unsecured promissory note issued by corporations with strong credit ratings, typically maturing in 1–270 days, used to finance short-term liabilities.
Question 4: When a bank sells a portfolio of mortgages to a special purpose entity that issues mortgage-backed securities, this process is called:
- Securitization (Correct answer)
- Syndication
- Factoring
- Forfaiting
Correct answer: Securitization
Securitization converts illiquid loan assets into tradable securities by transferring them to an SPE, which funds the purchase by issuing asset-backed or mortgage-backed securities.
Question 5: A treasurer wants to lock in the rate on a 90-day borrowing that will begin in 60 days. The most appropriate instrument is a:
- Forward Rate Agreement (FRA) (Correct answer)
- Overnight index swap
- Currency basis swap
- Cross-currency repo
Correct answer: Forward Rate Agreement (FRA)
An FRA is an OTC contract that fixes the interest rate for a future borrowing or lending period, making it ideal for locking in a rate that starts at a future date.
Question 6: Under U.S. GAAP, which category of investment securities requires unrealized gains and losses to flow through Other Comprehensive Income (OCI)?
- Held-to-maturity (HTM)
- Available-for-sale (AFS) (Correct answer)
- Trading securities
- Equity method investments
Correct answer: Available-for-sale (AFS)
AFS securities are marked to market, with unrealized gains and losses recorded in OCI (bypassing net income) until the securities are sold or impaired.
Question 7: Which metric best measures the cost efficiency of a bank's treasury operations by comparing non-interest expense to net revenue?
- Return on equity (ROE)
- Net interest margin (NIM)
- Efficiency ratio (Correct answer)
- Loan-to-deposit ratio
Correct answer: Efficiency ratio
The efficiency ratio (non-interest expense ÷ net revenue) measures how much it costs to generate each dollar of revenue; a lower ratio indicates better operational efficiency.
Banking Treasury Management 3
A company uses a notional pooling arrangement across its European subsidiaries.
What is the key benefit compared to physical cash concentration?