CCA CCA Treasury & Cash Management 2 — Questions and Answers
Question 1: What is a revolving credit facility, and how is it used in corporate treasury?
- A one-time term loan repaid in equal installments
- A committed credit line that a company can draw on, repay, and reborrow multiple times up to a maximum limit (Correct answer)
- A government-backed emergency loan program for large corporations
- A form of asset-backed securitization for receivables
Correct answer: A committed credit line that a company can draw on, repay, and reborrow multiple times up to a maximum limit
A revolving credit facility provides flexible short-to-medium-term borrowing; companies draw down when cash is needed and repay when surplus cash is available, making it ideal for managing working capital fluctuations.
Question 2: What is the purpose of a hedging strategy in corporate treasury?
- To speculate on favorable currency and commodity price movements
- To reduce or eliminate exposure to financial risks such as foreign exchange, interest rate, or commodity price fluctuations (Correct answer)
- To maximize investment returns on excess cash
- To avoid maintaining a diversified investment portfolio
Correct answer: To reduce or eliminate exposure to financial risks such as foreign exchange, interest rate, or commodity price fluctuations
Corporate hedging uses financial instruments (forwards, futures, options, swaps) to offset or reduce exposure to adverse price movements in currencies, interest rates, or commodities.
Question 3: Which financial instrument locks in an exchange rate for a future transaction, obligating both parties to exchange currencies at a specified rate and date?
- Currency option
- Interest rate swap
- Foreign exchange forward contract (Correct answer)
- Currency futures ETF
Correct answer: Foreign exchange forward contract
A foreign exchange forward contract obligates both buyer and seller to exchange currencies at a predetermined rate on a future settlement date, eliminating exchange rate uncertainty.
Question 4: What is a 'sweep account' used for in cash management?
- Automatically moving excess balances from operating accounts into interest-bearing investments at end of day (Correct answer)
- Consolidating multiple bank accounts into a single statement
- Paying employee payroll from a segregated account
- Collecting customer payments via automated clearing house (ACH)
Correct answer: Automatically moving excess balances from operating accounts into interest-bearing investments at end of day
Sweep accounts automatically transfer funds above a target balance into higher-yielding instruments (money market funds, overnight repos) each day, maximizing interest income on idle cash.
Question 5: What is Days Sales Outstanding (DSO), and what does a rising DSO signal?
- The average number of days to pay suppliers; rising DSO signals improved supplier relationships
- The average number of days to collect receivables after a sale; rising DSO may signal collection problems or looser credit terms (Correct answer)
- The number of days inventory is held; rising DSO means faster inventory turnover
- The average payment terms negotiated with customers; rising DSO means better terms
Correct answer: The average number of days to collect receivables after a sale; rising DSO may signal collection problems or looser credit terms
DSO = (Accounts Receivable ÷ Net Credit Sales) × Days; a rising DSO means the company is taking longer to collect cash from customers, which can stress liquidity.
Question 6: What is the purpose of a 13-week cash flow forecast in corporate treasury?
- To prepare the annual budget for board approval
- To provide a near-term visibility tool for weekly cash inflows and outflows, enabling proactive liquidity management (Correct answer)
- To report cash position to the SEC quarterly
- To calculate the company's cash conversion cycle for investor presentations
Correct answer: To provide a near-term visibility tool for weekly cash inflows and outflows, enabling proactive liquidity management
The 13-week cash flow forecast is a rolling short-term liquidity tool that helps treasury identify potential cash shortfalls or surpluses with enough lead time to take corrective action.
CCA CCA Treasury & Cash Management 2
What is a revolving credit facility, and how is it used in corporate treasury?