Master of Business Administration- MBA Semester 4 MF0015 International Financial Management Assignment Set- 1

Q1. You are given the following information: Spot EUR/US: 0.7940/0.8007Spot USD/GBP:1.8215/1.8240 Three months swap: 25/35 Calculate three month EUR/USD rate. Ans:-1stMethod Forward points = ((Spot * (1 + (OCR rate * n/360))) / (1 + (BCR rate * n/360))) Spot OCR = Other Currency Rate BCR = Base Currency Rate Forward points = ((0.07940 * (1 + (0.018215 * 90/360))) / (1 + (0.08007 * 90/360))) 0.07940SWAP = -0.00120 Forward rate = 0.07940 - 0.00120 = 0.0782 Customer sells EUR 3 Mio against USD at 0.0782 at 3 month (0.07940 0.00120). Customer wants to Buy EUR 3 Mio against USD 3 months forward.

Q2. Distinguish between Eurobond and foreign bonds? What are the unique characteristics o f E u r o b o n d markets? A n s : - A E u r o b o n d is underwritten by an international syndicate of banks and other securities firms, and is sold exclusively in countries other than the country in whose currency the issue is denominated. For example, a bond issued by a U.S. corporation, denominated in U.S. dollars, but sold to investors in Europe and Japan (not to investors in the United States), would be a Eurobond. Eurobonds are issued by multinational corporations, large domestic corporations, sovereign governments, governmental enterprises, and international institutions. They are offered simultaneously in a number of different national capital markets, but not in the capital market of the country, or to residents of the country, in whose currency the bond is denominated. Almost all Eurobonds are in bearer form with call provisions and sinking funds. A foreign bond is underwritten by a syndicate composed of members from a single country, sold principally within that country, and denominated in the currency of that country. The issuer, however, is from another country. A bond issued by a Swedish corporation, denominated in dollars, and sold in the U.S. to U.S. investors by U.S. investment bankers, would be a foreign Bond. Foreign bonds have nicknames: foreign bonds sold in the U.S. are "Yankee bonds"; those sold in Japan are "Samurai bonds"; and foreign bonds sold in the United Kingdom are "Bulldogs."Figure 4 specifically reclassifies foreign bonds from a U.S. investor`s perspective.

F I G U R E 4 FOREIGN BONDS TO U.S. INVESTORS

Foreign currency bonds are issued by foreign governments and foreign corporations, denominated in their own currency. As with domestic bonds, such bonds are priced inversely to movements in the interest rate of the country in whose currency the issue is denominated. For example, the values of German bonds fall if German interest rates rise. In addition, values of bonds denominated in foreign currencies will fall (or rise) if the dollar appreciates (or depreciates) relative to the denominated currency. Indeed, investing in foreign currency bonds is really a play on the dollar. If the dollar and foreign interest rates fall, investors in foreign currency bonds could make a nice return. It should be pointed out, however, that if both the dollar and foreign interest rates rise, the investors will be hit with a double whammy. Characteristics of Eurobond markets 1. C u r r e n c y d e n o m i n a t i o n : The generic, plain vanilla Eurobond pays an annual fixed interest and has a long-term maturity. There are a number of different currencies in which Eurobonds are sold. The major currency denominations are the U.S. dollar, yen, and euro.(70 to 75 percent of Eurobonds are denominated in the U.S. dollar.) The central bank of a country can protect its currency from being used. Japan, for example, prohibited the yen from being used for Eurobond issues of its corporations until 1984.

2. N o n - r e g i s t e r e d : Eurobonds are usually issued in countries in which there is little regulation. As a result, many Eurobonds are unregistered, issued as bearer bonds. (Bearer form means that the bond is unregistered, there is no record to identify the owners, and these bonds are usually kept on deposit at depository institution). While this feature provides confidentiality, it has created some problems in countries such as the U.S., where regulations require that security owners be registered on the books of issuer 3. C r e d i t r i s k : Compared to domestic corporate bonds, Eurobonds have fewer protective covenants, making them an attractive financing instrument to corporations, but riskier to bond investors. Eurobonds differ in term of their default risk and are rated in terms of quality ratings. 4. M a t u r i t i e s : The maturities on Eurobonds vary. Many have intermediate terms (2 to 10years), referred to as Euro notes, and long terms (10-30 years), and called Eurobonds. There are also short-term Euro paper and Euro Mediumterm notes. 5. O t h e r f e a t u r e s : Like many securities issued today, Eurobonds often are sold with many innovative features. For example: a) Dual-currency Eurobonds Pay coupon interest in one currency and principal in another. b) Option currency Eurobond Offers investors a choice of currency. For instance, aster ling/Canadian dollar bond gives the holder the right to receive interest and principal in either currency. 1. A number of Eurobonds have special conversion features. One type of convertible Eurobond is a dual-currency bond that allows the holder to convert the bond into stock or another bond that is denominated in another currency. 2. A number of Eurobonds have special warrants attached to them. Some of the warrants sold with Eurobonds include those giving the holder the right to buy stock, additional bonds, currency, or gold.

Q.2 what is sub-prime lending? Explain the drivers of sub-prime lending? Explain briefly the different exchange rate regime that is prevalent today A n s : S u b p r i m e l e n d i n g is the practice of extending credit to borrowers with certain credit characteristics e.g. a FICO score of less than 620 that disqualify them from loans at the prime rate (hence the term sub-prime). Sub-prime lending covers different types of credit, including mortgages, auto loans, and credit cards. Since sub-prime borrowers often have poor or limited credit histories, they are typically perceived as riskier than prime borrowers. To compensate for this increased risk, lenders charge sub-prime borrowers a premium. For mortgages and other fixed-term loans, this is usually a higher interest rate; for credit cards, higher over-the-limit or late fees are also common. Despite the higher costs associated with sub-prime lending, it does give access to credit to people who might otherwise be denied. For this reason, sub-prime lending is a common first step toward credit repair; by maintaining a good payment record on their sub-prime loans, borrowers can establish their creditworthiness and eventually refinance their loans at lower, prime rates. Sub-prime lending became popular in the U.S. in the mid-1990s, with outstanding debt increasing from $33 billion in 1993 to $332 billion in 2003. As of December 2007, there was an estimated $1.3 trillion in sub-prime mortgages outstanding.20% of all mortgages originated in2006 were considered to be sub-prime, a rate unthinkable just ten years ago. This substantial increase is attributable to industry enthusiasm: banks and other lenders discovered that they could make hefty profits from origination fees, bundling mortgages into securities, and selling these securities to investors. These banks and lenders believed that the risks of sub-prime loans could be managed, a belief that was fed by constantly rising home prices and the perceived stability of mortgage-backed securities. However, while this logic may have held for a brief period, the gradual decline of home prices in 2006 led to the possibility of real losses. As home values declined, many borrowers realized that the value of their home was exceeded by the amount they owed on their mortgage. These borrowers began to default on their loans, which drove home prices down further and

ruined the value of mortgage-backed securities (forcing companies to take write downs and write-offs because the underlying assets behind the securities were now worth less). This downward cycle created a mortgage market meltdown. The practice of sub-prime lending has widespread ramifications for many companies, with direct impact being on lenders, financial institutions and home-building concerns. In the U.S. Housing Market, property values have plummeted as the market is flooded with homes but bereft of buyers. The crisis has also had a major impact on the economy at large, as lenders are hoarding cash or investing in stable assets like Treasury securities rather than lending money for business growth and consumer spending; this has led to an overall credit crunch in 2007. The sub-prime crisis has also affected the commercial real estate market, but not as significantly as the residential market as properties used for business purposes have retained their long-term value. The International Monetary Fund estimated that large U.S. and European banks lost more than$1 trillion on toxic assets and from bad loans from January 2007 to September 2009. These losses are expected to top $2.8 trillion from 200710. U.S. banks losses were forecast to hit$1 trillion and European bank losses will reach $1.6 trillion. The IMF estimated that U.S. banks were about 60 percent through their losses, but British and euro zone banks only 40 percent. Drivers of sub-prime lending Home price appreciation Home price appreciation seemed an unstoppable trend from the mid-1990s through to today. This "assumption" that real estate would maintain its value in almost all circumstances provided a comfort level to lenders that offset the risk associated with lending in the sub-prime market. Home prices appeared to be growing at annualized rates of 5-10% from the mid-90s forward. In the event of default, a very large percentage of losses could be recouped through foreclosure as the actual value of the underlying asset (the home) would have since appreciated. Lax lending standards

Outstanding mortgages and foreclosure starts in 1Q08, by loan type. The reduced rigor in lending standards can be seen as the product of many of the preceding themes. The increased acceptance of securitized products meant that lending institutions were less likely to actually hold on to the risk, thus reducing their incentive to maintain lending standards. Moreover, increasing appetite from investors not only fueled a boom in the lending industry, which had historically been capital constrained and thus unable to meet demand, but also led to increased investor demand for higher-yielding securities, which could only be created through the additional issuance of sub-prime loans. All of this was further enabled by the long-term home price appreciation trends and altered rating agency treatment, which seemed to indicate risk profiles were much lower than they actually were. As standards fell, lenders began to relax their requirements on key loan metrics. Loan-to-value ratios, an indicator of the amount of collateral backing loans, increased markedly, with many lenders even offering loans for 100% of the collateral value. More dangerously, some banks began lending to customers with little effort made to investigate their credit history or even income. Additionally, many of the largest sub-prime lenders in the recent boom were chartered by state, rather than federal, governments. States often have weaker regulations regarding lending practices and fewer resources with which to police lenders. This allowed banks relatively free rein to issue sub-prime mortgages to questionable borrowers. Adjustable-rate mortgages and interest rates Adjustable-rate mortgages (ARMs) became extremely popular in the U.S. mortgage market, particularly the sub-prime sector, toward the end of the 1990s and through the mid-2000s.Instead of having a fixed interest rate, ARMs feature a variable rate that is linked to current prevailing interest rates. In the recent sub-prime boom, lenders began heavily promoting ARMs as alternatives to traditional fixed-rate mortgages. Additionally, many lenders offered low introductory, or teaser, rates aimed at attracting new borrowers. These teaser rates attract add roves of sub-prime borrowers, who took out mortgages in record numbers. While ARMs can be beneficial for borrowers if prevailing interest rates fall after the loan origination, rising interest rates can substantially increase both loan rates and monthly payments. In the sub-prime bust, this is precisely what happened. The

target federal funds rate (FFR) bottomed out at 1.0% in 2003, but it began hiking steadily upward in 2004. As of mid-2007, the FFR stood at 5.25%, where it had remained for over one year. This 4.25%increase in interest rates over a three-year period left borrowers with steadily rising payments, which many found to be unaffordable. The expiration of teaser rates didnt help either; as these artificially low rates are replaced by rates linked to prevailing interest rates, sub-prime borrowers are seeing their monthly payments jump by as much as 50%, further driving the increasing number of delinquencies and defaults. Between September of 2007 and January 2009, however, the U.S. Federal Reserve slashed rates from 5.25% to 0-.25% in hopes of curbing losses. Though many sub-prime mortgages continue to reset from fixed to floating, rates have fallen so much that in many circumstances the fully indexed reset rate is below the pre-existing fixed rate; thus ,a boon for some sub-prime borrowers. The exchange rate is an important price in the economy and some governments like to control it, manage it or influence it. Others prefer to leave the exchange rate to be determined only by market forces. This decision is the choice of exchange rate regime. Many alternative regime sexist: Floating Exchange Rate (Flexible) Regimes: A flexible exchange rate system is one where the value of the currency is not officially fixed but varies according to the supply and demand for the currency in the foreign exchange market. In this system, currencies are allowed to: Appreciate when the currency becomes more valuable relative to others. Depreciate when the currency becomes less valuable relative to others. Fixed Exchange Rate Regimes: A Fixed exchange rate system is one where the value of the currency is set by official government policy. The exchange rate is determined by government actions designed to keep rates the same over time. The currencies are altered by the government:

Revaluation Government action to increase the value of domestic currency relative to others. Devaluation Government action to decrease the value of domestic currency. After the transition period of 1971-73, the major currencies started to float. Flexible exchange rates were declared acceptable to the IMF members. Gold was abandoned as an international reserve asset. Since 1973, most major exchange rates have been floating against each other. However, there are countries which have fixed exchange rate regimes.

Q4. Explain (a) Parallel Loans (b) Back to- Back loans.

A n s : - Parallel loan The fore runner of a swap; a method of raising capital in a foreign country to finance assets there without a cross-border movement of capital. For example, a $US loan would be made to an Australian company to finance its factory in the US; at the same time the US party which made the loan would borrow $A in Australia from the Australian company's parent to finance a project in Australia. Parallel loans enjoyed considerable popularity in the 1970s in the UK when they were frequently used to circumvent strict exchange controls. The Development of Parallel loans Parallel loans means of financing investment abroad in the face of exchange control regulations and are regarded as the forerunners of swaps. In fact, currency swaps is regarded as an outgrowth of the experience with parallel and back-to-back loans. Both of these attained prominence in the 1970s when the British government tried to discourage capital outflows by taxing pound sterling forex transactions and when their usefulness in maneuvering around comprehensive exchange controls was demonstrated. Parallel loans involve at least four parties and usually the parties consist of two pairs of affiliated companies. The parallel loans commonly consist of a loan by an affiliate of each company to an affiliate of the other company, with the loans being in different currencies. Example Assume that a parent firm in the Netherlands with a subsidiary in UK wants a year pound sterling loan. Also, assume a parent corporation in UK with a subsidiary in Netherlands wants to take a one year loan in guilders.

Each parent company has a higher credit rating in its home country than its subsidiary has in the country in which it is located. The situation here is ideal for a parallel loan arrangement. Each parent company could borrow locally at a favorable interest rate in their capital markets and relend to the others subsidiary. This procedure would allow the two subsidiaries to avoid forex transactions and the cost savings realized could be allocated to effectively lower each subsidiarys borrowing cost. Figure below shows the example. The solid line depicts the resulting exchange of principals. The flow of interest payments and the repayments of principal are depicted by the broken lines.

In this example there is a transfer of the Netherlands guider between the Netherlands parent and the Netherlands subsidiary of the British parent at

inception and a transfer back at the maturity date of the loan so that the Netherlands parent can repay the loan. Similarly, there is a transfer of the pound sterling principal from the British parent to the British subsidiary of Netherlands parent and a transfer back at the maturity date so that the British parent can retire its loan. During the term of the loans the Netherlands subsidiary of the British parent earns revenues in guilders so that it can pay the guilders debt service to the Netherlands lender. Similarly, the British subsidiary of Netherlands parent earns revenues in pound sterling so that it can pay the pound sterling debt service to the British parent to pay the British lender. Back-to-back loans Back-to-back loans are resemble parallel loans, but are simpler since they involve only 2parties instead of four. In a back-to-back loan the parties simultaneously lend to each other but in different currencies. This arrangement would tend to lower each firms cost of borrowing advantage which each firm has in its home country currency and also the fact the forex transactions would be avoided. Continuing with the earlier example, the British and Netherlands parent firms would lend directly to one another in a back-to-back loan. Below figure shows the details. The British parent would borrow pounds sterling in British capital market and relend the principal amount to the Netherlands parent. The Netherlands parent would borrow guilders in the Netherlands capital market and relend the principal sum to the British parent. Here it is assumed that the relending is done at a cost. When the debts mature, the principal sums would be re-exchanged so that the two parent firms can retire their debts in their national capital markets.

Annually, each parent firm would pay to the other the annual debt service in the currency needed by the recipient to make the payment in its national capital market. In the present example, the Netherlands parent would pay pounds sterling to the British parent and receive guilders from the British parent. The parent firms can, if they want, relend the foreign currency proceeds to a foreign subsidiary. Thus, the Netherlands parent may relend the pounds sterling to its British subsidiary. The basic difference between a parallel loan and a back-to-back loan is the party to whom the parent firm lends. Is a loan agreement between entities in two countries in which the currencies remain separate but the maturity dates remain fixed? The gross interest rates of the loan are separate as well and are set on the basis of the commercial rates in place when the signed. Most back-to-back loans come due within 10 years, due to their inherent risks. Initiated as a way of avoiding currency regulations, the practice had, by the mid-1990s, largely been replaced by currency swaps. Problems with Parallel and Back -to-back loans Both parallel and back-to back loans were time consuming and expensive to establish. Time had to be spent searching for a party whose needs would match exactly with the other party. This proved

to be expensive and difficult sometimes. Specifically, there were three major problems with the parallel and back -to back loans. First if one party defaulted the other party was not automatically released from its obligations under the loan agreement. Second, even though the two loans cancelled each other out , they were still considered on balance sheet items for accounting and regulatory purposes. Third, parallel loans were difficult to arrange because it was necessary to find two counter parties with exactly offsetting needs.

Q5. Explain double taxation avoidance agreement in detail. Ans:- Double Taxation Avoidance Agreements Double taxation relief Double taxation means taxation of same income of a person in more than one country. This results due to countries following different rules for income taxation. There are two main rules of income taxation (a) source of income rule and (b) residence rule. As per source of income rule, the income may be subject to tax in the country where the source of such income exists (i.e. where the business establishment is situated or where the asset/property is located) whether the income earner is a resident in that country or not. On the other hand, the income earner may be taxed on the basis of his residential

status in that country. For example if a person is resident of a country, he may have to pay tax on any income earned outside that country as well. Further some countries may follow a mixture of the above two rules. Thus problem of double taxation arises if a person is taxed in respect of any income on the basis of source of income rule in one country and on the basis of residence in another country or on the basis of mixture of above two rules. Relief against such hardship can be provided mainly in two ways: Bilateral relief Unilateral relief. Bilateral Relief The governments of two countries can enter into agreement to provide relief against double taxation, worked out on the basis of mutual agreement between the two concerned sovereign states. This may be called a scheme of bilateral relief as both concerned powers agree as to the basis of the relief to be granted by either of them. Unilateral Relief The above procedure for granting relief will not be sufficient to meet all cases. No country will be in a position to arrive at such agreement as envisaged above with all the countries of the world for all time. The hardship of the taxpayer, however, is a crippling one in all such cases. Some relief can be provided even in such cases by home country irrespective of whether the other country concerned has any agreement with India or has otherwise provided for any relief at all in respect of such double taxation. This relief is known as unilateral relief. Types of Agreements Agreements can be divided into two main categories: 1.Limited agreements 2.Comprehensive agreements L i m i t e d a g r e e m e n t s are generally entered into to avoid double taxation relating to income derived from operation of aircraft, ships, carriage of cargo and freight. C o m p r e h e n s i v e a g r e e m e n t s on the other hand, are very elaborate documents which lay down in detail how incomes under various heads may be dealt with. Countries with which no agreement exists [section 91] [unilateral

relief]If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise ,under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal. In other words, unilateral relief will be available, if the following conditions are satisfied: 1. The assessee in question must have been resident in the taxable territories. 2. That some income must have accrued or arisen to him outside the taxable territory during the previous year and it should also be received outside India. 3. In respect of that income, the assessee must have paid by deduction or otherwise tax under the law in force in the foreign country in question in which the income outside India has arisen. 4. There should be no reciprocal arrangement for relief or avoidance from double taxation with the country where income has accrued or arisen. India has agreements for avoidance of double taxation with over 60 countries. If all the above conditions are satisfied, such person shall be entitled to deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income At the average Indian rate of tax or the average rate of tax of the said country, whichever is the lower, or At the Indian rate of tax if both the rates are equal. Average rate of tax means the tax payable on total income divided by the total income. Steps for calculating relief under this section: Step I: Calculate tax on total income inclusive of the foreign income on which relief is available. Claim relief if available under sections 88, 88B and 88C. Step II: Calculate average rate of tax by dividing the tax computed under Step I with the

total income (inclusive of such foreign income). Step III: Calculate average rate of tax of the foreign country by dividing income-tax actually paid in the said country after deduction of all relief due but before deduction of any relief due in the said country in respect of double taxation by the whole amount of the income as assessed in the said country. Step IV: Claim the relief from the tax payable in India at the rate calculated at Step II or Step III whichever less is.

Q6. What do you mean by optimum capital structure? What factors affect cost of capital across nations? Ans :- The objective of capital structure management is to mix the permanent sources of funds in a manner that will maximize the companys common stock price. This will also minimize the firms composite cost of capital. This proper mix of fund sources is referred to as the optimal capital structure. Thus, for each firm, there is a combination of debt, equity and other forms (preferred stock) which maximizes the value of the firm while simultaneously minimizing the cost of capital. The financial manager is continuously trying to achieve an optimal proportion of debt and equity that will achieve this objective. Cost of Capital across Countries

Just like technological or resource differences, there exist differences in the cost of capital across countries. Such differences can be advantageous to MNCs in the following ways: 1. Increased competitive advantage results to the MNC as a result of using low cost capital obtained from international financial markets compared to domestic firms in the foreign country. This, in turn, results in lower costs that can then be translated into higher market shares. 2. MNCs have the ability to adjust international operations to capitalize on cost of capital differences among countries, something not possible for domestic firms. 3. Country differences in the use of debt or equity can be understood and capitalized on by MNCs. We now examine how the costs of each individual source of finance can differ across countries. Country differences in Cost of Debt Before tax cost of debt (Kd) = Rf + Risk Premium This is the prevailing risk free interest rate in the currency borrowed and the risk premium required by creditors. Thus the cost of debt in two countries may differ due to difference in the risk free rate or the risk premium. (a) Differences in risk free rate: Since the risk free rate is a function of supply and demand, any factors affecting the supply and demand will affect the risk free rate. These factors include: Tax laws: Incentives to save may influence the supply of savings and thus the interest rates. The corporate tax laws may also affect interest rates through effects on corporate demand for funds. Demographics: They affect the supply of savings available and the amount of loanable funds demanded depending on the culture and values of a given country. This may affect the interest rates in a country. Monetary policy: It affects interest rates through the supply of loanable funds. Thus a loose monetary policy results in lower interest rates if a low rate of inflation is maintained in the country. Economic conditions: A high expected rate of inflation results in the creditors expecting a high rate of interest which increases the risk free rate. (b) D i f f e r e n c e s i n r i s k p r e m i u m :

The risk premium on the debt must be large enough to compensate the creditors for the risk of default by the borrowers. The risk varies with the following: Economic conditions: Stable economic conditions result in a low risk of recession. Thus there is a lower probability of default. Relationships between creditors and corporations: If the relationships are close and the creditors would support the firm in case of financial distress, the risk of illiquidity of the firm is very low. Thus a lower risk premium. Government intervention: If the government is willing to intervene and rescue a firm, the risk of bankruptcy and thus, default is very low, resulting in a low risk premium. Degree of financial leverage: All other factors being the same, highly leveraged firms would have to pay a higher risk premium. . ..

Master of Business Administration- MBA Semester 4 MF0016 Treasury Management Assignment Set- 1

Q.1. Bring out in a table format the features of certificate of deposits and commercial papers. Ans: Certificate of deposit (CDs) I s a s h o r t - t e r m i n s t r u m e n t i s s u e d b y commercial banks and financial institutions? It is a document issued for the amount deposited in a bank for a specified period at a specified rate of interest. The concerned bank issues a receipt which is both marketable and transferable in the market. The receipts are in bearer or registered form. CDs are known as negotiable instruments and they are also known as Negotiable Certificates of Deposit. Basically they are a part of banks deposit; hence they are riskless in terms of payments and principal amount. CDs are interest-bearing, maturity-dated obligations of banks. CDs benefit both the banker and the investor. The bankers need not en cash the deposit before the maturity and the investor can sell the CDs in the secondary market before the maturity. This contributes to the liquidity and ready marketability for the instrument. CDs can be issued only by the schedule banks. It is issued at discount to face value. The discount rate depends on the market conditions. CDs are issued in the multiples of Rs. 25l a k h a n d t h e m i n i m u m s i z e o f t h e i s s u e i s R s . 1 c r o r e . T h e m a t u r i t y p e r i o d ranges from three months to one year. The introduction of CDs in Indian market was assessed in 1980. RBI appointed the Vaghul Working Group to study the Indian market for five years. Based on the suggestions of Vaghul committee; RBI formulated a scheme for the issue of CDs. As per the scheme, CDs can be issued only by the scheduled banks at a discount rate to face value. There is no restriction on the discount rate by the RBI. Commercial Papers (CPs)
Commercial Papers is a type of instrument in money market and it was introduced in Jan 1990. Commercial paper is a short-term unsecured promissory note issued by large corporations. They are issued in bearer forms on discount to face value. It issued by the corporations to raise funds for a short-term. The maturity period ranges from 30 days to one year. CPs is negotiable by endorsement and delivery. They are highly liquid as they have buy-back facility. The CPs is issued in denominations of Rs. 5lakh or multiples of Rs. 5lakh .Generally CPs is issued through banks, dealers or brokers. Sometimes they are issued directly to the investors. It is purchased mostly by the commercial banks, Non-Banking Finance Companies (NBFCs) and business organizations. CPs is issued in domestic as well as international financial markets. In international financial markets, they are known as Euro-commercial paper

Features of CDs in Indian market Schedule banks are eligible to issue CDs Maturity period varies from three months to one year Banks are not permitted to buy back their CDs before the maturity CDs are subjected to CRR and Statutory Liquidity Ratio (SLR) requirements. They are freely transferable by endorsement and delivery. They have no lock-in period.

Features of Commercial Papers CPs is an unsecured promissory note. CPs can be issued for a maturity period of 15 days to less than one year. CPs is issued in the denomination of Rs.5 lakhs. The minimum size of the issue is Rs. 25 lakhs. The ceiling amount of CPs should note exceed the working capital of the issuing company. The investors in CPs market are banks, individuals, business organizations and the corporate units registered in India and incorporated units. The interest rate of CPs depends on the prevailing interest rate on CPs market, forex market and call money market. The attractive rate of interest in any of these markets, affects the demand of CPs. The eligibility criteria for the companies to issue CPs are as follows: - The tangible worth of the issuing company should not be less than Rs.4.5 Crores. The company should have a minimum credit rating of P2 and A2obtained from Credit Rating Information Services of India (CRISIL) and Investment Information and Credit Rating Agency of India Limited.(ICRA ) respectively. The current ratio of the issuing

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

The NRIs can subscribe to CDs on repatriation basis

company should be 1.33:1. The issuing company has to be listed on stock exchange.

Q.2. what is capital account convertibility? What are the implications on implementing CAC? Ans: C a p i t a l A c c o u n t C o n v e r t i b i l i t y ( C A C ) r e f e r s t o r e l a x i n g c o n t r o l s o n c a p i t a l account transactions. It means freedom of currency conversion in terms of inflow and outflows with respect to capital account transaction. Most of the countries have liberalized their capital account by having an open account, but they do retain some regulations for influencing inward and outward capital flow. Due to global integration, both in trade and finance, CAC enhances growth and welfare of country. The perception of CAC has undergone some changes following the events of emerging market economies (EMEs) in Asia and Latin America, which went through currency and banking crises in 1990s. A few counties backtracked and re-imposed capital controls as part of crisis resolution. Crisis such as economic, social, human cost and even extensive presence of capital controls creates distortions, making CAC either ineffective or unsustainable. The cost and benefits from capital account liberalization is s t i l l b e i n g d e b a t e d a m o n g academics and policy makers. These developments have led to considerable caution being exercised by EMEs in opening up capital account. The Committee on Capital Account Convertibility (Chairman: Shri. S.S. Tara pore) which submitted its report in 1997 highlighted the benefits of a more open capital a c c o u n t b u t a t t h e same time cautioned that CAC could pose tremendous pressures on the financial system. India has cautiously opened its capital account and the state of capital control in I n d i a i s c o n s i d e r e d a s t h e m o s t liberalized it had been since late 1950s. The different ways of implementing CAC are as follows: Open the capital account for residents and non-residents. Initially open the inflow account and later liberalize the outflow account. Approach to simultaneously liberalize control of inflow and o u t f l o w account. Liberalization of current account transactions Current account transaction refers to converting domestic currencies freely into foreign currency and vice versa. The domestic currency is said to be convertible on the

current account. This is known as current account convertibility. The benefits of current account transaction are as follows: Current account convertibility enhances the increase of capital inflow in to the country. The confidence of a country will be enhanced when the country will manage its affairs without exchange restrictions which enhance the international confidence in the countries policies. Relaxing the exchange restrictions has improved the Balance of Payment (BOP) in the country. The exclusion of exchange restrictions tends to increase the capital inflows and t h u s p r o m o t e e f f i c i e n t a l l o c a t i o n o f i n f l o w s t o t h e g r o w t h o f t h e c o u n t r y s economy. RBI has introduced more relaxations in current account t r a n s a c t i o n s . T h e authorized dealers (ADs) have been permitted to provide exchange facilities to their customers up to specified limit without prior approval of the RBI. The liberalization rules regarding current account transaction of RBI under FEMA 1999 are as follows: Authorized Dealers of Category - I banks permits withdrawal of foreign exchange payments below USD 2million by the individ uals and approval of Ministry of Commerce and Industry, GOI is not mandatory. As per the Rule 4 of FEMA (current account transactions), it is mandatory to get approval of Ministry of Commerce and Industries for drawing foreign exchange remittances ,when the payment exceeds 5% on local sales and 8% increase on exports. Liberalized remittance scheme is a facility extended to the residents of India .Under this scheme; the residents can remit in any current or capital account up to USD 2 million per financial year. This facility is only for resident individuals. The resident individuals can purchase and hold immovable property or shares or debt instrument outside India, without the prior approval of RBI. Residents can open, maintain and hold foreign currency accounts with banks outside India. The liberalized remittance scheme is not applicable for the following:

- Any purpose under Schedule I and any item under Schedule II are prohibited for remittance under Foreign Exchange Management Rules 2000. - The resident individual cannot remit directly to Nepal, Bhutan and Pakistan. - There can be no remittances made directly or indirectly towards countries identified as non-co-operative countries and territories by the Financial Action Task Force (FATF). - The individuals and organizations identified and a d v i s e d b y t h e R B I a s significant risk of committing terrorism are not eligible for any remittances directly or indirectly. Liberalization of Exchange Earners Foreign Currency (EEFC) account EEFC account is a foreign currency account maintained by a resident individual with an authorized dealer in India. These accounts are non-interest bearing and they are used for hedging against foreign currency fluctuations by the business organizations which have exports and imports in foreign currency payments. Some of the liberalized measures in EEFC account are:RBI has permitted to earn interests on EEFC account if the o u t s t a n d i n g balance is USD 1 million. - Due to liberalization, all categories of foreign exchange earners can avail credit in this account based on their foreign exchange earnings. RBI decides on credit and debit limits. - If the reimbursement for an international credit card is provided in foreign exchange, it may be considered as a remittance through normal banking and the earnings can be credited to EEFC account. Other measures The other measure taken towards CAC is fuller capital account convertibility which is explained as follows: Fuller Capital Account Convertibility (FCAC) India s cautious approach towards capital account and a s s e s s i n g i t a s a liberalization process based on certain pre conditions has held India in good state. But with the changes that

have taken place over the last two decades, India felt the need to revisit the CAC and suggested a new map towards FCAC based on current situations. RBI, in consultation with the Government of India ( G O I ) appointed a committee on FCAC. S.S Tara pore was the chairman of c o m m i t t e e . The committee suggested several recommendations for t h e development of financial market in addition to addressing issues related to interaction of monetary policy and exchange rate management, regulation and s u p e r v i s i o n o f b a n k s , a n d t h e t i m i n g a n d s e q u e n c i n g o f c a p i t a l a c c o u n t liberalization measures. The objectives of FCAC are as follows: Economic growth - It facilitates economic growth t h r o u g h h i g h e r c a p i t a l investment .This will lead to growth in employment opportunities, infrastructure development and other areas. Improvement in financial sector - Huge capital flow into the system will lead to the improvement of financial sector which will enhance performance of the companies. This will enhance the liquidity in the system. Diversify the investment: The diversification of investment will help ordinary people, to invest in foreign countries without restriction. This will help them to diversify their portfolio. Risks involved in FCAC FCAC risk arises from inadequate preparedness before liberalization in domestic and external sector of policy consolidation, strengthening of regulation and development of financial markets. A transparent financial consolidation is necessary to reduce risk of the currency crisis. The risks are as follows: Market risks - Markets risks like interest rate and foreign exchange risks become more complicated when financial i n s t i t u t i o n s h a v e a c c e s s t o n e w markets or securities. Participation of foreign investors in domestic market changes the working of the domestic market. For example, banks have to quote rates and take open positions in new and more volatile currencies. Likewise, the change in foreign interest rate, affects the banks interest rate and liabilities.

Credit risk: It includes a new dimension with cross border transaction. Cross border transactions introduces country risks to domestic market participants, t h e r i s k a s s o c i a t e d w i t h e c o n o m i c , s o c i a l , a n d p o l i t i c a l e n v i r o n m e n t o f t h e borrowers country. Risk in derivatives transaction It is very important with FCAC as derivatives transaction are main tools used in hedging risks .It includes both market and credit risk. Liquidity risk: It includes risk in foreign currencies denominated assets and liabilities. Large flow of funds in different currencies will expose the banks to greater variations in their liquidity position and complicate their asset-liability management. Operational risk: The difference between domestic and foreign legal rights and obligations and their enforcements is important with FCAC. Operational risk may increase with FCAC. Limitations of FCAC The effort of making the Indian rupee fully convertible h a s a n u m b e r o f difficulties involved in it. The limitations are as follows: Indian industries lack competitive strength. Lack of emphasis on the quality of labor and management practices. Inadequate technology for industrial economy. Absence of prudent fiscal management. Lack of resilient exchange rate mechanism at work. Inadequate attention on tariff reduction and the rationalization of tax structure in the adjustment scheme. Inflationary pressure on the economy. Consequences of FCAC India might face the following consequences if it implements full convertibility without adequate reform measures:

It will have to face the danger of becoming vulnerable to free movement of foreign capital, which may further worsen the macro-economic imbalances. Though the banks and financial institutions are fully capitalized, they are not fully prepared to handle the intricacies of the fuller convertibility. Hence it is desirable to further strengthen their financial base. The prevailing high interest rates in the economy will attract capital inflow. This will result in rupee appreciation which will affect Indian exporters.

Q3. Distinguish between CRR and SLR Ans: Cash Reserve Ratio (CRR) Cash Reserve Ratio (CRR) is a countrys central bank regulation that sets the minimum reserves for banks to hold for their customer deposits and notes. These reserves are considered to meet the withdrawal demands of the customers. The reserves are in the form of authorized currency stored in a bank treasury (vault cash) or with the central bank. CRR is also called liquidity ratio as it controls money supply in the economy. CRR is occasionally used as a tool in monetary policies that influence the countrys economy. CRR in India is the amount of funds that a bank has to keep with the RBI which is the central bank of the country. If RBI decides to increase CRR, then the banks available cash drops. RBI practices this method, that is, increases CRR rate to drain out excessive money from banks. The CRR in the economy as declared by RBI in September 2010 is 6 percent. An organization that holds reserves in excess amount is said to hold excess reserves. The following are the effects of CRR on economy: CRR influences an economys money supply by affecting the potential of banks CRR influences inflation in an organization CRR stimulates higher economic activity by influencing the liquidity

Statutory Liquidity Ratio Statutory Liquidity Ratio (SLR) is the percentage of total deposits that banks have to invest in government bonds and other approved securities. It means the percentage of demand and time maturities that banks need to have informs of cash, gold and securities like Government Securities (G-Secs). As gold and government securities are highly liquid and safe assets they are included along with cash. In India, RBI determines the percentage of SLR. There are some statutory requirements for placing the money in the government bonds. After following the requirements, the RBI arranges the level of SLR. The maximum limit of SLR is 40 percent and minimum limit of SLR is 25 percent. The RBI increases the SLR to control inflation; extract liquidity in the market and protects customers money. Increase in SLR also limits the banks leverage position to drive more money into the economy. If any Indian bank fails to maintain the required level of SLR, then it is penalized by RBI. The nonpayer bank pays an interest as penalty which is above the actual bank rate. The main objectives for maintaining SLR are the following: By changing the SLR level, the RBI increases or decreases banks credit expansion Ensures the comfort of commercial banks Forces the commercial banks to invest in government securities like government bonds

Q.4 Explain various sources of interest rate risk?

Ans: The interest rate risk adversely affects the organizations financial situation. It p o s e s s i g n i f i c a n t t h r e a t t o t h e i n c o m e s a n d c a p i t a l i n v e s t m e n t s o f t h e organization. The changes o c c u r r i n g i n i n t e r e s t r a t e a f f e c t s t h e v a l u e o f underlying assets of the organization. It changes the price values of interest b e a r i n g asset and liability based on the magnitude level of f l u c t u a t i o n s i n interest rates. We shall discuss some of the sources of interest rate risk in the following subsections. Yield curve risk The yield refers to the relationship between short term and long term interest rates. The yield curve risk occurs due to the yield curve fluctuations which affect the organizations income and economic values of underlying assets. The short term interest rates are lower than long term interest rates and hence the occurring fluctuation exposes the organization to maturity gap of interest rate risk. The variations in movements of interest rates changes when the yield curve of a market flattens or steepens in the interest rate cycle. The yield curve slopes upwards when the short term interest rates are lower than the long term interest rates. This yield curve is known as normal yield curve. The yield curve flattens when the short term interest rates increases across the long term interest rates. This occurs during the transition of the normal yield curve to an inverted curve. It is called as flat curve. The inverted y i e l d c u r v e r e f e r s t o t h e e c o n o m i c r e c e s s i o n p e r i o d . T h e r e f o r e t h e m a r k e t status overviews the yield curve of long term interest rate as decline in the long term fixed income of the organization. The effects of recession impose negative impacts to the organization hence they must concentrate on diversifying the investment portfolio.

Figure 1 depicts the normal yield curve

Figure 1: Normal Yield Curve Figure 2 depicts the inverted yield curve

Figure 2: Inverted Yield Curve The yield curve has major impacts on the consumers, equity and fixed income investors. The fixed rate loans will be encou raged when the short term rates exceeds the long term rates. Hence the consumers who invest in financing properties experience higher mortgage payments. The fixed income investors a r e b e n e f i t e d w i t h b e t t e r r e t u r n s w i t h s h o r t t e r m i n v e s t m e n t s d u e t o t h e elimination of risk premium for long term investments. During the phase of i n v e r t e d y i e l d curve the margins of the profits decline such that t h e organization at short term rates borrow cash and lend it at long term rates to gain profits.

Basis risk Basis risk occurs due to the changes in relationship between the various financial markets or financial instruments. The d i f f e r e n t m a r k e t r a t e s o f financial instruments differ with time and amounts. In the banking organization basis risk occurs due to the differences in the prime rate and offering rates on money market deposits, saving accounts. The changes of interest rates can give rise to unexpected changes of asset and liability cash flows and earnings. For example - an organization holds large untraded stocks. If the company tries to sell those stocks in wholesale, it experiences liquidity risk because the selling prices may be depressed in the market. Hence to overcome this issue, the company enters into futures contract with stock index. This r e d u c e s t h e liquidity risk but increases the basis risk due to the differences between the selling and stock index prices. The basis risk affects the profits of an organization by s t r i k i n g t h e c a s h positions. The basis risk changes the s t o r a b l e c o m m o d i t i e s b a s e d o n t h e changes of the storage costs over a period of time. Optionality risk Optionality risk arises with various option instruments of banks like assets, liabilities. It occurs during the process of altering the banks instruments levels of cash flows by banks customers or by bank itself. The option allows the option holder to buy or sell financial instruments. It usually results in a risk or rewards to the bank. The option holder experiences limited downside risk (paid amount) and unlimited upside reward whereas the option seller has unlimited risk and limited upside reward. The bank faces losses during the sold position option to its customers. There are chances of losses in banks capital value due to unfavorable interest rate m o v e m e n t s s u c h t h a t i t e x c e e d s t h e p r o f i t s t h a t a b a n k g a i n s , d u r i n g t h e favorable movements. There for it has more downside exposure than upside reward. The options are traded in banks with stand-alone instruments such as over the counter (OTC), exchange traded options, bond loans and so on. The stand-alone instruments are explicitly priced and are not linked with other bank products. Most of the banking organizations allow prepayment option

of commercial loans which includes the prepayment process without any penalties. Hence during the decline of rates the customers will perform prepaying loan process which shortens the banks asset maturities while the bank desires to extend it. Repricing risk Repricing risk arises due to the differences between the timing of rate changes and cash flows occurring in pricing and maturity of banks instruments such as a s s e t s , l i a b i l i t i e s a n d o f f b a l a n c e s h e e t s . I t i s m e a s u r e d b y c o m p a r i n g t h e liability volume with asset volume that reprice within specified period of time. T h e r e p r i s i n g r i s k i n c r e a s e s t h e e a r n i n g s o f t h e b a n k s . L i a b i l i t y s e n s i t i v i t y occurs in banking organizations since repricing asset maturities are longer than t h e repricing liability maturities. The income of the liability s e n s i t i v e b a n k increases during the fall of interest rates and declines when the interest rate increases. Inversely, the asset sensitive bank benefits from rise in rates and detriments with fall in rates. Repricing risk affects the banks earnings performance. Since the banks focus on short term repricing imbalances are initiated to implement increase interest rate risk by extending maturities to improve profits. The banking organizations must consider long term imbalances during the repricing risk evaluation. If the g a u g i n g o f l o n g t e r m r e p r i c i n g i s i m p r o p e r , t h e r e a r e c h a n c e s o f b a n k experiencing variations in interest rate movements of future earnings. Embedded option risk The embedded option refers to other option securities such as bonds, financial i n s t r u m e n t s . T h e e m b e d d e d o p t i o n i s a p a r t o f a n o t h e r instrument which cannot be separated. The callable e m b e d d e d o p t i o n b o n d c o n s i s t s o f h o l d (option free bond) option and embedded call option. The value of the bond changes according to the changes occurring in interest rates of embedded options values. The price of callable bond is equal to the price of hold option bond minus price of call option bond. The decline in interest rates increases the callable option price bond.

Figure 3 depicts the value of embedded call option varying with respect to changes in interest rates.

Figure 3: Value of Embedded Call Option The embedded putable bond consists of option free bond and embedded put option. The price of putable bond is equal to price of option bond plus price of embedded put option. Figure 4 depicts the value of embedded put option which is obtained by the changes in interest rates.

Figure 4: Value of Embedded Put Option The organizations must handle the options effectively such that the various types of bonds under embedded option are exposed to low level of

risks. During the selling process of financial instruments there are chances of exposure to significant risks since the holding options are explicit and embedded which p r o v i d e s a d v a n t a g e t o h o l d e r a n d d i s a d v a n t a g e t o s e l l e r . T h e e x c e e d i n g number of options can implicate leverage magnifying the positive or negative influences of financial options positions in the organization.

Q.5. Describe the three approaches to determine VaR. Ans: Approaches to Compute VaR In most of the organizations including financial and non-financial sectors, VaR h a s b e c o m e a n e s t a b l i s h e d r i s k e x p o s u r e m e a s u r e m e n t t o o l . M u l t i p l e approaches are used to compute VaR and they have numerous variations. The m e a s u r e o f V a R c a n b e c a l c u l a t e d a n a l y t i c a l l y t h r o u g h a s s u m p t i o n s a b o u t return distributions in market risks, and the variances across these risks. In spite of the variations in different approaches to compute VaR, the three basic approaches used to calculate VaR are: Variance covariance method Simulation approaches Extreme value theory Variance covariance method Variance covariance method is an approach that has the a d v a n t a g e o f simplicity but it is limited by the difficulties related with derived probability distributions. As VaR measures the probability of loss going beyond a specific amount in a particular time period, it should be moderately simple to calculate if we can derive a probability distribution of potential values. The method of mapping equity positions through beta is often used in this approach as it is a very crucial stage in computing VaR. But it is simplistic as it neglects the following factors while calculating VaR for nonlinear positions:

The relationship between the underlying asset price and the potential value of the component of a portfolio is nonlinear. The price of the components is also exposed to risk factors like delay in time and the expected volatility of the underlying assets returns. If back testing, a method which is discussed later in this unit indicates that VaR estimations are not accurate, the risk manager should try to analyze whether to change methodology, improve the mapping process, or implement both. Risk metrics contribution Risks metrics contribution has two major basic contributions. They are making variance and covariance method freely available to everyone, and providing e a s y a c c e s s t o c o m p u t e t h e V a R l o g i c a l l y f o r a p o r t f o l i o . T h e f o l l o w i n g assumptions underlying the computations of VaR are described by publications by J. P. Morgan in 1996: Returns may not distribute themselves normally and the outliers are very common. It is assumed that the return d i v i d e d b y t h e f o r e c a s t e d s t a n d a r d deviation is normally distributed. The attention on the standardized returns indicates that we should focus on the size relative to the standard deviation rather than the size of the return. The focus on normal standardized returns attains more exposure of VaR estimation to the frequent out liers risks than that could be assumed with a normal distribution. The risk metrics approach also covers standard normal and normal mixture distributions. ARCH and GARCH model To generate more accurate variance covariance values in VaR estimations, few recommended improving the sampling methods and data innovations. Others suggested that arithmetical innovations in existing data can bring better accuracy. R F Engle, an American economist, suggested the following two variants which provide better forecasts of variance and better estimations of VaR: Autoregressive Conditional Heteroskedasticity (ARCH) model the basic idea of ARCH is that the error terms conditional variance at time (t) depends on the squared error term (t-1). ARCH is crucially applied in the following areas:

- The shock effects on the variance of stock market returns. - Effects of increase in the variance of excess returns of bonds on risk premiums. Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model This model was introduced by Taylor (1986) and Schwert (1989). It is described by asymmetric response of current volatility to positive and negative lagged errors. Simulation approaches In this approach, we estimate VaR by assum ing the distribution of basic risk f a c t o r s o r t a r g e t i n g a s s e t r e t u r n s , e x t r a c t i n g a s a m p l e f r o m t h e j o i n t distribution and then recalculating the portfolio of assets. Here, the revaluation of VaR of each asset is computed as per the value of each set of ri sk factors. They recalculate the portfolio with a simple approach that is based on partial derivatives. Analyzing the assumptions based on marginal distributions and dependence structure among various benchmark assets is relevant. The three methods of simulation approaches are as follows: Historical simulation It is the most popular among simulation approaches. It represents the simplest way to evaluate VaR for many portfolios. This approach estimates VaR by creating imaginary returns of that portfolio based on time series. These returns are gained by applying historical data on the portfolio and evaluating the changes occurred in each period. Hybrid model In this method, portfolio returns are categorized based on historical stimulation in decreasing order. Then, the manager would evaluate the gathered weights of portfolio returns. VaR is detected by t h e v a l u e f o r which the total weight would be equal to the aspired confidence level. This approach has both the advan tages of risk metrics contribution and historical simulation. Monte Carlo simulation : This method is based on using r a n d o m d a t a a n d probability to gain an approximate solution to an issue in lesser time when compared to the formal techniques. It depends on the assumption that more simulations provide higher level

of accuracy. Various Monte Carlo methods are i n t r o d u c e d a s a n a t t e m p t t o m i n i m i z e t h e a p p r o x i m a t i o n e r r o r . T h e f o u r methods of Monte Carlo simulation are as follows: - Crude Monte Carlo: This method concludes the confidence intervals of your method and the accuracy of the answer. - Acceptance Rejection Monte Carlo: This evaluation provides a less accurate approximation when compared to Crude Monte Carlo method. - Stratified sampling: This technique divides the interval into subintervals and then performs Crude Monte Carlo method on each interval.- Importance sampling: This method uses more samples on more important functional areas. It achieves good approximation on the important functional areas which has greater impact on the overall approximation value and reduces variance. Extreme value theory Extreme value theory is used for measuring extreme risks. It concentrates only on the samples of returns data carrying information about extreme behavior. The sample of non-overlapping returns is categorized into n blocks in each block. A series of maxima and minima are generated by extracting the r e s p e c t i v e l a r g e s t r i s e a n d f a l l i n r e t u r n s f r o m e a c h b l o c k . A G e n e r a l i z e d Extreme Value (GEV) or Generalized Pareto (GP) distributions is used to one of these series through method of moments to evaluate the tail index parameter. This parameter illustrates the way in which the extreme events in the data can occur. The probability of occurrence of an extreme event is estimated from the VaR value for a given probability when the tail index is available. Extreme value theory provides a significant set of techniques to quantify the boundaries between different loss classes. It also delivers a scientific language for translating management guidelines on the boundaries into actual numbers .Extreme value theory generates methods for quantifying events and their into actual numbers. E x t r e m e v a l u e t h e o r y generates methods for quantifying events and their Consequences in a statistically optimal way. It also helps in the patterning of d e f a u l t p r o b a b i l i t i e s a n d t h e e v a l u a t i o n o f d i v e r g e n c e f a c t o r s i n t h e management of bond portfolios. I t h a s developed as one of the most important statistical fields for a p p l i e d sciences and is widely used in many other subjects. This modeling

is applied in the fields of management strategy, thermodynamics of earthquakes, memory cell failure and bio-medical data processing. Q.6. what is liquidity gap and detail the assumptions of it? Ans: A liquidity gap is the difference between the due balances of assets and liabilities over time. At any point of time, a positive gap between assets and liabilities is equivalent to shortage of cash. The marginal gap refers to the difference between the changes of assets and liabilities over time. A positive marginal gap means that the change in the values of assets exceeds that of liabilities. The gap profile changes as and when new assets and liabilities are added. The gap pr ofile i s represented either in the form of tables or charts. All the assets and liabilities a r e a c c o u n t e d in liquidity gap report and it is dependent on the dates o f maturity and the actual date. Alternative scenarios Alternative scenario method is used t o calculate the adequate liquidity in banks. Depending on the behavior of cash flow the a l t e r n a t i v e s c e n a r i o calculates banks liquidity in different conditions. There are three scenarios for a bank that provides useful benchmarks. They are: Going concern Bank specific crisis General market crisis A bank should try to account for any major liquidity c h a n g e s ( p o s i t i v e o r negative) that could occur in these scenarios. Going concern/general market conditions The going concern/general market conditions scenario is helpful for banks in establishing a standard for the normal business behavior. Banks use general m a r k e t c o n d i t i o n s t o h a n d l e t h e d e p o s i t a n d o t h e r d e b t s . W i t h t h e h e l p o f general market conditions the banks avoid the impact of temporary constraints and manage their NFRs. Due to

this concern, the banks never face a very large need of cash to be paid on any given day. Bank specific crisis The bank specific crises are liquidity crises for individual ban ks. The crises remain restricted to the banks and provide a sort of worst-case benchmark. The main idea in bank specific crisis is that, the banks liabilities cannot be replaced or rolled over. The banks must pay the liabilities at the time of maturity. If a bank can survive these types of worst cases, then the bank can survive any kind of small problems. General market crisis The general market crises are the ones under which liquidity affects every bank in more than one market. Some banks might think tha t the nations Central bank would ensure that the key markets would continue to function in some form. For bank management, the scenario represents a second type of "worst-case". While surveying the liquidity profile of entire banking sector, the Central bank might find this scenario to be of particular interest. The combined results will suggest the size of the total liquidity buffer in the banking system. The result also suggests the likely distribution of liquidity problems among large institutions. A bank needs to assign the time for cash flow for each category of asset. The decision about the exact time and size of cash flows is an essential part of the construction of the maturity ladder under every situation. Assumptions in preparation of gap report in terms of assets, liabilities and off balance sheet items Since the future liquidity position of a firm cannot always be predicted based on the factors, assumptions play an important role in determining the continuing due to the rapidly changing banking markets. But the number of assumptions to be made should be limited. The assumptions can be made based on three aspects. They are assets, liabilities, and off-balance sheet assets. Assets Assets are nothing but any item of economic value owned by an individual or corporation. Assumptions regarding a banks future stock of assets include

their possible marketability and use an asset as a guarantee of existing assets which could increase flow of cash and others. To determine the marketability of an asset, the method segregates the assets into three categories according to their degree of relative liquidity: The highly liquid group of assets consists of components such as interbank l o a n s , c a s h a n d s e c u r i t i e s . S o m e o f t h e a s s e t s m i g h t instantaneously be converted into cash at existing market v a l u e s u n d e r a l m o s t a n y s i t u a t i o n whereas others, such as interbank loans might lose liquidity in a common crisis. A less liquid group of assets consists of bank's saleable loan p o r t f o l i o . T h e assignment here is to develop assumptions about a reasonable plan for the clearance of a bank's assets. Some assets, while marketable, might be viewed as unsalable within the time frame of the liquidity analysis. The least liquid group of assets consist of basically unmarketable assets such as loans that are not capable of being readily sold, b a n k p r e m i s e s a n d investments in subsidiaries. Because of the difference in the banks internal asset -liability management, different b a n k s c a n a l l o t t h e s a m e a s s e t s t o d i f f e r e n t g r o u p s o n m a t u r i t y ladder. While categorizing the assets, banks should take care of the effects on the assets liquidity under the various conditions. Under normal conditions, there may be assets which are much liquid then during a time of crisis. Therefore a bank may classify the assets according to the type of scenario it is forecasting. Liabilities To check the cash flows occurring due to a bank's liabilities, a bank should first examine the behavior of its liabilities under normal business situations. This would include forming: The level of roll-overs of deposits and other liabilities remain normal.

The actual maturity of deposits with non -contractual m a t u r i t i e s , s u c h a s demand deposits and others; the normal growth in new deposit accounts. While examining the cash flow arising from a bank's liabilities during the two crisis scenario, a bank would look at four basic q u e s t i o n s . T h e f i r s t t w o questions represent the proceedings in the flow of cash that tend to reduce the cash outflows planned directly from contractual maturities. The four questions are as follows: What are the different sources of funding that are likely to stay with a bank under any situation, and can the count of these sources be increased? Other than the liabilities identified from this step, a bank's capital and term liabilities that are not maturing within the prospect of the liquidity analysis provide a liquidity buffer. The total liabilities identified in the first category may be assumed to stay with the bank even when its a worst scenario. Some core deposits generally remain with a bank because retail and small scale industry depositors may rely on the public-sector security net to shield them from occurring loss, or because the cost of changing banks, especially for some business services that include transactions accounts, is unaffordable in the very short term. What are the sources of funding that can be estimated to run off gradually if problems occur, and at what rate? Is deposit pricing a way for controlling the rate of runoff? The second category consists of liabilities that have chances of staying back with the bank during the period of slight difficulties and can be used during crisis. Liabilities, includes core deposits that are not already included in the first category. In some countries, other than core deposits, some of the interbank deposits and government funding remains with the bank even though they are c o n s i d e r e d v o l a t i l e . f o r t h e s e k i n d s o f c a s h f l o w s a b a n k ' s v e r y o w n p a s t experience related to liabilities and the experiences of other such firms with similar problems may come handy. And help in creating a time table. Which maturing liabilities can be estimated to run off i n s t a n t l y a t t h e f i r s t warning of trouble?

The third category consists of the maturing liabilities that remained, including some without contractual maturities, such as wholesale deposits. Under each c a s e , t h i s a p p r o a c h a d o p t s a c o n s e r v a t i v e s t a n d a n d a s s u m e s t h a t t h e s e remaining liabilities will be paid back at as early as possible before the maturity date, especially when there is high crisis, as such money may flow to government securities and other safe refuges. Factors such as diversification and relationship building are considered important during the evaluation of the degree of the outflow of funds and a bank's capacity to replace funds. Nevertheless, in a general market c r i s i s , sometimes high scale firms may find that they receive larger than the usually got wholesale deposit inflows, even though there are no cash inflows existing for other firms in the market. Does the bank have a reliable back-up facility? For example, small banks in local areas may also have credit lines that they can bring down to offset cash discharges. These facilities are rarely found in larger b a n k s b u t h o w e v e r i t d e p e n d s o n t h e a s s u m p t i o n s m a d e o n t h e b a n k s liabilities. Such facilities usually need to undergo many changes but only to a limit, especially in a bank specific crisis. Off balance sheet item A bank should also examine the availability of sufficient cash flows from its off balance sheet activities (other than the loan commitments already considered), even if they are not a portion of the banks recent liquidity analysis. In addition, the Contingent liabilities, such as letters of credit and financial guarantees, represent potentially significant cash outflow for a bank, but are usually not dependent on a bank's condition. A bank may be able to create a "normal" level of out flow of cash on a regulatory basis, and then estimate the possibility a raise in these flows during periods of stress. However, a general market crisis may generate a considerable increase in the total invocation of l e t t e r s o f credit because of an increase in defaults and liquidations in t h e market. Other possible sources of cash outflows are swaps, written Over-TheCounter ( O T C ) o p t i o n s , a n d f o r w a r d f o r e i g n e x c h a n g e r a t e c o n t r a c t s . F o r i n s t a n c e , consider that a bank has a large swap book; it would then want to study the circumstances under which it

could become a net payer, and whether or not the total net pay-out is significant. Consider another situation wherein a bank acts as a swap market-maker, with a possibility that in a bank-specific or general market crisis, customers with in-the-money swaps (or a net in-the-money swap position) would try to reduce their credit exposure to the bank by requesting the bank to buy the swaps back. Similarly, a bank would like to review its written OTC options book and any warrants that are due, along with hedges if any against these positions, since certain types of crises sometimes arouse an increase in early exercises or requests that the banks should buy the offer back. These activities could result i n a n unexpected cash loss, if hedges can neither be quickly l i q u i d a t e d t o generate cash nor provide insufficient cash. Other assumptions Until now the discussion was centered on the assumption about the behavior of the specific instrument under different scenarios. At the time of looking the components exclusively, there might be some of the factors that might have a major impact on the cash flows. The need for liquidity arises from business activities. The b a n k s t o o n e e d excess funds to support extra operations. For example, the majority of the banks provide clearing services to financial institutions and correspondent banks. These institutions generate a major sum of cash inflow and cash outflows and unpredicted variations in these services can reduce banks funds to a large extent. The other expenses such as rent and salary however are not g i v e n m u c h importance in the analysis of the banks liquidity. But they can be sources of cash outflows in some cases.

MBA Semester 4 MF 0017-Merchant Banking and Financial Services Assignment Set -1

Ques:1.Discuss the role of custodian of shares. The SEBI regulations prescribe the roles and responsibilities of the custodians. According to SEBI the roles and responsibilities of the custodians are to: Administrate and protect the assets of the clients. Open a separate custody account and deposit account in the name of each client Record assets Conduct registration of securities Segregate securities and cash belonging of each client from others including custodian himself. Take adequate insurance of risks Maintain records manually or in machine readable form. State clearly the method and system of receiving instructions from the client regarding collection, receipt, reporting and delivery of securities. Conduct verification of securities and to follow the stated control mechanism Mention specifically the fees charged in the agreement Conduct audit annually.

The custodian should have an adequate internal control system to prevent the manipulation of records and documents, which includes audit for securities and entitlements arising from securities, and held on behalf of the clients To monitor the compliance to the SEBI Act, every custodian of securities appoints a compliance officer. The SEBI can ask for any information with respect to any matter relating to the activities of the custodian. The SEBI is authorized to conduct inspection or investigation of accounts, documents or records of the custodians to ensure that the provision of the SEBI and regulation are followed. In case of default, the SEBI can suspend or cancel registration of a custodian. Every registered custodian must follow the code of conduct prescribed by SEBI. The following are the code of conduct prescribed by SEBI:

Integrity- the custodian of securities must maintain high standards of integrity and professionalism while discharging duties. Prompt distribution- The custodian of securities must be prompt in distributing interests and dividends collected by him, on behalf of his clients on the securities held in custody. Infrastructure- the custodian of securities must establish and maintain suitable infrastructure to discharge custodial services to the satisfaction of the clients. The operating procedures and systems of the custodian of securities need to be well documented. Accountability- The custodian of securities is responsible for the movement of securities. The movement of securities can be from custody account, deposit and withdrawal of cash from the clients account. Whenever demanded by SEBI or the client, the custodian of securities must provide the complete audit trial. Confidentiality- The custodian of securities has to maintain confidentiality regarding he client. Precautions- The custodian of securities must take necessary precaution to ensure that continuity in custodial records is not lost or destroyed. To maintain sufficient backup records, the custodial records are kept electronically. Records- The custodian of securities must create and maintain records of securities held in custody appropriately. This must be done to locate securities or obtain duplicate documents easily if the original records are lost due to any reason. Cooperation- The custodian of securities must cooperate with other custodial entities and depositories which are necessary for the conduct of business, especially in the areas of inter custodial settlements and transfer of securities and funds. Diligence- The custodian of securities must exercise diligence in administration and safekeeping the clients assets which are in his custody.

2. What are the provisions for prevention of fraudulent and unfair trade practices by SEBI regulations? Prohibitions of Fraudulent and Unfair Trade Practices Relating to the Securities The SEBI regulations, 2003 authorizes SEBI to investigate into cases of market fraudulent and unfair trade practices, the regulation prohibit market manipulation, misleading statements to increase sale or purchase of securities, unfair trade practices relating to securities. The SEBI can conduct investigation by an investigating officer regarding conduct and affairs of any person dealing, buying and selling securities. The investigating officer prepares a report based on this information. The SEBI can take action for cancellation or suspension of registration of an intermediary base on this report. Fraud is any act, expression or concealment committed by a person of his agent while dealing with securities in order to promote the deal in securities. The regulations prohibit the dealing in securities in fraudulent method, it prohibits market manipulation, misleading statements that promote sale of securities and unfair trade practice related to securities. Any dealing in securities shall be considered to be fraudulent or an unfair trade practice if it: Indulges in an act which creates misleading or false impression of trading in securities market Advances of agrees to advance any money to any person to induce other person to buy and security in any issue with an intention of securing the minimum subscription to such issue. Pays, offers, or agrees to pay directly or indirectly to any person, any money for inducing such person for dealing in any security with the objection of depression or causing fluctuation in te price of such security. Acts to manipulate the price of security Publishes reports, dealing in securities which are not true Sells and deals with stolen security whether in physical or dematerialized form Advertises misleading or containing information in a distorted manner which can influence the decision of the investors Spread false or misleading news which induces sale or purchase of securities For restricting unethical trading practices, SEBI propagated the SEBI regulation in 1995.

3. Explain the different life insurance products.

Insurance Products or Services. Insurance products or services are managing tools. It manages the uncertain risks and losses. Different life insurance products Life insurance is a policy that people purchase from a life insurance company. This can be a way of protecting the family and its financial stability after ones death. The following are the different types of the conventional life insurance products: Term Insurance Whole life insurance Endowment Insurance Annuities. Term Insurance: A term insurance is a temporary insurance. Term insurance provides life insurance protection for a specific period only. If the policy holder dies during the selected period, the benefits are payable to the estate or named beneficiary as mentioned in the policy. In case the policy holder survives till the end of the selected term, the policy expires without providing any benefits to the policy holder. Whole life insurance The whole life insurance policies are intended to provide life insurance protection over ones lifetime. The benefits are only payable to the policy holder after his death. The different whole life policies are as follows Ordinary whole life insurance Limited payment whole life insurance Convertible whole life insurance. Endowment insurance This gives assurance that the benefits under the policy will be given the beneficiaries on the death of the policy holder within the selected term or on its maturity date. The endowment insurance is paid out whether or not the policy holder lives after a certain period. Annuities: An annuity is a series of periodic payments. This is an insurance policy, under which the insurer agrees to pay the policy holder a series of regular periodical payments for a fixed period of time or during someones life time. Annuities can be classified on the basis of the following aspects. The number of lives covered The beginning of the payment of annuity.

Different non life insurance products All the insurance products other than the life insurance products are called the general insurance or non life insurance products. Non life insurance comprises of insurance of property against fire, burglary and so on, personal insurance like accident and health insurance, and liability insurance which covers legal liabilities. Let us now read about the different non life insurance products. Fire Insurance products Companies that sell non life insurance products provide various policies that cover property against fire, flood storm, earthquake and so on. The following are the two types of fire insurance products. Standard fire and special perils policy: This policy operates in the incident of damage to the property of an insured due to any peril insured under the standard fire and special perils policy, causing an interruption to his business. The policy enables the insured to recover the loss of gross profit because of the reduction in turnover and increased cost of working earned in minimizing that loss of gross profit. Fire loss of profit policy: This policy can be taken only after taking a standard fire and special perils policy for the risk. An entrepreneur usually takes this policy to cover property damage. Under the fire loss of profit policy one can insure standing charges which continues to accumulate in spite of the termination of the business operation.

Different marine insurance products The non life insurance companies also offer policies which cover machinery breakdown, damage to hull of ships, and so on. Marine insurance covers boats and ships, along with their cargo and in some cases the places where the boat or ship is docked. The following are the types of marine insurance policies. Marine Cargo- This insurance covers whatever goods the boat is carrying. Generally it covers the loss or damage of goods at sea. Marine bull- This insurance covers the loss or damage of hull and machinery.

Different health insurance products Non life insurance also includes policies for accident and health. Health insurance policies cover only the hospitalization charges either on

reimbursement or cashless basis. The cashless service is offered through third party administrators who have arrangement with various hospitals. The two types of health insurance products are: Family Medicare: This policy covers all the family members under a single sum assured. The family must comprise of self, spouse and dependent children and their age group must be between 18 to 80 years. Senior citizen policy: The government of India has launched various policies for older person. These policies are basically meant to promote the health and independence of senior citizen around the country. This policy actually aims to encourage individuals to make provision for their own and their spouses old age. It also encourages families to take care of their older family members.

Other miscellaneous services The other miscellaneous services include the following Social policies- This is a Government provision for unemployed injured or aged people who are financed by the contribution given by their employers and employees as well as by the government revenue. Rural policies- This policy provides insurance solution to meet the needs of agriculture an rurally based business. Accident policies- This policy offers a payout when people experience injury or death due to any accident Package policies- This type of policy combines co0verage form two or more type of insurance. Business policies- This is a guiding procedure fo an enterprise structured for commercial purposes Travel policy- Travel type of policy includes risks of accidents, illness, missed flights, cancellation of trip and interruption, trip and baggage delay, lost of baggage, emergency evacuation, hijacking, and arrangement in case of death while travelling. It is a simple and affordable way covering a person for unforeseen cost and events. There are three types of travel policies such as baggage policy, Suhana Safar policy and Marga Bandhu policy. 4. Describe the deposit products and loan products. Deposit Products:

These are a major component of banking demand and time liabilities and it enables the banks to expand its loan functions. Bank deposits are structured to serve the different needs of its various customers. Some customers deposit money in the bank when they have extra income. The purpose is to keep the money safe for future needs. Some customers deposit money to accumulate savings with interest to meet their future needs. Businessmens deposit their sale proceeds of business in the bank and meet their required expense by withdrawing money through cheques. Banks offer different types of deposit accounts to suit their customer requirements. Deposit accounts are classified into two types, demand deposits and term deposits: Demand deposit: These are repayable to the depositors on demand. There are two types of demand deposits. They are: Current deposits: In current deposits withdrawal are permitted by cheques in favor of self and other parties. The payee can endorse the cheques in favor of third parties. The current deposits do not bear interest thus banks are not permitted to pay interest or brokerage to depositors. The banks can charge incidental expenses from the depositors, if the accounts do not maintain sufficient balances. Third party cheques and bills collection and purchase facilities can be guaranteed to the accountholders as per mutually agreed arrangements and charges. The account holders are provided with periodical statements of accounts for records and reconciliation by the banks. The current deposit is not intended at savings of the cash payments regularly. Savings deposits: This encourage saving habits among the depositors. The saving deposits can be done with a cheque book facility to withdraw cash and make payments and with non cheque book facility where the account holders have withdrawal facility only at the draw bank branch through a withdrawal form. Theresa are permitted on demand on presentation of cheque or withdrawal form to encourage savings, banks impose restrictions such as withdrawal within a given period, the minimum balance to be maintained and number of withdrawals and do on. Term deposit: This is also known as fixed deposit, is a deposit held at a financial institution for a specified term. The term deposit can be withdrawn only after the end of the term or by providing prior notice. This is a safe investment and is preferred by low risk investors. Recurring Deposit- A recurring deposit is a deposit in which a specific amount is invested in the bank on monthly basis for a fixed rate of return. The deposit has a fixed term. At the end of the term the

principal sum and the interest obtained during that period is returned to the investors Certificate of Deposits- The certificate of deposit (CD) is a short or medium term deposit instrument offered by banks. The investor deposits funds for a specified period that ranges from one month to five years. It is low risk and low return investment. The CDs are secure form of investment as it is insured by government agencies.

Loan Products A loan is granted for a specified time period. The borrower is given the amount in lump sum or in installments. Loans are granted against or in exchange of the ownership of different types of tangible item. The securities against which banks lend are commodities, debts, financial instruments, real estate, automobiles, consumer durable goods, and documents of title. There are various types of loan products available for corporate or non corporate clients in India. Retail loansThe retail loan is designed for small entrepreneurs and individuals who are involved in profitable commercial activity and have the capability to repay the loan. Loans are granted keeping in mind the repaying capacity of the borrower. The repaying capacity is judged through the cash income available with the borrower for the repayment of the loan. Fund-based credit facilitiesFund base credit facilities provide funds to borrowers for working capital and for capital expenditure or project finance which includes deferred payment guarantee. The working capital finance facility is granted for s short period usually for one year and is renewed over from year to year depending on assessment of the requirements of the borrowers.

Cash creditCash credit facility is a unique credit facility provided by banks in India. It is a running account for drawing of funds with features such as credit limit, actual limit, actual drawls and drawing power. The borrower can draw funds within the specified credit limit sanctioned by the banks against the security of the inventory and receivable which are guaranteed by the borrower. Overdraft- Overdraft is the process of drawing funds from a current account in excess of credit balance. The drawings can be made till a sanctioned limit and interest is charged on the daily debit balance in the account Clean- Clean overdraft is given to parties which are financially sound and reputed for integrity against personal security. These advances are not

supported by tangible security so the banks impose limitations on such advances. Secured- Secured overdraft is a standby credit facility that is secured by assets such as term deposits, savings deposits and property. The interest is charged on daily overdraft amount. Demand Loan- A demand loan is a onetime facility which is subjected to periodic principal repayment along with the monthly or quarterly interest payment. The loan is a fixed amount advanced to the borrower for a specific purpose and usually for one year. Loans for consumption are sanctioned against the following. Against own deposits- Banks grants loans up to 90 percent of the deposit amount which includes interest component accumulated on the deposit. There is exception in certain cases where loan is granted up to 85 percent of the deposit amount. Against third party deposits- Apart from the providing loans to the depositors, banks grant loans to the third parties. The rate of interest charged on such loans is two percent over the deposit rate Against gold and Jeweler- Banks provides loans against gold jeweler. Any individual owing gold jeweler fondly or jointly is eligible of the loan. The loan is granted to meet expenses on consumption needs such as educational, medical, marriage and so on. Term loans- These are granted by banks for capital expenditure such as acquisition of fixed assets for setting up a new unit, expansion or modernization of an existing one. The term loan for acquiring assets are: For consumer durables- Banks provide term loans for financing consumer durables. A permanent salaried individual is eligible to avail for this facility. For home loans- Home loans are offered to customers by banks to construct a house, buy a flat or renovate the house.

Non fund credit facility- The non fund credit facility does not involve outlay of funds. They are also known as off-balance items as they act as a commitment to honor certain promises. Letter of credit- A letter of credit is an arrangement in which a bank at the request of a customer undertakes to pay the named beneficiary by a specified date, against the presentment of the specified

documents, the value of goods. The LC involves three parties, namely the issuing bank, opener, and the beneficiary Guarantees- Banks issue guarantees on behalf of obligators as a security for due fulfillment of the contract by them in favor of beneficiaries. The issuing bank charges commission depending on the amount and validity period of the guarantee.

5. Discuss about the two important credit rating agencies in India. Important Credit Ratings Agencies Ratings from the important rating agencies are important to some level because investors look to them as expert assessments of credit risk. Independence assessments in the form of credit ratings and a wide range of financial instruments are provided by the credit rating agencies. The CRAs apply a powerful influence upon the financial system. CRISIL CRISIL Rating Information Services of India Limited is Indias leading rating company and has played a vital role in Indias economic growth. The CRISIL rating is the only rating agency in India to function on the basis of sectored proficiency. The formation of the workers first regional credit rating agency way due to the pioneer work of CRISIL. Ratings It is the only rating agency in India to function on the basis of securely proficiency. The agency has urbanized new ratings methodologies for debt instruments and pioneering structures across sectors. The CRICIL ratings provide technical expertise to clients all over the world and have helped set up ratings agencies in different countries. The CRISIL ratings play a principal role in the maturing f the debt markets in India. Research CRISIL provides investigation, study, planning and research on the Indian economy. It also focuses on industries and companies to over 500 Indian and international clients in the corporate, consulting, financial and public sectors. The following are the extended services related to research: CRISIL fund services- It provides fund assessment services and risk solutions to the mutual fund industry.

The Centre for economic research- It implements economic principles to live business applications and provide standards and analyses for Indias policy and business decision makers. Investment research outsourcing- CIRSIL acquired a leading global equity research and analytics company. It offers investment research services to the worlds leading investment banks and financial corporate.

ICRA The investment information and Credit Rating Agency of India has been promoted to meet the requirements of the banks, financial institutions and mutual funds in India providing them with credit institutions and has added equity research as one of its services. Advisory CRISIL provides advisory services in the following areas: CRISIL infrastructure advisory- It facilitates the governments and leading organization by providing plan, policy, regulatory and transaction level guidance. Investment and risk management services- CRISIL risk solutions suggest integrated risk management solutions with guidance in the areas of credit and market risk to banks and Education, credit research, risk management software and consulting services. It also provides assistance to investors and issuers in making well informed decision and assist them in raising funds in large amounts and low cost. It provides bank, shareholders, and brokers with a marketing tool which enable them in placing debt with investors. The ICRA provides three types of services- rating services and advisory services. Rating Services- The rating services comprise rating of debt instruments and credit assessment which include long term instruments such as bonds, medium-term instruments such as fixed deposits and shout term instruments such as commercial paper programs. Structured and sector-specific debt obligations such as instruments published by power, telecom and infrastructure companies are also rated by ICRA. Other services offered by the ICRA include the following: o Corporate governance rating o Insurance companies claims paying ability rating

o Line of credit rating o Credit assessment of companies Information services- Information services department of the ICRA focuses on providing genuine data and value added products used by intermediaries, financial institution, banks, institutional and individual investors. Value added services comprise of equity grading, corporate reports, equity evaluation and industry specific publications.

Earnings Prospects and Risk Analysis (EPRA) The EPRA range of information services are ordered with a view to providing genuine information on the virtual quality in diverse corporate. The relative quality of equity, growth, stability and composition of its earnings is assessed by analyzing the core fundamentals that would affect its future performance over the medium term. The EPRA includes the following: Equity Grading- The equity grading process commences at the request of the prospective issuer, on receipt of the required information from him, and culminates in an opinion from the ICRA, expressed symbolically as an equity grade. A team of analysts takes up the work of collection of data and information from the books, reports and records of the concern and meets with its executives. The support in-house research and the database of the ICRA as well as secondary data are also availed of. The ICRA reserves the right to make public such equity change in equity grade. Equity assessment- The equity assessment process commences at the request of an investor and the consent of the company being assessed. ICRA may or may not disclose the investors identity to the company depending upon the investors preference. The rest of the assessment process is similar to the equity grading process, except that the end result is not in the form of a symbol but as an assessment report specific to the investors need and intended to the used by the investor only. Advisory services- ICRAs foray into advisory services represents an organic growth of the cumulative expertise built by ICRA in different industries and sectors. ICRA advisory services offers independent, objective and high quality consulting services to organizations with an interest in India, with the fundamental aim of improving the quality of decision making. It is active in the areas of strategy consulting, risk management and policy formulation.

Q6. Describe issue management in merchant banking. Merchant bank is a financial institution that specializes in providing various financial services such as hire purchase or installment buying, international trade financing, acceptance of exchange bills, long term loans, and so on. It provides advice on portfolio management. Merchant banks act as an intermediary between issuer and purchaser of securities. Merchant bankers manage the new issue of companies. They give services in designing the capital structure of a company and also hire issue houses and advertising agencies for pre and post publicity of the issue. The merchant bankers have pre and post issue obligation. In case of pre issue the merchant bankers have to make arrangements for filling the prospectus and relevant documents with SEBI and in case of post issue they have to make arrangements for getting the shares allotted and dispatched within specified period to the applicants. In this unit, you will study about merchant banking and its function as financial intermediaries. This unit explains issue management in merchant banking. It analyses the prohibition of fraudulent and unfair trade practices relating to the securities. It also discusses the market regulations. Merchant banking is an essential service provided by financial institutions that help in the growth of corporate sector, which eventually reflects in the overall growth and economic development of the country. Merchant banking in India The need for merchant banking was felt with the rapid growth in number of issues made and initiated into Indian capital market. The National and Grind lays Bank (NGB) then got the license from RBI in 1967. Later in 1970, First National City Bank (FNCB) set up a merchant banking division. As a commercial activity, merchant banking took shape in India through the management of public issues of capital and loan syndication. During that time the main services offered by the merchant banks to the corporate enterprises involved management of public issues and financial consultancy. State Bank of India was the first Indian bank to set up its Merchant Banking Division in 1972. There was a boom for merchant banking organizations in the country in midseventies as various financial institutions and commercial banks entered into the field of merchant banking. From 1992, reform measures were introduced in the capital market. The reform measures included conferring of statutory powers on the Securities and Exchange Board of India (SEBI) and the repeal

of Capital Issues Control Act. These measures brought about major improvement in the regulatory and functional efficiency of the market. The measures also enabled the merchant bankers to take legal and moral responsibility towards the investing public. It includes public sector, private sector and foreign players. Some of the registered merchant banks in India are Kotak Mahindra Capital, HDFC Bank, ICICI Bank, IDBI Bank, and so on. Merchant banking helps with the following: Channelize the financial surplus of the public into productive investment prospects. Coordinate the activities of intermediaries to the share issue such as bankers, registrars, underwriters, and brokers. Ensure the compliance with the rules and regulations governing the market. As per the SEBI guidelines, a Category I merchant banker must be a corporate body with a net worth of Rs.5 Crores and has to compulsorily register with the SEBI in the interest of the investors. In order to get the registration with SEBI the merchant banker must meet following requirements: Capital adequacy The merchant banker has to fulfill the minimum prescribed capital adequacy norms in terms of net worth. Infrastructure The merchant banker needs to have adequate infrastructure. Expertise The merchant banker must be professionally competent to undertake merchant banking business. Responsibility The merchant banker has to make payment of the prescribed fee to SEBI and also needs to adhere to the obligations, responsibilities and to the code of conduct prescribed by SEBI. Functions of merchant banking The following are the main functions of merchant banking: Issue management A major function of merchant banking is issue management. The issue can be through offer of sale or private placements, prospectus, and so on. The issue management includes the following functions with respect to issue through prospectus:

To obtain approval for the issue from the SEBI. To arrange underwriting for the proposed issue. To draft and finalize the prospectus and to obtain clearance from the stock exchange, auditors, underwriters and registrar of companies. To select registrar of the issue, advertising agencies, underwriters, bankers and brokers to the issue and finalize the charges to be paid to the registrar. To arrange press conferences, and investors and brokers through advertising agency. To finalize the terms of issue to make the issue more attractive.

Pre-investment studies of investors The merchant bankers undertake the practicality surveys in selected areas of clients interest. It also includes the studies for foreign organizations which are planning for joint ventures in India. The survey covers the advice on the nature of participation and Government regulations. Pre-investment study covers the study of the project and includes the following aspects: Developing or reviewing of project profile. Preparing project reports after analyzing financial, market and economic feasibility. Estimating the cost of the project. Studying the procedural aspects of project implementation. Determining the source of financing and deciding the capital structure. Assisting in legal formalities for implementing the project.

Corporate counseling Corporate counseling refers to the activities undertaken to ensure effective running of a corporate enterprise through efficient management of finance. A merchant banker guides the clients on organizational goals, choice of product and market survey, forecasting a product, cost analysis, investment decisions, pricing methods, capital management and expenditure control, market strategy and so on. Corporate counseling is a facility provided by merchant bankers to corporate enterprises free of charge. This is to improve the performance of the enterprise. Merchant bankers also provide services such as building a good image among the investors which help in increasing the market value of investors equity shares. The following are the areas in which the corporate counseling is provided: Area of diversification considering the Governments licensing and economic policies. Market analysis for growth, present and future demand, and profitability of each product produced by the corporate enterprise. The

analysis also helps to determine whether to continue the product or not. Project counseling Project counseling is a part of corporate counseling which is related to project finance. A merchant banker provides the clients project counseling that involves providing advice on procedural aspects of project implementation, conducting financial study of the project, providing assistance in project profiles, providing assistance in seeking approvals from Government of India for foreign technical and financial collaboration agreements. Loan syndication A merchant banker helps the clients to get loan for the project. They also help in conducting appraisal and designing capital structure. Portfolio management - Portfolio management refers to making decisions related to investment of cash resources of a corporate enterprise in marketable securities by deciding the type of security to be purchased. A merchant banker helps the clients in making the right choice of investment to obtain optimum investment, undertaking investment in securities conducting critical evaluation of investment portfolio, and so on. Project finance A merchant banker who undertakes a project scheme also assists in arranging a comprehensive package for the project funding. The process involves the study of the pattern of financing available from merchant banks and financial institutions. The merchant bankers work closely with the client and the technical consultant and submit a complete financial report to the client. They also provide assistance in legal documentation for the finance arranged. Working capital Merchant bankers assist in arranging finance for working capital particularly for new ventures. For existing firms, the merchant bankers arrange the funds from non-traditional sources such as through issue of debentures, and so on. For example, Central Bank of India (CBI) has started working capital finance as one of the merchant banking service area. Managerial and technical services Merchant bankers provide services to deal with problems in technical, financial and managerial fields. Issue Management: Intermediaries The primary market intermediaries are the merchant bankers, underwriters to issue and brokers to issues. The merchant bankers are the issue managers who bring the issues to the primary market investors. Issue management is a tedious job and is closely regulated

by SEBI. In many countries, the regulators implement a licensing mechanism for issue management. Issue management is one of the important fee-based services provided by financial institutions. There are few large-scale and specialized issue management agencies in the country. The growth of stock market and opening up of economy has increased the scope of issue management activity. SEBI has laid guidelines as ground rules relating to new issue management activities to protect the investors interest and for development of market. The guidelines are in addition to the companys law requirements for the issue of capital. Merchant bankers as lead managers Merchant banker is the person who arranges or assists in funds from investors through stocks, bonds or shares on behalf of the issuer for corporate establishment or for expansion purpose of the corporate firms. The main merchant banker is the lead manager. The lead manager can have associate merchant bankers to the issue. The merchant banker is a channel between the issuer and investors. As per SEBI, merchant banker is anyone who is engaged in business of issue management by making arrangements related to buying, selling or subscribing securities or providing corporate advisory service related to issue management. The importance of merchant bankers as sponsors of capital issues is seen in their major services such as determining the composition of securities types to be issues, draft of prospectus, appointment of registrars, arrangement of underwriters, selection of brokers and advertising agents, and so on. The role of merchant bankers in the process of capital issues is very important. All public issues must be managed by merchant bankers who function as lead managers. Underwriters A significant intermediary in issue market is the underwriters to issue of capital who take up securities which are not fully subscribed. Underwriter is a person who agrees to take up shares specified in the underwriting agreement of the public, who fails to subscribe them. SEBI has allowed merchant bankers and registered underwriters to act as underwriters. To act as underwriter, a certificate of registration must be obtained from SEBI. The underwriter makes profit on the difference between the public offering price and the price paid to the issuer; and that is called the underwriting spread or price spread. Underwriters are appointed by the issuing companies after consulting with the merchant bankers to the issues. Bankers to an issue The bankers to an issue engage in activities such as acceptance of applications along with the application money from the investors with

respect to issues of capital and refund application of money. Bankers to an issue accept applications with the subscriptions offered at their designated branches and forward them to the registrar in agreement with instructions issued to them. They undertake publicity to the issue by distributing publicity material, prospectus and application forms. They are entitled for brokerage on shares allocated against applications bearing their stamps. In case of large issues, sufficient numbers of banks with branches at major centers are appointed. According to SEBI regulations, registration of bankers to issues with SEBI is compulsory. Under the regulations, inspection of bankers to an issue is done by Reserve Bank on request from SEBI. Brokers to an issue Brokers are mainly concerned about obtaining the subscription to the issue from the prospective investors. The appointment of brokers is not compulsory. Members of established stock exchange are appointed as brokers to issue. Companies are permitted to appoint any number of brokers. The official brokers together with the managers to the issue coordinate the preliminary distribution of securities and acquire direct subscription from many investors. The stock exchange laws prohibit the members from acting as brokers to the issue. The stock exchange grants permission to the members if the members give their approval and the company conforms to the requirements and undertakes to have its securities listed on a recognized stock exchange. The company appoints the broker to the issue at every centre where stock exchanges are located. Registrar to an issue and share transfer agents Registrar to an issue is an intermediary in primary market. They conduct activities such as maintaining records of applications and money received from investors or money paid to the seller of securities, assisting companies in deciding the basis of allotment of securities in consultation with stock exchanges, finalizing the allotment of securities and dispatching allotment letters, refund orders, and other documents related to issue of capital. Merchant bankers have a panel of registrars who help the issuing company to finalize the terms and conditions of application. Lead managers ensure that the registrar to issue is registered with SEBI and is appointed in all public issues. The registrar to issue is completely responsible for all activities allocated to him for issue management. The share transfer agents deal with all matters related to transfer of the companys securities. They maintain the records of holders of securities for and on behalf of the companies. The agents undertake various activities ranging from transfer of holdings to dispatch of documents, annual reports, notices, and other related activities. SEBI has laid guidelines regarding the authorization to registrar to issue and share transfer agents. According to

the guidelines a fee must be paid to SEBI. The authorization has validity for one year which can be renewed annually. Debenture trustees Debenture trustee is the trustee of debenture stock. A debenture stock is issued as loan security to secure debts of the company. It is necessary to get a certificate of registration from the SEBI to act as a debenture trustee. The debenture trustee holds a secured property on behalf of the issuer of security. The trustee has the right to carry on with the sale of secured property in case of default by the issuer of security, according to the procedure in the Transfer of Property Act. The profits of sales will be applied to redeem the debentures. The appointment of debenture trustee is mandatory. A company appoints debenture trustees when there is a need for executing a trust deed. This occurs when the company wants to issue a prospectus or letter of offer to the public for securing subscription to its debentures. A debenture trustee is an intermediary between the issuer of debentures and the holder of debentures. The main responsibility of the debenture trustee is to safeguard the interest of holders of debentures. This includes creation of security by the company issuing the debenture and to compensate their grievances. Portfolio managers Portfolio manager is a person responsible for investing a mutual, exchangetraded fund asset and also responsible for implementing investment strategy and managing the day-to-day portfolio trading. The portfolio manager is an important factor that needs to be considered regarding fund investing. He undertakes the management and administration of portfolio of securities and funds of clients on their behalf. Portfolio management is the art of making decisions about investments and policy, allocating assets for individuals and balancing risk against performance. Portfolio management can be classified into two types Discretionary portfolio management It permits the use of discretion regarding investment and management of the portfolio of the securities and funds. In this type of management the manager independently manages the capital of each client. Non-discretionary portfolio management In this type of management the manager manages funds according to the directions of the client. It is mandatory to obtain a certificate from SEBI in order to carry on portfolio management services.

Master of Business AdministrationMBA Semester 4 MF0018 Insurance and Risk Management Assignment Set- 1

Q.1. Discuss the guidelines for settlement of claims by Insurance Company Ans: - General guidelines for claims settlement There are some guidelines that must be followed while settling the claims. These guidelines are general in nature, and are not compiled to be the same always. Therefore, the claim settling authority uses discretion and records reasons. Appointment of surveyor The Insurance Act states that surveyor should survey claims above Rs. 20,000. The surveyors appointment should be based on the following points: The surveyor should have a valid license. The surveyor selected should consider the type of loss and nature of the claims. Depending on the situation, if technical expertise is required, a consultant having technical expertise assists the surveyor. One surveyor can be used for various jobs, if the surveyors competence is good for both.

Appointment of investigator Depending on circumstances, it is necessary to appoint an investigator for verifying the claim version of loss. The appointing letter of the investigator o mentions all the reference terms to perform.

Claims are submitted for different types of insurance policies depending on what the insurance policy is designed to cover. Once a claim has been filed, an insurer may need to investigate the circumstances before a payment is made on the claim. One type of insurance policy that an insurer may investigate before paying out a settlement is an automobile insurance policy. An insurer has certain procedures in place to determine the validity of each submitted claim. Claims Process

The first step before an insurance settlement is received is to file a claim. Claims can be submitted for an injury resulting from a car accident, damage that occurs to a home or the death of a member of the family. When a claim is submitted on a automobile policy, an insurance adjuster will come out to examine the damage to the vehicle. The insurance adjuster will determine the cost to repair or replace the vehicle and in some cases offer a settlement at the accident scene.

Verifying Information

Whenever a claim is filed for an accident, whether it involved a vehicle or while on another person's property, an insurer will want to speak with everyone involved to get all of the facts. An individual should follow basic guidelines when discussing the circumstances of an accident with an adjuster or company representative. These include remaining calm, polite and giving only limited information such as a name, address as well as a phone number and not settling the claim immediately.

Making a Claim

When an individual needs to file a claim with an insurer other than her own, there are steps that should be taken to request payment for injuries. The first step is to write a demand letter to the insurance company. The letter should include why the individual insured is responsible for injuries that were sustained, the specific injuries that were sustained as well as any income that was lost. If an individual has no-fault insurance their own insurance company should be contacted first.

Claim Determination

Insurance companies can make a determination to the amount they will pay out on a claim using a variety of factors. These can include any medical care that was received by an injured person, income that was lost because of an injury, disability or any pain and discomfort as well as the loss of any family, educational or social activities or experiences. In the case of determination of a claim for life insurance an insurer may have specific guidelines that need to be followed (see Additional Resources).

Limitations

When a claim is filed for an accident, an insurer cannot ask about the types of income or benefits that are received from other sources. This can include sick pay from an employer or health insurance benefits for medical costs. They can only use the facts about the specific claim and its causes. However, an individual may be required to reimburse the health insurer for some costs from the amount received from a claim settlement.

Q.2 What is premium accounting and claim accounting? Ans: - Premium accounting For the businesses that have a fixed rate like that of fire insurance, motor insurance etc., the premium is charged based on the rate. Where as in businesses that do not have fixed rate, the premium is charged based on the guideline rates fixed by the respective technical departments of the insurers Head Office. According to section 64VB of the Insurance Act, 1938; the insurer cannot assume any risk unless the premium is received in advance. Apart from collection of premium by cash, cheque DD etc., the IRDA recently has permitted to collect the premium by other type of receipt like the credit card, debit card, E transfer etc. However, the same has to be collected before assumption of the risk. Service tax of 8% (presently) has to be collected on taxable premium and deposited with the respective excise authorities within prescribed time limit. If the same business is shared among more than one insurer as preferred by the policy holder, then the lead insurer has to collect the full premium along with service tax. But only one share of premium is accounted as premium and the balance is shown as the amount that is due to other co-insurers. As per the Stamp Act, a policy stamp has to be affixed and has to be accounted properly by debiting policy stamp expenses. A premium register is generated in the system on a daily basis. According to the IRDA Regulation, the premium has to be identified as the income over the contract period or the period of risk, whichever is suitable. Most of the general insurance policies are annual contracts and therefore the premium earned is worked out using 1/365 method. In the insurance policies in which the same is not practicable, it is worked out either using 1/24 or 1/12 method. According to the section 64V (1)(ii)(b) of the Insurance Act, 1938, the unearned premium is compared with the reserve for unexpired risks at the end of the financial year and if there is any shortfall it is accounted as unearned premium.

Claims accounting Claims outgo is the major outgo of an insurance company. The respective technical department does the processing of claims and the competent authority approves it. The accounts department does the payment and accounting of the claims. When claim is made for a policy that has more than one insurer the lead insurer pays the full amount of claims. Only own share of claim is accounted as claims cost and the balance is shown as amount recoverable from the other insurers (co-insurers). If a claim is made but not settled by the end of the financial year, then enough provision is made for such outstanding claims. By the end of the financial year the IRDA needs the actuarial valuation of the claims liability of an insurer that the appointed actuary makes and if there is any shortfall, it is provided as Incurred But Not Reported (IBNR) losses.

Q.3. Critically evaluate the role of agents in insurance industry

Ans: Insurance agents are people who possess specialized knowledge in the field of finance. They play an important intermediary role between the customer and the insurance company. They are also known as insurance agents. Insurance agents can be either of the following: An individual A commercial business entity Insurance Brokers: Well Informed and Unbiased Insurance brokers or agents have a thorough knowledge and extensive experience in the insurance sector and are quite conversant with the contingent risks of life and their possible risk-management. They actually broker the insurance deal between the insurance company and the consumer and in lieu for this, extract a commission. Insurance brokers are basically financial planners who acquire suitable insurance schemes in accordance with the needs of the insurance clients. Insurance brokers are not tied to any specific insurance companies but to multiple ones. So, there is little chance of them favoring insurances of any specific company/companies. An insurance broker is expected to perform extensive research while choosing the right insurance scheme/policy for the clients requirements without any prior biases.

Insurance Brokers: Serving a Large Client Base The job of an insurance broker varies from firm-to-firm because in such cases, size does matter. In large business entities, they have a wide range of client base along with their wide range of requirements. However, it is impossible for a single broker to meet all these need. So, each broker in a big business house has categorical specializations according to the needs of the clients. Insurance brokers in small business entities who have comparatively less businesses and a small number of clients are required to do all the associated work themselves. Insurance Brokers: A Brief Job Description Generally, an insurance broker is involved with the following work: Acquisition of clients in need of insurance - Even if people don't have the demand for insurance in a specific field, brokers generate this demand through advertisements and other methods. This is known as business development. Giving proper and adequate service to the client to maintain an ongoing relationship between the insurance company and the client - This is commonly known as servicing of client. Constantly remaining in touch with the clients and catering to their problems by gathering proper information and assessing their risk profile and requirements. Renewing the policies of the existing clients in a hassle-free manner and with appropriate judgment and guidance. Giving proper advice to clients in a customized way by gauging their risk profile coupled with extensive research. Keeping abreast with new policies and schemes of the insurance companies so that they can choose the right policy for their clients personal needs. Collecting regular premiums paid by the clients. Processing the accounts of the clients.

Q.4. Explain product design and development process in Insurance Industry Ans:- One main issue in the liberalized scenario of the insurance sector is in the area of developing new products. Constant activity in this area is very

important for determining the overall profitability, and growth of any insurance company. The main reason for the liberalization of the insurance sector is that it the public sector was not practical in the process of developing products that satisfied the needs of the customer. Product development process is an important process for an insurance company. Developing insurance products include the following steps: Customer requirement analysis - In the first step, the customer requirements are analyzed. In this phase, the information on the amount to be insured, total income, client biometrics such as age and family size, current purchasing habits, and so on are analyzed. Business analysis - In the business analysis stage of product development, different departments of the insurance company have the following responsibilities. 1. Marketing department has to perform the market analysis to know the customer needs, and make a forecast for sales. 2. Underwriting department has to prepare the manuals. 3. Customer service department assesses the procedural requirements of the new products. 4. Actuarial department develops the specifications of the product, and the resulting impact on product portfolios. 5. Accounting department reports the financial requirements of the new product. 6. Information systems department checks whether the insurer has enough operating systems to accommodate the new product or not. 7. Investment department along with the actuarial department determines the investment needs for the new product. Prototype development - In this step, a prototype of the product is designed and testing is carried out. Pricing the product - The pricing of the insurance products plays an important role in the design and development of the product. The price of the product should include the risk premium that the insurance company needs for accepting the policy, and the cost for distributing and administering the product to the client. The policy price that is charged to the client includes the risk premium and the cost of the distributor. Product release - This stage is called as the technical design stage. It involves creation of drafts for policy documents, commission structure, underwriting, forms and procedures and issue specifications.

Before the product is released to the market the insurance companies have to take care of the following: 1. Arrangement of training material. 2. Designing promotional materials for the products. 3. Releasing all the information that is needed to understand the product. 4. Administration of the product after release. 5. Complete policy filing, the process by which the organisation obtains all the regulatory approvals from all the applicable authorities that are needed to release the product. 6. Educating and training the staff and the sales agents on administrative procedures and forms that are needed to sell, administer and service the product. The environment in which the insurer functions inspires its product development. This comprises of the legal framework which the insurance industry has to follow and social and economic factors. Any stage of product development has to be carried out in accordance with the customers interest. Thus, since 1973, the Indian Insurance sector has directed the product development towards meeting this goal. In the last three decades, the General Insurance Company (GIC) together with its four subsidiaries has developed 150 new products, and has met its customer requirements. To control poverty and provide employment in the rural areas, the insurance sector developed the Integrated Rural Development Program (IRDP). Defining the product While designing the product, we must follow some steps for defining the procedures. These steps are 1. In the first step of design process, the managers plan and identify the research objectives. They also verify the consistency of these objectives in all the national market. 2. In the next step the aspects of the procedural operations to ensure the consistency in the process of data collection is defined. The other points to be considered while defining a product are: 1. Incorporate study control: All external factors must be thoroughly investigated so as to minimize their impact on the end results

2. Counting the cost: The market analysis the actuarial research and the competitive research help in determing the cost of the product 3. Premium rating and product design: To compete in the competitive market it is essential to know the increased customer demands, improving the product design, bringing in new marketing strategies, releasing the product on time and so on Analysis in the product: This is very important stage in designing a product. It helps in identifying the customer needs and the nature of the product of market. It includes calculating the present market size, establishing the products and the rating methods that are used in the competition, understanding he market needs and the profitability, advising the effective methods for sales and distribution by comparing the advantages of the different distribution methods Analysis of data: The actual premium rating is based on the collection of the relevant data in a proper format and its analysis. The insurance companies can address this issue by giving an advice on the design data base and the collection of statistical information 1. Consider the possible effect on the collection of particular rate changes 2. Analyze the claims that are experienced to know the effect the rating factors on the risk 3. Carry out sensitivity analysis 4. Compare the theoretical results with the existing rating structure and understanding the results 5. Provide financial forecasts on the future results depending on the premium rates that is calculated The product itself: Insurers are constantly developing new products on the basis of advanced ideas. They have to constantly develop the new products, keeping in mind the new challenges of the society. There are only a few products developed on the basis of new market requirements. Insurance companies have to develop suitable products, verify price properly and increase. with

the product life cycle of the insurance product weakening either the product life cycle has to be extended by improving the existing or a new product has to be developed to fulfill the customer requirements Some insurance companies have launched many insurance products recently. The table listed below adds these products and features. Insurance company AEGON Religare Product AEGON Religare growth plan Features 1. It has a zero premium allocation charges and has an option of four funds 2. It has a invest protect option according to which the policy holders funds will be moved automatically form equity to debt while the period of the policy is ending 3. It allows partial withdrawal of 20% of the funds after the first three years of the policy.

Aviva

Wealth product

1. The product assures the highest net asset value for the first seven years of the policy 1. It has the option of paying premium monthly, quarterly, half yearly and annually 2. Once the policy measures the policy holder gets all the monthly paid premium and the loyalty additions 1. It provides the money back that is equal 15% of the total sum guaranteed at the end of 5 years 2. Once the policy matures, the policy holder will get the amount assured but

Birla sun life Bachat plan

DLF Pramerica

Dhan Suraksha

Future General Life

Nivesh Plan

the money back amount that is already paid will be detected. 1. It is a single premium plan with a debt benefit of the fund value and the sum assured.

HDFC Standard life Endowment Champion Suvidha

2. On the policy matures, the policy holder can neither receive the entire fund value or opt for settlement option according to which the fund amount will be paid in 5 years through annual installments.

India First Life Group plan

1. Once the policy matures, the policy holder receives a bumper additions along with the fund value depending on the term of the policy. This additional term amount can be obtained at once or in installments for 5 to 10 years 2. It also has the option of partial withdrawal after 5th year of the policy.

Reliance Life

1. It is a yearly renewable plan Group credit life plan 2. It offers life coverage of minimum Rs 5000 per member Super Golden Years Term 1. It is offered against the loans to the 10:Senior borrowers of any common lenders. Citizen plan 1. It is pension plan with a regular or single premium option. 2. On the day of investment the policy holder can opt for a life annuity with return of purchase price payable on death or a life annuity assured upto 15 years and there after payable. 1. It is a savings plan 2. Once it matures, the policy holder

Reliance Life Traditional Investment Insurance Plan

gets the total premium paid as returns.

Product Development

: Role of tariffs and after

The Indian regulators at different forums have stated that the insurance companies are free to develop their own products without any interference of the regulatory authority. The only condition laid was that the nonlife insurance companies have to concentrate only on non life sectors, where as the life insurance companies has to concentrate on developing life insurance products. This helps in meeting the policy holders expectations in covering for a suitable insurance sector. The tariff advisory comity (TAC) controls the pricing of new products. The tariff prices are inflexible and not responsive as per the market requirements. According to the emerging market trends, the insurance industry has to develop non tariff rule. The products developed under the non tariff rule will have features like customer friendly documentation, simplicity, quality, speed, relevance to risk and so on. Intermediaries: In the insurance industry distribution is an important link of value chain. The insurers are finding it difficult to do a way the distribution even in this technology based generation. Intermediaries act as the important link between the insurers and the insured. Insurance Intermediaries are the brokers and agents who represent the insurance company.

Q.5 What is facultative reinsurance and treaty reinsurance? Ans: - The two different types of reinsurances are: Facultative reinsurance. Treaty reinsurance.

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

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

Quota-Share treaty-According to this treaty, reinsurer and the ceding insurer agree to share a fixed % of premium and also losses depending on some proportion. Therefore because of this the quota share treaty is also called proportional reinsurance.

For instance, the primary insurer can take a decision of retaining around 70% of the new business with it and transferring the rest 30% to the reinsurer. Accordingly it also divides the expenses, incomes and losses in the same proportion. Premiums are also shared in the same proportion as agreed in the treaty. The major advantage of the quote share treaty is that it permits the primary insurer in reducing its unearned premium reserve considerable by transferring a lot of profitable business to the reinsurer. Surplus-Share treaty- This is an agreement that shares some of the qualities of the quote share and excess of loss treaties. According to this treaty the reinsurer accepts the insurance in excess to the ceding insurer retention limits. The loss and premium are shared among the primary insurer and the reinsurer in the same proportion The major advantage of the surplus share treaty is that it increases the under writing capacity of the primary insure. The major disadvantage of this treaty is that the coverage that a reinsurer provides for each policy has more record keeping and thus creates more administrative expenses. Excess- of- loss treaty. This treaty is largely designed for providing protection against the catastrophic losses. It is an agreement where the insurer covers only the losses that are more than the retention limit of the primary insurer. This coverage is obtained mainly for covering the catastrophic losses. This treaty can be written to cover: 1. A single occurrence 2. A single exposure 3. Excess losses when the primary insurer total losses exceeds some amount during some started time period. Re insurance pool: This also provides reinsurance. It is an organization of insurers that under writes insurance of a joint basis. These are formed as a single insurer possibly will not be financially able to write huge amount of insurance policies. These pools are created to provide coverage for nuclear accidents, aviation disasters and exposure in foreign countries where losses can be catastrophic and that could easily exceed the financial capacity of single insurer.

The method of sharing premiums and losses are different for different types of reinsurance pools. The pool works in the following two different ways. 1. All the members of the pool decide to pay some percentage of amounts for every loss that occurs 2. The agreement is same as that of the excess-of- loss reinsurance treaty.

Q.6 what is the role of information technology in promoting insurance products

Ans:-The rapid developments in information technology are posing serious challenges for insurance organizations. The use of information technology in insurance industry has an impact on the efficiency of the organization as it reduces the operational costs. After many private players entered the insurance industry, the competition in the insurance sector has become immense. Information technology has helped in enhancing the insurance business. Insurance industry uses information technology for internal administration, accounting, financial management, reports, and so on. Indian insurance organizations are rapidly growing as technology-driven organizations, by replacing billions of files with folders of information. Insurers are heading towards the technological enhancements, in order to focus on the key areas of insurance business.

The role of IT in different fields of insurance like: Actuarial investigation - Insurers depend on the rates of actuarial models to decide the quantity of risks which create loss. Insurance organizations are using new technologies, to analyze the claims and policyholders data for providing connection between risk characteristics and claims. Developments in technology allow actuaries to examine risks more precisely. Policy management - Most of the insurance policies are printed and conveyed to policy owners through mail every year. The method of creating documents is accomplished by technicians and typists. In

most of the cases, this task is generally completed by using new technology. Customer data is accessed by computer systems, and maintained in huge folders, in order to renew each policy. To assemble the policies, complex software packages are used, and to print the policies high speed printers are utilized. Underwriting Underwriters can use knowledge based expert systems to make underwriting decisions. By using automated systems, underwriters can compare an individuals risk profile with their data and customize policies according to the individuals risk profile. Front end operations: CRM (Customer Relationship Management) packages are used to integrate the different functional processes of the insurance company and provide information to the personnel dealing with the front end operations. CRM facilitates easy retrieval of customer data. LIC is using CRM packages to handle its front end operations.

Marketing There is a huge scope of information technology in insurance marketing sectors. Information technology in insurance marketing strategy includes pricing, promotion and customization techniques. Information technology is used in the marketing of insurance products in the following manner: 1. Customer Knowledge Information technology helps insurance companies to create awareness of insurance products among public. With the help of internet, information regarding products and rating policies can be conveyed to the public within seconds. Information about new products and changes in old products can be provided at a faster pace and lower price. 2. Consumer Service It needs lot of attention, right from distribution of information to policy, and claims management. The new private players are posing threads and challenges to LIC. The developing areas of information technology applications are: 1. market research 2. Products customization 3. Agent analysis.
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Master of Business Administration MB0052 Strategic Management and Business Policy Assignment Set 2

1. What is meant by Business Continuity Plan (BCP)? Discuss the steps involved in BCP. According to the Business Continuity Institute, a Business Continuity Plan is defined as A document containing the recovery timeline methodology, test-validated documentation, procedures, and action instructions developed specifically for use in restoring organization operations in the event of a declared disaster. To be effective, most Business Continuity Plans also require testing, skilled personnel, access to vital records, and alternate recovery resources including facilities. BCP is a collection of procedures which is developed, recorded and maintained in readiness for use in the event of an emergency or disaster. Steps involved in Business Continuity Plan: The BCPs senior management committee is responsible for the initiation, planning, approval, testing and audit of the BCP. The BCPs senior management committee also implements the BCP, coordinates its activities, supervises its creation and reviews the results of quality assurance activities, these steps are discussed below. Initiation Business impact analysis Disaster readiness strategies Develop and implement the plan Maintenance and testing.

Initiation This senior management initiates the project and conducts the meeting to review the following. Establish a business continuity planning committee- The senior management identifies a team and discusses the business continuity planning project with them the management forms a team and clearly defines the roles of project team members. Draw up business continuity policies- The team establishes the basic principles and framework necessary to ensure emergency response for resumption and recovery, restoration and permanent

recovery of the organizational operations and business activities during a business interruption event. Business Impact Analysis BIA is the most important element of the continuity plan. BIA reveals the financial and operational impact of a major disruption. Its report describes the potential risks specific to the organization. It will provide the organization with the following details. The identification of time sensitive business operations and services : An analysis of the organizations financial status and operational impacts The time frames in which the time sensitive processes, operations and functions must resume An estimation of the resources necessary for successful resumption, recovery and restoration. The BIA will provide a basis and cost justification for risk management, response, recovery and restoration.

Disaster readiness strategies The disaster readiness strategies include the following activities. o Define business continuity alternatives- Using the information from BIA, the project team should assess the alternative strategies that are available to the organization and identify two or three strategies that are more credible. o Estimate cost of business continuity alternatives- Based on these strategies, the organization develops the budgetary plan. The resumption timeframe plays an important role in examination which elements may require pre-positioning. o Recommend disaster readiness strategy- based on the needs of the business and evaluation of alternatives, the project team should develop recommendations of strategies to provide funds for implementation. Prepare a formal report based on the findings; of the BIA for the strategy alternatives that were developed and analyses take approval from senior management to proceed with the project. Develop and implement the plan.

Develop and implement the plan includes the following activities: o Emergency response and operations- it establishes a crisis management process to respond to these incidents o Develop and implement a business continuity plan- the plan describes specifically how to deal with the incidents. It should focus on the priorities of overall business continuity strategy. o Apply business unit plans for each department- Describe the roles that each department has to perform in the event of an emergency. It should detail the actions that the IT department will have to carry out if IT services are lost. Maintenance and testing It includes the following activities: o Establish a plan exercise program- BCP should develop and schedule the exercise to achieve and maintain high levels of competence and readiness. Document the objectives of each exercise and it should include the measurement criteria. Evaluate the results of each exercise against pre-stated values and document the results along with proposed plan enhancement. o Awareness and training plans- it should ensure that the personnel is aware of the importance of business continuity plan and can operate effectively in case of an event. Review the effectiveness of awareness training and identify the need for further training. o Sample emergency response exercise- Emergency response exercises should be ongoing. The exercises can be using alternate setup and it should involve whole organization within a particular facility that may be affected by a system disaster. o Audit and update the plans regularly- It should regularly audit the plans to check if it meets the needs of the organization and ensures that the documentation remains accurate and reflects any changes inside or outside the business.

2. What is meant by Business plan? Describe the strategies to create a business plan.

Ans: Definition: A written document describing the nature of the business, the sales and marketing strategy, and the financial background, and containing a projected profit and loss statement. A business plan is also a road map that provides directions so a business can plan its future and helps it avoid bumps in the road. The time you spend making your business plan thorough and accurate, and keeping it up-todate, is an investment that pays big dividends in the long term. Your business plan should conform to generally accepted guidelines regarding form and content. Each section should include specific elements and address relevant questions that the people who read your plan will most likely ask. The process of creating and writing a business plan is as valuable as the final product or service. Is valuable because it provides the priorities and steps that need to start our business. The business plan is the manifestation of a commitment that we respect if we are to succeed. The business plan will be useful not only for us but that can be used as a tool to generate interest to financiers, employees, partners and customers. To develop our business plan will focus on the following three aspects: (i) respond to 12 key questions, (ii) the key components of a business plan, and (iii) write the business plan. THE TWELVE ESSENTIAL QUESTIONS A business plan is useless if you cannot answer these twelve basic questions, so lets make sure to answer: 1. What is the idea behind the business? 2. How will the project meet a need? 3. What business model is better suited to business? 4. How stands the business? 5. How big is the market and how we grow? 6. What will be our role?

7. Who will shape our team? 8. How do customers acquire our products and how they can pay? 9. How much money do we need and how we plan to build? 10. Where do we get the funds? 11. How will we measure success? 12. What are the key achievements we want to achieve? KEY COMPONENTS OF THE BUSINESS PLAN Executive Summary Section which summarizes the information contained in the entire business plan: people, ideas, markets, competitors, strategy. Usually should not exceed two pages and is usually written at the end when we have the complete business plan. * * * * * What is the business? Brief description of business Potential business Forecast earnings Required funds

Business Overview It details the mission, objectives, proposals, business model, and key points. When people read this section must clearly grasp what it is. We have to include the history of business and what makes an entrepreneur successful qualified to lead the business. * What is the business? * Product (s) and service (s) Statement of objectives and commitments This is a statement of what we want to achieve with the company: how far we intend and what we commit. * Main objectives and business accessories * Vision of where the company will in the coming years * Objectives based on the areas

Market Analysis Here we focus on the needs of potential consumers in our market, as well as competition and market share that we cover. Do not forget to include all research and analysis, we have made, and cite our sources. * * * * Size and growth expectations Analysis of market segmentation Target audience List of competitors

Operations Plan We must clearly describe the business situation and all the production processes of the business: provider description, list of machinery, production line, storage, etc.. * * * * * Location of local Production process Equipment / Machinery Inventory and stock plans Quality Control

Marketing and distribution In this section we describe the strategy and have set deadlines to meet our goal of marketing and explain how we get our product into the hands of consumers. * * * * * * Market Research Where to Buy Pricing Strategy Promotional Plans Distribution strategy Customer Service

Organization Describe who make (and shape) the management team and all key staff for the success of the business. Also, do not forget to detail what role each will fulfill and what responsibility will, as well as a commentary on their experience and why they are ideal for this position.

* * * * *

Organizational Structure List of Members Method of recruitment and selection Staff List Training

Finance Section should include all of our strategies, what will it cost and what will generate profits during the first years of business. *Financing Plan *Business Statement * Cash flow Exit Strategy Explain what the fate of the business. If we make it grow and then sell, merge, liquidate and create a new, or expand it. This information will be very useful if we apply for funding. WRITING THE BUSINESS PLAN The business plan should be concise and clear format. The idea is to use tools such as Microsoft Word and Excel. It is important to avoid quirky graphics, language and excess surface photographs. The document must be serious and easy to read for investors or potential partners. If you prefer facilitated the process of developing the whole document, there are online services that offer models of business plans, in exchange for payment. The problem is that they offer the same flexibility as a document prepared by ourselves. Do not wait any longer and begin developing your business plan. If you have further advice, feel free to discuss. Do not miss the next step, Choosing a business structure.

3. What are the benefits of MNCs? Ans: MNCs have certain unique advantages in their operations that are not benefited by domestic oriented companies. The international success of MNCs is mainly because of the ability to capitalize the advantages. The

advantages widely depend on the nature of individual corporations and the type of their business. Benefits are Superior Technical Knowledge- The most important advantage of MNCs is the patented technical knowledge which enables them to compete internationally. Large MNCs have access to advanced levels of technology which are either developed or acquired by the corporation. These technologies are patented. It can be in the areas of management, services or production. Extensive application of these technologies gives a competitive advantage to the MNC in international market, as it results in efficient, low priced, hi-tech products and services that dominate a large international market. This results in efficient production and services like that of IBM or Microsoft.

Large size of economy- Generally, MNCs are large like Wal-Mart and ExxonMobil which has sales larger than the gross national products of many countries. The large size gives the advantage of significant economic growth of the MNCs. The higher volume of production leads to lower fixed costs per unit for the companys products. Competitors, whose volume of production of goods is smaller, must raise the price to recover the higher fixed costs. This situation implies to capitalintensive industries like steel, automobiles etc., in which fixed costs form a major proportion of total costs. MNC like Nippon steel of Japan can sell its products at lower process than those of companies with smaller plants.

Lower input costs due to large size- The production levels of MNCs are large and thus the purchase of inputs is in large volumes. Bulk purchases of inputs enable the corporation to bargain for lower input costs and obtain considerable amount of discount. Lower input costs means less expensive and more competitive products. Nestle, which buys huge quantities of coffee from the market, can bargain for lower prices than small buyers can. Wal-Mart sells products at lower prices relative to its competitor due to bulk purchasing and efficient inventory control. By identifying which product sell effectively, Wal-Mart combines low-cost purchasing with efficient inventor to achieve competitive advantage in retail market.

Ability to access raw materials overseas-By accessing raw materials in foreign countries, many MNCs lower the input and production costs. In many cases, MNCs supply the technology to extract raw materials because they supply technology in exchange for monopolistic control. This control enables them to supply or deny raw materials to their competitors.

Ability to shift production overseas- Another advantage of MNCs is the ability to shift the production overseas. MNCs relocate their production facilities to take advantage of lower labor costs, raw materials and other incentives offered by the host countries. They take advantage of the lower costs by exporting lower cost goods to foreign markets. Many MNCs have set up factories in low-cost areas like China, India, and Mexico.

Brand image and Goodwill advantage- Most of the MNCs possess product lines that have created a good reputation for quality, value and service, this reputation spread to other countries through exports and promotion and adds to the goodwill or brand image of the company. MNCs are able to influence this brand image by standardizing their product lines in different counties. Sony Play stations do not have any modifications for different countries and the parent factory produces standardized products for the world market. Brand names like Sony help the company to charge premium prices for its products, because the customers are ready to buy quality products at premium prices.

Information advantage- MNCs have a global market view with which it collects, analyses, and processes the in-depth knowledge of worldwide markets. This knowledge is used to create new products for potential market niches and expand the market coverage of their products. The MNCs have good information gathering capabilities in all aspects of their operations. Through this information network, the MNC is able to forecast government controls and gather commercial information. The network also helps in providing important information about economic conditions, changing market trends, social and cultural changes that affect the business of MNCs in different countries. With

these information MNCs can position themselves appropriately to contingencies.

Managerial experience and expertise- The MNCs function in large number in different countries simultaneously. This enables them to integrate wealth for valuable managerial experience. This experience helps them in dealing with different business situations around the globe. An MNC located in Japan can attain knowledge of Japanese management techniques and apply them successfully in a different location.

4. Define the term Strategic Alliance. Differentiate between Joint ventures and Mergers. Ans: Strategic Alliance Strategic Alliance is a kind of partnership between two entities in which they take advantage of each others core strengths like proprietary processes, intellectual capital, research, market penetration, manufacturing and/or distribution capabilities etc. They share their core strengths with each other. They will have an open door relationship with another entity and will mostly retain control. The length of agreement could have a sunset date or could be open-ended with regular performance reviews. However, they simply would want to work with the other organizations on a contractual basis, and not as a legal partnership. E.g. HP and Oracle had a strategic alliance wherein HP recommended Oracle as the perfect database for their servers by optimizing their servers as per Oracle and Oracle also did the same.

Basically, a joint venture is when two or more companies make an agreement to do business in one specific area. They can share the insurance, shipping and liability costs and produce higher profits. It is usually a short lived collaboration. A merger is when two companies come together to form a single company. They combine their respective resources. Sometimes there are losses of jobs, but not all. Those decisions are specified in the merger contract well in advance of the deal. An acquisition is when one company is buying and taking over another. If it is friendly, often the seller can stipulate who keeps their job

and so forth. If it is unfriendly, the company taking over gets to make all the final decisions. They cannot take away benefits already earned. When you are running a small business, you are often limited by your size. One way of increasing your capacity is by working together with another firm. Two methods of doing this are via a joint venture or through a merger. Both options involve collaboration between firms, but they differ significantly. Legal Structure When two firms merge, they cease to exist as independent firms. For example, when the U.S.-based Anheuser--Busch merged with Belgiums In Bev, the two companies no longer existed and were replaced by Anheuser-Busch in Bev, a new and separate legal entity controlling the assets of both firms. In a joint venture, a new separate firm is formed, but the original companies continue to exist on their own. Ownership When a joint venture is created, it is owned by the original firms that created it. For example, when Microsoft and NBC Universal created MSNBC as a joint venture, the two mother companies maintained ownership of the new entity. In the case of a merger, the owners of the newly formed company are the same as the owners of the original two companies. Commitment A joint venture involves a lower level of commitment from the two parties than a merger. A joint venture can be a good way to test the waters to see how well two firms work together. It can also be used for a temporary arrangement to work on a short-term project. A merger, in contrast, involves a virtually permanent commitment. Although it is possible to break up a company, doing so can be difficult, costly and disruptive to business. Scope A merger is useful when two businesses wish to become fully integrated -that is, when two firms have enough overlap that they can perform most of their business together. A joint venture, on the other hand, typically has a much more limited scope. A joint venture normally focuses on a specific area where two firms overlap and can work together, but the bulk of their business remains separate.

5. What do you mean by innovation? What are the types of innovation?

Ans: Innovation is the creation of better or more effective products, processes, services, technologies, or ideas that are accepted by markets, governments, and society. Innovation differs from invention in that innovation refers to the use of a new idea or method, whereas invention refers more directly to the creation of the idea or method itself. From my previous post, Aditya has commented about innovation being as a result of disruptive thinking which means that you cannot plan it. As I promised in my answer to Aditya, in this post I will try to clarify the concept of innovation by providing some examples illustrating different kinds of innovation. If you are interested to read more about innovation and how you can manage it, I would recommend a book called Making Innovation Work by Davila, Epstein & Shelton. From my point of view, this book provides a very clear understanding of innovation, not only from the conceptual level but also from a practical level. To make things simpler, I will try to highlight some key points from this book (even though there are many other understandings what innovation is) First of all, it is essential to understand that not all innovations are created equally. Hence, they do not entail the same risk or provide similar rewards. From a very basic conceptual (business) level, innovation is about change generated from a technological perspective and/ or a business model perspective. At a very generic level, innovation can be characterized into seven types. They are: Architectural innovation:

This innovation defines the basic configuration of the product and the process. It will establish the technical and marketing agendas that will guide subsequent developments. Market niche innovation:

This innovation involves development of new marketing methods for the existing products. It provides the scope for improvement in product design, product promotion and pricing. Regular innovation:

This innovation involves the change that is applied on established technical and production competence of the existing markets and customers. The effect of these changes is to develop the existing skills and resources. Revolutionary innovation:

This innovation disrupts and renders established technical and production competence that out of date, yet it is applied to existing markets and customers. Radical innovation:

Radical innovation is about significant change that simultaneously affects both the business model and the technology of the company. If the radical innovation also shifts an industry into another direction and brings out fundamental changes to the competitive landscape, it can also be called as disruptive innovation. Remember how it was when Amazon.com started out? It changed the way in which books are sold and pushed the publishing industry into another competitive environment. Semi-radical innovation:

From a companys perspective, semi-radical innovation involves substantial change in either technology of an organization or its business model- but not to both. Further, when substantial change happens at one level e.g. technology, it also involves small changes from the business level or vice versa. An example can be the success of Wal-Mart where the substantial change happened at the business model. With a souped-up supply chain that cut costs dramatically, Wal-Mart was able to apply the supermarket business model to retailing, opened large store space, and provided a wide variety of goods at discount prices. Another good example is DELL; its shift in business model is also substantial which required small changes to its process and enabling technologies (such as the supply chain management and internet technologies) Incremental innovation:

This is actually the most prevalent form of innovation, receiving more than 80% of a companys total innovation investment (Davila et al.). The goal is of course, to get as much as possible from an already existing innovation without making major changes in investment. Any product improvement can be characterized as incremental innovation. For example new car models every few years, upgraded version of a program, new service procedures from a company etc.

6. Describe Corporate Social Responsibility? Ans: Corporate Social Responsibility (CSR) is the continuing obligation of a business to behave ethically and contribute to the economic

development of the organization. It improves the quality of life of the organization. The meaning of CSR has two folds. On one hand, it exhibits the ethical behavior that and organization exhibit towards its internal and external stakeholders. And on the other hand, it denotes the responsibility of and organization towards the environment and society in which it operates. Thus CSR makes a significant contribution towards sustainability and competitiveness of the organization. CSR is effective in number of areas such as human rights, safety at work, consumer protection, climate protection, caring for the environment, sustainable management of natural resources, and such other issues, CSR also provides health and safety measures, preserves employee rights and discourages discrimination at workplace. CSR activities include commitments consumers, resorting to legal assistance in case of unresolved business problems. Features of CSR are: It provides the customer satisfaction through its products and services. It also assists in environmental protection and contributes towards social activities. The following are the features of CSR. Improved the quality of an organization in terms of economic, legal and ethical factors-CSR improves the economic features of an organization by earning profits for the owners. It also improves the legal and ethical features by fulfilling the law and implementing ethical standards

Builds and improved management system- It improves the management system by providing products which meets the essential customer needs. It develops relevant regulations through the utilization of innovative technologies in the organization

Contributes to countries by improving the quality of management- CSR contributes high quality product, environment conservation and occupational health safety to various regions and countries.

Enhances information security systems and implementing effective security measures-CSR enhances the information security measures by establishing improved information security system and distributing them to overseas business sites. The information system has improved by enhancing better responses to complex security accidents.

Creates a new value in transportation- It creates a new value in transportation for the greater safety of pedestrians and automobiles. The information and technology helps in establishing a safety driving assistance system.

Creates awareness towards environmental issues- It serves in preventing global warming by reducing the harmful gases emitted in to the atmosphere during the process of business activities.

Roles played in terms of ethical conduct. CSR plays a significant role in maintaining ethical conduct in an organization. the following are the roles played by CSR. Improves the relationships with the investment community and develops better access to capital and risks. Enhances ability to recruit, develop and retain staff Improves the reputation and branding of the organization Improves innovation, competitiveness and market positioning Improves the ability to attract and build effective and efficient supply chain relationships Improves relationships with regulators Reduces the costs through re-cycling process Enhances strong financial performance and profitability through operational efficiency gains

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Master of Business Administration Semester 4 MB0053: International Business Management ASSIGNMENT- Set-1

1. Write a note on strategic objectives. Not to oversimplify how to create a strategic plan, but by placing all the parts of a plan into three areas, you can clearly see how the pieces fit together. The three pieces of the puzzle are: Where are we now? Where are we going? How will we get there? Each part has certain elements to show you how and where things fit it. Where are we now? As you think about where your organization is now, you want to look at your foundational elements (mission and value) to make sure there has not been a change. More than likely, you will not revise these two areas very often. Then you want to look at your current position or your strategic position. This is where you look at what is happening internally and externally to determine how you need to shift and change. You should review your strategic position regularly through the use of a SWOT. These elements are as follows: Mission statement: The mission describes your organizations purpose the purpose for which you were founded and why you exist. Some mission statements include the business of the organization. Others explain what products or services they produce or customers they serve. Does your mission statement say what you do? Why does your organization exist? Values and/or guiding principles: This clarifies what you stand for and believe in. Values guide the organization in its daily business. What are the core values and beliefs of your company? What values and beliefs guide your daily interactions? What are you and your people really committed to? SWOT: SWOT is an acronym that stands for strengths, weaknesses, opportunities, and threats. These elements are crucial in assessing your strategic position with your organization. You want to build on your companys strengths; shore up the

weaknesses; capitalize on the opportunities; and recognize the threats. Where are we going? The elements of the question where are we going? Help you answer other questions such as what will my organization look like in the future? Where are we headed? What is the future I want to create for my company? Because the future is hard to predict, you can have fun imagining what it may look like. The following elements help you define the future for your business: Sustainable competitive advantage: Sustainable competitive advantage explains what your are best at compared to your competitors. Each company strives to create an advantage that continues to be competitive over the time. What can you be best at? What is your uniqueness? What can your organization potentially do better than any other organization? Vision statement: Your vision is formulating a picture of what your organizations future makeup will be and where the organization is headed. What will your organization look like in 5 to 10 years from now?

How will we get there? Knowing how youll reach your vision is the meat of your strategic plan, but its also the most time consuming. The reason it takes so much time to develop is because there are a number of routes from your current position to your vision. Picking the right one determines how quickly or slowly you get to your final destination. The parts of your plan that layout your roadmap is listed below: Strategic objectives: Strategic objectives are long-term, continuous strategic areas that help you connect your mission to your vision. Holistic objectives encompass four areas: financial, customer, operational, and people. What are the key activities that you need to perform in order to achieve your vision? Strategy: Strategy establishes a way to match your organizations strengths with market opportunities so that your organization

comes to mind when your customer has a need. This section explains how you travel to your final destination. Does your strategy match your strengths in a way that provides value to your customers? Does it build an organizational reputation and recognizable industry position? Short-term goals/priorities/initiatives: Short-term goals convert youre the strategic objectives into specific performance targets. You can use goals, priorities, and initiatives interchangeably. In this book, I use goals to define short-term action. Effective goals clearly state what you want to accomplish, when you want to accomplish it, how youre going to do it, and whos going to be responsible. Each goal should be specific and measurable. What are the 1- to 3-year-goals youre trying to achieve to reach your vision? What are your specific, measurable, and realistic targets of accomplishment? Action items: Action items are plans that set specific actions that lead to implementing your goals. They include start and end dates and appointing a person responsible are your action items comprehensive enough to achieve your goals? Scorecard: A scorecard measures and manages your strategic plan. What are the key performance indicators you need to track to monitor whether youre achieving your mission? Pick 5 to 10 goal related measures you can use to track the progress of your plan and plug them into your scorecard. Execution: In executing the plan, identify issues that surround who manages and monitors the plan and how the plan is communicated and supported. How committed are you to implementing the plan to move your organization forward? Will you commit money, resources, and time to support the plan?

2. Discuss in brief the role of WTO in promoting international business. WTO was established on 1st January 1995. In April 1994, the final act was signed at a meeting in Marrakesh, Morocco. The Marrakesh declaration of 15th April 1994 was formed to strengthen the world economy that would lead to better investment, trade, income growth and employment

throughout the world. The WTO is the successor to the general agreement of tariffs and trade (GATT). India is one of the founder members of WTO. This represents the latest attempts to create an organizational focal point for liberal trade management and to consolidate a global organizational structure to govern world affairs. WTO has attempted to create various organizational attentions for regulation of international trade. WTO created a qualitative change in international trade. It is the only international body that deals with the rules of trades between nations. Objectives and functions: The key objective of WTO is to promote and ensure international trade in developing countries. The other major functions include: Helping trade flows by encouraging nations to adopt discriminatory trade policy Promoting employment, expanding productions and trade and raising standard of living and income and utilizing the worlds resources Ensuring that developing countries secure a better share of growth in world trade Providing forum for trade negotiations Proving forum for trade negotiations Resolving trade disputes. The important functions of the WTO as stated in the WTO agreement are the following: Developing transitional economies- Majority of the WTO members belong to developing countries. The developing countries such as India, China, Mexico, Brazil and others have an important role in the organization. The WTO helps in solving the problems of developing economies. Providing help for export promotion- The WTO provides specialized help for export promotion to its members. The export promotion is done through the international trade center established by the GATT in 1964. It is operated by the WTO and the United Nations. The center also provides assistance in establishing export promotion and marketing services

Cooperating in global economic policy-making- The main function of the WTO is to cooperate in global economic policy making in the Marrakesh Ministerial Meeting in April 1994, a separate declaration was adopted to achieve this objective. Monitoring implementation of the agreement- The WTO administers sixty different agreements that have the statue of international legal documents. The member governments sign and confirm all WTO agreements on attainment. Providing forum for negotiations- The WTO provides a permanent forum for negotiations among members. The negotiations can be on matters already in the WTO agreements or matters not addressed in the WTO law. Administrating dispute settlement- The important function of WTO is the administration of the WTO dispute settlement system. The dispute settlement body is responsible for the settlement of disputes. The WTO dispute settlement system helps to: Preserve the rights and responsibilities of the members. Clarify the current provision of the agreements.

Structure: The structure of the WTO consists of the Ministerial Conference, which is the highest authority. This body consists of the representatives from all WTO members. The WTO members meet in every two years and take decisions on all matters under the multilateral trade agreements. The daily activities of the WTO are conducted by subsidiary bodies and principally by the General Council which is composed of WTO members. The members report to the Ministerial Conference. The General Council delegated responsibility to other major bodies. They are : Council for Trade in Goods manages the implementation and functioning of all agreements covering trade in goods

Trade in services and trade of intellectual property rights are to two councils that have responsibility for their respective WTO agreements and can establish their own subsidiary bodies if required. The committee on trade and development manages issued relating to the developing countries. The committee on Balance of Payments conducts consultations measures to handle balance of payments difficulties. Committee on Budget and Administration manages issues relating to financing and budget of WTO.

Principles: The WTO principles of the trading system are: Trading without discrimination- One aspect of nondiscrimination is that foreigners and people within the home country must be treated equally. This implies that imported goods that are in the market must not face discrimination. There is also a most favored nation principle which requires the nations to treat all WTO members equally. In case one nation grants a special trade deal to another nation, the deal must be extended to all WTO members. Trade barriers negotiated downwards- To lower trade barriers such as import tariffs, red tape and encourage trade growth. Predictable trading- The predictability in business helps to know the real const. the WTO operates with tariff bindings and agreements that restricts raising a specific tariff over a given time. This provides the business people with realistic data. Making trade rules clear and accessible helps the business people to anticipate stabled future. Competitive trading- The WTO works toward trade liberalization and understands that trade relationships between nations can be very complex. The WTO agreements support healthy competition in services and intellectual property and discourage subsidies and dumping of products at prices below the cost of their manufacturer. Encourage development and economic reforms- The majority of the WTO members are developing economies that are changing to market economies.

Agreements

The WTO agreements are a set of rules that are followed by the member governments while formulating policies and practices in the area of international trade. The agreements mainly cover goods, services and intellectual property. According to the agreement, the government must notify the WTO about the measures adopted to make their trade policies transparent. The major agreements are: General Agreement on Trade in Services (GATS) - This is a framework agreement defining the rules under which trade in services occurs. Trade in services cover a wide range of activities in the area of telecommunication, information, banking, insurance and education. The main objective of GATS is to establish framework for liberalizing trade in service. It encourages countries to modify their domestic regulations. According to the GATS, MFN status and transparency is applicable to all services. GATS cover services known as Consumption abroad where services are used by the consumers in a host country such as e-commerce and where citizens of a country travel overseas to consume products such as tourism or education. Trade-Related Aspects of Intellectual Property Rights (TRIPS)The agreement on Trade-Related Aspects of Intellectual Property Rights is one of the WTO agreements that are compiled by all the WTO members. According to TRIPS, developed and developing members of WTO must adopt the same minimum levels of intellectual property protection. According to TRIPS Agreement, members can adopt measures to protect the public health and nutrition; it encourages protection of new plant varieties. The 1995 WTO TRIPS Agreements covers copyright and related rights, geographic indications, trademarks, and patents of integrated circuits, protection of information and control of anticompetitive practices in contractual licenses. General Agreement on Tariffs and Trade (GATT) - This is a multilateral agreement among countries providing a framework for conducting international trade. GATT is regarded as an international institution governing international trade relations. GATT provides a framework for negotiations on the level of tariff. It promotes multilateral trade among members nations. It provides production against unfair trade and obstructions to trade.

Issues: The issues related to WTO are: Trend towards unilateral action by some developed countries in disregard of the provisions laid down in the Uruguay Round. The unilateral action brings dishonor to the entire multilateral trading system. This slows down the motivation for reform in all developing countries. Another issue is the favor of regionalism. The regional economic grouping have resulted in increased trade among countries in the region; there is a possibility of discrimination against third countries The Agreement on Agriculture has number of inequities in the implementation of the Agreement. The WTOs current position on trade, environment and sustainable development has faced criticism. Other issues are green room negotiations are the informal negotiation meeting at the WTO in which 35 countries are chosen by the Director General.

3. Write a note on various export promotion schemes by GOI. Export promotion schemes are the incentive programs that are developed to attract more firms into exporting. It helps in identification of the product and market. This also helps in pre shipment and post shipment financing, training, payment guarantee schemes, trade fairs, trade visits, and foreign representation and so on. India being a developing economy, export promotion schemes are needed to give a boost for our economy. The needs of the export promotion scheme are explained as follows. It is not wise to depend on the other external assistances for financing essential imports, rather exportable surplus needs to be created In any country, there are some capital goods, machinery and raw materials that cannot be product for some mote time and it has to be imported from the other countries. In order to pay for such imports, the country needs to have sufficient funds so that the country has to promote for its exports

The earning of the exports need to be raised to create the purchasing power in order to import the essential goods We need to explore the foreign markets in order to expand the capacities of the existing units and find market for the new units To tap our export potentials completely, we need to focus on our strengths like price stability, low wages and the industrial bases to increase its exports The deficits of payments in Indian economy can be resolved through funds received through the foreign assistance. We need to create the repaying capacity with the help of exports

The export promotion measures are explained as follows Export Production- For gearing up the production, we need to sharpen the competitive edge and upgrade the technology to get a better quality Liberalization- the policies like the trade and industrial licensing are oriented toward exports Supply of raw materials There are some license free import goods such as the raw materials, intermediates, components, consumables, spares, part accessories and other items that are not regulated by negative list of imports.

There are many export promotion schemes and export promotion capital goods are one of the export promotion schemes.

Export Promotion Capital Goods (EPCG) scheme This scheme allows import of the capital goods at the reduced rate of 15% customs duty. The goods can be both new and second hand goods and to the service sector. These are explained as follows: Import of second hand capital goods- The import of second hand goods that have the minimum residual life of five years are allowed free of license but is subjected to actual user conditions. Duty exemption scheme- This scheme aims at import of duty free goods. The goods that can be imported by this way include raw

materials, components, consumables, accessories, computer software. They can be imported under various schemes. Investment in plant and equipment- The investments beyond 75 lakhs is permitted for the small scale industrial sectors Processing zones for export- The establishment of the Export processing zones, Export oriented units, Electronic Hardware Technology parks, and software Technology parks helps in facilitating the export production in non-traditional sectors. Quality- The central government helps in modernizing and upgrading the test houses and laboratories in order to bring the standards so that the certifications from such test houses are very well recognized within and outside the country.

4. What do you understand by regional integration? List its types. Regional integration can be defined as the unification of countries into a larger whole. Regional integration also reflects a countrys willingness to share or unify into a larger whole. The level of integration of a country with other countries is determined by what it shares and how it shares. Regional integration requires some compromise on the part of counties. It should aim to improve the general quality of their life for the citizens of those countries. In recent years, we have seen more and more countries moving towards regional integration to strengthen their ties and relationship with other countries. This tendency towards integrating was activated by the European Union (EU) market integration. This trend has influenced both developed and developing countries to from customs unions and free trade areas. The world trade organization (WHO) terms these agreements of integration as Regional Trade Agreements). Need for Integration: There are many different approaches to achieve regional integration. To some extent, each country and region will find its own way. But typically there are some common ideas for achieving regional integration. Some of these are Facilitating the growth of trade Creating attractive investment climates

Surmounting the regulatory and administrative barriers to transit zones. Guaranteeing the physical security of trade routes. Strengthening physical and institutional infrastructure Promoting economic diversification.

Therefore the policy makers can make use of the wealth of knowledge that is made possible by the rise of the global economy. On the long run regional integration may transform the regions. The initiative of regional integration should perform at least the following functions: Strengthening of trade integration in the region Creating an appropriate environment for enabling private sector development. Developing infrastructure programmers to support economic growth and regional integration. Developing strong public sector institutions and good governance. Recuing social disparities and developing and inclusive civil society Contributing to the peace and security of the region Building environmental programmers at the regional level Strengthening the regions interaction with other region of the world.

Impact of integration Regional integration results in the creation and diversion of trade. It supports overall growth of the region, coupled with efficient trading practices. Trade creation increase production and income, and also leads to new entries in the market and therefore, results in tougher competition. The transfer of technology is also faster. Regional integration provides some of reduction on tariffs and prohibitions. It spreads goodwill among member countries and also helps in reducing the chances of conflict between countries. Types of integration Preferential trading agreement. This is a trade pact between countries. It is the weakest type of economic integration and aims to reduce the taxes on few products to the countries who sign the pact. The tariffs are not abolished completely but are lower than the tariffs charged to countries not party to the agreement. India

is in PTA with countries like Afghanistan, Chile and South common market. The introduction of PTA has generated an increase in the market size, and resulted in availability and variety of new products.

Free Trade Area This is a type of trade bloc and can be considered as a second stage of economic integration. The importers must obtain product information from all the suppliers within the supply chain, in order to determine the eligibility for a free trade agreement. After receiving the supplier documentation, the importer must evaluate the eligibility of the product depending on the rules surrounding the products. The importers product is qualified individually by the FTA. Common market Common market is a group formed by countries within a geographical area to promote duty free trade and free movement of labor and capital among its members. European community is an example of common market. A single market is a type of trade bloc, comprising a free trade area with common policies on product regulation, and freedom of movement of goods, capital, labour and service, which are known as the four factors of production. The member countries must come forward to eliminate the barriers, have a political will and formulate common economic policies. A common market is a first step towards a single market. It may be initially limited to a FTA with moderate free movement of capital and services, but it is not capable of removing rest of the trade barriers. Benefits and costs A single market has many advantages, the freedom of movements of goods, capital, labor and services between the member countries, results in the efficient allocation of these production factors and increases productivity. A single market presents a challenging environment of businesses as well as for customers, making the existence of monopolies difficult. This affects the inefficient companies and hence, results in a loss of market share

and the companies may have to close down. However, efficient companies can gain from the increase competitiveness, economies of scale and lower costs. Single market also benefits the consumers in a way that the competitive environment provides them with inexpensive products, more efficient providers of products and increased variety of products. If the companies fail to improve their methods, they may have to close down leading to migration and unemployment.

Economic union: Economic union is a type of trade bloc and is instituted though a trade pact. It comprises of a common market with a customs union. The countries that are part of an economic union have common policies on the freedom of movement of four factors of production, common product regulations and d common external trade policy. The purpose of and economic union is to promote closer cultural and political ties, while increasing the economic efficiency between the member countries. Economic unions are established by means of a formal intergovernmental legal agreement. Among independent countries either the intention of fostering greater economic integration. The members of an economic union share some elements associated with their national economic jurisdiction. These include the free movement of: Goods and services within the union along with a common taxing method for imports from nonmember countries Capital within the economic union. Persons within the economic union. Some form of cooperation usually exists when framing fiscal and monetary policies.

Political union A political union is a type of country, which consists of smaller countries. Here the individual nations share a common government and the union is acknowledged internationally as a single political entity. A political union can also be termed as a legislative union or state union.

5. What are the challenges faced by Indian businesses in global market? India is a developing country and every developing country has its own organizational problems. In the past decade, some Indian companies have made remarkable progress by reaching the international platform in short time. India has transformed from being primarily domestic players into confident global corporations. Brand India: Brand India is a phrase that describes the campaign which projects India as an emerging destination for business in various fields such as information technology, manufacturing, infrastructure, service sector and so on. Brand India is receiving a positive response. However, Brand India is weak in many ways. In developed countries, people are yet to associate India with world class standards. The initial market entry strategy of a company from a developing country is to offer cheaper products of acceptable quality. Example, china and Korea. The customers of developed countries buy those products only on the basis of price. Brand India is comprised of a large number of sub brands that are relatively established. It reflects the economic reforms and liberalization process that India economy has undergone. Brand equity is the word derived from the goodwill and name reorganization acquired over a period of time. It improves sales volume and profit margins. The India Brand Equity Foundation was established to promote brand India. Government and bureaucracy: The political environment of a country influences the business to a large extent. The political environment includes political stability in ht country, nature and extent of bureaucracy, ideology of government, party in power and so on. Another challenge that influences business is bureaucracy. Industrial incentives are administered by an elaborate and expensive bureaucracy. The relationship of government to international business is based on the concept of sovereignty. Government policy and procedures in India are very complex and confusion. Government policy and bureaucratic culture in India do not

encourage international business. Unnecessary government interference can hinder globalization. Government support is essential to encourage globalization. Government support is extended in the form of policy reforms, development of infrastructure, financial market.

Corporate governance: This is a process of promoting corporate transparency and accountability. It is set of policies that affect the way a company is administered and controlled. Quality corporate governance is a tool for socio-economic development. Corporate governance deals with power and accountability for the safety of assets and resources entrusted to the operating team of the firm. The objective of the corporate governance is to attain highest standards of procedures and practices that are followed by the corporate world. The new emerging corporate India needs guiding principles for corporate governance. The common aspects for the failure of corporate governance are misuse of power, frauds, misappropriation of funds and so on. Ethics Corporate governance is about ethical conduct of the business. Ethics is related to the code of values and principles that helps a person they choose between right or wrong. Managers made decisions base on a set of values and principles that are influenced by the culture of the organization. Ethical leadership is important for the business to be conducted by meeting the expectations of all the stakeholders. Corporate governance is the ethical framework under which corporate decisions are taken. Ethics is s generalized value system avoiding discrimination in recruitment and adopting fair business practices. The ethical norms vary from country to country. Labor practices: Ethical concerns are at the core of dispute regarding the labor practices. The multinational enterprises are charged of unjust treatment of workers in developing nations. The labor law enforcement is weak. The laws that force firms to obtain permission from the government prior to

retrenchment are not enforced properly. Hiring labors to contractor and subcontracting non core activities to other companies provides flexibility to the firms that seek to manage their labor force in volatile context. Child labor is used in the manufacture of exports from the developing countries is criticized by people in the developed countries. In India the carpet industry uses child labor and social activists in developed nations demand ban on the import goods embodying child labor. Managing diversity: Most of the international businesses face problems in managing multicultural diversity. Previously, MNCs had a county specific business strategy but now it is moving towards a global one. For an international manager, managing diversity is a challenge. The challenge is to create a work environment where every person performs to his full potential and compete for rewards and promotions that based on merits. The success of an MNC is determined by its ability to manage diversity. In an international organization, the workforce consists of variety of cultures. Today a typical firm is a combination of diverse workforce in terms of gender, race and so on. Focusing on bringing in best talent. Establishing programmers among employees of same and different race. Developing and age, gender and race profile of the workforce. Promoting minorities and other sections to decision making positions. Providing extended leaves, flexible time, and job sharing opportunities.

6. Discuss the various e-business models: Business to business model:

The business to business model describes the transactions between the buyers, suppliers, manufactures, resellers, distributors, and trading partners. This involves the transactions that involve the products, services, and the information. Internet based e-business is carried out through the industry sponsored market places and private exchanges that are conducted by the large companies.

The above diagram indicates direct business to business mode. In this direct business, the selling enterprise includes wholesaler, retailer or manufacturers who sell to the buyers of other business. The main reason behind introducing B2B model is to overcome the problems met by industry sponsored marketplaces in approaching buyers and sellers. Most of the companies do not want to get customized designs through market places as they do not want to expose proprietary information on a state that is shared by competitors. B2B e-commerce differs from business to consumer e-commerce in many ways. Business to consumer merchants sells on a first come, first serve basis. Most B2B transactions are done through negotiated contracts that allow the seller to think and plan for how much the buyer is likely to purchase. Business to consumer Model: The activities that serve the business customers with the products and services are described. The best example we can give for the business to consumer transaction is the person buying a pair of shoes from the retailer. The manufacture of the shoes performs many transactions such as the purchase of leather, laces, rubber and other raw materials. There are two models of implementation.

Generic B2C model: The generic model is mainly designed for the small and medium enterprises. The third party e-market place is used to help the enterprises for selling the products online. Dedicated B2C model: Many of the large enterprises use the dedicated B2C model. The enterprise itself owns the e-market place to sell service and support the customers online. As the name indicated this model is fully dedicated to the customers and is almost equivalent to the customer relationship management.

There are some e-commerce constituents with the B2C model. Commerce- This involves the process like the catalog, compare, products and a service, advertisements,. Order status and also enables the online payment. Personalization- This involves the activities like profile matching that matches the web content to specific profiles and gets the feedback from the customers and deals with the events, calendaring and registration. Community services- These include services that are dealt for the whole community. The community services can be chat, message boards, email services, subscriptions. Customer services- This process involves the services that are helpful for the customer. These include the activities such as the product support, online support like the call centers and telephony integration. Computer hardware and software- Most of the people buy software products online. The major online retailers of computer hardware and software are Dell and Gateway. Consumer electronics- The second largest product category sold online is electronics. Some of the electronics items shopped or purchased online are digital cameras, printers, scanners, and wireless devices like mobile phones, pen drives and so on.

Sporting goods- Sports related items like cricket bats, tennis bats, golf accessories like clubs, golf balls are some of the sporting goods which are sold online. Office supplies- Business to customer sales of office supplies are increasing all over the world.

Consumer to consumer model: The consumer to consumer C2C model involves the transaction between the customers through the third party. C2C is also called as Peer to Peer exchanges. The C2C transaction includes the classifieds, music and file shafting, and also the personal services. There will be million consumers those who want to sell their products in the e-business field. Equally on the other side there are million people who want to purchase the products and services. Finding each other are beneficial for both the retailer and the consumers and this can happen many times only with the help of third party that act as the intermediaries. The intermediaries in the C2C business model charge the sellers. The intermediaries charge because they bring the customers and sellers to one marketplace. C2C e-business has created a new dimension in online shopping business. C2C e-business gives many small business owners a way to sell their products without running a highly profit draining bricks and mortar store. Consumer to business model A consumer to business model is the electric business model, in which the consumers offer products and services to the enterprises. This is called as the inverted business model since the process operates completely in the opposite direction of the traditional e-business model, in which the organizations offer the goods and services to the consumer. The C2B model involves consumers themselves presenting as a group and provides the goods and services to the enterprise. For example, www.speakout.com. This site provides consumers market strategies and business and it also makes them familiar with the requirements of the various businesses. A concrete example of this is when competing airlines

gives a traveler best travel and ticket offers in response to the travelers post. This C2B model is advantageous because of the following reasons. The model helps In connecting large group of people by the bidirectional network. Many of the traditional media is of unidirectional but the internet is the bidirectional media. Individuals to access the technologies that were once available only for the large companies.

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