Paper 1 Module 1 to 5

Part A Answer all questions. 1 mark each

1. What is the expansion of CTS in clearing functions?

a. Cheque Tracking System

b. Cheque Truncation System

c. Cheque Transfer System

d. Cheque Timing System

2. Collection float is :

a. total time between the mailing of the check by the customer and the availability of

cash to the receiving firm

b. time consumed in clearing the check through the banking system

c. time the check is in the mail

d. time during which the check received by the firm remains uncollected

3. Concentration banking occurs when the firm

a. moves cash from regional lockboxes to a centralized cash pool at a single

institution

b. replaces their lockbox system with a system that involves the direct payment to

the firm

c. reduces the control over the inflow and outflow of corporate cash

d. increases the quantity of cash balances that are "idle" (not earning a return)

4. lockbox is a facility offered by

a. Banks for safekeeping of the valuables

b. Banks for taking possession of securities for loans

c. NBFCs as document safety services

d. Banks for collection of receivables

5. Treasury Policy Manual should necessarily contain the following:

a. Ceiling on the corporate risk a treasury can take

b. Guidelines for dealing with regulators

c. Various limits governing the activities of the treasury

d. Working hours of the treasury

6. Finacle software has been developed by

a. Infosys for banks

b. Infosys for bank and other treasuries

c. Oracle on its taking over another company

d. SAP as an enterprisewide solution

7. A treasury software should necessarily ensure that

a. The mid office functions are separate from back office

b. The front office functions are separate from back office

c. The front office functions are separate from mid office

d. The mid office functions are necessarily on a stand alone basis

8. A forward purchase contract is needed by

a. An exporter

b. An importer

c. Anyone who wants to take a position in forex

d. Bank

9. A forward contract once booked

a. Cannot be cancelled

b. Can be cancelled at the ruling rate

c. Binds the customer but not the bank

d. Has to be reported to RBI only for large values

10. Cancellation of forward sale contract is

a. Same as booking forward purchase contract

b. A loss making event to the customer

c. Subject to RBI permission

d. Generally done by importers

11. Volatility of Indian rupee against US dollar

a. Necessarily results in volatility of Indian rupee against all other currencies

b. Necessarily results in volatility of Indian rupee against Euro

c. Necessarily results in stability of Indian rupee against Euro

d. Does not necessarily result in volatility of Indian rupee against all other currencies

12. Non deliverable forward markets

a. Do not exist for Indian Rupee

b. Do not exist for Indian Rupee in India

c. Are illegal

d. Trade actively in US dollar

13. In a zero coupon bond

a. There is no yield

b. The discount represents the interest earned

c. The payout is in bullet on maturity

d. The price is higher than that for deep discount bond

14. International Monetary Fund is accountable to

a. World Bank i.e. IBRD

b. United Nations Organization

c. None

d. Governments of the member organization

15. Following is an example of one currency being used in more than one country

a. Only euro

b. Euro and US dollar

c. Indian Rupee

d. Only US Dollar

16. Following is not an example of raising debt globally

a. ADR

b. ECB

c. Buyers’ Credit

d. Loan syndications

17. In foreign exchange markets, Indian Rupee is

a. Traded globally because it is convertible

b. Traded only in India

c. Least known

d. Not convertible

18. Price to Earnings is an example of

a. Valuation ratio

b. Efficiency ratio

c. Liquidity measure

d. Debt servicing capacity indicator

19. Term structure of interest rate is

a. Known as spot curve

b. Known as yield curve

c. The structure of interest rate in a market

d. Cost of capital

20. The price of a zero-coupon bond can be calculated by using the following formula

P = M / (1+r)n where n is

a. Number of years until maturity

b. Double the number of years until maturity

c. Half the number of years until maturity

d. The interest rate

21. Which of the below sentences is true

a. Duration is the measurement of the price (the value of principal) of a fixed

income investment to a change in interest rates

b. Duration is the measurement of the sensitivity of the price (the value of principal)

of a fixed income investment

c. Duration is the measurement of the price (the value of principal) of a fixed

income investment to a change in interest rates

d. Duration is the measurement of the sensitivity of the price (the value of principal)

of a fixed income investment to a change in interest rates

22. Monte Carlo simulation approach is used for measuring

a. Duration

b. VaR

c. PV & FV

d. Price sensitivity

23. If the treasurer concludes a deal after the back office is closed for the day,

a. They are to be included in that day’s position

b. They are to be included in next day’s position

c. It has to be reported to RBI

d. It is highly illegal or atleast unethical

24. An example of interest rate sensitive asset in the balance sheet of a bank branch is

a. Head office balance

b. Fixed deposits of customers

c. Loans to customers

d. Fixed assets held

25. A corporate which raises GDR has

a. Exchange risk to the extent of GDR raised

b. Exchange risk to the extent of interest payment on GDR

c. Exchange risk to the extent of dividend payment on GDR

d. No exchange risk on account of GDR raised

26. Treasury bill is not

a. A government debt obligation with maturity of one year or less

b. A part of money market

c. Always issued at discount

d. An interest bearing security

27. Commercial paper is

a. In the form of bill of exchange

b. In the form of a promissory note

c. An instrument issued by banks

d. Issued only by corporates

28. Certificates of deposits are issued

a. Only by banks

b. Only to corporates

c. By Banks & FIs

d. As short term instruments

29. Which is not a post sale finance among the following?

a. Packing credit

b. Bill finance

c. Factoring

d. Forfeiting

30. The concept of avalising is similar to

a. Bill co-acceptance

b. Packing credit advance

c. Factoring

d. Bill rediscounting

31. Alternative Investment

a. Is a generic term to describe any other investment

b. Is not covered by any specific SEBI guidelines

c. Attracts specific guidelines of SEBI

d. Includes investment in real estate

32. Credit rating agencies are

a. Governed by regulations issued by RBI

b. Governed by regulations issued by SEBI

c. Governed by regulations issued by Ministry of Corporate Affairs

d. Not guided by any formal guidelines

33. Following is not one of the stakeholders in the credit rating

a. Issuer

b. Investor

c. Regulator

d. Debtor

34. Portfolio management service

a. Is offered to corporates as a cash management service

b. Is offered to investors as a risk mitigation instrument

c. Is a specialized investment vehicle

d. Enables investor guaranteed higher return

35. A cheque is an example of

a. Promissory note

b. Bill of exchange

c. Guaranteed payment

d. Deferred payment

36. In case of bill financing by a bank, the credit risk is borne by

a. The bank

b. The seller

c. The buyer

d. Respective parties

37. Export Credit Guarantee Corporation [ECGC] Ltd

a. Is not an insurance company

b. Extends guarantees to banks

c. Finances export transactions

d. Is a publicly held company

38. Clearing Corporation of India Ltd [CCIL] extends the following service

a. Clearing the cargo at the ports & airports

b. Clearing and settlement in interbank payments

c. Dmat service

d. Clearing cheques earlier handled by banks’ clearing houses

39. What is the yield on a security?

a. It is the interest rate mentioned in the security

b. Coupon rate that is assured by the issuer

c. Implied interest over its life given its current market price

d. The benefit that is received by the holder

40. In case of a fixed deposit receipt of a bank, which is true?

a. The coupon and yield are same

b. It is transferable

c. It is a negotiable instrument

d. It is a money market instrument

41. Which of the following is not a part of money market instrument?

a. Certificate of deposit

b. Commercial paper

c. Treasury bill

d. Government security

42. Bootstrapping is

a. An iterative process of generating a Zero Coupon Yield Curve from the observed

prices/yields of coupon bearing securities

b. An iterative process of generating a Yield Curve from the observed prices/yields

of coupon bearing securities

c. An iterative process of generating a Zero Coupon Yield Curve from the observed

prices/yields

d. An iterative process of generating a Zero Coupon Yield Curve from the observed

prices/yields of other similar securities

43. Crystallisation of an export bill

a. Results in recovery of export bill

b. Means payment of an export bill

c. Removes the foreign exchange element

d. Is done as per RBI guidelines

44. Find the odd name out of the following from a regulatory perspective

a. Bank of Canada

b. Bank of England

c. Bank of Japan

d. Bank of India

45. The foreign exchange market, in which bank treasuries function

a. Is a centralized market with RBI as the central counter party

b. Does not have a central counter party

c. Internationally has CLS as provider of central settlement services compulsorily

d. Is a retail market among banks

46. A bank which can handle foreign exchange business is referred to as

a. Foreign exchange bank

b. Authorised dealer

c. Authorised person

d. Overseas branch

47. Which of the following entries in the financial statements of the Indian subsidiary require

valuation

a. External commercial borrowing

b. Balances in the accounts with banks abroad

c. Guarantees issued by the bank on its behalf favouring foreign supplier

d. All the above

48. Trading books of a bank refer to

a. The records maintained supporting the trading activities of a bank

b. Commodities traded by a bank

c. Audit functions of a bank

d. The treasury of a bank

49. One common link between credit management and treasury in a bank is

a. The Board of Directors

b. The Chairman of the bank

c. The ALCO committee

d. The common General Manager heading the departments

50. In case of reconciliation of nostro accounts held by a bank, the following is likely to

affect customer service more

a. Long outstanding nostro credit

b. Long outstanding mirror credit

c. Long outstanding nostro debit

d. Long outstanding mirror debit

51. Following organization does not belong to the ‘World Bank group’

a. International Monetary Fund

b. International Bank for Reconstruction and Development

c. The International Development Association

d. International Financial Corporation

52. Which of the following agency of the World Bank group assists private sector

enterprises?

a. IMF

b. IDA

c. IFC

d. IBRD

53. The software to be used by treasury of a bank

a. Is advised by RBI

b. Should conform to the guidelines prescribed by RBI

c. Is a pure commercial decision taken by the bank

d. Is always developed in house, in view of sensitivity

54. US dollar is quoted today as: spot $ 1 = Rs 60 and six months forward $1 = Rs 63.

a. This means $ is at discount

b. This means future of rupee is uncertain

c. This means future of rupee is unclear

d. This means $ is at premium

55. US dollar is quoted today as: spot $ 1 = Rs 60 and six months forward $1 = Rs 63. The

annualized forward margin is

a. 10%

b. 5%

c. 3%

d. 6%

56. Huge foreign investments are expected to be received from Japan and China as per

present market reports. This will

a. Strengthen Indian rupee

b. Weaken Indian rupee

c. Increase inflation

d. Flow into stock market will increase

57. The Value at Risk [VaR] can be specified for

a. An individual asset only

b. A portfolio of assets only

c. An entire firm only

d. An individual asset, a portfolio of assets or for an entire firm

58. A 3 X 6 forward loan in a fixed interest rate market

a. Commences three months from the spot date and lasts for three months

b. Commences three months from the spot date and lasts for six months

c. Commences from the spot date and lasts for three months

d. Commences from the spot date and lasts for six months

59. An efficiency ratio in financial statement analysis indicates

a. How well a company uses its assets and liabilities internally

b. How well a company uses its cash flows to repay the debt

c. How well a company uses its cash flows to manage the inventory

d. How well a company uses its debt and equity

60. The interest rate on export bill discounted by banks is

a. Exactly as advised by RBI

b. A concessional interest rate

c. Purely at the discretion of the bank concerned

d. Advised by FEDAI

61. Foreign Investments in India under the FII scheme are

a. Freely repatriable

b. Repatriable subject to RBI permission

c. Repatriable subject to Government permission

d. Repatriable subject to quantitative limits prescribed

62. In case of ADR/GDR issues,

a. The custodian bank is outside India

b. They are listed on European or US Stock exchanges

c. The depository is in India

d. The custodian deposits the underlying shares with the company

63. Following is not considered as a credit support

a. Bank guarantee

b. Letter of credit

c. Bank co-acceptance

d. Indemnity of the borrower

64. Which of the following is true?

a. Technically, venture capital is a subset of private equity

b. Technically, private capital is a subset of venture equity

c. Private Equity & Venture Capital do not earn money through investments

d. Private Equity & Venture Capital earn money through advisory services

65. Following is not a source of foreign currency for lending to customers by banks in India

in foreign currency

a. NRE account balances

b. FCNR account balances

c. RFC account balances

d. EEFC account balances

Part B:

Answer any five. Each carries 5 marks.

[Unrelated answers & answers exceeding the brief will attract negative marks]

1. Explain in not exceeding 10 sentences, the essential ingredients of a treasury policy

manual of a corporate.

2. Describe the RBI guidelines on reconciliation of nostro accounts by a bank treasury

3. Compare the essential features of equity and foreign exchange market with specific

reference to structure, costing and other features. Confine your answer to maximum 15

lines.

4. What is Statutory Liquidity Ratio [SLR] applicable to banks and explain its significance

in not exceeding 15 lines.

5. Narrate atleast one financial event which affects capital market, foreign exchange market

and money market. Explain in which way each market moves and show correlation

between the markets.

6. You are the financial advisor of a medium sized industry with large, diversified exports.

Exports include machineries on long term credit due to market competition. The

company is dealing with one public sector and one foreign bank. While the PSU bank has

been liberal in extending credit limits, its exchange rates and product bouquet are not

attractive and the foreign bank has offered better terms by offering factoring and

forfeiting services. Explain the comparative features of factoring and forfeiting versus

the usual bill discounting by banks, in simple terms to them.

7. Explain the terms current yield and YTM and give examples to support your answers.

Part C:

Case Studies. Answer any one. Max 10 marks

1. Solid Business with Liquid Cash

Bharat Health products Ltd was incorporated twenty two years ago as a private limited company

undertaking manufacture of health care products. Its registered office was in the State of Punjab

with manufacturing units spread over several States across India. It became a public limited

company eight years ago with a very successful IPO. Its shares continued to be well traded with

a good margin over the IPO pricing. The steady growth both in the top line and bottom line

ensured this. Most of its sales were domestic spread over most States. The exports were mainly

through non – LC usance sales with 180 days credit. The domestic sales were achieved

exclusively through large number of distributors spread over metros and other major centres. The

company had a long standing relationship with most of the distributors and the payment position

was reasonably satisfactory. What was an area of concern was that the distributors were taking

their own time to make the payments and the agreed credit period of 90 days was rarely adhered

to. They also did not pay any interest for the delayed credit and sometimes for the usance period

itself. Bharat had branch offices in most places where these distributors w ere situated and one of

the tasks of a branch staff was to chase the distributors for payments of principal and interest, if

possible. A delay of average 15 days had become an accepted fact to live with.

The general practice of the distributors was to sell to retailers on different credit periods and to

collect on due date with interest. The payment to Bharat was made periodically, mostly treating

it as on account basis. Since there was no chance of Bharat switching over to any other

wholesalers, the distributors were not incentivised in any way for making prompt payment. They

normally issued cheques drawn on their accounts and sent by one of the normal couriers or

handed it to the local branch manager of Bharat for despatch to its HO. By keeping the branch

manager or his colleagues in good humour, the distributors ensured a small delay in sending the

cheques to the HO.

Bharat had a very supportive banking relation with three leading banks, including one from

private sector. The company was enhancing its capacity and widening its product range

constantly resulting it using the bank limits to the hilt. Growing business and regular servicing

the accounts kept the banks happy. The banks considered Bharat as a top class customer and it

was customary for most top officials of these banks to visit the company frequently to enhance

relationship. Some new banks also used to drop in offering their services, both fund based and

others.

Some of the financial indicators of the company as on or for the year ended 31.3.2012 were as

under:

Annual Sales Rs 2500 crores

Net profit after tax Rs 100 crores

Average manufacturing period 3 months

Average credit available on purchases 1 month

Average domestic sales credit extended 3 months

Average export credit period 6 months

Average period of realisation of domestic sales 4 months

Number of wholesale distributors 35

Bank cash credit – aggregate from all the banks Rs 300 crores

Bank post sales limits – aggregate from all the

banks

Rs 800 crores

Average interest rate on inventory & bills limits 12 & 11.5 % p

a respectively

Average overdue interest rate 14% pa

Average size of invoice for domestic sales Rs 5 crores

Average salary of the follow up staff at branches Rs 3 lacs p a

Recently a newly established private sector bank manager made a courtesy call on the finance

manager of Bharat and offered his bank’s CMS services. The salient features of his proposal

were:

His bank had branches in 28 of the 35 places where Bharat had distributors and

correspondent arrangement with other banks in the remaining 7 centres.

His bank was ready to diarise and follow up each bill with the distributors and collect

their cheques through the local bank branch or correspondent bank branch and pool the

funds into the account of Bharat.

His bank was ready to pick up cash from the distributors & if necessary from their retail

customers and credit to the account of Bharat if some of them were to pay by cash

regularly or occasionally.

His bank was ready to provide a statement of accounts showing the collections with

interest details.

His bank is also ready to handle the salary payment of the staff of Bharat in its different

branches.

While the bank manager was talking high of customer service & customer delight, he also

mentioned that for offering these services in turn, the bank naturally expected business

support and revenue from Bharat. He said the bank is flexible in structuring the revenue

model and gave a couple of options to choose viz.:

If Bharat shifted all its bank relations to his bank, he will offer the entire new service

free. His bank will support all credit requirements though its interest rate could be

marginally higher by quarter percent.

If Bharat agreed to maintain a privileged current account [during discussions, he

indicated that this meant a minimum average balance of Rs 25 crores], the bank will

agree a charge of one lac rupee per bill.

The bank also indicated that many corporates are finding the bank schedule very

attractive ultimately because it could reduce the staff deployment substantially and

reduce overdue interest at the banks.

The manager left a gist of his proposal with the FM and assured to revisit after a week.

While the proposal looked atrocious on the face of it, with an additional interest outflow

and charges per invoice, on a second thought that FM felt it is worth calculating the

overdue interest and salary payment due to delayed receipt. He decided to work out the

actual cost benefit analysis.

2. National Fashion Textiles Ltd [NFT] is a seventeen year old publicly quoted company with

an annual turnover of Rs 10000 crores with 60% of exports. Its yarn spinning mill is in

Kolhapur and the fabric unit is in Surat. Its ten rupee shares are quoted at around Rs 125. Its

present long debt: equity ratio is 1.7:1. The conservative promoters have effective control on

45% of the equity. NFT’s exports to Europe are double that to East Asia. While exports to

European countries are invoiced in Euro rest of it is invoiced in US dollar. NFT has an

expansion program on hand nearly doubling the capacity. This involves an outlay of funds to

the extent of Rs 4000 crores and the company is examining various options of raising funds.

The promoters have enough liquidity to retain their shareholding but would not like to ‘put

all their eggs into one basket’. If you are the financial advisor, what options you place before

them and why? Give numbers supporting your answer; presume any market related data.