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.
b.
c.
d.

Cheque Tracking System

Cheque Truncation System
Cheque Transfer System
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.
b.
c.
d.

Banks for safekeeping of the valuables

Banks for taking possession of securities for loans
NBFCs as document safety services
Banks for collection of receivables

5. Treasury Policy Manual should necessarily contain the following:

a.
b.
c.
d.

Ceiling on the corporate risk a treasury can take

Guidelines for dealing with regulators
Various limits governing the activities of the treasury
Working hours of the treasury

6. Finacle software has been developed by

a.
b.
c.
d.

Infosys for banks

Infosys for bank and other treasuries
Oracle on its taking over another company
SAP as an enterprisewide solution

7. A treasury software should necessarily ensure that

a.
b.
c.
d.

The mid office functions are separate from back office

The front office functions are separate from back office
The front office functions are separate from mid office
The mid office functions are necessarily on a stand alone basis

8. A forward purchase contract is needed by

a.
b.
c.
d.

An exporter
An importer
Anyone who wants to take a position in forex
Bank

9. A forward contract once booked

a.
b.
c.
d.

Cannot be cancelled
Can be cancelled at the ruling rate
Binds the customer but not the bank
Has to be reported to RBI only for large values

10. Cancellation of forward sale contract is

a.
b.
c.
d.

Same as booking forward purchase contract

A loss making event to the customer
Subject to RBI permission
Generally done by importers

11. Volatility of Indian rupee against US dollar

a.
b.
c.
d.

Necessarily results in volatility of Indian rupee against all other currencies

Necessarily results in volatility of Indian rupee against Euro
Necessarily results in stability of Indian rupee against Euro
Does not necessarily result in volatility of Indian rupee against all other currencies

12. Non deliverable forward markets

a.
b.
c.
d.

Do not exist for Indian Rupee

Do not exist for Indian Rupee in India
Are illegal
Trade actively in US dollar

13. In a zero coupon bond

a.
b.
c.
d.

There is no yield
The discount represents the interest earned
The payout is in bullet on maturity
The price is higher than that for deep discount bond

14. International Monetary Fund is accountable to

a.
b.
c.
d.

World Bank i.e. IBRD

United Nations Organization
None
Governments of the member organization

15. Following is an example of one currency being used in more than one country
a.
b.
c.
d.

Only euro
Euro and US dollar
Indian Rupee
Only US Dollar

16. Following is not an example of raising debt globally

a.
b.
c.
d.

ADR
ECB
Buyers Credit
Loan syndications

17. In foreign exchange markets, Indian Rupee is

a.
b.
c.
d.

Traded globally because it is convertible

Traded only in India
Least known
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.
b.
c.
d.

Number of years until maturity

Double the number of years until maturity
Half the number of years until maturity
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.
b.
c.
d.

Duration
VaR
PV & FV
Price sensitivity

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

They are to be included in that days position

They are to be included in next days position
It has to be reported to RBI
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.
b.
c.
d.

Head office balance

Fixed deposits of customers
Loans to customers
Fixed assets held

25. A corporate which raises GDR has

a.
b.
c.
d.

Exchange risk to the extent of GDR raised

Exchange risk to the extent of interest payment on GDR
Exchange risk to the extent of dividend payment on GDR
No exchange risk on account of GDR raised

26. Treasury bill is not

a.
b.
c.
d.

A government debt obligation with maturity of one year or less

A part of money market
Always issued at discount
An interest bearing security

27. Commercial paper is

a.
b.
c.
d.

In the form of bill of exchange

In the form of a promissory note
An instrument issued by banks
Issued only by corporates

28. Certificates of deposits are issued

a.
b.
c.
d.

Only by banks
Only to corporates
By Banks & FIs
As short term instruments

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

a.
b.
c.
d.

Packing credit
Bill finance
Factoring
Forfeiting

30. The concept of avalising is similar to

a.
b.
c.
d.

Bill co-acceptance
Packing credit advance
Factoring
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.
b.
c.
d.

Governed by regulations issued by RBI

Governed by regulations issued by SEBI
Governed by regulations issued by Ministry of Corporate Affairs
Not guided by any formal guidelines

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

a.
b.
c.
d.

Issuer
Investor
Regulator
Debtor

34. Portfolio management service

a.
b.
c.
d.

Is offered to corporates as a cash management service

Is offered to investors as a risk mitigation instrument
Is a specialized investment vehicle
Enables investor guaranteed higher return

35. A cheque is an example of

a.
b.
c.
d.

Promissory note
Bill of exchange
Guaranteed payment
Deferred payment

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

a.
b.
c.
d.

The bank
The seller
The buyer
Respective parties

37. Export Credit Guarantee Corporation [ECGC] Ltd

a.
b.
c.
d.

Is not an insurance company

Extends guarantees to banks
Finances export transactions
Is a publicly held company

38. Clearing Corporation of India Ltd [CCIL] extends the following service
a.
b.
c.
d.

Clearing the cargo at the ports & airports

Clearing and settlement in interbank payments
Dmat service
Clearing cheques earlier handled by banks clearing houses

39. What is the yield on a security?

a.
b.
c.
d.

It is the interest rate mentioned in the security

Coupon rate that is assured by the issuer
Implied interest over its life given its current market price
The benefit that is received by the holder

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

a.
b.
c.
d.

The coupon and yield are same

It is transferable
It is a negotiable instrument
It is a money market instrument

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

a.
b.
c.
d.

Certificate of deposit
Commercial paper
Treasury bill
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.
b.
c.
d.

Results in recovery of export bill

Means payment of an export bill
Removes the foreign exchange element
Is done as per RBI guidelines

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

Bank of Canada
Bank of England
Bank of Japan
Bank of India

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

a.
b.
c.
d.

Is a centralized market with RBI as the central counter party

Does not have a central counter party
Internationally has CLS as provider of central settlement services compulsorily
Is a retail market among banks

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

a.
b.
c.
d.

Foreign exchange bank

Authorised dealer
Authorised person
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.
b.
c.
d.

The records maintained supporting the trading activities of a bank

Commodities traded by a bank
Audit functions of a bank
The treasury of a bank

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

The Board of Directors

The Chairman of the bank
The ALCO committee
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.
b.
c.
d.

Long outstanding nostro credit

Long outstanding mirror credit
Long outstanding nostro debit
Long outstanding mirror debit

51. Following organization does not belong to the World Bank group
a.
b.
c.
d.

International Monetary Fund

International Bank for Reconstruction and Development
The International Development Association
International Financial Corporation

52. Which of the following agency of the World Bank group assists private sector
enterprises?
a.
b.
c.
d.

IMF
IDA
IFC
IBRD

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

a.
b.
c.
d.

Is advised by RBI
Should conform to the guidelines prescribed by RBI
Is a pure commercial decision taken by the bank
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.
b.
c.
d.

This means $ is at discount

This means future of rupee is uncertain
This means future of rupee is unclear
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.
b.
c.
d.

10%
5%
3%
6%

56. Huge foreign investments are expected to be received from Japan and China as per
present market reports. This will
a.
b.
c.
d.

Strengthen Indian rupee

Weaken Indian rupee
Increase inflation
Flow into stock market will increase

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

a.
b.
c.
d.

An individual asset only

A portfolio of assets only
An entire firm only
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.
b.
c.
d.

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

59. An efficiency ratio in financial statement analysis indicates

a.
b.
c.
d.

How well a company uses its assets and liabilities internally

How well a company uses its cash flows to repay the debt
How well a company uses its cash flows to manage the inventory
How well a company uses its debt and equity

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

a.
b.
c.
d.

Exactly as advised by RBI

A concessional interest rate
Purely at the discretion of the bank concerned
Advised by FEDAI

61. Foreign Investments in India under the FII scheme are

a.
b.
c.
d.

Freely repatriable
Repatriable subject to RBI permission
Repatriable subject to Government permission
Repatriable subject to quantitative limits prescribed

62. In case of ADR/GDR issues,

a.
b.
c.
d.

The custodian bank is outside India

They are listed on European or US Stock exchanges
The depository is in India
The custodian deposits the underlying shares with the company

63. Following is not considered as a credit support

a.
b.
c.
d.

Bank guarantee
Letter of credit
Bank co-acceptance
Indemnity of the borrower

64. Which of the following is true?

a.
b.
c.
d.

Technically, venture capital is a subset of private equity

Technically, private capital is a subset of venture equity
Private Equity & Venture Capital do not earn money through investments
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.
b.
c.
d.

NRE account balances

FCNR account balances
RFC account balances
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
Net profit after tax
Average manufacturing period
Average credit available on purchases
Average domestic sales credit extended
Average export credit period
Average period of realisation of domestic sales
Number of wholesale distributors
Bank cash credit aggregate from all the banks
Bank post sales limits aggregate from all the
banks
Average interest rate on inventory & bills limits
Average overdue interest rate
Average size of invoice for domestic sales
Average salary of the follow up staff at branches

Rs 2500 crores
Rs 100 crores
3 months
1 month
3 months
6 months
4 months
35
Rs 300 crores
Rs 800 crores
12 & 11.5 % p
a respectively
14% pa
Rs 5 crores
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 banks 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. NFTs 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.