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

Kestrel Group's treasury is run as a profit centre and charges subsidiary Alba Ltd a market-based fee for hedging. Alba's forecast cost of an external bank hedge for a $5m exposure is 0.60% of the amount. The treasury's internal charge is 0.50% of the amount and the treasury's own cost of covering the exposure externally is 0.40%. What is the saving to Alba from using the treasury instead of the bank, and the treasury's margin on the deal?

Alba saves $5,000 because the bank would charge $30,000 (0.60% of $5m) against the treasury's $25,000 (0.50%). The treasury earns a margin of $5,000, being the 0.10% difference between its 0.50% charge and its 0.40% external cost.

  1. ASaving to Alba $5,000; treasury margin $5,000Correct
  2. BSaving to Alba $10,000; treasury margin $5,000
  3. CSaving to Alba $5,000; treasury margin $10,000
  4. DSaving to Alba $10,000; treasury margin $10,000

Explanation

Bank hedge cost for Alba = 0.60% x $5m = $30,000. Treasury charge = 0.50% x $5m = $25,000, so Alba saves $5,000. Treasury margin = (0.50% - 0.40%) x $5m = $5,000. Options with $10,000 wrongly use a 0.2% or 0.1% difference, mixing up the rates.

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