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Master of Business Administration MBA Semester I

MF0016 Treasury Management (Finance) 4 Credits
(Book ID -B1814)
Model Question Paper Key Answers
Duration: 3 hours

Total marks: 140

Section A
Descriptive questions

(4*10 marks = 40 marks)

(Answer any TWO questions from 1-4. Case study questions 5 and 6 are COMPULSORY)

1. What are money market instruments? How are they relevant to the corporate treasury
function? (Unit 2)
2. Write short notes on:
a. RBIs role in the money market (Unit 5)
b. Traditional and evolving functions of Treasury (Unit 1)
c. Interest rate risk management and its relevance to corporates (Unit 9)
3. What is financial risk? How is it different from liquidity risk? How can ERM help in
coping with financial risk? (Unit 10)
4. Present a comparative analysis of:
a. Working capital management v. Working capital financing (Unit 12)
b. Transaction risk v. Translation risk (Unit 11)
c. Decentralised treasury v. Centralised treasury (Unit 13)

Case Studies (Compulsory)

1. High Ground Hardware Systems Inc. USA

High Ground Hardware Systems Inc. USA (High Ground) is mulling the manufacture and
sale of computers in India. Target for the first year is 20,000 laptops and volume growth of
10% every year. High Ground plans to operate the project for 5 years and dispose of the plant
and working capital at the end of year 5. High Ground expects that all net cash flows will be
permitted to be repatriated to USA every year.

Investment in the plant is expected to cost $10 million. Working capital is budgeted at $5
million initially and expected to stay constant throughout the project. Plant will be
depreciated over 5 years on straight line basis for tax purposes.
Over the 5-year period selling price per laptop will be $500 converted to Indian rupees at the
prevailing exchange rates at the time of sale. Operating expenses are expected to be the rupee
equivalent of $250 per laptop.
High Ground will finance the project with a debt/equity ratio of 0.50. The debt will be raised
in rupees and the company will pay interest @ 10% (expected market borrowing rate). The
principal will be repaid in 4 equal annual instalments from end of year 2.
The cost of capital for High Ground is 19%. The corporate tax rate is 35% in India and
because of a double taxation treaty between India and the US no further taxes are payable by
High Ground in the US on its incomes from the project.
It can be assumed that investment is made at the beginning of year 1 and inflows happen at
the end of every year from year 1 through 5.
The current exchange rate is Rs 62/$. You can assume that exchange rates will remain at this
level during the project.

1. Calculate the project NPV as well as the equity NPV of the High Ground project.
2. What are the key factors of success of the project? Discuss the sensitivity of the project to
the key factors and ideate on fall-back plans that High Ground can consider to reduce the

2. Aashirwad Home Appliances Ltd

Aashirwad Home Appliances Ltd (AHA) is a 20-year-old company making and selling home
appliances and office furniture from its factory in Coimbatore. Its products have a good name
in the market, but recently AHA has been finding it difficult to maintain its quality image
because of manufacturing defects. Its plant is old and AHA feels this could be the main
reason for quality issues. Sub hash, the managing director, is worried.

Deepak, the MD of a furniture manufacturer in Nagpur meets Sub hash and proposes to him
that AHA should outsource manufacture to his firm, which has a brand new factory with
excellent process skills. Deepak offers that the products can be sold under the AHA brand

name, and suggests that Subhash closes down his factory and establishes a marketing unit
with branches and revive AHAs fortunes. He is keen on signing a five-year contract.

Subhash finds the offer interesting and asks for details. It turns out that the project will cost
AHA Rs 60 million. The earnings before interest and tax from the revamped setup would be
Rs 24 million every year, and prima facie the economics look very attractive.

The problem before Subhash now is: how to finance the project?
The options before him are:
1. A rights issue at the price of Rs 17 per share
2. Long-term bank loan @ 14% interest

The latest balance sheet of AHA (abridged) is as follows:

Fixed assets (net)

Rs million

Current assets (net of current liabilities)


Total assets


Funded by
Debt capital


Share capital (shares of Rs 10 each)


Reserves & surplus


Total liabilities & capital


Some other information:

For the last year profit after tax was Rs 80 million and dividend declared and paid 12.5%.

The project is expected to yield EBIT of Rs 24 million per annum for 5 years.

The tax rate is 35% and cost of capital of AHA is 18%.

AHA shares sell in the range Rs 17-19 in the secondary market.

1. Is it worthwhile for Subhash to consider the project? How would you evaluate its merits?
2. How should Subhash evaluate the two financing options from the perspective of treasury
risk v. return? What are the pros and cons of the two methods of financing proposed?
Note: Make sure that you take into account qualitative factors as well as quantitative, in doing
your analysis and stating your recommendations.

Section B
Answer the following one mark questions from (1-50) (50*1 = 50 marks)
1. A corporation must have a team in place to deal with events that impact the







________________ of financial results.

a. Internal reporting
b. External reporting
c. Quarterly reporting
d. Annual reporting
_______________ policies deal with handling cash deficits and disposal of cash
a. Treasury risk
b. Foreign exchange fluctuation management
c. Liquidity
d. Treasury reporting
Money markets are used by organizations that need to borrow, lend or invest
______________. (Complete the sentence)
a. For the short-term, meaning periods up to one year
b. For very brief periods of a week or less
c. For the long term, meaning periods in excess of one year
d. For periods of all durations
___________ is/are used by the central banks for conducting open market operations.
a. Stock market
b. Debt market
c. Call money market
d. T-Bills
___________ are drawn by the seller on the buyer for the value of goods delivered by
the seller.
a. Accommodation bills
b. Bills of exchange and hundis
c. Only bills of exchange
d. Promissory notes
Certificates of deposit are _________ (complete the sentence)
a. Receipts issued by corporates to investors in their public deposits
b. Acknowledgements of interbank deposits
c. Freely negotiable certificates of deposits made by banks in corporate entities
d. Freely negotiable certificates of deposits made by investors in banks
________ and _______ markets are the two segments of equity market.
a. Debenture market and Bond market
b. Primary market and Secondary market
c. Debt market and Share market
d. Premium market and Discount market

8. SEBI prohibits ______________ as part of its regulatory measures.









a. Issue of shares at a discount

b. Margin trading
c. Trading in foreign exchange
d. Insider trading
Foreign institutional investors are: (Choose the correct definition) (1)
a. The only foreign entities authorized to invest in India
b. Non-resident Indian individuals
c. Foreign banks with branches in India
d. Foreign arms of Indian companies
In ___________ method, foreign exchange rate is quoted as domestic currency per unit
of foreign currency.
a. Cross
b. Indirect
c. Direct
d. Forward
In forward contracts the receiver of delivery ____________.
a. May change with time.
b. Is known.
c. Is not known.
d. Is always the bank.
Forward and futures contracts often work ___________.
a. without any correlation
b. In tandem
c. Against one another
d. Together, and so double the risk/return.
In case of options, underlying asset refers to the ______________________________.
a. Amount per share that an option buyer pays to the seller
b. Total value of the transaction
c. The net asset value of the option buyer
d. Value of the security based on which the options have been generated
The process of removing excess money supply is known as _______________.
a. Intervention
b. Sterilised intervention
c. Bond issue to banks
d. Purchase of US$ from banks
__________ refers to relaxing controls on capital account transactions.
a. Capital account convertibility
b. Current account convertibility
c. Liberalized Exchange Rate Management System (LERMS)
d. Unified exchange rates
Formulation of FEDAI guidelines and rules for forex business is








a. The sole function of Foreign Exchange Dealers Association of India

b. Not in the purview of FEDAI
c. One of the functions of FEDAI
d. The function of RBI in which FEDAI plays an advisory role.
___________ refers to the loans arranged by the importer for payments of imports in
India from a bank outside India for maturity less than three years.
a. Exchange Earner's foreign currency (EEFC) account
b. Supplier's credit
c. Buyer's credit
d. NOSTRO account
The liquidity of an organization depends on the organizations ___________ need for
a. Short-term
b. Long-term
c. Total
d. Daily
In taking care of the risk element, one of the features of a liquidity plan is
a. The capital budget
b. The operating budget
c. Listing fall-back action options
d. Long-term strategy of the company
_________________ is the ratio that sets the minimum cash balance that each bank
must hold.
a. Statutory liquidity ratio
b. Cash reserve ratio
c. Liquidity ratio
d. Debt service coverage ratio
Avoiding _________ _____ is one of the reasons for the requirement of liquid assets.
a. Bankruptcy
b. Equity financing
c. Long-term debt
d. Compulsory high-cost debt
One of the major risks companies experience in the domain of personnel is
a. Idle time
b. Production of defectives
c. Work-related physical violence
d. Absenteeism
Inventory risk occurs as a result of ________________________.
a. Failure of salespeople to make sales









b. Problems arising in quantity and quality of manufactured products

c. Accumulation of inventory
d. Damage to the inventory by natural and manmade causes
Altmans model and a few other credit score formulae have been developed to measure.
a. Liquidity risk
b. Market risk
c. Foreign exchange risk
d. Credit risk or default risk
Risk reduction leverage is defined as ____________________________.
a. Return on investment in the business
b. Reduction in Risk Exposure Cost of countermeasure
c. Debt capital equity capital
d. Analysing, classifying and quantifying risk
A party is interested in trading an asset but there is no buying party. This is an example
of a _____________________.
a. Market risk
b. Exchange risk
c. Liquidity risk
d. Credit risk
Failure of __________________ is a technical liquidity risk.
a. Markets
b. Payment system
c. Government
d. RBI
The risk that occurs when reserve fund sources do not materialize resulting in lost
business opportunities is known as ____________________
a. Timing risk
b. Call risk
c. Funding risk
d. Technical failure risk
_____________________ are the two different ways of measuring liquidity.
a. Maturity ladder and contingency plans
b. Stock approach and Flow approach
c. Net funding requirement and market access
d. Backup liquidity and strategy
Interest rate risk management (IRRM) does not deal with ___________.
a. Re-pricing risk
b. Yield curve risk
c. Exchange risk
d. Basis risk
Interest rate is an important constituent of ____________________.
a. Cost of capital
b. Market capitalization







c. Cost of debt capital

d. Cost of equity capital
__________________ refers to the risk occurring in the future price of underlying asset.
a. Reinvestment risk
b. Price risk
c. Rate level risk
d. Volatility risk
______________________ suggested interest rate as the component which balances
savings with investment.
a. Classical theory
b. Abstinence theory
c. Loanable funds theory
d. Liquidity preference theory
The dimensions of financial risk are ____________________________________.
a. Interest, foreign exchange and fundraising
b. Shareholder relationship, financial market and lenders
c. Financial reporting, cash management, cost management and compliance
d. Accounting, reporting and disclosure
Foreign exchange risk comprises risks of _________________________________.
a. Choice of currency and currency movement
b. Transaction and translation
c. Failure to book forward
d. Contracting issues with the foreign party
A _______________ elaborately lists out all statutory payments, filings, returns and
other compliances required in the business.
a. Financial Policy Manual
b. Financial procedures Manual
c. Strategic checklist
d. Statutory checklist
Currency swaps can be ____________; transactions do not have to be completed.
a. Netted out
b. Extended
c. Cancelled

d. Converted
38. Translation exposure can also be termed as ___________________ exposure.
a. Cash flow or liquidity
b. Accounting or balance sheet
c. Economic or sovereign
d. Conversion or exchange

39. The exposure dealing with the actual cash flows involved in settling transactions

denominated in a foreign currency is called ___________.

a. Total exposure
b. Translation exposure
c. Transaction exposure
d. Economic exposure
40. Companies are not allowed to _____ in foreign currencies as a business by itself. Only
_________ are licensed to do so.
a. Invest, banks
b. Borrow, FEDAI dealers
c. Trade, banks






d. Trade, FEDAI dealers

A business must have some idle cash and unused bank balance for ________________.
a. Buying fixed assets
b. Repaying loans
c. Spot payments
d. Payment of dividends
Every company should _____________ its operating cash cycle and broadly know the
amount of capital that will be required. 1
a. Control
b. Plan
c. Quantify
d. Reduce
ABC analysis of ________________________ is an excellent device to devote focused
attention to high-value inventories.
a. Finished goods
b. Raw materials
c. Stores & spares
d. Work-in-process
A derivative product is _______________________________.
a. A financial product the value of which is independent of any financial asset
b. A financial asset that is traded in a foreign market
c. A financial product that derives its value from the underlying financial asset
d. A financial asset that is traded in the secondary market
Market risk is the risk arising from _______________________.
a. Trying to raise money in a volatile capital market
b. Rise or fall of the companys product or service in the market
c. Raising debt capital at exorbitant rates of interest
d. Unfavourable conditions and fluctuations in market prices
Liquidity risk could arise from __________________.
a. Implementation of unrealised transactions





b. Realised and unrealised transactions

c. Realised transactions
d. Forex assets and liabilities on the balance sheet
Treasury deals with ______________ cash.
a. Daily
b. Short-term
c. Long-term
d. Liquid
Treasury with its own trading and investment activity has developed into a
___________. Choose the correct answer.
a. Profit centre
b. Cost centre
c. Service centre
d. Responsibility centre
Treasury uses _____________________ to control the cost of funds.
a. Bank assistance
b. Forward booking
c. Hedge and risk management
d. Interest rate swaps
___________ refers to an agreement between two parties to exchange currencies at a
certain exchange rate and at a certain time in future.
a. Swaps
b. Convertible bonds
c. Government securities
d. Forward contracts

Answer the following two mark questions from (51-75)

51. Globalization

(2*25=50 marks)

of business has thrown up opportunities for optimizing the

_________________ and minimizing the _________ of funds.
a. Utilization, cost
b. Circulation, fluctuation
c. Cost, regulation
d. Generation, requirement
52. Operators in the unorganized sector are _________________. (Complete the sentence)
a. Banks other than nationalized banks, NBFCs and non-corporate borrowers
b. Unregulated financial intermediaries, indigenous bankers, private
moneylenders and corporate and non-corporate small businesses.
c. Foreign institutional investors and big multinational corporates
d. Mutual funds and individual borrowers and lenders
53. Regulation of money market has the following objectives (pick the best option).
a. Control the commercial banks money market transactions
b. Keep inflation and rupee exchange rate under check







c. Regulate operations of non-banking finance companies

d. Effectively prevent liquidity mismatch, communicate monetary policy and
changes in policy, and expanding the markets
Information asymmetry in the capital markets refers to a situation in which (complete
the sentence appropriately):
a. False information provided by a participant is the basis for a trading decision.
b. A participant uses inside information and benefits from it.
c. One of the participants in the transaction has more or superior information
compared to the other.
d. The actual information is different from the forecast based on which the
decision was taken.
Of different types of share issues, the following are governed by SEBI (choose the
correct option).
a. All public issues including rights issues and preferential issues made by
b. Initial Public Offers (IPOs) only
c. Only issues of shares at a premium or discount
d. Only preference share issues
Pick the correct statement about a country's exchange rate fluctuations from the
a. A countrys exchange rates will not be impacted by its economic ups and
b. Exchange rate fluctuations do not have any effect upon an economy's health.
c. A countrys exchange rates will be impacted by its economic ups and downs.
d. If the economy is strong and booming the exchange rate fluctuations will
always be favourable.
Selling hedge happens when __________________.
a. a business needs a currency at a future date and buys a forwards contract to
protect against upward price movement
b. a business holds a currency and buys a forward contract to protect against
downward price movement
c. a bank expects a downward price movement and trades in the futures market
to make profits
d. a bank expects an upward price movement and trades in the futures market to
make profits
____________ plays a catalytic role for smooth functioning of the markets with close
co-ordination with RBI and other organizations. Choose the correct answer.
a. Fixed Income and Money Market Derivatives Association (FIMMDA)
b. Authorised forex dealers
c. Foreign Exchange Dealers' Association of India (FEDAI)
d. Commercial banks
Liquidity planning comprises two steps: ________ planning and ______ planning.








a. Short-term, long-term
b. Equity, debt
c. Strategic, contingency
d. Capital expenditure, operating expenditure
A major factor in the amount of cash available for use is ________________________.
a. Payment float
b. Collection float
c. Deposit float
d. Collection and deposit float
From the following statements on risk mitigation, pick the correct one.
a. Fault tree analysis (FTA) is a specific method used to mitigate risk
b. Risk calculation is a tool that measures risk
c. The Process Decision Program Chart tool is useful for new businesses in
identifying the risk of failure
d. Insurance is a specific method used to mitigate risk
The different types of liquidity risks are _________________________.
a. Competitor activity, major mishaps and unexpected statutory demand
b. Funding risk, timing risk and call risk
c. Payment risk, collection risk and bankruptcy risk
d. Failure of equity issue, failure of debt issue and inadequacy of retained
Alternative scenarios are used to _________________________.
a. Tabulate liquidity gap profiles
b. Review assumptions related to the companys assets and liabilities
c. Compare the companys structural and dynamic liquidity gaps
d. Determine a companys liquidity under different conditions
Pick the correct statement from the following statements on interest rate risk
a. Watching market interest rates is irrelevant for a companys interest rate risk
management (IRRM) program
b. An IRRM program need not be independently reviewed
c. IRRM should be an important item in the regular internal audit program
d. Annual reporting on IRRM to shareholders is a crucial aspect of IRRM
Pick the correct statement from the following statements on interest rate theories.
a. The core focus of interest rate theories is on reasoning out interest rate
b. The focus of interest rate theories is on short-term interest rate fluctuations
c. The focus of interest rate theories is on long-term interest rate movement
d. The focus of interest rate theories is on productivity of capital
A strong capital budgeting system based on the right ____________________________
mitigates investment risks.
a. Timing of the expenditure

b. Economic conditions of the country

c. Cost of capital and evaluation techniques
d. Global cues
67. Choose the correct statement from the following statements on compliance risks.
a. Keeping excellent relations with statutory authorities is the right preventive
action to manage compliance risks.
b. Maintaining a clean compliance record is the right preventive action to cope
with compliance risk.
c. As statutory authorities are not under our control, we cannot take any
preventive action for compliance risks.
d. As the statutory procedures to be observed are too many and not easy to
understand, we cannot take any preventive action for compliance risks.
68. The in-built risk in foreign exchange dealings is ____________.
a. Transaction risk
b. Credit risk
c. Cross-country risk





d. Sovereign risk
The risk of a counterparty failing to meet the obligations in a financial deal after the
bank has fulfilled the obligations on the date of settlement of the contract is known as
a. Pre-settlement risk
b. Settlement risk
c. Position risk
d. Cross-country risk
Operating cash cycle is the period during which _____________________________.
a. Cash has to be kept idle
b. Cash stays invested in the working assets of the business
c. The customer does not pay the bill and the cash does not come in
d. From the time materials are bought till they are manufactured and sold
The basic methods of financing working capital are ______________________.
a. Bank loans and Equity
b. Debentures and Bank overdrafts
c. Spontaneous financing and planned financing
d. Public deposits and Retained earnings
An evolved Treasury organisation can be described as follows: (pick the correct
a. A fully centralised Treasury
b. A fully decentralised Treasury
c. A Treasury that functions as a profit centre
d. A Treasury that focuses on corporate-wide cash flow
Choose the correct one from the following comments on treasury products

a. Business liabilities cannot be replaced with treasury products but business

assets can.
b. Treasury can use its expertise to replace assets or liabilities with treasury
products to increase returns or lower costs.
c. Business assets cannot be replaced with treasury products but business
liabilities can
d. Neither business assets nor liabilities can be replaced with treasury products
74. Treasury products are used by corporates to ______________________________.
a. Trade in the forex market and make profits
b. Study interest rate fluctuations in the market to make profits
c. Manage mismatches in liquidity position and to get returns
d. Take care of balance sheet risks
75. Merchant services are ___________________________. (complete the sentence)
a. Overseas investments, foreign currency loans and hedging of export
receivables and import payables with the help of banks (FEDAI
b. External commercial borrowings i.e. borrowings in foreign currency
from banks
c. Trading in foreign currency with the help of banks
d. Currency forwards and futures