98th AIBB Professional Exam
Module A: Introduction to Treasury
Treasury Management in Financial Institutions (TMFI)
IBB Banking Professional Academy
Syllabus: i. Meaning and function of Integrated Treasury, ii. Nature of
Integration, iii. Money Market, iv. Foreign Exchange Market, v.
Relationship between Money Market and Foreign Exchange Market, vi.
Guidelines of Asset Liability Management.
Sazzad Hasan Sumon Ahamed
AIBB, CECM, MBA (Finance) DAIBB, CECM, MBA (Finance & Banking, DU)
IBB Banking Professional Academy
*** Write Short notes: a. Integrated Treasury b. Money Market c. FX Market d.
Macroeconomic Equilibrium e. Quasi-money
Integrated Treasury: Integrated treasury is a strategic approach used by banks to manage their finances
across different areas like domestic markets (within the country),
international markets (outside the country), and foreign exchange
markets (currency trading).
This strategy involves balancing the bank's assets and liabilities,
which basically means managing what they own (assets) and what
they owe (liabilities) to minimize risks and maximize profits.
By using integrated treasury, banks aim to allocate their money
smartly across these different markets. This helps them take
advantage of any chances to make profits through arbitrage, which is
essentially buying something in one place at a lower price and selling
it in another at a higher price.
Money Market: A marketplace where short-term borrowing and
lending of funds trader with short maturities usually a year or
less.
It is a place where governments, banks, and other large
institutions can quickly borrow or lend money for short periods.
For example, Treasury bills, certificates of deposit, commercial
paper, and short-term bonds.
FX Market: The foreign exchange (FX)
market, also known as the forex market, is
a global marketplace where currencies are
bought and sold. It's like a giant network
of banks, financial institutions,
corporations, governments, and individual
traders who exchange currencies.
The forex market operates 24 hours a day,
five days a week, because it involves
different time zones around the world. It
doesn’t have a physical location; instead, it
functions electronically, with transactions
occurring through computer networks.
Sazzad Hasan Sumon Ahamed
AIBB, CECM, MBA (Finance) DAIBB, CECM, MBA (Finance, DU)
IBB Banking Professional Academy
Overall, the forex market plays a crucial role in global trade and
finance, allowing for the exchange of currencies that facilitates
international business, travel, and investment.
Macroeconomic Equilibrium: Macroeconomic equilibrium in the
foreign exchange (forex) market refers to a situation where the
supply and demand for different currencies are balanced, leading to
a stable exchange rate.
Macroeconomic equilibrium in the forex market occurs when the
supply and demand for currencies reach a point where the exchange
rate remains relatively stable, reflecting the underlying economic
conditions of the countries involved.
Quasi-money: Quasi-money is like money, but not exactly. It
refers to certain assets or financial instruments that are not
exactly money, like cash, but they're very close to it because they
can be easily converted into cash or used as a substitute for
money. "Quasi-money" is a liability of banks. It includes all
deposits with the monetary system
that are not utilized directly as a means
of payment and that usually have a
lower rate of turnover.
Examples of quasi-money include
certain types of savings accounts,
short-term investments, or even some forms of securities that can
be readily traded for cash. Though not as liquid or widely
accepted as cash, quasi-money can be quickly converted or used
for transactions when needed.
*** What is Treasury Management? What are the functions of treasury management?
Treasury Management: Treasury management refers to the
planning, controlling and execution of financial activities within an
organization to effectively manage its financial resources, mitigate
risks, and optimize liquidity. It involves overseeing a company's cash
flow, investments, banking relationships, and financial assets to
ensure they are utilized efficiently and in line with the organization's
objectives.
Functions of treasury management: Functions of treasury
management includes:
Cash Management: Monitoring and managing the
company's cash flow to ensure there is enough liquidity to
meet financial obligations while maximizing the utilization of
available funds.
Sazzad Hasan Sumon Ahamed
AIBB, CECM, MBA (Finance) DAIBB, CECM, MBA (Finance, DU)
IBB Banking Professional Academy
Risk Management: Identifying, assessing, and mitigating various financial risks such as interest
rate risk, foreign exchange risk, credit risk, and market risk. Strategies may include hedging using
financial instruments or other risk mitigation techniques.
Working Capital Management: Optimizing the balance between current assets and current
liabilities to maintain sufficient liquidity for day-to-day operations without tying up excess capital.
Capital Raising and Funding: Evaluating different sources of funding and managing capital
structure, including debt and equity, to support the organization's growth and financial stability.
Investment Management: Making strategic investment decisions to generate returns on surplus
funds while considering risk tolerance and liquidity needs.
Banking and Relationship Management: Managing relationships with banks and financial
institutions to negotiate favorable terms for services, optimize cash management solutions, and
ensure efficient banking operations.
Compliance and Regulatory Management: Staying abreast of financial regulations, compliance
requirements, and accounting standards to ensure the organization's treasury activities adhere to
legal and regulatory frameworks.
Treasury Technology and Systems: Implementing and utilizing treasury management systems
(TMS) and technological tools to automate processes, enhance efficiency, and provide real-time
visibility into financial positions.
Effective treasury management is crucial for businesses of all sizes as it helps maintain financial stability,
supports strategic decision-making, and minimizes financial risks, contributing significantly to the overall
financial health and success of the organization.
***Describe about the nature and the benefits of integrated treasury.
Integrated Treasury: A comprehensive strategic approach taken for funding the balance sheet and
allocating capital across domestic, international, and foreign exchange markets is known as integrated
treasury. With this strategy, the bank is able to maximize asset-liability management and take advantage of
arbitrage opportunities.
Nature of Integrated Treasury: Integration of geography and infrastructure are the first step of integrated
treasury. The domestic treasury unit and the FX trading rooms are combined and housed in the same
location. The dealing/trading rooms that engage in the same trading activity are brought under the same
policies, hierarchy, technological platform, and accounting system under horizontal integration. With a
shared pool of money and contributions, all current and different trading and arbitrage activities are placed
under one control through vertical integration where transactions are linked electronically.
Independent Forex Role Independent Investment Role Integrated Role
Merchant Dealing Funds Management ALM
Corporate FX Trading Liquidity CRR/SLR SWAP Management
Management
Proprietary Trading SLR / Non-SLR Investments Overseas Borrowing Investment
Derivatives Dealing Securities Trading Arbitrage
Equities Trading Derivatives Dealing
Sazzad Hasan Sumon Ahamed
AIBB, CECM, MBA (Finance) DAIBB, CECM, MBA (Finance, DU)
IBB Banking Professional Academy
Benefits of Integrated Treasury: An integrated treasury system refers to the consolidation of various
treasury functions within an organization into a unified, centralized platform. This consolidation offers
several benefits:
Enhanced Efficiency: Integration streamlines processes by centralizing functions such as cash
management, risk management, liquidity management, and financial reporting. This leads to
increased efficiency in decision-making and reduces the duplication of efforts.
Improved Cash Management: Integrated treasury systems provide a comprehensive view of cash
positions and cash flow forecasts across the organization. This allows for better management of
cash, optimizing the allocation of funds, and minimizing idle cash.
Better Risk Management: Centralizing risk management functions enables a holistic view of
financial risks, including interest rate risk, foreign exchange risk, credit risk, etc. This facilitates
the implementation of strategies to mitigate these risks, ensuring better protection against market
fluctuations.
Cost Reduction: Through automation and consolidation, integrated treasury systems can reduce
operational costs associated with manual processes, reconciliation, and data entry errors. This leads
to savings in time and resources.
Compliance and Reporting: Integration helps in maintaining accurate and real-time data, which
aids in compliance with regulatory requirements. Additionally, it facilitates the generation of timely
and precise reports, which is crucial for internal management as well as regulatory bodies.
Optimized Investments: Integrated systems offer visibility into available funds and investment
opportunities. Treasurers can make informed decisions on where to invest surplus cash, considering
risk tolerance and maximizing returns.
Centralized Control: With all treasury functions consolidated, there's centralized control and
oversight, allowing for better monitoring, tracking, and managing of financial activities across the
organization.
Scalability and Adaptability: These systems are often scalable and adaptable to changing business
needs, allowing for seamless integration of new functionalities or adjustments to accommodate
growth or shifts in the market.
Strategic Decision Making: Access to comprehensive and real-time data empowers treasury
departments to make informed, strategic decisions that align with the company's overall financial
objectives.
Improved Relationships: Streamlined processes and accurate data contribute to better
relationships with banks, suppliers, and other financial partners due to increased transparency and
more efficient communication.
In summary, integrating treasury functions into a unified system offers numerous advantages by optimizing
processes, improving visibility, reducing costs, and enabling better decision-making and risk management
within an organization.
Sazzad Hasan Sumon Ahamed
AIBB, CECM, MBA (Finance) DAIBB, CECM, MBA (Finance, DU)
IBB Banking Professional Academy
***What are the common money market instruments? Describe briefly.
Money market instruments are short-term, highly liquid financial assets that serve as a means for entities
to manage their short-term cash needs. These instruments are typically low-risk and have maturities ranging
from overnight to one year. Some common money market instruments include:
Treasury Bills (T-Bills): Short-term
debt securities issued by governments
with maturities ranging from a few days
to one year. They are considered one of
the safest forms of investment because
they are backed by the government.
Commercial Paper: Unsecured, short-
term debt issued by corporations to raise
funds for short-term obligations. It
typically matures in less than 270 days
and is usually issued at a discount to face
value.
Certificates of Deposit (CDs): Time deposits offered by banks and financial institutions with fixed
maturity dates ranging from a few weeks to several years. Investors deposit funds for a specified
period in exchange for a fixed interest rate higher than regular savings accounts.
Repurchase Agreements (Repos): Short-term borrowing and lending agreements involving the
sale and repurchase of securities. In a repo transaction, one party sells securities to another party
with an agreement to repurchase them at a later date, often the next day, at a slightly higher price.
Banker's Acceptance (BA): Short-term debt instruments that arise from a bank's acceptance of
future payment obligations on behalf of its customers. BAs are commonly used in international
trade transactions.
Money Market Mutual Funds: Investment funds that invest in short-term, low-risk securities like
Treasury bills, commercial paper, and CDs. They allow individual investors to access a diversified
portfolio of money market instruments.
Treasury Notes: Debt securities issued by the government with maturities ranging from one to ten
years. Although longer-term than T-Bills, they are still considered part of the money market due to
their high liquidity.
These money market instruments plays a crucial role in providing liquidity, financing short-term needs, and
serving as investment options for entities seeking safety and short-term returns on their surplus funds.
Sazzad Hasan Sumon Ahamed
AIBB, CECM, MBA (Finance) DAIBB, CECM, MBA (Finance, DU)
IBB Banking Professional Academy
***Distinguish between the money market and FX market.
Distinguishing between the money market and the foreign exchange (FX) market are as follows:
Aspect Money Market FX Market (Foreign Exchange
Market)
Purpose Deals with short-term borrowing Involves the buying and selling of
currencies
Participants Banks, financial institutions, Banks, corporations, governments,
corporations, governments, central institutional investors
banks
Instruments Treasury bills, commercial paper, Spot transactions, forward contracts,
certificates of deposit, repurchase futures, options, swaps
agreements (repos)
Duration Short-term (up to one year) Short-term and long-term
Risk Low risk Subject to various risks, including
exchange rate, interest rate, political, and
economic risks
Function Provides liquidity and short-term Facilitates currency conversion and
funding for participants determines exchange rates between
currencies.
Market Size Generally smaller compared to other One of the largest and most liquid
financial markets financial markets globally
Regulatory Regulated by central banks and Regulated by government bodies, central
Oversight financial regulators banks, and international organizations
The money market primarily deals with short-term borrowing and lending, providing liquidity for short
durations through various instruments like Treasury bills, commercial paper, etc. Conversely, the FX
market focuses on the buying and selling of currencies, determining exchange rates, and facilitating
currency conversion among participants across the globe.
***What are the advantages and disadvantages of asset liability management?
Asset Liability Management (ALM) is a financial strategy used by institutions, particularly banks and other
financial firms, to manage their assets and liabilities in a way that minimizes risk and maximizes returns.
Here are some advantages and disadvantages associated with ALM:
Advantages of asset liability management:
Risk Management: ALM helps in identifying, measuring, and managing various risks, including
interest rate risk, liquidity risk, credit risk, and market risk. By aligning assets and liabilities
properly, institutions can mitigate these risks and ensure they have adequate funds to meet
obligations.
Improved Profitability: Effective ALM can lead to better profitability by optimizing the balance
between returns earned on assets and the costs associated with liabilities. It helps in maximizing
the spread between asset yields and liability costs.
Sazzad Hasan Sumon Ahamed
AIBB, CECM, MBA (Finance) DAIBB, CECM, MBA (Finance, DU)
IBB Banking Professional Academy
Liquidity Management: ALM enables organizations to maintain an appropriate level of liquidity
to meet short-term obligations without compromising long-term profitability. It ensures that there
are enough liquid assets to cover unexpected cash outflows.
Regulatory Compliance: ALM practices assist institutions in complying with regulatory
requirements by maintaining appropriate levels of capital, liquidity, and risk exposure. It helps in
meeting regulatory standards and guidelines.
Disadvantages of asset liability management:
Complexity: Implementing an effective ALM framework can be complex and resource-intensive.
It requires sophisticated models, data analysis, and continuous monitoring, which might be
challenging for smaller institutions with limited resources.
Assumptions and Limitations: ALM relies on certain assumptions and forecasts related to interest
rates, market conditions, and behavioral patterns of assets and liabilities. If these assumptions are
incorrect or the models used are flawed, it can lead to inaccurate decision-making and increased
risk exposure.
Interest Rate Risk: While ALM aims to manage interest rate risk, it cannot completely eliminate
it. Sudden or unexpected changes in interest rates can still affect the institution's profitability and
financial stability despite ALM strategies in place.
Market Volatility: Economic and market uncertainties can impact the effectiveness of ALM
strategies. Rapid and unforeseen changes in market conditions can challenge the assumptions made
in ALM models, leading to difficulties in managing assets and liabilities effectively.
In conclusion, while Asset Liability Management offers numerous benefits in terms of risk mitigation,
improved profitability, and regulatory compliance, it also comes with challenges related to complexity,
reliance on assumptions, and vulnerability to market dynamics. Institutions need to carefully assess these
pros and cons to implement ALM strategies that suit their specific financial situations and objectives.
***What are the major objectives of macroeconomics? Write a brief definition of each of these
objectives. Explain carefully why each objective is important.
Macroeconomics focuses on studying the behavior, performance, structure, and decision-making of an
economy as a whole. The major objectives of macroeconomics are:
Economic Growth: Economic growth refers to the increase in an economy's production of goods
and services over time. This objective is crucial because sustained economic growth leads to higher
standards of living, increased employment opportunities, and the potential for enhanced prosperity.
It enables a nation to produce more and improve the overall well-being of its citizens by providing
better access to goods and services.
Price Stability (Low Inflation): Price stability aims to keep inflation in check, ensuring that the
general price level of goods and services remains relatively stable over time. Moderate inflation
can be healthy for an economy, but excessive inflation reduce purchasing power, hampers
economic decision-making, and can lead to economic instability. Controlling inflation is important
as it helps maintain the value of money, encourages investment, and fosters confidence among
consumers and businesses.
Sazzad Hasan Sumon Ahamed
AIBB, CECM, MBA (Finance) DAIBB, CECM, MBA (Finance, DU)
IBB Banking Professional Academy
Full Employment: Full employment exists when all individuals who are willing and able to work
can find employment at prevailing wage rates. Achieving full employment is essential as it
enhances social stability, reduces poverty, and maximizes the productive capacity of the economy.
It leads to higher incomes for individuals and a more efficient allocation of resources, contributing
to overall economic growth and prosperity.
Balance of Payments Stability: A balance of payments equilibrium occurs when a country's
exports equal its imports, along with other financial inflows and outflows. Maintaining a stable
balance of payments is crucial for ensuring a nation's long-term economic health. Persistent deficits
or surpluses can create vulnerabilities, affecting exchange rates, national debt levels, and the overall
stability of the economy. Balancing payments helps prevent excessive debt accumulation,
safeguards currency values, and supports sustainable economic growth.
Income Distribution and Equity: This objective concerns the fair distribution of income and
wealth among different segments of society. While some level of income inequality may exist in
any economy, excessive inequality can lead to social tensions, reduced social mobility, and
hindered economic growth. Striving for a more equitable distribution of income supports social
cohesion, enhances overall welfare, and can contribute to a more sustainable and inclusive
economy.
Each of these objectives is vital for the stability, growth, and overall well-being of an economy. They are
interconnected and require careful policy considerations and adjustments to achieve a balanced and
sustainable economic environment. Governments, policymakers, and central banks often use various tools
and policies to address these objectives and maintain a healthy macroeconomic framework.
*** If the CPI were 300 in 2020 and 315 in 2021, what would the inflation rate be for 2021?
To calculate the inflation rate between 2020 and 2021 using the Consumer Price Index (CPI), you can use
the following formula:
Inflation Rate= {(CPI in 2021 - CPI in 2020)/CPI in 2020} × 100
Given that the CPI was 300 in 2020 and 315 in 2021:
Inflation Rate = {(315− 300) / 300} ×100
= (15/300) ×100
= 0.05 ×100
= 5%
Therefore, the inflation rate for 2021, based on the given CPI values, is 5%.
*** What is balance of payment account? Write a brief note on BoP account.
Balance of payment account: The Balance of Payments (BoP) account is a systematic record of all
economic transactions between residents of one country and the rest of the world over a specified period,
typically a year. It is a comprehensive accounting system that tracks both the inflows and outflows of goods,
services, investments, and financial capital between a country and other nations.
Sazzad Hasan Sumon Ahamed
AIBB, CECM, MBA (Finance) DAIBB, CECM, MBA (Finance, DU)
IBB Banking Professional Academy
The BoP account is divided into two main components:
Current Account: This section records the transactions related to the trade of goods and services
(visible trade), income flows such as wages, interest, and dividends (invisible trade), as well as
unilateral transfers like foreign aid and remittances. It reflects a nation's net income from
international trade.
Capital Account and Financial Account: The Capital Account covers transfers of non-financial
assets, while the Financial Account documents international investments and financial flows. It
includes foreign direct investment (FDI), portfolio investment, changes in reserve assets, and other
financial derivatives. The balance of the financial and capital accounts combined is known as the
overall balance.
A BoP surplus occurs when a country receives more money from exporting goods and services, earning
income, and receiving transfers than it spends on importing, paying income abroad, and transferring money
out. Conversely, a deficit arises when a country spends more on imports, income payments, and transfers
than it earns from exports and transfers received.
Governments, policymakers, economists, and businesses closely monitor the Balance of Payments as it
provides valuable insights into a country's economic health, international trade competitiveness, and
financial stability. A sustained deficit or surplus in the BoP can impact a nation's currency value, interest
rates, and overall economic policies. It serves as a crucial tool for assessing a country's external economic
relationships and financial health in the global context.
*** Describe the types of government transactions.
Government transactions encompass various activities involving the use of public funds, resources, or
authority to achieve specific objectives or address societal needs. These transactions can be broadly
categorized into several types:
Expenditure Transactions:
Operating Expenses: These cover day-to-day costs, such as salaries, administrative expenses, maintenance,
and other regular expenditures.
Capital Expenses: Involves investments in infrastructure, buildings, equipment, and other long-
term assets that are expected to provide benefits over an extended period.
Transfer Payments: Funds transferred from the government to individuals, groups, or other levels
of government, often in the form of grants, subsidies, or welfare benefits.
Revenue Transactions:
Taxation: Income tax, sales tax, property tax, corporate tax, and other levies imposed by the
government to generate revenue.
Fees and Charges: Charges for specific services provided by the government, such as licenses,
permits, tolls, or user fees for public amenities.
Grants and Aid: Receiving funds from other governments or international organizations for
specific purposes like development projects or humanitarian aid.
Sazzad Hasan Sumon Ahamed
AIBB, CECM, MBA (Finance) DAIBB, CECM, MBA (Finance, DU)
IBB Banking Professional Academy
Borrowing and Debt Transactions:
Government Bonds: Issuing bonds or securities to raise capital, often for long-term projects or to
cover budget deficits.
Loans: Borrowing money from domestic or international sources, including financial institutions
or other governments, to fund various initiatives.
Debt Repayment: Transactions related to repaying the principal amount and interest accrued on
loans or bonds.
Regulatory Transactions:
Regulation and Oversight: Activities related to the creation, implementation, and enforcement of
laws, regulations, and policies governing various sectors, such as finance, healthcare, environment,
etc.
Investment Transactions:
Investing Public Funds: Putting government reserves or surplus funds into various financial
instruments or assets to generate returns or facilitate economic growth.
International Transactions:
Foreign Aid: Providing financial assistance or resources to other countries for development,
disaster relief, or geopolitical reasons.
Trade Agreements: Engaging in international trade agreements, negotiations, and transactions for
import/export purposes.
Social Transactions:
Social Programs: Initiatives aimed at providing social welfare, such as education, healthcare,
housing, and other social services.
These transactions collectively form the financial and operational backbone of a government, enabling it to
manage resources, fulfill obligations, and provide services to its citizens while contributing to economic
development and societal well-being.
Sazzad Hasan Sumon Ahamed
AIBB, CECM, MBA (Finance) DAIBB, CECM, MBA (Finance, DU)