CFC Treasury Management & Cash Flow 5 — Questions and Answers
Question 1: A treasury policy requires a minimum liquidity coverage ratio (LCR) of 100%. If high-quality liquid assets (HQLA) total $50M and net cash outflows over 30 days are $60M, what action is required?
- No action; the LCR exceeds 100%
- Increase HQLA by at least $10M to meet the 100% threshold (Correct answer)
- Reduce net outflows by refinancing all debt immediately
- Reclassify receivables as HQLA to bridge the gap
Correct answer: Increase HQLA by at least $10M to meet the 100% threshold
LCR = HQLA / Net Cash Outflows = $50M/$60M = 83%; the company must add $10M in HQLA to reach 100%.
Question 2: Which treasury risk arises when a company cannot sell a financial asset quickly at fair market value without significantly affecting its price?
- Credit risk
- Market risk
- Liquidity/market liquidity risk (Correct answer)
- Settlement risk
Correct answer: Liquidity/market liquidity risk
Market liquidity risk is the risk that selling an asset rapidly would require a significant price concession due to thin trading.
Question 3: A US company has €20M in European receivables due in 90 days. To eliminate FX risk, the treasurer sells €20M forward at today's forward rate. At settlement, the spot rate is higher than the forward rate. What is the economic outcome?
- The company benefits from the spot rate appreciation and earns a windfall gain
- The company receives the locked-in forward rate, missing the spot rate upside (Correct answer)
- The hedge produces a cash gain equal to the spot-forward differential
- The forward contract is automatically cancelled and renegotiated at the new spot rate
Correct answer: The company receives the locked-in forward rate, missing the spot rate upside
A forward hedge locks in the forward rate; the company receives exactly that rate regardless of where spot settles, foregoing any upside.
Question 4: A CFC candidate reviews a month-end bank reconciliation and finds that outstanding checks total $150,000. How should these be treated in the cash balance per books?
- Add to the bank balance to reconcile to book balance
- They are already deducted in the book balance but not yet cleared the bank (Correct answer)
- Deduct from the book balance as an additional adjustment
- Record as a contingent liability until checks clear
Correct answer: They are already deducted in the book balance but not yet cleared the bank
Outstanding checks have been recorded as book deductions already; they represent items not yet cleared on the bank statement.
Question 5: What is the primary purpose of a treasury management system (TMS) in a large corporation?
- To replace the general ledger accounting system
- To automate payroll processing across all subsidiaries
- To centralize visibility, control, and reporting of cash positions and financial risk (Correct answer)
- To manage human resources and benefits administration
Correct answer: To centralize visibility, control, and reporting of cash positions and financial risk
A TMS consolidates cash positions, automates transactions, and provides risk management tools across the enterprise treasury function.
Question 6: A company uses the Miller-Orr model to manage cash. The model sets a lower bound of $1M, an upper bound of $4M, and a return point of $2.33M. When cash hits $4M, what does the model prescribe?
- Borrow $1M to push cash back to the upper bound
- Invest $1.67M in marketable securities to return to the return point (Correct answer)
- Transfer all cash to an overnight deposit
- Issue commercial paper for the difference between the bounds
Correct answer: Invest $1.67M in marketable securities to return to the return point
When cash reaches the upper bound, the Miller-Orr model prescribes investing the excess to bring the balance back to the return point ($4M − $2.33M = $1.67M invested).
Question 7: Which short-term borrowing instrument is issued directly to investors without a bank intermediary, is unsecured, and typically has maturities of 1–270 days?
- Banker's acceptance
- Commercial paper (Correct answer)
- Repurchase agreement
- Federal funds loan
Correct answer: Commercial paper
Commercial paper is an unsecured, short-term promissory note issued by corporations directly to investors, bypassing bank intermediation.
CFC Treasury Management & Cash Flow 5
A treasury policy requires a minimum liquidity coverage ratio (LCR) of 100%.
If high-quality liquid assets (HQLA) total $50M and net cash outflows over 30 days are $60M, what action is required?