ACCA Strategic Professional · Advanced Financial Management · The role of the treasury function in multinationals
A group treasury centre operates as a profit centre and charges subsidiaries for its services. Which of the following is the main drawback of operating the treasury as a profit centre rather than a cost centre?
The main drawback is that a profit-centre treasury may be tempted to speculate to earn profit, which increases rather than reduces the group's risk. It can still hedge, net and pool cash, so those options are not drawbacks. Tight controls and limits are therefore needed.
- AIt cannot provide hedging services to subsidiaries
- BIt may be tempted to speculate or take positions to generate profit, increasing the group's risk exposureCorrect
- CIt prevents the group from netting intra-group balances
- DIt removes the ability to use group-wide cash pooling
Explanation
A profit-centre treasury is measured on profits, which can encourage speculative positions rather than risk reduction, raising group risk. It can still hedge, net and pool cash, so the other options are incorrect.
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