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MF0016

MF0016

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Published by garima bhatngar
sem4 finance
sem4 finance

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Published by: garima bhatngar on Mar 07, 2013
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05/19/2013

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Q1. Analyse the significance and objectives of asset liability management.?Ans
:-
 
Asset Liability Management (ALM)
 Asset liability management refers to the strategic balance involving risk caused due to the changes ininterest rate, exchange rates and liquidity position in the organisation. The credit risk and contingency risk are the roots of ALM. During the post liberalisation period, India witnessed rapid industrial growth whichhas further inspired the growth of fund raising activities. The changes in the sources and features of funds
were remarkable due to rise in demand for funds. Hence this reflected in the organisation’s profile and
exposure limits in interest rate structure for deposits and advances etc.
Significance
 
The changing environment in assets and liabilities has brought the following significances of ALMin recent years:
 1.
 
Volatility
 – 
The globalization scenario has led to increase in number of economies. This haspaved way for market driven economies due to the changing dynamics of the financial markets.These changes are reflected in interest rate structures, money supply, and credit position of themarket, exchange rates and price levels. Hence the organisation experiences low market value,net interest income etc.2.
 
Product innovation
 – 
The innovation in financial products has grown rapidly. Some of theinnovations are repacked with existing products with slight modifications. These have majorimpact on the risk profile in the organization enhancing the need for ALM.3.
 
Regulatory environment
 – 
The integration of domestic and international market has enabled theregulatory bodies of financial markets to initiate number of measures. These measures preventmajor losses that occur due to market impulses.4.
 
Management recognition
 – 
The top management in the organisation realised that asset liability is
neither a franchise for credit disbursement nor it’s a place for retail deposit base. It must be
considered to relate and link the asset with liability. Hence the need for efficient asset liabilitymanagement came into existence.
Objectives
 The objective of ALM is to achieve perfect match in assets and liabilities. The match is related to thechanges in the present value of assets and liabilities. The importance of ALM has led to the change in thefunctional environment. The ALM objectives are divided into micro and macro levels.The macro level objectives deal with formulation of critical business policies, efficient allocation of capital and designing of products with suitable pricing strategies. At macro level, the ALM aims atobtaining profits through price matching while ensuring liquidity by maturity matching. The process of price matching ensures deployment of liabilities which are greater than costs.
 
Q2 What are the features of a capital market?Ans:- Capital Market
 A financial market is an organization which permits the employees to trade financial securitieslike stocks, bonds, commodities and so on to raise its net capital in economy. A financial marketincludes parties like brokers, dealers, investment bankers and financial mediators.A capital market is an organization where securities like debt and equity are traded to raise long-term funds in the economy. The capital market is fragmented into stock market which tradeequity securities and the bond market which trade debt securities. Various financial instrumentslike equity, insurance, derivative instruments and so on are traded in capital market to enhanceliquidity.The regulation of an organization is essential for its perfect functioning. In Indian capital marketthe protection of investor's activity is carried out by
Features of capital market are as follows:
1.
 
Capital markets deal with primary securities like equities, bonds and so on.2.
 
Trading in capital market occurs without intervention of financial intermediary.3.
 
The information structure is complex.4.
 
The security prices are volatile in nature.
 
Q3. Describe the approaches of CAC.Ans:-
Approaches to Capital Account Convertibility (CAC)
 Capital Account Convertibility (CAC) refers to relaxing controls on capital account transactions. It meansfreedom of currency conversion in terms of inflow and outflows with respect to capital account transaction.Most of the countries have liberalized their capital account by having an open account, but they do retain someregulations for influencing inward and outward capital flow. Due to global integration, both in trade andfinance, 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 1990’s. A few counties
backtracked and re-imposed capital controls as part of crisis resolution. Crisis such as economic, social, humancost and even extensive presence of capital controls creates distortions, making CAC either ineffective orunsustainable. The cost and benefits from capital account liberalization is still being debated among academicsand policy makers. These developments have led to considerable caution being exercised by EMEs in openingup capital account. The Committee on Capital Account Convertibility (Chairman: Shri. S.S. Tarapore) whichsubmitted its report in 1997 highlighted the benefits of a more open capital account but at the same timecautioned that CAC could pose tremendous pressures on the financial system. India has cautiously opened itscapital account and the state of capital control in India is considered as the most liberalized it had been since
late 1950’s. The different ways of implementing CAC are as follows:
 1.
 
Open the capital account for residents and non-residents.2.
 
Initially open the inflow account and later liberalise the outflow account.3.
 
Approach to simultaneously liberalise control of inflow and outflow account.
Liberalization of current account transactions
 Current account transaction refers to converting domestic currencies freely into foreign currency and viceversa. The domestic currency is said to be convertible on the current account. This is known as current accountconvertibility. The benefits of current account transaction are as follows:
 
Current account convertibility enhances the increase of capital inflow in to the country.
 
The confidence of a country will be enhanced when the country will manage its affairs withoutexchange restrictions which enhance the international confidence in the countries policies.
 
Relaxing the exchange restrictions has improved the Balance of Payment (BOP) in the country.
 
The exclusion of exchange restrictions tends to increase the capital inflows and thus promote efficient
allocation of inflows to the growth of the country’s economy.
 RBI has introduced more relaxations in current account transactions. The authorized dealers (ADs) have beenpermitted to provide exchange facilities to their customers up to specified limit without prior approval of theRBI. The liberalization rules regarding current account transaction of RBI under FEMA 1999 are as follows:
 
Authorized Dealers of Category - I banks permits withdrawal of foreign exchange payments belowUSD 2million by the individuals and approval of Ministry of Commerce and Industry, GOI is notmandatory.
 
As per the Rule 4 of FEMA (current account transactions), it is mandatory to get approval of Ministryof Commerce and Industries for drawing foreign exchange remittances ,when the payment exceeds5% on local sales and 8% increase on exports.

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thanx a lot garima
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