Advanced Financial Management · The role of the treasury function in multinationals

Treasury Risk Management and Governance in ACCA AFM

Updated 11 October 2026 · Fact-checked

Treasury risk management means identifying, measuring and controlling the financial risks a group faces: currency, interest rate, liquidity, counterparty and political risk. Governance means a board-approved policy, limits, segregation of duties and reporting, so derivatives are used to hedge and not to speculate. In AFM, answer by risk, then policy, then control.

Understand Treasury Risk Management and Governance

A multinational earns, pays and borrows in many currencies and countries. That creates financial risks that can change profit and cash flow even when the core business performs well. The treasury function exists to manage those risks and to make sure the group has the funds it needs.

The main risks are:
- Currency risk: exchange rate moves change the value of transactions (cash flows), translated results (accounts) and long-term competitive position (economic risk).
- Interest rate risk: changes in rates alter the cost of floating-rate debt, the value of fixed-rate debt, and returns on deposits.
- Liquidity risk: the group cannot meet payments when due, or cannot borrow at reasonable cost. Cash may also be trapped in subsidiaries.
- Counterparty risk: a bank, customer or derivative counterparty fails to perform. A hedge is only as good as the party on the other side.
- Political risk: government action such as blocked funds, expropriation, new taxes or currency controls.

Hedging is not free and not always wise. A key governance question is what the board wants from treasury. If treasury is a cost centre, its job is to reduce risk at least cost. If it is a profit centre, it takes positions to earn a return, which raises the risk of large losses. Most boards choose the cost-centre approach for derivatives, and the policy should say so.

Derivatives can lose far more than the underlying exposure. Speculation can start quietly, for example by hedging more than the exposure or by hiding losses. Good governance therefore sets a written treasury policy approved by the board. It covers objectives, permitted instruments, exposure limits, counterparty limits, authority levels, and reporting. Controls then enforce the policy.

Key controls include segregation of duties between dealing, confirmation, settlement and recording; independent middle-office monitoring; mark-to-market reporting; limits on exposure and counterparty credit; and internal audit review. Hedge accounting under IFRS 9 also needs documentation of the hedge relationship, so it supports control too.

Key rules to remember

Net exposure to hedge: Net exposure = Receipts in currency − Payments in currency; Net first using matching and netting. Hedge only the remaining exposure. Hedging more than this is speculation.
Hedge ratio: Hedge ratio = Amount hedged ÷ Underlying exposure; A ratio above 100% means part of the position is speculative. A policy often sets a range, for example a minimum and maximum cover.
Counterparty exposure: Exposure ≈ Current positive mark-to-market value of contracts with that counterparty (plus potential future movement); Only positive value is at risk if the counterparty defaults. Limits are set per counterparty.
Liquidity measure: Cash and committed facilities available ÷ Forecast net outflows over the period; A simple test. Policy sets a minimum headroom. Exclude cash blocked in other countries.

How to solve Treasury Risk Management and Governance questions

Use this method for scenario questions on treasury risks, policy or derivatives control. Link every point to the facts given.

1Read the requirement. Decide whether it asks you to identify risks, advise on policy, or recommend controls.
2Pick out the facts: currencies, debt type, countries, counterparties, and any sign of unusual derivative activity.
3Name each risk that applies, then explain how it affects this company in practice, using the numbers where given.
4Recommend a response for each risk: internal methods first, then external hedges, with a reason for the choice.
5State the policy elements: objectives, instruments allowed, limits, authority and reporting.
6List controls that stop speculation: segregation of duties, independent monitoring, mark-to-market reporting, board oversight, internal audit.
7Conclude with a clear recommendation and note any trade-off such as cost, accounting effect or residual risk.
8Check your points are applied to the scenario, not generic, to earn the professional skills marks.

Quickest way: Risk, response, control

When to use it: Use when time is short and the question asks for a discussion of treasury risks or governance.

Write the five risk headings: currency, interest rate, liquidity, counterparty, political.
Under each heading, write one scenario-specific impact and one response.
Add a short block called Controls: policy, limits, segregation of duties, independent reporting, internal audit.
Add one line on whether treasury is a cost or profit centre and why that matters.
Finish with a recommendation. Cut any point that is not tied to the scenario.

Common mistakes in Treasury Risk Management and Governance

Listing risks with textbook definitions and no link to the company.
Students recall the list from notes and skip the scenario.
Fix: Add one fact from the scenario to each risk, such as the currency, loan type or country.
Treating hedging as always good and profit-making.
Students forget hedging has a cost and removes upside with some tools.
Fix: State that hedging reduces variability, not cost, and say what is given up.
Suggesting controls without a board-approved policy.
Students jump to checks and forget that controls enforce a policy.
Fix: Start with policy: objectives, limits, authority. Then show how controls enforce it.
Ignoring counterparty risk on derivatives.
Students focus on the exposure and assume the hedge is safe.
Fix: Mention credit limits, bank ratings, spreading deals across banks and exchange-traded instruments with a clearing house.
Confusing liquidity risk with currency risk when cash is blocked abroad.
Both involve foreign cash, so they blur together.
Fix: Say that blocked funds are political and liquidity risk. Exchange movements are currency risk.
Recommending a profit-centre treasury without discussing the danger.
Students see the extra return and miss the speculation risk.
Fix: Weigh potential gains against large losses, and say what limits and oversight would be required.

Worked examples

Example 1

A group's treasury has $8m of expected receipts in 3 months. It has entered forward contracts to sell $14m for the same date. There are no other dollar flows. Assess the position and advise on control.

Show the solution

Underlying net exposure is $8m of receipts.
Hedged amount is $14m, so the hedge ratio is 14 ÷ 8 = 175%.
Over-hedged amount is 14 − 8 = $6m.
The $6m has no underlying exposure. It is a speculative position that gains if the dollar falls and loses if it rises.
Control response: confirm whether the policy allows this; if not, report it to the board or risk committee and close out the extra $6m.
Strengthen controls: set a maximum hedge ratio of 100% of forecast exposure, require independent confirmation of deals, and give a middle office the right to check deals against exposure forecasts.

Answer: The group is hedged at 175%, so $6m is speculative. Close it out, cap the hedge ratio at 100% of forecast exposure, and add independent monitoring and reporting.

Example 2

A multinational has subsidiaries in three countries. One country has introduced limits on dividend payments abroad. The group also has floating-rate bank debt and uses one bank for all derivatives. Identify the treasury risks and recommend actions.

Show the solution

Political and liquidity risk: the dividend limit traps cash locally. Response: use other remittance routes allowed by law, such as management fees, royalties or loan repayments, and plan local reinvestment. Reduce reliance on that cash in the group cash forecast.
Interest rate risk: floating-rate debt means interest cost rises if rates rise. Response: use a swap, FRA or cap to fix or limit part of the cost, in line with the policy's target mix of fixed and floating debt.
Counterparty risk: relying on one bank for all derivatives concentrates credit exposure. Response: set a limit per bank, use several banks with acceptable credit ratings, and monitor mark-to-market exposure.
Currency risk: trapped cash in a local currency is also exposed to its value changing. Response: consider whether to hold it in a stronger currency where allowed, or invest it locally.
Governance: ensure policy covers these risks with limits and regular reporting to the board.

Answer: The dividend limit is political and liquidity risk, floating debt is interest rate risk, and the single bank is counterparty risk. Use alternative remittances, hedge part of the interest cost, spread deals across banks, and set policy limits with regular reporting.

Exam tips

Apply every risk to the scenario facts. Generic lists earn few marks and miss professional skills marks.
When asked about speculation, name specific controls: board-approved policy, hedge ratio limits, segregation of duties, independent reporting and internal audit.
Discuss cost centre versus profit centre when the scenario hints at treasury seeking gains.
Where the scenario has numbers, compute the exposure and hedge ratio first, then comment.
Keep a balanced view: give the benefit of a hedge and its cost or residual risk, then recommend.

Practice questions from The role of the treasury function in multinationals

Treasury Risk Management and Governance in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Treasury Risk Management and Governance: frequently asked questions

What risks does a treasury department manage in a multinational?

The main ones are currency, interest rate, liquidity, counterparty and political risk. Treasury also looks at funding and cash management across the group. In the exam, link each risk to the facts in the scenario.

How do you control derivatives speculation in treasury?

Use a board-approved policy that says derivatives are for hedging only. Add limits on size and counterparties, split dealing from settlement and recording, and require independent mark-to-market reporting. Internal audit should review compliance.

Should treasury be a cost centre or a profit centre?

A cost centre aims to reduce risk at least cost, which suits most groups. A profit centre takes positions to earn returns and can produce large losses. If a board chooses profit-centre treasury, it needs strict limits and strong oversight.

What should a treasury policy contain?

It should set objectives, the risks covered, permitted instruments, exposure and counterparty limits, who can authorise deals, and how results are reported. It should also say how often the policy is reviewed by the board.