Question 2

(b)

(i) The roles

Corporate treasury management Bank treasury management

a corporate treasury is a sales/structuring bank treasuries are profit centres. bank

team that offers services to treasuries within treasuries aim to make profits. A bank’s

corporate or small bank clients. For treasury is a business unit and is trading

instance: FX trading, deposits, structuring oriented. A bank treasury, for instance,

and corporate lending. estimates foreign exchange transactions

against current market values and receives

the difference between the bid (buy) and ask

(sell) rates.

(ii)

Opening exposure

Corporate treasury management Bank treasury management

Translation exposure - translation or Transaction exposure - foreign currency

conversion of the financial statements (such exposure, arises due to an actual business

as P&L or balance sheet) of a foreign transaction taking place in foreign currency.

subsidiary from its local currency into the example, due to the time difference between

reporting currency of the parent. This arises an entitlement to receive cash from a

because the parent company has reporting customer and the actual physical receipt of

obligations to shareholders and regulators the cash or, in the case of a payable, the
 which require it to provide a consolidated time between placing the purchase order and

set of accounts in its reporting currency for settlement of the invoice.

all its subsidiaries.

(iii)

Exposure to interest rate

Corporate treasury management Bank treasury management

Credit Risk: Caused by changes in interest Basis Risk: Risk that interest rate spreads

rate charged relative to benchmark. Usually will change. common risk for financial

due to changes in perceived institutions Banks borrow short at deposit

creditworthiness (e.g. credit rating rates, lend long at commercial loan &

upgrades/downgrades). In worst case, credit mortgage

may not be available at any price

(c)

It is important to manage exposure of interest rates for a firm as well as for a bank.

It is true that it is important to manage exposure of interest rates for both the firm and the

bank as well. This is because interest rate risk occurs in an equity asset, such as a loan or a

bond, because of the likelihood of a shift in the asset's value as a consequence of interest rate

volatility. Interest rate risk management has grown in importance, and many tools have been

devised to cope with it.