Cash and Treasury Management Flashcards

A business operates a target cash balance policy using the Miller-Orr model. The minimum cash balance is set at £10,000, the return point is £25,000, and the upper limit is £55,000. Cash falls to £8,000. What action should the treasurer take?

Answer: Sell short-term investments worth £17,000 to restore cash to the return point

When cash falls below the minimum (£10,000 floor), the treasurer sells investments to top cash back up to the return point (£25,000). Amount needed = £25,000 − £8,000 = £17,000.

What is a 'netting' arrangement in the context of treasury management for a multinational group?

Answer: Offsetting intercompany payables and receivables so only net amounts are settled between group companies

Netting reduces the volume and cost of intercompany foreign currency transactions by offsetting amounts owed in each currency, with only the net balance actually transferred between entities.

A UK exporter will receive USD 500,000 in 3 months. The current spot rate is USD/GBP 1.25 (i.e., £1 = $1.25). A 3-month forward rate is $1.22 per pound. How much will the company receive in GBP if it uses the forward contract?

Answer: £409,836

Using the forward rate: GBP received = USD 500,000 ÷ 1.22 = £409,836 (approximately). The forward rate of $1.22/£ is more favourable than the spot rate of $1.25/£ (fewer dollars per pound = more pounds per dollar).

Which of the following is NOT a characteristic of commercial paper as a short-term financing instrument?

Answer: It is available to all sizes of businesses including small companies

Commercial paper is only available to large, well-rated companies with strong credit profiles. Small companies cannot issue commercial paper as the market requires investor confidence in the issuer's creditworthiness.

A company has net current assets of £800,000, of which 40% is inventory and 30% is receivables. It wants to reduce its working capital investment by 10% through better management. Which strategy best achieves this for the receivables component?

Answer: Implement stricter credit control and offer early payment discounts to prompt payers

Tightening credit control and incentivising early payment directly reduces receivables balances, decreasing the cash tied up in trade debtors. Extending credit would increase receivables, not reduce them.

Under the Baumol model of cash management, which variable does NOT affect the optimal transfer amount?

Answer: Current bank overdraft interest rate on the company's account

The Baumol model uses transaction costs, annual cash requirement, and opportunity cost (return foregone) to calculate optimal transfer size. The overdraft rate does not feature in the Baumol formula.