Banking Treasury Management 5 — Questions and Answers
Question 1: What is the primary distinction between 'hard' currency and 'soft' currency in international treasury management?
- Hard currencies are issued by central banks; soft currencies are issued by private banks
- Hard currencies are widely accepted globally and stable; soft currencies are illiquid and subject to high volatility or controls (Correct answer)
- Hard currencies have higher interest rates; soft currencies have lower rates
- Hard currencies are backed by gold; soft currencies are fiat money
Correct answer: Hard currencies are widely accepted globally and stable; soft currencies are illiquid and subject to high volatility or controls
Hard currencies (e.g., USD, EUR, JPY) are globally accepted, freely convertible, and relatively stable, while soft currencies face restricted convertibility, capital controls, or high volatility.
Question 2: Which internal control best mitigates the risk of unauthorized wire transfers in a corporate treasury department?
- Requiring dual authorization (four-eyes principle) for all outgoing payments above a threshold (Correct answer)
- Restricting treasury staff from accessing the general ledger system
- Performing annual external audits of the treasury function
- Using a single treasury management system for all operations
Correct answer: Requiring dual authorization (four-eyes principle) for all outgoing payments above a threshold
Dual authorization (requiring two separate approvers for payments) is the most direct control preventing a single employee from initiating and approving unauthorized transfers.
Question 3: A U.S. multinational consolidates financial statements in USD. Fluctuations in the value of its foreign subsidiaries' net assets due to exchange rate changes affect which financial statement item?
- Operating income
- Other Comprehensive Income (OCI) via cumulative translation adjustment (CTA) (Correct answer)
- Retained earnings directly
- Cost of goods sold
Correct answer: Other Comprehensive Income (OCI) via cumulative translation adjustment (CTA)
Under ASC 830, translation gains and losses from converting foreign subsidiaries' balance sheets to the reporting currency are recorded in OCI as a cumulative translation adjustment, not in net income.
Question 4: In the context of bank capital management, what is the purpose of a Contingent Convertible bond (CoCo)?
- To provide short-term liquidity during market stress without regulatory approval
- To automatically convert debt to equity or be written down when a bank's capital falls below a trigger level (Correct answer)
- To hedge the bank's equity portfolio against market downturns
- To fund long-term infrastructure projects at fixed rates
Correct answer: To automatically convert debt to equity or be written down when a bank's capital falls below a trigger level
CoCo bonds absorb losses by converting to equity or writing down principal when a bank's CET1 ratio falls below a predefined trigger, automatically recapitalizing the bank without a bailout.
Question 5: A treasury manager calculates that the company's working capital cycle is 80 days. Which formula correctly derives this figure?
- Days Sales Outstanding + Days Payable Outstanding − Days Inventory Outstanding
- Days Inventory Outstanding + Days Sales Outstanding − Days Payable Outstanding (Correct answer)
- Days Payable Outstanding + Days Inventory Outstanding + Days Sales Outstanding
- Days Sales Outstanding − Days Inventory Outstanding − Days Payable Outstanding
Correct answer: Days Inventory Outstanding + Days Sales Outstanding − Days Payable Outstanding
The cash conversion cycle (working capital cycle) = DIO + DSO − DPO, representing the days cash is tied up from raw material purchase to customer collection.
Question 6: Which risk arises when a bank uses short-term deposits to fund long-term fixed-rate mortgages?
- Credit concentration risk
- Maturity mismatch (funding liquidity) risk (Correct answer)
- Operational risk
- Systemic market risk
Correct answer: Maturity mismatch (funding liquidity) risk
Funding long-term fixed assets with short-term liabilities creates a maturity mismatch — if depositors withdraw funds or rates rise at rollover, the bank faces a liquidity or margin squeeze.
Question 7: Under the U.S. Dodd-Frank Act, which of the following standardized OTC derivatives must be centrally cleared through a qualifying central counterparty (CCP)?
- FX spot transactions
- Equity total return swaps on individual stocks
- Plain vanilla interest rate swaps denominated in USD (Correct answer)
- Credit default swaps on emerging-market sovereign debt
Correct answer: Plain vanilla interest rate swaps denominated in USD
Dodd-Frank Title VII mandated central clearing for standardized, liquid OTC derivatives including plain vanilla interest rate swaps, reducing bilateral counterparty risk.
Banking Treasury Management 5
What is the primary distinction between 'hard' currency and 'soft' currency in international treasury management?