Masters in Business Administration-MBA Semester III MF0008
Merchant Banking & Financial Services 2 Credits Assignment
Set-1Note: Each question carries 10 Marks. Answer all the
questions. Bring out an overview of Indian financial system post
1950 period. The economy of India is the eleventh largest economy
in the world by nominal GDP and the fourth largest by purchasing
power parity (PPP).Following strong economic reforms from the
socialist inspired economy of a post-independence Indian nation,
the country began to develop a fast-paced economic growth, as free
market principles were initiated in 1990 for international
competition and foreign investment. India is an emerging economic
power with a very large pool of human and natural resources, and a
growing large pool of skilled professionals. Economists predict
that by 2020, India will be among the leading economies of the
world. Pre-colonial The citizens of the Indus Valley civilization a
permanent settlement that flourished between 2800 BC and 1800 BC,
practiced agriculture, domesticated animals, used uniform weights
and measures, made tools and weapons, and traded with other cities.
Evidence of well planned streets, a drainage system and water
supply reveals their knowledge of urban planning, which included
the world's first urban sanitation systems and the existence of a
form of municipal government. The 1872 census revealed that 99.3%
of the population of the region constituting present-day India
resided in villages, whose economies were largely isolated and
self-sustaining, with agriculture the predominant occupation. This
satisfied the food requirements of the village and provided raw
materials for hand-based industries, such as textiles, food
processing and crafts. Although many kingdoms and rulers issued
coins, barter was prevalent. Villages paid a portion of their
agricultural produce as revenue to the rulers, while its craftsmen
received a part of the crops at harvest time for their services.
Religion, especially Hinduism, and the caste and the joint family
systems, played an influential role in shaping economic activities.
The caste system functioned much like medieval European guilds,
ensuring the division of labour, providing for the training of
apprentices and, in some cases, allowing manufacturers to achieve
narrow specialization. For instance, in certain regions, producing
each variety of cloth was the specialty of a particular sub-caste.
Textiles such as muslin, Calicos, shawls, and agricultural products
such as pepper, cinnamon, opium and indigo were exported to Europe,
the Middle East and South East Asia in return for gold and silver.
Assessment of India's pre-colonial economy is mostly qualitative,
owing to the lack of quantitative information. One estimate puts
the revenue of Akbar's Mughal Empire in 1600 at 17.5 million, in
contrast with the total revenue of Great Britain in 1800, which
totalled 16 million. India, by the time of the arrival of the
British, was a largely traditional agrarian economy with a dominant
subsistence sector dependent on primitive technology. It existed
alongside a competitively developed network of commerce,
manufacturing and credit. After the decline of the Mughals,
western, central and parts of south and north India were integrated
and administered by the Maratha Empire. The Maratha Empire's budget
in 1740s, at its peak, was 100 million. After the loss at Panipat,
the Maratha Empire disintegrated into confederate states of
Gwalior, Baroda, Indore, Jhansi, Nagpur, Pune and Kolhapur. Gwalior
state had a budget of 30M. However, at this time, British East
India company entered the Indian political theatre. Until 1857,
when India was firmly under the British crown, the country remained
in a state of political instability due to internecine wars and
conflicts. Colonial Calcutta, which was the economic hub of British
India, saw increased industrial activity during World War II.
Company rule in India brought a major change in the taxation
environment from revenue taxes to property taxes, resulting in mass
impoverishment and destitution of majority of
farmers and led to numerous famines. The economic policies of
the British Raj effectively bankrupted India's large handicrafts
industry and caused a massive drain of India's resources. Indian
Nationalists employed the successful Swadeshi movement, as strategy
to diminish British economic superiority by boycotting British
products and the reviving the market for domesticmade products and
production techniques. India had become a strong market for
superior finished European goods. This was because of vast gains
made by the Industrial revolution in Europe, the effects of which
was deprived to Colonial India. The Nationalists had hoped to
revive the domestic industries that were badly effected by policies
implemented by British Raj which had made them uncompetitive to
British made goods. An estimate by Cambridge University historian
Angus Maddison reveals that "India's share of the world income fell
from 22.6% in 1700, comparable to Europe's share of 23.3%, to a low
of 3.8% in 1952". It also created an institutional environment
that, on paper, guaranteed property rights among the colonizers,
encouraged free trade, and created a single currency with fixed
exchange rates, standardized weights and measures, capital markets.
It also established a well developed system of railways and
telegraphs, a civil service that aimed to be free from political
interference, a common-law and an adversarial legal system.[41]
India's colonisation by the British coincided with major changes in
the world economy industrialisation, and significant growth in
production and trade. However, at the end of colonial rule, India
inherited an economy that was one of the poorest in the developing
world,[42] with industrial development stalled, agriculture unable
to feed a rapidly growing population, India had one of the world's
lowest life expectancies, and low rates for literacy. The impact of
the British rule on India's economy is a controversial topic.
Leaders of the Indian independence movement, and left-nationalist
economic historians have blamed colonial rule for the dismal state
of India's economy in its aftermath and that financial strength
required for Industrial development in Europe was derived from the
wealth taken from Colonies in Asia and Africa. At the same time
right-wing historians have countered that India's low economic
performance was due to various sectors being in a state of growth
and decline due to changes brought in by colonialism and a world
that was moving towards industrialization and economic integration
2. Explain latest monetary policy of RBI? 1.The Monetary Policy for
2010-11 is set against a rather complex economic backdrop. Although
the situation is more reassuring than it was a quarter ago,
uncertainty about the shape and pace of global recovery persists.
Private spending in advanced economies continues to be constrained
and inflation remains generally subdued making it likely that
fiscal and monetary stimuli in these economies will continue for an
extended period. Emerging market economies (EMEs) are significantly
ahead on the recovery curve, but some of them are also facing
inflationary pressures. 2. India s growth-inflation dynamics are in
contrast to the overall global scenario. The economy is recovering
rapidly from the growth slowdown but inflationary pressures, which
were triggered by supply side factors, are now developing into a
wider inflationary process. As the domestic balance of risks shifts
from growth slowdown to inflation, our policy stance must recognise
and respond to this transition. While global policy co-ordination
was critical in dealing with a worldwide crisis, the exit process
will necessarily be differentiated on the basis of the
macroeconomic condition in each country. India s rapid turnaround
after the crisis induced slowdown evidences the resilience of our
economy and our financial sector. However, this should not divert
us from the need to bring back into focus the twin challenges of
macroeconomic stability and financial sector development. 3. This
statement is organised in two parts. Part A covers Monetary Policy
and is divided into four Sections: Section I provides an overview
of global and domestic macroeconomic developments; Section II sets
out the outlook and projections for growth, inflation and monetary
aggregates; Section III explains the stance of monetary policy; and
Section IV specifies the
monetary measures.Part B covers Developmental and Regulatory
Policies and is organised into six sections: Financial Stability
(Section I), Interest Rate Policy (Section II), Financial Markets
(Section III), Credit Delivery and Financial Inclusion (Section
IV), Regulatory and Supervisory Measures for Commercial Banks
(Section V) and Institutional Developments (Section VI). 4. Part A
of this Statement should be read and understood together with the
detailed review in Macroeconomic and Monetary Developments released
by the Reserve Bank. 3. Explain the recent SEBI guidelines for
merchant bankers? Merchant banking may be defined as an institution
which covers a wide range of activities such as underwriting of
shares, portfolio management, project counseling, insurance etc
They render all these services for a fee ORIGIN : The term merchant
banking originated from the London who started financing foreign
trade through acceptance of bills Later they helped government of
under developed countries to raise long term funds Later these
merchants formed an association which is now called Merchant
Banking and Securities House Association Recent SEBI guidelines for
merchant bankers: Merchant Bankers have been barred from
undertaking activities other than related to the securities market.
The SEBI (Merchant Bankers) Regulations, 1992 have been amended on
December 19, 1997 to provide that: the applicant should be a fit
and proper person; a merchant banker has to seek separate
registration for its underwriting or portfolio management
activities; the categorisation of merchant bankers I, II, III and
IV has been dispensed with; a merchant banker, other than a bank or
a public financial institution, has been prohibited from carrying
any activities not pertaining to the securities market; and the
applicant should be a body corporate other than non-banking finance
company. The Merchant Bankers Regulations were amended on January
21, 1998 to provide time upto June 30, 1998 to sever its activities
or hive off its activities not pertaining to the securities market.
The Reserve Bank of India has exempted merchant banking companies
from the provisions of Reserve Bank of India Act, 1934 relating to
compulsory registration (section 451A), maintenance of liquid
assets (section 451B), creation of reserve fund (section 451C ) and
all the provisions of the recent Directions relating to deposit
acceptance and prudential norms. Merchant banking companies, to be
eligible for the above exemption, are required to satisfy the
following conditions: Such companies are registered with the SEBI
under section 12 of the SEBI Act, 1992 and are carrying on the
business of merchant banker in accordance with the Rules /
Regulations framed by the SEBI; they acquire securities only as
part of their merchant banking business; they do not carry on any
other financial activities as mentioned in section 451 (c ) of the
RBI Act, 1934; they do not accept / hold public deposits
Masters in Business Administration-MBA Semester III MF0008
Merchant Banking & Financial Services 2 Credits Assignment
Set-2Note: Each question carries 10 Marks. Answer all the
questions. 1. Explain the listing, trading and settlement issues in
industrial securities market? The industrial securities market
refers to the market which deals in equities and debentures of the
corporates. It is further divided into primary market and secondary
market. Primary market (new issue market):- deals with 'new
securities', that is, securities which were not previously
available and are offered to the investing public for the first
time. It is the market for raising fresh capital in the form of
shares and debentures. It provides the issuing company with
additional funds for starting a new enterprise or for either
expansion or diversification of an existing one, and thus its
contribution to company financing is direct. The new offerings by
the companies are made either as an initial public offering (IPO)
or rights issue. Secondary market/ stock market (old issues market
or stock exchange):- is the market for buying and selling
securities of the existing companies. Under this, securities are
traded after being initially offered to the public in the primary
market and/or listed on the stock exchange. The stock exchanges are
the exclusive centres for trading of securities. It is a sensitive
barometer and reflects the trends in the economy through
fluctuations in the prices of various securities. It been defined
as, "a body of individuals, whether incorporated or not,
constituted for the purpose of assisting, regulating and
controlling the business of buying, selling and dealing in
securities". Listing on stock exchanges enables the shareholders to
monitor the movement of the share prices in an effective manner.
This assist them to take prudent decisions on whether to retain
their holdings or sell off or even accumulate further. However, to
list the securities on a stock exchange, the issuing company has to
go through set norms and procedures
2. Explain the role of credit rating agencies? A credit rating
agency (CRA) is a company that assigns credit ratings for issuers
of certain types of debt obligations as well as the debt
instruments themselves. In some cases, the servicers of the
underlying debt are also given ratings. In most cases, the issuers
of securities are companies, special purpose entities, state and
local governments, non-profit organizations, or national
governments issuing debt-like securities (i.e., bonds) that can be
traded on a secondary market. A credit rating for an issuer takes
into consideration the issuer's credit worthiness (i.e., its
ability to pay back a loan), and affects the interest rate applied
to the particular security being issued. (In contrast to CRAs, a
company that issues credit scores for individual credit-worthiness
is generally called a credit bureau or consumer credit reporting
agency.) The value of such ratings has been widely questioned after
the 2007/2009 financial crisis. In 2003 the U.S. Securities and
Exchange Commission submitted a report to Congress detailing plans
to launch an investigation into the anti-competitive practices of
credit rating agencies and issues including conflicts of interest.
Agencies that assign credit ratings for corporations include: A. M.
Best (U.S.) Baycorp Advantage (Australia) Dominion Bond Rating
Service (Canada) Fitch Ratings (U.S.)
Moody's Investors Service (U.S.) Standard & Poor's (U.S.)
Egan-Jones Rating Company (U.S.) Japan Credit Rating Agency (Japan)
Credit ratings are used by investors, issuers, investment banks,
broker-dealers, and governments For investors, credit rating
agencies increase the range of investment alternatives and provide
independent, easy-to-use measurements of relative credit risk; this
generally increases the efficiency of the market, lowering costs
for both borrowers and lenders. This in turn increases the total
supply of risk capital in the economy, leading to stronger growth.
It also opens the capital markets to categories of borrower who
might otherwise be shut out altogether: small governments, startup
companies, hospitals, and universities
3. Explain call money market in India? The call money market is
a mechanism that allows both dealers and brokers to locate and
borrow funds that can be used for investment needs. The funds
located through the money market can be utilized to provide
financing for the purchase of securities that can be added to the
portfolio of the investment firm, or as a resource that will cover
the margin accounts of the firm s clients. As a means of securing
financing for credit needs, the call money market provides a range
of options. Chief among them is the ability to create and manage
what is referred to as a call money loan. The call money loan
essentially works in the same manner as a day to day loan. Call
money loans provide funds that can be used to conduct transactions
between banks, or with other money market dealers. Generally, these
types of loans are paid off in a short period of time, allowing the
broker to move on to secure new loans and continue to process
orders on behalf of their clients. The loans may be secured or
unsecured, depending on the terms and conditions of the loan, along
with the duration and the credit rating of the debtor. Individual
investors generally do not participate directly in the call money
market. Instead, the investor will work through a brokerage firm.
The broker will determine the best avenue to take in financing an
investment, based on the individual circumstances of the client.
This process is actually to the advantage of the investor, since
the broker will be aware of sources of funding that may or may not
be readily accessible to individuals who are looking for financial
support to build a portfolio. The call money market crosses
international lines, with funding opportunities located in a number
of countries around the world. Because of the inclusion of
international banking institutions, the role of the brokerage firm
becomes even more vital to the individual investor. Brokers will be
aware of applicable banking laws, and how those laws could impact
the transaction. This knowledge regarding participants in the call
money market allows the firm to pick and choose among possible
avenues for funding with a level of efficiency that would be
difficult for the individual
Masters in Business Administration-MBA Semester III MF0006
International Financial Management 2 Credits Assignment Set-1 (30
Marks)Note: Each question carries 10 Marks. Answer all the
questions. Q.1 Give possible reasons by which the companies are
encouraged to be an MNC?Some of the possible reasons are To broaden
markets: Saturated home markets ask for market development abroad
(Coca Cola, Mac Donalds etc.). Multinationals seek new markets to
fill product gaps in foreign markets where excess returns can be
earned. To seek raw materials: Multinationals secure the necessary
raw materials required to sustain primary business line (Exxon; Wal
Mart). Multinationals also seek to obtain easy access to oil
exploration, mining, and manufacturing in many developing
nations.
To seek new technologies: Multinationals seek leading scientific
and design ideas. To seek production efficiencies by shifting to
low cost regions (GE). To avoid political hurdles such as import
quota, regulatory measures of governments, trade barriers, etc. To
diversify i.e. to cushion the impact of adverse economic events. To
postpone payment of domestic taxes. To counter foreign investments
by competitors. Multiple operating environments: Multinationals
operate under a diverse pattern of consumer preferences,
distribution channels, legal frameworks and financial
infrastructures. Political demands; political risks: Multinationals
have to mesh corporate strategy with host country industrial
development policies; thus there is a potential for conflict.
Global competitive game: Multiple market access and various global
scale economies allow companies new competitive strategic options.
Currency fluctuations (foreign exchange risk): The economic
performance of a multinational is measured in multiple currencies
which result in accounting, transaction and economic exposure.
Q.2 What do you mean by International Trade Flows? Also explain
various factors affecting international trade flows. International
Trade Flows International trade is the exchange of goods and
services across international boundaries. The world trade in goods
and services has grown much faster than world GDP since 1960,global
trade has grown twice as fast as the global GDP. The share of
international trade in national economies has , in the most cases,
increased dramatically over the past few decades, In most
countries, international trade represents a significant share of
GDP. Factors Affecting International Trade Flows Impact of
Inflation: A relative increase in a countrys inflation rate will
decrease itscurrent account, as imports increase and exports
decrease. Impact of National Income: A relative increase in a
countrys income level will decrease its current account, as imports
increase. Impact of Government Restrictions: A gover n ment ma y r
edu ce it s cou ntr ys imports by imposing a tariff on imported
goods, or by enforcing a quota. Some trade restrictions may be
imposed on certain products for health and safety reasons. Impact
of Exchange Rates: If a countrys currency begins to rise in value,
its current account balance will decrease as imports increase and
exports decrease Q.3 (a) Define Swaps. Also explain various types
of swaps.
Swaps A swap is an agreement to exchange cash flows at specified
future times according to certain specified rules. The two counter
parties in a swap agree to exchange or swap cashflows at periodic
intervals The different kinds of swaps are: Interest Rate Swap An
exchange of fixed-rate interest payment for floating-rate interest
payments. Currency Swap An exchange of interest payments and
principal in one currency for interest payment and principal in
another currency. Cr oss C ur r ency I nt er est Rat e S wap An ex
cha nge of f loa t ing r at e int er es t payment and principal in
one currency for fixed rate interest payment and principal in
another currency. (b) Define foreign bonds with their salient
features. Foreign Bonds A countrys foreign bond market is that
market in which the bonds of issuers not domiciled in that country
are sold and traded. For example, the bonds of a German company
issued in the U.s. or traded on the U.S. secondary markets would by
part of the U.S. foreign bondmarket. The definition of foreign
refers to the nationality of the issuer in relation to the market
place. For example, a US dollar bond sold in the United States by
the Swedish car pr odu cer Volvo is class if ied a s a f or eign b
ond wh il e on e is s ued b y G ener a l M ot or s is domestic
bond. Features of the Foreign Bonds: 1. Foreign bonds are sold in
the currency of the local economy.2. Foreign bonds are subject to
the regulations governing all securities traded in the national
market and sometimes special regulations governing foreign
borrowers (e.g., additional registration).3. Foreign bonds provide
foreign companies access to funds they often use to finance their
operations in the country where they sell the bonds.4. Foreign
bonds are regulated by the domestic market authorities. The issuer
mustsatisfy all regulations of the country in which it issues the
bonds.
Masters in Business Administration-MBA Semester III MF0006
International Financial Management Assignment Set- 2Q.1 (a) Explain
the responsibilities of IMF. IMF is the central institution of the
international monetary system. The responsibilities of IMFare: To
promote international monetary co-operation: prevent or manages
financial crises. To facilitate expansion and balanced growth of
international trade. To promote exchange rate stability. To assist
in establishing multilateral system of payment. To lend to member
countries experiencing balance of payment difficulties. The IMF
gets its resources from the quota countries pay when they join the
IMF and from periodic increases in this quota. The quotas determine
a country s voting power and the amount of financing it can receive
from the IMF. (b) Describe two types of exchange rates. Floating
Exchange Rate (Flexible) Regimes: A fle xibl e e xch ang e r a te
sy stem i s o ne where the value of the currency is not officially
fixed but exchange market in this system, currencies are allowed
to: Appreciate when currency becomes more valuable relative to
other. Depreciate when the currency becomes less valuable relative
to others. Fixed Exchange Rate Regimes: a fixed exchange rate
system is one where the value of th e cur re n cy i s s et b y of
fi ci al go ve rn me n t p oli cy. The ex cha ng e r a te i s de te
rmi ne d b y government actions designed to keep rates the same
over time. The currencies are altered by the government:
Revaluation Government action to increase the value of domestic
currency relative to other. Devaluation Government action to
decrease the value of domestic currency. Q.2 Illustrate Political
Exposure in Foreign Exchange Market? Management of Political
Exposure Political risk stems from political action taken by
political actors that affect business. The political actors may be
the members of the government, political parties, public interest
groups that are trying to affect the political process,
supra-government entities (e.g. WTO,NAFTA) or other corporations
that might act in a political way. Political action has a direct
bearing when political actors change laws, regulations, etc. or
take other actions that directly affect business. An example of
such direct effect is the nationalization of business. The indirect
effect of political action occurs when the political actors change
the economic environment, the attitudes of the population, or some
other factor that then indirectly affects specific businesses. An
example of such indirect effect is when the local business lobbies
the government against the entry of foreign companies. Country risk
and political risk are sometimes used interchangeably. Country risk
comprises all the socio-political and economic factors which
determine the degree and level of ris kassociated with undertaking
business transactions in particular country; the likelihood
thatchanges in the business environment will occur that reduce the
profitability of doing businessin a country.Examples of political
risk: 1) Nationalization: Nationalization is the appropriation of
private assets by a nationalgovernment. 2) Creeping
Expropriation:
Creeping expropriation occurs when the government changes the
rules and makes profit impossible. An example: The host government
may require that the company sell its products only to the local
enterprises and that export opportunities are not pursued. This
limits the profit potential of company. 3) Contract Repudiation:
Here, the terms of operating arrangements are changed of
renegotiated once their operations are in place and have proved
successful. Thus a d d i tio na l tax es m ay be i mp os e d. Co mp
an ies wi th l arg e fi xe d i nve s tme n ts ar e vulnerable due
to the hostage effect. They cannot credible threaten to withdraw.
Companies with stable technologies are vulnerable because locals
could take over the operation without need for continuing foreign
technology transfer. 4) P olit ica l Pr ess ur e in a D emocr a t
ic S yst em: Spread of democracy increases popular criticism of
foreign investors. Opposition parties may use attacks on foreign
investors as nationalistic position to gain voter support (but
pro-business opposition ca n al s o a s ta ri ff i n cr ea se s).
The re i s ev id en ce ma ny belie ve t ha t su p pr es sive
authoritarian regimes are more favorable to business. 5) Threats
from Local Business: Local business interests use political
connections to secure favorable treatment over foreign companies or
resist market liberalization. Many local business people become
wealthy during the period of protected markets and do not want to
eliminate protectionist policies. As a result of lobbying by local
business, government may require foreign investors to have local
partners or make laws that keep foreigners entirely away from some
critical sectors or enact licensing procedures that delay
investment. When liberalization occurs, local business still tries
to create adverse political conditions. They try to prevent foreign
companies form winning government contracts, or try to slow
licensing and other approvals for foreign companies to decrease
their relative efficiency. Q.3 Explain Trade deficits and Trade
surplus in regard to Balance of Payments.Trade Deficits The trade
balance is the difference between a countrys output and its
domestic demand-the difference between what goods and services a
country produce and how many goods and services it buys from
abroad. A trade deficit occurs when, during a certain period, a
nation imports more goods and services than it exports. A trade
surplus occurs when a nation exports more goods and services than
it imports .According to the BOP identity (Current Account+ Capital
Account = Change in Official Reserve Accounts), any trade deficit
must be offset by surpluses on other accounts. Since the official
reserves are limited, a surplus on the Official Reserve Account
(which means selling of the foreign exchange reserves by the
central bank) can at best be a temporary measure. Thus the trade
deficit must be financed by foreign income or transfers, or by a
capital account surplus. A capital account surplus consists of
capital purchases (stocks, bon ds e t c. ) by for e i gn n a t i on
a l s. A ca pi t a l a c c oun t s ur pl u s (a n i n cr ea s e i n
n et for ei gn investment) may result in an increase in the net
outflow of income (dividend, interest) to foreign nationals could
have intergenerational effects: they shift consumption over time,
and future generations have to pay for the consumption by the
present generation. However atrade deficit can also lead to higher
consumption in the future, if for example, it is used to finance
profitable domestic investment, which generates returns in excess
of what is paid tothe foreign nationals on their investments in the
country. Such a situation may arise if acountry experiences a gain
in productivity as a result of these investments.A trade surplus
implies an increase in the net international investment of
residents of thecountry and shifting of consumption to future
rather than current generations. Even tradesurpluses can be
undesirable for a country. An example where a trade surplus was
notbeneficial for the country is Japan in the 1990s. The positive
trade balance that Japan hadwas partly due to the protectionist
measures that were adopted by the Japanesegovernment. These
measures caused the price of goods in Japan to be much higher
thatwhat they would have been, had import been freely allowed. The
foreign currency that theJapanese companies earned overseas were
kept abroad and not converted into yen in order to keep the value
of the yes low and maintain the competitiveness of Japanese
exports.However, a weak yen also prevented Japanese consumers from
importing goods fromabroad and benefiting from trade surplus. The
foreign exchange earned abroad as a resultof the trade surplus was
party squandered by spending it on real estate purchases in
theUnited States that often proved unprofitable.
Master of Business Administration (MBA) Semester 4 MF0009
Insurance & Risk Management 2 Credits (Book ID: MF0009)
Assignment Set 1 (30 Marks)Note: Each question carries 10 Marks.
Answer all the questions.Risk can be classified into several
distinct categories . Explain. Risk is defined as uncertainty
concerning the occurrence of a loss. Objective Risk: the relative
variation of actual loss from expected loss. Objective risk
declines as the number of exposures increases. More specifically,
objective risk varies inversely with the square root of the number
of cases under observation. Subjective Risk :uncertainty based on a
persons mental condition or state of mind. Categories of Risk: Pure
and Speculative risks Types of Pure Risk Personal risk Risk of
premature death or disability Risk of insufficient income on
retirement Risk of unemployment Property risk Direct Loss Indirect
or consequential loss Liability risk Fundamental and Particular
Risks. Risk can be also categoried as following: 1. Operational
Risk: Risks of loss due to improper process implementation, failed
system or some external events risks. Examples can be Failure to
address priority conflicts, Insufficient resources or No proper
subject training etc. 2. Schedule Risk: Project schedule get slip
when project tasks and schedule release risks are not addressed
properly. Schedule risks mainly affect on project and finally on
company economy and may lead to project failure 3. Budget Risk:
Wrong budget estimation or Project scope expansion leads to Budget
/ Cost Risk. This risk may lead to either a delay in the delivery
of the project or sometimes even an incomplete closure of the
project. 4. Business Risk: Non-availability of contracts or
purchase order at the start of the project or delay in receiving
proper inputs from the customer or business analyst may lead to
business risks. 5. Technical Environment Risk: These are the risks
related to the environment under which both the client and the
customer work. For example, constantly changing development or
production or testing environment can lead to this risk. 6.
Information Security Risk: The risks related to the security of
information like confidentiality or integrity of customers personal
/ business data. The Access rights / privileges failure will lead
to leakage of confidential data. 7. Programmatic Risks: The
external risks beyond the operational limits. These are outside the
control of the program. These external events can be Running out of
fund or Changing customer product strategy and priority or
Government rule changes etc. 8. Infrastructure Risk: Improper
planning of infrastructure / resources may lead to risks related to
slow network connectivity or complete failure of connectivity at
both the client and the customer sites. So, it is important to do
proper planning of infrastructure for the efficient development of
a project. 9. Quality and Process Risk: This risk occures due to
Iincorrect application of process tailoring and deviation
guidelines New employees allocated to the project not trained in
the quality processes and procedures adopted by the organization
10. Resource Risk: This risk depends on factors like Schedule,
Staff, Budget and Facilities. Improper management of any of these
factors leads to resource risk. 11. Supplier Risk: This type of
risk may occurs when some third party supplier is involved in the
development of the project. This risk occurs due to the uncertain
or inadequate capability of supplier. 12. Technology Risk: It is
related to the complete change in technology or introduction of a
new technology. 13. Technical and Architectural Risk: These types
of risks generally generally leads to failure of functionality and
performance. It addresses the hardware and software tools &
supporting equipments used in the project. The risk for this
category may be due to Capacity, Suitability, usability,
Familiarity, Reliability, System Support and deliverability.
2) Identify common misconceptions about risk management and
explain why these misconceptions are developed.Three common
misconceptions about risk management are: Downside: The first
misconception is that risk is only about downside. The fact is, for
risk to exist, positive and negative implications must coexist
equally. Saying that risk is measurable only in the context of
negative outcomes would be no different from saying that a balance
sheet contains only liabilities and no assets. Event drive: The
second misconception is that the definition of risk can be
dependent only upon the occurrence of an event. As human beings, we
undergo the aging process day-to-day and, inevitably, we die. Even
if the passage of time is the only cause of our death, the risk of
mortality statistically increases on a daily basis. There may never
be a single event that raises the risk factor, but risk still
exists without the presence of any significant precipitating event.
Insurance: The third misconception is that risk is an item that
affects businesses only in the context of insurance. Risk occurs
everywhere. For example, any issue that involves governance and
compliance is fundamentally based upon risk
3) What are the social values of insurance? What are the social
costs? Explain.In law and economics, insurance is a form of risk
management primarily used to hedge against the risk of a
contingent, uncertain loss. Insurance is defined as the equitable
transfer of the risk of a loss, from one entity to another, in
exchange for payment. An insurer is a company selling the
insurance; an insured or policyholder is the person or entity
buying the insurance policy. The insurance rate is a factor used to
determine the amount to be charged for a certain amount of
insurance coverage, called the premium. Risk management, the
practice of appraising and controlling risk, has evolved as a
discrete field of study and practice. The social values of
insurance are: Risk Cover - Life today is full of uncertainties; in
this scenario Life Insurance ensures that your loved ones continue
to enjoy a good quality of life against any unforeseen event.
Planning for life stage needs - Life Insurance not only provides
for financial support in the event of untimely death but also acts
as a long term investment. You can meet your goals, be it your
children's education, their marriage, building your dream home or
planning a relaxed retired life, according to your life stage and
risk appetite. Traditional life insurance policies i.e. traditional
endowment plans, offer in-built guarantees and defined maturity
benefits through variety of product options such as Money Back,
Guaranteed Cash Values, Guaranteed Maturity Values. Protection
against rising health expenses - Life Insurers through riders or
stand alone health insurance plans offer the benefits of protection
against critical diseases and hospitalization expenses. This
benefit has assumed critical importance given the increasing
incidence of lifestyle diseases and escalating medical costs.
Builds the habit of thrift - Life Insurance is a long-term contract
where as policyholder, you have to pay a fixed amount at a defined
periodicity. This builds the habit of long-term savings. Regular
savings over a long period ensures that a decent corpus is built to
meet financial needs at various life stages. Safe and profitable
long-term investment - Life Insurance is a highly regulated sector.
IRDA, the regulatory body, through various rules and regulations
ensures that the safety of the policyholder's money is the primary
responsibility of all stakeholders. Life Insurance being a
long-term savings instrument, also ensures that the life insurers
focus on returns over a long-term and do not take risky investment
decisions for short term gains. Assured income through annuities -
Life Insurance is one of the best instruments for retirement
planning. The money saved during the earning life span is utilized
to provide a steady source of income during the retired phase of
life. Protection plus savings over a long term - Since traditional
policies are viewed both by the distributors as well as the
customers as a long term commitment; these policies help the
policyholders meet the dual need of protection and long term wealth
creation efficiently. Growth through dividends - Traditional
policies offer an opportunity to participate in the economic growth
without taking the investment risk. The investment income is
distributed among the policyholders through annual announcement of
dividends/bonus. Facility of loans without affecting the policy
benefits - Policyholders have the option of taking loan against the
policy. This helps you meet your unplanned life stage needs without
adversely affecting the benefits of the policy they have bought.
Tax Benefits-Insurance plans provide attractive tax-benefits for
both at the time of entry and exit under most of
the plans. Mortgage Redemption- Insurance acts as an effective
tool to cover mortgages and loans taken by the policyholders so
that, in case of any unforeseen event, the burden of repayment does
not fall on the bereaved family Social cost, in economics, is
generally defined in opposition to "private cost". In economics,
theorists model individual decision-making as measurement of costs
and benefits. Rational choice theory often assumes that individuals
consider only the costs they themselves bear when making decisions,
not the costs that may be borne by others. With pure private goods,
the costs carried by the individuals involved are the only
economically meaningful costs. The choice to purchase a glass of
lemonade at a lemonade stand has little consequence for anyone
other than the seller or the buyer. The costs involved in this
economic activity are the costs of the lemons and the sugar and the
water that are ingredients to the lemonade, the opportunity cost of
the labour to combine them into lemonade, as well as any
transaction costs, such as walking to the stand. If there is a
negative externality, then social costs will be greater than
private costs. Environmental pollution is an example of a social
cost that is seldom borne completely by the polluter, thereby
creating a negative externality. If there is a positive
externality, then one will have higher social benefits than private
benefits. For example, when a supplier of educational services
indirectly benefits society as a whole but only receives payment
for the direct benefit received by the recipient of the education:
the benefit to society of an educated populace is a positive
externality. In either case, economists refer to this as market
failure because resources will be allocated inefficiently. In the
case of negative externalities, private agents will engage in too
much of the activity; in the case of positive externalites, they
will engage in too little. (The marginal rate of transformation in
production will not be equal to the marginal rate of substitution
in consumption due to the effect of the externality and as a result
Pareto optimality will not occursee welfare economics for an
explanation.)
Master of Business Administration MBA Semester 4 MF0009
Insurance and Risk Management Assignment Set 2Q.1.What is the
nature of actuarial practice? Discuss the actuarial modeling
principles? Nature of Actuarial Practice The primary focus of
actuarial work is on the financial and economic consequences of
events involving risk and uncertainty. Actuarial practice involves
the management of these implications and their associated
uncertainties. To gain insights about future possibilities, the
actuary depends on observation and the wisdom gained through prior
experience. The actuary uses these observations and this experience
when constructing validating and applying models. Actuarial models
are constructed to aid in the assessment of the financial and
economic consequences associated with phenomena that are subject to
uncertainty with respect to occurrence, timing, or severity. This
requires: a) Understanding the conditions and processes under which
past observations were obtained. b) Anticipating changes in those
conditions that will affect future experience. c) Evaluating the
quality of the available data. d) Bringing judgment to bear on the
modeling process. e) Validating the work as it progresses. f)
Estimating the uncertainty inherent in the modeling process itself.
Actuarial Modeling Principles Principles abstract the key elements
of the scientific framework. Principles are not prescriptions that
specify how actuarial work is to be done, but are statements
grounded in observations and experience. The concept of actuarial
risk defines the subject matter of actuarial science. An actuarial
risk is a phenomenon that has economic consequences and is subject
to uncertainty with respect to one or more of the actuarial risk
variables occurrence, timing and severity. Principle of Modeling or
Actuarial risks This provides assurance that actuarial risk can be
analyzed and that estimates of future behavior can be obtained.
Actuarial risks can be stochastically modeled based on assumptions
about the probability that will apply to the actuarial risk
variables in the future, including assumptions about the future
environment. A model described by this principle together with a
present value model, if applicable, is called an actuarial model.
Actuarial assumptions are those upon which an actuarial model is
based. An actuarial model can be constructed using data from
prior
experiments, data from related phenomena or judgment. Such a
model can be validated by comparing its results to the actual
outcomes to the phenomena being modeled. In certain circumstances,
the actuary choice of assumptions may be constrained by regulations
or by professional standards. In general, an actuarial model
utilizes a present value model if it is intended to determine
economic values. A present value model included in an actuarial
model is often based on assumptions concerning aspects of the
future environment, such as interest rates and inflation rates. The
present value model can reflect the judgment of the actuary
constructing the model or that of the actuary client. Although all
actuarial risk is subject to timing considerations, a present value
model directly addresses timing risk and is used if the time
dimension is significant. Most actuarial models are representations
of collection of related actuarial risks. For example, the
actuarial risk of claims under Rs.100, 000 life insurance policies
issued to selected 45-year-old male sand the actuarial risk of
claims under Rs.200, 000 policies for similarly selected insured
can usually be represented by the same actuarial model. The
economic consequences in effect act as a scaling factor that
relates these separate phenomena and allows the same model to apply
to both. In other words, the economic consequences suggest exposure
measures. This observation applies to most actuarial models,
although the economic consequences and exposure measures may not be
in exact proportion. Principle of Exposure For most actuarial
models there exist one or more exposure measures that are
approximately proportional to the economic consequences of one or
more collections of the actuarial risks being modeled. The degree
of accuracy of a mathematical model is based on a comparison of
values calculated using the model with known values. As time passes
and more known values are available for comparison, the degree of
accuracy of the model may change. In the case of a model that is
initially validated only judgmentally, it may become possible to
determine the degree of accuracy. Actuarial modeling involves a
feedback mechanism. As additional data emerge or the environment
changes, the model may need to be changed. Principle of continued
validity of Actuarial models The change over time in the degree of
accuracy of an initially valid actuarial model depends upon changes
in the: a. Nature of the right to receive or the duty to make a
payment b.Various environments (for example, regulatory, judicial,
social, financial, and economic) within which the modeled events
occur financial, economic) within which the modeled events occur.
c. Sufficiency and quality of the data available to validate the
model.d. Actuary understands the environment.
2) Discuss the various methods of reinsurance. Explain with
suitable examples.Reinsurance is insurance that is purchased by an
insurance company (reinsurer) from an insurer as a means of risk
management, to transfer risk from the insurer to the reinsurer. The
reinsurer and the insurer enter into a reinsurance agreement which
details the conditions upon which the reinsurer would pay the
insurer's losses (in terms of excess of loss or proportional to
loss). The reinsurer is paid a reinsurance premium by the insurer,
and the insurer issues thousands of policies. For example, assume
an insurer sells one thousand policies, each with a $1 million
policy limit. Theoretically, the insurer could lose $1 million on
each policy totaling to $1 billion. It may be better to pass some
potential risk to a reinsurance company (reinsurer) as this will
minimize the insurer's risk. There are two basic methods of
reinsurance: Facultative Reinsurance is specific reinsurance
covering a single risk. The reinsurer is reinsuring one insured on
a specific policy. Each facultative risk is submitted by the
insurer to the reinsurer. Treaty Reinsurance is a method of
reinsurance requiring the insurer and the reinsurer to formulate
and execute a reinsurance contract. The reinsurer then covers all
the insurance policies coming within the scope of that contract.
There are two basic methods of treaty reinsurance: Quota Share
Treaty Reinsurance, and Excess of Loss Treaty Reinsurance. In the
past 30 years there has been a major shift from Quota Share to
Excess of Loss in the property and casualty fields. Almost all
insurance companies have a reinsurance program. The ultimate goal
of that program is to reduce their exposure to loss by passing the
exposure to loss to a reinsurer or a group of reinsurers.
Therefore, they are 'transferring some of the risk to the reinsurer
or a group of reinsurers'. Insurance, which is regulated at the
state level (in the USA), permits an insurer only to issue policies
with a maximum limit of 10% of their surplus (net worth), unless
those policies are reinsured
3) What are the critical issues in bancassurance.The Bank
Insurance Model ('BIM'), also sometimes known as 'Bancassurance',
is the term used to describe the partnership or relationship
between a bank and an insurance company whereby the insurance
company uses the bank sales channel in order to sell insurance
products. BIM allows the insurance company to maintain smaller
direct sales teams as their products are sold through the bank to
bank customers by bank staff. Bank staff and tellers, rather than
an insurance salesperson, become the point of sale/point of contact
for the customer. Bank staff are advised and supported by the
insurance company through product information, marketing campaigns
and sales training. Both the bank and insurance company share the
commission. Insurance policies are processed and administered by
the insurance company. BIM differs from 'Classic' or Traditional
Insurance Model (TIM) in that TIM insurance companies tend to have
larger insurance sales teams and generally work with brokers and
third party agents such as MAIC. An additional approach, the Hybrid
Insurance Model (HIM), is a mix between BIM and TIM. HIM insurance
companies may have a sales force, may use brokers and agents and
may have a partnership with a bank. BIM is extremely popular in
European countries such as Spain, France and Austria. The usage of
the term picked up as banks and insurance companies merged and
banks sought to provide insurance, especially in markets that have
been liberalised recently. It is a controversial idea, and many
feel it gives banks too great a control over the financial industry
or creates too much competition with existing insurers. In some
countries, bank insurance is still largely prohibited, but it was
recently legalized in countries such as the United States, when the
Glass-Steag all Act was repealed after the passage of the
Gramm-Leach-Bliley Act. But revenues have been modest and flat in
recent years, and most insurance sales in U.S. banks are for
mortgage insurance, life insurance or property insurance related to
loans. But China recently allowed banks to buy insurers and vice
versa, stimulating the bancassurance product, and some major global
insurers in China have seen the bancassurance product greatly
expand sales to individuals across several product lines. MAIC
Privat bancassurance is a wealth management process pioneered by
Lombard International Assurance and now used globally. The concept
combines private banking and investment management services with
the sophisticated use of life assurance as a financial planning
structure to achieve fiscal advantages and security for wealthy
investors and their families. In addition the Treasury function may
also have a Proprietary Trading desk that conducts trading
activities for the bank's own account and capital, an Asset
liability management or ALM desk that manages the risk of interest
rate mismatch and liquidity; and a Transfer Pricing or Pooling
function that prices liquidity for business lines (the liability
and asset sales teams) within the bank. Banks may or may not
disclose the prices they charge for Treasury Management
products
Q.2 What is Qualified Institutional Placement? Do you think it
is injustice on retail investors of the Company? Qualified
institutional placement (QIP) is a capital raising tool, primarily
used in India, whereby a listed company can issue equity shares,
fully and partly convertible debentures, or any securities other
than warrants which are convertible to equity shares to a Qualified
Institutional Buyer (QIB). Apart from preferential allotment, this
is the only other speedy method of private placement whereby a
listed company can issue shares or convertible securities to a
select group of persons. QIP scores over other methods because the
issuing firm does not have to undergo elaborate procedural
requirements to raise this capital. The Securities and Exchange
Board of India (SEBI) introduced the QIP process through a circular
issued on May 8, 2006[1], to prevent listed companies in India from
developing an excessive dependence on foreign capital. Prior to the
innovation of the qualified institutional placement, there was
concern from Indian market regulators and authorities that Indian
companies were accessing international funding via issuing
securities, such as American depository receipts (ADRs), in outside
markets. The complications associated with raising capital in the
domestic markets had led many companies to look at tapping the
overseas markets. This was seen as an undesirable export of the
domestic equity market, so the QIP guidelines were introduced to
encourage Indian companies to raise funds domestically instead of
tapping over seas markets.
In India Therefore, in order to encourage domestic securities
placements (instead of foreign currency convertible bonds (FCCBs)
and global or American depository receipts (GDRs or ADRs)), the
Securities Exchange Board of India (SEBI) has with effect from May
8, 2006 inserted Chapter XIIIA into the SEBI (Disclosure &
Investor Protection) Guidelines, 2000 (the DIP Guidelines), to
provide guidelines for Qualified Institutional Placements (the QIP
Scheme). The QIP Scheme is open to investments made by Qualified
Institutional Buyers (which includes public financial institutions,
mutual funds, foreign institutional investors, venture capital
funds and foreign venture capital funds registered with the SEBI)
in any issue of equity shares/ fully convertible debentures/ partly
convertible debentures or any securities other than warrants, which
are convertible into or exchangeable with equity shares at a later
date (Securities). Pursuant to the QIP Scheme, the Securities may
be issued by the issuer at a price that shall be no lower than the
higher of the average of the weekly high and low of the closing
prices of the related shares quoted on the stock exchange (i)
during the preceding six months; or (ii) the preceding two weeks.
The issuing company may issue the Securities only on the basis of a
placement document and a merchant banker needs to be appointed for
such purpose. There are certain obligations which are to be
undertaken by the merchant banker. The minimum number of QIP
allottees shall not be less than two when the aggregate issue size
is less than or equal to Rs 250 crore; and not less than five,
where the issue size is greater than Rs 250 crore. However, no
single allottee shall be allotted more than 50 per cent of the
aggregate issue size. The aggregate of proposed placement under the
QIP Scheme and all previous placements made in the same financial
year by the company shall not exceed five times the net worth of
the issuer as per the audited balance sheet of the previous
financial year. The Securities allotted pursuant to the QIP Scheme
shall not be sold by the allottees for a period of one year from
the date of allotment except on a recognized stock exchange. This
provision allows the allottees an exit mechanism on the stock
exchange without having to wait for a minimum period of one year,
which would have been the lock in period had they subscribed to
such shares pursuant to a preferential allotment. Q.3 What is risk
involved in investment in debt funds where more than 90% investment
is in Government bonds? Which short term option (90days) you will
choose for your Company for investment of liquid surplus and why.
The following is a list of services generally offered by banks and
utilised by larger businesses and corporations: Account
Reconcilement Services: Balancing a checkbook can be a difficult
process for a very large business, since it issues so many checks
it can take a lot of human monitoring to understand which checks
have not cleared and therefore what the company's true balance is.
To address this, banks have developed a system which allows
companies to upload a list of all the checks that they issue on a
daily basis, so that at the end of the month the bank statement
will show not only which checks have cleared, but also which have
not. More recently, banks have used this system to prevent checks
from being fraudulently cashed if they are not on the list, a
process known aspositive pay. Advanced Web Services: Most banks
have an Internet-based system which is more advanced than the one
available to consumers. This enables managers to create and
authorize special internal logon credentials, allowing employees to
send wires and access other cash management features normally not
found on the consumer web site. Armored Car Services (Cash
Collection Services): Large retailers who collect a great deal of
cash may have the bank pick this cash up via an armored car
company, instead of asking its employees to deposit the cash.
Automated Clearing House: services are usually offered by the cash
management division of a bank. The Automated Clearing House is an
electronic system used to transfer funds between banks. Companies
use this to pay others, especially employees (this is how direct
deposit works). Certain companies also use it to collect funds from
customers (this is generally how automatic payment plans work).
This system is criticized by some consumer advocacy
groups, because under this system banks assume that the company
initiating the debit is correct until proven otherwise. Balance
Reporting Services: Corporate clients who actively manage their
cash balances usually subscribe to secure web-based reporting of
their account and transaction information at their lead bank. These
sophisticated compilations of banking activity may include balances
in foreign currencies, as well as those at other banks. They
include information on cash positions as well as 'float' (e.g.,
checks in the process of collection). Finally, they offer
transaction-specific details on all forms of payment activity,
including deposits, checks, wire transfers in and out, ACH
(automated clearinghouse debits and credits), investments, etc.
Cash Concentration Services: Large or national chain retailers
often are in areas where their primary bank does not have branches.
Therefore, they open bank accounts at various local banks in the
area. To prevent funds in these accounts from being idle and not
earning sufficient interest, many of these companies have an
agreement set with their primary bank, whereby their primary bank
uses the Automated Clearing House to electronically "pull" the
money from these banks into a single interest-bearing bank account.
Lockbox - Retail: services: Often companies (such as utilities)
which receive a large number of payments via checks in the mail
have the bank set up a post office box for them, open their mail,
and deposit any checks found. This is referred to as a "lockbox"
service. Lockbox - Wholesale: services: are for companies with
small numbers of payments, sometimes with detailed requirements for
processing. This might be a company like a dentist's office or
small manufacturing company. Positive Pay: Positive pay is a
service whereby the company electronically shares its check
register of all written checks with the bank. The bank therefore
will only pay checks listed in that register, with exactly the same
specifications as listed in the register (amount, payee, serial
number, etc.). This system dramatically reduces check fraud.
Reverse Positive Pay: Reverse positive pay is similar to positive
pay, but the process is reversed, with the company, not the bank,
maintaining the list of checks issued. When checks are presented
for payment and clear through the Federal Reserve System, the
Federal Reserve prepares a file of the checks' account numbers,
serial numbers, and dollar amounts and sends the file to the bank.
In reverse positive pay, the bank sends that file to the company,
where the company compares the information to its internal records.
The company lets the bank know which checks match its internal
information, and the bank pays those items. The bank then
researches the checks that do not match, corrects any misreads or
encoding errors, and determines if any items are fraudulent. The
bank pays only "true" exceptions, that is, those that can be
reconciled with the company's files. Sweep accounts: are typically
offered by the cash management division of a bank. Under this
system, excess funds from a company's bank accounts are
automatically moved into a money market mutual fund overnight, and
then moved back the next morning. This allows them to earn interest
overnight. This is the primary use of money market mutual funds
Zero Balance Accounting: can be thought of as somewhat of a hack.
Companies with large numbers of stores or locations can very often
be confused if all those stores are depositing into a single bank
account. Traditionally, it would be impossible to know which
deposits were from which stores without seeking to view images of
those deposits. To help correct this problem, banks developed a
system where each store is given their own bank account, but all
the money deposited into the individual store accounts are
automatically moved or swept into the company's main bank account.
This allows the company to look at individual statements for each
store. U.S. banks are almost all converting their systems so that
companies can tell which store
made a particular deposit, even if these deposits are all
deposited into a single account. Therefore, zero balance accounting
is being used less frequently. Wire Transfer: A wire transfer is an
electronic transfer of funds. Wire transfers can be done by a
simple bank account transfer, or by a transfer of cash at a cash
office. Bank wire transfers are often the most expedient method for
transferring funds between bank accounts. A bank wire transfer is a
message to the receiving bank requesting them to effect payment in
accordance with the instructions given. The message also includes
settlement instructions. The actual wire transfer itself is
virtually instantaneous, requiring no longer for transmission than
a telephone call. Controlled Disbursement: This is another product
offered by banks under Cash Management Services. The bank provides
a daily report, typically early in the day, that provides the
amount of disbursements that will be charged to the customer's
account. This early knowledge of daily funds requirement allows the
customer to invest any surplus in intraday investment
opportunities, typically money market investments. This is
different from delayed disbursements, where payments are issued
through a remote branch of a bank and customer is able to delay the
payment due to increased float time
Masters in Business Administration-MBA Semester III MF0007
Treasury Management 2 Credits Assignment Set-2Note: Each question
carries 10 Marks. Answer all the questions. Q.1 Give any three
measures taken by RBI in the recent past (1 year) to liberalise
exchange control? The three measures taken by RBI in the recent
past (1 year) to liberalise exchange control are: 1. The Committee
has focused on moving towards a policy content supported with
procedures that would enable individuals to undertake foreign
exchange transactions, with operational ease as is in the case of
rupee transactions. 2. Noted for guidance for future. It may also
be noted that a variety of measures have been taken both to
liberalise facilities as well as carry out relaxation in procedures
for foreign exchange transactions involving individuals. Some of
them are: Simplification of exchange release of foreign exchange
upto USD 10,000 for private travel in any calendar year. Procedural
simplification of any permitted current account transaction upto
USD 5,000 without documentary requirements. Release of foreign
exchange upto USD 100,000 on the basis of selfcertification towards
study abroad, medical treatment overseas, employment abroad,
emigration and towards maintenance of close relatives. Use of
International Credit Card upto sanctioned credit limit for meeting
expenses/making purchases while abroad and for purchase of books
and other items through Internet. 3. Though there has been a move
away from micro regulation of transactions and authorised dealers
(ADs) were given the freedom and responsibility on appropriate
documentation for current account transactions, room for
improvement will be continuously explored. Greater focus is being
placed on monitoring flows and analysis of data under various Auto
Route facilities. Q.2 Explain various objectives of liquidity
management by Banks. What steps Banks can take to meet the
impending shortage of liquidity? Measuring and managing the
liquidity needs are vital for effective operation of commercial
banks. By assuring a bank's ability to meet its liabilities as they
become due, liquidity management can reduce the probability of an
adverse situation developing. The importance of liquidity
transcends individual institutions, as liquidity shortfall in one
institution can have repercussions on the entire system. Bank
managements should measure, not only the liquidity positions of
banks on an ongoing basis, but also examine how liquidity
requirements are likely to evolve under different conditions. Banks
are in the business of maturity transformation. They lend for
longer time periods, as borrowers normally prefer a longer time
frame. But their liabilities are typically short term in nature, as
lenders normally prefer a shorter time frame (liquidity
preference). This results in long-term interest rates typically
exceeding short-term rates. Hence, the incentive for banks for
performing the function of financial intermediation is the
difference between interest receipt and interest cost which is
called the interest spread. It is implicit, therefore, that banks
will have a mismatched balance sheet, with liabilities greater than
assets in short term, and with assets greater than liabilities in
the medium and long term. These mismatches, which represent
liquidity risk, are with respect to various time horizons. Hence,
the overwhelming concern of a bank is to maintain adequate
liquidity. Liquidity has been defined as the ability of an
institution to replace liability run off and fund asset growth
promptly and at a reasonable price. Maintenance of superfluous
liquidity will, however, impact profitability adversely. It can
also be defined as the comprehensive ability of a bank to meet
liabilities exactly when they fall due or when depositors want
their money back.
This is a heart of the banking operations and distinguishes a
bank from other entities. Objectives and Methodology of the Study
Though Basel Capital Accord and subsequent RBI guidelines have
given a structure for Liquidity Management and Asset Liability
Management (ALM) in banks, the Indian banking system has not
enforced the guidelines in total. The banks have formed
Asset-Liability Committees (ALCO) as per the guidelines; but these
committees rarely meet to take decisions. Taking this as a base,
this research article attempts to find out the status of Liquidity
Management in State Bank of India with the help of "Cash Flow
Approach" methodology for controlling liquidity risk Q.3 What is
operating cycle? How does it affect working capital management?
What are other major factors that influence working capital
management? Operating cycle is the average time between purchasing
or acquiring inventory and receiving cash proceeds from its sale.
Decisions relating to working capital and short term financing are
referred to as working capital management. These involve managing
the relationship between a firm's short-term assets and its
short-term liabilities. The goal of working capital management is
to ensure that the firm is able to continue its operations and that
it has sufficient cash flow to satisfy both maturing short-term
debt and upcoming operational expenses. Decision criteria By
definition, working capital management entails short term decisions
- generally, relating to the next one year period - which are
"reversible". These decisions are therefore not taken on the same
basis as Capital Investment Decisions (NPV or related, as above)
rather they will be based on cash flows and / or profitability. One
measure of cash flow is provided by the cash conversion cycle - the
net number of days from the outlay of cash for raw material to
receiving payment from the customer. As a management tool, this
metric makes explicit the inter-relatedness of decisions relating
to inventories, accounts receivable and payable, and cash. Because
this number effectively corresponds to the time that the firm's
cash is tied up in operations and unavailable for other activities,
management generally aims at a low net count. In this context, the
most useful measure of profitability is Return on capital (ROC).
The result is shown as a percentage, determined by dividing
relevant income for the 12 months by capital employed; Return on
equity (ROE) shows this result for the firm's shareholders. Firm
value is enhanced when, and if, the return on capital, which
results from working capital management, exceeds the cost of
capital, which results from capital investment decisions as above.
ROC measures are therefore useful as a management tool, in that
they link short-term policy with long-term decision making. See
Economic value added (EVA). Management of working capital Guided by
the above criteria, management will use a combination of policies
and techniques for the management of working capital. These
policies aim at managing the current assets (generally cash and
cash equivalents, inventories and debtors) and the short term
financing, such that cash flows and returns are acceptable. Cash
management. Identify the cash balance which allows for the business
to meet day to day expenses, but reduces cash holding costs.
Inventory management. Identify the level of inventory which allows
for uninterrupted production but reduces the investment in raw
materials - and minimizes reordering costs - and hence increases
cash flow. Besides this, the lead times in production should be
lowered to reduce Work in Progress (WIP) and similarly, the
Finished Goods should be kept on as low level as possible to avoid
over production - see Supply chain management; Just In Time (JIT);
Economic order
quantity (EOQ); Economic production quantity Debtors management.
Identify the appropriate credit policy, i.e. credit terms which
will attract customers, such that any impact on cash flows and the
cash conversion cycle will be offset by increased revenue and hence
Return on Capital (or vice versa); see Discounts and allowances
Short term financing. Identify the appropriate source of financing,
given the cash conversion cycle: the inventory is ideally financed
by credit granted by the supplier; however, it may be necessary to
utilize a bank loan (or overdraft), or to "convert debtors to cash"
through "factoring"
Master of Business Administration MBA Semester 4 MB0036
Strategic Management & Business Policy Assignment Set- 1Note:
Each question carries 10 Marks. Answer all the questions. 1.
Explain the different circumstances under which a suitable growth
strategy should be selected by any company to improve its
performance (i.e., intensive, integrative or diversification
growth). You may select an example of your choice to substantiate
your views (10 marks). Strategies to Improve Sales There are three
alternatives to improve the sales performance of a business unit,
to fill the gap
between actual sales and targeted sales: a) Intensive growth b)
Integrative growth c) Diversification growth a) Intensive Growth:
It refers to the process of identifying opportunities to achieve
further growth within the companys current businesses. To achieve
intensive growth, the management should first evaluate the
available opportunities to improve the performance of its existing
current businesses. It may find three options: To penetrate into
existing markets To develop new markets To develop new products At
times, it may be possible to gain more market share with the
current products in their current markets through a market
penetration strategy. For instance, SONY introduced TV sets with
Trinitron picture tubes into the market in 1996 priced at a premium
of Rs.10,000 and above over the market through a niche market
capture strategy. They gradually lowered the prices to market
levels. However, it also simultaneously launched higher-end
products (high-technology products) to maintain its global image as
a technology leader. By lowering the prices of TVs with Trinitron
picture tubes, the company could successfully penetrate into the
market in 1996 priced at a premium of Rs.10,000 and above over the
market through a niche market capture strategy. They gradually
lowered the prices to market levels. However, it also
simultaneously launched higher-end products (hightechnology
products) to maintain its global image as a technology leader. By
lowering the prices of TVs with Trinitron picture tubes, the
company could successfully penetrate into the markets to add new
customers to its customer base. Market Development Strategy is to
explore the possibility to find or develop new markets for its
current products (from the northern region to the eastern region
etc.). Most multinational companies have been entering Indian
markets with this strategy, to develop markets globally. However,
care should be taken to ensure that these new markets are not low
density or saturated markets, which could lead to price pressures.
Product Development Strategy involves consideration of new products
of potential interest to its current markets (e.g. Gramaphone
Records to Musical Productions to CDs) as part of a
Diversifications trategy. b) Integrative Growth: It refers to the
process of identifying opportunities to develop or acquire
businesses that are related to the companys current businesses.
More often, the business processes have to be integrated for linear
growth in the profits. The corporate plan may be designed to
undertake backward, forward or horizontal integration within the
industry. If a company operating in music systems takes over the
manufacturing business of its plastic material supplier, it would
be able to gain more control over the market or generate more
profit. (BackwardIntegr ation)
Alternatively, if this company acquires some of its most
profitably operating intermediaries such as wholesalers or
retailers, it is forward integration. If the company legally takes
over or acquires the business of any of its leading competitors, it
is called horizontal integration (however, if this competitor is
weak, it might be counter-productive due to dilution of brand
image). c) Diversification Growth: It refers to the process of
identifying opportunities to develop or acquire businesses that are
not related to the companys current businesses. This makes sense
when such opportunities outside the present businesses are
identified with attractive returns and that industry has business
strengths to be successful. In most cases, this is planned with new
products that have technological or marketing synergies with
existing businesses to cater to a different group of customers
(Concentric Diversification). A printing press might shift over to
offset printing with computerised content generation to appeal to
higher-end customers and also add new application areas (
Horizontal Diversification ) or even sell stationery.
Alternatively, the company might choose new businesses that have
nothing to do with the current technology, products or markets
(Conglomerate Diversification). The classic examples for this would
be engineering and textile firms setting up software development
centres or Call Centres with new service clients.
2. What are the components of a good Business Plan and briefly
explain the importance of each.(10 marks).
The format of a Business Plan is something that has been
developed and refined over the years and is something that should
not be changed. Like a good recipe, a business plan needs to
include certain ingredients to make it work. When you create a
business plan, don't attempt to recreate its format. Those
reviewing this type of document have expectations you must meet. If
they do not see those crucial decision-making components, they'll
see no reason to proceed with their review of your business plan,
no matter how great your business idea. Executive Summary Section
Every business plan must begin with an Executive Summary section. A
well-written Executive Summary is critical to the success of the
rest of the document. Here is where you need to capture the
attention of your audience so that they will be compelled to read
on. Remember, it's a summary, so each and every word must be
carefully selected and presented. Use the Executive Summary section
of your business plan to accurately describe the nature of your
business venture including the need that you plan to fill. Show the
reasons why people need your product or service. Show this by
including a brief analysis of the characteristics of your potential
market. Describe the organization of your business including your
management team. Also, briefly describe your sales and marketing
plan or approach. Finally include the numbers that those reviewing
your business plan want to see - the amount of capital you seek,
the carefully calculated sales projections and your plan to repay
the loan. If you've captured your audience so far they'll read on.
Otherwise, they'll close the document and add your business plan to
the heap of other rejected ideas. Devote the balance of your
business plan to providing details of the items outlined in the
Executive Summary. The Business Section Be sure to include the
legal name, physical address and detailed description of the nature
of your business. It's important to keep the description easy to
read using common terminology. Never assume that those reading your
business plan have the same level of technical knowledge that you
do. Describe how you plan to better serve your market than your
competition is currently doing. Market Analysis Section An analysis
of the market shows that you have done your homework. This section
is basically a summary of your Marketing Plan. It needs to show the
demand for your product or service, the proposed market, trends
within the industry, a description of your pricing plan and
packaging and a description of your company policies. Financing
Section
The Financing section must show that you are as committed to
your business venture as you expect those reading your business
plan to be. Show the amount of personal funds you are contributing
and their source. Also include the amount of capital you need and
your plan to repay this debt. Include all pertinent financial
worksheets in this section: annual income projections, a break-even
worksheet, projected cash flow statements and a balance sheet.
Management Section Outline your organizational structure and
management team here. Include the legal structure of your business
whether it is a partnership, corporation or limited liability
corporation. Include resumes and biographies of key players on your
management team. Show staffing projection data for the next few
years. By now you're probably thinking that you don't need Business
Plan just yet. Well you do, and there is business plan building
software that can help you through this immense project. These
software packages are easy to use and affordable. Use one today and
produce a professional- quality Business Plan - including all
critical components tomorrow!
3. You wish to start a new venture to manufacture auto
components. Explain different stages in the process of starting
this new business. (10 marks). Sol. Every business starts out as an
idea. This idea usually involves the invention of a new product, or
revolves around a better way of making and marketing an existing
one. While many would argue that the idea stage is not a stage at
all, it is actually a turning point, as business adviser Mike
Pendrith points out. After this, you as a business builder must
refine this idea into a money- making reality. Here in this case
supposing we are to start a new venture of manufacturing auto
components and also to market them. We will see here in the
following paragraphs different stages of achieving the same goal.
1. Idea Researching In this stage, you are researching your idea.
The object of your research is to find out who is marketing the
same product or service in your area, and how successful the
marketer has been. You can accomplish this by a Google search on
the Internet, launching a test- marketing campaign, or conducting
surveys. Also, you are attempting to find what the level of
interest is in the products (or services) you wish to market. Here
as the main goal is to start a company that manufactures the auto
components, we are to make a research on all the auto companies
which are procuring the spares from the outside vendors. And also
the competitors who are all marketing that, their existence and
also how successful they are. As part of the initial research
process, it is important to consider the legal requirements of
selling your product or service. According to the Biz Ed website,
examine the legal ramifications of your business. Know the tax laws
governing your business. If insurance is a requirement, prepare to
budget for it. Also, be aware of any safety laws governing you as
an employer. Hence we are also to make a research on the feasible
area where we can start our organization and licenses that we need
to take keeping in mind the environmental factors as well. 2.
Business Plan Formulation You must write a business plan. As
Pendrith points out, this is crucial if you want funding, such as a
small business loan or grant, or if you wish to lease a building.
At this stage, Pendrith advises, you need to consult with an
attorney or business adviser for assistance. In the business plan
you typically include following heads: i) Executive Summary ii)
Company and Product Description iii) Market Description iv)
Equipment and Materials v) Operations
vi) Management and Ownership vii) Financial Information and
Start-Up Timeline viii) Risks and Their Mitigation
3. Financial Planning Financial planning involves thinking about
the financial costs of starting and maintaining your business.
According to the Biz Ed website, you should consider such issues as
the costs of running the business; the prices you wish to charge
your customers; cash flow control; and how you wish to set up
financial reserves in case of an emergency or an event causing
significant loss to the business. This includes the planning of
whether to take any loans or make personal investments in the
company. 4. Advertising Campaign Decide how you will market your
product. Consider your budget and your target audience. Make up
business cards with your logo on it, your name and the name of your
business. Make sure that they are of the most professional quality.
Utilizing print, the newspaper, the Internet, radio or TV is also
wise, considering, of course, the size of your advertising budget.
Here in this case more than TV, a better advertising media will be
road side sign boards placed close to the auto companies for
getting the deals to manufacture their spares. As TV is useful only
to reach the common man and he is not our target customer. Hence
sign boards is the feasible solution and also pamphlets circulated
across the pioneers. This apart personal marketing is much more
suggested. 5. Preparing for Launch Advertise for employees. This
also requires adequate planning. Think about what you look for in
an employee. Be specific about the requisite skills and experience
you are seeking. Then begin requesting resumes and setting up
interviews, making hiring decisions based on the standards you have
set.
In this case we will be looking for a few candidates in
managerial position who must be good in managing things apart from
minimal technical knowledge. Lower level people at the shopfloor
people. They need to have real time experience in the shop floor
activities. The employees apart, one needs to plan on the plant and
machinery as well. Thus these are all the stages that I would
consider performing if incase I plan to start a manufacturing unit
producing automobile components.
4. Explain the process of due Diligence and why it is
necessary.(10 marks). Sol. Due diligence Of course, your commercial
partner will need some reassurance about the quality of the offer
you are making to them. If you are involved in licensing technology
or seeking commercial support for your research you are likely to
hear of due diligence. When a future partner is considering whether
or not to license technology, to buy a share of patent rights, or
to support your research, they will need to satisfy themselves that
it is a viable proposition. The process of assessing the viability,
risk, potential liabilities and commercial prospects of a project
is known as due diligence. Indeed, if a potential partner seems not
to be interested in this kind of issues, it may actually raise
questions about their commitment to the project or the credibility
of their business plan, particularly if the relationship assumes
some degree of risk and investment on their part. Generally, due
diligence will involve assessing the overall commercial operations,
cash flow, assets and liabilities of a business that is being
purchased or otherwise financially supported. You would think twice
about purchasing a business if you found that it was burdened with
debts, or was about to be involved in difficult litigation, or if
there were doubts about whether it really owned its assets. The
same applies to a potential investment involving intellectual
property. For instance, a potential commercial partner would not
want to invest in patented technology only to find out that patent
renewal fees have not been paid and the patent has lapsed, or to
find out that the patent was being opposed by another company, or
to find that there is prior art available that calls into question
its validity. It may transpire that a student, a contractor or a
visiting researcher could actually be legally entitled to some or
all of the patent rights. Even a serious level of uncertainty or
doubt could be enough to deter a potential partner,
especially if they have run into this kind of difficulty before.
Due diligence may also involve searching for information about the
full range of IP rights that might impact on the relevant
technology for instance, to check whether you have later filed
patent applications on improvements to the original patented
technology, that may limit the value of their investment in the
original technology. Other intellectual property rights such as
related trade mark or design registrations, or key trade secrets or
copyright material (such as manuals or software) may also need to
be identified or located, as these may also affect the commercial
partners interests in the technology. For example, they may be
unwilling to take out a licence for your patent without getting
access to the software you have developed for a related process.
They may want the right to use your trade mark in association with
the patented technology. So in a due diligence process, your
commercial partner may undertake a range of checks and need various
forms of information. These may include: Checks on external
records, such as patent registers and patent databases, including
foreign patents; Searches of patent databases for conflicting
technology; Independent advice from patent attorneys on issues such
as patent ownership, patent validity and scope of patent claims;
Checks on employment contracts, confidentiality arrangements, and
contracts with other parties that may interfere with the exercise
of IP rights; Details of the patent prosecution such as examiners
reports and other opinions; Details of any legal challenges to the
patent, and the way the proceedings were resolved; Checks on
laboratory notebooks in the event that the validity of US patents
is of concern to the commercial partner (this als