TREASURY MANAGEMENT

Treasury Management



Treasury Management

Answer 1

Series

Present Value

Weight (%)

Duration

Weighted Duration

1

200000

8.274720728

0.0000

0

2

187500

7.757550683

0.1667

1.292925114

3

717500

29.68556061

0.4167

12.36898359

4

616000

25.48613984

0.8333

21.23844987

5

696000

28.79602813

1.0000

28.79602813

 

2,417,000

100

 

63.69638671

The task that was needed in this exercise was to increase the investment from $2.5 million of the total investment. The weighted duration will also face an increase of one year which was required in the exercise. This particular option required the need of the tool called solver to calculate the values in it. The access to solver is not there but there is one thing that can be easily said with the help of a hint assignment file. The basic thing is that the present value of the bond for each year will increase considerably in order to increase the total investment by $2.5 million. In the case of duration, the calculation will also take in such a way that the weighted duration will reach the new value of 64.69638671. The present value of the bonds will also show new amount that is going to be $4917000. This amount will be reached when there is going to be a change in the individual values of the bond. Security's Bonds Portfolio will certainly have a new set of portfolio of securities for its investment policy. This will turn out to be positive factors for the investors because the duration will also increase from one year and the pool for generating additional amount on the investment of the bonds will even considerably for the investors. Therefore, this is going to be the overall investment policy of the Security Bonds Ltd in relation to its existing portfolio plus the additional investment of $ 2.5 million.

Answer 2

The bank's cash market risk will comprise of the additional risk that is going to be generated from the period between October and March. Since, on October 28, 2010, the treasury operations decided to hedge the bank's interest cost on an amount of 10 million and on the other hand, the bank can lend the same amount to the borrower. The only factor that would matter in this case is the interest rate which will be charged by the bank. The interest rate would be 5.79%. However, the projection of the bank's bill future rate would be 6.36%. It means that the bank will carry a risk of around 0.57%. The risk is not very high but its existence cannot be ruled out at any cost. Therefore, under such situation bank can put the option to hedge its borrowing cost. Bank can afford to take some risk under the present conditions. The buying option for the Bank will not have much value under such situations. It might not have a lot of risk but the scope for generating revenues is not going to be very high. Hedging carries a price risk management process. It can be defined as, the establishment of a position in the future that has a market which is equal because of a certain position in the cash market that carries an objective for transferring cash price ...