Cash & Treasury Management Flashcards
6 cards from real AAT L4 practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Cash & Treasury Management flashcards as text
A cash pooling arrangement in a group context:
Answer: Allows surplus cash from one entity to fund deficits in another within the group, reducing overall external borrowing and optimising interest
Cash pooling (notional or physical) allows group treasury to offset surplus cash balances against deficit balances — reducing gross borrowing, improving interest received on surpluses, and reducing interest paid on overdrafts.
The Bank of England base rate is relevant to treasury management because:
Answer: It is the benchmark for many variable rate loans, deposits, and financial instruments — changes in base rate directly affect borrowing costs and deposit returns
The Bank of England base rate is the benchmark rate against which many floating rate instruments are priced (e.g., SONIA, which replaced LIBOR). Changes in the base rate directly affect the cost of floating rate debt and the return on deposits.
Which of the following is a key risk in treasury operations?
Answer: Counterparty risk — the risk that a bank, financial counterparty, or deposit-taker defaults on its obligation
Counterparty risk in treasury is the risk that the other party to a financial instrument or deposit (e.g., a bank holding funds, a swap counterparty) defaults — managed through counterparty limits, diversification, and credit ratings.
A money market fund (MMF) is suitable for investing short-term surplus cash because:
Answer: It provides diversified, highly liquid investment in short-term, high-quality instruments with immediate access to funds
MMFs invest in diversified portfolios of short-term, high-quality instruments (government securities, bank deposits, commercial paper) — providing safety, liquidity (daily access), and a return above bank deposits for short-term cash parking.
The treasury function should operate within board-approved limits for which of the following?
Answer: Counterparty exposure limits, maximum permitted debt levels, permissible hedging instruments, and currency exposure limits
The board approves a treasury policy setting maximum limits: how much can be placed with any single counterparty, maximum debt gearing levels, what hedging instruments are permitted, and maximum open currency exposure — ensuring treasury operates within controlled parameters.
When a company has a surplus of foreign currency received from exports, it can manage this by:
Answer: Converting to sterling using a spot transaction, using the funds to pay foreign currency suppliers (natural hedge), or entering a forward contract
Options include: converting to sterling at spot rate; retaining to pay matching foreign currency costs (natural hedge); or using a forward contract to lock in the conversion rate — the choice depends on the timing of matching outflows and risk appetite.