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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, India’s 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 bank’s 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.00120).0782 Customer sells EUR 3 Mio against USD at 0.00120 = 0. Both the techniques .2713*84.8215/1. 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. 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.018215 * 90/360))) / (1 + (0.0.7940/0. You are given the following information: Spot EUR/US: 0. Sounds easy.07940 .08007 * 90/360))) – 0.4 Explain various methods of Capital budgeting of MNCs.86. The two most widely used criteria of the DCF technique are the Net Present Value (NPV) and the Internal Rate of Return (IRR).00120 Forward rate = 0. Ans:.8007 Spot USD/GBP:1.07940 . Customer wants to Buy EUR 3 Mio against USD 3 months forward. What we can do now is short the EUR/JPY and go long EUR/USD and USD/JPY until the correlation is reestablished.0782 at 3 month (0. Let us consider the following example : EUR/JPY=107.2713 USD/JPY = 84.86 EUR/USD=1.75 which would be 107.0.75 The exchange rate inferred from the above would be 1.07940 SWAP = -0.8240 Three months swap: 25/35 Calculate three month EUR/USD rate. Q3.07940 * (1 + (0. Q.74 and the actual rate is 107.Methods of Capital Budgeting Discounted Cash Flow Analysis (DCF) DCF technique involves the use of the time-value of money principle to project evaluation. right ? The fact is that there are many important problems that make the exploitation of this three way arbitrage almost impossible.
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. IRR is calculated by solving for r in the following equation.discount the projects’ cash flow at an appropriate discount rate. The NPV of a project is the present value of all cash inflows. where r is the internal rate of return of the project. The decision criteria is to accept projects with a positive NPV and reject projects which have a negative NPV. The results are then used to evaluate the projects based on the acceptance/rejection criteria developed by management. I0 = initial cash investment CFt = expected after-tax cash flows in year t. The . to be accommodated in the analysis of the foreign project. minus the present value of all cash outflows. This allows the required flexibility. including those at the end of the project’s life. 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 decision criteria is to accept a project if NPV ≥ o and to reject if NPV < o. 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 NPV can be defined as follows: NPV = Where. k = the weighted average cost of capital n = the life span of the project. The APV format allows different components of the project’s cash flow to be discounted separately. The discount rate used here is known as the cost of capital.
i. in the APV approach each cash flow is discounted at a rate of discount consistent with the risk inherent in that cash flow.e. foreign exchange regulation. foreign projects face a number of complexities not encountered in domestic capital budgeting. blocked funds. Also. As mentioned earlier. If the project is acceptable in this scenario. restriction on transfer of cash flows. for example. the issue of remittance. then an additional evaluation is done taking into account the other complexities. lost exports. the APV format helps the analyst to test the basic viability of the foreign project before accounting for all the complexities. no further evaluation based on accounting for other cash flows is done. each cash flow as a source of value is considered individually. In addition. The APV model is a value additivity approach to capital budgeting. etc. If not.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 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) ..
S. settlement.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. Eurobonds are issued by multinational corporations. How can it cope with this risk? Ans:. Boeing is likely to lose both foreign and domestic sales to Airbus unless it cuts its dollar prices.Depository Receipt (DR) is a negotiable certificate that usually represents a company’s publicly traded equity or debt. a European consortium of companies that builds the Airbus. and international institutions. However. and (2) Boeing faces stiff competition from Airbus Industrie. even the 50% of its sales destined for overseas markets.5 a. These features make it easier for international investors to evaluate the shares than if they were traded in the issuer’s home market. manufactures all its planes in United States and prices them in dollars. 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.S. a bond issued by a U. large domestic corporations. When companies make a public offering in a market other than their home market. 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. Absent a more detailed analysis. Q6. What are depository receipts? Ans:. Both ADRs and GDRs have to meet the listing requirements of the exchange on which they are traded. but sold to investors in Europe and Japan (not to investors in the United States). governmental enterprises.5 b. would be a Eurobond. sovereign governments. Q. Depository receipts represent shares of company held in a depository in the issuing company’s country. and is sold exclusively in countries other than the country in whose currency the issue is denominated. dollars. they must launch a depository receipt program. For example. There are two types of depository receipts – GDRs and ADRs. this tactic ignores the fact that Boeing is competing with Airbus. Boeing commercial Airplane Co. As the dollar appreciates. Assess Boeing’s currency risk. corporation. 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. denominated in U. They are offered . They are quoted in the host country currency and treated in the same way as host country shares for clearance. 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). Q.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. transfer and ownership purposes.
. INVESTORS Foreign currency bonds are issued by foreign governments and foreign corporations. the values of German bonds fall if German interest rates rise. the investors will be hit with a double whammy. however. such bonds are priced inversely to movements in the interest rate of the country in whose currency the issue is denominated. would be a foreign bond. to U. however. but not in the capital market of the country.S. investors by U. investment bankers. those sold in Japan are "Samurai bonds". FIGURE 4 FOREIGN BONDS TO U. and euro. are "Yankee bonds". A foreign bond is underwritten by a syndicate composed of members from a single country. dollar. For example.S. Characteristics of Eurobond markets 1. Almost all Eurobonds are in bearer form with call provisions and sinking funds.S. Japan.S. The major currency denominations are the U. Currency denomination: The generic. A bond issued by a Swedish corporation. The issuer. Foreign bonds have nicknames: foreign bonds sold in the U.S. If the dollar and foreign interest rates fall. and denominated in the currency of that country. investors in foreign currency bonds could make a nice return.S. sold principally within that country. It should be pointed out. There are a number of different currencies in which Eurobonds are sold." Figure 4 specifically reclassifies foreign bonds from a U. In addition. Indeed. that if both the dollar and foreign interest rates rise. (70 to 75 percent of Eurobonds are denominated in the U. As with domestic bonds. values of bonds denominated in foreign currencies will fall (or rise) if the dollar appreciates (or depreciates) relative to the denominated currency. is from another country. investor`s perspective. in whose currency the bond is denominated. plain vanilla Eurobond pays an annual fixed interest and has a long-term maturity.simultaneously in a number of different national capital markets. investing in foreign currency bonds is really a play on the dollar. for example. and sold in the U. yen. denominated in their own currency.) The central bank of a country can protect its currency from being used.S. prohibited the yen from being used for Eurobond issues of its corporations until 1984. denominated in dollars. nor to residents of the country. dollar. and foreign bonds sold in the United Kingdom are "Bulldogs.S.
5. referred to as Euronotes. 1. As a result. and long terms (10-30 years).. 4. Credit risk: Compared to domestic corporate bonds. There are also short-term Europaper and Euro Medium-term notes. making them an attractive financing instrument to corporations. but riskier to bond investors. many Eurobonds are unregistered. Eurobonds often are sold with many innovative features. and called Eurobonds. Eurobonds have fewer protective covenants. While this feature provides confidentiality. issued as bearer bonds. additional bonds. there is no record to identify the owners. 3. where regulations require that security owners be registered on the books of issuer. currency. and these bonds are usually kept on deposit at depository institution). A number of Eurobonds have special conversion features. b) Option currency Eurobond offers investors a choice of currency.2. a sterling/Canadian dollar bond gives the holder the right to receive interest and principal in either currency. it has created some problems in countries such as the U. (Bearer form means that the bond is unregistered. A number of Eurobonds have special warrants attached to them. For example: principal in another. Some of the warrants sold with Eurobonds include those giving the holder the right to buy stock. 2.S. 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. Eurobonds differ in term of their default risk and are rated in terms of quality ratings. For a) Dual-currency Eurobonds pay coupon interest in one currency and instance. Many have intermediate terms (2 to 10 years). Maturities: The maturities on Eurobonds vary. Other features: • Like many securities issued today. . Non-registered: Eurobonds are usually issued in countries in which there is little regulation. or gold.
Ans:.Master of Business Administration .1 Q. measurement and cultural aspects. planning. It deals with issues of profit centre. and implementing treasury functions.2 depicts the structure of treasury organisation which is divided into five groups.The treasury organisation deals with analysing. recharging. Structure of treasury organisation Figure 1. The organisations managing interfaces with treasury functions include intragroup communications. cost centre etc. .MBA Semester 4 MF0016 – Treasury Management Assignment Set. taxation.1 Explain how organization structure of commercial bank treasury facilitates in handling various treasury operations.
It includes business tax division. Markets – This group mainly deals with selling of products in the competitive market.2: Treasury Organisations • • • • • Fiscal – This group includes budget policy planning division. international and treaties division. It includes financial and facilities division. corporations and financial services policy. investments and trading. business solutions and information management division. Treasury management in banks In recent days. Macroeconomic – This group deals with economic sector of the organisation.Figure 1. and social policy division. industrial and environmental division. personal and income division. common wealth state relationships. most of the Indian banks have classified their business into two primary business segments like treasury operations (investments) and banking operations (excluding treasury). human resource division. macroeconomic policy and modeling division. It includes competition and consumer policy. tax analysis and tax design division. The various products in rupee treasury are: . Corporate services – This group deals with overall management of the treasury organisation. statutory liquidity ratio according to the norms of the Reserve Bank of India (RBI). The treasury operations in banks are divided into: • Rupee treasury – The rupee treasury carries out various rupee based treasury functions like asset liability management. foreign investments and trade policy division. indirect tax. It includes domestic and international economic divisions. Revenue – This group is concerned with the taxes in an organisation. It helps in managing the bank’s position in terms of statutory requirements like cash reserve ratio.
treasury bonds. repo. They have no lock-in period. 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. Q. The next section deals with inter-dependency between policy and strategy. commercial papers. It deals with buying and selling currencies. The minimum size of the issu e is Rs. It helps in developing new products. trading in order to lay off risks and form apparatus for much of the industry’s self-regulation. Ans:Features of commercial papers CPs is an unsecured promissory note.1.5 lakh. . Equities • • Foreign exchange treasury – The banks provide trading of currencies across the globe. business organisations and the corporate units registered in India an d incorporated units. CPs can be issued for a maturity period of 15 days to less than one year. The ceiling amount of CPs should not exceed the working capital of th e issuing company. The investors in CPs market are banks. The role of policies in strategic management was described in this section. Derivatives – The banks make foundation for Over the Counter (OTC). Bonds – Government securities. and notice money. Money market instruments – Call. 25 lakh. reverse repo and interbank participation etc. individuals. debentures etc 3.2 Bring out in a table format the features of certificate of deposits and commercial papers. 2. CPs is issued in the denomination of Rs. term.
Central bank – It plays a vital role in the country’s economy by controlling money supply. Detail the regulatory aspects on it.33:1. The attractive rate of interest In any of these markets. companies and individuals. The major participants of foreign exchange market are: • Corporates – They mainly include business houses.The participants in forex market are the RBI at the apex. CDs have to bear stamp duty at the prevailing rate in the markets The NRIs can subscribe to CDs on repatriation basis Q. They operate in market by buying or selling currencies within the framework of exchange control regulations. and multinational corporations. It deals with banks and their clients to form retail segment of forex market.The interest rate of CPs depends on the prevailing interest rate on CPs market. international investors. Large volume of transactions consists of banks dealing directly among themselves and smaller transactions usually consists of intermediary foreign exchange brokers. importers. exporters. Commercial banks – They play an important role in forex market. Central banks get involved in forex market to regain price • • . authorised dealers (ADs) licensed by forex market. forex market and call money market. (ICRA) respectively The current ratio of the issuing company should be 1.3 Critically evaluate participatory notes. 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 . affects the deman d of CPs. They operate in market by trading currencies for their clients. 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. Ans:.5 Crores. The issuing company has to be listed on stock exchange. 4.
A few counties backtracked and re-imposed capital controls as part of crisis resolution.5 Detail domestic and international cash management system Ans. Banks provide opportunities to brokers in order to increase or decrease the rate of buying or selling foreign currencies. companies and individuals.• stability of exchange rate..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. but they do retain some regulations for influencing inward and outward capital flow. .4 What is capital account convertibility? What are the implications on implementing CAC? Ans:. exporters. Most of the countries have liberalised their capital account by having an open account. The different ways of implementing CAC are as follows: • • • Open the capital account for residents and non-residents.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. making CAC either ineffective or unsustainable. The main goal of multinational cash management is the utilisation of local banking and cash management services. Crisis such as economic. social. 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. importers. and support economic goals like inflation and growth. human cost and even extensive presence of capital controls creates distortions. The Committee on Capital Account Convertibility (Chairman: Shri. Exchange brokers – They ensure the most favourable quotations between the banks at a low cost in terms of time and money. In India. The perception of CAC has undergone some changes following the events of emerging market economies (EMEs) in Asia and Latin America. 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 1950’s. The cost and benefits from capital account liberalisation is still being debated among academics and policy makers. Due to global integration. The other participants include RBI and its authorised dealers. S. both in trade and finance. which went through currency and banking crises in 1990’s. CAC enhances growth and welfare of country. Initially open the inflow account and later liberalise the outflow account. Approach to simultaneously liberalise control of inflow and outflow account. These developments have led to considerable caution being exercised by EMEs in opening up capital account. many banks deal through recognised exchange brokers or may deal directly among themselves.S. Q. Exchange brokers have a tendency to specialise in unusual currencies but also manage major currencies. protect certain levels of price in exchange rate. Q.
Several factors which distinguish multinational cash management from domestic cash management are as follows: • • • • • • Different currency denominations Political risk and other risk. use of lockboxes or intercept points. Role of governments Language and cultural differences. payable periods. The payments between the branches and the parent company are managed through the branches. Economic and legal complications.Multinational companies are those that operate in two or more countries. import duties. Multinational cash management programme specifically evaluate its techniques by timing of billing. negotiated value range. 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. Wincor’s focus was on the entire process chain which started from head office to stores. 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. The exchange rates are determined by a structure which is called the international monetary system. head . Wincor Nixdorf played an innovative role in enhancing cash handling between various countries. The principle objective of multinational cash management programme is to maximise a company’s financial resources by taking benefits from all liability provisions. correspondents or associates of the parent company. During multinational cash management system payments by customers to company’s branches are basically handled through a local bank. crediting to the retail company’s account. Difference in tax rates. It occurs due to the change in exchange rates. Through the use of electronic reporting systems a parent company observes cash balances in its foreign local banks. Preventing the regulatory obstacles. 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. For example. Decision making within the corporation is centralised in the home country or decentralised across the countries where the organisation does its business. Retaining customers and protecting its processes Expanding its business.
Wincor Nixdorf’s served several countries with its innovative hardware and software elements. extract liquidity in the market and protects customers’ money. In India. These reserves are considered to meet the withdrawal demands of the customers.office to branches and so on. Increase in SLR also limits the bank’s leverage position to drive more money into the economy. RBI practices this method.Cash Reserve Ratio Cash Reserve Ratio (CRR) is a country’s central bank regulation that sets the minimum reserves for banks to hold for their customer deposits and notes. The maximum limit of SLR is 40 percent and minimum limit of SLR is 25 percent. If RBI decides to increase CRR. There are some statutory requirements for placing the money in the government bonds. increases CRR rate to drain out excessive money from banks.6 Distinguish between CRR and SLR Ans:. It means the percentage of demand and time maturities that banks need to have in forms of cash. The CRR in the economy as declared by RBI in September 2010 is 6 percent. The RBI increases the SLR to control inflation. As gold and government securities are highly liquid and safe assets they are included along with cash. 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. The reserves are in the form of authorised currency stored in a bank treasury (vault cash) or with the central bank. RBI determines the percentage of SLR. then the banks’ available cash drops. An organisation that holds reserves in excess amount is said to hold excess reserves. the RBI arranges the level of SLR. that is. IT services to side operations and consulting services to develop custom optimised solutions. The following are the effects of CRR on economy: • • • CRR influences an economy’s 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. Q. CRR is occasionally used as a tool in monetary policies that influence the country’s economy. After following the requirements. CRR is also called liquidity ratio as it controls money supply in the economy. . gold and securities like Government Securities (G-Secs).
then it is penalized by RBI. 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 . 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.If any Indian bank fails to maintain the required level of SLR.
as we will see . Recollect that specified persons were banned from carrying out opposite transactions "(banned transactions") for six months of original buy/sale ("original transactions"). the "clarifications" have no formal standing or reference. India's capital markets watchdog – the Securities and Exchange Board of India organised an international seminar on capital market regulations. nor even a press release.to the plain reading of the text. It is neither signed nor dated. It is neither a circular. 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.1 What do you understand by insider trading. one should not examine them in the mouth too closely! Let us see the clarifications given.MBA Semester 4 MF0017 – Merchant Banking and Financial Services Assignment Set. Among others issues. But it seeks to "clarify" and giving meaning to the Regulations that have legal standing and where such "meaning" is quite contrary . Almost eight years ago. 2008 which I had discussed it here and here. Ans:. Curiously. it had invited senior officials of the Securities and Exchange Commission to tell us how it tackled the menace of insider trading.Master of Business Administration . SEBI has now released a set of "Clarifications" on 24th July 2009 on certain issues arising out of the amendments made. nor a notification. SEBI rules and regulations to prevent insider trading. the "clarifications" mostly relaxes the requirements and hence. 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. What are the SEBI rules and regulations to prevent insider trading."Insider trading" is a term subject to many definitions and connotations and it encompasses both legal and prohibited activity. . being gift horses. 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.1 Q. Having said that. Insider trading takes place legally every day. SEBI had amended the Insider Trading Regulations 1992 vide a Notification dated November 19. 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. when corporate insiders – officers.
The reasoning given is that the ban is only on transactions in secondary market. In undersubscription. unwinding of positions in derivatives held on the date of this amendment is possible. taking all things into account. a new stock issue has fewer buyers than the shares available. Ans:.this is an academic issue now at least as the six month period is now complete. Thus.obviously there cannot be any personal emergency to purchase shares! Q. there is a ban now till 15th September. This excess demand over supply increases the share price. if there is a fresh purchase on 15th March. Green shoe option agreement allows the underwriters to . I had felt that "However. "). The stabilizing agent stabilizes the price for a period of 30 days from the date of listing as authorised by the SEBI. An issuing company appoints a stabilizing agent. There is another situation called undersubscription.(Incidentally. which is usually an underwriter or a lead manager. you don't trigger a ban and if you are banned for six months. even if you are under a ban. by acquiring shares under ESOPs. What about transactions before this amendment . 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". On this aspect.It is clarified that exercise of ESOPs will neither be deemed to be "original transaction" nor "banned transaction".". A purchase on 1st February results in ban till 1st August. However. Then. you have triggered a ban of six months.the logic of covering secondary market transactions should apply here also. On a similar note. to purchase shares from the open market using the funds collected from the over-subscription of shares. you can still sell shares acquired under ESOPs but once you sell such shares. I do not understand the basis of clarifying that the sale of shares acquired under ESOPs scheme will not be an "original transaction" . 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 . It is clarified though that the transactions before the amendment are not to be considered. This is not evident from a plain reading of the provision and I had opined that "This bar on such transactions is total. Oversubscription is a situation when a new stock issue has more buyers than shares to meet their orders. There are no circumstances – whether of urgent need or otherwise – under which the bar can be lifted. In other words.2 What is the provision of green shoe option and how is it used by companies to stabilize prices. you can still exercise ESOPs. Effectively.Green Shoe Option (GSO) is an option where a company can retain a part of the over-subscribed capital by issuing additional shares.will the amendment create ban in respect of them too . A crucial clarification is that the ban on "sale" of shares for personal emergencies is permisible by waiver by the Compliance Officer. perhaps the intention is not to cover shares acquired under ESOPs Schemes. this means that the ban period is from 2nd Febuary till 15th September. There is also no provision under which even SEBI could grant exemption. it is clarified that every later transaction triggers a fresh six month ban.
15 million shares of stock to its clients. When there is already an established market and the company is simply selling more of their non-publicly traded stock. When a public offering trades below its offering price. to permit underwriters to use this practice in its offering. To manage this possible situation. The green shoe option is also known as over-allotment option. it is called a follow-on offering. If they were . When the stock offering is the first time the stock is available for public trading. the underwriter initially oversells ("shorts") to their clients the offering by an additional 15% of the offering size. which can lead to further selling and hesitant buying of the shares. They can do this without the market risk of being "long" this extra 15% of shares in their own account.000 shares in this example) in the market at or below the offer price.sell 15 percent more shares to the investors than planned by the issuer in an underwriting. The underwriters function as the broker of these shares and find buyers among their clients. The term comes from the first company. 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). the offering is said to have "broke issue" or "broke syndicate bid". A price for the shares is determined by agreement between the company and the buyers. 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. This creates the perception of an unstable or undesirable offering. 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. 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. it is called an IPO (initial public offering). Green Shoe Manufacturing now called Stride Rite Corporation. One responsibility of the lead underwriter in a successful offering is to help ensure that once the shares begin to publicly trade. When the offering is priced and those 1. as they are simply "covering" (closing out) their 15% oversell short. In this example the underwriter would sell 1. 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. 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. 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. they do not trade below the offering price.15 million shares are "effective" (become eligible for public trading). then the underwriter has oversold the offering by 15% and is now technically short those shares.
value and percentage of applications received along with stockinvest. Advertisement stating that "the subscription to the issue has been closed" may be issued after the actual closure of the issue. 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. But if they were only able to buy back some of the shares before the stock went higher. value and percentage of successful allottees who have applied through stockinvest. Bankers to an Issue). the underwriter would be buying back those shares at a higher price than it sold them at. one Hindi National Paper and a Regional language daily circulated at the place where registered office of the issuer company is situated. basis of allotment.5) Post-issue Lead Merchant Banker shall ensure that in all issues. date of completion of despatch of refund orders. during the period when the public issue is still open for subscription by the public. and would incur a loss on the transaction. number.e.3 Discuss the proportionate allotment procedure followed by the lead banker to allot shares. Ans:. advertisement giving details relating to over-subscription.The post-issue Lead Merchant Banker shall ensure that moneys received pursuant to the issue and kept in a separate bank (i. number. 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. Q. If the underwriters were able to buy back all of its oversold shares at the offering price in support of the deal. then they would exercise a partial greenshoe for the rest of the shares.6) . 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. 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. then they would be able to completely cover their 15% short position by exercising the full greenshoe. 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. as per the provisions of section 73(3) of the Companies Act 1956.to go into the open market to buy back that 15% of shares. they would not need to exercise any of the greenshoe. Basis of Allotment -(Clause 7.
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:.3. total number of shares applied for by each applicant in that category multiplied by the inverse of the oversubscription ratio. 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 . b. Number of the shares to be allotted to the successful allottees shall be arrived at on a proportionate basis i.e. All the applications where the proportionate allotment works out to less than 100 shares per applicant.e. Each successful applicant shall be allotted a minimum of 100 securities. on a proportionate basis as explained below: a.500 Total number of shares applied for .1. . Applicants shall be categorised according to the number of shares applied for. Provided.50.000 x 1/3 = 50.000 c.100 x 1/3 = 33 (to be rounded off to 100) d. in the book building portion of a book built public issue notwithstanding the above clause. The total number of shares to be allotted to each category as a whole shall be arrived at on a proportionate basis i.50. 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. the allotment shall be made as follows: i. Schedule XVIII of basis of allotment procedure may be referred to.000 Number of times over-subscribed . Clause 188.8.131.52 of Chapter XI of these Guidelines shall be applicable. Proportionate Allotment Procedure The allotment shall be subject to allotment in marketable lots. and ii.3 Proportionate allotment to category .In a public issue of securities. Number of shares applied for by – 100 each applicant Number of times oversubscribed – 3 Proportionate allotment to each successful applicant .
the final allotment may be higher by 10 % of the net offer to public. Enables lessee to pay rentals from the funds generated from operations as lease structure can be made flexible to suit the cash flow. Q. it shall be rounded off to the lower multiple of 100. f. Lease financing offers the following benefits to the lessee: • • • • • • • • • • One hundred percent finance without immediate down payment for huge investments. it may be necessary to allow a 10% margin i. If the shares allocated on a proportionate basis to any category is more than the shares allotted to the applicants in that category.e. the applicant shall be allotted 200 shares. This gives the option to the lessee to replace the equipment with latest technology . Offers restriction free financing without any unduly restrictive covenants. When compared to term loan and institutional financing. g.e. h. where the allocated shares are not sufficient for proportionate allotment to the successful applicants in that category. the applicant would be allotted 300 shares. As the process of rounding off to the nearer multiple of 100 may result in the actual allocation being higher than the shares offered. Ans:. All applicants in such categories shall be allotted shares arrived at after such rounding off. The balance shares if any. except for his margin money investment. Provides finance without diluting the ownership or control of the lessor. The lessor being the owner of the asset bears the risk of obsolescence and the lessee is free on this score. Facilitates the availability and use of equipments without the necessary blocking of capital funds.4 What are the advantages of leasing to a company. 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. i. If that number is lower than 50. remaining after such adjustment shall be added to the category comprising applicants applying for minimum number of shares. Acts as a less costly financing alternative as compared to other source of finance. lease finance can be arranged fast and documentation is simple and without much formalities. Offers tax benefits which depend on the structure of the lease. the balance available shares for allotment shall be first adjusted against any other category. j.Leasing has many advantages for the lessee as well as for the lessor. Enhances the working capital position. If however the proportionate allotment works out to 240. As an illustration. if the proportionate allotment works out to 250. 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 following are the benefits offered by lease financing to the lessor: • • • • • The lessor’s 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:
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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:
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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 user’s 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 lessee’s 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 lessor’s 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 lessor’s 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
Open-ended Fund/ Scheme An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These mutual funds schemes disclose NAV generally on weekly basis. take any two schemes and discuss the performance of the schemes. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i. either repurchase facility or through listing on stock exchanges.e. Such schemes may be open-ended or close-ended schemes as described earlier.g. The fund is open for subscription only during a specified period at the time of launch of the scheme. In order to provide an exit route to the investors. 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. These schemes do not have a fixed maturity period.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.arranging a lease will be recognised as an expense when the selling profit is identified. Q. or balanced scheme considering its investment objective.6 Given the various types of mutual funds. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. Schemes according to Investment Objective: A scheme can also be classified as growth scheme. 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. These schemes provide different options to the . Such funds have comparatively high risks. 5-7 years. Such schemes normally invest a major part of their corpus in equities. Ans:. income scheme. The key feature of open-end schemes is liquidity. some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. Close-ended Fund/ Scheme A close-ended fund or scheme has a stipulated maturity period e.
Government securities and money market instruments. However. Government securities have no default risk. Gilt Fund These funds invest exclusively in government securities. Index Funds . commercial paper and inter-bank call money. and the investors may choose an option depending on their preferences. Such funds are less risky compared to equity schemes. The investors must indicate the option in the application form. certificates of deposit. 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. etc. Growth schemes are good for investors having a longterm outlook seeking appreciation over a period of time. 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. However. capital appreciation. NAVs of such funds are likely to be less volatile compared to pure equity funds. 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. government securities.investors like dividend option. Such schemes generally invest in fixed income securities such as bonds. preservation of capital and moderate income. corporate debentures. However. opportunities of capital appreciation are also limited in such funds. NAVs of such funds are likely to increase in the short run and vice versa. long term investors may not bother about these fluctuations. These schemes invest exclusively in safer short-term instruments such as treasury bills. These are appropriate for investors looking for moderate growth. The mutual funds also allow the investors to change the options at a later date. These funds are not affected because of fluctuations in equity markets. The NAVs of such funds are affected because of change in interest rates in the country. 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. Income / Debt Oriented Scheme The aim of income funds is to provide regular and steady income to investors. etc. Money Market or Liquid Fund These funds are also income funds and their aim is to provide easy liquidity. If the interest rates fall.
Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds. Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis. On the basis of performance of the mutual funds.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. S&P NSE 50 index (Nifty). Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. 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. many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index.amfiindia. The NAVs are also available on the web sites of mutual funds. 3 years. 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 NAVs of mutual funds are required to be published in newspapers. though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. etc. last six months. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) www. the investors should decide when to enter or exit from a mutual fund scheme. Apart from these. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index.e. Investors can compare the performance of their schemes with those of other mutual funds under the same category. etc These schemes invest in the securities in the same weightage comprising of an index. 5 years and since inception of schemes. The mutual funds are also required to send annual report or abridged annual report to the unitholders at the end of the year.Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges. S&P CNX Nifty. 1 year. .
Master of Business Administration . Chance of loss .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. has undertaken to assure the insured. in consideration of the premium.MBA Semester 4 MF0018 – Insurance and Risk Management Assignment Set.1 Q.1 Explain chance of loss and degree of risk with examples Ans:.
namely peril and hazard. It can be assessed by finding the difference between expected loss and actual loss. which increases the chance of loss. The committee . It modified the financial sector to design a system appropriate for the changing economical structures in India. 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. Q. The chance of loss is a result of two factors. or leaving car keys in an unlocked car increase the chance of loss. For example.Recommendations of Malhotra committee The major reforms in Indian industry started when the Malhotra committee was formed in 1993 headed by R. then greater is the likelihood of deviation from the outcome that is hoped for and greater the risk.2 Explain in detail Malhotra Committee recommendations Ans:. because the losses were insured. Moral hazard – It is an increase in the probability of loss due to dishonesty or character defects of an insured person. For example defective wiring in a building which enhances the chance of fire. The formula used is Degree of risk = Degree of risk is measured by the probability of adverse deviation. as long as the probability of loss is less than one. If the probability of the occurrence of an event is high. Morale hazard – It is an attitude of carelessness or indifference to losses. Legal hazard – It is the severity of loss which is increased because of the regulatory framework or the legal system. Burning of unsold goods that are insured in order to increase the amount of claim is a moral hazard. In the case of exposures in large numbers. 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. N. which is the amount of uncertainty in a given situation.is defined as the probability that an event that causes a loss will occur. For example. This was formed to analyse the Indian insurance industry and propose the future course of the industry. careless acts like leaving a door unlocked which makes it easy for a burglar to enter. Malhotra (former Finance Secretary and RBI Governor). estimates are made based on the likelihood of the number of losses that will occur. Therefore insurance companies make predictions about the losses that are expected to occur and formulate a premium based on that. 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.
GIC must be taken under the government so that the GIC subsidiaries can work independently. Better freedom of operation for insurance companies. should be allowed to work independently. They should also extend the insurance coverage areas to various sectors. The insurance companies should promote and fulfil customer services. Foreign companies may be permitted to work in the Indian insurance industry only as partners of some domestic company. Investments • • The mandatory investments given to government securities from the LIC Life Fund must be reduced from 75% to 50%. The report submitted by the committee in 1994 is given below: Structure • • • Government risk in the insurance Companies to be decreased to 50%. Companies should not use a single entity to deal with life and general Insurance. Competition • • • • • Private companies who have initial capital of Rs 1 billion must be permitted to work in the insurance industry. Customer service • • • LIC must pay interest if it delays any payments beyond 30 days. Regulatory body • • • The Insurance Act must be changed. GIC and its subsidiaries should not be allowed to hold more than 5% in any company. Insurance controller. All insurance companies should be encouraged to create unit linked pension plans. Every state must have only one state level life insurance company. which was a part of finance ministry.recognised the importance of insurance in financial systems and designed suitable insurance programs. 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 . The insurance industry should be computerised and the technologies must be updated. An Insurance Regulatory body must be formed. Postal life insurance must be permitted to work in the rural market.
The company should only provide life.100 crores can act as an independent company with economic motives. the Insurance Regulatory and Development Authority Act. The Insurance (Laws) Amendment Bill . These amendments influenced the Indian insurance industry in a huge way. 1956. Appointment of surveyor The Insurance Act states that surveyor should survey claims above Rs. General Insurance Business (Nationalisation) Act 1972 (GIBNA) and Insurance Regulatory and Development Authority Act 1999.2009. support and ensure a structured growth of the insurance industry. 20. The company should have an initial paid capital of at least Rs. 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. Q. 1999 (IRDA Act) was formed to control. The surveyor selected should consider the type of loss and nature of the claims.200 crores to provide reinsurance. Later in 2008. general insurance or reinsurance. The company should have an initial paid capital of at least Rs. a consultant having technical expertise assists the surveyor. Every insurance company with an initial capital of Rs. Therefore. The private sector insurance companies were allowed to work along with the public sector. further reforms were made by introducing the plan for Insurance (Laws) Amendment Bill . and are not compiled to be the same always. The surveyor’s appointment should be based on the following points: • • • The surveyor should have a valid license. Since then there is a competition between the private and public sectors of insurance.000. but had to follow the conditions given below: • • • • • The company must be registered under the Companies Act.3 What is the procedure to determine the value of various investments? Ans:Q. These guidelines are general in nature. the claim settling authority uses discretion and records reasons.4 Discuss the guidelines for settlement of claims by Insurance company Ans:. Insurance Act 1938.General guidelines for claims’ settlement There are some guidelines that must be followed while settling the claims.2008 and The LIC (Amendment) Bill .100 crores to provide life insurance. . if technical expertise is required.2008 amended three other acts namely.industry. Depending on the situation.
Facultative reinsurance It is a type of reinsurance that is optional. it enters the market. Facultative reinsurance is the reinsurance of a part of a single policy or the entire policy after negotiating the terms and conditions. It helps the insurance companies in writing large amount of insurance policies. Appointment of investigator Depending on circumstances. Facultative reinsurance is used when a huge amount of insurance is preferred and while considering a specific risk involved in an individual contract. The ceding insurer will not know in advance whether a reinsurer will agree to pay any part of the insurance. One main disadvantage of facultative reinsurance is that it is not reliable. Treaty reinsurance. It is based on the individual agreements that help to cover specific losses.• One surveyor can be used for various jobs. One advantage of facultative reinsurance is it is flexible as a reinsurance contract is arranged to fit any kind of cases. 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. Before issuing the insurance policy the insurer looks for reinsurance and speaks to many reinsurers. looking out for a better value. According to most of the contracts. It reduces the risk exposure of the ceding company against a particular policy. the reinsurer pays a ceding commission to the insurer to pay for purchase expenses. However if the insurance company find a reinsurer who is willing to take the insurance policy then they can enter into a contract.5 What is facultative reinsurance and treaty reinsurance? Ans:. Reinsurance moves the huge losses of the insurers to the reinsurer and thus helps the insurer. The insurance company does not have any commitments to cede insurance and also the reinsurer has no commitments to accept the insurance. if the surveyor’s competence is good for both. it is a case-by-case method that is used when the ceding company receives an application for insurance that exceeds its retention limit. The appointing letter of the investigator o mentions all the reference terms to perform. and bargains with different reinsurance companies for the amount of coverage and premium. Facultative reinsurance is not mandatory.The two different types of reinsurances are: • • Facultative reinsurance. . Q. it is necessary to appoint an investigator for verifying the claim version of loss. When any primary insurer wants reinsurance for a specific coverage.
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. 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. accounting.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. more reliable. The use of information technology in insurance industry has an impact on the efficiency of the organisation as it reduces the operational costs. Insurance industry uses information technology for internal administration. 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. and so on. The amount of insurance that the primary insurer sells and those policies where both the parties provide the service is specified in the contract. The primary insurer may pay insufficient premium 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. Q. Reinsurance pool. and there is no delay in issuing the policy. reports. . After many private players entered the insurance industry. Therefore the reinsurer undergoes a loss if the risk selection of the primary insurer is not good and they charge insufficient rates. It is automatic. The treaty reinsurance is not advantageous to the reinsurer. The treaty reinsurance provides many advantages to the primary insurance company. the competition in the insurance sector has become immense. Excess–of–loss treaty. Surplus–share treaty. It is a type of reinsurance that is preferred while considering the groups of homogenous risks. It includes a standing agreement with a specific reinsurer. Information technology has helped in enhancing the insurance business. There are different types of treaty reinsurance arrangements which may differ according to the liability of the reinsurer. All the business that comes under the contract is automatically reinsured according to the conditions of the treaty. financial management. They are: • • • • Quota–share treaty.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. It is also more cost effective as there is no need to shop around for reinsurers before writing the policy.
by replacing billions of files with folders of information. in order to renew each policy. The method of creating documents is accomplished by technicians and typists.Indian insurance organisations are rapidly growing as ‘technology-driven’ organisations. . and maintained in huge folders. Policy management . and to print the policies high speed printers are utilised. Insurers are heading towards the technological enhancements. LIC is using CRM packages to handle its front end operations. To assemble the policies.Most of the insurance policies are printed and conveyed to policy owners through mail every year. Customer data is accessed by computer systems. this task is generally completed by using new technology. Insurance organisations are using new technologies. The role of IT in different fields of insurance like: • • • • Actuarial investigation . 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. underwriters can compare an individual’s risk profile with their data and customise policies according to the individual’s risk profile. in order to focus on the key areas of insurance business. to analyse the claims and policyholder’s data for providing connection between risk characteristics and claims. complex software packages are used. CRM facilitates easy retrieval of customer data. Underwriting – Underwriters can use knowledge based expert systems to make underwriting decisions. In most of the cases.Insurers depend on the rates of actuarial models to decide the quantity of risks which create loss. Developments in technology allow actuaries to examine risks more precisely. By using automated systems.
which is categorised under . If such a product gains enough market shares to become a market leader.5 BCG Growth Share Matrix Question Marks (high growth. Ansoff growth matrix and GE growth pyramid. it is categorised into one of four types for the purpose of funding decisions. but they need a lot of cash for development. During a product’s life cycle. The BCG matrix is a portfolio management tool used in product life cycle. Figure 3.5 below depicts the BCG matrix.1 (60 Marks) Note: Each question carries 10 Marks. (10 marks) Ans. Answer all the questions.Master of Business Administration-MBA Semester 4 MB0052 – Strategic Management and Business Policy . Q. BCG matrix is often used to highlight the products which get more funding and attention within the company. low market share) are new products with potential success. Figure 3.4 Credits Assignment Set.1 What similarities and differences do you find in BCG business portfolio matrix.
Growth matrix suggests that an organisation’s attempts to grow depend on whether it markets new or existing products in new or existing markets. Cash Cows (low growth. the organisation takes money from more mature products and spends it on Question Marks. According to BCG matrix. 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. .Stars.6 depicts Ansoff growth matrix. Dogs have to be sold off or be managed carefully for the small amount of cash they guarantee.4. Firms with the highest market share tend to have a cost leadership position based on economies of scale among other things. In this declining stage of their life cycle. Figure 3. high market share) are products at the peak of their product life cycle and they are in a growing market. it should able to produce and sell new products at low price. — Growth rate is the only aspect of industry attractiveness — Market share is the only aspect of overall competitive position 3. The key to success is assumed to be the market share. low market share) are products that have low market share and do not have the potential to bring in much cash.2 Igor Ansoff growth matrix The Ansoff Growth matrix is a tool that helps organisations to decide about their product and market growth strategy. high market share) are typically products that bring in far more money than is needed to maintain their market share. enough to garner early market share leadership. When their market rate grows. they become Cash Cows. Ansoff’s matrix suggests strategic choices to achieve the objectives. Small competitors with fast growing shares are ignored. these products are milked for cash that can be invested in new Question Marks. Stars (high growth. Dogs (low growth. If a company is able to apply the experience curve to its advantage.
For a business to adopt a diversification strategy. 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. size and pricing practices. it should have a clear idea about what it expects to gain from the strategy and an honest assessment of the risks.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. This increases the revenue of the organisation. 3. It includes market growth. Diversification – Diversification is the growth strategy where a business markets new products in new markets. This strategy may need the development of new competencies and requires the business to revise products to appeal to existing markets. Product development – Product development is a growth strategy where a business aims to introduce new products into existing markets.Figure 3. This is an intrinsically riskier strategy because the business is moving into markets in which it has little or no experience. but it is marketed to a new audience. It is more sophisticated than BCG matrix in the following three aspects: — Industry (market) attractiveness – Industry attractiveness replaces market growth. among other possible opportunities and threats. industry profitability.6 Ansoff Growth Matrix Market penetration – Market penetration is a strategy where the business focuses on selling existing products into existing markets.4.
It includes market share as well as technological positions.— Competitive strength – Competitive strength replaces market share. profitability. 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 . — McKinsey/GE growth pyramid matrix works with 3*3 grids while BCG matrix is 2*2 matrixes. direct.g. 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. retail. among other possible strengths and weaknesses. size..
but a few key tips can help lay groundwork for effective investing. Entire college programs have been designed specifically to teach business investment strategies. If a business has outstanding debt financed at a given interest rate. 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. (10 marks) Ans. remodeling customer-facing . paying off this debt can provide an instant. and it's critical to ensuring the success of the business.7 McKinsey/GE Growth Pyramid Q.2 Discuss the investment strategies applicable for businesses and methods to rectify faulty investment strategies. debt elimination can equate to a financial return that outpaces even the best investments. An investment strategy is a key component of every conceivable business type.Figure 3. Because business debt often reaches into double digit interest rates. paying off that debt guarantees an instant return of that percentage. Use Income to Eliminate Debt o While the pay-down of outstanding debt may not seem like business investment on the surface.
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. 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. as spreading investments into other types of operations can help diversify a business's holdings and reduce the risk of a complete business loss. ° Be conservative in your valuation assumptions ° Only buy assets dealing at substantial discounts to your conservative estimate. As an added bonus. purchasing assets. By reinvesting profits back into the business for expansion or improvement. a guaranteed return on the investment will come in the form of tax not assessed on the reinvested funds. as loans or by purchasing securities issued to business start-ups. These investments may be made as traditional cash investments. products/services etc. Never purchase the stock until you understand the industrial economy and able to forecast the future of the company with certainty. Invest in Other Businesses o Some businesses find success in investing their profits in other noncompeting businesses. The following are the two ways to incorporate the above principle in your investment selection process. the business stands to gain additional profits as a result of the expansion. . keeping funds in a bank account etc) to generate future returns. Investing in other businesses can be an especially wise move for companies in shaky industries.g.environments or opening additional locations. — Invest in business which you understand – Invest in a business in which you have a thorough understanding of the customers. — Measure your success – Evaluate your performance by the underlying measures in business. — Make assumptions – Make assumptions about your future performance by recognising your own limitations.
It includes corporate restructuring. 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. the lesser is your return value.— Have a clear disposition towards price – The more you pay for an asset in relation to its earnings. Internal transformation Internal transformation takes place in an organisation to sustain constant growth. 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 . — Allocate capital by opportunity cost – Allocate investments/assets to the choice which has been opted as the best among several mutually exclusive choices. So have a clear outlook towards the price. survival and maintain profitability. Internal methods to rectify faulty investment strategies In this section we will explain the methods to rectify faulty investment strategies.
° 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. (5 marks) b. procedure. . 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. process and programmes In the previous topic we discussed the definition and meaning of policy.The main objective of a company which adopts internal transformation is to increase efficiency by reaching the standards in the global market. a. procedure. (5 marks) Differences between policy. Now we will analyze how each concept is different from the other. procedure and programmes with examples. process and programmes. — Corporate restructuring and re-organisation — Layoffs and employee termination Q. This is achieved by holding high quality level of productivity.3. Distinguish policy. Give a short note on synergy.
It defines an outcome or a goal. 2. They are described by using simple sentences. Policy shows how rules are enforced and describes its consequenc es. It is a part of tactical tools. Policies are a part of the strategies of the organization. Process is a set of activities conducted by people to achieve organizational goals. 9. 4. 7. the method in which the work is It provides done. Policy is general in nature and identifies the company rules. Policy explains the reason for existence of an organisation. Programme is a concrete scheme of activities designed to accomplish a specific Process defines objective. It describes emergency procedures which include warnings and cautions. 6. goals. It is systematic way of handling routine actions. step by step approach to the activities It is a long term to rule that drives an taken achieve the organization. It is generally detailed and rigid. . 8. Policies are guidelines for managerial actions. Procedure identifies the specific actions and explains when an action needs to be taken. 3. It is framed by the top level managemen t. Procedure defines the means to achieve the goals. Programming helps in developing an economical way of doing things in a systematic manner. It is a planned way to handle certain issues in the organization. 5. Procedures are written in an outline format.1.
business lines. before it demerged from its Americas Beverages manufacturing business in 2008 (Peston. The intended result of many business decisions is positive synergy.4. and a wide array of innovative services for consumers. is the world’s leading confectionery manufacturer and distributor. 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 own—offering better coverage. Downsizing and the divestiture of businesses is in part the result of negative synergy. works with over 35. 2008). (10 marks) Cadbury plc.Ans. Negative synergy is also possible at the corporate level. Cadbury plc “operates in over 60 countries. “Cadbury means quality” as an integral part of its business’s activities (Superbrands. improved quality and reliability. According to the company. and the resulting lack of harmony or coordination can lead to negative synergy. Cadbury stresses the importance that it places on quality. the mere combination of people or business elements does not necessarily lead to better outcomes. 2008). Rather than having two representatives make two sales calls to a potential customer. b. Mergers and acquisitions are corporate-level strategies designed to achieve positive synergy. For instance. Organizations strive to achieve positive synergy or strategic fit by combining multiple products. Apart from its mission statement. Select any established Indian company and analyse the different types of strategies taken up by the company over the last few years. .. 2008). the removal of the pulp mill will enhance operational flexibility and eliminate distraction on periphery units. However. or markets. core business activity. Q. 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). One way to achieve positive synergy is by acquiring related products. one sales representative can offer the broader mix of products. Synergy is the energy or force created by the working together of various parts or processes. Managers expect that combining employees into teams or broadening the firm's product or market mix will result in a higher level of performance.000 people” (Cadbury India Ltd. it also references the slogan. thus allowing the corporation to concentrate on a single. formerly known as Cadbury-Schweppes plc.000 direct and indirect suppliers and employs around 50. 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. so that sales representatives can sell numerous products during one sales call.
which averages sales of around 1 million bars per day (Cadbury Dairy Milk. 2008). 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). Cadbury India Ltd. (a) (i) Pricing Cadbury Dairy Milk Cadbury India enjoys controlling 70% of the confectionery market in India. milk food drinks. 5 (about 0. technological knowledge and health-consciousness. n. . affordable by many middle-class Indians as an occasional treat.6 billion CAD) chocolate market (Gupta. Cadbury Dairy Milk bars are Cadbury India’s cash cow in the country’s 4000 tonne. 2008) but also in the fact that it is priced relatively cheaply (Chatterjee. one year after the country was made independent from the British Empire) (Cadbury Dairy Milk. one of the fastest growing confectioneries markets in the world (Financial Express. this report will simply examine the activities of Cadbury India Ltd in the Indian market. the 13 gram version.50 billion (around 1. Its history of operating in the country and its average level pricing of chocolate bars. 2008. its product line is split up into the chocolate confectionery. Part of Cadbury Dairy Milk’s success lies in its shared history with India’s identity (it was first sold in 1948. 2006) and is relatively affordable by the Indian masses. towards market segments divided by age. candy and gums categories (Cadbury India Ltd.d. Even its smallest Dairy Milk bar. Chatterjee. is priced at Rs. Rs.. as such. 2006). (ii) Consumer segments served and advertising/promotional strategies used Cadbury India Ltd continuously markets Dairy Milk as a relatively inexpensive treat. 2000). 2008). Cadbury also aims to put “A Cadbury in every pocket” (Karvy Research.. but in the Indian market. 6. Since Cadbury’s activities vary from country to country. albeit with different business strategies and approaches. 2008).. Cadbury plc manufactures and sells three different kinds of confectionery: chocolate. n. 2008).Lastly. but not affordable for those who buy from the less-then-3-rupee (Rs. affordable pure milk chocolate for many Indian customers (Cadbury Dairy Milk. has made the Cadbury dairy Milk bar synonymous with high quality. candy and chewing gum (Cadbury India Ltd. 2008). 2003). also utilizes the same mission and vision statements of its parent firm when operating in the Indian market. 3) segment of the market (Chatterjee. as the Indian subsidiary of this confectionery giant. income. has been designated its flagship brand (Cadbury India Ltd. of which 30% is directly due to the success of its Dairy Milk product. Products offered by Cadbury India Ltd.). Marketing Communications.13 CAD).) by targeting current consumers and encouraging them to make impulse purchases and by maintaining a superior marketing mix (Karvy Research.d.
Nowadays. adults and technologically-savvy consumers. but it does not serve those segments of the market that have been divided by income levels. 1999). with Disney characters embossed on each chocolate square (Cadbury Dairy Milk. where the “pure taste of Cadbury Dairy Milk defines the chocolate taste for the Indian consumer” (Cadbury India Ltd. The Cadbury Bournville Dark Chocolate bar. similar to the Dairy Milk bar. Cadbury will need to address the needs of this market segment in order to boost its sales of Dairy Milk. the company stated promoting the chocolate for “the kid in everyone”. 2008). 2008). 2008). 2008). 2008). Lastly. Cadbury managed to capture the attention of the nation and cement its market share superiority in India (Cadbury Dairy Milk. 2008) attempted to absorb these customers into its market share. In fact.. which allowed students across the country to check their examination grades online and celebrate with Cadbury’s Dairy Milk if they did well (Cadbury Dairy Milk. targets the health-conscious market segment of the chocolate market. Cadbury’s market segmentation is quite effective because it allows them to target all three major market segments: children. Variations include the Fruit & Nut and Crackle & Roast Almond variations (Cadbury Dairy Milk. 2008. as Cadbury Dairy Milk is their “Gold Standard” for chocolate. 2007). as well as the Cadbury Dairy Milk Desserts. the most notable being its “Pappu Pass Ho Gaya” (Pappu Passed!) joint venture operation with Reliance India Mobile. 2008) clearly targets the child segment of its market. In order to appeal to potential lower-income customers in the villages of India. Cadbury Dairy Milk was voted one of the India’s most trusted brands in a poll conducted in 2005 (Cadbury Dairy Milk. . 2008). Although Dairy Milk is affordable to the upper and middle-income consumers who view it as a mid-priced item (Kochhar. Furthermore. Analysts Meet. 2008). a branch of India’s largest network service provider. “to cater to the urge for ‘something sweet’ after meals” (Cadbury Dairy Milk. despite popular opinion that it is a relatively expensive luxury product (Cadbury India Ltd. who wish to enjoy the taste of dark chocolate but also its health benefits (Financial Express. Indian consumers seem to be satisfied with Cadbury Dairy Milk as its marketing promotes it as an occasional indulgence. further marketing in the form of the “Real taste of life” campaign (Cadbury Dairy Milk. Marketing Communications. Cadbury’s is trying to tap into the potential market of younger generation Internet users by offering contests and hosting competitions online. By using opinion leaders from Bollywood and using extensive advertising in newspapers. This restrained marketing has allowed the chocolate to slowly become a measure of quality for many Indians. 2008) which are meant for snacking. lower income consumers who buy from the less-than-3-rupee range of chocolate cannot afford to buy Cadbury Dairy Milk regularly.In the 1990’s. magazines and massive billboards across the country. Cadbury India continuously develops new versions of its Dairy Milk brand in order to keep its adult and children consumers satisfied and interested. Cadbury Dairy Milk Wowie. television. in an attempt to appeal to adults as well as children (Cadbury Dairy Milk.
1999) and not as household goods. Amul’s origins as a community welfare program in Gujarat. 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. 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. Cadbury India may have misinterpreted the popularity of Dairy Milk as a sign that the Indian public has accepted it as a household product. 2008) of the chocolate market. 2008) spanned the decades during which newly-independent India forged its identity. its chocolates are viewed as being local and not luxurious. 2007). so by at least promoting the fact that it has been operating in India for almost as long as Amul. the booming economy and the increasing affluence of the burgeoning middle class (Basu. Customer satisfaction must be given the utmost importance. As seen in Appendix B. it can try to be “Indian” too. thus becoming an integral part of India’s identity and giving its marketing strategy a new source of authority. one of India’s most industrialized states. 2004) has promoted the use of status symbols.(iii) Product Positioning Cadbury India Ltd’s main sources of competition come from Amul..) and Nestle India around 27% (Nestle to expand. This contradicts Cadbury’s assertion that its leadership is maintained by a “superior marketing mix” (Karvy Research. Despite Amul’s longer history in India. n. 2008) was no longer gold.d. where the regular consumption of so-called luxury chocolates such as Cadbury Dairy Milk is viewed as fashionable (Kochhar. n.d. The “Gold Standard” (Cadbury Dairy Milk. India’s own dairy company and Nestle India. nor was it a standard anymore. . as people’s confidence in its safety was shattered. 2006). whereas Amul controls around 2% (Dobhal. Nestle’s subsidiary in India. Cadbury India should make attempts to be even more sensitive to consumer demands. Cadbury India controls around 70% (Cadbury India Ltd. In fact. 2004). 2008). 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 public’s trust (Vivek. Cadbury simply cannot match this kind of national endorsement. 2008). 1999).. Although this has allowed it to control more of the market than its closest competitors. Moreover. to becoming a national enterprise (Amul. Cadbury’s 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. safety and consumer satisfaction was only reinforced when Cadbury India’s Chinese-made products were found to be contaminated with worms and melamine (Sinn and Karimi.). Amul’s reputation for credibility. in combination with the longest running advertising campaign that Amul is famous for gives it a brand awareness boost. as this will eventually allow it to negate some of the extensive damage that this negative publicity has to the firm’s reputation. This. In order to position its products as safe and affordable treats once again. even if the company has to run at a loss for a few months. As mentioned earlier. 2006). justifying a lower price tag (Chansarkar et al.
India alone accounts for 22% of the world’s malt-food milk drink retail sales (BeverageDaily. Bournvita’s still remains popular (Hawa. 2002. promotion and distribution have allowed Cadbury Bournvita to maintain its 17% market share over the years in India’s 220. namely. 2008). By doing so. due to its long history with India. but also finds followers amongst elderly people. Cadbury will be able to position its chocolates as chocolate specifically designed for India.Lastly. Cadbury India must counter this threat that Nestle and Amul pose. but unlike Cadbury Dairy Milk. Cadbury India’s longer track history gives it a competitive edge. Amul’s innovative ideas will be the bane of Cadbury. However. Cadbury Bournvita enjoys a 17% market share of the malt-based food drink market (Cadbury Bournvita. Cadbury Bournvita does not control a large share of India’s malt-based food drinks market. Cadbury has more of a brand recognition power than Nestle has. As a result of being one of the first products offered on the Indian market by Cadbury. 2004). pregnant women and athletes (Hawa. one way to do this would be to follow Amul’s lead and develop and market products that meet specific ethnic needs. Bournvita has been marketed mainly towards children. soon after Cadbury India Ltd (then known as Cadbury-Fry) was incorporated (Cadbury Bournvita. the production of chocolates specifically for the festive seasons of India. and it uses this extensively to promote Cadbury Dairy Milk all over the country. 2008. 2007) as well as chocolates for festive seasons allow them to rapidly sway consumers over to their products. a “rich brand heritage” and complete overhauls in packaging. endearing it to the consumers and boosting its sales. BeverageDaily. and the fact that it is used a staple source of nourishment by Indian mothers for their children. . 2002). Cadbury Bournvita. 1999). combined with successful marketing strategies and promotional offers. and is perceived to be quite expensive (Hawa. Their release of diabetic friendly chocolate and chocolates catering to different ethnic flavours (Janve and Dogra. In comparison to Nestle India however. Nestle still has to break into the Indian market.000 tonne malt-food market (Cadbury Bournvita. such as chocolates for Diwali and Rakshabandan (two different Indian festivals) (Kochhar.35 CAD) a piece despite other sizes being available. (ii) Consumer segments served and advertising/promotional strategies used Cadbury markets its Bournvita product in diverse market segments. Bournvita is largely sold in 500 gram bottles for around Rs. (a) Cadbury Bournvita (i) Pricing Cadbury Bournvita was first sold on the Indian markets in 1948. 2004). 2008). 2007) . 2002). product design. This accounts for their soaring annual market growth rates of 18% annually (Indian Express. 2008). concepts that Cadbury India has yet to explore. Continuous brand re-invention. 95 (2.
has involved more than 4000 schools and more than 1 million students. 1999). The Bournvita Quiz Contest is the longest running quiz show in India. the primary medium of communication for many Indians at the time (Ranjan. 2008). making it one of the most popular high school contests (Cadbury Bournvita. 2008). Goodness that grows with you” campaign to promote Bournvita as an essential health drink for children (Cadbury Bournvita. Cadbury has marketed Bournvita in order to appeal to the change in perceptions and tastes of its consumers. Bournvita challenged the public by promising complete physical and mental development for its consumers (Cadbury Bournvita. Cadbury Bournvita has managed to appeal to an athletic market segment as well. 2008) to reach out to more children and promote the link between intelligence and Bournvita. .. It focused on the “Good Upbringing. 2007). 2008) and allowed Cadbury Bournvita to keep “pace with the evolving mindsets of the new age consumers” (Cadbury Bournvita. 2008). By also sponsoring the Indian Olympic team to the Moscow Olympics of 1980 (Cadbury Bournvita. 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. Cadbury Bournvita has managed to promote itself as a sports drink for athletes (Kapoor. This campaign was followed by the massively successful “Brought up right. This marketing campaign was broadcast on television and published in newspapers in an effort to recruit contestants (Kapoor. one of its caramel chocolates helps maintain consumer interest. However. Bournvita bright” television. vitality and nutrition necessary for facing the challenges of the new millennium (Cadbury Bournvita. Cadbury India Ltd Analysts Meet. having first been aired in 1972. 2007). In order to cement their consumer base and ensure brand loyalty. The Contest spans 7 countries. 2002). 2007). 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. despite Cadbury Bournvita’s history of serving consumers in the Indian market. newspaper and magazine campaign (Cadbury Bournvita. one of the most famous Indian examples of Cadbury Bournvita’s ingenious marketing is its sponsorship of the Bournvita Quiz Contest. The “Real Achievers who have grown up on Bournvita” campaign focused on preparing consumers with the health. The new product is being aimed at the segment of children who want nutrition but also taste (Cadbury Bournvita. This campaign was conducted mainly on the radio. by supporting sports competitions and sponsoring athletes across the country. 2008).Over the years. Furthermore.d. combining the flavour of the original chocolate Bournvita with the flavor of Cadbury 5-Star (Cadbury Bournvita. as well as one of Cadbury’s most successful marketing ventures till date. 2008). 2008). a concept that appealed to many children. 2008). many customers still feel that Bournvita does not have the appeal that other brands. in the 1990s. and amidst allegations of declining quality and taste of the Bournvita brand (Hawa. n. The release of new versions of the original Bournvita such as Bournvita 5-Star. where the subsequent television marketing campaign secured Cadbury Bournvita’s place in the Indian market. Recently.
d. 2006).). however. Even the Bournvita Quiz Contest. more consumers have started switching over to consuming white drinks than brown drinks.d. such as Mother’s Horlicks (Horlicks.) rather than as a healthy drink for children. n. followed by Cadbury Bournvita with its 17% market share (Chatterjee.d. Cadbury Bournvita’s current marketing strategy is simply not enough. with white drinks being popular in the southern and eastern parts of the country. Meanwhile. Complan’s market share of 13% (Samajdar.d. is less than Bournvita’s. even elderly and convalescent consumers can consume the product without feeling conscious of consuming a child-only product. Complan has marketed itself as a “perfect nutritional supplement” (Complan. this larger market share may be explained by more consumer familiarity with Horlicks than with Bournvita.).(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. Only then will it be able to compete effectively with Horlicks. Cadbury Bournvita’s major source of competition comes from GlaxoSmithKline’s Horlicks and Heinz Food’s Complan. Thus. n. n. Horlicks has always marketed itself as a “Great Family Nourisher” with products such as Mother’s Horlicks designed for different members of the family (Horlicks. 2006) and then Complan with its 13% market share (Samajdar. with products designed for different members of the family. this may possibly work against Complan as many families may feel that their child receives enough nourishment and does not require more. the malt-drinks market is split up into the white and brown drinks categories. the solution lies in Cadbury India marketing Bournvita as an adult drink as well. Although Cadbury Bournvita currently has a larger market share of the two. . thereby giving Horlicks a larger market share than Bournvita (Karvy Research.).). in order to maintain its superiority. n. 2006). Horlicks is the market leader with a 44% market share (Chatterjee. which makes it more appealing to a wider section of the market. 2002). 2008). The white drinks category is mainly led by Horlicks whereas the brown drinks category is led by Bournvita (Karvy Research. it must continue to market itself as a child-friendly drink. Horlicks’ extensive marketing campaigns may also have played a part. Karvy Research. Thus. and the brown drinks being popular in the northern and western parts of the country (Karvy Research. Lately. which is Bournvita’s approach. Since the words ‘nutritional supplement’ connote a need for extra nourishment.d. 2008). and not as a nutritional supplement. 2006). Given than Horlicks has been operating in the Indian market for longer than Cadbury (Horlicks. effectively Bournvita’s longest running marketing campaign. and thus cannot compete with Horlicks’ wider appeal. n. Although both products are targeted at children. mainly attracts more child consumers to its product (Radakrishnan. When competing with Horlicks. 1999. As mentioned earlier. 2008). than Bournvita’s mainly child-oriented approach. As seen in Appendix C.
The Indian retail sector is composed of 97% “family-run. 1999). As seen in Appendix D. Therefore. 1999). it can benefit from inelastic demand as a household product.Delivering Cadbury products to customers India’s 300 billion USD retail market is growing at a rate of 30% per annum (Rai. SWOT Analysis of Cadbury India Ltd. This objective can be accomplished by simply building on the good reputation and trust that it has earned. length of time serving India and its ability to develop and market products specifically tailored for Indian consumers. Cadbury India Ltd’s objective of putting a “Cadbury in every pocket” (Karvy Research. selling treats such as Cadbury Dairy Milk bars and Cadbury Bournvita powder will generate massive returns. Furthermore. In order to maintain its lead in such a large market. Conclusion Cadbury India Ltd’s position in India is relatively strong. 2006). 1999). 1999). 1999) and compete with Horlicks. 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. and by listening to the needs of its consumers. produces its products in factories spread geographically across India.000 retailers spread across India (Cadbury India Ltd Analysts Meet. 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. but also sells its products through a chain of over 300. disposable incomes are on the rise and the economy is growing at a rate of 8% annually (Rai. 1999). in order to be able to sell these products to customers. The efforts of these retailers are augmented by the support of 1900 distributor locations and 27 depots (Cadbury India Ltd Analysts Meet. almost 3100 locations are directly supplied by Cadbury India Ltd distributors at least thrice a month (Cadbury India Ltd Analysts Meet. proper distribution channels must be identified. 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. thus generating a constant stream of revenue and cementing the Dairy Milk brand as a cash cow product. As a result of its witty marketing strategies.d. Cadbury India Ltd. Furthermore. 2006). However. Until then. of a total of 3600 locations that sell Cadbury products. street corner stores” (Rai. In a country where half a billion people are under the age of 25. it must learn to address the specific needs of its consumers . These distribution networks give Cadbury India its competitive edge in India’s massive consumer market. the key threat that can affect Cadbury India Ltd’s success in India is Amul’s innovative marketing strategy. n.) can only be done if the company markets its Cadbury Dairy Milk as a household good and its Bournvita as a family-friendly drink. 2006) and the remaining 3% consisting of malls and shopping complexes. Amul’s yearly growth rate of 18% may slowly start to eat away at Cadbury’s success (Indian Express.
leaving the path open for more efficient local companies like Amul to learn from Cadbury India’s mistakes and take over its market share. a large youth population. At the same time the management is also aware of external changes taking place in the competitive environment and is taking steps to remain . 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.and continue to maintain their goodwill. • The above are some steps being taken internally to improve future operation and profitability. the share of chocolate in 6. This would be really effective in maintaining consumption in summer. Various measures are undertaken in all areas of operation to create value for the future. the company has been able to increase the width of its consumer base through launch of low priced products. 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’. it will be able to isolate the benefits and drawbacks of its competitors’ marketing mix and use those to its own advantage. while also analyzing its competitors’ marketing strategies. Cadbury must also appreciate the advantages of a positive reputation and always stress consumer satisfaction. higher local consumption by entering long term contract with farmer and undertaking efforts in expanding local coca area development. By doing so.6% and Cadbury’s share in the impulse segment is 4.8% factor like changing attitude. • Expand the consumer base. This will cripple sales and reverse the fruits of 70 years of hard work in the country. when sales usually dip due to the fact that the heat effects product quality and thereby consumption. 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. higher disposable income.e. Cadbury India’s brand recognition aspect will immediately work against it by highlighting the link between its name and contaminated food products. Repeats of the recent melamine and worms issues cannot be allowed to happen as once consumer confidence in its brand name is shattered. Future Strategy In the branded impulse market. coca through forward purchase of imports. Efficient sourcing of key raw material i. The company is today the second best manufacturing location of Cadbury’s Schweppes in the world. • Improving distribution quality by addressing issues of product stability by installation of visi coolers at several outlets. In terms of manufacturing management focus is on optimizing manufacturing efficiencies and creating a world class manufacturing location for CDM and Éclairs. 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. 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. • Use of it to improve logistic and distribution competitiveness • Utilizing mass media to create and maintain brands. 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.
Example . The management is not unduly concerned about the huge deluge of imported chocolate brands in the market place. . the company looks at the tree important as an opportunity. It integrates an understanding about the nature and aspirations of the organisation and develops this conception to lead the organisation towards a better objective. 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. Vision statement A vision statement defines the purpose and principles of an organisation in terms of the values of the organisation. where it could optimally use the global Cadbury Schweppes portfolio. lower barrier to trade and the advent of all global players in to the country. Vision and Mission statements A well-articulated strategic intent guides the development of goals and helps in inspiring the employees to achieve targets. Q. which limit the opportunity to launch value for money products. It should be implanted in the organisation being collectively shared by everyone in the organisation. It is prepared for the organisation and its employees. It conveys an effective business plan. It is of the view that size of this imported premium market is small to threaten its own volumes or sales in fact. It is a concise and motivating statement that guides the employees to select the procedures to attain the goals. A vision statement describes the future ambition of an organisation.Wal-Mart’s vision is to become worldwide leader in retailing. A vision is the ability to view what the organisation wants to be in future. 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. It comprises of the vision and mission statements. The only concerns that the company has in this regard is the current high level of duties. It must synchronise with the organisation’s principles. The ambition should be rational and achievable. The company would be able to not only provide greater variety. Vision statement is the framework of strategic planning. It also facilitates in utilising the intent to allocate resources and in encouraging team participation. (10 marks) Ans.competitive in the future environment of free imports.
L&T shall promote a culture of trust and continuous learning. It describes the present potentials and activities of the organisation. It is a concise description of the existence and fundamental purpose of an organisation. We are currently the biggest. It should be unique and different to leave an impact on everyone. Mission statement is the responsibility by which an organisation aims to serve its stakeholders. It should be credible so that the stakeholders accept it. delivered through our priorities. the stakeholders and the reason for existence of an organisation. stakeholders and society. It should be practical and achievable. The statement distinguishes an organisation from its other competitors by explaining its scope of activities. It conveys the purpose of the organisation to its employees and the public. Example -Wal-Mart’s mission is to provide ordinary customers the chance to buy the same thing as rich people. capabilities and sustainability from 2008 to 2011 (Cadbury plc. 2008) by measuring its financial progress in the areas of growth. (i) Cadbury’s Vision Statement Our objective is to deliver superior shareholder returns by realizing our vision to the be the world’s biggest and best confectionery company. It shall meet the expectations of employees. It describes the present capabilities.Vision statement of L&T L&T employees shall be innovative and the empowered team will constantly create values and attain global benchmarks. It should be clear and precise so that the actions can be taken based on it. its products and services used to achieve the goals and objectives. Mission statement A mission statement is the extensive definition of the mission of an organisation. It gives a framework on the operations of the organisation within which the strategies are devised. sustainability commitments and culture Cadbury plans to “deliver superior shareholder returns” (Cadbury plc. At the heart of our plan is our performance scorecard. It is vital for the development and growth of the organisation. efficiency. technologies. Mission statement of IBM . 2008). and we have an enduring commitment to become the undisputed best.
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. (ii) Cadbury’s Mission Statement Cadbury’s mission statement outlines its overall business objective and its commitment to its customers.“At IBM. 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. These skills enable a business to deliver essential customer benefit like the selection of a product or service by a customer. Core Competencies are not fixed. As an organisation progresses and adapts to new circumstances. developing and manufacturing most advanced information technologies. the core competencies also adjust to the change. It is a unique skill or technology that establishes a distinct customer value. we strive to be the forerunner in inventing. We collaborate and work as teams to convert products into brands. including computer systems. They change in response to the transformation in the environment of the company. Core competencies are those skills that are critical for a business to achieve competitive advantage. As the organisation progresses and adapts to the new environment. Example – Infosys has a core competency in information technology.” 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. . the core competencies also adapt to the transformation. They are adaptable and advance over time. Our core purpose “Working together to create brands people love” captures the spirit of what we are trying to achieve as a business. The strategy is devised in a manner that an organisation can receive reasonable profit and attain strategic competitiveness. software. storage systems and microelectronics.
Q. These strategic groups are called Strategic Business Units (SBUs). When companies become really large. corporate set different groups of product/product line regarding the strategy to follow (in terms of competition. Should have a Manager authorized and responsible for its operation. prices. 6. functions and roles. To ease its operation. 2. style/ quality. Is able to carry out integrative planning relatively independently of other SBUs. independent from other SBUs. (10 marks) Incompelete Ans. . Strategic Business Unit (SBUs) is necessary when corporation starts to provide different products and hence. What is SBU? Explain its features. Mention some of the successful SBU of MNC’s. need to follow different strategies. and impact of product withdrawal). Have a unique business mission.SBUs are also known as strategy centers. 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. substitutability. need to follow different strategies. Independent Business Unit or even Strategic Planning Centers. 3. The unique small business unit benefits that a firm aggressively promotes in a consistent manner. Have clearly definable set of competitors. Each Business Unit must meet the following criteria: 1. 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.
capital flows.Master of Business Administration-MBA Semester 4 International Business Management – MB0053 Assignment Set . migration. foreign direct investment. and trade. globalization is usually recognized as being driven by a combination of economic. societies. However.1 Q. transportation. political. and cultures have become integrated through a global network of political ideas through communication. and military presence. and biological .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. technological. the spread of technology. sociocultural. The term is most closely associated with the term economic globalization: the integration of national economies into the international economy through trade.
Financial . With the influence of globalization and with the help of the United States’ own economy. an alternative approach stresses how globalization has actually decreased inter-cultural contacts while increasing the possibility of international and intra-national conflict. .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. Particularly movement of material and goods between and within national boundaries. International companies – Companies that deal with foreign companies for their business are considered as international companies. If China continues to grow at the rate projected by the trends. languages.emergence of worldwide production markets and broader access to a range of foreign products for consumers and companies. the economic fate of workers was tied to the fate of national economies. industry. this is no longer the case. In the past.5 trillion in national currencies were traded daily to support the expanded levels of trade and investment Economic .factors. An aspect of the world which has gone through the process can be said to be globalized. the People's Republic of China has experienced some tremendous growth within the past decade. wages are less dependent on the success or failure of individual economies. By the early part of the 21st century more than $1. 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. With the advent of the information age and improvements in communication. there will be a major reallocation of power among the world leaders. in part because of its strong and wealthy economy. based on the freedom of exchange of goods and capital Job Market. In fact.realization of a global common market. Because workers compete in a global market. 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. Against this view. the United States has enjoyed a position of power among the world powers. and technology to rival the United States for the position of leading world power. there is a considerable difference between the two terms.competition in a global job market. This has had a major effect on wages and income distribution Political . then it is very likely that in the next twenty years. Politically.emergence of worldwide financial markets and better access to external financing for borrowers. China will have enough wealth. Globalization has various aspects which affect the world in several different ways Industrial . The term can also refer to the transnational circulation of ideas. apart from their home country. or popular culture through acculturation. They can be exporters or importers who may not have any investments in any other country.
are considered as global companies. and sales and marketing worldwide. In a global scenario. They have multiple manufacturing plants across the globe. watches. 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. and the set of competitors also differ from country to country. Research and Development setup in USA and India. catering to multiple markets. and competitive position in one nation have little or no bearing on its ability to successfully compete in another nation. a company’s business gets affected by the changing environments in different countries. Multinational strategy – Companies adopt this strategy when each country’s market needs to be treated as self contained. The same set of competitors may compete against each other in several countries. a company’s overall competitive advantage is gauged by the cumulative efforts of its domestic operations and the international operations worldwide. customer base. which has its headquarters in Sweden. life insurance. o Competition in each national market is essentially independent of competition in other national markets. manufacturing and assembly plants in low wage countries like China. Companies can also be differentiated by the kind of competitive strategy they adopt while dealing internationally. It can be for the following reasons: o Customers from different countries have different preferences and expectations about a product or a service. This is made possible because of the ease in transferring technology and expertise from country to country.Global companies – Companies. In a globally competitive industry. mobile phone). 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. Competing on a truly global scale comes later. and food products. A good example to illustrate is Sony Ericsson. Multinational strategy and global competitive strategy are the two types of competitive strategy. consumer electronics (like televisions. o Some of the industry examples for multinational competition include beer. 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. o A company’s reputation. which invest in other countries for business and also operate from other countries. Industries that have a global competition are automobiles. Strategy International Global Location Selected target countries Most global businesses and trading areas operate in North America. . Table 1 portrays the differences in strategies adopted by companies in international and global operations. after the company has established operations in several countries across continents and is racing against rivals for global market leadership. Thus. and commercial aircraft and so on.
minor adaptation to host country situations if required Efforts made to use almost the same technologies. each subsidiary operates more or less autonomously to fit host country conditions Company organisation Europe.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. as observed by Klaus Schwab of the Davos World Economic Forum. and capabilities in all country markets (to promote use of a mostly standard strategy). 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. 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. technologies. All economic analysts must agree that the living standards of people have considerably improved through the market growth. moderate customisation depending on the regulatory framework Plants located on the basis of maximum competitive advantage (in low cost countries close to major markets. and Latin America Same basic strategy worldwide with minor country customisation where necessary Mostly standardised products sold worldwide. geographically scattered to minimise shipping costs. With the development in . competencies. or use of a few world scale plants to maximise economies of scale) Attractive suppliers from across the world Much more worldwide coordination. Asia Pacific. 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". new successful competitive capabilities are transferred to different country markets All major strategic decisions closely coordinated at global headquarters.
technology and their introduction in the global markets. technological. and spread of technology. trade's guidelines. that is integration of national economies into the international economy through trade.. nations. . Investment sector is witnessing high infusions by more and more people connected to the world's trade happenings with the help of computers. is very often used to refer to economic globalization. everyday more than $1. foreign direct investment. o Promotes better education and jobs. Internet users will quickly touch 1 billion. economical to purchase than to produce. cultures. however such usage is typically incorrect as "global" implies "one world" as a single unit. more and more people are crossing national borders. Globally. economies. For the purpose of commerce and pleasure. Globalization has two components: the globalization of market and globalization of production. consumers are likely to profit less from globalization. Outsourcing helps the companies to be competitive by keeping the cost low. As per statistics.org/). Technological advancement and productivity expansion are the other benefits of globalization because since 1970s growing international rivalry has triggered the industries to improvise increasingly. Buyers of products and services in all nations comprise one huge group who gain from world trade for reasons encompassing opportunity charge. stable business and alterations in consumption and 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. and ecosystems exist(http://en. languages. Another factor which is often considered as a positive outcome of globalization is the lower inflation. This process is a combination of economic. The number of mobile subscribers has elevated from almost zero to 1. in a doctrinal sense to describe the neoliberal form of economic globalization. there is not only a steady increase in the demand for commodities but has also led to greater utilization.wikipedia.8 billion indicating around 30% of the world population. while "international" (between nations) recognizes that different peoples. comparative benefit. By the mid-1980s it increased to six and ever since the number has doubled to 12. Compared to others. o Promotes foreign trade and liberalisation of economies... as a term. migration. with increased productivity. Globalization can be described as a process by which the people of the world are unified into a single society and functioning together. Globalization. capital flows. o Increases the living standards of people in several developing countries through capital investments in developing countries by developed countries. Worldwide telephone traffic has tripled since 1991. on average nations in 1950 witnessed just one overseas visitor for every 100 citizens. sociocultural and political forces. The word globalization is also used.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. This is because the market rivalry stops the businesses from increasing prices unless guaranteed by steady productivity.Globalization is also defined as internationalism. The stock of foreign direct investment resources has increased rapidly as a percentage of gross world product in the past twenty years. o Benefits customers as companies outsource to low wage countries. borders.
o Leads to free flow of information and wide acceptance of foreign products. o Provides several platforms for international dispute resolutions in business. best practices. The MNCs increasingly use their economical powers to influence political decisions. Causes destruction of ethnicity and culture of several regions worldwide in favour of more accepted western culture. civilisation. . Culture determines every aspect that is from birth to death and everything in between it. even though the marginalised groups represent a majority or a minority in the society. Causes unemployment in the developed countries due to outsourcing. It is the duty of people to respect other cultures. o Gives better access to finance for corporate and sovereign borrowers. This shows a close relation between culture and international business. o Provides better quality of products. and culture. o Increases sales as the availability of cutting edge technologies and production techniques decrease the cost of production. Culture is the part of environment. Culture is an important factor for practising international business. it is the total sum of knowledge. Leads to adverse health issues due to rapid expansion of fast food chains and increased consumption of junk food. healthcare. globalisation has improved our lives in various fields like communication. digital communication. Causes ecological damage as the companies set up polluting production plants in countries with limited or no regulations on pollution. customs. transportation. laws. and not of the marginalised groups.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. In spite of its disadvantages. Culture is very important to understand international business. ethics. Culture is not similar to cultural practice. Harms the local businesses of a country due to dumping of cheaper foreign goods. which in turn leads to a flourishing travel and hospitality industry across the world. Research shows that national ‘‘cultures’’ generally characterise the dominant groups’ values and practices in society. arts. and other abilities and habits gained by people as part of society. o Increases business travel. other than their culture. Influences political decisions in foreign countries. and standardised delivery models across countries. travel and so on. 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. ideas. Some of the ill-effects of globalisation are as follows: Leads to exploitation of labour in several cases. and the way of life of a specific society or group. Culture affects all the business functions ranging from accounting to finance and from production to service. and education. Leads to the misuse of IPR. customer services. which facilitates international trade. which human has created. copyrights and so on due to the easy availability of technology. beliefs. Q. morals.
South Korea. and perform activities as they are different in different nations. and systems must be modified. 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. This is due to varied preferences and tastes. The trend is Asia centric and not European or American centric. Globalisation is only one of many processes involved in cultural change. The organisation must consider the concept of international business and construct guidelines that help them to take business decisions. because of the growing economic and political power of China. which help the candidate to work in a foreign environment. even if a worker can go to another Japanese entity. even if Japanese workers were not satisfied with the specific aspects of their work. India. Before manufacturing any product. Cultural differences affect the success or failure of multinational firms in many ways. The kinds of products and services that consumers can afford are determined by the level of per capita income. The organisation must manage and motivate people with broad different cultural values and attitudes. 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. This study showed the fact that it is tough for Japanese workers to change jobs. the organisation has to be aware of the customer choice or preferences. To motivate employees in North America. While this trend is changing. product differentiation has become business strategy all over the world. These models show that there is a relation between job satisfaction and production. in underdeveloped countries. The organisation must identify candidates and train them to work in other countries as the cultural and corporate environment differs. training them on the technology and so on. Also. The increased diversity within cultures and geographies. particularly those with an ancient cultural heritage. corporate training. they know that the conditions may not change considerably at another place. The following are the necessary implications in international business: . Thus. Globalisation does not characterise a rupture with the past but is a continuation of prior trends. 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. The following are the three mega trends in world cultures: The reverse culture influence on modern Western cultures from growing economies. practices. and Japan and also the ASEAN. the demand for luxury products is limited. discontent might not impact their level of production. they know that the management style and practices will be quite alike to those found in their present firm. As such. they have come up with models. however the production levels stayed high. Adaptations must be made to the product where there is demand or the message must be advertised by the company. the fact that job turnover among Japanese workers is still lower than the American workers is true. For example. The training may include language training. Hence the management style. 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.
A country with low masculinity ranking shows the country. These cultures support extended families and collectives where everyone takes responsibility for fellow members of their group. At that time he gathered and analysed data from many people from several countries. laws. A rule-oriented society that incorporates rules. A country with high masculinity ranking shows the country experiences high level of gender differentiation. Later. A country with high power distance ranking depicts that inequality of power and wealth has been allowed to grow within the society. values and viewpoints. Grow the total share market by innovating affordable products and services. capital. In these societies equality and opportunity is stressed for everyone. Masculinity – This focuses on the extent to which the society supports or discourages the traditional masculine work role model of male achievement. Cultural differences are a trouble and always a disaster. Organise global enterprises around global centres of excellence. people. and controls is created to minimise the amount of . Geert Hofstede. A high individualism ranking depicts that individuality and individual rights are dominant within the society. ‘Culture is more often a source of conflict than of synergy. In these cultures. Individualism – This dimension focuses on the extent to which the society reinforces individual or collective achievement and interpersonal relationships. Hofstede’s cultural dimensions According to Dr. as national markets are diverse with growing mobility of products. and control. Uncertainty Avoidance Index (UAI) – This focuses on the degree of tolerance for uncertainty and ambiguity within the society that is unstructured situations. women are treated equal to men in all aspects of the society. Individuals in these societies form a larger number of looser relationships. A country with high uncertainty avoidance ranking shows that the country has low tolerance for uncertainty and ambiguity. men dominate a major part of the society and power structure. He worked as a psychologist in IBM from 1967 to 1973. a fifth dimension called ‘long-term outlook’ was added. A low individualism ranking characterises societies of a more collective nature with close links between individuals. In low masculinity cultures. Avoid self reference criterion such as. regulations. and culture. A country with low power distance ranking depicts the society and de-emphasises the differences between its people’s power and wealth. having a low level of differentiation and discrimination between genders. Discover and identify global segments and global niche markets. power. These societies follow caste system that does not allow large upward mobility of its people. they are affordable for even subsistence level consumers rather than fighting for market share. Professor Hofstede established a model using the results of the study which identifies four dimensions to differentiate cultures. Follow a philosophical viewpoint that considers that many perspectives of a single observation or phenomenon can be true. with women being controlled and dominated by men. one’s own upbringing.’ Professor Hofstede carried out a detailed study of how values in the workplace are influenced by culture. The following are the five cultural dimensions: Power Distance Index (PDI) – This focuses on the level of equality or inequality. between individuals in the nation’s society. and making them accessible so that.
S. Conflicting attitudes. Culture must not be imposed on individuals of different culture. For example. They have a small term orientation and a concern for stability. The managers cannot expect to force members of other culture to fit into their cultural customs. Every society has its own unique culture. Formulating and applying plans for modification. accept change easily. Any organisation that tries to enforce its behavioural customs on unwilling workers from another culture faces conflict. Identifying and solving disagreements. Cultures recording little on this dimension. and takes greater risks reflects a low uncertainty avoidance ranking. Establishing and applying formal structures. when people involved have diverse cultural identities. Religion. PDI is the highest Hofstede dimension for culture with a rank of 77. In India. 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. 2009 was a landmark international deal. based company Kraft acquired the British chocolate giant. . and masculinity dimension rank is 62. believe in many truths. Cadbury which were in complete extremes in terms of culture. which is the main assumption of cross cultural skills learning. These countries have a long term orientation. 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 Asian countries are scoring high on this dimension. The manager has to possess the skills linked with the following: Providing inspiration and appraisal systems. in which a U. It is functionally linked to achieving a performance goal. readily agrees to changes.uncertainty. A society which is less rule-oriented. 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. Cultural elements that relate business The most important cultural components of a country which relate business transactions are: Language. the Cadbury Kraft Acquisition. International managers in senior positions do not have direct interaction that is face-to-face with other culture workforce. and have thrift for investment. LTO dimension rank is 61. Cross cultural management is defined as the development and application of knowledge about cultures in the practice of international management. trust in absolute truth is conventional and traditional. Let us discuss the major cultural elements that are related to business. 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. Many western cultures score considerably low on this dimension. Identifying the importance of informal structures. but several home based managers handle immigrant groups adjusted into a workforce that offers domestic markets.
Cultural diversity offers key chances for joint work and co-operative action. Strategies to ignore diversity may be possible when culture groups are given various jobs. In diverse groups. The organisation’s capability to draw. o Thinks the likely benefits of identifying and managing diversity do not validate the expected expenses. The top management level provides its moral and administrative support. where the members are tolerant of differences. But the impact cannot be evaluated and there is always risk in creating a diverse group. This rejection to identify diversity happens when management: o Fails to have sufficient awareness and skills to identify diversity. Group work is a joint venture where. problem solving. o Recognises the negative consequences of identifying diversity probably cause greater issues than ignoring it. A diverse group is known to be more creative. Factors related with the industry and company culture are also important. o Respect each other’s skills and share their own. and organisational and functional discriminations. Diverse groups do well when the members: o Assist to make group decisions. It is better to ignore. The management must: o Ignore cultural diversity within the employees.Handling cultural diversity Cultural diversity in a work group offers opportunities and difficulties. which is an alternative. the work experience helps to overcome gender. A successful group is profitable with respect to quick results and the creation of concern for the future. Economy is benefited when the work groups are managed successfully. o Identifies diversity but does not have the skill to manage the diversity. creativity. o Value the exchange of different points of view. over time. Negative stereotypes are emphasised if it fails. and adjusting to change. They also provide diversity training. o Identifies that the job provides no chances for drawing advantages from diversity. o Tolerate uncertainty and try to triumph over the inefficiencies that occur when members of diverse cultures work together. In such . and sharing required resources are independent in the workplace. and the group members are rewarded for their commitment. Diverse groups require time to solve issues of working together. Ignore diversity It may be difficult to manage diversity. save. Factors controlling group creativity On complicated problem solving jobs diverse groups do better than identical groups. o Value the chance for cross-cultural learning. the production of two or more individuals or groups working in cooperation is larger than the combined production of their individual work. and inspire people from diverse cultures can give the organisation spirited advantages in structures of cost. and gives time for the group to overcome the usual process difficulties. Groups and group members are equally incorporated and work together. o Down-play the importance of cultural diversity. racial.
confusion occurs when the diverse value systems are not identified that are held by different staff groups. All business dealings involve risks. or wealth distribution or creation). or in countries with similar perceived characteristics. economic structures. economic. Whenever investors or companies have assets or business operations across national borders. 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. For example. It is analysed as a function of a country’s ability to earn foreign currency. These additional risks are called country risks which include risks arising from national differences in socio-political institutions. The CRA monitors the potential for these risks to decrease the expected return of a cross-border investment. the financial markets are being refined with the introduction of new products.cases. and social upheavals in a foreign country. When business transactions occur across international borders. it implies that effort in earning foreign currency increases the possibility of capital controls. they face currency risk if their positions are not hedged. It includes effects caused by problems in a region or in countries with similar characteristics. and geography. CRA represents the potentially adverse impact of a country’s environment on the multinational corporation’s cash flows and is the probability of loss due to exposure to the political. With globalisation. Q3. It is used to survey countries where the firm is engaged in international business. and avoids countries with excessive risk. Sovereign risk – This risk is based on a government’s inability to meet its loan obligations. they bring additional risks compared to those in domestic transactions. 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. Risk arises from the negative changes in fundamental economic policy goals (fiscal. monetary. Therefore. Since the 1980s. Location risk – This type of risk is also referred to as neighborhood risk. Exchange risk – This risk occurs due to an unfavourable movement in the exchange rate. Sovereign risk is closely linked to transfer risk in which a government . 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. policies. Exchange risk can be defined as a form of risk that arises from the change in price of one currency against another. Transfer risk – Transfer risk arises from a decision by a foreign government to restrict capital movements. 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. Location risk includes effects caused by troubles in a region. Cosmos Limited wants to enter international markets. in trading partner of a country. 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. An increasing number of companies involving in external trade indicate huge business opportunities and promising markets. currencies. international.
tax laws. 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. it is easier to make comparisons between countries as it follows a specific format across countries. The assessment of country risk is used to incorporate country risk in capital budgeting and modify the discount rate. For example. It can be used to monitor countries where the MNC is engaged in international business. including the decision-making process in the government. expropriation of assets. This technique was the most popular among the banks during the late seventies. Risk assessment requires analysis of many factors. war. investment projects and their cash flows. in which the scoring does not need personal judgment of the country being scored or qualitative. tariffs. It is essential to analyse the sustainable amount of funds a country can borrow. and social conditions and prediction. It is mainly used by MNCs. Country detailed risk refers to the unpredictability of returns on international business transactions in view of information associated with a particular country. CRA regulates the estimated cash flows and explores the main techniques used to measure a country’s overall riskiness. Country risk is determined by the costs and benefits of a country’s repayment and default strategies. A survey conducted by the US EXIM bank classified the various methods of country risk assessment used by the banks into four types. political. Purpose of Country Risk Analysis Risk arises because of uncertainty and uncertainty occurs due to the lack of reliable information. The techniques used by the banks and other agencies for country risk analysis can be classified as qualitative or quantitative. All items are scaled from the lowest to the highest . In structured qualitative method. Structured qualitative method – The structured method uses a uniform format with predetermined scope. The international trade growth and the financial programs development demand periodical improvement of risk methodology and analysis of country risks. or restriction in repatriation of profits. 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. Many agencies merge both qualitative and quantitative information into a single rating. corruption and bureaucracy also contribute to the element of political risk. Country risk is due to unpredicted events in a foreign country affecting the value of international assets. It includes general discussion of a country’s economic. Fully qualitative method can be adapted to the unique strengths and problems of the country undergoing evaluation. The analysis of country risks distinguishes between the ability to pay and the willingness to pay. They are: Fully qualitative method – The fully qualitative method involves a detailed analysis of a country. in which the scoring needs subjective determinations. The ways of evaluating country risks by different firms and financial institutions differ from each other. Checklist method – The checklist method involves scoring the country based on specific variables that can be either quantitative. in order to avoid countries with excessive risk. Country risk is composed of all the uncertainty that defines the risk of country exposure. relationships of various groups in a country and the history of the country.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.
Other quantitative methods – The quantitative models used in statistical studies of country risk analysis can be classified as discriminant analysis. The MNC gets responses from its evaluation and then may determine some opinions about the risk of the country. and capital) between residents and non-residents. are associated with the country’s real ability to repay its commitments. level of literacy and so on. 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. the MNC can assess definite employees who have the capability to evaluate the risk characteristics of a particular country. Following are the tools recommended: Chain of value – Includes the main countries that sustain trade relationships with the nation. business executives. consistent and comparable. outlook provided by rating agencies. external and internal environment. The standard economic variables that are found mainly in the varied approach adopted by financial institutions and rating agencies. consumption. The economic. broken by sectors and products. Table of macroeconomic variables – Provides alert signals when the behavior of any ratio presents a relevant change. Therefore. during a period) and its evolution through the years means a strong source of data. internal savings. level of investments. life expectancy. The standard variables are used to maintain the regular analysis comparable with similar works of other countries. The social-political aspects are necessary for all kind of analysis as they describe the whole setting of the running economy. the first step is to make sure that the historical series of official data are reliable. GDP or GNP. The analysis must be accomplished with qualitative variables. as it balances the transactions (balances the prices of goods. These meetings clarify any vague opinions the firm has about the country. As applied to country risk analysis. and so on. principal component analysis. 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. which consider social aspects as population. logit analysis and classification and regression tree method Data sourcing The basic data is important to analyse a country. The exchange rate (currency risk) is another important variable considered. The balance of payments (summary account of economic transactions among a country and the others nations of the world. Strength and weakness chart – Focus the key aspects that warn the country. Inspection visits – Involves travelling to a country and conducting meeting with government officials. rate of birthday.score. services. Tools The risk management demands a regular follow up regarding governmental policies. there are some other relevant variables such as the interest rate. . public debt and its service. The sum of scores is then used to determine the country risk. inflation rate and so on. Apart from the macroeconomic variables which deal with the external sector of the economy. Table of financial markets performance – Follow up the behavior of bonds and stocks already issued and to be issued. Delphi technique – The technique involves a set of independent opinions without group discussion. rate of unemployment. money supply. and consumers.
financial crisis and international liquidity is a framework over which the analysis must start. Thus. which can be real values. the legal environment. after the international crisis. is a clear definition about how the country is positioned in the world in terms of its wide relationships. the forecasts for conflicts among nations. In this case. and the relationships to neighbour nations and the world as a whole. They can be separated into two groups such as domestic and external. Globalisation has brought international business to the center of the discussions and the external environment has become vital for all countries. Basel Committee has defined some strong measures to be followed by the financial houses and Central Banks are trying to monitor their jurisdictions. the improvement of the economic blocks. by evaluating information provided by the Central Banks and. recently Asia and Turkey crisis have shown that the inspection is not enough to keep the reliability of some domestic system. the country risk happens to be the worst. the maturity of debts (internal and external) and the available sources of financing also help to measure the freedom grades of the country. The mainly used ratios and variables in case of domestic economy are the . corporate risk. percentages. Corporate risk Both country risk studies and business risk analysis enhances wealth from the available resources. When domestic banks do not have a consistent risk management policies and adequate provisions to theirs credits. in terms of capital.The content of country risk analysis mainly involves country history. importance of international trade and so on. ratios for economic risk evaluation and strength and weakness chart. domestic financial system. the economical. including financial theory. Domestic financial system The banking sector has implemented many actions to avoid losses. All these aspects are significant to identify the dependency level of the country. economic block in which it belongs to. Dependency level The next step after the history in brief. The figures must be presented in historic series (at least five years) to provide information about its progress. The international banks had developed many tools to deal with international crisis. natural resources. political. the level of openness of the world economy. from the principal banks of the country. The financial dependency to meet the needs of a country is also a strong concern for the analyst. External environment The external trade is an important factor to the development of societies. the behavior of financial markets. the analysis must consider the health of the domestic financial system. Therefore. the private sector. a complete vision on economic trends. or relations. The main historical data provides a good understanding of the key factors which draw the behaviour of the society. technology and labour forces. external environment. reducing the ability to payback any external commitment. Ratios for economic risk evaluation Cross-border economic risk analysis evaluates the probable macroeconomic ratios among some variables. the government. dependency level. Accessing Centrals Bank policies and supervising procedures also help to evaluate the health of the financial system. Apart from those procedures. Country history The historical brief helps to identify aspects that interfere in the future behavior of the country. This clarifies that those kind of analysis procures extensive knowledge from the business approach for companies.
· Budget deficit or GDP –· Internal debt or GDP – The monetary policy is essential as it deals with the price stability. provides huge facilities to decision makers based on their predictions to expected returns of investments and a firm social. producing inferior quality goods. but in the pursuit of profit. the strength and weakness chart can be used to merge each strength and weakness with the related scenario. principles. and the industrial phase. 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. These factors have unique value systems that have varying degrees of control over managers. An economy which presents less instability in its prices of goods and services. Despite the differences in religious teachings. and disregard for environmental protection laws. and standards of human conduct and its application in daily life to determine acceptable human behaviour. Q4. Ethics is significant in all areas of business and plays an important role in ensuring a . agriculture phase. Business ethics is almost similar to the generally accepted norms and principles. Culture – Culture refers to a set of values and standards that defines acceptable behaviour passed on to generations. religions agree on the fundamental principles and ethics. laws are frequently violated. Business ethics pertains to the application of ethics to business. These phases reflect the changing economic and social arrangements in human history. Every organisation is expected to abide the law. and stress on social responsibility as contributing factors to general well-being. The most common breach of law in business is tax evasion. applies to business as well. Civilisation is the collective experience that people have passed on through three distinct phases: the hunting and gathering phase. Laws change and evolve with emerging and changing issues. These values and standards are important because the code of conduct of people reflects on the culture they belong to. is a model of relationships among several variables (quantitative and qualitative) to show their interdependency and the complexity of analysis. an orderly social system. Religion – Religion is one of the oldest factors affecting ethics. economical and political environment. approved by the legal system of a country or state that guides human behaviour. and is a matter of concern in the corporate world. Law – Law refers to the rules of conduct. for example dishonesty. Behaviour that is considered unethical and immoral in society. Managers are influenced by three factors affecting ethical values. Strength and weakness chart In order to explain the significant aspects provided by the analysis.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 –. All major religions preach the need for high ethical standards. 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 –.
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. Public image – In order to gain public confidence and respect. Profit maximisation – Companies that emphasise on ethical conduct are successful in the long run. Management’s credibility with employees – Common goals and values are developed when employees feel that the management is ethical and genuine. The issue arises when there are differences in perception in different countries. A company that is ethically and socially responsible has a better public image.successful business. economic and ethical factors. considered unlawful. which enables them to offer goods and services at a lower price than their competitors. Most countries have similar ethical values. Employees feel proud to be a part of an organisation that is respected by the public. Thus. Generous compensations and effective business strategies do not always guarantee employee loyalty. Thus. it is perfectly acceptable to offer an official a gift. a business that is inspired by ethics is a profitable business. companies benefit from being ethical because they attract and retain good and loyal employees. Corruption is the abuse of public office for personal gain. These ethical issues create complications to Multi-National Companies (MNCs) while dealing with other countries for business. who develop these services or products. customer service. This section deals with the way individuals in different countries approach ethical issues. every division such as sales and marketing. Management’s credibility with employees and the public are intertwined. issues related to ethical values and traditions become more common. Two of the most prominent issues that managers in MNCs operating in foreign countries face are bribery and corruption and worker compensation. its employees. and the public. The issue arises when workers are exploited and are underpaid compared to the workers in the parent country who are . organisations are responsible to practice ethics and ensure mechanisms to prevent unlawful events. Hence. by propagating ethical values. The role of business ethics is evident from the conception of an idea to the sale of a product. Investors’ trust is just as important as public image for any business. and hence. or soliciting something of value for the purpose of influencing the action of officials in the discharge of their duties. People tend to favour the products and services of such organisations. Hence. a business organisation can save government resources and protect the society from exploitation. many companies have formulated well-designed codes of conduct to help their employees. With the rise in global firms. Ethical decisions take into account various social. but are practiced differently. A company that practices good ethical creates a positive impression among its stakeholders. finance. even though they lose money in the short run. in the Middle East. and their ethically acceptable behaviour. In Britain it is considered as an attempt to bribe the official. Worker compensation – Businesses invest in production facilities abroad because of the availability of low-cost labour. Better decision-making – Decisions made by an ethical management are in the best interests of the organisation. organisations must ascertain that they are honest in their transactions. accepting. For example. Costs of audit and investigation are lower in an ethical company. and accounting and taxation has to follow certain ethics. organisation ethics is equally significant. Bribery and corruption – Bribery can be defined as the act of offering. In an organisation. Protection of society – In the absence of proper enforcement.
Code of conduct for MNCs The code of conduct for MNCs refers to a set of rules that guides corporate behaviour. o Protect the environment. . and marketing practices all vary. Many companies use management techniques to encourage ethical behaviour at an organisational level. The techniques used while dealing overseas is an extension of the techniques used in the home country by the company. some countries prevent foreign firms from entering into its market space through protective legislation. 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 women’s apparel. And for some it is a policy driven decision to globalise and to take advantage by pressurising competitors. Protectionism on the long run results in inefficiency of local firms as it is inept towards competition from foreign firms and other technological advancements. o Minimise any negative impact on local economic policies. Taking into account the various conditions on which markets vary and depend. appropriate marketing strategies should be devised and adopted. but now this perception has immensely changed. certain models help in solving these ethical issues Culture is a major factor which influences marketing decisions and practices in a foreign country. o Transfer technology. as showcasing some aspects of women clothing is considered immodest and immoral. Q. it will have an effect on the firm. The disparity arises due to the differences in the regulatory standards in the two countries. therefore the firms planning to venture abroad must analyse all segments of the market in which they expect to compete. 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.5 Discuss the international marketing strategies. Some firms go abroad as the result of potential opportunities to exploit the market and to grow globally. customer preferences. These rules prescribe the duties and limitations of a manager. For example. Some of the ethical requirements for international companies are as follows: o Respect basic human rights. we believed that ethics is a prerogative of individuals. Like. o Employ labour practices that are not exploitative. The decision of a firm to compete internationally is strategic. 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.paid more for the same job. The top management must communicate the code of conduct to all members of the organisation along with their commitment in enforcing the code. Market sizes. o Protect the consumer. including its management and operations locally. When a manager of an international firm faces an ethical problem. o Maintain high standards of local political involvement. It also increases the living costs and protects inefficient domestic firms. The decision of a firm to compete in foreign markets has many reasons. Earlier.
attitudes. o Pursuing a global logic or imperative to harvest new markets and profits. Segmentation helps the firms to serve the markets in an improved way. demographic conditions. there can be other reasons like competition at home. personalities. Segmentation Firms that serve global markets can be segregated into several clusters based on their similarities. the decision to compete abroad is always a strategic down to business decision rather than simply a reaction. Likewise. Firms have a choice in marketing their products across markets. Product positioning is the process of creating a favourable image of the product against the competitor’s products. but the most common method of segmentation is on the basis of individual characteristics. In the process of developing an international marketing strategy. In order to succeed. o Exploiting product life cycle differences (technology). a warranty. and perishability. Many a times. o Globalising for defensive reasons. education and gender. the firms should position their product in the global market. o Following customers abroad (customer satisfaction). opinions. These service components are an integral part of the product and its positioning. tax structures. culture. income. Markets can be segmented into nine categories. psychographic. which include the behavioural. through which the firm . inseparability from consumption. Typically. products are composed of some service component like. values. firms opt for a strategy which involves customisation. lifestyles and so on. and distribution. Demographic segmentation considers the factors like age. Strategic reasons for global expansion are: o Diversifying markets that provide opportunistic global market development. Market positioning The next step in the marketing process is. Psychographic segmentation takes into account: beliefs. This is task is not easy. intangibility. economic trends. frequently even among different locations of the same firm). To a certain extent. 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. In global markets product positioning is categorised as high-tech or high–touch positioning. a firm should carefully look at their geographic expansion and global marketing strategy. The basis of behavioural segmentation is the general behavioural aspects of the customers. the firm may decide to do business in its homecountry (domestic operations) only or host-country (foreign country) only. comparative advantage. documentation. and the stage in the product life cycle. o Exploiting different economic growth rates. and demographic segmentations. 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.But. Each such cluster is termed as a segment. o Pursuing geographic diversification. o Pursuing potential abroad. 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.
and transfer pricing. polycentric. International advertising International advertising is usually associated with using the same brand name all over the world. making pricing decisions is entangled in difficulties as it involves trade barriers. market share. External factors include taxes. For example. For example. much of the design is identical or similar. Some common pricing objectives are: profit. and other charges.introduces a unique product in each country. In international markets. However. in most cases firms will go for some kind of adaptation. Governments usually discourage TPM since it is against transfer pricing. with the belief that the same product can be sold in different countries without significant changes. The approach taken by company towards pricing when operating in international markets are ethnocentric. and product quality. and longer distribution channels. tariffs. transfer pricing generally refers TPM. However. International pricing decisions Pricing is the process of ascertaining the value for the product or service that will be offered for sale. Before establishing the prices. · 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. the firm must know its target market well because when the firm is clear about the market it is serving. where transfer pricing is the act of pricing commodities or services. therefore cars have larger engines than the cars in Asia and Europe. in U.S. Transfer Pricing Manipulation (TPM) is used to overcome these reasons. then it can determine the price appropriately. and then again. survival. Many managers consider transfer pricing as non-market based. On the other hand. in common terminology. believing that tastes differ so much between countries that it is necessary to create a new product for each market. status quo. Here. . when moving a product between markets minor modifications are made to the product. Finally. market demand. fuel is relatively cheap. additional cost considerations. and geocentric. some of them are: · “Sticker” price changes –. multiple currencies. devaluation and revaluation. Intel microprocessors are the same irrespective of the country in which they are sold. nature of product or industry and competitive behaviour. The Arm’s Length pricing rule is used to establish the price to be charged to the subsidiary. transfer at cost and cost-plus pricing. standardisation proposes the marketing of one global product. The reason for transfer pricing may be internal or external. 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. The pricing policy must be consistent with the firms overall objectives. a firm can use different brand names for historic reasons. Internal transfer pricing include motivating managers and monitoring performance. which are sold between such related units. return on investment. Price can be defined by the following equation: The pricing decision enables us to change the price in many ways. Transfer pricing is determined in three ways: market based pricing.
and propagates certain values worldwide. values. culture. perception or interpretation of symbols and stimuli and level of literacy. there is no international phenomenon. The purpose of international advertising is to reach and communicate to target audiences in more than one country. Hence. The assembly of an attractive assortment of goods. The distribution services include: The purchase of goods. globalised firms use the same advertising agencies and centralise the advertising decisions and budgets. Whereas International or foreign marketing is the practice of marketing in a foreign country. while it is not totally aware of the policies and the market conditions of the foreign country. climate and so on of its home country. Selecting the distribution channel is very important for agents and distributors. The target audience differ from country to country in terms of the response towards humour or emotional appeals.The acquisition of local firms by global players has resulted in a number of local brands. In domestic marketing a firm has insight of the marketing practices. Whereas. Domestic vs. Sometimes. International marketing Domestic marketing refers to the practice of marketing within a firm’s home country. A firm may find it unfavourable to change those names as these local brands have their own distinctive market. It involves advertisers and advertising agencies that create ads and buy media in different countries. The stages that have led to achieve global marketing are: Domestic marketing – Firms manufacture and sell products within the country. and consumption patterns. local subsidiaries handle their budget. Promoting sale of goods to the customer. In international marketing. The physical movement of goods. Domestic marketing finds the "how" and "why" a product succeeds or fails within the firm’s home country and how the marketing activity affects the outcome. . Some companies directly perform the distribution service by contacting others whereas a few companies take help from other companies who perform the distribution services. In other cases. International promotion and distribution Distribution of goods from manufacturer to the end user is an important aspect of business. The distribution channel is also dependent on the way to manage and control the channel. International advertising is a business activity and not just a communication process. 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. Holding stocks. 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. This industry is growing worldwide. Companies have their own ways of distribution. 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 firm’s level. customer preferences. International advertising is also reckoned as a major force that mirrors both social values. the marketing is for the domestic operations of the firm in that country.
the number of countries in which the firm is doing business gets bigger than that in the earlier stage. The product will be considered as a local product by following this marketing approach. This approach is termed ‘regiocentric approach’. the company identifies the regions to which the company can deliver same product instead of producing different goods for different countries. 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’. the products are developed based on the company’s domestic market although the goods are exported to foreign countries. For example. Sri lanka and Pakistan. Export marketing – Firms start exporting products to other countries. Culture is a major factor which influences marketing decisions and practices in a foreign country. International marketing – Now. Firms start to sell products to various countries and the approach is ‘polycentric’. 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 women’s apparel. that is. a firm may decide to sell same products in India. This is achieved by analysing the requirements and the choice of the customers in those countries. 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. making different products for different countries. Few approaches that you can consider for an international marketing are: Advertise as a foreign product – By doing so. Multinational marketing – In this stage. assuming that the people living in this region have similar choice and at the same time offering different product for American countries. A firm that is successful internationally first obtains success locally. And hence. the product will be considered as genuine and original in some countries.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. Global marketing – Company operating in various countries opts for a common single product in order to achieve cost efficiencies. For example. Here. This approach is called ‘Geocentric approach’. There should never be a rigid marketing campaign. It also means recording of transactions in a standard manner that will show the financial position and performance of the organisation. Joint partnership with a local firm – finding a firm that has already established credibility will benefit a lot. This is a very basic stage of global marketing. The domestic financial management refers to managing financial services within the . as showcasing some aspects of women clothing is considered immodest and immoral. Q. The Financial Management can be categorised into domestic and international financial management. because there are differences between the target markets (that is domestic or international markets).
a better spot rate .country. It is considered to be the leading financial market in the world. commercial companies. the demand and supply of currency being traded and the amount to be dealt. But after the end of the Second World War. International trade gave way for the growth of international business. The firms of all types are now opting to operate their business and deploy their resources abroad. loans. Swap – Simultaneous sale and purchase of identical amounts of currency for different maturities. international stock listing. This phenomenon is also called as liberalisation. The International Financial Management (IFM) came to its existence when the countries all over the world started opening their doors for each other. Furthermore. trade. International financial management refers to managing finance and share between the countries. exchange and speculate foreign currency. the integration in terms of foreign activities has grown substantially. it is vital to manage the finance and business accounts appropriately. entrepreneurs capitalised the opportunity to step their foot to conduct business in different parts of the world. hedge funds. Next day – foreign exchange currency deals that take place on the next working day. The participant in a foreign exchange market will normally ask for a price. trade in goods. The main aim of international finance management is to maximise the organisation’s value that in turn will increase the impact on the wealth of the stockholders. central banks. A forward contract is a binding obligation to buy or sell a definite amount of foreign currency at the pre-agreed rate of exchange. “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. For a corporation to be successful. The advantage of spot dealing has resulted in a simplest way to deal with all foreign currency requirements. on or before a certain date. 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. The foreign exchange market is immense in size and survives to serve a number of functions ranging from the funding of cross-border investment. It is vital to realise that the foreign exchange is not a single exchange. The contributions of different financial innovations like currency derivative. The rise in significance and complexity of financial administration in a global environment creates a great challenge for financial managers. The spot rate that is intended to receive will be set by current market conditions. and multicurrency bonds have necessitated the accurate management of the flow of international funds through the study of international financial management. investment management firms and retail foreign exchange brokers and investors. 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. but is created from a global network of computers that connects the participants from all over the world. trade in services and currency speculation. The foreign exchange market consists of banks. In general. When the doors of liberalisation opened. It carries the greatest risk of exchange rate fluctuations due to lack of certainty of the rate until the deal is carried out.
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. It will permit gains if the markets move as per the expectations. 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. The main advantage from derivative hedging is the basket of currency available. 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. These will help to increase the funds of foreign currency from the cheapest sources. Often banks provide currency options which will ensure protection and flexibility. A forward market needs a more complex calculation. The decision must be made to book a foreign exchange contract with the bank whenever the foreign exchange risk is likely to occur. The derivatives can be hedged with other derivatives. For this base. 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. A currency option will prevent unfavourable exchange rate movements in the similar way as a forward contract does.can be received if the amount of dealing is high. 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. For example. but the likely problem to arise is the involvement of premium of particular kind. This is often referred to as ‘Economic’ foreign exchange and most difficult to protect a business. 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. currency options and currency swaps are usually traded. Hence. currency derivatives like the currency features. a currency option is often demonstrated as a forward contract that can be left if it is not followed. Figure 1 describes the examples of currency derivatives. 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. The spot deal will come to an end in two working days after the deal is struck. the spot market exposures can be enclosed with the currency derivatives. Foreign currency derivatives Currency derivative is defined as a financial contract in order to swap two currencies at a predestined rate. 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. The duration will be up to two years for a forward contract. . The premium involved might be a cash amount or it could also influence into the charge of the transaction. Managing the business becomes difficult if it depends on the selling or buying the currency in the spot market. In the foreign exchange market.
It also consists of set of rules that govern international scenario. The gold happened to be the only standard of value under the system.Figure 1: Example for Foreign Currency Derivatives Some of the risks associated with currency derivatives are: Credit risk takes place. 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. Market risk occurs due to adverse moves in the overall market. Thereby it can be operated successfully. International monetary systems The international monetary systems represent the set of rules that are agreed internationally along with its conventions. with addition to deferred payment. arising from the parties involved in a contract. The advantages of . Liquidity risks occur due to the requirement of available counterparties to take the other side of the trade. It was operating during the late 19th and early 20th centuries. The gold and gold bullion standards The gold standard was the first modern international system. supporting institutions which will facilitate the worldwide 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. Legal risks pertain to the counterparties of currency swaps that go into receivership while the swap is taking place. Operational risks are one of the biggest risks that occur in trading derivatives due to human error. the standard provided for the free circulation between nations of gold coins of standard specification. The global balance can be corrected by providing sufficient liquidity for the variations occurring in trade.
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 ’market’ is actually the telecommunications like among financial institutions around the globe and opens for business at any time. Many large companies opt to use euro rather than the dollar in bond trading with a goal to receive better exchange rates. International money markets – A money market can be conventionally defined as a market for accounts. The gold standard was suspended and the values of different currencies were determined in the market. Hence.this system depend in its stabilising influence. In this system. This system was also discarded in the 1930s. The sudden increase in the supply of gold may be due to the discovery of rich deposit. the International Monetary Fund (IMF) was created at the ‘Bretton Woods international Conference’ held in 1944. 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. The greater part of the worlds that deal in foreign currencies is still taking position in the cities where international financial activity is centred. With a view to maintain a stable exchange rate at the global level. The purpose of the foreign currency markets. The Euro was set up in financial market in 1999 as a replacement for the currencies. reversed their currencies with gold bullion and determined to buy and sell the bullion at a fixed cost. Any nation which exports more than its import would receive gold in payment of the balance. The drain on the US gold reserves continued up to the 1970s. the value of the currency is fixed by the nations with respect to some foreign currency but not with respect to gold. deposits or deposits that include maturities of one year or less. Later in 1971. Instead. Most of the nations fixed their currency to the US dollar funds in the United States. 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. This standard was substituted by the gold bullion standard during the 1920s. it became the second most commonly used currency after the dollar in the international market. at the same time the US dollar diminished its significance. The higher prices lead to the decreased demands for exports. Very recently the some of the members of Organisation of Petroleum Exporting Countries (OPEC) such as Saudi Arabia. Hence the purchase of goods and services is preceded by the purchase of currency. Iraq have opted to trade petroleum in Euro than in Dollar. The ‘Japanese yen’ and the ‘German Deutschmark’ strengthened and turned out to be increasingly important in international financial market. This is also termed as the Euro currency markets which constitute an . 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. which in turn will result in the increase of price abruptly. The gold-exchange system Trading was conducted internationally with respect to the gold-exchange standard following World War II. the gold convertibility was abandoned by the United States leaving the world without a single international monetary system. This means that there exists no central place where the trading can take place. international money markets. thereby the nations no longer minted gold coins. This in turn has resulted in the lowered value of domestic currency.
The firms enjoy the freedom to raise capital. It also comprises a separate market of their own. The majority of the deregulation that has differentiated government policy over the past 10 to 15 years. This has resulted greatly to the capacity of individuals on these markets to accomplish instantaneous arbitrage. The Euro currency market is a money market for depositing and borrowing money located outside the country where that money is officially permitted tender. The private placements. Euro currencies are bank deposits and loans existing outside any particular country. Also. 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. bonds and equities are included in the international security market. the capital market that flows in to the Euro markets. in addition to the performance of exchange or trading.enormous financial market that is beyond the influence and supervision of world financial and government authorities. 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. adding to the enthusiasm for moving further capital at faster rates. There are faster swings in the stock values and interest rates. fixed or floating interest rates and maturities varying from one month to thirty years in an international capital markets. debit. it is extremely simple to move the currencies and capital around the globe. Market upwings – The financial markets have become increasingly unstable over recent years. International capital markets – The international capital provides links among the capital markets of individual countries. . Gain in technology and transaction cost efficiency – The advancements in technology is not only taking place in the distribution of information.