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ans to the tutorial questions - Unit 1 Treasury Functions...

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Unit 1 – Treasury Functions and Risk 1. What are the main functions of treasury management? Ans: Financial Planning and Reporting, funding management, risk management, credit management, debt portfolio management, cash management or liquidity management, exposure management, corporate finance, internal and external relationship management. 2. What are the main treasury functions in an international bank? Ans: Dealing, settlement and control 3. Explain the following types of risks (you should be able to explain some of the measures taken by financial institutions to manage these risks): a. Credit or counterparty risk is the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. This will result in a loss to the lender or a significant reduction in the margin on which the transaction was made. However credit risk can be managed by having acceptable credit or exposure limits, acceptable account limits, review published accounts paying attention to capital accounts and gearing ratios, maintain a policy on internal authority for approval of facilities, senior management and board approval where appropriate and gearing ratios and considering the size and reputation of the counterparty. b. Pre-settlement risk and settlement risk: Pre-settlement exists when a party enters in a contract and will settle the amount at a forward date. However in the case that a loss occurs, it will occur because the counterparty defaults before the settlement date. Settlement risk refers to when the counterparty fail to deliver during the settlement period or the counterparty faces technical difficulty to pay even if the counterparty is able to perform. Pre-settlement and settlement risk can be managed by setting credit limits. c. Maturity mis-match risk: is the difference in maturity daters of assets and liabilities of the bank. Therefore if not managed it give rises to liquidity and interest rate risks. When assets and liabilities are mis-matched, treasury management will seek to raise sufficient funds in order to avoid liquidity problems. d. Operational risk: refers to the risk of loss resulting from the inadequate or failed internal processes, people, and systems or from external events. It includes legal risks, but excludes reputational and strategic risks. This can be managed
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through having proper systems and procedures, conducting proper audits both internal and external, having a disaster recovery and contingency plan in place, setting proper authority limits for staff, having back-up systems and data stored off-shore. e. Strategic risk: is the risk of loss resulting from the failure of implementing appropriate plan management for running the business. Strategic risk can be managed by ensuring that there are appropriate and revised plans that are implemented in the organization.
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