Chapter 19: Introduction to Treasury Management (CAIIB – Paper 2)
1. What is the primary objective of treasury management in banks?
A. Managing customer relationships
B. Conducting marketing campaigns
C. Optimizing liquidity, funding, and risk management
D. Hiring and training staff
Treasury management ensures that a bank has sufficient liquidity, manages funding requirements, and controls financial risks effectively.
2. Which of the following is a key function of an integrated treasury?
A. Asset-liability management
B. Customer account opening
C. Branch audits
D. Recruitment planning
An integrated treasury manages assets and liabilities, monitors liquidity, and handles market and interest rate risks.
3. What does an integrated treasury typically handle?
A. Only foreign exchange operations
B. Only cash collection
C. Only branch operations
D. Liquidity management, investment, and risk management
Integrated treasury functions encompass liquidity planning, investment of surplus funds, and managing interest rate, credit, and market risks.
4. Which statement best defines treasury management?
A. Managing only the human resources of a bank
B. Managing funds, liquidity, and financial risks of an organization
C. Handling marketing and sales activities
D. Supervising day-to-day branch operations
Treasury management is concerned with ensuring that the organization has optimal liquidity, funding, and risk mitigation strategies in place.
5. Integrated treasury helps a bank to:
A. Combine funding, investment, and risk management under one function
B. Open new customer accounts
C. Conduct branch inspections
D. Handle HR payroll only
By integrating funding, investment, and risk management, a bank can manage its overall liquidity and market risks more efficiently.
6. What is the primary driver of globalisation in banking?
A. Local branch expansion only
B. Customer loyalty programs
C. Cross-border trade, investment flows, and technology integration
D. Recruitment of foreign staff
Globalisation in banking is driven by the growth of cross-border trade, international investments, and the use of technology to manage financial operations worldwide.
7. Which of the following best describes financial globalisation?
A. Only opening international branches
B. Integration of financial markets across countries
C. Limiting capital flows to domestic markets
D. Conducting internal audits in multiple currencies
Financial globalisation refers to the process where financial markets in different countries become interlinked, allowing capital, investment, and risk management across borders.
8. How has technology influenced the globalisation of treasury functions?
A. By reducing the need for any risk management
B. By eliminating foreign exchange operations
C. By restricting cross-border transactions
D. By enabling real-time global cash and risk management
Technology allows banks to monitor and manage cash flows, liquidity, and financial risks globally in real-time, facilitating seamless international operations.
9. Which of the following is a benefit of globalisation for a bank's treasury?
A. Diversification of investment and funding sources
B. Limiting operations to one domestic currency
C. Reducing technological adoption
D. Focusing only on short-term domestic deposits
Globalisation allows banks to access international funding, diversify investments, manage currency risks, and optimize liquidity across borders.
10. What role does globalisation play in risk management for treasuries?
A. It eliminates all financial risks
B. It introduces and spreads currency, interest rate, and market risks internationally
C. It only affects HR-related risks
D. It prevents liquidity planning
Globalisation exposes treasuries to international financial risks, requiring advanced risk management strategies to mitigate currency, interest rate, and market risks.
11. How has the role of treasury evolved in modern banks?
A. Only to handle customer deposits
B. From a support function to a profit-generating centre
C. Only to manage HR and staffing
D. Exclusively to audit branches
Modern treasury functions not only manage liquidity and risk but also actively generate profits through investments, trading, and optimal asset-liability management.
12. Which of the following activities helps treasury operate as a profit centre?
A. Only managing internal audits
B. Branch marketing and customer surveys
C. Human resource allocation
D. Trading in money and forex markets and optimizing investment portfolios
Treasury contributes to profits by actively managing investments, trading in money and forex markets, and optimizing the bank’s overall portfolio.
13. What distinguishes a treasury profit centre from a traditional support treasury function?
A. Focus only on compliance
B. Performing only internal audits
C. Actively generating revenue while managing risk
D. Limiting activities to liquidity reporting
A profit-centre treasury not only ensures liquidity and compliance but also strategically invests and trades to enhance the bank’s profitability.
14. Which performance measure is commonly used to assess a treasury profit centre?
A. Return on Treasury Capital (ROTC) or Profit Contribution
B. Number of branches audited
C. Customer complaint resolution time
D. Employee satisfaction score only
Performance of a treasury profit centre is measured by the profits it generates relative to its capital and its effectiveness in managing risks.
15. How does integrating treasury with risk management enhance profitability?
A. By ignoring market risks entirely
B. By optimizing investment and funding decisions while controlling risk exposure
C. By limiting international operations
D. By focusing solely on internal accounting procedures
Integrating risk management allows treasury to take calculated positions in markets, optimizing returns without exposing the bank to unacceptable risks.
16. Which of the following best describes the organisational structure of a modern bank treasury?
A. Only branch-level management
B. Independent departments with no central coordination
C. Centralised treasury with front, middle, and back-office functions
D. HR-managed operational units
Modern bank treasuries are usually centralised and divided into front office (trading, investment), middle office (risk management, compliance), and back office (settlement, accounting) functions.
17. What is the primary function of the front office in a bank treasury?
A. Settling transactions and bookkeeping
B. Trading, investment, and customer deal execution
C. Compliance monitoring
D. HR and payroll management
The front office executes trades, manages investments, and interacts with clients to capture business opportunities for the treasury.
18. Which function is primarily handled by the middle office in treasury?
A. Frontline customer acquisition
B. Branch auditing
C. Payroll processing
D. Risk management, control, and compliance
The middle office monitors and controls risk exposures, ensures compliance with regulations, and supports front-office decision-making.
19. The back office in a treasury organisation is responsible for:
A. Settlement of trades, accounting, and record-keeping
B. Trading and investment decisions
C. Customer relationship management
D. Market research and policy formulation
The back office ensures that all trades are accurately settled, recorded, and reconciled, maintaining operational integrity of treasury functions.
20. Why is centralisation of treasury functions important in banks?
A. To decentralise risk and liquidity decisions
B. To limit investment opportunities
C. To optimise liquidity, consolidate risk management, and standardise operations
D. To reduce customer interaction at branches
Centralisation allows banks to manage liquidity efficiently, monitor risks consistently, and standardise treasury processes across all branches and business units.
21. Which of the following best describes the funding function of treasury?
A. Managing only customer accounts
B. Raising and managing funds to meet liquidity and operational requirements
C. Conducting marketing campaigns
D. Branch recruitment
Funding involves sourcing money from deposits, interbank markets, and capital markets to meet the bank's operational and liquidity requirements efficiently.
22. Treasury investment function primarily focuses on:
A. Customer service operations
B. Branch auditing
C. Investing surplus funds in money market, government securities, and bonds
D. Employee payroll
Treasury invests surplus funds to earn returns while managing liquidity and ensuring regulatory compliance, using instruments like government securities, bonds, and money market instruments.
23. Which of the following is a key risk managed by treasury?
A. Interest rate, market, liquidity, and currency risk
B. HR recruitment risk
C. Customer complaint risk
D. Branch audit risk only
Treasury manages financial risks including interest rate fluctuations, market volatility, liquidity shortages, and currency exchange movements.
24. A bank treasury holds ₹50 lakh in short-term government securities yielding 6% per annum. What is the approximate annual income?
A. ₹2.5 lakh
B. ₹3 lakh
C. ₹4 lakh
D. ₹5 lakh
Annual income = 50,00,000 × 6% = ₹3,00,000. Treasury invests to earn returns while keeping liquidity needs in mind.
25. How does a treasury manage currency risk in foreign exchange operations?
A. By avoiding all forex transactions
B. By investing only in domestic bonds
C. By ignoring market fluctuations
D. By using hedging instruments like forwards, futures, and swaps
Treasury mitigates currency risk through derivatives such as forwards, futures, options, and swaps to protect against adverse exchange rate movements.
26. Scenario: A treasury has surplus funds for 3 months. Which instrument is most suitable for short-term investment?
A. 10-year government bonds
B. Treasury bills or money market instruments
C. Long-term corporate bonds
D. Equity shares
For short-term investment, treasury uses liquid instruments like T-bills or money market instruments to ensure quick access to funds and stable returns.
27. Which risk arises when a treasury’s funding costs increase unexpectedly?
A. Liquidity risk
B. Credit risk
C. Operational risk
D. HR risk
Liquidity risk arises when the treasury cannot meet funding requirements at reasonable costs due to market fluctuations or unexpected cash outflows.
28. Scenario: A treasury invests $1 million in a foreign currency bond. The home currency strengthens against the foreign currency. What is the impact?
A. No effect on returns
B. Gain in home currency value
C. Loss in home currency value
D. Automatic hedge by default
When the home currency strengthens, the foreign currency investment value in home currency terms decreases, causing a loss unless hedged.
29. Which of the following is a primary objective of risk management in treasury?
A. Eliminating all profits
B. Identifying, measuring, and mitigating financial risks
C. Reducing branch operations
D. Only compliance reporting
Treasury risk management ensures that the bank’s positions are protected against market, interest rate, liquidity, and currency risks.
30. Scenario: Treasury has surplus funds and wants maximum short-term return with low risk. Which instrument is suitable?
A. Treasury bills
B. Equity shares
C. Long-term corporate bonds
D. Derivative contracts for speculation
Treasury bills provide a safe, liquid, short-term investment with predictable returns, making them ideal for surplus fund deployment.
