Banking Treasury Management 4 — Questions and Answers
Question 1: A company with significant EUR receivables due in 90 days and no EUR payables uses a EUR/USD forward contract to sell EUR forward. This strategy is an example of:
- Speculative currency trading
- A natural hedge
- A transaction hedge (Correct answer)
- An economic hedge without financial instruments
Correct answer: A transaction hedge
Selling EUR forward to cover specific anticipated EUR receivables is a transaction hedge, directly offsetting a known foreign currency cash flow with a matching derivative.
Question 2: Which Basel III metric requires banks to fund long-term illiquid assets with stable funding sources over a one-year horizon?
- Liquidity Coverage Ratio (LCR)
- Net Stable Funding Ratio (NSFR) (Correct answer)
- Leverage Ratio
- Capital Conservation Buffer
Correct answer: Net Stable Funding Ratio (NSFR)
The NSFR requires that available stable funding (ASF) equals or exceeds required stable funding (RSF), ensuring banks maintain a stable funding profile over a 12-month horizon.
Question 3: A pension fund manager wants to extend the duration of a bond portfolio without buying or selling bonds. The most efficient approach is to:
- Sell short-duration bonds and reinvest in long-duration bonds
- Enter a receive-fixed interest rate swap on a notional amount (Correct answer)
- Buy credit default swaps on investment-grade issuers
- Increase the allocation to floating-rate notes
Correct answer: Enter a receive-fixed interest rate swap on a notional amount
Receiving fixed in an interest rate swap increases the portfolio's duration synthetically, as rising rates decrease swap value similarly to long-duration bonds, without requiring physical bond transactions.
Question 4: What is the main purpose of a Funds Transfer Pricing (FTP) system within a bank?
- To set wire transfer fees charged to retail customers
- To allocate funding costs and benefits to individual business units based on their asset/liability mix (Correct answer)
- To calculate foreign exchange conversion rates for internal transactions
- To price syndicated loan participations sold to other banks
Correct answer: To allocate funding costs and benefits to individual business units based on their asset/liability mix
FTP allocates the bank's central cost of funds to each business line, ensuring that units originating assets or liabilities are charged or credited the appropriate marginal funding cost.
Question 5: A repurchase agreement (repo) is best described as:
- An unsecured short-term loan between financial institutions
- A sale of securities with an agreement to repurchase them at a specified price and date (Correct answer)
- A derivative contract referencing a basket of government bonds
- A long-term mortgage backed by commercial real estate
Correct answer: A sale of securities with an agreement to repurchase them at a specified price and date
In a repo, one party sells securities (typically government bonds) and simultaneously agrees to repurchase them at a higher price on a future date, effectively creating a secured short-term loan.
Question 6: A corporate treasurer observes that the three-month SOFR futures rate is trading below the expected spot SOFR. This difference is known as:
- The credit spread
- Convexity adjustment (Correct answer)
- Basis risk
- Contango premium
Correct answer: Convexity adjustment
Because futures are marked to market daily while FRAs settle once, a convexity adjustment is needed to reconcile the futures-implied rate with the true forward rate.
Question 7: Which of the following best describes a 'laddered' investment portfolio strategy used in treasury management?
- Concentrating all investments at the short end of the yield curve to maximize liquidity
- Distributing investments evenly across multiple maturity dates to manage reinvestment risk (Correct answer)
- Investing solely in floating-rate instruments to eliminate interest rate risk
- Purchasing only the highest-yielding available securities regardless of maturity
Correct answer: Distributing investments evenly across multiple maturity dates to manage reinvestment risk
A laddered portfolio staggers maturities across different time horizons, so that as short-term securities mature and are reinvested, the portfolio maintains consistent exposure and reduces reinvestment risk.
Banking Treasury Management 4
A company with significant EUR receivables due in 90 days and no EUR payables uses a EUR/USD forward contract to sell EUR forward.
This strategy is an example of: