5. As Treasurer, you are responsible for ensuring adequate funding of trading ac

Question

5. As Treasurer, you are responsible for ensuring adequate funding of trading activity. Therefore new deals require your approval before traders execute. Currently, you have funding capacity of S100 million to fund trades and unexpected cash needs. Company policy is to reserve capacity of at least 25% of expected usage, ie. you will keep an extra 25% of whatever you useeachday as a reserve. Below is a portfolio of trades awaiting approval to execute. Decide which trades you will approve in order to obtain the most profitable position for your company while staying Deal 1Deal Deal 3 Cash Out Cash In Cash Timeframe Capital Required (5MM) 11/3/2016 11/1/2016 11/11/2016 11/20/2016 11/24/2016 11/29/2016 18 days 535 50.5 17 days $40 $1.0 23 days 525 51.5 Expected Margin (SMM) Deal 1 Deal2Deal 3 11/1/2016 11/2/2016 11/3/2016 11/4/2016 11/5/2016 11/6/2016 11/7/2016 11/8/2016 540 525 $40 540 S25 540 25 540 S25 11/10/2016 540 25 540 S25 11/11/2016 $35 s40 l $25 | $35 540 $25 $35 11/12/2016 11/13/2016 11/14/2016 11/15/2016 $25 11/16/2016 11/17/2016 11/18/2016 11/19/2016 11/20/2016 11/21/2016 11/22/2016 540 25 535 540 525 35 40 25 $35 540 $25 $35 540 $25 $35 525 $35 $35 35

Explanation / Answer

Deal 1: Capital Required =$ 40 m and Margin Required =$ 1 m. Therefore, Total Cash Outgo = 40 + 1= $ 41 m

Similarly, for Deal 2: Total Cash Outgo = 25 + 1.5 =$26.5 m and Deal 3: Total Cash Outgo = 35 + 0.5 =$35.5 m

Reserve Requirement = 25% of total cash outgo.

Therefore, Reserve Requirement for :

Deal 1 = Total Cash Outgo x 0.25 =$ 10.25 m

Deal 2 = Total Cash Outgo x 0.25 = $ 6.625 m

Deal 3 = Total Cash Outgo x 0.25 = $ 8.875 m

Deals would be acceptable only when the various combinations of these three deals will have total cash outgo + reserve requirements less than $ 100 m.

Therefore,Deal 1 + Deal 2 : Total Cash Outgo + Reserve Requirement = 41 + 26.5 + 10.25 + 6.625 = $ 84.375m

Deal 2 + Deal 3 : Total Cash Outgo + Reserve Requirement = 26.5 + 35.5 + 6.625 + 8.875 = $ 77.5 m

Deal 1 + Deal 3 : Total Cash Outgo + Reserve Requirement = 41 + 35.5 + 10.25 + 8.875 = $ 95.625 m

Therefore, the Treasurer has the option of authorizing any of the above combination of deals but not all three together as the total cash outgo + reserve requirements in that case will exceed the total available amount of $ 100 m.

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