SIKKIM MANIPAL UNIVERSITY DEPARTMENT OF DISTANCE EDUCATION ASSIGNMENT

SEMESTER 4

NAME ROLL NUMBER LEARNING CENTRE PRADESH ASSIGNMENT SET No. COURSE NAME

SUNIL KUMAR GUPTA : : : 511029827 RAEBARELI-UTTAR 1 (One)

MBA - FINANCE

Master of Business Administration - MBA Semester 4 MF0015 - International Financial Management Assignment Set- 1 Q1. What is meant by BOP? How are capital account convertibility and current account convertibility different? What is the current scenario in India? Ans:- The balance of payments (or BOP) of a country is a record of international transactions between residents of one country and the rest of the world over a specified period, usually a year. Thus, Indias balance of payments accounts record transactions between Indian residents and the rest of the world. International transactions include exchanges of goods, services or assets. The term residents means businesses, individuals and government agencies and includes citizens temporarily living abroad but excludes local subsidiaries of foreign corporations. The balance of payments is a sources-and-uses-of-funds statement. Transactions such as exports of goods and services that earn foreign exchange are recorded as credit, plus, or cash inflows (sources). Transactions such as imports of goods and services that expend foreign exchange are recorded as debit, minus, or cash outflows (uses). The Balance of Payments for a country is the sum of the Current Account, the Capital Account and the change in Official Reserves. The current account is that balance of payments account in which all short-term flows of payments are listed. It is the sum of net sales from trade in goods and services, net investment income (interest and dividend), and net unilateral transfers (private transfer payments and government transfers) from abroad. Investment income for a country is the payment made to its residents who are holders of foreign financial assets (includes interest on bonds and loans, dividends and other claims on profits) and payments made to its citizens who are temporary workers abroad. Unilateral transfers are official government grants-in-aid to foreign governments, charitable giving (e.g., famine relief) and migrant workers transfers to families in their home countries. Net investment income and net transfers are small relative to imports and exports. Therefore a current account surplus indicates positive net exports or a trade surplus and a current account deficit indicates negative net exports or a trade deficit. The capital (or financial) account is that balance of payments account in which all cross-border transactions involving financial assets are listed. All purchases or sales of assets, including direct investment (FDI) securities (portfolio investment) and bank claims and liabilities are listed in the capital account. When Indian citizens buy foreign securities or when foreigners buy Indian securities, they are listed here as outflows and inflows, respectively. When domestic residents purchase more financial assets in foreign economies than what foreigners purchase of domestic assets, there is a net capital outflow. If foreigners purchase more Indian financial assets than domestic residents spend on foreign financial assets, then there will be

a net capital inflow. A capital account surplus indicates net capital inflows or negative net foreign investment. A capital account deficit indicates net capital outflows or positive net foreign investment. Current scenario in India The official reserves account (ORA) records the total reserves held by the official monetary authorities (central banks) within the country. These reserves are normally composed of the major currencies used in international trade and financial transactions. The reserves consist of hard currencies (such as US dollar, British Pound, Euro, Yen), official gold reserve and IMF Special Drawing Rights (SDR). The reserves are held by central banks to cushion against instability in international markets. The level of reserves changes because of the central banks intervention in the foreign exchange markets. Countries that try to control the price of their currency (set the exchange rate) have large net changes in their Official Reserve Accounts. In general, a net decrease in the Official Reserve Account indicates that a country is buying its currency in exchange for foreign exchange reserves, to try to keep the value of the domestic currency high with respect to foreign currencies. Countries with net increases in the Official Reserve Account are usually attempting to keep the price of the domestic currency cheap relative to foreign currencies, by selling their currencies and buying the foreign exchange reserves. When a central bank sells its reserves (foreign currencies) for the domestic currency in the foreign exchange market, it is a credit item in the balance of payment accounts as it makes available foreign currencies. Similarly, when a central bank buys reserves (foreign currency), it is a debit item in the balance of payment accounts. The Balance of Payments identity states that: Current Account + Capital Account = Change in Official Reserve Account. If a country runs a current account deficit and it does not run down its official reserve to cover this deficit (there is no change in official reserve), then the current account deficit must be balanced by a capital account surplus. Typically, in countries with floating exchange rate system, the change in official reserves in a given year is small relative to the Current Account and the Capital Account. Therefore, it can be approximated by zero. Thus, such a country can only consume more than it produces (or imports are greater than exports; a current account deficit) only if it has a capital account surplus (foreign residents are willing to invest in the country). Even in a fixed exchange rate system, the size of the official reserve account is small compared to the transactions in the current and capital account. Thus the residents of a country cannot have a current account deficit (imports exceeding exports) unless the foreigners are willing to invest in that country (capital account surplus). Q2. What is arbitrage? Explain with the help of suitable example a towway and a three-way arbitrage. Ans:- Arbitrage is the activity of exploiting imbalances between two or more markets. Foreign money exchangers operate their entire businesses on this principle. They find tourists who need the convenience of a quick cash exchange. Tourists exchange cash for less than the market rate and then the money exchanger converts those foreign funds into the local currency at a higher rate. The difference between the two rates is the spread or profit.

There are plenty of other instances where one can engage in the practice arbitrage. In some cases, one market does not know about or have access to the other market. Alternatively, arbitrageurs can take advantage of varying liquidities between markets. The term 'arbitrage' is usually reserved for money and other investments as opposed to imbalances in the price of goods. The presence of arbitrageurs typically causes the prices in different markets to converge: the prices in the more expensive market will tend to decline and the opposite will ensue for the cheaper market. The the efficiency of the market refers to the speed at which the disparate prices converge. Engaging in arbitrage can be lucrative, but it does not come without risk. Perhaps the biggest risk is the potential for rapid fluctuations in market prices. For example, the spread between two markets can fluctuate during the time required for the transactions themselves. In cases where prices fluctuate rapidly, would-be arbitrageurs can actually lose money. There are basically two types of arbitrage. One is two-way arbitrage and the other is three-way arbitrage. The more popular of the two is the two-way forex arbitrage. In the international market the currency is expressed in the form AAA/BBB. AAA denotes the price of one unit of the currency which the trader wishes to trade and it refers the base currency. While BBB is international three-letter code 0f the counter currency. For instance, when the value of EUR/USD is 1.4015, it means 1 euro = 1.4015 dollar. If the speculator is shrewd and has a deeper understanding of the forex market, then he can make use of this opportunity to make big profits. Forex arbitrage transactions are quite easy once you understand the method by which the business is conducted. For instance, the exchange rates of EUR/USD = 0.652, EUR/GBP = 1.312 and USD/GBP = 2.012. You can buy around 326100 Euros with $500,000. Using the Euros you buy approximately 248420 Pounds which is sold for approximately $500,043 and thereby earning a small profit of $43. To make a large profit on triangular arbitrage you should be ready to invest a large amount and deal with trustworthy brokers. Arbitrage is one of the strategies of forex trading. To make a substantial income out of this strategy you need to make an enormous amount of investment. Though theoretically it is considered to be risk free, in reality it is not the case. You should enter into this transaction only if you have deeper understanding of forex market. Hence, it would be wise not to devote much time in looking out for arbitrage opportunities. However, forex arbitrage is a rare opportunity and if it comes your way, then grab it without any hesitation. Three Way (Triangular) Arbitrage

The three way arbitrate inefficiency now arises when we consider a case in which the EUR/JPY exchange rate is NOT equivalent to the EUR/USD/USD/JPY case so there must be something going on in the market that is causing a temporary inconsistency. If this inconsistency becomes large enough one can enter trades on the cross and the other pairs in opposite directions so that the discrepancy is corrected. Let us consider the following example : EUR/JPY=107.86 EUR/USD=1.2713 USD/JPY = 84.75 The exchange rate inferred from the above would be 1.2713*84.75 which would be 107.74 and the actual rate is 107.86. What we can do now is short the EUR/JPY and go long EUR/USD and USD/JPY until the correlation is reestablished. Sounds easy, right ? The fact is that there are many important problems that make the exploitation of this three way arbitrage almost impossible. Q3. You are given the following information: Spot EUR/US: 0.7940/0.8007 Spot USD/GBP:1.8215/1.8240 Three months swap: 25/35 Calculate three month EUR/USD rate. Ans:1st Method : Forward Points = ((Spot * (1 + (OCR rate * n/360))) / (1 + (BCR rate * n/360))) Spot OCR = Other Currency Rate BCR = Base Currency Rate Forward points = ((0.07940 * (1 + (0.018215 * 90/360))) / (1 + (0.08007 * 90/360))) 0.07940 SWAP = -0.00120 Forward rate = 0.07940 - 0.00120 = 0.0782 Customer sells EUR 3 Mio against USD at 0.0782 at 3 month (0.07940 - 0.00120). Customer wants to Buy EUR 3 Mio against USD 3 months forward. Q.4 Explain various methods of Capital budgeting of MNCs. Ans:- Methods of Capital Budgeting Discounted Cash Flow Analysis (DCF) DCF technique involves the use of the time-value of money principle to project evaluation. The two most widely used criteria of the DCF technique are the Net Present Value (NPV) and the Internal Rate of Return (IRR). Both the techniques

discount the projects cash flow at an appropriate discount rate. The results are then used to evaluate the projects based on the acceptance/rejection criteria developed by management. NPV is the most popular method and is defined as the present value of future cash flows discounted at an appropriate rate minus the initial net cash outlay for the projects. The discount rate used here is known as the cost of capital. The decision criteria is to accept projects with a positive NPV and reject projects which have a negative NPV. The NPV can be defined as follows:

NPV = Where, I0 = initial cash investment CFt = expected after-tax cash flows in year t. k = the weighted average cost of capital n = the life span of the project. The NPV of a project is the present value of all cash inflows, including those at the end of the projects life, minus the present value of all cash outflows. The decision criteria is to accept a project if NPV o and to reject if NPV < o. IRR is calculated by solving for r in the following equation.

where r is the internal rate of return of the project. The IRR method finds the discount rate which equates the present value of the cash flows generated by the project with the initial investment or the rate which would equate the present value of all cash flows to zero. Adjusted Present Value Approach (APV) A DCF technique that can be adapted to the unique aspect of evaluating foreign projects is the Adjusted Present Value approach. The APV format allows different components of the projects cash flow to be discounted separately. This allows the required flexibility, to be accommodated in the analysis of the foreign project. The

APV approach uses different discount rates for different segments of the total cash flows depending upon the degree of certainty attached with each cash flow. In addition, the APV format helps the analyst to test the basic viability of the foreign project before accounting for all the complexities. If the project is acceptable in this scenario, no further evaluation based on accounting for other cash flows is done. If not, then an additional evaluation is done taking into account the other complexities. As mentioned earlier, foreign projects face a number of complexities not encountered in domestic capital budgeting, for example, the issue of remittance, foreign exchange regulation, lost exports, restriction on transfer of cash flows, blocked funds, etc. The APV model is a value additivity approach to capital budgeting, i.e., each cash flow as a source of value is considered individually. Also, in the APV approach each cash flow is discounted at a rate of discount consistent with the risk inherent in that cash flow. In equation form the APV approach can be written as:

APV =

Where the term Io = Present value of investment outlay

= Present value of operating cash flows

= Present value of interest tax shields

= Present value of interest subsidies The various symbols denote Tt = Tax savings in year t due to the financial mix adopted St = Before-tax value of interest subsidies (on the home currency) in year t due to project specific financing id = Before-tax cost of dollar debt (home currency)

The last two terms in the APV equation are discounted at the before-tax cost of dollar debt to reflect the relative certain value of the cash flows due to tax savings and interest savings. Q.5 a. What are depository receipts? Ans:- Depository Receipt (DR) is a negotiable certificate that usually represents a companys publicly traded equity or debt. When companies make a public offering in a market other than their home market, they must launch a depository receipt program. Depository receipts represent shares of company held in a depository in the issuing companys country. They are quoted in the host country currency and treated in the same way as host country shares for clearance, settlement, transfer and ownership purposes. These features make it easier for international investors to evaluate the shares than if they were traded in the issuers home market. There are two types of depository receipts GDRs and ADRs. Both ADRs and GDRs have to meet the listing requirements of the exchange on which they are traded. Q.5 b. Boeing commercial Airplane Co. manufactures all its planes in United States and prices them in dollars, even the 50% of its sales destined for overseas markets. Assess Boeings currency risk. How can it cope with this risk? Ans:- Boeing faces foreign exchange risk for two reasons: (1) It sells half its planes overseas and the demand for these planes depends on the foreign exchange value of the dollar, and (2) Boeing faces stiff competition from Airbus Industrie, a European consortium of companies that builds the Airbus. As the dollar appreciates, Boeing is likely to lose both foreign and domestic sales to Airbus unless it cuts its dollar prices. One way to hedge this operating risk is for Boeing to finance a portion of its assets in foreign currencies in proportion to its sales in those countries. However, this tactic ignores the fact that Boeing is competing with Airbus. Absent a more detailed analysis, another suggestion is for Boeing to finance at least half of its assets with ECU bonds as a hedge against depreciation of the currencies of its European competitors. ECU bonds would also provide a hedge against appreciation of the dollar against the yen and other Asian currencies since European and Asian currencies tend to move up and down together against the dollar (albeit imperfectly). Q6. Distinguish between Eurobond and foreign bonds? What are the unique characteristics of Eurobond markets? Ans:- A Eurobond is underwritten by an international syndicate of banks and other securities firms, and is sold exclusively in countries other than the country in whose currency the issue is denominated. For example, a bond issued by a U.S. corporation, denominated in U.S. dollars, but sold to investors in Europe and Japan (not to investors in the United States), would be a Eurobond. Eurobonds are issued by multinational corporations, large domestic corporations, sovereign governments, governmental enterprises, and international institutions. They are offered

simultaneously in a number of different national capital markets, but not in the capital market of the country, nor to residents of the country, in whose currency the bond is denominated. Almost all Eurobonds are in bearer form with call provisions and sinking funds. A foreign bond is underwritten by a syndicate composed of members from a single country, sold principally within that country, and denominated in the currency of that country. The issuer, however, is from another country. A bond issued by a Swedish corporation, denominated in dollars, and sold in the U.S. to U.S. investors by U.S. investment bankers, would be a foreign bond. Foreign bonds have nicknames: foreign bonds sold in the U.S. are "Yankee bonds"; those sold in Japan are "Samurai bonds"; and foreign bonds sold in the United Kingdom are "Bulldogs." Figure 4 specifically reclassifies foreign bonds from a U.S. investor`s perspective. FIGURE 4 FOREIGN BONDS TO U.S. INVESTORS

Foreign currency bonds are issued by foreign governments and foreign corporations, denominated in their own currency. As with domestic bonds, such bonds are priced inversely to movements in the interest rate of the country in whose currency the issue is denominated. For example, the values of German bonds fall if German interest rates rise. In addition, values of bonds denominated in foreign currencies will fall (or rise) if the dollar appreciates (or depreciates) relative to the denominated currency. Indeed, investing in foreign currency bonds is really a play on the dollar. If the dollar and foreign interest rates fall, investors in foreign currency bonds could make a nice return. It should be pointed out, however, that if both the dollar and foreign interest rates rise, the investors will be hit with a double whammy. Characteristics of Eurobond markets
1. Currency denomination: The generic, plain vanilla Eurobond pays an

annual fixed interest and has a long-term maturity. There are a number of different currencies in which Eurobonds are sold. The major currency denominations are the U.S. dollar, yen, and euro. (70 to 75 percent of Eurobonds are denominated in the U.S. dollar.) The central bank of a country can protect its currency from being used. Japan, for example, prohibited the yen from being used for Eurobond issues of its corporations until 1984.

2. Non-registered: Eurobonds are usually issued in countries in which there is

little regulation. As a result, many Eurobonds are unregistered, issued as bearer bonds. (Bearer form means that the bond is unregistered, there is no record to identify the owners, and these bonds are usually kept on deposit at depository institution). While this feature provides confidentiality, it has created some problems in countries such as the U.S., where regulations require that security owners be registered on the books of issuer. 3. Credit risk: Compared to domestic corporate bonds, Eurobonds have fewer protective covenants, making them an attractive financing instrument to corporations, but riskier to bond investors. Eurobonds differ in term of their default risk and are rated in terms of quality ratings. 4. Maturities: The maturities on Eurobonds vary. Many have intermediate terms (2 to 10 years), referred to as Euronotes, and long terms (10-30 years), and called Eurobonds. There are also short-term Europaper and Euro Medium-term notes. 5. Other features: Like many securities issued today, Eurobonds often are sold with many innovative features. For example: principal in another.
b) Option currency Eurobond offers investors a choice of currency. For

a) Dual-currency Eurobonds pay coupon interest in one currency and

instance, a sterling/Canadian dollar bond gives the holder the right to receive interest and principal in either currency.
1. A number of Eurobonds have special conversion features. One

type of convertible Eurobond is a dual-currency bond that allows the holder to convert the bond into stock or another bond that is denominated in another currency. 2. A number of Eurobonds have special warrants attached to them. Some of the warrants sold with Eurobonds include those giving the holder the right to buy stock, additional bonds, currency, or gold.

Master of Business Administration - MBA Semester 4 MF0016 Treasury Management Assignment Set- 1 Q.1 Explain how organization structure of commercial bank treasury facilitates in handling various treasury operations. Ans:- The treasury organisation deals with analysing, planning, and implementing treasury functions. It deals with issues of profit centre, cost centre etc. The organisations managing interfaces with treasury functions include intragroup communications, taxation, recharging, measurement and cultural aspects. Structure of treasury organisation Figure 1.2 depicts the structure of treasury organisation which is divided into five groups.

Figure 1.2: Treasury Organisations Fiscal This group includes budget policy planning division, industrial and environmental division, common wealth state relationships, and social policy division. Macroeconomic This group deals with economic sector of the organisation. It includes domestic and international economic divisions, macroeconomic policy and modeling division. Revenue This group is concerned with the taxes in an organisation. It includes business tax division, indirect tax, international and treaties division, personal and income division, tax analysis and tax design division. Markets This group mainly deals with selling of products in the competitive market. It includes competition and consumer policy, corporations and financial services policy, foreign investments and trade policy division. Corporate services This group deals with overall management of the treasury organisation. It includes financial and facilities division, human resource division, business solutions and information management division.

Treasury management in banks In recent days, most of the Indian banks have classified their business into two primary business segments like treasury operations (investments) and banking operations (excluding treasury). The treasury operations in banks are divided into: Rupee treasury The rupee treasury carries out various rupee based treasury functions like asset liability management, investments and trading. It helps in managing the banks position in terms of statutory requirements like cash reserve ratio, statutory liquidity ratio according to the norms of the Reserve Bank of India (RBI). The various products in rupee treasury are:

1. Money market instruments Call, term, and notice money, commercial papers, treasury bonds, repo, reverse repo and interbank participation etc. 2. Bonds Government securities, debentures etc 3. Equities Foreign exchange treasury The banks provide trading of currencies across the globe. It deals with buying and selling currencies. Derivatives The banks make foundation for Over the Counter (OTC). It helps in developing new products, trading in order to lay off risks and form apparatus for much of the industrys self-regulation.

The role of policies in strategic management was described in this section. The next section deals with inter-dependency between policy and strategy. Q.2 Bring out in a table format the features of certificate of deposits and commercial papers. Ans:Features of commercial papers CPs is an unsecured promissory note. CPs can be issued for a maturity period of 15 days to less than one year. CPs is issued in the denomination of Rs.5 lakh. The minimum size of the issu e is Rs. 25 lakh. The ceiling amount of CPs should not exceed the working capital of th e issuing company. The investors in CPs market are banks, individuals, business organisations and the corporate units registered in India an d incorporated units. Features of CDs in Indian market Schedule banks are eligible to issue CDs Maturity period varies from three months to one year Banks are not permitted to buy back their CDs before the maturity CDs are subjected to CRR and Statutory Liquidity Ratio (SLR) requirements

They are freely transferable by endorsement and delivery. They have no lock-in period.

The interest rate of CPs depends on the prevailing interest rate on CPs market, forex market and call money market. The attractive rate of interest In any of these markets, affects the deman d of CPs. The eligibility criteria for the companies to issue CPs are as follows: The tangible worth of the issuing company should not be less than Rs . 4.5 Crores. The company should have a minimum credit rating of P2 and A2 obtained from Credit Rating Information Service of India (CRISIL) and Investment Information and Credit Ratin g Agency of India Limited. (ICRA) respectively The current ratio of the issuing company should be 1.33:1. The issuing company has to be listed on stock exchange.

CDs have to bear stamp duty at the prevailing rate in the markets

The NRIs can subscribe to CDs on repatriation basis

Q.3 Critically evaluate participatory notes. Detail the regulatory aspects on it. Ans:- The participants in forex market are the RBI at the apex, authorised dealers (ADs) licensed by forex market, exporters, importers, companies and individuals. The major participants of foreign exchange market are: Corporates They mainly include business houses, international investors, and multinational corporations. They operate in market by buying or selling currencies within the framework of exchange control regulations. It deals with banks and their clients to form retail segment of forex market. Commercial banks They play an important role in forex market. They operate in market by trading currencies for their clients. Large volume of transactions consists of banks dealing directly among themselves and smaller transactions usually consists of intermediary foreign exchange brokers. Central bank It plays a vital role in the countrys economy by controlling money supply. Central banks get involved in forex market to regain price

stability of exchange rate, protect certain levels of price in exchange rate, and support economic goals like inflation and growth. Exchange brokers They ensure the most favourable quotations between the banks at a low cost in terms of time and money. Banks provide opportunities to brokers in order to increase or decrease the rate of buying or selling foreign currencies. Exchange brokers have a tendency to specialise in unusual currencies but also manage major currencies. In India, many banks deal through recognised exchange brokers or may deal directly among themselves.

The other participants include RBI and its authorised dealers, exporters, importers, companies and individuals. Q.4 What is capital account convertibility? What are the implications on implementing CAC? Ans:- Capital Account Convertibility (CAC) refers to relaxing controls on capital account transactions. It means freedom of currency conversion in terms of inflow and outflows with respect to capital account transaction. Most of the countries have liberalised their capital account by having an open account, but they do retain some regulations for influencing inward and outward capital flow. Due to global integration, both in trade and finance, CAC enhances growth and welfare of country. The perception of CAC has undergone some changes following the events of emerging market economies (EMEs) in Asia and Latin America, which went through currency and banking crises in 1990s. A few counties backtracked and re-imposed capital controls as part of crisis resolution. Crisis such as economic, social, human cost and even extensive presence of capital controls creates distortions, making CAC either ineffective or unsustainable. The cost and benefits from capital account liberalisation is still being debated among academics and policy makers. These developments have led to considerable caution being exercised by EMEs in opening up capital account. The Committee on Capital Account Convertibility (Chairman: Shri. S.S. Tarapore) which submitted its report in 1997 highlighted the benefits of a more open capital account but at the same time cautioned that CAC could pose tremendous pressures on the financial system. India has cautiously opened its capital account and the state of capital control in India is considered as the most liberalised it had been since late 1950s. The different ways of implementing CAC are as follows: Open the capital account for residents and non-residents. Initially open the inflow account and later liberalise the outflow account. Approach to simultaneously liberalise control of inflow and outflow account.

Q.5 Detail domestic and international cash management system Ans;- The strategy of a company which has its businesses in many nations and efficiently manages its cash and liquidity is called multinational cash management programme. The main goal of multinational cash management is the utilisation of local banking and cash management services.

Multinational companies are those that operate in two or more countries. Decision making within the corporation is centralised in the home country or decentralised across the countries where the organisation does its business. The reasons for which the firms expand into other countries are as follows: Seeking new markets and raw materials Seeking new technology and product efficiency. Preventing the regulatory obstacles. Retaining customers and protecting its processes Expanding its business.

Several factors which distinguish multinational cash management from domestic cash management are as follows: Different currency denominations Political risk and other risk. Economic and legal complications. Role of governments Language and cultural differences. Difference in tax rates, import duties.

The principle objective of multinational cash management programme is to maximise a companys financial resources by taking benefits from all liability provisions, payable periods. The multinational cash management programme effectively achieve its goals by using excess cash flow from some units across the globe to extend cash needs in other units which is called in-house banking and by relocating funds for tax and foreign exchange management through repricing and invoicing. During multinational cash management system payments by customers to companys branches are basically handled through a local bank. The payments between the branches and the parent company are managed through the branches, correspondents or associates of the parent company. Through the use of electronic reporting systems a parent company observes cash balances in its foreign local banks. Multinational cash management programme specifically evaluate its techniques by timing of billing, use of lockboxes or intercept points, negotiated value range. The multinational cash management system involves exchange rate risk which occurs when the cash flow of one currency during transformation to another currency the cash value gets declined. It occurs due to the change in exchange rates. The exchange rates are determined by a structure which is called the international monetary system. For example, Wincor Nixdorf played an innovative role in enhancing cash handling between various countries. Wincors focus was on the entire process chain which started from head office to stores, crediting to the retail companys account, head

office to branches and so on. Wincor Nixdorfs served several countries with its innovative hardware and software elements, IT services to side operations and consulting services to develop custom optimised solutions. Q.6 Distinguish between CRR and SLR Ans:- Cash Reserve Ratio Cash Reserve Ratio (CRR) is a countrys central bank regulation that sets the minimum reserves for banks to hold for their customer deposits and notes. These reserves are considered to meet the withdrawal demands of the customers. The reserves are in the form of authorised currency stored in a bank treasury (vault cash) or with the central bank. CRR is also called liquidity ratio as it controls money supply in the economy. CRR is occasionally used as a tool in monetary policies that influence the countrys economy. CRR in India is the amount of funds that a bank has to keep with the RBI which is the central bank of the country. If RBI decides to increase CRR, then the banks available cash drops. RBI practices this method, that is, increases CRR rate to drain out excessive money from banks. The CRR in the economy as declared by RBI in September 2010 is 6 percent. An organisation that holds reserves in excess amount is said to hold excess reserves. The following are the effects of CRR on economy: CRR influences an economys money supply by effecting the potential of banks CRR influences inflation in an organization CRR stimulates higher economic activity by influencing the liquidity

Statutory Liquidity Ratio Statutory Liquidity Ratio (SLR) is the percentage of total deposits that banks have to invest in government bonds and other approved securities. It means the percentage of demand and time maturities that banks need to have in forms of cash, gold and securities like Government Securities (G-Secs). As gold and government securities are highly liquid and safe assets they are included along with cash. In India, RBI determines the percentage of SLR. There are some statutory requirements for placing the money in the government bonds. After following the requirements, the RBI arranges the level of SLR. The maximum limit of SLR is 40 percent and minimum limit of SLR is 25 percent. The RBI increases the SLR to control inflation, extract liquidity in the market and protects customers money. Increase in SLR also limits the banks leverage position to drive more money into the economy.

If any Indian bank fails to maintain the required level of SLR, then it is penalized by RBI. The nonpayer bank pays an interest as penalty which is above the actual bank rate. The main objectives for maintaining SLR are the following: By changing the SLR level, the RBI increases or decreases banks credit expansion Ensures the comfort of commercial banks Forces the commercial banks to invest in government securities like government bonds

Master of Business Administration - MBA Semester 4 MF0017 Merchant Banking and Financial Services Assignment Set- 1 Q.1 What do you understand by insider trading. What are the SEBI rules and regulations to prevent insider trading. Ans:- "Insider trading" is a term subject to many definitions and connotations and it encompasses both legal and prohibited activity. Insider trading takes place legally every day, when corporate insiders officers, directors or employees buy or sell stock in their own companies within the confines of company policy and the regulations governing this trading. It is the trading that takes place when those privileged with confidential information about important events use the special advantage of that knowledge to reap profits or avoid losses on the stock market, to the detriment of the source of the information and to the typical investors who buy or sell their stock without the advantage of "inside" information. Almost eight years ago, India's capital markets watchdog the Securities and Exchange Board of India organised an international seminar on capital market regulations. Among others issues, it had invited senior officials of the Securities and Exchange Commission to tell us how it tackled the menace of insider trading. SEBI rules and regulations to prevent insider trading. SEBI had amended the Insider Trading Regulations 1992 vide a Notification dated November 19, 2008 which I had discussed it here and here. SEBI has now released a set of "Clarifications" on 24th July 2009 on certain issues arising out of the amendments made. I had opined on some of these issues in my earlier posts referred to above and hence me update on what are the clarifications so given. Curiously, the "clarifications" have no formal standing or reference. It is neither a circular, nor a notification, nor even a press release. It is neither signed nor dated. But it seeks to "clarify" and giving meaning to the Regulations that have legal standing and where such "meaning" is quite contrary - as we will see - to the plain reading of the text. Having said that, the "clarifications" mostly relaxes the requirements and hence, being gift horses, one should not examine them in the mouth too closely! Let us see the clarifications given. Recollect that specified persons were banned from carrying out opposite transactions "(banned transactions") for six months of original buy/sale ("original transactions"). The question was whether acquisition of shares under ESOPs scheme and sale of such shares would be considered as transactions that trigger off such ban and whether these themselves are banned.

It is clarified that exercise of ESOPs will neither be deemed to be "original transaction" nor "banned transaction". Thus, by acquiring shares under ESOPs, you don't trigger a ban and if you are banned for six months, you can still exercise ESOPs. The reasoning given is that the ban is only on transactions in secondary market.(Incidentally, I had felt that "However, taking all things into account, perhaps the intention is not to cover shares acquired under ESOPs Schemes. "). But sale of shares acquired through ESOPs is covered but it will only be deemed to be a "original transaction" and not a "banned transaction". In other words, even if you are under a ban, you can still sell shares acquired under ESOPs but once you sell such shares, you have triggered a ban of six months. On this aspect, I do not understand the basis of clarifying that the sale of shares acquired under ESOPs scheme will not be an "original transaction" - the logic of covering secondary market transactions should apply here also. Then, it is clarified that every later transaction triggers a fresh six month ban. A purchase on 1st February results in ban till 1st August. However, if there is a fresh purchase on 15th March, there is a ban now till 15th September. Effectively, this means that the ban period is from 2nd Febuary till 15th September. What about transactions before this amendment - will the amendment create ban in respect of them too - this is an academic issue now at least as the six month period is now complete. It is clarified though that the transactions before the amendment are not to be considered. On a similar note, unwinding of positions in derivatives held on the date of this amendment is possible. A crucial clarification is that the ban on "sale" of shares for personal emergencies is permisible by waiver by the Compliance Officer. This is not evident from a plain reading of the provision and I had opined that "This bar on such transactions is total. There are no circumstances whether of urgent need or otherwise under which the bar can be lifted. There is also no provision under which even SEBI could grant exemption.". But SEBI thinks it is so evident and hence let us accept this gift without creating legal niceties! Note that this clarification applies only to sales and there can be no purchases within these six month ban period - obviously there cannot be any personal emergency to purchase shares! Q.2 What is the provision of green shoe option and how is it used by companies to stabilize prices. Ans:- Green Shoe Option (GSO) is an option where a company can retain a part of the over-subscribed capital by issuing additional shares. Oversubscription is a situation when a new stock issue has more buyers than shares to meet their orders. This excess demand over supply increases the share price. There is another situation called undersubscription. In undersubscription, a new stock issue has fewer buyers than the shares available. An issuing company appoints a stabilizing agent, which is usually an underwriter or a lead manager, to purchase shares from the open market using the funds collected from the over-subscription of shares. The stabilizing agent stabilizes the price for a period of 30 days from the date of listing as authorised by the SEBI. Green shoe option agreement allows the underwriters to

sell 15 percent more shares to the investors than planned by the issuer in an underwriting. Some issuers do not include green shoe options in their underwriting contracts under certain circumstances where the issuer funds a particular project with a fixed amount of price and does not require more funds than quoted earlier. The green shoe option is also known as over-allotment option. The over-allotment refers to allocation of shares in excess of the size of the public issue made by the stabilizing agent out of shares borrowed from the promoters in pursuance of a GSO exercised by the issuing company. The greenshoe option is popular because it is the only SEC-permitted means for an underwriter to stabilize the price of a new issue post-pricing. Issuers will sometimes not permit a greenshoe on a transaction when they have a specific objective for the offering and do not want the possibility of raising more money than planned. The term comes from the first company, Green Shoe Manufacturing now called Stride Rite Corporation, to permit underwriters to use this practice in its offering. The mechanism by which the greenshoe option works to provide stability and liquidity to a public offering is described in the following example: A company intends to sell 1 million shares of its stock in a public offering through an investment banking firm (or group of firms which are known as the syndicate) whom the company has chosen to be the offering's underwriter(s). When the stock offering is the first time the stock is available for public trading, it is called an IPO (initial public offering). When there is already an established market and the company is simply selling more of their non-publicly traded stock, it is called a follow-on offering. The underwriters function as the broker of these shares and find buyers among their clients. A price for the shares is determined by agreement between the company and the buyers. One responsibility of the lead underwriter in a successful offering is to help ensure that once the shares begin to publicly trade, they do not trade below the offering price. When a public offering trades below its offering price, the offering is said to have "broke issue" or "broke syndicate bid". This creates the perception of an unstable or undesirable offering, which can lead to further selling and hesitant buying of the shares. To manage this possible situation, the underwriter initially oversells ("shorts") to their clients the offering by an additional 15% of the offering size. In this example the underwriter would sell 1.15 million shares of stock to its clients. When the offering is priced and those 1.15 million shares are "effective" (become eligible for public trading), the underwriter is able to support and stabilize the offering price bid (which is also known as the "syndicate bid") by buying back the extra 15% of shares (150,000 shares in this example) in the market at or below the offer price. They can do this without the market risk of being "long" this extra 15% of shares in their own account, as they are simply "covering" (closing out) their 15% oversell short. If the offering is successful and in strong demand such that the price of the stock immediately goes up and stays above the offering price, then the underwriter has oversold the offering by 15% and is now technically short those shares. If they were

to go into the open market to buy back that 15% of shares, the underwriter would be buying back those shares at a higher price than it sold them at, and would incur a loss on the transaction. This is where the over-allotment (greenshoe) option comes into play: the company grants the underwriters the option to take from the company up to 15% more shares than the original offering size at the offering price. If the underwriters were able to buy back all of its oversold shares at the offering price in support of the deal, they would not need to exercise any of the greenshoe. But if they were only able to buy back some of the shares before the stock went higher, then they would exercise a partial greenshoe for the rest of the shares. If they were not able to buy back any of the oversold 15% of shares at the offering price ("syndicate bid") because the stock immediately went and stayed up, then they would be able to completely cover their 15% short position by exercising the full greenshoe. Q.3 Discuss the proportionate allotment procedure followed by the lead banker to allot shares. Ans:- The post-issue Lead Merchant Banker shall ensure that moneys received pursuant to the issue and kept in a separate bank (i.e. Bankers to an Issue), as per the provisions of section 73(3) of the Companies Act 1956, is released by the said bank only after the listing permission under the said Section has been obtained from all the stock exchanges where the securities were proposed to be listed as per the offer document. Post-issue Advertisements -(Clause 7.5) Post-issue Lead Merchant Banker shall ensure that in all issues, advertisement giving details relating to over-subscription, basis of allotment, number, value and percentage of applications received along with stockinvest, number, value and percentage of successful allottees who have applied through stockinvest, date of completion of despatch of refund orders, date of despatch of certificates and date of filing of listing application is released within 10 days from the date of completion of the various activities at least in an English National Daily with wide circulation, one Hindi National Paper and a Regional language daily circulated at the place where registered office of the issuer company is situated. Post-issue Lead Merchant Banker shall ensure that issuer company / advisors / brokers or any other agencies connected with the issue do not publish any advertisement stating that issue has been over-subscribed or indicating investors' response to the issue, during the period when the public issue is still open for subscription by the public. Advertisement stating that "the subscription to the issue has been closed" may be issued after the actual closure of the issue. Basis of Allotment -(Clause 7.6)

In a public issue of securities, the Executive Director/Managing Director of the Designated Stock Exchange along with the post issue Lead Merchant Banker and the Registrars to the Issue shall be responsible to ensure that the basis of allotment is finalised in a fair and proper manner in accordance with the following guidelines:. Provided, in the book building portion of a book built public issue notwithstanding the above clause, Clause 11.3.5 of Chapter XI of these Guidelines shall be applicable. Proportionate Allotment Procedure The allotment shall be subject to allotment in marketable lots, on a proportionate basis as explained below: a. Applicants shall be categorised according to the number of shares applied for. b. The total number of shares to be allotted to each category as a whole shall be arrived at on a proportionate basis i.e. the total number of shares applied for in that category (number of applicants in the category x number of shares applied for) multiplied by the inverse of the over-subscription ratio as illustrated below: Total number of applicants in category of 100s - 1,500 Total number of shares applied for - 1,50,000 Number of times over-subscribed - 3 Proportionate allotment to category - 1,50,000 x 1/3 = 50,000 c. Number of the shares to be allotted to the successful allottees shall be arrived at on a proportionate basis i.e. total number of shares applied for by each applicant in that category multiplied by the inverse of the oversubscription ratio. Schedule XVIII of basis of allotment procedure may be referred to. Number of shares applied for by 100 each applicant Number of times oversubscribed 3 Proportionate allotment to each successful applicant - 100 x 1/3 = 33 (to be rounded off to 100) d. All the applications where the proportionate allotment works out to less than 100 shares per applicant, the allotment shall be made as follows: i. Each successful applicant shall be allotted a minimum of 100 securities; and ii. The successful applicants out of the total applicants for that category shall be determined by drawal of lots in such a manner that the total number of shares allotted in that category is equal to the number of shares worked out as per (ii) above.

e. If the proportionate allotment to an applicant works out to a number that is more than 100 but is not a multiple of 100 (which is the marketable lot), the number in excess of the multiple of 100 shall be rounded off to the higher multiple of 100 if that number is 50 or higher. f. If that number is lower than 50, it shall be rounded off to the lower multiple of 100. As an illustration, if the proportionate allotment works out to 250, the applicant would be allotted 300 shares. g. If however the proportionate allotment works out to 240, the applicant shall be allotted 200 shares. All applicants in such categories shall be allotted shares arrived at after such rounding off. h. If the shares allocated on a proportionate basis to any category is more than the shares allotted to the applicants in that category, the balance available shares for allotment shall be first adjusted against any other category, where the allocated shares are not sufficient for proportionate allotment to the successful applicants in that category. i. The balance shares if any, remaining after such adjustment shall be added to the category comprising applicants applying for minimum number of shares. j. As the process of rounding off to the nearer multiple of 100 may result in the actual allocation being higher than the shares offered, it may be necessary to allow a 10% margin i.e. the final allotment may be higher by 10 % of the net offer to public.

Q.4 What are the advantages of leasing to a company. Ans:- Leasing has many advantages for the lessee as well as for the lessor. Lease financing offers the following benefits to the lessee: One hundred percent finance without immediate down payment for huge investments, except for his margin money investment. Facilitates the availability and use of equipments without the necessary blocking of capital funds. Acts as a less costly financing alternative as compared to other source of finance. Offers restriction free financing without any unduly restrictive covenants. Enhances the working capital position. Provides finance without diluting the ownership or control of the lessor. Offers tax benefits which depend on the structure of the lease. Enables lessee to pay rentals from the funds generated from operations as lease structure can be made flexible to suit the cash flow. When compared to term loan and institutional financing, lease finance can be arranged fast and documentation is simple and without much formalities. The lessor being the owner of the asset bears the risk of obsolescence and the lessee is free on this score. This gives the option to the lessee to replace the equipment with latest technology

The following are the benefits offered by lease financing to the lessor: The lessors ownership is fully secured as he is the owner and can always take possession in case of default by the lessee. Tax benefits are provided on the depreciation value and there is a scope for him to avail more depreciation benefits by tax planning. High profit is expected as the rate of return increases Return on equity is elevated by leveraging results in low equity base which enhance the earnings per share. High growth potential is maintained even during periods of depression.

Q.5 Discuss Accounting standard 19 for lease based on operating lease. Ans:- Accounting Standard (AS)-19, Leases, is issued by the Council of the Institute of Chartered Accountants of India. This standard comes into force with respect of all assets leased during accounting periods commencing on or after 1.4.2001 and is mandatory in nature from that date. Accordingly, the Guidance Note on Accounting for Leases issued by the Institute in 1995, is not applicable in respect of such assets. Earlier application of this Standard is, however, encouraged. Scope The right accounting policies and disclosures in relation to finance leases and operating leases should be applied in accounting for all leases other than the following: Lease agreements to explore or to use natural resources, such as oil, gas , timber, metals and other mineral rights; and Licensing agreements for items such as motion picture films, video recordings, plays, manuscripts, patents and copyrights; and Lease agreements to use property such as lands.

Related definitions The following terms are used in this statement:

Lease A lease is an agreement calling for the lessee (user) to pay the lessor (owner) for use of an asset for an agreed period of time. A rental agreement is a lease in which the asset is a substantial property. Finance lease A lease which transfers all the risks and rewards incident to ownership of an asset. Operating lease A lease for which the lessee acquires the property for only a small portion of its useful life. Non-cancellable lease A non-cancellable lease is a lease that can be abandoned only:

Inception of lease The inception of lease is the former date of the lease agreement and the commitment date by the parties to the principal provisions of the lease. Lease term The lease term is the non cancellable period for which the lessee has agreed to take on lease asset together with future periods. Minimum lease payments It is the regular rental payments excluding executory costs to be paid by the lessee to the lessor in a capital lease. The lessee informs that an asset and liability at the discounted value of the future minimum lease payments. Fair value The expected value of all assets and liabilities of a owned company used to combine the financial statements of both companies. Economic life The outstanding period of time for which real estate improvements are expected to generate more income than operating expenses cost. Useful life Useful life of a leased asset is either the period over which leased asset is expected to be useful by the lessee or the number of production units expected to be gained from the use of the asset by the lessee. Residual value The value of a leased asset is the estimated fair value of the asset at the end of the lease term. Guaranteed residual value It is guaranteed by the lessee or by a party on behalf of the lessee to pay the maximum amount of the guarantee; and in the case of the lessor, the part of the residual value which is guaranteed by the lessee or on behalf of the lessee, or an independent third party who is financially able of discharging the obligations under the guarantee. Unguaranteed residual valued of a lease asset It is the value of a leased asset that is the total amount by which the residual value of the asset exceeds its guaranteed residual value. Gross investment in the lease It is the sum of the minimum lease payments within a finance lease from the lessors view and any unguaranteed residual value accumulating to the lessor. Unearned finance income Any income that comes from investments and other sources unrelated to employment services. Net investment in the lease Net investment in the lease is the gross investment in the lease less unearned finance income. Implicit interest An interest rate that is not explicitly stated, but the implicit rate can be determined by use of present value factors. Contingent rent It is the portion of the lease payments that is not permanent in amount but is based on a factor other than just the passage of time. For example, percentage of sales.

Classification of leases The lease can be classified as either a finance lease or an operating lease based on different accounting treatments as required for the different types of lease. This classification is based on the extent to which risks and rewards of ownership of leased asset are transferred to the lessee or remain with the lessor. Risks include

loss from idle capacity, technological obsolescence, and variations in return. Rewards include the rights to sell the asset and gain from its capital value. Leases are classified as a finance lease if it transfers considerably all the risks and rewards of ownership to the lessee; else if it does not then it is an operating lease. While classifying a lease, it is important to recognize the essence of the agreement and not just its legal form. The commercial reality is always important. Conditions in the lease may specify that an entity has only a limited disclosure to the risks and benefits of the leased asset. The following are some of the situations where an individual or in combination, would usually direct to a lease being a finance lease: Transfer of ownership to the lessee by the end of the lease term. The lessee has the choice to purchase the asset at a cost that is expected to be lower than its fair value and such that the option is likely to be exercised. The lease term is for a key part of the financial life of the asset, even if title to the asset is not transferred. The current value of the least lease payments is equal to substantially all of the fair value of the asset. The leased resources are of a specialized nature such that only the lessee can use them without significant modification. Losses or gains from changes in the fair value of the residual value of the asset add to the lessee. The lessee has the option to continue the lease for a secondary term at significantly below market rent.

The following are some of the situations where an individual or in combination, would usually direct to a lease being an operating lease: If the lessor experiences the risk associated with a movement in the market value of the asset or the use of the asset. If there is an option to cancel, and the lessee is likely to exercise such an option. Leases of land, if title is not transferred. If the title to the land is not likely to pass to the lessee, then the rewards and risks of ownership has not substantially passed.

The lowest lease payments need to be allocated between the land and the building component in proportion to their relative fair values of the lease holding interests at the beginning of the lease. If the allocation is not be made reliably, then both leases are treated as finance leases or as operating leases. Leases in the financial statements of lessees Let us now discuss about leases in the financial statement of lessees. Operating lease

In an operating lease, the lease payments are recognised as an expenditure on a straight-line basis over the lease term, unless another organised basis is more representative of the pattern of the users benefit. The incentives in operating leases will be in the form of up-front payments and rent-free periods. These need to be properly noticed over the lease term from its commencement. Finance lease At the initiation of the lease term, lessees identify finance leases as assets and liabilities in their balance sheets on sum equal to the value of the leased asset or, if lower, on the current value of the minimum lease payments. The discount rate in calculating the current value of the minimum lease payments is the interest rate contained in the lease, if this is possible to determine. Else, the lessees incremental borrowing rate can be used. Any initial direct costs of the lessee are included to the amount identified as an asset. After the initial recognition, the lease payments are assigned between the repayment of the outstanding liability and the finance charge in order to reflect a constant periodic rate of interest on the liability. The asset needs to be depreciated over its expected useful life under IAS 16, using rates for similar assets. If there is no reasonable certainty that ownership will transfer to the lessee, then the shorter of the lease term and the useful life must be used. Leases in the financial statements of lessors This section analyses leases in the financial statement of lessors. Operating lease Lessors present assets under operating leases in their balance sheets based on the nature of the asset. The depreciation policy for depreciable leased assets will be consistent with the lessors normal depreciation policy for related assets, and depreciation is calculated in accordance with International Accounting Standard (IAS 16 and IAS 38). Lease income from operating leases is identified in income on a straight-line basis over the lease term, unless another organised basis is more representative of the pattern in which user benefit derived from the leased asset is reduced. Finance lease Lessors recognise assets held under a finance lease in their balance sheets and present them as a receivable on an amount equal to the net investment in the lease. The identification of finance income is based on a pattern showing a periodic rate of return on the lessors net investment in the finance lease. The dealer lessors recognise selling profit or loss in the period, based on the policy followed by the entity for outright sales. If low rates of interest are quoted, selling profit will be restricted which would apply if a market rate of interest were charged. Costs incurred by manufacturer or dealer lessors associated with negotiating and

arranging a lease will be recognised as an expense when the selling profit is identified. Q.6 Given the various types of mutual funds, take any two schemes and discuss the performance of the schemes.

Ans:- Different types of mutual fund schemes Schemes according to Maturity Period: A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period. Open-ended Fund/ Scheme An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity. Close-ended Fund/ Scheme A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis. Schemes according to Investment Objective: A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows: Growth / Equity Oriented Scheme The aim of growth funds is to provide capital appreciation over the medium to longterm. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the

investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a longterm outlook seeking appreciation over a period of time. Income / Debt Oriented Scheme The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations. Balanced Fund The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds. Money Market or Liquid Fund These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods. Gilt Fund These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. Index Funds

Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges. How to know the performance of a mutual fund scheme? The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published in newspapers. The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) www.amfiindia.com and thus the investors can access NAVs of all mutual funds at one place The mutual funds are also required to publish their performance in the form of halfyearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an affect on the yield and other useful information in the same half-yearly format. The mutual funds are also required to send annual report or abridged annual report to the unitholders at the end of the year. Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis. Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds. Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc. On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme.

Master of Business Administration - MBA Semester 4 MF0018 Insurance and Risk Management Assignment Set- 1 Q.1 Explain chance of loss and degree of risk with examples Ans:- Chance of loss Loss is the injury or damage borne by the insured in consequence of the happening of one or more of the accidents or misfortunes against which the insurer, in consideration of the premium, has undertaken to assure the insured. Chance of loss

is defined as the probability that an event that causes a loss will occur. The chance of loss is a result of two factors, namely peril and hazard. Hazards are further classified into the following four types:

Physical hazard This is a danger likely to happen due to the physical characteristics of an object, which increases the chance of loss. For example defective wiring in a building which enhances the chance of fire. Moral hazard It is an increase in the probability of loss due to dishonesty or character defects of an insured person. For example, Burning of unsold goods that are insured in order to increase the amount of claim is a moral hazard. Morale hazard It is an attitude of carelessness or indifference to losses, because the losses were insured. For example, careless acts like leaving a door unlocked which makes it easy for a burglar to enter, or leaving car keys in an unlocked car increase the chance of loss. Legal hazard It is the severity of loss which is increased because of the regulatory framework or the legal system. For example actions by government departments restricting the ability of insurers to withdraw due to poor underwriting results or a new environment law that alters the risk liability of an organisation.

Degree of risk Degree of risk refers to the intensity of objective risk, which is the amount of uncertainty in a given situation. It can be assessed by finding the difference between expected loss and actual loss. The formula used is Degree of risk = Degree of risk is measured by the probability of adverse deviation. If the probability of the occurrence of an event is high, then greater is the likelihood of deviation from the outcome that is hoped for and greater the risk, as long as the probability of loss is less than one. In the case of exposures in large numbers, estimates are made based on the likelihood of the number of losses that will occur. With regard to aggregate exposures the degree of risk is not the probability of a single occurrence but it is the probability of an outcome which is different from that expected or predicted. Therefore insurance companies make predictions about the losses that are expected to occur and formulate a premium based on that. Q.2 Explain in detail Malhotra Committee recommendations Ans:- Recommendations of Malhotra committee The major reforms in Indian industry started when the Malhotra committee was formed in 1993 headed by R. N. Malhotra (former Finance Secretary and RBI Governor). This was formed to analyse the Indian insurance industry and propose the future course of the industry. It modified the financial sector to design a system appropriate for the changing economical structures in India. The committee

recognised the importance of insurance in financial systems and designed suitable insurance programs. The report submitted by the committee in 1994 is given below: Structure Government risk in the insurance Companies to be decreased to 50%. GIC must be taken under the government so that the GIC subsidiaries can work independently. Better freedom of operation for insurance companies.

Competition Private companies who have initial capital of Rs 1 billion must be permitted to work in the insurance industry. Companies should not use a single entity to deal with life and general Insurance. Foreign companies may be permitted to work in the Indian insurance industry only as partners of some domestic company. Postal life insurance must be permitted to work in the rural market. Every state must have only one state level life insurance company.

Regulatory body The Insurance Act must be changed. An Insurance Regulatory body must be formed. Insurance controller, which was a part of finance ministry, should be allowed to work independently.

Investments The mandatory investments given to government securities from the LIC Life Fund must be reduced from 75% to 50%. GIC and its subsidiaries should not be allowed to hold more than 5% in any company.

Customer service LIC must pay interest if it delays any payments beyond 30 days. All insurance companies should be encouraged to create unit linked pension plans. The insurance industry should be computerised and the technologies must be updated. The insurance companies should promote and fulfil customer services. They should also extend the insurance coverage areas to various sectors.

The committee allowed only a limited competition in this sector as any failure on the part of new players could ruin the confidence of the public to associate with this

industry. Every insurance company with an initial capital of Rs.100 crores can act as an independent company with economic motives. Since then there is a competition between the private and public sectors of insurance, the Insurance Regulatory and Development Authority Act, 1999 (IRDA Act) was formed to control, support and ensure a structured growth of the insurance industry. The private sector insurance companies were allowed to work along with the public sector, but had to follow the conditions given below: The company must be registered under the Companies Act, 1956. The total capital share by a foreign company held by itself or by through sub sectors of the company should not exceed 26% of the capital paid to the Indian insurance industry. The company should only provide life, general insurance or reinsurance. The company should have an initial paid capital of at least Rs.100 crores to provide life insurance. The company should have an initial paid capital of at least Rs.200 crores to provide reinsurance.

Later in 2008, further reforms were made by introducing the plan for Insurance (Laws) Amendment Bill - 2008 and The LIC (Amendment) Bill - 2009. These amendments influenced the Indian insurance industry in a huge way. The Insurance (Laws) Amendment Bill - 2008 amended three other acts namely, Insurance Act 1938, General Insurance Business (Nationalisation) Act 1972 (GIBNA) and Insurance Regulatory and Development Authority Act 1999. Q.3 What is the procedure to determine the value of various investments? Ans:Q.4 Discuss the guidelines for settlement of claims by Insurance company Ans:- General guidelines for claims settlement There are some guidelines that must be followed while settling the claims. These guidelines are general in nature, and are not compiled to be the same always. Therefore, the claim settling authority uses discretion and records reasons. Appointment of surveyor The Insurance Act states that surveyor should survey claims above Rs. 20,000. The surveyors appointment should be based on the following points: The surveyor should have a valid license. The surveyor selected should consider the type of loss and nature of the claims. Depending on the situation, if technical expertise is required, a consultant having technical expertise assists the surveyor.

One surveyor can be used for various jobs, if the surveyors competence is good for both.

Appointment of investigator Depending on circumstances, it is necessary to appoint an investigator for verifying the claim version of loss. The appointing letter of the investigator o mentions all the reference terms to perform. Q.5 What is facultative reinsurance and treaty reinsurance? Ans:- The two different types of reinsurances are: Facultative reinsurance. Treaty reinsurance.

Facultative reinsurance It is a type of reinsurance that is optional; it is a case-by-case method that is used when the ceding company receives an application for insurance that exceeds its retention limit. It is based on the individual agreements that help to cover specific losses. When any primary insurer wants reinsurance for a specific coverage, it enters the market, and bargains with different reinsurance companies for the amount of coverage and premium, looking out for a better value. According to most of the contracts, the reinsurer pays a ceding commission to the insurer to pay for purchase expenses. Before issuing the insurance policy the insurer looks for reinsurance and speaks to many reinsurers. The insurance company does not have any commitments to cede insurance and also the reinsurer has no commitments to accept the insurance. However if the insurance company find a reinsurer who is willing to take the insurance policy then they can enter into a contract. Facultative reinsurance is used when a huge amount of insurance is preferred and while considering a specific risk involved in an individual contract. Facultative reinsurance is the reinsurance of a part of a single policy or the entire policy after negotiating the terms and conditions. It reduces the risk exposure of the ceding company against a particular policy. Facultative reinsurance is not mandatory. One advantage of facultative reinsurance is it is flexible as a reinsurance contract is arranged to fit any kind of cases. It helps the insurance companies in writing large amount of insurance policies. Reinsurance moves the huge losses of the insurers to the reinsurer and thus helps the insurer. One main disadvantage of facultative reinsurance is that it is not reliable. The ceding insurer will not know in advance whether a reinsurer will agree to pay any part of the insurance. The other disadvantage of this kind of reinsurance is the delay in issuing the policy as it cannot be issued until the reinsurance is got for that policy.

Treaty reinsurance Treaty reinsurance is one in which the primary insurer agrees to cede the insurance policy to the reinsurer and the reinsurer has to accept it. It includes a standing agreement with a specific reinsurer. The amount of insurance that the primary insurer sells and those policies where both the parties provide the service is specified in the contract. All the business that comes under the contract is automatically reinsured according to the conditions of the treaty. Treaty reinsurance needs the reinsurer to assume the entire responsibility of the ceding company or a part of it for some particular sections of the business with respect to the terms of the policy. The contract is a compulsory contract because according to the treaty the ceding company has to cede the business and the reinsurer is compelled to assume the business. It is a type of reinsurance that is preferred while considering the groups of homogenous risks. The treaty reinsurance provides many advantages to the primary insurance company. It is automatic, more reliable, and there is no delay in issuing the policy. It is also more cost effective as there is no need to shop around for reinsurers before writing the policy. The treaty reinsurance is not advantageous to the reinsurer. Usually the reinsure does not know about the individual applicant of the policy and has to depend on the underwriting judgment that the primary insurer gives. It may be so that the primary insurer can show bad business like more losses and get reinsured for it as the reinsurer does not know the real fact. The primary insurer may pay insufficient premium to the reinsurer. Therefore the reinsurer undergoes a loss if the risk selection of the primary insurer is not good and they charge insufficient rates. There are different types of treaty reinsurance arrangements which may differ according to the liability of the reinsurer. They are: Quotashare treaty. Surplusshare treaty. Excessofloss treaty. Reinsurance pool.

Q.6 What is the role of information technology in promoting insurance products Ans:-The rapid developments in information technology are posing serious challenges for insurance organisations. The use of information technology in insurance industry has an impact on the efficiency of the organisation as it reduces the operational costs. After many private players entered the insurance industry, the competition in the insurance sector has become immense. Information technology has helped in enhancing the insurance business. Insurance industry uses information technology for internal administration, accounting, financial management, reports, and so on.

Indian insurance organisations are rapidly growing as technology-driven organisations, by replacing billions of files with folders of information. Insurers are heading towards the technological enhancements, in order to focus on the key areas of insurance business. The role of IT in different fields of insurance like:

Actuarial investigation - Insurers depend on the rates of actuarial models to decide the quantity of risks which create loss. Insurance organisations are using new technologies, to analyse the claims and policyholders data for providing connection between risk characteristics and claims. Developments in technology allow actuaries to examine risks more precisely. Policy management - Most of the insurance policies are printed and conveyed to policy owners through mail every year. The method of creating documents is accomplished by technicians and typists. In most of the cases, this task is generally completed by using new technology. Customer data is accessed by computer systems, and maintained in huge folders, in order to renew each policy. To assemble the policies, complex software packages are used, and to print the policies high speed printers are utilised. Underwriting Underwriters can use knowledge based expert systems to make underwriting decisions. By using automated systems, underwriters can compare an individuals risk profile with their data and customise policies according to the individuals risk profile. Front end operations: CRM (Customer Relationship Management) packages are used to integrate the different functional processes of the insurance company and provide information to the personnel dealing with the front end operations. CRM facilitates easy retrieval of customer data. LIC is using CRM packages to handle its front end operations.

Master of Business Administration-MBA Semester 4 MB0052 Strategic Management and Business Policy - 4 Credits Assignment Set- 1 (60 Marks) Note: Each question carries 10 Marks. Answer all the questions.

Q.1 What similarities and differences do you find in BCG business portfolio matrix, Ansoff growth matrix and GE growth pyramid. (10 marks) Ans. The BCG matrix is a portfolio management tool used in product life cycle. BCG matrix is often used to highlight the products which get more funding and attention within the company. During a products life cycle, it is categorised into one of four types for the purpose of funding decisions. Figure 3.5 below depicts the BCG matrix.

Figure 3.5 BCG Growth Share Matrix Question Marks (high growth, low market share) are new products with potential success, but they need a lot of cash for development. If such a product gains enough market shares to become a market leader, which is categorised under

Stars, the organisation takes money from more mature products and spends it on Question Marks. Stars (high growth, high market share) are products at the peak of their product life cycle and they are in a growing market. When their market rate grows, they become Cash Cows. Cash Cows (low growth, high market share) are typically products that bring in far more money than is needed to maintain their market share. In this declining stage of their life cycle, these products are milked for cash that can be invested in new Question Marks. Dogs (low growth, low market share) are products that have low market share and do not have the potential to bring in much cash. According to BCG matrix, Dogs have to be sold off or be managed carefully for the small amount of cash they guarantee. The key to success is assumed to be the market share. Firms with the highest market share tend to have a cost leadership position based on economies of scale among other things. If a company is able to apply the experience curve to its advantage, it should able to produce and sell new products at low price, enough to garner early market share leadership. Limitations of BCG matrix: The use of highs and lows to form four categories is too simple The correlation between market share and profitability is questionable. Low share business can also be profitable. Product lines or business are considered only in relation to one competitor: the market leader. Small competitors with fast growing shares are ignored. Growth rate is the only aspect of industry attractiveness Market share is the only aspect of overall competitive position 3.4.2 Igor Ansoff growth matrix The Ansoff Growth matrix is a tool that helps organisations to decide about their product and market growth strategy. Growth matrix suggests that an organisations attempts to grow depend on whether it markets new or existing products in new or existing markets. Ansoffs matrix suggests strategic choices to achieve the objectives. Figure 3.6 depicts Ansoff growth matrix.

Figure 3.6 Ansoff Growth Matrix Market penetration Market penetration is a strategy where the business focuses on selling existing products into existing markets. This increases the revenue of the organisation. Market development Market development is a growth strategy where the business seeks to sell its existing products into new markets. This means that the product is the same, but it is marketed to a new audience. Product development Product development is a growth strategy where a business aims to introduce new products into existing markets. This strategy may need the development of new competencies and requires the business to revise products to appeal to existing markets. Diversification Diversification is the growth strategy where a business markets new products in new markets. This is an intrinsically riskier strategy because the business is moving into markets in which it has little or no experience. For a business to adopt a diversification strategy, it should have a clear idea about what it expects to gain from the strategy and an honest assessment of the risks. 3.4.3 McKinsey/GE growth pyramid The McKinsey/GE matrix is a tool that performs a business portfolio analysis on the Strategic Business units in an organisation. It is more sophisticated than BCG matrix in the following three aspects: Industry (market) attractiveness Industry attractiveness replaces market growth. It includes market growth, industry profitability, size and pricing practices, among other possible opportunities and threats.

 Competitive strength Competitive strength replaces market share. It includes market share as well as technological positions, profitability, size, among other possible strengths and weaknesses. McKinsey/GE growth pyramid matrix works with 3*3 grids while BCG matrix is 2*2 matrixes. External factors that determine market attractiveness are the following: Market size Market growth Market profitability Pricing trends Competitive intensity/rivalry Overall risk of returns in the industry Opportunity to differentiate products and services Segmentation Distribution structure (e.g., retail, direct, wholesale) Internal factors that affect competitive strength are the following: Strength of assets and competencies Relative brand strength Market share Customer loyalty Relative cost position (cost structure compared to competitors) Distribution strength Record of technological or other innovation Access to financial and other investment resources

Figure 3.7 McKinsey/GE Growth Pyramid

Q.2 Discuss the investment strategies applicable for businesses and methods to rectify faulty investment strategies. (10 marks) Ans. An investment strategy is a key component of every conceivable business type, and it's critical to ensuring the success of the business. Entire college programs have been designed specifically to teach business investment strategies, but a few key tips can help lay groundwork for effective investing. Use Income to Eliminate Debt o While the pay-down of outstanding debt may not seem like business investment on the surface, debt elimination can equate to a financial return that outpaces even the best investments. If a business has outstanding debt financed at a given interest rate, paying off that debt guarantees an instant return of that percentage. Because business debt often reaches into double digit interest rates, paying off this debt can provide an instant, guaranteed return that is significantly higher than usual returns on other investments. Reinvest Funds to Nurture the Business
o

Perhaps one of the most common ways businesses invest their funds involves purchasing additional equipment, remodeling customer-facing

environments or opening additional locations. By reinvesting profits back into the business for expansion or improvement, the business stands to gain additional profits as a result of the expansion. As an added bonus, a guaranteed return on the investment will come in the form of tax not assessed on the reinvested funds. Invest in Other Businesses
o

Some businesses find success in investing their profits in other noncompeting businesses. These investments may be made as traditional cash investments, as loans or by purchasing securities issued to business start-ups. Investing in other businesses can be an especially wise move for companies in shaky industries, as spreading investments into other types of operations can help diversify a business's holdings and reduce the risk of a complete business loss.

Or Use of income to eliminate debt Reinvestment of funds to nurture the business Investment in other businesses Investment is defined as the commitment of money or capital (e.g. purchasing assets, keeping funds in a bank account etc) to generate future returns. A proper understanding of the investment strategies and a thorough analysis of the options helps an investor to create a portfolio that maximises returns and minimises exposure to risks. Following are the ways to invest successfully: Leave a margin of safety Always leave a margin of safety in your investments to protect your portfolio. The following are the two ways to incorporate the above principle in your investment selection process. Be conservative in your valuation assumptions Only buy assets dealing at substantial discounts to your conservative estimate. Invest in business which you understand Invest in a business in which you have a thorough understanding of the customers, products/services etc. Make assumptions Make assumptions about your future performance by recognising your own limitations. Never purchase the stock until you understand the industrial economy and able to forecast the future of the company with certainty. Measure your success Evaluate your performance by the underlying measures in business.

 Have a clear disposition towards price The more you pay for an asset in relation to its earnings, the lesser is your return value. So have a clear outlook towards the price. Allocate capital by opportunity cost Allocate investments/assets to the choice which has been opted as the best among several mutually exclusive choices.

Internal methods to rectify faulty investment strategies In this section we will explain the methods to rectify faulty investment strategies. Some of the methods are as follows: Internal transformation Corporate restructuring and reorganisation Financial restructuring Divestment strategy Expansion strategy Diversification strategy Vertical and horizontal integration strategy Building core competencies and critical success factors Frequent assessment report assists in detecting the problems associated with faulty investment strategies in an organisation. Internal transformation Internal transformation takes place in an organisation to sustain constant growth, survival and maintain profitability. It includes corporate restructuring, downsizing of employees etc. The following are the reasons for internal transformation of a company: Pressure on owner to decrease costs Overstaffing Large and complicated company structure Low flexibility of staff Financial instability

The main objective of a company which adopts internal transformation is to increase efficiency by reaching the standards in the global market. This is achieved by holding high quality level of productivity. The essential components of a successful business transformation are as follows: Achievement A new level of sustainably high performance emerges Extraordinary and unexpected results appear throughout Improved synergy Collaboration naturally occurs across all levels Creativity and innovation flourishes Aliveness Employees flourish as they openly express their passion, commitment and creativity towards work. Growth and development occurs both personally and professionally Shared future The entire organisation unites to accomplish the future and live consistently with core values We will now discuss the two internal transformation processes in the following section. Corporate restructuring and re-organisation Layoffs and employee termination Q.3. a. Distinguish policy, procedure and programmes with examples. (5 marks) b. Give a short note on synergy. (5 marks)

Differences between policy, procedure, process and programmes In the previous topic we discussed the definition and meaning of policy, procedure, process and programmes. Now we will analyze how each concept is different from the other.

1. Policy is general in nature and identifies the company rules. 2. Policy explains the reason for existence of an organisation. 3. Policy shows how rules are enforced and describes its consequenc es. 4. It defines an outcome or a goal. 5. They are described by using simple sentences. 6. Policies are guidelines for managerial actions. 7. It is a planned way to handle certain issues in the organization. 8. It is framed by the top level managemen t. 9. Policies are a part of the strategies of the organization.

Procedure identifies the specific actions and explains when an action needs to be taken. It describes emergency procedures which include warnings and cautions. It is systematic way of handling routine actions. Procedure defines the means to achieve the goals. Procedures are written in an outline format. It is generally detailed and rigid. It is a part of tactical tools.

Process is a set of activities conducted by people to achieve organizational goals.

Programme is a concrete scheme of activities designed to accomplish a specific Process defines objective. the method in which the work is It provides done. step by step approach to the activities It is a long term to rule that drives an taken achieve the organization. goals. Programming helps in developing an economical way of doing things in a systematic manner.

Ans. b. Synergy is the energy or force created by the working together of various parts or processes. Synergy in business is the benefit derived from combining two or more elements (or businesses) so that the performance of the combination is higher than that of the sum of the individual elements (or businesses). Organizations strive to achieve positive synergy or strategic fit by combining multiple products, business lines, or markets. One way to achieve positive synergy is by acquiring related products, so that sales representatives can sell numerous products during one sales call. Rather than having two representatives make two sales calls to a potential customer, one sales representative can offer the broader mix of products. Mergers and acquisitions are corporate-level strategies designed to achieve positive synergy. The 2004 acquisition of AT&T Wireless by Cingular was an effort to create customer benefits and growth prospects that neither company could have achieved on its ownoffering better coverage, improved quality and reliability, and a wide array of innovative services for consumers. Negative synergy is also possible at the corporate level. Downsizing and the divestiture of businesses is in part the result of negative synergy. For instance, Kimberly-Clark Corporation set out to sharpen its emphasis on consumer and health care products by divesting its tiny interests in business paper and pulp production. According to the company, the removal of the pulp mill will enhance operational flexibility and eliminate distraction on periphery units, thus allowing the corporation to concentrate on a single, core business activity. The intended result of many business decisions is positive synergy. Managers expect that combining employees into teams or broadening the firm's product or market mix will result in a higher level of performance. However, the mere combination of people or business elements does not necessarily lead to better outcomes, and the resulting lack of harmony or coordination can lead to negative synergy. Q.4. Select any established Indian company and analyse the different types of strategies taken up by the company over the last few years. (10 marks) Cadbury plc, formerly known as Cadbury-Schweppes plc, before it demerged from its Americas Beverages manufacturing business in 2008 (Peston, 2008), is the worlds leading confectionery manufacturer and distributor. Cadbury plc operates in over 60 countries, works with over 35,000 direct and indirect suppliers and employs around 50,000 people (Cadbury India Ltd., 2008). Cadbury stresses the importance that it places on quality. Apart from its mission statement, it also references the slogan, Cadbury means quality as an integral part of its businesss activities (Superbrands, 2008).

Lastly, Cadbury also aims to put A Cadbury in every pocket (Karvy Research, n.d.) by targeting current consumers and encouraging them to make impulse purchases and by maintaining a superior marketing mix (Karvy Research, n.d.). Cadbury India Ltd, as the Indian subsidiary of this confectionery giant, also utilizes the same mission and vision statements of its parent firm when operating in the Indian market, albeit with different business strategies and approaches. Since Cadburys activities vary from country to country, this report will simply examine the activities of Cadbury India Ltd in the Indian market, one of the fastest growing confectioneries markets in the world (Financial Express, 2008). Products offered by Cadbury India Ltd. Cadbury plc manufactures and sells three different kinds of confectionery: chocolate, candy and chewing gum (Cadbury India Ltd., 2008), but in the Indian market, its product line is split up into the chocolate confectionery, milk food drinks, candy and gums categories (Cadbury India Ltd., 2008). This report will examine two different products offered to the Indian market by Cadbury India: Cadbury Dairy Milk (chocolate category) and Cadbury Bournvita (milk drinks category). (a) (i) Pricing Cadbury Dairy Milk

Cadbury India enjoys controlling 70% of the confectionery market in India, of which 30% is directly due to the success of its Dairy Milk product, which averages sales of around 1 million bars per day (Cadbury Dairy Milk, 2008; Marketing Communications, 2008). Cadbury Dairy Milk bars are Cadbury Indias cash cow in the countrys 4000 tonne, Rs. 6.50 billion (around 1.6 billion CAD) chocolate market (Gupta, 2003), as such, has been designated its flagship brand (Cadbury India Ltd., 2008; Chatterjee, 2000). Part of Cadbury Dairy Milks success lies in its shared history with Indias identity (it was first sold in 1948, one year after the country was made independent from the British Empire) (Cadbury Dairy Milk, 2008) but also in the fact that it is priced relatively cheaply (Chatterjee, 2006) and is relatively affordable by the Indian masses. Even its smallest Dairy Milk bar, the 13 gram version, is priced at Rs. 5 (about 0.13 CAD), affordable by many middle-class Indians as an occasional treat, but not affordable for those who buy from the less-then-3-rupee (Rs. 3) segment of the market (Chatterjee, 2006). Its history of operating in the country and its average level pricing of chocolate bars, has made the Cadbury dairy Milk bar synonymous with high quality, affordable pure milk chocolate for many Indian customers (Cadbury Dairy Milk, 2008). (ii) Consumer segments served and advertising/promotional strategies used Cadbury India Ltd continuously markets Dairy Milk as a relatively inexpensive treat, towards market segments divided by age, income, technological knowledge and health-consciousness.

In the 1990s, the company stated promoting the chocolate for the kid in everyone, in an attempt to appeal to adults as well as children (Cadbury Dairy Milk, 2008). In order to appeal to potential lower-income customers in the villages of India, further marketing in the form of the Real taste of life campaign (Cadbury Dairy Milk, 2008) attempted to absorb these customers into its market share. By using opinion leaders from Bollywood and using extensive advertising in newspapers, television, magazines and massive billboards across the country, Cadbury managed to capture the attention of the nation and cement its market share superiority in India (Cadbury Dairy Milk, 2008; Marketing Communications, 2008). Nowadays, Cadburys is trying to tap into the potential market of younger generation Internet users by offering contests and hosting competitions online, the most notable being its Pappu Pass Ho Gaya (Pappu Passed!) joint venture operation with Reliance India Mobile, a branch of Indias largest network service provider, which allowed students across the country to check their examination grades online and celebrate with Cadburys Dairy Milk if they did well (Cadbury Dairy Milk, 2008). Furthermore, Cadbury India continuously develops new versions of its Dairy Milk brand in order to keep its adult and children consumers satisfied and interested. Variations include the Fruit & Nut and Crackle & Roast Almond variations (Cadbury Dairy Milk, 2008) which are meant for snacking, as well as the Cadbury Dairy Milk Desserts, to cater to the urge for something sweet after meals (Cadbury Dairy Milk, 2008). The Cadbury Bournville Dark Chocolate bar, similar to the Dairy Milk bar, targets the health-conscious market segment of the chocolate market, who wish to enjoy the taste of dark chocolate but also its health benefits (Financial Express, 2008). Lastly, Cadbury Dairy Milk Wowie, with Disney characters embossed on each chocolate square (Cadbury Dairy Milk, 2008) clearly targets the child segment of its market. Cadburys market segmentation is quite effective because it allows them to target all three major market segments: children, adults and technologically-savvy consumers, but it does not serve those segments of the market that have been divided by income levels. Although Dairy Milk is affordable to the upper and middle-income consumers who view it as a mid-priced item (Kochhar, 2007), lower income consumers who buy from the less-than-3-rupee range of chocolate cannot afford to buy Cadbury Dairy Milk regularly. Cadbury will need to address the needs of this market segment in order to boost its sales of Dairy Milk. Indian consumers seem to be satisfied with Cadbury Dairy Milk as its marketing promotes it as an occasional indulgence, despite popular opinion that it is a relatively expensive luxury product (Cadbury India Ltd. Analysts Meet, 1999). This restrained marketing has allowed the chocolate to slowly become a measure of quality for many Indians, as Cadbury Dairy Milk is their Gold Standard for chocolate, where the pure taste of Cadbury Dairy Milk defines the chocolate taste for the Indian consumer (Cadbury India Ltd., 2008). In fact, Cadbury Dairy Milk was voted one of the Indias most trusted brands in a poll conducted in 2005 (Cadbury Dairy Milk, 2008).

(iii) Product Positioning Cadbury India Ltds main sources of competition come from Amul, Indias own dairy company and Nestle India, Nestles subsidiary in India. As seen in Appendix B, Cadbury India controls around 70% (Cadbury India Ltd., 2008) of the chocolate market, whereas Amul controls around 2% (Dobhal, n.d.) and Nestle India around 27% (Nestle to expand, 2008). As mentioned earlier, Cadburys main strength comes from it ability to market Dairy Milk products through altering the theme and functionality of the product as the time demands (Cadbury India Ltd Analysts Meet, 1999). Although this has allowed it to control more of the market than its closest competitors, the reasons for its success may also lie in the fact that many Indians still view its chocolates as luxury products (Cadbury India Ltd Analysts Meet, 1999) and not as household goods. This contradicts Cadburys assertion that its leadership is maintained by a superior marketing mix (Karvy Research, n.d.). Cadbury India may have misinterpreted the popularity of Dairy Milk as a sign that the Indian public has accepted it as a household product. In fact, the booming economy and the increasing affluence of the burgeoning middle class (Basu, 2004) has promoted the use of status symbols, where the regular consumption of so-called luxury chocolates such as Cadbury Dairy Milk is viewed as fashionable (Kochhar, 2007). Despite Amuls longer history in India, its chocolates are viewed as being local and not luxurious, justifying a lower price tag (Chansarkar et al., 2006). Cadbury India must maintain its current marketing strategy but slowly start to promote Dairy Milk as a household good so that consumers spend their rising disposable incomes on it and boost its sales (Rai, 2006). Amuls origins as a community welfare program in Gujarat, one of Indias most industrialized states, to becoming a national enterprise (Amul, 2008) spanned the decades during which newly-independent India forged its identity, thus becoming an integral part of Indias identity and giving its marketing strategy a new source of authority. Cadbury simply cannot match this kind of national endorsement, so by at least promoting the fact that it has been operating in India for almost as long as Amul, it can try to be Indian too. This, in combination with the longest running advertising campaign that Amul is famous for gives it a brand awareness boost. Moreover, Amuls reputation for credibility, safety and consumer satisfaction was only reinforced when Cadbury Indias Chinese-made products were found to be contaminated with worms and melamine (Sinn and Karimi, 2008). The Gold Standard (Cadbury Dairy Milk, 2008) was no longer gold, nor was it a standard anymore, as peoples confidence in its safety was shattered. In order to position its products as safe and affordable treats once again, Cadbury India should make attempts to be even more sensitive to consumer demands. Customer satisfaction must be given the utmost importance, even if the company has to run at a loss for a few months, as this will eventually allow it to negate some of the extensive damage that this negative publicity has to the firms reputation. The new extra-layer packaging of chocolate that is now being used in the manufacture of Dairy Milk is a good first step to take in reclaiming some of the publics trust (Vivek, 2004).

Lastly, Amuls innovative ideas will be the bane of Cadbury. Their release of diabetic friendly chocolate and chocolates catering to different ethnic flavours (Janve and Dogra, 2007) as well as chocolates for festive seasons allow them to rapidly sway consumers over to their products. This accounts for their soaring annual market growth rates of 18% annually (Indian Express, 1999). In comparison to Nestle India however, Cadbury Indias longer track history gives it a competitive edge. Cadbury has more of a brand recognition power than Nestle has, and it uses this extensively to promote Cadbury Dairy Milk all over the country. Nestle still has to break into the Indian market; one way to do this would be to follow Amuls lead and develop and market products that meet specific ethnic needs, such as chocolates for Diwali and Rakshabandan (two different Indian festivals) (Kochhar, 2007) , concepts that Cadbury India has yet to explore. Cadbury India must counter this threat that Nestle and Amul pose, namely, the production of chocolates specifically for the festive seasons of India. By doing so, Cadbury will be able to position its chocolates as chocolate specifically designed for India, endearing it to the consumers and boosting its sales. (a) Cadbury Bournvita (i) Pricing Cadbury Bournvita was first sold on the Indian markets in 1948, soon after Cadbury India Ltd (then known as Cadbury-Fry) was incorporated (Cadbury Bournvita, 2008). As a result of being one of the first products offered on the Indian market by Cadbury, combined with successful marketing strategies and promotional offers, Cadbury Bournvita enjoys a 17% market share of the malt-based food drink market (Cadbury Bournvita, 2008). India alone accounts for 22% of the worlds malt-food milk drink retail sales (BeverageDaily, 2004), but unlike Cadbury Dairy Milk, Cadbury Bournvita does not control a large share of Indias malt-based food drinks market. Bournvita is largely sold in 500 gram bottles for around Rs. 95 (2.35 CAD) a piece despite other sizes being available, and is perceived to be quite expensive (Hawa, 2002). However, due to its long history with India, and the fact that it is used a staple source of nourishment by Indian mothers for their children, Bournvitas still remains popular (Hawa, 2002). (ii) Consumer segments served and advertising/promotional strategies used Cadbury markets its Bournvita product in diverse market segments. Bournvita has been marketed mainly towards children, but also finds followers amongst elderly people, pregnant women and athletes (Hawa, 2002; Cadbury Bournvita, 2008). Continuous brand re-invention, a rich brand heritage and complete overhauls in packaging, product design, promotion and distribution have allowed Cadbury Bournvita to maintain its 17% market share over the years in Indias 220,000 tonne malt-food market (Cadbury Bournvita, 2008; BeverageDaily, 2004).

Over the years, Cadbury has marketed Bournvita in order to appeal to the change in perceptions and tastes of its consumers. It focused on the Good Upbringing, Goodness that grows with you campaign to promote Bournvita as an essential health drink for children (Cadbury Bournvita, 2008). This campaign was conducted mainly on the radio, the primary medium of communication for many Indians at the time (Ranjan, 2007). This campaign was followed by the massively successful Brought up right, Bournvita bright television, newspaper and magazine campaign (Cadbury Bournvita, 2008) to reach out to more children and promote the link between intelligence and Bournvita, a concept that appealed to many children. In order to cement their consumer base and ensure brand loyalty, in the 1990s, Bournvita challenged the public by promising complete physical and mental development for its consumers (Cadbury Bournvita, 2008), where the subsequent television marketing campaign secured Cadbury Bournvitas place in the Indian market. The most recent marketing campaign undertaken by Cadbury Bournvita is the one specially designed to harness consumers uncertainty about the challenges of the new millennium. The Real Achievers who have grown up on Bournvita campaign focused on preparing consumers with the health, vitality and nutrition necessary for facing the challenges of the new millennium (Cadbury Bournvita, 2008) and allowed Cadbury Bournvita to keep pace with the evolving mindsets of the new age consumers (Cadbury Bournvita, 2008). This marketing campaign was broadcast on television and published in newspapers in an effort to recruit contestants (Kapoor, 2007). The release of new versions of the original Bournvita such as Bournvita 5-Star, combining the flavour of the original chocolate Bournvita with the flavor of Cadbury 5-Star (Cadbury Bournvita, 2008), one of its caramel chocolates helps maintain consumer interest. The new product is being aimed at the segment of children who want nutrition but also taste (Cadbury Bournvita, 2008). By also sponsoring the Indian Olympic team to the Moscow Olympics of 1980 (Cadbury Bournvita, 2008), Cadbury Bournvita has managed to appeal to an athletic market segment as well. Recently, by supporting sports competitions and sponsoring athletes across the country, Cadbury Bournvita has managed to promote itself as a sports drink for athletes (Kapoor, 2007). Furthermore, one of the most famous Indian examples of Cadbury Bournvitas ingenious marketing is its sponsorship of the Bournvita Quiz Contest. The Bournvita Quiz Contest is the longest running quiz show in India, having first been aired in 1972. The Contest spans 7 countries, has involved more than 4000 schools and more than 1 million students, making it one of the most popular high school contests (Cadbury Bournvita, 2008), as well as one of Cadburys most successful marketing ventures till date. However, despite Cadbury Bournvitas history of serving consumers in the Indian market, and amidst allegations of declining quality and taste of the Bournvita brand (Hawa, 2002), many customers still feel that Bournvita does not have the appeal that other brands, such as Horlicks do (refer to Appendix C) and thus the market is slowly switiching over to white malt-based food drinks such as Horlicks (Karvy Research, n.d.; Cadbury India Ltd Analysts Meet, 1999).

(iii) Product Positioning The malt-based food drinks market in India is divided into brown drinks and white drinks categories (Cadbury India Ltd Analysts Meet, 1999; Karvy Research, n.d.), with white drinks being popular in the southern and eastern parts of the country, and the brown drinks being popular in the northern and western parts of the country (Karvy Research, n.d.). Cadbury Bournvitas major source of competition comes from GlaxoSmithKlines Horlicks and Heinz Foods Complan. As seen in Appendix C, Horlicks is the market leader with a 44% market share (Chatterjee, 2006), followed by Cadbury Bournvita with its 17% market share (Chatterjee, 2006) and then Complan with its 13% market share (Samajdar, 2006). As mentioned earlier, the malt-drinks market is split up into the white and brown drinks categories. The white drinks category is mainly led by Horlicks whereas the brown drinks category is led by Bournvita (Karvy Research, n.d.). Lately, more consumers have started switching over to consuming white drinks than brown drinks, thereby giving Horlicks a larger market share than Bournvita (Karvy Research, n.d.). When competing with Horlicks, Cadbury Bournvitas current marketing strategy is simply not enough. Given than Horlicks has been operating in the Indian market for longer than Cadbury (Horlicks, 2008), this larger market share may be explained by more consumer familiarity with Horlicks than with Bournvita, however, Horlicks extensive marketing campaigns may also have played a part. Horlicks has always marketed itself as a Great Family Nourisher with products such as Mothers Horlicks designed for different members of the family (Horlicks, 2008), which makes it more appealing to a wider section of the market, with products designed for different members of the family, such as Mothers Horlicks (Horlicks, 2008), than Bournvitas mainly child-oriented approach. Thus, even elderly and convalescent consumers can consume the product without feeling conscious of consuming a child-only product. Even the Bournvita Quiz Contest, effectively Bournvitas longest running marketing campaign, mainly attracts more child consumers to its product (Radakrishnan, 2002), and thus cannot compete with Horlicks wider appeal. Thus, the solution lies in Cadbury India marketing Bournvita as an adult drink as well. Only then will it be able to compete effectively with Horlicks. Meanwhile, Complans market share of 13% (Samajdar, 2006), is less than Bournvitas. Although both products are targeted at children, Complan has marketed itself as a perfect nutritional supplement (Complan, n.d.) rather than as a healthy drink for children, which is Bournvitas approach. Since the words nutritional supplement connote a need for extra nourishment, this may possibly work against Complan as many families may feel that their child receives enough nourishment and does not require more. Although Cadbury Bournvita currently has a larger market share of the two, it must continue to market itself as a child-friendly drink, and not as a nutritional supplement, in order to maintain its superiority.

Delivering

Cadbury

products

to

customers

Indias 300 billion USD retail market is growing at a rate of 30% per annum (Rai, 2006). In a country where half a billion people are under the age of 25, disposable incomes are on the rise and the economy is growing at a rate of 8% annually (Rai, 2006), selling treats such as Cadbury Dairy Milk bars and Cadbury Bournvita powder will generate massive returns. However, in order to be able to sell these products to customers, proper distribution channels must be identified. The Indian retail sector is composed of 97% family-run, street corner stores (Rai, 2006) and the remaining 3% consisting of malls and shopping complexes. Therefore, Cadbury India Ltd. produces its products in factories spread geographically across India, but also sells its products through a chain of over 300,000 retailers spread across India (Cadbury India Ltd Analysts Meet, 1999). The efforts of these retailers are augmented by the support of 1900 distributor locations and 27 depots (Cadbury India Ltd Analysts Meet, 1999). Furthermore, of a total of 3600 locations that sell Cadbury products, almost 3100 locations are directly supplied by Cadbury India Ltd distributors at least thrice a month (Cadbury India Ltd Analysts Meet, 1999). These distribution networks give Cadbury India its competitive edge in Indias massive consumer market. SWOT Analysis of Cadbury India Ltd. Cadbury India Ltds objective of putting a Cadbury in every pocket (Karvy Research, n.d.) can only be done if the company markets its Cadbury Dairy Milk as a household good and its Bournvita as a family-friendly drink. Until then, its Cadbury Dairy Milk success will only be short-term in nature and Bournvita will not be able to reverse the trend towards the consumption of white malted drinks (Cadbury India Ltd Analysts Meet, 1999) and compete with Horlicks. As seen in Appendix D, if Cadbury Dairy Milk can be marketed extensively enough to break the luxury perception that consumers have of it currently (Cadbury India Ltd Analysts Meet, 1999), it can benefit from inelastic demand as a household product, thus generating a constant stream of revenue and cementing the Dairy Milk brand as a cash cow product. This objective can be accomplished by simply building on the good reputation and trust that it has earned, and by listening to the needs of its consumers. Bournvita meanwhile needs to be extensively marketed in order to reduce the damaging effect that Horlicks family-friendly marketing mix is having on its market share. Furthermore, the key threat that can affect Cadbury India Ltds success in India is Amuls innovative marketing strategy. As a result of its witty marketing strategies, length of time serving India and its ability to develop and market products specifically tailored for Indian consumers, Amuls yearly growth rate of 18% may slowly start to eat away at Cadburys success (Indian Express, 1999). Conclusion Cadbury India Ltds position in India is relatively strong. In order to maintain its lead in such a large market, it must learn to address the specific needs of its consumers

and continue to maintain their goodwill, while also analyzing its competitors marketing strategies. By doing so, it will be able to isolate the benefits and drawbacks of its competitors marketing mix and use those to its own advantage. Cadbury must also appreciate the advantages of a positive reputation and always stress consumer satisfaction. One key aspect of this lies in maintaining the safety of its products so that the name of Cadbury is always synonymous with high quality safe products. Repeats of the recent melamine and worms issues cannot be allowed to happen as once consumer confidence in its brand name is shattered, Cadbury Indias brand recognition aspect will immediately work against it by highlighting the link between its name and contaminated food products. This will cripple sales and reverse the fruits of 70 years of hard work in the country, leaving the path open for more efficient local companies like Amul to learn from Cadbury Indias mistakes and take over its market share.

Future Strategy In the branded impulse market, the share of chocolate in 6.6% and Cadburys share in the impulse segment is 4.8% factor like changing attitude, higher disposable income, a large youth population, and low penetration of chocolate (22% of urban population) point towards a big opportunity of increasing the share of chocolate in the branded impulse among the costly alternative in the branded impulse market. It appears that company is likely to play the value game to expand the market encouraged by the recent success of its low priced value for many packs. Various measures are undertaken in all areas of operation to create value for the future. New channel of marketing such as gifting and child connectivity and low end value for money product for expanding the consumer base have been identified. In terms of manufacturing management focus is on optimizing manufacturing efficiencies and creating a world class manufacturing location for CDM and clairs. The company is today the second best manufacturing location of Cadburys Schweppes in the world. Efficient sourcing of key raw material i.e. coca through forward purchase of imports, higher local consumption by entering long term contract with farmer and undertaking efforts in expanding local coca area development. The initiatives in the terms of development a long term domestic coca a sourcing base would field maximum gains when commodity prices start moving up. Use of it to improve logistic and distribution competitiveness Utilizing mass media to create and maintain brands. Expand the consumer base. The company has added 8 million new consumer in the current year and how has consumer base of 60 million although the growth in absolute numbers is lower than targeted, the company has been able to increase the width of its consumer base through launch of low priced products. Improving distribution quality by addressing issues of product stability by installation of visi coolers at several outlets. This would be really effective in maintaining consumption in summer, when sales usually dip due to the fact that the heat effects product quality and thereby consumption. The above are some steps being taken internally to improve future operation and profitability. At the same time the management is also aware of external changes taking place in the competitive environment and is taking steps to remain

competitive in the future environment of free imports, lower barrier to trade and the advent of all global players in to the country. The management is not unduly concerned about the huge deluge of imported chocolate brands in the market place. It is of the view that size of this imported premium market is small to threaten its own volumes or sales in fact, the company looks at the tree important as an opportunity, where it could optimally use the global Cadbury Schweppes portfolio. The company would be able to not only provide greater variety, but it would also be more cost effective to test market new product as well as improve speed of response to change in consumer preference through imports. The only concerns that the company has in this regard is the current high level of duties, which limit the opportunity to launch value for money products.

Q. 5 Why do you think it is necessary for organisations to have vision and mission statements and also core competencies? Support your answer with relevant examples. (10 marks) Ans. Vision and Mission statements A well-articulated strategic intent guides the development of goals and helps in inspiring the employees to achieve targets. It also facilitates in utilising the intent to allocate resources and in encouraging team participation. It comprises of the vision and mission statements. Vision statement A vision statement defines the purpose and principles of an organisation in terms of the values of the organisation. It is a concise and motivating statement that guides the employees to select the procedures to attain the goals. Vision statement is the framework of strategic planning. A vision statement describes the future ambition of an organisation. A vision is the ability to view what the organisation wants to be in future. It is prepared for the organisation and its employees. It should be implanted in the organisation being collectively shared by everyone in the organisation. It conveys an effective business plan. It integrates an understanding about the nature and aspirations of the organisation and develops this conception to lead the organisation towards a better objective. It must synchronise with the organisations principles. The ambition should be rational and achievable. Example - Wal-Marts vision is to become worldwide leader in retailing.

Vision statement of L&T L&T employees shall be innovative and the empowered team will constantly create values and attain global benchmarks. L&T shall promote a culture of trust and continuous learning. It shall meet the expectations of employees, stakeholders and society. (i) Cadburys Vision Statement Our objective is to deliver superior shareholder returns by realizing our vision to the be the worlds biggest and best confectionery company. We are currently the biggest, and we have an enduring commitment to become the undisputed best. At the heart of our plan is our performance scorecard, delivered through our priorities, sustainability commitments and culture Cadbury plans to deliver superior shareholder returns (Cadbury plc, 2008) by measuring its financial progress in the areas of growth, efficiency, capabilities and sustainability from 2008 to 2011 (Cadbury plc, 2008).

Mission statement A mission statement is the extensive definition of the mission of an organisation. It is a concise description of the existence and fundamental purpose of an organisation. It describes the present potentials and activities of the organisation. It conveys the purpose of the organisation to its employees and the public. It is vital for the development and growth of the organisation. Mission statement is the responsibility by which an organisation aims to serve its stakeholders. It gives a framework on the operations of the organisation within which the strategies are devised. It describes the present capabilities, the stakeholders and the reason for existence of an organisation. The statement distinguishes an organisation from its other competitors by explaining its scope of activities, technologies, its products and services used to achieve the goals and objectives. It should be practical and achievable. It should be clear and precise so that the actions can be taken based on it. It should be unique and different to leave an impact on everyone. It should be credible so that the stakeholders accept it. Example -Wal-Marts mission is to provide ordinary customers the chance to buy the same thing as rich people.

Mission statement of IBM

At IBM, we strive to be the forerunner in inventing, developing and manufacturing most advanced information technologies, including computer systems, software, storage systems and microelectronics. The distinction between mission statement and vision statement is that the mission statement focuses on the present position of the organisation and the vision statement focuses on the future of the organisation. (ii) Cadburys Mission Statement Cadburys mission statement outlines its overall business objective and its commitment to its customers. Our core purpose Working together to create brands people love captures the spirit of what we are trying to achieve as a business. We collaborate and work as teams to convert products into brands. Core competencies are those skills that are critical for a business to achieve competitive advantage. These skills enable a business to deliver essential customer benefit like the selection of a product or service by a customer. Core competency is the key strength of business because it comprises the essential skills. These are the central areas of expertise of the company where maximum value is added to its services or products. Example Infosys has a core competency in information technology. It is a unique skill or technology that establishes a distinct customer value. As the organisation progresses and adapts to the new environment, the core competencies also adjust to the change. They are not rigid but flexible to advancing time. The organisation makes the maximum utilisation of the competencies and correlates them to new opportunities in the market. Resources and capabilities are the building blocks on which an organisation builds and executes a value-added strategy. The strategy is devised in a manner that an organisation can receive reasonable profit and attain strategic competitiveness. Core Competencies are not fixed. They change in response to the transformation in the environment of the company. They are adaptable and advance over time. As an organisation progresses and adapts to new circumstances, the core competencies also adapt to the transformation.

Q. 6. What is SBU? Explain its features, functions and roles. Mention some of the successful SBU of MNCs. (10 marks) Incompelete Ans. Strategic Business Unit or SBU is understood as a business unit within the overall corporate identity which is distinguishable from other business because it serves a defined external market where management can conduct strategic planning in relation to products and markets. The unique small business unit benefits that a firm aggressively promotes in a consistent manner. When companies become really large, they are best thought of as being composed of a number of businesses (or SBUs).Strategic Business Unit (SBU) is necessary when corporation starts to provide different products and hence, need to follow different strategies.SBUs are also known as strategy centers, Independent Business Unit or even Strategic Planning Centers. Strategic Business Unit (SBUs) is necessary when corporation starts to provide different products and hence, need to follow different strategies. To ease its operation, corporate set different groups of product/product line regarding the strategy to follow (in terms of competition, prices, substitutability, style/ quality, and impact of product withdrawal). These strategic groups are called Strategic Business Units (SBUs). Each Business Unit must meet the following criteria: 1. Have a unique business mission, independent from other SBUs. 2. Have clearly definable set of competitors. 3. Is able to carry out integrative planning relatively independently of other SBUs. Should have a Manager authorized and responsible for its operation.

Master of Business Administration-MBA Semester 4 International Business Management MB0053 Assignment Set - 1 Q.1 What is globalization? What are its benefits? How does globalization help in international business? Give some instances? Ans : Globalization (or globalization) describes the process by which regional economies, societies, and cultures have become integrated through a global network of political ideas through communication, transportation, and trade. The term is most closely associated with the term economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, the spread of technology, and military presence. However, globalization is usually recognized as being driven by a combination of economic, technological, sociocultural, political, and biological

factors. The term can also refer to the transnational circulation of ideas, languages, or popular culture through acculturation. An aspect of the world which has gone through the process can be said to be globalized. Against this view, an alternative approach stresses how globalization has actually decreased inter-cultural contacts while increasing the possibility of international and intra-national conflict.[3] Globalization has various aspects which affect the world in several different ways Industrial - emergence of worldwide production markets and broader access to a range of foreign products for consumers and companies. Particularly movement of material and goods between and within national boundaries. International trade in manufactured goods increased more than 100 times (from $95 billion to $12 trillion) in the 50 years since 1955.China's trade with Africa rose sevenfold during 2000-07 alone. Financial - emergence of worldwide financial markets and better access to external financing for borrowers. By the early part of the 21st century more than $1.5 trillion in national currencies were traded daily to support the expanded levels of trade and investment Economic - realization of a global common market, based on the freedom of exchange of goods and capital Job Market- competition in a global job market. In the past, the economic fate of workers was tied to the fate of national economies. With the advent of the information age and improvements in communication, this is no longer the case. Because workers compete in a global market, wages are less dependent on the success or failure of individual economies. This has had a major effect on wages and income distribution Political - some use "globalization" to mean the creation of a world government which regulates the relationships among governments and guarantees the rights arising from social and economic globalization. Politically, the United States has enjoyed a position of power among the world powers, in part because of its strong and wealthy economy. With the influence of globalization and with the help of the United States own economy, the People's Republic of China has experienced some tremendous growth within the past decade. If China continues to grow at the rate projected by the trends, then it is very likely that in the next twenty years, there will be a major reallocation of power among the world leaders. China will have enough wealth, industry, and technology to rival the United States for the position of leading world power. Most of us assume that international and global business are the same and that any company that deals with another country for its business is an international or global company. In fact, there is a considerable difference between the two terms. International companies Companies that deal with foreign companies for their business are considered as international companies. They can be exporters or importers who may not have any investments in any other country, apart from their home country.

Global companies Companies, which invest in other countries for business and also operate from other countries, are considered as global companies. They have multiple manufacturing plants across the globe, catering to multiple markets. The transformation of a company from domestic to international is by entering just one market or a few selected foreign markets as an exporter or importer. Competing on a truly global scale comes later, after the company has established operations in several countries across continents and is racing against rivals for global market leadership. Thus, there is a meaningful distinction between a company that operates in few selected foreign countries and a company that operates and markets its products across several countries and continents with manufacturing capabilities in several of these countries. Companies can also be differentiated by the kind of competitive strategy they adopt while dealing internationally. Multinational strategy and global competitive strategy are the two types of competitive strategy. Multinational strategy Companies adopt this strategy when each countrys market needs to be treated as self contained. It can be for the following reasons: o Customers from different countries have different preferences and expectations about a product or a service. o Competition in each national market is essentially independent of competition in other national markets, and the set of competitors also differ from country to country. o A companys reputation, customer base, and competitive position in one nation have little or no bearing on its ability to successfully compete in another nation. o Some of the industry examples for multinational competition include beer, life insurance, and food products. Global competitive strategy Companies adopt this strategy when prices and competitive conditions across the different country markets are strongly linked together and have common synergies. In a globally competitive industry, a companys business gets affected by the changing environments in different countries. The same set of competitors may compete against each other in several countries. In a global scenario, a companys overall competitive advantage is gauged by the cumulative efforts of its domestic operations and the international operations worldwide. A good example to illustrate is Sony Ericsson, which has its headquarters in Sweden, Research and Development setup in USA and India, manufacturing and assembly plants in low wage countries like China, and sales and marketing worldwide. This is made possible because of the ease in transferring technology and expertise from country to country. Industries that have a global competition are automobiles, consumer electronics (like televisions, mobile phone), watches, and commercial aircraft and so on. Table 1 portrays the differences in strategies adopted by companies in international and global operations. Strategy International Global Location Selected target countries Most global businesses and trading areas operate in North America,

Business

Custom strategies to fit the circumstances of each host country situation Adopted to local culture and particular needs and expectations of local buyers Plants scattered across many host countries, each producing versions suitable for the surrounding environment

Product-line

Production

Source of supply of raw Suppliers in host country materials preferred Marketing and distribution Adapted to practices and culture of each host country Cross country connections Efforts made to transfer ideas, technologies, competencies and capabilities that work successfully in one country to another country whenever such a transfer appears advantageous Form subsidiary companies to handle operations in each host country; each subsidiary operates more or less autonomously to fit host country conditions

Company organisation

Europe, Asia Pacific, and Latin America Same basic strategy worldwide with minor country customisation where necessary Mostly standardised products sold worldwide, moderate customisation depending on the regulatory framework Plants located on the basis of maximum competitive advantage (in low cost countries close to major markets, geographically scattered to minimise shipping costs, or use of a few world scale plants to maximise economies of scale) Attractive suppliers from across the world Much more worldwide coordination; minor adaptation to host country situations if required Efforts made to use almost the same technologies, competencies, and capabilities in all country markets (to promote use of a mostly standard strategy), new successful competitive capabilities are transferred to different country markets All major strategic decisions closely coordinated at global headquarters; a global organisational structure is used to unify the operations in each country

Benefits of globalisation We have moved from a world where the big eat the small to a world where the fast eat the slow", as observed by Klaus Schwab of the Davos World Economic Forum. All economic analysts must agree that the living standards of people have considerably improved through the market growth. With the development in

technology and their introduction in the global markets, there is not only a steady increase in the demand for commodities but has also led to greater utilization. Investment sector is witnessing high infusions by more and more people connected to the world's trade happenings with the help of computers. As per statistics, everyday more than $1.5 trillion is now swapped in the world's currency markets and around one-fifth of products and services are generated per year are bought and sold. Buyers of products and services in all nations comprise one huge group who gain from world trade for reasons encompassing opportunity charge, comparative benefit, economical to purchase than to produce, trade's guidelines, stable business and alterations in consumption and production. Compared to others, consumers are likely to profit less from globalization. Another factor which is often considered as a positive outcome of globalization is the lower inflation. This is because the market rivalry stops the businesses from increasing prices unless guaranteed by steady productivity. Technological advancement and productivity expansion are the other benefits of globalization because since 1970s growing international rivalry has triggered the industries to improvise increasingly. Globalization can be described as a process by which the people of the world are unified into a single society and functioning together. This process is a combination of economic, technological, sociocultural and political forces. Globalization, as a term, is very often used to refer to economic globalization, that is integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and spread of technology. The word globalization is also used, in a doctrinal sense to describe the neoliberal form of economic globalization.Globalization is also defined as internationalism, however such usage is typically incorrect as "global" implies "one world" as a single unit, while "international" (between nations) recognizes that different peoples, cultures, languages, nations, borders, economies, and ecosystems exist(http://en.wikipedia.org/). Globalization has two components: the globalization of market and globalization of production.... Some other benefits of globalization as per statistics Commerce as a percentage of gross world product has increased in 1986 from 15% to nearly 27% in recent years. The stock of foreign direct investment resources has increased rapidly as a percentage of gross world product in the past twenty years. For the purpose of commerce and pleasure, more and more people are crossing national borders. Globally, on average nations in 1950 witnessed just one overseas visitor for every 100 citizens. By the mid-1980s it increased to six and ever since the number has doubled to 12. Worldwide telephone traffic has tripled since 1991. The number of mobile subscribers has elevated from almost zero to 1.8 billion indicating around 30% of the world population. Internet users will quickly touch 1 billion. o Promotes foreign trade and liberalisation of economies. o Increases the living standards of people in several developing countries through capital investments in developing countries by developed countries. o Benefits customers as companies outsource to low wage countries. Outsourcing helps the companies to be competitive by keeping the cost low, with increased productivity. o Promotes better education and jobs.

o Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, best practices, and culture. o Provides better quality of products, customer services, and standardised delivery models across countries. o Gives better access to finance for corporate and sovereign borrowers. o Increases business travel, which in turn leads to a flourishing travel and hospitality industry across the world. o Increases sales as the availability of cutting edge technologies and production techniques decrease the cost of production. o Provides several platforms for international dispute resolutions in business, which facilitates international trade. Some of the ill-effects of globalisation are as follows: Leads to exploitation of labour in several cases. Causes unemployment in the developed countries due to outsourcing. Leads to the misuse of IPR, copyrights and so on due to the easy availability of technology, digital communication, travel and so on. Influences political decisions in foreign countries. The MNCs increasingly use their economical powers to influence political decisions. Causes ecological damage as the companies set up polluting production plants in countries with limited or no regulations on pollution. Harms the local businesses of a country due to dumping of cheaper foreign goods. Leads to adverse health issues due to rapid expansion of fast food chains and increased consumption of junk food. Causes destruction of ethnicity and culture of several regions worldwide in favour of more accepted western culture. In spite of its disadvantages, globalisation has improved our lives in various fields like communication, transportation, healthcare, and education. Q.2 What is culture and in the context of international business environment how does it impact international business decisions? Ans: Culture is defined as the art and other signs or demonstrations of human customs, civilisation, and the way of life of a specific society or group. Culture determines every aspect that is from birth to death and everything in between it. It is the duty of people to respect other cultures, other than their culture. Research shows that national cultures generally characterise the dominant groups values and practices in society, and not of the marginalised groups, even though the marginalised groups represent a majority or a minority in the society. Culture is very important to understand international business. Culture is the part of environment, which human has created, it is the total sum of knowledge, arts, beliefs, laws, morals, customs, and other abilities and habits gained by people as part of society. Culture is an important factor for practising international business. Culture affects all the business functions ranging from accounting to finance and from production to service. This shows a close relation between culture and international business. The following are the four factors that question assumptions regarding the impact of global business in culture: National cultures are not homogeneous and the impact of globalisation on heterogeneous cultures is not easily predicted. Culture is not similar to cultural practice.

 Globalisation does not characterise a rupture with the past but is a continuation of prior trends. Globalisation is only one of many processes involved in cultural change. Cultural differences affect the success or failure of multinational firms in many ways. The company must modify the product to meet the demand of the customers in a specific location and use different marketing strategy to advertise their product to the customers. Adaptations must be made to the product where there is demand or the message must be advertised by the company. The following are the factors which a company must consider while dealing with international business: The consumers across the world do not use same products. This is due to varied preferences and tastes. Before manufacturing any product, the organisation has to be aware of the customer choice or preferences. The organisation must manage and motivate people with broad different cultural values and attitudes. Hence the management style, practices, and systems must be modified. The organisation must identify candidates and train them to work in other countries as the cultural and corporate environment differs. The training may include language training, corporate training, training them on the technology and so on, which help the candidate to work in a foreign environment. The organisation must consider the concept of international business and construct guidelines that help them to take business decisions, and perform activities as they are different in different nations. The following are the two main tasks that a company must perform: o Product differentiation and marketing As there are differences in consumer tastes and preferences across nations; product differentiation has become business strategy all over the world. The kinds of products and services that consumers can afford are determined by the level of per capita income. For example, in underdeveloped countries, the demand for luxury products is limited. o Manage employees It is said that employees in Japan were normally not satisfied with their work as compared with employees of North America and European countries; however the production levels stayed high. To motivate employees in North America, they have come up with models. These models show that there is a relation between job satisfaction and production. This study showed the fact that it is tough for Japanese workers to change jobs. While this trend is changing, the fact that job turnover among Japanese workers is still lower than the American workers is true. Also, even if a worker can go to another Japanese entity, they know that the management style and practices will be quite alike to those found in their present firm. Thus, even if Japanese workers were not satisfied with the specific aspects of their work, they know that the conditions may not change considerably at another place. As such, discontent might not impact their level of production. The following are the three mega trends in world cultures: The reverse culture influence on modern Western cultures from growing economies, particularly those with an ancient cultural heritage. The trend is Asia centric and not European or American centric, because of the growing economic and political power of China, India, South Korea, and Japan and also the ASEAN. The increased diversity within cultures and geographies. The following are the necessary implications in international business:

 Avoid self reference criterion such as, ones own upbringing, values and viewpoints. Follow a philosophical viewpoint that considers that many perspectives of a single observation or phenomenon can be true. Discover and identify global segments and global niche markets, as national markets are diverse with growing mobility of products, people, capital, and culture. Grow the total share market by innovating affordable products and services, and making them accessible so that, they are affordable for even subsistence level consumers rather than fighting for market share. Organise global enterprises around global centres of excellence. Hofstedes cultural dimensions According to Dr. Geert Hofstede, Culture is more often a source of conflict than of synergy. Cultural differences are a trouble and always a disaster. Professor Hofstede carried out a detailed study of how values in the workplace are influenced by culture. He worked as a psychologist in IBM from 1967 to 1973. At that time he gathered and analysed data from many people from several countries. Professor Hofstede established a model using the results of the study which identifies four dimensions to differentiate cultures. Later, a fifth dimension called long-term outlook was added. The following are the five cultural dimensions: Power Distance Index (PDI) This focuses on the level of equality or inequality, between individuals in the nations society. A country with high power distance ranking depicts that inequality of power and wealth has been allowed to grow within the society. These societies follow caste system that does not allow large upward mobility of its people. A country with low power distance ranking depicts the society and de-emphasises the differences between its peoples power and wealth. In these societies equality and opportunity is stressed for everyone. Individualism This dimension focuses on the extent to which the society reinforces individual or collective achievement and interpersonal relationships. A high individualism ranking depicts that individuality and individual rights are dominant within the society. Individuals in these societies form a larger number of looser relationships. A low individualism ranking characterises societies of a more collective nature with close links between individuals. These cultures support extended families and collectives where everyone takes responsibility for fellow members of their group. Masculinity This focuses on the extent to which the society supports or discourages the traditional masculine work role model of male achievement, power, and control. A country with high masculinity ranking shows the country experiences high level of gender differentiation. In these cultures, men dominate a major part of the society and power structure, with women being controlled and dominated by men. A country with low masculinity ranking shows the country, having a low level of differentiation and discrimination between genders. In low masculinity cultures, women are treated equal to men in all aspects of the society. Uncertainty Avoidance Index (UAI) This focuses on the degree of tolerance for uncertainty and ambiguity within the society that is unstructured situations. A country with high uncertainty avoidance ranking shows that the country has low tolerance for uncertainty and ambiguity. A rule-oriented society that incorporates rules, regulations, laws, and controls is created to minimise the amount of

uncertainty. A country with low uncertainty avoidance ranking shows that the country has less concern about ambiguity and uncertainty and has high tolerance for a variety of opinions. A society which is less rule-oriented, readily agrees to changes, and takes greater risks reflects a low uncertainty avoidance ranking. Long-Term Orientation (LTO) Describes the range at which a society illustrates a pragmatic future oriented perspective instead of a conventional historic or short term point of view. The Asian countries are scoring high on this dimension. These countries have a long term orientation, believe in many truths, accept change easily, and have thrift for investment. Cultures recording little on this dimension, trust in absolute truth is conventional and traditional. They have a small term orientation and a concern for stability. Many western cultures score considerably low on this dimension. In India, PDI is the highest Hofstede dimension for culture with a rank of 77, LTO dimension rank is 61, and masculinity dimension rank is 62. Every society has its own unique culture. Culture must not be imposed on individuals of different culture. For example, the Cadbury Kraft Acquisition, 2009 was a landmark international deal, in which a U.S. based company Kraft acquired the British chocolate giant, Cadbury which were in complete extremes in terms of culture. Let us discuss the major cultural elements that are related to business. Cultural elements that relate business The most important cultural components of a country which relate business transactions are: Language. Religion. Conflicting attitudes. Cross cultural management is defined as the development and application of knowledge about cultures in the practice of international management, when people involved have diverse cultural identities. International managers in senior positions do not have direct interaction that is face-to-face with other culture workforce, but several home based managers handle immigrant groups adjusted into a workforce that offers domestic markets. The factors to be considered in cross cultural management are: Cross cultural management skills The ability to demonstrate a series of behaviour is called skill. It is functionally linked to achieving a performance goal. The most important aspect to qualify as a manager for positions of international responsibility is communication skills. The managers must adapt to other culture and have the ability to lead its members. The managers cannot expect to force members of other culture to fit into their cultural customs, which is the main assumption of cross cultural skills learning. Any organisation that tries to enforce its behavioural customs on unwilling workers from another culture faces conflict. The manager has to possess the skills linked with the following: Providing inspiration and appraisal systems. Establishing and applying formal structures. Identifying the importance of informal structures. Formulating and applying plans for modification. Identifying and solving disagreements.

Handling cultural diversity Cultural diversity in a work group offers opportunities and difficulties. Economy is benefited when the work groups are managed successfully. The organisations capability to draw, save, and inspire people from diverse cultures can give the organisation spirited advantages in structures of cost, creativity, problem solving, and adjusting to change. Cultural diversity offers key chances for joint work and co-operative action. Group work is a joint venture where, the production of two or more individuals or groups working in cooperation is larger than the combined production of their individual work. Factors controlling group creativity On complicated problem solving jobs diverse groups do better than identical groups. Diverse groups require time to solve issues of working together. In diverse groups, over time, the work experience helps to overcome gender, racial, and organisational and functional discriminations. But the impact cannot be evaluated and there is always risk in creating a diverse group. A successful group is profitable with respect to quick results and the creation of concern for the future. Negative stereotypes are emphasised if it fails. Factors related with the industry and company culture are also important. Diverse groups do well when the members: o Assist to make group decisions. o Value the exchange of different points of view. o Respect each others skills and share their own. o Value the chance for cross-cultural learning. o Tolerate uncertainty and try to triumph over the inefficiencies that occur when members of diverse cultures work together. A diverse group is known to be more creative, where the members are tolerant of differences. The top management level provides its moral and administrative support, and gives time for the group to overcome the usual process difficulties. They also provide diversity training, and the group members are rewarded for their commitment. Ignore diversity It may be difficult to manage diversity. It is better to ignore, which is an alternative. The management must: o Ignore cultural diversity within the employees. o Down-play the importance of cultural diversity. This rejection to identify diversity happens when management: o Fails to have sufficient awareness and skills to identify diversity. o Identifies diversity but does not have the skill to manage the diversity. o Recognises the negative consequences of identifying diversity probably cause greater issues than ignoring it. o Thinks the likely benefits of identifying and managing diversity do not validate the expected expenses. o Identifies that the job provides no chances for drawing advantages from diversity. Strategies to ignore diversity may be possible when culture groups are given various jobs, and sharing required resources are independent in the workplace. Groups and group members are equally incorporated and work together. In such

cases, confusion occurs when the diverse value systems are not identified that are held by different staff groups. Q3. Cosmos Limited wants to enter international markets. Will country risk analysis help Cosmos Limited to take correct decisions? Substantiate your answer Ans: Country risk analysis is the evaluation of possible risks and rewards from business experiences in a country. It is used to survey countries where the firm is engaged in international business, and avoids countries with excessive risk. With globalisation, country risk analysis has become essential for the international creditors and investors Overview of Country Risk Analysis Country Risk Analysis (CRA) identifies imbalances that increase the risks in a crossborder investment. CRA represents the potentially adverse impact of a countrys environment on the multinational corporations cash flows and is the probability of loss due to exposure to the political, economic, and social upheavals in a foreign country. All business dealings involve risks. An increasing number of companies involving in external trade indicate huge business opportunities and promising markets. Since the 1980s, the financial markets are being refined with the introduction of new products. When business transactions occur across international borders, they bring additional risks compared to those in domestic transactions. These additional risks are called country risks which include risks arising from national differences in socio-political institutions, economic structures, policies, currencies, and geography. The CRA monitors the potential for these risks to decrease the expected return of a cross-border investment. For example, a multinational enterprise (MNE) that sets up a plant in a foreign country faces different risks compared to bank lending to a foreign government. The MNE must consider the risks from a broader spectrum of country characteristics. Some categories relevant to a plant investment contain a much higher degree of risk because the MNE remains exposed to risk for a longer period of time. Analysts have categorised country risk into following groups: Economic risk This type of risk is the important change in the economic structure that produces a change in the expected return of an investment. Risk arises from the negative changes in fundamental economic policy goals (fiscal, monetary, international, or wealth distribution or creation). Transfer risk Transfer risk arises from a decision by a foreign government to restrict capital movements. It is analysed as a function of a countrys ability to earn foreign currency. Therefore, it implies that effort in earning foreign currency increases the possibility of capital controls. Exchange risk This risk occurs due to an unfavourable movement in the exchange rate. Exchange risk can be defined as a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. Location risk This type of risk is also referred to as neighborhood risk. It includes effects caused by problems in a region or in countries with similar characteristics. Location risk includes effects caused by troubles in a region, in trading partner of a country, or in countries with similar perceived characteristics. Sovereign risk This risk is based on a governments inability to meet its loan obligations. Sovereign risk is closely linked to transfer risk in which a government

may run out of foreign exchange due to adverse developments in its balance of payments. It also relates to political risk in which a government may decide not to honor its commitments for political reasons. Political risk This is the risk of loss that is caused due to change in the political structure or in the politics of country where the investment is made. For example, tax laws, expropriation of assets, tariffs, or restriction in repatriation of profits, war, corruption and bureaucracy also contribute to the element of political risk. Risk assessment requires analysis of many factors, including the decision-making process in the government, relationships of various groups in a country and the history of the country. Country risk is due to unpredicted events in a foreign country affecting the value of international assets, investment projects and their cash flows. The analysis of country risks distinguishes between the ability to pay and the willingness to pay. It is essential to analyse the sustainable amount of funds a country can borrow. Country risk is determined by the costs and benefits of a countrys repayment and default strategies. The ways of evaluating country risks by different firms and financial institutions differ from each other. The international trade growth and the financial programs development demand periodical improvement of risk methodology and analysis of country risks. Purpose of Country Risk Analysis Risk arises because of uncertainty and uncertainty occurs due to the lack of reliable information. Country risk is composed of all the uncertainty that defines the risk of country exposure. The assessment of country risk is used to incorporate country risk in capital budgeting and modify the discount rate. CRA regulates the estimated cash flows and explores the main techniques used to measure a countrys overall riskiness. It is mainly used by MNCs, in order to avoid countries with excessive risk. It can be used to monitor countries where the MNC is engaged in international business. Analysing the country risk helps in evaluating the risk for a planned project considered for a foreign country and assesses gain and loss possibility outcomes of cross-border investment or export strategy. Country detailed risk refers to the unpredictability of returns on international business transactions in view of information associated with a particular country. The techniques used by the banks and other agencies for country risk analysis can be classified as qualitative or quantitative. Many agencies merge both qualitative and quantitative information into a single rating. A survey conducted by the US EXIM bank classified the various methods of country risk assessment used by the banks into four types. They are: Fully qualitative method The fully qualitative method involves a detailed analysis of a country. It includes general discussion of a countrys economic, political, and social conditions and prediction. Fully qualitative method can be adapted to the unique strengths and problems of the country undergoing evaluation. Structured qualitative method The structured method uses a uniform format with predetermined scope. In structured qualitative method, it is easier to make comparisons between countries as it follows a specific format across countries. This technique was the most popular among the banks during the late seventies. Checklist method The checklist method involves scoring the country based on specific variables that can be either quantitative, in which the scoring does not need personal judgment of the country being scored or qualitative, in which the scoring needs subjective determinations. All items are scaled from the lowest to the highest

score. The sum of scores is then used to determine the country risk. Delphi technique The technique involves a set of independent opinions without group discussion. As applied to country risk analysis, the MNC can assess definite employees who have the capability to evaluate the risk characteristics of a particular country. The MNC gets responses from its evaluation and then may determine some opinions about the risk of the country. Inspection visits Involves travelling to a country and conducting meeting with government officials, business executives, and consumers. These meetings clarify any vague opinions the firm has about the country. Other quantitative methods The quantitative models used in statistical studies of country risk analysis can be classified as discriminant analysis, principal component analysis, logit analysis and classification and regression tree method Data sourcing The basic data is important to analyse a country. The economic, financial and currency risk components are based on the variables (quantitative and qualitative variables). The variables must consider the particularities of each country and the needs of the model used. The standard variables are used to maintain the regular analysis comparable with similar works of other countries. Therefore, the first step is to make sure that the historical series of official data are reliable, consistent and comparable. The standard economic variables that are found mainly in the varied approach adopted by financial institutions and rating agencies, are associated with the countrys real ability to repay its commitments. The balance of payments (summary account of economic transactions among a country and the others nations of the world, during a period) and its evolution through the years means a strong source of data. The exchange rate (currency risk) is another important variable considered, as it balances the transactions (balances the prices of goods, services, and capital) between residents and non-residents. The analysis must consider the historical behavior of the exchange rate and the policy which made clear whether the country follows a rational economics approach or it uses the exchange rate as a tool to maintain a forced macroeconomic equilibrium. Apart from the macroeconomic variables which deal with the external sector of the economy, there are some other relevant variables such as the interest rate, level of investments, public debt and its service, internal savings, consumption, GDP or GNP, money supply, inflation rate and so on. The analysis must be accomplished with qualitative variables, which consider social aspects as population, life expectancy, rate of birthday, rate of unemployment, level of literacy and so on. The social-political aspects are necessary for all kind of analysis as they describe the whole setting of the running economy. Tools The risk management demands a regular follow up regarding governmental policies, external and internal environment, outlook provided by rating agencies, and so on. Following are the tools recommended: Chain of value Includes the main countries that sustain trade relationships with the nation, broken by sectors and products. Strength and weakness chart Focus the key aspects that warn the country. Table of financial markets performance Follow up the behavior of bonds and stocks already issued and to be issued. Table of macroeconomic variables Provides alert signals when the behavior of any ratio presents a relevant change.

The content of country risk analysis mainly involves country history, corporate risk, dependency level, external environment, domestic financial system, ratios for economic risk evaluation and strength and weakness chart. Country history The historical brief helps to identify aspects that interfere in the future behavior of the country, reducing the ability to payback any external commitment. The main historical data provides a good understanding of the key factors which draw the behaviour of the society, the government, the private sector, the legal environment, the economical, political, and the relationships to neighbour nations and the world as a whole. Corporate risk Both country risk studies and business risk analysis enhances wealth from the available resources, in terms of capital, natural resources, technology and labour forces. This clarifies that those kind of analysis procures extensive knowledge from the business approach for companies, including financial theory. Dependency level The next step after the history in brief, is a clear definition about how the country is positioned in the world in terms of its wide relationships, economic block in which it belongs to, importance of international trade and so on. All these aspects are significant to identify the dependency level of the country. The financial dependency to meet the needs of a country is also a strong concern for the analyst. In this case, the maturity of debts (internal and external) and the available sources of financing also help to measure the freedom grades of the country. External environment The external trade is an important factor to the development of societies. Globalisation has brought international business to the center of the discussions and the external environment has become vital for all countries. Thus, a complete vision on economic trends, the behavior of financial markets, the forecasts for conflicts among nations, the improvement of the economic blocks, the level of openness of the world economy, financial crisis and international liquidity is a framework over which the analysis must start. Domestic financial system The banking sector has implemented many actions to avoid losses, after the international crisis. Basel Committee has defined some strong measures to be followed by the financial houses and Central Banks are trying to monitor their jurisdictions. Apart from those procedures, recently Asia and Turkey crisis have shown that the inspection is not enough to keep the reliability of some domestic system. The international banks had developed many tools to deal with international crisis. When domestic banks do not have a consistent risk management policies and adequate provisions to theirs credits, the country risk happens to be the worst. Therefore, the analysis must consider the health of the domestic financial system, by evaluating information provided by the Central Banks and, from the principal banks of the country. Accessing Centrals Bank policies and supervising procedures also help to evaluate the health of the financial system. Ratios for economic risk evaluation Cross-border economic risk analysis evaluates the probable macroeconomic ratios among some variables. They can be separated into two groups such as domestic and external. The figures must be presented in historic series (at least five years) to provide information about its progress, which can be real values, percentages, or relations. The mainly used ratios and variables in case of domestic economy are the

following: Gross domestic product (GDP) GDP per capita GDP growth rate Unemployment rate Internal savings or GDP Investment or GDP Gross domestic fixed investment or variation of GDP Gini Index Growth domestic fixed investment or gross domestic savings . Budget deficit or GDP Internal debt or GDP The monetary policy is essential as it deals with the price stability. An economy which presents less instability in its prices of goods and services, provides huge facilities to decision makers based on their predictions to expected returns of investments and a firm social, economical and political environment. All these aspects request a systematic approach over price indicators such as the following: Real interest rate Percentage increase in the money supply The mainly used ratios and variables in case of external economy are the following: External debt or GDP Short term debts and reserves Exchange currency rate External debt services and exports . Strength and weakness chart In order to explain the significant aspects provided by the analysis, the strength and weakness chart can be used to merge each strength and weakness with the related scenario. is a model of relationships among several variables (quantitative and qualitative) to show their interdependency and the complexity of analysis. Q4. How can managers in international companies adjust to the ethical factors influencing countries? Is it possible to establish international ethical codes? Briefly explain? Ans: Ethics can be defined as the evaluation of moral values, principles, and standards of human conduct and its application in daily life to determine acceptable human behaviour. Business ethics pertains to the application of ethics to business, and is a matter of concern in the corporate world. Business ethics is almost similar to the generally accepted norms and principles. Behaviour that is considered unethical and immoral in society, for example dishonesty, applies to business as well. Managers are influenced by three factors affecting ethical values. These factors have unique value systems that have varying degrees of control over managers. Religion Religion is one of the oldest factors affecting ethics. Despite the differences in religious teachings, religions agree on the fundamental principles and ethics. All major religions preach the need for high ethical standards, an orderly social system, and stress on social responsibility as contributing factors to general well-being. Culture Culture refers to a set of values and standards that defines acceptable behaviour passed on to generations. These values and standards are important because the code of conduct of people reflects on the culture they belong to. Civilisation is the collective experience that people have passed on through three distinct phases: the hunting and gathering phase, agriculture phase, and the industrial phase. These phases reflect the changing economic and social arrangements in human history. Law Law refers to the rules of conduct, approved by the legal system of a country or state that guides human behaviour. Laws change and evolve with emerging and changing issues. Every organisation is expected to abide the law, but in the pursuit of profit, laws are frequently violated. The most common breach of law in business is tax evasion, producing inferior quality goods, and disregard for environmental protection laws. Ethics is significant in all areas of business and plays an important role in ensuring a

successful business. The role of business ethics is evident from the conception of an idea to the sale of a product. In an organisation, every division such as sales and marketing, customer service, finance, and accounting and taxation has to follow certain ethics. Public image In order to gain public confidence and respect, organisations must ascertain that they are honest in their transactions. The services or products of a business affect the lives of thousands of people. It is important for the top management to impart high ethical standards to their employees, who develop these services or products. A company that is ethically and socially responsible has a better public image. People tend to favour the products and services of such organisations. Investors trust is just as important as public image for any business. A company that practices good ethical creates a positive impression among its stakeholders. Managements credibility with employees Common goals and values are developed when employees feel that the management is ethical and genuine. Managements credibility with employees and the public are intertwined. Employees feel proud to be a part of an organisation that is respected by the public. Generous compensations and effective business strategies do not always guarantee employee loyalty; organisation ethics is equally significant. Thus, companies benefit from being ethical because they attract and retain good and loyal employees. Better decision-making Decisions made by an ethical management are in the best interests of the organisation, its employees, and the public. Ethical decisions take into account various social, economic and ethical factors. Profit maximisation Companies that emphasise on ethical conduct are successful in the long run, even though they lose money in the short run. Hence, a business that is inspired by ethics is a profitable business. Costs of audit and investigation are lower in an ethical company. Protection of society In the absence of proper enforcement, organisations are responsible to practice ethics and ensure mechanisms to prevent unlawful events. Thus, by propagating ethical values, a business organisation can save government resources and protect the society from exploitation. Most countries have similar ethical values, but are practiced differently. This section deals with the way individuals in different countries approach ethical issues, and their ethically acceptable behaviour. With the rise in global firms, issues related to ethical values and traditions become more common. These ethical issues create complications to Multi-National Companies (MNCs) while dealing with other countries for business. Hence, many companies have formulated well-designed codes of conduct to help their employees. Two of the most prominent issues that managers in MNCs operating in foreign countries face are bribery and corruption and worker compensation. Bribery and corruption Bribery can be defined as the act of offering, accepting, or soliciting something of value for the purpose of influencing the action of officials in the discharge of their duties. Corruption is the abuse of public office for personal gain. The issue arises when there are differences in perception in different countries. For example, in the Middle East, it is perfectly acceptable to offer an official a gift. In Britain it is considered as an attempt to bribe the official, and hence, considered unlawful. Worker compensation Businesses invest in production facilities abroad because of the availability of low-cost labour, which enables them to offer goods and services at a lower price than their competitors. The issue arises when workers are exploited and are underpaid compared to the workers in the parent country who are

paid more for the same job. The disparity arises due to the differences in the regulatory standards in the two countries. Earlier, we believed that ethics is a prerogative of individuals, but now this perception has immensely changed. Many companies use management techniques to encourage ethical behaviour at an organisational level. Code of conduct for MNCs The code of conduct for MNCs refers to a set of rules that guides corporate behaviour. These rules prescribe the duties and limitations of a manager. The top management must communicate the code of conduct to all members of the organisation along with their commitment in enforcing the code. Some of the ethical requirements for international companies are as follows: o Respect basic human rights. o Minimise any negative impact on local economic policies. o Maintain high standards of local political involvement. o Transfer technology. o Protect the environment. o Protect the consumer. o Employ labour practices that are not exploitative. When a manager of an international firm faces an ethical problem, certain models help in solving these ethical issues Culture is a major factor which influences marketing decisions and practices in a foreign country. For example, in the middle-eastern countries the prior approval of the governing authorities should be taken if a firm plans to advertise a product related to womens apparel, as showcasing some aspects of women clothing is considered immodest and immoral. Q.5 Discuss the international marketing strategies. How is it different from domestic marketing strategies? Ans: International marketing refers to marketing of goods and products by companies overseas or across national borderlines. The techniques used while dealing overseas is an extension of the techniques used in the home country by the company. Taking into account the various conditions on which markets vary and depend, appropriate marketing strategies should be devised and adopted. Like, some countries prevent foreign firms from entering into its market space through protective legislation. Protectionism on the long run results in inefficiency of local firms as it is inept towards competition from foreign firms and other technological advancements. It also increases the living costs and protects inefficient domestic firms. To counter this scenario firms must learn how to enter foreign markets and increase their global competitiveness. Firms that plan to do business in foreign land find the marketplace different from the domestic one. Market sizes, customer preferences, and marketing practices all vary; therefore the firms planning to venture abroad must analyse all segments of the market in which they expect to compete. The decision of a firm to compete internationally is strategic; it will have an effect on the firm, including its management and operations locally. The decision of a firm to compete in foreign markets has many reasons. Some firms go abroad as the result of potential opportunities to exploit the market and to grow globally. And for some it is a policy driven decision to globalise and to take advantage by pressurising competitors.

But, the decision to compete abroad is always a strategic down to business decision rather than simply a reaction. Strategic reasons for global expansion are: o Diversifying markets that provide opportunistic global market development. o Following customers abroad (customer satisfaction). o Exploiting different economic growth rates. o Pursuing a global logic or imperative to harvest new markets and profits. o Pursuing geographic diversification. o Globalising for defensive reasons. o Exploiting product life cycle differences (technology). o Pursuing potential abroad. Likewise, there can be other reasons like competition at home, tax structures, comparative advantage, economic trends, demographic conditions, and the stage in the product life cycle. In order to succeed, a firm should carefully look at their geographic expansion and global marketing strategy. To a certain extent, a firm makes a decision about its extent of globalisation by taking a stance that may span from entirely domestic to a global reach where the company devotes its entire marketing strategy to global competition. In the process of developing an international marketing strategy, the firm may decide to do business in its homecountry (domestic operations) only or host-country (foreign country) only. Segmentation Firms that serve global markets can be segregated into several clusters based on their similarities. Each such cluster is termed as a segment. Segmentation helps the firms to serve the markets in an improved way. Markets can be segmented into nine categories, but the most common method of segmentation is on the basis of individual characteristics, which include the behavioural, psychographic, and demographic segmentations. The basis of behavioural segmentation is the general behavioural aspects of the customers. Demographic segmentation considers the factors like age, culture, income, education and gender. Psychographic segmentation takes into account: beliefs, values, attitudes, personalities, opinions, lifestyles and so on. Market positioning The next step in the marketing process is, the firms should position their product in the global market. Product positioning is the process of creating a favourable image of the product against the competitors products. In global markets product positioning is categorised as high-tech or hightouch positioning. One challenge that firms face is to make a trade-off between adjusting their products to the specific demands of a country and gaining advantage of standardisation such as the maintenance of a consistent global brand image and cost savings. This is task is not easy. International product policy Some thinkers of the industry tend to draw a distinction between conventional products and services, stressing on service characteristics such as heterogeneity (variation in standards among providers, frequently even among different locations of the same firm), inseparability from consumption, intangibility, and perishability. Typically, products are composed of some service component like, documentation, a warranty, and distribution. These service components are an integral part of the product and its positioning. Firms have a choice in marketing their products across markets. Many a times, firms opt for a strategy which involves customisation, through which the firm

introduces a unique product in each country, believing that tastes differ so much between countries that it is necessary to create a new product for each market. On the other hand, standardisation proposes the marketing of one global product, with the belief that the same product can be sold in different countries without significant changes. For example, Intel microprocessors are the same irrespective of the country in which they are sold. Finally, in most cases firms will go for some kind of adaptation. Here, when moving a product between markets minor modifications are made to the product. For example, in U.S. fuel is relatively cheap, therefore cars have larger engines than the cars in Asia and Europe; and then again, much of the design is identical or similar. International pricing decisions Pricing is the process of ascertaining the value for the product or service that will be offered for sale. In international markets, making pricing decisions is entangled in difficulties as it involves trade barriers, multiple currencies, additional cost considerations, and longer distribution channels. Before establishing the prices, the firm must know its target market well because when the firm is clear about the market it is serving, then it can determine the price appropriately. The pricing policy must be consistent with the firms overall objectives. Some common pricing objectives are: profit, return on investment, survival, market share, status quo, and product quality. The strategies for international pricing can be classified into the following three types: Market penetration Market holding: Market skimming: The factors that influence pricing decisions are inflation, devaluation and revaluation, nature of product or industry and competitive behaviour, market demand, and transfer pricing. The approach taken by company towards pricing when operating in international markets are ethnocentric, polycentric, and geocentric. Price can be defined by the following equation: The pricing decision enables us to change the price in many ways, some of them are: Sticker price changes . Change quantity Change quality Change terms Transfer pricing Transfer pricing is the process of setting a price that will be charged by a subsidiary (unit) of a multi-unit firm to another unit for goods and services, which are sold between such related units. Transfer pricing is determined in three ways: market based pricing, transfer at cost and cost-plus pricing. The Arms Length pricing rule is used to establish the price to be charged to the subsidiary. Many managers consider transfer pricing as non-market based. The reason for transfer pricing may be internal or external. Internal transfer pricing include motivating managers and monitoring performance. External factors include taxes, tariffs, and other charges. Transfer Pricing Manipulation (TPM) is used to overcome these reasons. Governments usually discourage TPM since it is against transfer pricing, where transfer pricing is the act of pricing commodities or services. However, in common terminology, transfer pricing generally refers TPM. International advertising International advertising is usually associated with using the same brand name all over the world. However, a firm can use different brand names for historic reasons.

The acquisition of local firms by global players has resulted in a number of local brands. A firm may find it unfavourable to change those names as these local brands have their own distinctive market. The purpose of international advertising is to reach and communicate to target audiences in more than one country. The target audience differ from country to country in terms of the response towards humour or emotional appeals, perception or interpretation of symbols and stimuli and level of literacy. Sometimes, globalised firms use the same advertising agencies and centralise the advertising decisions and budgets. In other cases, local subsidiaries handle their budget, resulting in greater use of local advertising agencies. International advertising can be thought of as a communication process that transpires in multiple cultures that vary in terms of communication styles, values, and consumption patterns. International advertising is a business activity and not just a communication process. It involves advertisers and advertising agencies that create ads and buy media in different countries. This industry is growing worldwide. International advertising is also reckoned as a major force that mirrors both social values, and propagates certain values worldwide. International promotion and distribution Distribution of goods from manufacturer to the end user is an important aspect of business. Companies have their own ways of distribution. Some companies directly perform the distribution service by contacting others whereas a few companies take help from other companies who perform the distribution services. The distribution services include: The purchase of goods. The assembly of an attractive assortment of goods. Holding stocks. Promoting sale of goods to the customer. The physical movement of goods. In international marketing, companies usually take the advantage of other countries for the distribution of their products. The selection of distribution channel is helpful to gain the competitive advantage. The distribution channel is also dependent on the way to manage and control the channel. Selecting the distribution channel is very important for agents and distributors. Domestic vs. International marketing Domestic marketing refers to the practice of marketing within a firms home country. Whereas International or foreign marketing is the practice of marketing in a foreign country; the marketing is for the domestic operations of the firm in that country. Domestic marketing finds the "how" and "why" a product succeeds or fails within the firms home country and how the marketing activity affects the outcome. Whereas, foreign marketing deals with these questions and tries to find answers according to the foreign market conditions and it provides a micro view of the market at the firms level. In domestic marketing a firm has insight of the marketing practices, culture, customer preferences, climate and so on of its home country, while it is not totally aware of the policies and the market conditions of the foreign country. The stages that have led to achieve global marketing are: Domestic marketing Firms manufacture and sell products within the country. Hence, there is no international phenomenon.

 Export marketing Firms start exporting products to other countries. This is a very basic stage of global marketing. Here, the products are developed based on the companys domestic market although the goods are exported to foreign countries. International marketing Now, Firms start to sell products to various countries and the approach is polycentric, that is, making different products for different countries. Multinational marketing In this stage, the number of countries in which the firm is doing business gets bigger than that in the earlier stage. And hence, the company identifies the regions to which the company can deliver same product instead of producing different goods for different countries. For example, a firm may decide to sell same products in India, Sri lanka and Pakistan, assuming that the people living in this region have similar choice and at the same time offering different product for American countries. This approach is termed regiocentric approach. Global marketing Company operating in various countries opts for a common single product in order to achieve cost efficiencies. This is achieved by analysing the requirements and the choice of the customers in those countries. This approach is called Geocentric approach. The practice of marketing at the international stage does not designate any country as domestic or foreign. The firm is not considered as the corporate citizen of the world as it has a home base. The firm must not have a single marketing plan, because there are differences between the target markets (that is domestic or international markets). There should never be a rigid marketing campaign. A firm that is successful internationally first obtains success locally. Few approaches that you can consider for an international marketing are: Advertise as a foreign product By doing so, the product will be considered as genuine and original in some countries. Joint partnership with a local firm finding a firm that has already established credibility will benefit a lot. The product will be considered as a local product by following this marketing approach. Licensing You can sell the rights of your product to a foreign firm. Here the problem is that the firm may not maintain the quality standard and therefore may hurt the image of the brand. Culture is a major factor which influences marketing decisions and practices in a foreign country. For example, in the middle-eastern countries the prior approval of the governing authorities should be taken if a firm plans to advertise a product related to womens apparel, as showcasing some aspects of women clothing is considered immodest and immoral. Q.6 Explain briefly the international financial management components with examples and applicability Ans: The term Financial Management refers to the proper maintenance of all the monetary transactions of the organisation. It also means recording of transactions in a standard manner that will show the financial position and performance of the organisation. The Financial Management can be categorised into domestic and international financial management. The domestic financial management refers to managing financial services within the

country. International financial management refers to managing finance and share between the countries. The main aim of international finance management is to maximise the organisations value that in turn will increase the impact on the wealth of the stockholders. When the doors of liberalisation opened, entrepreneurs capitalised the opportunity to step their foot to conduct business in different parts of the world. International trade gave way for the growth of international business. For a corporation to be successful, it is vital to manage the finance and business accounts appropriately. The rise in significance and complexity of financial administration in a global environment creates a great challenge for financial managers. The contributions of different financial innovations like currency derivative, international stock listing, and multicurrency bonds have necessitated the accurate management of the flow of international funds through the study of international financial management. The International Financial Management (IFM) came to its existence when the countries all over the world started opening their doors for each other. This phenomenon is also called as liberalisation. But after the end of the Second World War, the integration in terms of foreign activities has grown substantially. The firms of all types are now opting to operate their business and deploy their resources abroad. Furthermore, the differences between the countries have persisted that has given rise to the prevalence of market imperfections Components of International Financial Management Foreign exchange market The Foreign exchange or the forex markets facilitates the participants to obtain, trade, exchange and speculate foreign currency. The foreign exchange market consists of banks, central banks, commercial companies, hedge funds, investment management firms and retail foreign exchange brokers and investors. It is considered to be the leading financial market in the world. It is vital to realise that the foreign exchange is not a single exchange, but is created from a global network of computers that connects the participants from all over the world. The foreign exchange market is immense in size and survives to serve a number of functions ranging from the funding of cross-border investment, loans, trade in goods, trade in services and currency speculation. The participant in a foreign exchange market will normally ask for a price. The trading in the foreign exchange market may take place in the following forms: Outright cash or ready foreign exchange currency deals that take place on the date of the deal. Next day foreign exchange currency deals that take place on the next working day. Swap Simultaneous sale and purchase of identical amounts of currency for different maturities. Spot and Forward contracts A Spot contract is a binding obligation to buy or sell a definite amount of foreign currency at the existing or spot market rate. A forward contract is a binding obligation to buy or sell a definite amount of foreign currency at the pre-agreed rate of exchange, on or before a certain date. The advantage of spot dealing has resulted in a simplest way to deal with all foreign currency requirements. It carries the greatest risk of exchange rate fluctuations due to lack of certainty of the rate until the deal is carried out. The spot rate that is intended to receive will be set by current market conditions, the demand and supply of currency being traded and the amount to be dealt. In general, a better spot rate

can be received if the amount of dealing is high. The spot deal will come to an end in two working days after the deal is struck. A forward market needs a more complex calculation. A forward rate is based on the existing spot rate plus a premium or discounts which are determined by the interest rate connecting the two currencies that are involved. For example, the interest rates of UK are higher than that of US and therefore a modification is made to the spot rate to reflect the financial effect of this differential over the period of the forward contract. The duration will be up to two years for a forward contract. A variation in foreign exchange markets can be affected to any company whether or not they are directly involved in the international trade or not. This is often referred to as Economic foreign exchange and most difficult to protect a business. The three ways of managing risks are as follows: Choosing to manage risk by dealing with the spot market whenever the need of cash flow rises. This will result in a high risk and speculative strategy since one will not know the rate at which a transaction is dealt until the day and time it occurs. Managing the business becomes difficult if it depends on the selling or buying the currency in the spot market. The decision must be made to book a foreign exchange contract with the bank whenever the foreign exchange risk is likely to occur. This will help to fix the exchange rate immediately and will give a clear idea of knowing the exact cost of foreign currency and the amount to be received at the time of settlement whenever this due occurs. A currency option will prevent unfavourable exchange rate movements in the similar way as a forward contract does. It will permit gains if the markets move as per the expectations. For this base, a currency option is often demonstrated as a forward contract that can be left if it is not followed. Often banks provide currency options which will ensure protection and flexibility, but the likely problem to arise is the involvement of premium of particular kind. The premium involved might be a cash amount or it could also influence into the charge of the transaction. Foreign currency derivatives Currency derivative is defined as a financial contract in order to swap two currencies at a predestined rate. It can also be termed as the agreement where the value can be determined from the rate of exchange of two currencies at the spot. Hence, the spot market exposures can be enclosed with the currency derivatives. The main advantage from derivative hedging is the basket of currency available. Figure 1 describes the examples of currency derivatives. The derivatives can be hedged with other derivatives. In the foreign exchange market, currency derivatives like the currency features, currency options and currency swaps are usually traded. The agreement undertaken to exchange cash flow streams in one currency for cash flow streams in another currency in future is provided by currency swaps. These will help to increase the funds of foreign currency from the cheapest sources.

Figure 1: Example for Foreign Currency Derivatives Some of the risks associated with currency derivatives are: Credit risk takes place, arising from the parties involved in a contract. Market risk occurs due to adverse moves in the overall market. Liquidity risks occur due to the requirement of available counterparties to take the other side of the trade. Settlement risks similar to the credit risks occur when the parties involved in the contract fail to provide the currency at the agreed time. Operational risks are one of the biggest risks that occur in trading derivatives due to human error. Legal risks pertain to the counterparties of currency swaps that go into receivership while the swap is taking place. International monetary systems The international monetary systems represent the set of rules that are agreed internationally along with its conventions. It also consists of set of rules that govern international scenario, supporting institutions which will facilitate the worldwide trade, the investment across cross-borders and the reallocation of capital between the states. International monetary systems provide the mode of payment acceptable between buyers and sellers of different nationality, with addition to deferred payment. The global balance can be corrected by providing sufficient liquidity for the variations occurring in trade. Thereby it can be operated successfully. The gold and gold bullion standards The gold standard was the first modern international system. It was operating during the late 19th and early 20th centuries, the standard provided for the free circulation between nations of gold coins of standard specification. The gold happened to be the only standard of value under the system. The advantages of

this system depend in its stabilising influence. Any nation which exports more than its import would receive gold in payment of the balance. This in turn has resulted in the lowered value of domestic currency. The higher prices lead to the decreased demands for exports. The sudden increase in the supply of gold may be due to the discovery of rich deposit, which in turn will result in the increase of price abruptly. This standard was substituted by the gold bullion standard during the 1920s; thereby the nations no longer minted gold coins. Instead, reversed their currencies with gold bullion and determined to buy and sell the bullion at a fixed cost. This system was also discarded in the 1930s. The gold-exchange system Trading was conducted internationally with respect to the gold-exchange standard following World War II. In this system, the value of the currency is fixed by the nations with respect to some foreign currency but not with respect to gold. Most of the nations fixed their currency to the US dollar funds in the United States. With a view to maintain a stable exchange rate at the global level, the International Monetary Fund (IMF) was created at the Bretton Woods international Conference held in 1944. The drain on the US gold reserves continued up to the 1970s. Later in 1971, the gold convertibility was abandoned by the United States leaving the world without a single international monetary system. Floating exchange rates and recent development After the abundance of the gold convertibility by the US, the IMF in 1976 decided to be in agreement on the float exchange rates. The gold standard was suspended and the values of different currencies were determined in the market. The Japanese yen and the German Deutschmark strengthened and turned out to be increasingly important in international financial market, at the same time the US dollar diminished its significance. The Euro was set up in financial market in 1999 as a replacement for the currencies. Hence, it became the second most commonly used currency after the dollar in the international market. Many large companies opt to use euro rather than the dollar in bond trading with a goal to receive better exchange rates. Very recently the some of the members of Organisation of Petroleum Exporting Countries (OPEC) such as Saudi Arabia, Iraq have opted to trade petroleum in Euro than in Dollar. International financial markets International foreign markets provide links connecting the financial markets of each country and independent markets external to the authority of any one country. The heart of the international financial market is being governed by the market of currency where the foreign currency is denominated by the international trade and investment. Hence the purchase of goods and services is preceded by the purchase of currency. The purpose of the foreign currency markets, international money markets, international capital markets and international securities markets are as follows: The foreign currency markets The foreign currency market is an international market that is familiar in structure. This means that there exists no central place where the trading can take place. The market is actually the telecommunications like among financial institutions around the globe and opens for business at any time. The greater part of the worlds that deal in foreign currencies is still taking position in the cities where international financial activity is centred. International money markets A money market can be conventionally defined as a market for accounts, deposits or deposits that include maturities of one year or less. This is also termed as the Euro currency markets which constitute an

enormous financial market that is beyond the influence and supervision of world financial and government authorities. The Euro currency market is a money market for depositing and borrowing money located outside the country where that money is officially permitted tender. Also, Euro currencies are bank deposits and loans existing outside any particular country. International capital markets The international capital provides links among the capital markets of individual countries. It also comprises a separate market of their own, the capital market that flows in to the Euro markets. The firms enjoy the freedom to raise capital, debit, fixed or floating interest rates and maturities varying from one month to thirty years in an international capital markets. International security markets The banks have experienced the greatest growth in the past decade because of the continuity in providing large portion of the international financial needs of the government and business. The private placements, bonds and equities are included in the international security market. The following are the reasons given for the enormous growth in the trading of foreign currency: Deregulation of international capital flows Without the major government restrictions, it is extremely simple to move the currencies and capital around the globe. The majority of the deregulation that has differentiated government policy over the past 10 to 15 years. Gain in technology and transaction cost efficiency The advancements in technology is not only taking place in the distribution of information, in addition to the performance of exchange or trading. This has resulted greatly to the capacity of individuals on these markets to accomplish instantaneous arbitrage. Market upwings The financial markets have become increasingly unstable over recent years. There are faster swings in the stock values and interest rates, adding to the enthusiasm for moving further capital at faster rates.