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Roll Number: 531110332
Learning Centre: 02544
Course & Semester: MBA
Strategic Management and Business Policy
Assignment No.: 1
Subject Code: MB0052
Date of Submission at the Learning Centre: 27 February, 2013
Q. 1 What do you understand by the term Strategy in the context of Business Management and Policy? And what are the stages in the formulation of a Strategy? Answer: Businesses have to respond to a dynamic and often hostile environment for pursuit of their mission. Strategies provide an integral framework for management and negotiate their way through a complex and turbulent external environment. Strategy seeks to relate the goals of the organisation to the means of achieving them. A company‟s strategy is the game plan management is using to stake out market position and conduct its operations. A company‟s strategy consists of the combination of competitive moves and business approaches that managers employ to please customers, compete successfully and achieve organisational objectives. Strategy may be defined as a long range blueprint of an organisation's desired image, direction and destination what it wants to be, what it wants to do and where it wants to go. Strategy is meant to fill in the need of organisations for a sense of dynamic direction, focus and cohesiveness. Strategy is a well defined roadmap of an organization. It defines the overall mission, vision and direction of an organization. The objective of a strategy is to maximize an organization‟s strengths and to minimize the strengths of the competitors. Strategy, in short, bridges the gap between “where we are” and “where we want to be”. Features of Strategy 1. Strategy is Significant because it is not possible to foresee the future. Without a perfect foresight, the firms must be ready to deal with the uncertain events which constitute the business environment. 2. Strategy deals with long term developments rather than routine operations, i.e. it deals with probability of innovations or new products, new methods of productions, or new markets to be developed in future. 3. Strategy is created to take into account the probable behavior of customers and competitors. Strategies dealing with employees will predict the employee behavior.
The overall objective of a strategy is twofold: To create competitive advantage, so that the company can outperform the To guide the company successfully through all changes in the environment competitors in order to have dominance over the market. The Generic Strategies According to Glueck and Jauch there are four generic ways in which strategic alternatives can be considered. These are stability, expansion, retrenchment and combinations. (i) Stability strategies: One of the important goals of a business enterprise is stability to safeguard its existing interests and strengths, to pursue well established and tested objectives, to continue in the chosen business path, to maintain operational efficiency on a sustained basis, to consolidate the commanding position already reached, and to optimise returns on the resources committed in the business. (ii) Expansion Strategy: Expansion strategy is implemented by redefining the business by adding the scope of business substantially increasing the efforts of the current business. Expansion is a promising and popular strategy that tends to be equated with dynamism, vigor, promise and success. It is often characterised by significant reformulation of goals and directions, major initiatives and moves involving investments, exploration and onslaught into new products, new technology and new markets, innovative decisions and action programmes and so on. Expansion include diversifying, acquiring and merging businesses. (iii) Retrenchment Strategy: A business organisation can redefine its business by divesting a major product line or market. Retrenchment or retreat becomes necessary or expedient for coping with particularly hostile and adverse situations in the environment and when any other strategy is likely to be suicidal. In business parlance also, retreat is not always a bad proposition to save the enterprise's vital interests, to minimise the adverse environmental effects, or even to regroup and recoup the resources before a fresh assault and ascent on the growth ladder is launched. (iv) Combination Strategies: Stability, expansion or retrenchment strategies are not mutually exclusive. It is possible to adopt a mix to suit particular situations. An enterprise may seek stability in some areas of activity, expansion in some and retrenchment in the others. Retrenchment of ailing products followed by stability and capped by expansion in some situations may be thought of. For some organisations, a strategy by diversification
and/or acquisition may call for a retrenchment in some obsolete product lines.The next step is to evaluate the general economic and industrial environment in which the organization operates. The process of strategy formulation basically involves six main steps. Evaluating the Organizational Environment . production facilities and plant locations. 2. Thus. strategy is a wider term which believes in the manner of deployment of resources so as to achieve the objectives. After identifying its strengths and weaknesses. B. an organization must keep a track of . Strategy Formulation Process Strategy formulation refers to the process of choosing the most appropriate course of action for the realization of organizational goals and objectives and thereby achieving the organizational vision. Objectives stress the state of being there whereas Strategy stresses upon the process of reaching there. however they are very rational and can be easily followed in this order. While fixing the organizational objectives.The key component of any strategy statement is to set the long-term objectives of the organization. Though these steps do not follow a rigid chronological order. The purpose of such a review is to make sure that the factors important for competitive success in the market can be discovered so that the management can identify their own strengths and weaknesses as well as their competitors‟ strengths and weaknesses. This includes a review of the organizations competitive position. Strategy includes both the fixation of objectives as well the medium to be used to realize those objectives. Once the objectives and the factors influencing strategic decisions have been determined. it is easy to take strategic decisions. Setting Organizations’ objectives . It is essential to conduct a qualitative and quantitative review of an organizations existing product line. it is essential that the factors which influence the selection of objectives must be analyzed before the selection of objectives. It is known that strategy is generally a medium for realization of organizational objectives. 1.
6. A critical evaluation of the organizations past performance. organizational strengths. An attempt is made by the organization to estimate its probable future condition if the current trends persist. potential and limitations as well as the external opportunities. Performance Analysis . . This requires a careful analysis of macroeconomic trends. Aiming in context with the divisional plans . Setting Quantitative Targets .In this step. the contributions made by each department or division or product category within the organization is identified and accordingly strategic planning is done for each sub-unit.Performance analysis includes discovering and analyzing the gap between the planned or desired performance. 3. present condition and the desired future conditions must be done by the organization. 5. This critical evaluation identifies the degree of gap that persists between the actual reality and the long-term aspirations of the organization. so as to evaluate the contribution that might be made by various product zones or operating departments.In this step. The best course of action is actually chosen after considering organizational goals. Choice of Strategy . The idea behind this is to compare with long term customers. 4.competitors‟ moves and actions so as to discover probable opportunities of threats to its market or supply sources.This is the ultimate step in Strategy Formulation. an organization must practically fix the quantitative target values for some of the organizational objectives.
The Cricket Board may permit Coke‟s products to be displayed during the cricket matches for a period of one year. Kolkata entered into a logistic alliance with TDK Logistics Ltd. Pricing collaborations: Companies may join together for special pricing collaborations.Q. Product and/or service alliance: Two or more companies may get together to synergise their operations.Sony Music created a retail corner for itself in the ice-cream parlours of Baskin-Robbins. Two companies. The necessary market and product support. Hyderabad. Companies can develop alliances with the members of the strategic group and perform more effectively. in brief.It is customary to find that hardware and software companies in information technology sector offer each other price discounts. Promotional alliance: Two or more companies may come together to promote their products and services. Example :. These alliances may take any of the following forms.The outlets of Pizza Hut.. Companies should be very careful in selecting strategic partners. 4. A manufacturing company may grant license to another company to produce its products. 3. Example:. Example :. Logistic alliance: Here the focus is on developing or extending logistics support. may produce a new product altogether. Example :. 2) TV Channels tie-up with Cricket boards to telecast entire series of cricket matches live. including technical know-how. to outsource the requirements of these outlets from more than 30 vendors all over India – for instance. seeking alliance for their products and/or services. A company may agree to carry out a promotion campaign during a given period for the products and/or services of another company. is provided as part of the alliance. One company extends logistics support for another company‟s products and services. are the types of Strategic Alliances and the purpose of each? Supplement your answer with one real life example of each Answer: Strategic alliances constitute a viable alternative in addition to Strategic Alternatives. What. The strategy should . Two companies may jointly market their products which are complementary in nature.2. who come together in such an alliance.1) Chocolate companies more often tie up with toy companies. Following are the different types of strategic Alliances: 1. Example :. Example :.Coca-cola initially provided such support to Thums Up. meat and eggs from Hyderabad etc. 2.
be to select such a partner who has complementary strengths and who can offset the present weaknesses. .
You‟ll be much more confident about the purpose of the business and how internal and external factors will impact your success. these stores were backed by large chains. 2. and current market opportunities you may find that you see the business moving in a different direction than you first anticipated. The exercise of writing a plan can help you decide whether or not the business is viable. You‟ll be challenged to write a Mission Statement. 4. Road map. They decided to forgo the idea. 3. establish your staffing plans. 3 What is a Business Plan? What purpose does it serve? (10 marks) Ans: A business plan is a map for where the company is heading.Q. Bill was interested in opening up a boutique grocery store. written statement of a set of business goals. Direction. Clarity. the financial background and nature of the business. In addition. competitors. They were really excited about starting the new venture. determine your break even point and much more. Viability. A few years later. The New World Encyclopedia defines a business plan as "a formal. It‟s much easier to stop moving forward with an idea when you have invested little time or money. The outline of a business plan is fairly structured. Following the tasks you‟ve established in the business plan will help you get up and . and the strategy for reaching those goals. Boutique grocery stores started popping up on every corner of the neighborhoods they considered opening their store. When researching your industry. Once the business has started you‟re more likely to keep pouring your money and your efforts into trying to make it succeed. their timing was a little off. Bill wrote another business plan for a different business. However. He wrote a full business plan with two of his friends. The business plan is a template to follow for both the start-up phase as well as execution of daily operations. As an example. a Vision Statement. Within 6 months of completing the plan he opened up his wholesale business and was exceeding revenue projections. Purpose 1." It therefore defines much about the company for outsiders and those who have or plan to have a stake in the company.
Without a road map. although they will try to limit their exposure to it. check your calculations. will be looking to see how you propose to handle risks that your company may encounter. The bank will look for collateral and cash flow within your plan. a economic boom. What will you do with it? 3. As well as checking your credit rating a bank manager may ask you a number of questions which you will need to be able to answer. What collateral or guarantee do you have? You need to ensure that the first 6 questions are already answered in your business plan as it is much harder to change the manager‟s mind in your interview with them. help you monitor results and enable communication of your ideas. If you don‟t have the time to write the plan. then how do you think you are going to find time to operate your new business? If you are truly committed to your business idea. is commitment. Professional Investors accept risk. How are you going to pay it back? 7. The most important benefit. Writing the business plan is a level of commitment. 6. Why do you need the amount requested? 2. the entry of a new competitor. other than determining viability. a recession. The questions they may be asking themselves while reading your business plan are: . How much less can the company survive on? 5. etc. Communicating your business idea with a financier The lender. such as a bank. 7. Although even if you do not intend to raise finance you should still prepare a plan to help focus your thoughts. What other sources of finance do you have or who else are you borrowing from? 6.running sooner with fewer mishaps. How do you know it‟s enough? 4. Commitment. Reviewing your business idea Business plans are often used for raising finance for the business as they are generally a requirement of lenders or investors. They are concerned about the security of the repayment of the money they have loaned to you and so want to ensure that you will be managing the company‟s risk wisely. such as product or service offerings. how are you going to know what steps to take or when you need to make adjustments to the business? The plan can be adapted as any aspect of your business changes. such as: 1. you will take the time to create a business plan. And it provides a base line for which to compare your results. 5.
How much can I lose? – What is the risk of losing their investment? ..How can I get my money back or out of the company? .Who else is investing in this company? .How much can I make? – They are usually looking to make around 30-50% annual compound growth on their investment .
In the US. The planning group should comprise representatives from all departments or organizational units. or unavailable transportation? How will management contact employees in the event personnel are required to evacuate to another area during non-business hours? Will the financial institution have the resources necessary to transport personnel to an offsite facility that is located a significant distance from their residence? . Explain in a sentence or two as to how it is different from a Business Plan (10 marks) Answer: Business continuity planning (BCP) "identifies an organization's exposure to internal and external threats and synthesizes hard and soft assets to provide effective prevention and recovery for the organization. and service providers. specific personnel. reduce the overall risks. A business continuity plan is a roadmap for continuing operations under adverse conditions such as a storm or a crime. Based on the BIA. and shorten the recovery window? How will decision-making succession be determined in the event management personnel are unavailable? How will management continue operations if employees are unable or unwilling to return to work due to personal losses. while maintaining competitive advantage and value system integrity”. The BCP should address: How will management prepare employees for a disaster. In addition. the BCP should assign responsibilities to management. and succession plans should assign responsibilities to back-up personnel in the event integral employees are not available. closed roads.Q. and often. It is also called business continuity and resiliency planning (BCRP). personnel issues are not fully integrated into the enterprise-wide plan. teams. Additionally. the plan should specifically identify the integral personnel that are needed for successful implementation of the BCP. vendor support needs should be identified. Personnel Human resources represent one of most critical BCP components. 4 What is the chief purpose of a Business Continuity Plan and what are its components for effective implementation. governmental entities refer to the process as continuity of operations planning (COOP). and the BCP should be prepared by the individuals responsible for carrying out the assigned tasks.
On-site medical support. Emergency Training Since personnel are critical to the recovery of the financial institution. Communications. Recovery. advance plans should be established regarding living arrangements for displaced employees and their families. clothing. If possible. Crisis/Emergency. Technology.. management should be aware of the business needs of each employee to ensure that proper communication channels and alternative telecommunications options are available. Facilities. if available. child care. Business Units and Processes. such as securing blocks of hotel rooms or maintaining rental contracts for small homes. particularly if employees are required to work at their hotel or at an alternate location. and transportation prior to the disruptive event. and access to company vehicles and other modes of transportation should also be provided. Ideally. Recovery efforts are typically more successful when management attempts to solicit and meet the immediate needs of their employees. mobile command centers. realize the potential threats that may affect the financial institution. within and outside the local area. Management should plan for basic necessities and services for its staff members who have been displaced during a disaster. Human Resources. medical supplies.g. management should establish plans to obtain water. Who will be responsible for contacting employees and directing them to their alternate locations? Who will be responsible for leading the various BCP Teams (e. and service providers? Who will be responsible for security (information and physical)? Personnel Needs One of the first things that many financial institutions realize during a disaster is that recovery cannot take place without adequate personnel. Customer Service)? Who will be the primary contact with critical vendors. business continuity training should be an integral part of the BCP. a well-trained staff will more likely remain calm during an emergency. suppliers. and . During a disaster. Management's efforts to maintain good employee relations will likely contribute to the commitment and loyalty of financial institution personnel and their desire to assist with the timely recovery of operations. If an emergency lodging program is offered by the financial institution. food.
management may use formal agreements with temporary agencies and headhunting services to provide temporary staffing solutions. and data files required for recovery. A comprehensive training program should be developed for all employees. equipment. telecommunications equipment. supplies. financial institutions may decide to locate staff at the back-up facility on a permanent basis or hire employees who live outside the primary business area and closer to the alternate facility. a recovery team is established to perform this function. if possible. branches. Key personnel should also be identified to make decisions regarding the renovation or rebuilding of the primary facility after the immediate disaster has ended. an audit trail should be maintained to document management's training efforts. To ensure adequate staffing at the alternate site. The financial institution should also plan to shift employees to other corporate sites. the recovery team will install the necessary hardware. If employees are unable to return to work. Cross Training and Succession Planning Cross-training of personnel and succession planning is also an important element of the business continuity planning process. Typically. software. Once these materials have been obtained. or service provider facilities outside of the disaster area and prior to the development of transportation problems. which .be able to safely implement required procedures without endangering their lives or the lives of others. BCP Team Assignments Planning should also consider human resources necessary for decision making and staffing at alternate facilities under various scenarios. and software. Personnel responsible for returning the primary facility to normal operations are usually designated to a salvage team. and kept up-to-date to ensure that everyone understands their current role in the overall recovery process. conducted at least annually. such as data files. They will be responsible for retrieving materials from the off-site storage location. and their primary responsibility is to recover predefined critical business functions at the alternate back-up site. back-up locations. Management should cross train employees throughout the organization and assign back-up personnel for key operational positions. In addition. These tasks usually require personnel beyond what is necessary for ongoing business continuity efforts.
and the media (designated media spokesperson). the business continuity planning coordinator or planning committee should be given responsibility for regularly conducting employee awareness training and performing annual tests of the BCP. Finally. emergency personnel. However. and the recovery of spoiled media and reports. . Communication Communication is a critical aspect of a BCP and should include communication with employees. the salvage team will be responsible for supervising the retrieval and cleaning of equipment. after significant changes to business operations. before restoration tasks can be performed and employees return to the primary facility. The BCP should address guidelines for transferring operations from the back-up site to the primary facility with minimum disruption. The salvage team must be certain that all pending danger is over. or more frequently. and employees can safely return to the primary facility. vendors/suppliers (detailed contact information). the salvage team should perform an inventory of all property and ensure that the on-site investigation is complete. Policy guidelines should also address alternate methods of telecommunications in the event primary providers are unable to supply necessary services. general ledger records. regulators. The salvage team is also given the authority to resume normal operations at the primary facility. the BCP should be updated at least annually. Once the salvage team approves the resumption of normal operations.should be separate from the recovery team. In addition. and insurance claims. In addition. records should be maintained detailing associated costs and property valuations for documenting budgetary changes. customers (notification procedures). the removal of debris. and regular audits should confirm the adequacy of these diverse systems. which is a significant task since numerous areas must be closely reviewed to ensure that operations will function properly. Once personal security is ascertained. or if training and testing reveal gaps in the policy guidelines. the recovery team is assigned the responsibility of returning production to the primary facility. Alternate telecommunications capabilities should be implemented to prevent any single point of failure that could disrupt operations.
Communicating With Employees One of the most important activities of business continuity planning involves communicating with employees. Employees should be promptly notified of a pending disaster, and specific evacuation instructions should be provided and included in the BCP. Management must be able to communicate with personnel located in isolated areas or dispersed across multiple locations, and management should be aware of each employee's evacuation plans to ensure that they can be contacted in a timely manner during a disaster. While manually dialed telephone call trees may be a viable communication tool in some instances, emergency notification systems should be evaluated to determine their cost effectiveness. With either method, management should ensure that contact information is current and easily accessible. Synchronization with human resource departments and company mail systems may prove helpful in maintaining the currency of contact information. Employee notification solutions may also include the following:
An in-bound hotline number for employees to retrieve up-to-date voice messages from any location or a website accessible only by employees that provides important information regarding the operational status of the financial institution and contact numbers for financial institution personnel;
A two-way polling phone system that confirms all employees have been contacted, with confirmed delivery of messages; Remote access provided to employees through the use of laptops, software, and Internet based solutions by utilizing dial-up connections, cable modems, virtual private networks (VPNs), integrated services digital networks (ISDNs), digital subscriber lines (DSLs), or wireless capabilities;
Ultra forward service, which allows incoming calls to be rerouted to a pre-determined alternate location; Custom redirect service, which allows management to determine where incoming calls are answered and redirect calls to various locations or pre-established phone numbers; Provisioning local phone services to one office from two different telecommunications provider locations to provide phone system redundancy; and Adding a back-up Internet Service Provider (ISP) and balancing the traffic between the two ISPs over separate communication paths.
Interfacing With External Groups Financial institutions often forget about the need to include BCP guidelines regarding their interaction with external groups such as local and state municipal employees and city officials. Management should implement BCP guidelines addressing escalation procedures and include contact information for communicating with these various groups. Consideration should be given to the proximity of the financial institution to police, fire, and medical facilities, and the timeliness of their response should be factored into BCP recovery strategies. Given the importance of the on-going operation of the financial system, financial institutions should be able to communicate with their industry counterparts. Current contact information should be maintained and should be easily accessible to facilitate conference calls and meetings between financial sector trade associations, financial authority working groups, emergency response groups, and international exchange organizations. These groups should assess the potential impact of major operational disruptions, coordinate recovery efforts, and promptly respond to failures in critical communication systems. Media Relations A significant part of any BCP and related test plan should involve dealing with the media. When a disruptive event occurs that could affect the financial institution's ability to continue operations, the public must be informed. Before a disaster strikes, management should prepare a response that has been approved by the board and the shareholders. In addition, employees should be instructed to refer any questions to the financial institution's media contact. The chosen spokesperson should be adequately informed, credible, have strong communication skills, and be accessible to the media so that inaccurate information is not broadcast to the public, which could potentially harm the reputation of the financial institution. Only confirmed information should be provided, and the spokesperson should discuss what the financial institution is doing to mitigate any potential threats. In order to ease customer's concerns regarding the security of their deposit funds, it is a good idea to conduct regular media briefings until the emergency has ended. Technology Issues The technology issues that should be addressed in an effective BCP include:
Hardware - mainframe, mid-range, servers, network, end-user; Software - applications, operating systems, utilities; Communications (network and telecommunications); Data files and vital records; Operations processing equipment; and Office equipment.
These technology issues play a critical role in the recovery process; therefore, comprehensive inventories should be maintained to ensure that all applicable components are considered during plan development. Planning should include identifying critical business unit data that may only reside on individual workstations, which may or may not adhere to proper back-up schedules. Additionally, the plan should address vital records, necessary back-up methods, and appropriate back-up schedules for these records. The BCP team or coordinator should also identify and document end-user requirements. For example, employees may be able to work on a stand-alone personal computer (PC) to complete most of their daily tasks, but they may require a network connection to fulfill other critical duties. Consequently, management should consider providing employees with laptops and remote access capabilities using software or a VPN connection. When developing the BCP, institutions should exercise caution when identifying non-critical assets. An institution's telephone banking, Internet banking, or automated teller machine (ATM) systems may not seem mission critical when systems are operating normally. However, these systems may play a critical role in the BCP and be a primary delivery channel to service customers during a disruption. Similarly, an institution's electronic mail system may not appear to be mission critical, but may be the only system available for employee or external communication in the event of a disruption. Data Center Recovery Alternatives Financial institutions should make formal arrangements for alternate processing capability in the event their data processing site becomes inoperable or inaccessible. The type of recovery alternative selected will vary depending on the criticality of the processes being recovered and the recovery time
Recovery plan alternatives may take several forms and involve the use of another data center or a third-party service provider. Opportunities.objectives (RTOs). & Threats) and PEST (Political. Weaknesses. . A legal contract or agreement should evidence recovery arrangements with a third-party vendor. utilities. such as same-day business resumption. interdependent business partners.a hurricane wipes out a server farm. The following are acceptable alternatives for data center recovery. less stringent recovery objectives may be acceptable for other entities. institutions will be expected to describe their reasons for choosing a particular alternative and why it is adequate based on their size and complexity. infrastructure systems. Economic. suppliers. Considerations such as the increased risk of failed transactions. financial industry participants whose operations are critical to the functioning of the overall financial system and other financial industry participants should establish high recovery objectives. SWOT (Strengths. For example. However. Sociocultural and Technology) analysis. budget. The scope of the recovery plan should address alternate measures for core operations. Conversely. operations. solvency. For example . liquidity concerns. The disaster recovery plan focuses on the technological aspect of getting the business up and running. key personnel. Business continuity plans are the guidelines for continuing business operations in the event of a disaster (but is not a disaster recovery plan). and reputation risks should be factored into the decision making process. Difference between A business Plan and Business Continuity Plan A business plan is the guiding document stating a business's goals. and expected profitability. facilities. startup costs. and key personnel.
5 Take any three examples of the components of a Decision Support System and explain how they help decision making (10 marks) Ans. The manager should be able to know. The Manager can review these financial and production ratios. The Daily Ratios Report: This is the most important part of the decision support system. the actual expenditures are compared to the budget in a feedback loop. It enables the Manager to instantly analyse dozens of important aspects of the functioning of his company. Where there is a strong deviation from historical patterns. It also allows him to compare the performance of his company to the performance of his competitors. at each and every stage.Q. Examples of the Ratios to be Included in the Decision System SUE measure – deviation of actual profits from expected profits ROE – the return on the adjusted equity capital Debt to equity ratios ROA – the return on the assets The financial average ROS – the profit margin on the sales . or where the ratios warn about problems in the future – management intervention may be required. The most important statement is that of the cash flow. and a balance sheet. other firms in his branch and to the overall performance of the industry that he is operating in. 3. these four documents are the formal edifice of the firm‟s finances. they can not serve as day-to-day guides to the General Manager. However. 2. the cash flow statement. what his real cash situation is – as opposed to the theoretical cash situation which includes accounts payable and account receivable in the form of expenses and income. When putting together. Daily Financial Statements: The Manager should have access to continuously updated statements of income. During the year. Annual Budget: It is really a business plan. or at the end of the fiscal year. cash flow. the balance sheet. As time passes. The budget allocates amounts of money to every activity and/or department of the firm. It allows him to compare the behaviour of these parameters to historical data and to simulate the future functioning of his company under different scenarios. the firm generates its financial statements: the income statement. Following are the three examples of the components of a Decision Support System 1.
It is completely compatible with western accounting methods and derives all the data that it needs from information extant in the company. inventory and inflation policies. how efficiently assets are used Tax burden and interest burden ratios Compounded leverage Sales to fixed assets ratios Inventory turnover ratios Days receivable and days payable Current ratio. b. but infact helps the manager to take quick decisions and make profit to the company. quick ratio. non cash outlays are controlled. ATO – asset turnover. The management knows exactly how much credit it could take. It warns the management against impending crises and problems in the company. A decision system allows for careful financial planning and tax planning. So. managers tend to take too much credit and burden the cash flow of their companies. It forces the management to rationalize the depreciation. interest coverage ratio and other liquidity and coverage ratios Valuation price ratios And many others A decision system has great impact on the profits of the company. tax liabilities are minimized and cash flows are maintained positive throughout. The decision system is an integral part of financial management in the West. Profits go up. for how long (for which maturities) and in which interest rate. . It has been proven that without proper feedback. It specially helps in following areas: a. the establishment of a decision system does not hinder the functioning of the company in any way and does not interfere with the authority and functioning of the financial department.
. Social dialogue is seen as a powerful instrument to address employment-related issues. the EU Disability Strategy and the Health and Safety Strategy. In its document "Anticipating and managing change: a dynamic approach to the social aspects of corporate restructuring". Employment and Social Affairs Policy Within a business CSR relates to quality employment.6 Ans. adapting structural changes and changing the work environment in order to create more balanced conditions for both genders acknowledging the valuable contribution of women as strategies which will benefit the society as well as the enterprise itself. Following are the different ways in which company's CSR can be expressed. this will have a positive impact at the macro-economic level. The Commission has called upon the social partners to give their opinion in relation to the usefulness of establishing at Community level a number of principles for action. an initiative on socially responsible restructuring. initiatives to promote equality and diversity in the workplace.Q. If companies succeed in managing change in a socially responsible manner. the European Social Inclusion Strategy. the Commission has stressed that properly taking into account and addressing the social impact of restructuring contributes to its acceptance and to enhance its positive potential. Employment and social policy integrates the principles of CSR. CSR is also about managing change at company level in a socially responsible manner. integration of people with disabilities anticipation of industrial change and restructuring. consultation and participation of workers. in particular. which is acceptable to all parties. This happens when a company seeks to set the trade-offs between the requirements and the needs of the various stakeholders into a balance. Deeply rooted societal changes such as increasing participation of women in the labour market should be reflected in CSR. through the European Employment Strategy. 1. which would support business good practice in restructuring situations. information. Name and explain any three ways in which a Company’s CSR can be expressed CSR is “a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis” as they are increasingly aware that responsible behaviour leads to sustainable business success. equal opportunities. life-long learning.
are being taken into account. If CSR is therefore to continue to serve its purpose. Its objective is to ensure a balanced approach to sustainable development. increasingly require information and reassurance that their wider interests. The role of enterprise policy is to help create a business environment. strong lines of communication between enterprises and consumers need to be created. Consumers and their representative organisations have an important role to play in the evolution of CSR. Enterprise policy Only competitive and profitable enterprises are able to make a long-term contribution to sustainable development by generating wealth and jobs without compromising the social and environmental needs of society. . social and environmental dimensions. which maximises synergies between its economic. Consumers. 3.2. such as environmental and social concerns. supports entrepreneurship and a sustainable economic growth. in their purchasing behaviour. which supports the Lisbon objective of becoming the world‟s most dynamic knowledge-driven economy. In fact. only profitable firms are sustainable and have better chances to adopt/develop responsible practices. Consumer Policy CSR has partly evolved in response to consumer demands and expectations.
8. B. Here: p.Reference: http://www.com/98/business-plan-its-real-purpose/ http://www. D.co. Swartz.htm http://www.com/strategy-definition.uk/?q=business-plans http://pros-per. SMU Manual on Strategic Management and Business Policy (Book ID: B1314) .wisteria. Journal of Applied Management Studies.. Herbane.org/entry/Business_plan Elliot.. No. Vol. pp. (1999) Just waiting for the next big bang: business continuity planning in the UK finance sector. 48. 43–60.newworldencyclopedia.managementstudyguide. E.
2013 .Name: Dromor Tackie-Yaoboi Roll Number: 531110332 Learning Centre: 02544 Course & Semester: MBA Semester IV Subject: International Business Management Assignment No.: 1 Subject Code: MB0053 Date of Submission at the Learning Centre: 27 February.
urban industries. there is nothing mysterious about globalization. Trade: Developing countries as a whole have increased their share of world trade – from 19 percent in 1971 to 29 percent in 1999. It refers to an extension beyond national borders of the same market forces that have operated for centuries at all levels of human economic activity – village markets. Globalization is not just a recent phenomenon. while Africa as a whole has fared poorly. or financial centers. The most striking aspect of this has been the integration of financial markets made possible by modern electronic communication.1 Ans. Countries that have been able to integrate are seeing faster growth and reduced poverty. even fear. The strongest rise by far has been in the export of manufactured goods. Write a short note on ‘Globalization’. the newly industrialized economies (NIEs) of Asia have done well. At its most basic. believing that it increases inequality within and between nations. Globalization offers extensive opportunities for truly worldwide development but it is not progressing evenly. Some analysts have argued that the world economy was just as globalized 100 years ago as it is today. There are four aspects of globalization: 1. reflecting technological advances that have made it easier and quicker to complete international transactions – both trade and financial flows. It refers to the increasing integration of economies around the world. Some view it as a process that is beneficial – a key to future world economic development – and also inevitable and irreversible. political and environmental dimensions of globalization that are not covered here. There are also broader cultural. The term sometimes also refers to the movement of people (labor) and knowledge (technology) across international borders. This brief offers an overview of some aspects of globalization and aims to identify ways in which countries can tap the gains of this process. while remaining realistic about its potential and its risks. The term "globalization" has acquired considerable emotive force.Q. The share of primary commodities in . threatens employment and living standards and thwarts social progress. But today commerce and financial services are far more developed and deeply integrated than they were at that time. The term has come into common usage since the 1980s. particularly through trade and financial flows. Others regard it with hostility. Some countries are becoming integrated into the global economy more quickly than others. the result of human innovation and technological progress. For instance. The composition of what countries export is also important. Economic "globalization" is a historical process.
For instance. direct foreign investment brings not only an expansion of the physical capital stock. but in the period 1965-90. Movement of people: Workers move from one country to another partly to find better employment opportunities. net official flows of "aid" or development assistance have fallen significantly since the early 1980s. management techniques. often overlooked. But the flow of migrants to advanced economies is likely to provide a means through which global wages converge. knowledge about production methods. Most migration occurs between developing countries. the proportion of labor forces round the world that was foreign born increased by about one-half. There is also the potential for skills to be transferred back to the developing countries and for wages in those countries to rise. More generally. Spread of knowledge (and technology): Information exchange is an integral. Direct foreign investment has become the most important category.world exports – such as food and raw materials – that are often produced by the poorest countries. . It also shows that: the increase followed a particularly "dry" period in the 1980s. 4. has declined. Both portfolio investment and bank credit rose but they have been more volatile. Capital movements: Globalization sharply increased private capital flows to developing countries during much of the 1990s. and the composition of private flows has changed dramatically. falling sharply in the wake of the financial crises of the late 1990s. The numbers involved are still quite small. 3. but also technical innovation. export markets and economic policies is available at very low cost. 2. and it represents a highly valuable resource for the developing countries. aspect of globalization.
without being open to the rest of the world. New jobs are created for unskilled workers. including India. and Uganda. the increased growth that results from free trade itself tends to increase the incomes of the poor in roughly the same proportion as those of the population as a whole. Although there are benefits from improved access to other countries’ markets. No country in recent decades has achieved economic success. There is considerable evidence that more outward-oriented countries tend consistently to grow faster than ones that are inward-looking. The main benefits for industrial countries would come from the liberalization of their agricultural markets. have experienced faster growth and more poverty reduction. In these countries. however. Moreover. The evidence on this is clear. Further liberalization – by both industrial and developing countries – will be needed to ." the number of people in absolute poverty declined by over 120 million (14 percent) between 1993 and 1998. in terms of substantial increases in living standards for its people. Overall. reflecting more rapid economic growth in developing countries. in part the result of trade liberalization. Developing countries would gain about equally from liberalization of manufacturing and agriculture. inequality among countries has been on the decline since 1990.Q. Vietnam. Describe the positives of trade liberalization. Countries that have opened their economies in recent years. one finding is that the benefits of trade liberalization can exceed the costs by more than a factor of 10. would gain most from agricultural liberalization in industrial countries because of the greater relative importance of agriculture in their economies. In contrast. The group of low-income countries. countries benefit most from liberalizing their own markets. trade opening (along with opening to foreign direct investment) has been an important element in the economic success of East Asia.2 Ans. Indeed. often channeled to narrow privileged interests that trade protection provides. Freeing trade frequently benefits the poor especially. On average. raising them into the middle class. Opening up their economies to the global economy has been essential in enabling many developing countries to develop competitive advantages in the manufacture of certain products. Developing countries can ill-afford the large implicit subsidies. Policies that make an economy open to trade and investment with the rest of the world are needed for sustained economic growth. defined by the World Bank as the "new globalizers. those developing countries that lowered tariffs sharply in the 1980s grew more quickly in the 1990s than those that did not.
This would give the poorest countries the confidence to persist with difficult domestic reforms and ensure effective use of debt relief and aid flows.realize trade’s potential as a driving force for economic growth and development. are called for to remove the trade barriers facing developing countries. . To be completely effective. speedier liberalization of textiles and clothing and of agriculture is particularly important. Similarly. Offering the poorest countries duty – and quota – free access to world markets would greatly benefit these countries at little cost to the rest of the world. Although quotas under the so-called Multi-fibre Agreement are due to be phased out by 2005. the elimination of tariff peaks and escalation in agriculture and manufacturing also needs to be pursued. extended to all goods. such access should be made permanent. transparent rules of origin. and accompanied by simple. Enhanced market access for the poorest developing countries would provide them with the means to harness trade for development and poverty reduction. In turn. Greater efforts by industrial countries and the international community more broadly. particularly the poorest countries. developing countries would strengthen their own economies (and their trading partners’) if they made a sustained effort to reduce their own trade barriers further. The recent market-opening initiatives of the EU and some other countries are important steps in this regard.
that it would not seek Congressional ratification of the Havana Charter.000 tariff concessions affecting $10 billion or about one-fifth – of world trade. ratification in national legislatures proved impossible in some cases. Although the ITO Charter was finally agreed at a UN Conference on Trade and Employment in Havana in March 1948. the ITO was effectively dead.3 Write a short note on GATT and WTO. The Charter was intended to provide not only world trade disciplines but also contained rules relating to employment. or "trade rounds". highlighting the difference between the two. under the auspices of GATT – the Uruguay Round was the latest and most extensive. in 1950.Q. was established on a provisional basis after the Second World War in the wake of other new multilateral institutions dedicated to international economic cooperation – notably the "Britton Woods" institutions now known as the World Bank and the International Monetary Fund. The biggest leaps forward in international trade liberalization have come through multilateral trade negotiations. It was also agreed that the value of these concessions should be protected by early and largely "provisional" acceptance of some of the trade rules in the draft ITO Charter. there were additions in the form of "plural-lateral” voluntary membership agreements and continual efforts to reduce tariffs. Ans. General Agreement on Tariff and Trade( GATT): The GATT. When the United States’ government announced. . the basic legal text of the GATT remained much as it was in 1948. restrictive business practices. The tariff concessions and rules together became known as the General Agreement on Tariffs and Trade and entered into force in January 1948. Despite its provisional nature. the GATT remained the only multilateral instrument governing international trade from 1948 until the establishment of the WTO. Much of this was achieved through a series of "trade rounds". The original 23 GATT countries were among over 50 which agreed a draft Charter for an International Trade Organization (ITO) – a new specialized agency of the United Nations. In an effort to give an early boost to trade liberalization after the Second World War and to begin to correct the large overhang of protectionist measures which remained in place from the early 1930s-tariff negotiations were opened among the 23 founding GATT "contracting parties" in 1946. Although. commodity agreements. international investment and services. in its 47 years. This first round of negotiations resulted in 45.
Numerous specialized committees. Below this is the General Council which meets several times a year in the Geneva headquarters. GATT. GATT’s success in reducing tariffs to such a low level. . The WTO’s top level decision-making body is the Ministerial Conference which meets at least once every two years. drove governments to devise other forms of protection for sectors facing increased overseas competition. Both these changes undermined the credibility and effectiveness of GATT. development. combined with a series of economic recessions in the 1970s and early 1980s. Services Council and Intellectual Property (TRIPS) Council report to the General Council.The limited achievement of the Tokyo Round. through technical assistance and training programs Cooperating with other international organizations The WTO has nearly 150 members. accounting for over 97% of world trade. fairly and predictably. This is typically by consensus. the Goods Council. freely. working groups and working parties deal with the individual agreements and other areas such as the environment. It does this by: Administering trade agreements Acting as a forum for trade negotiations Settling trade disputes Reviewing national trade policies Assisting developing countries in trade policy issues. was a sign of difficult times to come. At the next level. The WTO’s overriding objective is to help trade flow smoothly. outside the tariff reduction results. Decisions are made by the entire membership. The WTO’s agreements have been ratified in all members’ parliaments. A majority vote is also possible but it has never been used in the WTO. Around 30 others are negotiating membership. The General Council also meets as the Trade Policy Review Body and the Dispute Settlement Body. WTO World Trade Organization came into existence in 1995 after the desolation of General Agreement on Tariff and Trade (GATT). High rates of unemployment and constant factory closures led governments in Europe and North America to seek bilateral market-sharing arrangements with competitors and to embark on a subsidies race to maintain their holds on agricultural trade. and was extremely rare under the WTO’s predecessor.
In addition to goods. The WTO is run by its member governments. The WTO commitments are full and permanent. The GATT rules applied to trade in merchandise goods. and thus much less susceptible to blockages. governments chose to treat it as a permanent commitment. Its annual budget is roughly 160 million Swiss francs. Since decisions are taken by the members themselves.membership applications and regional trade agreements. c. The GATT was applied on a "provisional basis" even if. While GATT was a multilateral instrument. with no institutional foundation. b. than the old GATT system. more automatic. based in Geneva. involve commitments for the entire membership. a multilateral agreement. . d. either by ministers (who meet at least once every two years) or by their ambassadors or delegates (who meet regularly in Geneva). The WTO dispute settlement system is faster. e. The agreements which constitute the WTO are almost all multilateral and. Difference between WTO and GATT:The World Trade Organization is not a simple extension of GATT. It does not have branch offices outside Geneva. The WTO Secretariat. it completely replaces its predecessor and has a very different character. the Secretariat does not have the decision-making role that other international bureaucracies are given with. thus. by the 1980s many new agreements had been added of a plural-lateral. the WTO covers trade in services and trade-related aspects of intellectual property. Decisions are normally taken by consensus. after more than forty years. The WTO is a permanent institution with its own secretariat. All major decisions are made by the membership as a whole. only a small associated secretariat which had its origins in the attempt to establish an International Trade Organization in the 1940s. nature. The implementation of WTO dispute findings will also be more easily assured. has around 600 staff and is headed by a director-general. The GATT was a set of rules. on the contrary. Among the principal differences are the following: a. and therefore selective.
firms rely on export agents expansion of export sales further expansion . whereas "polycentric" loses its meaning when the MNCs operate only in one or two foreign countries. exercises direct control over the policies of its affiliates. engages in foreign production through its affiliates located in several countries. b. Foreign Production Stage There is a limit to foreign sales (tariffs. Perlmutter uses such terms as ethnocentric. .: Kentucky Fried Chicken in the U. especially when the home country itself is populated by many different races. Export stage initial inquiries . According to Franklin Root (1994). Problem that may arise while following a particular business strategy: The mother firm may find it difficult in exercise of any managerial control over the licensee (as it is independent). Think of any MNC and analyze its business strategy orientation.4 Ans. marketing. Licensing is usually first experience (because it is easy) it does not require any capital expenditure it is not risky payment = a fixed % of sales e. Multinational companies (MNC) may pursue business strategies that are home country – oriented or host country – oriented or world – oriented. Business strategy of a MNC can be analyzed with the help of Three Stages of Evolution 1.foreign sales branch or assembly operations (to save transport cost) 2. finance and staffing that transcend national boundaries. "ethnocentric" is misleading because it focuses on race or ethnicity.K. it must decide whether to establish a foreign production subsidiary or license the technology to a foreign firm. However. polycentric and geocentric. an MNC is a parent company that a.Once the firm chooses foreign production as a method of delivering goods to foreign markets. NTBs). implements business strategies in production. c.g.Q.
Secondly. marketing. the firm must find the best location. organize and coordinate production. Multinational Stage: The company becomes a multinational enterprise when it begins to plan. thereby creating a rival. Singer Manufacturing Company established its foreign plants in Scotland and Australia in the 1850s) plants are established in several countries licensing is switched from independent producers to its subsidiaries. the licensee may transfer industrial secrets to another independent firm. export continues 3. financing. R&D. and staffing. The next stage for supplementing any particular business strategy is Investments involved. It requires the decision of top management because it is a critical step. For each of these operations. . it is risky (lack of information) (for example-US firms tend to establish subsidiaries in Canada first. This is how a MNC decides its business strategy orientation.
FDI is a means to bypassing protective instruments in the importing country.S. 2. It is the result of conscious planning by corporate managers. Japanese automobile firms have plants to produce automobile parts. Japanese corporations located auto assembly plants in the US. multinational firms want to build production plants close to the market in order to save transportation costs. 6. When transportation costs are high. and produce the rest in the U. GM purchased Monarch (GM Canada) and Opel (GM Germany). which is not growing. Investment flows from regions of low anticipated profits to those of high returns. Cheap foreign labour.5 Ans. What does FDI stand for? Why do MNCs opt for FDI to enter international market? FDI stands for Foreign Direct Investment. invests in another country. The main reasons for MNCs to opt for FDI to enter international market is stated as follows: 1.Q. European Community imposed common external tariff against outsiders. 3. Toyota imports engines and transmissions from Japanese plants. When MNC incorporated in one country. Market competition: The most certain method of preventing actual or potential competition is to acquire foreign businesses. Also. Exchange Rate Fluctuations: Japanese firms invest here to produce heavy construction machines to avoid excessive exchange rate fluctuations. Labour costs tend to differ among nations. it is said that the FDI has flowed into the other country from some foreign origin. 4. to bypass VERs. MNCs can hold . They later became competitors. Cost reduction: United Fruit has established banana-producing facilities in Honduras. Looking for new markets. High Transportation Costs : Transportation costs are like tariffs in that they are barriers which raise consumer prices. Datsun (Nissan) and Volkswagen. US companies circumvented these barriers by setting up subsidiaries. Protection in the importing countries : Foreign direct investment is one way to expand. It did not buy Toyota. Growth motive: A company may have reached a plateau satisfying domestic demand. provided that they built plants in a safe area. 5. Multinational firms that invested and built production plants in the United States are better off than the exporting firms that utilized New Orleans port to ship and distribute products through New Orleans. New MNCs do not pop up randomly in foreign nations. For instance.
(Maquildoras) .down costs by locating part of all their productive facilities abroad.
organizations. which is invisible and taken for granted. There are two kinds of approach construct of culture. One is a multi-level approach. group cultures. democracy. through national cultures. and cultural values that are represented in the self at the individual level. and openness to change. acceptance and tolerance of diversity. the deeper level of values. respect of freedom of choice. The present model proposes that culture as a multi – layer construct exists at all levels – from the global to the individual – and that at each level change first occurs at the most external layer of behaviour. organizational cultures. or nations).6 Ans. Below the global level are nested organizations and networks at the national level with their local cultures varying from one nation or network to another. The second is based on Schein’s (1992) model viewing culture as a multi – layer construct consisting of the most external layer of observed artifacts and behaviours. In the model. it becomes a shared value that characterizes the aggregated unit (group. Further down are . Viewing culture as a multi-level construct. the values that dominate the global context are often based on a free market economy. individual rights. when shared by individuals who belong to the same cultural context. and then. and the deepest level of basic assumption. Figure-1: The dynamic of top-down–bottom-up processes across levels of culture.Q. viewing culture as a multi-level construct that consists of various levels nested within each other from the most macro-level of a global culture. Given the dominance of Western MNCs. the most macro-level is that of a global culture being created by global networks and global institutions that cross national and cultural borders. describe various levels it consists of. which is testable by social consensus.
Global organizations and networks are being formed by having local-level organizations join the global arena. Reciprocally. over time. Individuals who belong to the same group share the same values that differentiate them from other groups and create a group – level culture through a bottom-up process of aggregation of shared values. and explain how culture at different levels is being shaped and reshaped by changes that occur at other levels. and local organizations that share similar values create the national culture that is different from other national cultures. which are also shaped by the type of industry that they represent. they shape the local organizations. but that differ from each other in their unit culture on the basis of the differences in their functions (e. For example. Both top-down and bottom-up processes reflect the dynamic nature of culture. These global rules and values filter down to the local organizations that constitute the global company. multinational companies that operate in the global market develop common rules and cultural values that enable them to create a synergy between the various regions. the values of the founders. . Similarly. and. employees of an R&D unit are selected into the unit because of their creative cognitive style and professional expertise. all members of this unit share similar core values. and upper levels through a bottom-up process of aggregation. changes at each level affect lower levels through a topdown process. Thus. which differentiate them from other organizational units. either above it through top-down processes or below it through bottom-up processes. That means that there is a continuous reciprocal process of shaping and reshaping organizations at both levels. R&D vs manufacturing). Groups that share similar values create the organizational culture through a process of aggregation. and different parts of the multinational company.local organizations. Their leader also typically facilitates the display of these personal characteristics because they are crucial for developing innovative products. At the bottom of this structure are individuals who through the process of socialization acquire the cultural values transmitted to them from higher levels of culture. and although all of them share some common values of their national culture. and the professional and educational level of their members. they vary in their local organizational cultures. having local organizations join a global company may introduce changes into the global company because of its need to function effectively across different cultural boarders.. etc. the type of ownership. For example.g. their leaders’ values. Within each organization are sub-units and groups that share the common national and organizational culture.
com/UsersFiles/admin/files/article-en/..persianholdings.ac./52.Reference: http://ie.htm www.technion.going-global.pdf SMU Manual on International Business Management (Book ID: B1315) .com/articles/understanding_foreign_direct_investment.il/~merez/papers/jibs_culture_Intern_B..pdf http://www.
Name: Dromor Tackie-Yaoboi Roll Number: 531110332 Learning Centre: 02544 Course & Semester: MBA Semester IV Subject: International Financial Management Assignment No.: 1 Subject Code: Mf0015 Date of Submission at the Learning Centre: 27 February. 2013 .
including direct investment (FDI) securities (portfolio investment) and bank claims and liabilities are listed in the . or cash inflows (sources). the Capital Account and the change in Official Reserves. India’s balance of payments accounts record transactions between Indian residents and the rest of the world. The balance of payments is a sources-and-uses-of-funds statement. What is meant by BOP? How are capital account convertibility and current account convertibility different? What is the current scenario in India? Ans: The balance of payments (or BOP) of a country is a record of international transactions between residents of one country and the rest of the world over a specified period. or cash outflows (uses). Net investment income and net transfers are small relative to imports and exports. minus. Therefore a current account surplus indicates positive net exports or a trade surplus and a current account deficit indicates negative net exports or a trade deficit.. Transactions such as exports of goods and services that earn foreign exchange are recorded as credit. charitable giving (e. International transactions include exchanges of goods. The capital (or financial) account is that balance of payments account in which all cross-border transactions involving financial assets are listed. Unilateral transfers are official government grants-in-aid to foreign governments.g. Investment income for a country is the payment made to its residents who are holders of foreign financial assets (includes interest on bonds and loans. net investment income (interest and dividend). services or assets. and net unilateral transfers (private transfer payments and government transfers) from abroad. famine relief) and migrant workers’ transfers to families in their home countries. plus. usually a year. Transactions such as imports of goods and services that expend foreign exchange are recorded as debit. The Balance of Payments for a country is the sum of the Current Account. It is the sum of net sales from trade in goods and services. All purchases or sales of assets. dividends and other claims on profits) and payments made to its citizens who are temporary workers abroad.1. individuals and government agencies and includes citizens temporarily living abroad but excludes local subsidiaries of foreign corporations. The term “residents” means businesses. Thus. The current account is that balance of payments account in which all short-term flows of payments are listed.
The Balance of Payments identity states that: Current Account + Capital Account = Change in Official Reserve Account. A capital account deficit indicates net capital outflows or positive net foreign investment. it is a credit item in the balance of payment accounts as it makes available foreign currencies. then the current account deficit must be balanced by a capital account surplus. When Indian citizens buy foreign securities or when foreigners buy Indian securities. If a country runs a current account deficit and it does not run down its official reserve to cover this deficit (there is no change in official reserve). When domestic residents purchase more financial assets in foreign economies than what foreigners purchase of domestic assets. These reserves are normally composed of the major currencies used in international trade and financial transactions. when a central bank buys reserves (foreign currency). In general. When a central bank sells its reserves (foreign currencies) for the domestic currency in the foreign exchange market. If foreigners purchase more Indian financial assets than domestic residents spend on foreign financial assets. in countries with . to try to keep the value of the domestic currency high with respect to foreign currencies. The level of reserves changes because of the central bank’s intervention in the foreign exchange markets.capital account. Countries with net increases in the Official Reserve Account are usually attempting to keep the price of the domestic currency cheap relative to foreign currencies. Similarly. Yen). respectively. it is a debit item in the balance of payment accounts. A capital account surplus indicates net capital inflows or negative net foreign investment. The reserves are held by central banks to cushion against instability in international markets. official gold reserve and IMF Special Drawing Rights (SDR). then there will be a net capital inflow. there is a net capital outflow. Countries that try to control the price of their currency (set the exchange rate) have large net changes in their Official Reserve Accounts. Current scenario in India The official reserves account (ORA) records the total reserves held by the official monetary authorities (central banks) within the country. Euro. Typically. they are listed here as outflows and inflows. British Pound. The reserves consist of “hard” currencies (such as US dollar. a net decrease in the Official Reserve Account indicates that a country is buying its currency in exchange for foreign exchange reserves. by selling their currencies and buying the foreign exchange reserves.
. Thus. the size of the official reserve account is small compared to the transactions in the current and capital account. a current account deficit) only if it has a capital account surplus (foreign residents are willing to invest in the country). the change in official reserves in a given year is small relative to the Current Account and the Capital Account. it can be approximated by zero. Even in a fixed exchange rate system. Therefore. Thus the residents of a country cannot have a current account deficit (imports exceeding exports) unless the foreigners are willing to invest in that country (capital account surplus).floating exchange rate system. such a country can only consume more than it produces (or imports are greater than exports.
In some cases. it means 1 euro = 1. The term 'arbitrage' is usually reserved for money and other investments as opposed to imbalances in the price of goods. Tourists exchange cash for less than the market rate and then the money exchanger converts those foreign funds into the local currency at a higher rate. Foreign money exchangers operate their entire businesses on this principle. Perhaps the biggest risk is the potential for rapid fluctuations in market prices. If the speculator is shrewd and has a deeper understanding of the forex market. For instance.043 and thereby earning a small profit of $43. one market does not know about or have access to the other market. would-be arbitrageurs can actually lose money. The efficiency of the market refers to the speed at which the disparate prices converge. The difference between the two rates is the spread or profit. Engaging in arbitrage can be lucrative. In the international market the currency is expressed in the form AAA/BBB. Using the Euros you buy approximately 248420 Pounds which is sold for approximately $500.000. For example. The presence of arbitrageurs typically causes the prices indifferent markets to converge: the prices in the more expensive market will tend to decline and the opposite will ensue for the cheaper market. AAA denotes the price of one unit of the currency which the trader wishes to trade and it refers the base currency. The more popular of the two is the two-way forex arbitrage. One is two-way arbitrage and the other is three-way arbitrage. You can buy around 326100 Euros with $500. In cases where prices fluctuate rapidly. the spread between two markets can fluctuate during the time required for the transactions themselves. There are plenty of other instances where one can engage in the practice arbitrage. but it does not come without risk. They find tourists who need the convenience of a quick cash exchange. then he can make use of this opportunity to make big profits. EUR/GBP = 1. Answer: Arbitrage is the activity of exploiting imbalances between two or more markets.312 and USD/GBP =2. While BBB is international three-letter code 0f the counter currency. Alternatively.To make a large profit on triangular arbitrage you should be ready to invest a large amount and . Forex arbitrage transactions are quite easy once you understand the method by which the business is conducted.4015.652. arbitrageurs can take advantage of varying liquidities between markets.2 What is arbitrage? Explain with the help of suitable example a two-way and a three way arbitrage.4015 dollar.Q. the exchange rates of EUR/USD = 0. For instance. There are basically two types of arbitrage .012. when the value of EUR/USD is 1.
To make a substantial income out of this strategy you need to make an enormous amount of investment.2713*84. in reality it is not the case. . forex arbitrage is a rare opportunity and if it comes your way. Three Way (Triangular) Arbitrage The three way arbitrate inefficiency now arises when we consider a case in which the EUR/JPY exchange rate is NOT equivalent to the EUR/USD/USD/JPY case so there must be something going on in the market that is causing a temporary inconsistency.86. Though theoretically it is considered to be risk free. Let us consider the following example : EUR/JPY=107. right ? The fact is that there are many important problems that make the exploitation of this three way arbitrage almost impossible. What we can do now is short the EUR/JPY and go long EUR/USD and USD/JPY until the correlation is reestablished.2713USD/JPY = 84. You should enter into this transaction only if you have deeper understanding of forex market. Sounds easy.86EUR/USD=1.75 which would be 107. then grab it without any hesitation. If this inconsistency becomes large enough one can enter trades on the cross and the other pairs in opposite directions so that the discrepancy is corrected.74 and the actual rate is 107. it would be wise not to devote much time in looking out for arbitrage opportunities.75 The exchange rate inferred from the above would be 1. Arbitrage is one of the strategies of forex trading.deal with trustworthy brokers. Hence. However.
0025/0.7940-0.8215/1.7965/0.8240 Three months swap: 25/35 Calculate three month EUR/USD rate.0025/-0.7915/0.8007-0.0025)/(0.8007+0.7940/0.8007 Forward Outright (if Premium) 3 months swap: 25/35=0.8042 Forward Outright (if Discounted) 3 months swap: -25/-35=-0.3 You are given the following information: Spot EUR/USD : 0.0035 3 months EUR/USD rate= (0.7972 .7940/0.0035)=0.0025)/(0.7940+0.Q.0035 3 months EUR/USD rate= (0.8007 Spot USD/GBP: 1.0035)=0. Solution: Spot Rate EUR/USD: 0.
Ans:. The discount rate used here is known as the cost of capital. The results are then used to evaluate the projects based on the acceptance/rejection criteria developed by management. k = the weighted average cost of capital n = the life span of the project. Both the techniques discount the projects‟ cash flow at an appropriate discount rate. The IRR method finds the discount rate which equates the present value of the cash flows generated by the project with the initial investment or the rate which would equate the present value of all cash flows to zero. The NPV can be defined as follows: NPV = Where. The decision criteria is to accept a project if NPV o and to reject if NPV < o.Q. NPV is the most popular method and is defined as the present value of future cash flows discounted at an appropriate rate minus the initial net cash outlay for the projects. including those at the end of the project‟s life. where r is the internal rate of return of the project. minus the present value of all cash outflows. The two most widely used criteria of the DCF technique are the Net Present Value (NPV) and the Internal Rate of Return (IRR). The decision criteria is to accept projects with a positive NPV and reject projects which have a negative NPV. The NPV of a project is the present value of all cash inflows. IRR is calculated by solving for r in the following equation. I0 = initial cash investment CFt = expected after-tax cash flows in year t.4 Explain various methods of Capital budgeting of MNCs. .Methods of Capital Budgeting Discounted Cash Flow Analysis (DCF) DCF technique involves the use of the time-value of money principle to project evaluation.
each cash flow as a source of value is considered individually. If not. In addition. etc. foreign projects face a number of complexities not encountered in domestic capital budgeting. restriction on transfer of cash flows. The APV model is a value additivity approach to capital budgeting. As mentioned earlier. in the APV approach each cash flow is discounted at a rate of discount consistent with the risk inherent in that cash flow. The APV approach uses different discount rates for different segments of the total cash flows depending upon the degree of certainty attached with each cash flow. foreign exchange regulation. no further evaluation based on accounting for other cash flows is done. If the project is acceptable in this scenario. i. the APV format helps the analyst to test the basic viability of the foreign project before accounting for all the complexities.. lost exports. then an additional evaluation is done taking into account the other complexities. In equation form the APV approach can be written as: APV = Where the term Io = Present value of investment outlay = Present value of operating cash flows = Present value of interest tax shields = Present value of interest subsidies The various symbols denote Tt = Tax savings in year t due to the financial mix adopted St = Before-tax value of interest subsidies (on the home currency) in year t due to project specific financing .Adjusted Present Value Approach (APV) A DCF technique that can be adapted to the unique aspect of evaluating foreign projects is the Adjusted Present Value approach. for example. This allows the required flexibility. Also.e. The APV format allows different components of the project‟s cash flow to be discounted separately. blocked funds. the issue of remittance. to be accommodated in the analysis of the foreign project.
.id = Before-tax cost of dollar debt (home currency) The last two terms in the APV equation are discounted at the before-tax cost of dollar debt to reflect the relative certain value of the cash flows due to tax savings and interest savings.
What are depository receipts? Ans:Depository Receipt (DR) is a negotiable certificate that usually represents a company‟s publicly traded equity or debt. How can it cope with this risk? Ans:Boeing faces foreign exchange risk for two reasons: (1) It sells half its planes overseas and the demand for these planes depends on the foreign exchange value of the dollar. They are quoted in the host country currency and treated in the same way as host country shares for clearance. These features make it easier for international investors to evaluate the shares than if they were traded in the issuer‟s home market. Assess Boeing’s currency risk. When companies make a public offering in a market other than their home market. this tactic ignores the fact that Boeing is competing with Airbus. a European consortium of companies that builds the Airbus. Q.Q.5 a. Depository receipts represent shares of company held in a depository in the issuing company‟s country. manufactures all its planes in United States and prices them in dollars. Both ADRs and GDRs have to meet the listing requirements of the exchange on which they are traded. Boeing is likely to lose both foreign and domestic sales to Airbus unless it cuts its dollar prices. transfer and ownership purposes. As the dollar appreciates. ECU bonds would also provide a hedge against appreciation of the dollar against the yen and other Asian currencies since European and Asian currencies tend to move up and down together against the dollar (albeit imperfectly). . One way to hedge this operating risk is for Boeing to finance a portion of its assets in foreign currencies in proportion to its sales in those countries.5 b. However. settlement. Boeing commercial Airplane Co. and (2) Boeing faces stiff competition from Airbus Industrie. they must launch a depository receipt program. even the 50% of its sales destined for overseas markets. another suggestion is for Boeing to finance at least half of its assets with ECU bonds as a hedge against depreciation of the currencies of its European competitors. Absent a more detailed analysis. There are two types of depository receipts – GDRs and ADRs.
Foreign bonds have nicknames: foreign bonds sold in the U. nor to residents of the country. They are offered simultaneously in a number of different national capital markets. would be a foreign bond. is from another country. to U. and international institutions. and transfer Eurobonds. but didn't gain international significance until the early 1980s. sovereign governments. a bond issued by a U. sold principally within that country. They are also issued by international bodies such as the World Bank. those sold in Japan are "Samurai bonds". and foreign bonds sold in the United Kingdom are "Bulldogs. banks. investment bankers. denominated in dollars. Eurobonds are issued by multinational corporations.Q. large domestic corporations." . but with important differences. Since then. Almost all Eurobonds are in bearer form with call provisions and sinking funds. but not in the capital market of the country. governmental enterprises. some observers warn that new European Union tax harmonization policies may lessen the bonds' appeal. For example. however.S. and is sold exclusively in countries other than the country in whose currency the issue is denominated. Distinguish between Eurobond and foreign bonds? What are the unique characteristics of Eurobond markets? Ans: The Eurobond market is made up of investors. and trading agents that buy. They could also offer borrowers favorable interest rates and international exchange rates.S. A Eurobond is also underwritten by an international syndicate of banks and other securities firms. Similar to foreign bonds. however. sell. they have become a large and active component of international finance. A foreign bond is underwritten by a syndicate composed of members from a single country.S.S. in whose currency the bond is denominated. Eurobonds became popular with issuers and investors because they could offer certain tax shelters and anonymity to their buyers. would be a Eurobond.S. The creation of the unified European currency. The issuer.S. and sold in the U. investors by U. Eurobonds are a special kind of bond issued by European governments and companies. the euro.6. dollars. and denominated in the currency of that country. denominated in U. corporation. has stimulated strong interest in euro-denominated bonds as well. Eurobonds are unique and complex instruments of relatively recent origin. but often denominated in non-European currencies such as dollars and yen. are "Yankee bonds". but sold to investors in Europe and Japan (not to investors in the United States). They debuted in 1963. borrowers. A bond issued by a Swedish corporation.
) The central bank of a country can protect its currency from being used. dollar. Eurobonds differ in term of their default risk and are rated in terms of quality ratings. for example. While this feature provides confidentiality. As with domestic bonds. many Eurobonds are unregistered. If the dollar and foreign interest rates fall. however. Non-registered: Eurobonds are usually issued in countries in which there is little regulation. Japan. Characteristics of Eurobond markets Currency denomination: The generic. and these bonds are usually kept on deposit at depository institution). denominated in their own currency. Credit risk: Compared to domestic corporate bonds.S. the values of German bonds fall if German interest rates rise. The major currency denominations are the U. (70 to 75 percent of Eurobonds are denominated in the U. yen. investors in foreign currency bonds could make a nice return. making them an attractive financing instrument to corporations.S. the investors will be hit with a double whammy. it has created some problems in countries such as the U. that if both the dollar and foreign interest rates rise. but riskier to bond investors. There are a number of different currencies in which Eurobonds are sold.Foreign currency bonds are issued by foreign governments and foreign corporations. As a result. It should be pointed out. dollar. issued as bearer bonds. Eurobonds have fewer protective covenants. prohibited the yen from being used for Eurobond issues of its corporations until 1984. such bonds are priced inversely to movements in the interest rate of the country in whose currency the issue is denominated. there is no record to identify the owners. plain vanilla Eurobond pays an annual fixed interest and has a long-term maturity. investing in foreign currency bonds is really a play on the dollar. values of bonds denominated in foreign currencies will fall (or rise) if the dollar appreciates (or depreciates) relative to the denominated currency.. where regulations require that security owners be registered on the books of issuer.S. For example. . In addition. Indeed. and euro. (Bearer form means that the bond is unregistered.
A number of Eurobonds have special warrants attached to them. currency. Other features: Like many securities issued today. For example: Dual-currency Eurobonds pay coupon interest in one currency and principal in another. Option currency Eurobond offers investors a choice of currency. a sterling/Canadian dollar bond gives the holder the right to receive interest and principal in either currency. For instance. Some of the warrants sold with Eurobonds include those giving the holder the right to buy stock. or gold. . 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. A number of Eurobonds have special conversion features. There are also short-term Euro paper and Euro Medium-term notes. Eurobonds often are sold with many innovative features. referred to as Euro notes. Maturities: The maturities on Eurobonds vary. additional bonds. and called Eurobonds. Many have intermediate terms (2 to 10 years). and long terms (10-30 years).
com/terms/a/arbitrage.net.Reference: mrv.asp en.html#ixzz2M5i17qLL .financialexpress.pdf www.com/news/what-are-depository-receipts-/161428 http://www.wikipedia.org/wiki/Capital_budgeting http://www.com/encyclopedia/Ent-Fac/EurobondMarket.referenceforbusiness.investopedia.in/images/stories/convertibility/Capital.
Name: Dromor Tackie-Yaoboi Roll Number: 531110332 Learning Centre: 02544 Course & Semester: MBA Semester IV Subject: Treasury Management Assignment No. 2013 .: 1 Subject Code: Mf0016 Date of Submission at the Learning Centre: 27 February.
Ans:. and social policy division. taxation. international and treaties division. Structure of treasury organisation Figure 1. It includes business tax division. The organisations managing interfaces with treasury functions include intra-group communications.2: Treasury Organisations Fiscal – This group includes budget policy planning division. measurement and cultural aspects.The treasury organisation deals with analysing. planning. indirect tax.Q.2 depicts the structure of treasury organisation which is divided into five groups. Figure 1. cost centre etc. Revenue – This group is concerned with the taxes in an organisation.1 Explain how organization structure of commercial bank treasury facilitates in handling various treasury operations. tax analysis and tax design division. industrial and environmental division. Macroeconomic – This group deals with economic sector of the organisation. and implementing treasury functions. macroeconomic policy and modeling division. It includes domestic and international economic divisions. It deals with issues of profit centre. common wealth state relationships. personal and income division. . recharging.
It includes competition and consumer policy. Markets – This group mainly deals with selling of products in the competitive market. most of the Indian banks have classified their business into two primary business segments like treasury operations (investments) and banking operations (excluding treasury). debentures etc 3. trading in order to lay off risks and form apparatus for much of the industry‟s self-regulation. 2. Treasury management in banks In recent days. corporations and financial services policy. The role of policies in strategic management was described in this section. It deals with buying and selling currencies. Derivatives – The banks make foundation for Over the Counter (OTC). human resource division. It helps in managing the bank‟s position in terms of statutory requirements like cash reserve ratio. foreign investments and trade policy division. Equities Foreign exchange treasury – The banks provide trading of currencies across the globe. business solutions and information management division. term. Money market instruments – Call. treasury bonds. It includes financial and facilities division. The treasury operations in banks are divided into: Rupee treasury – The rupee treasury carries out various rupee based treasury functions like asset liability management. The various products in rupee treasury are: 1. Bonds – Government securities. repo. . commercial papers. The next section deals with inter-dependency between policy and strategy. investments and trading. reverse repo and interbank participation etc. Corporate services – This group deals with overall management of the treasury organisation. statutory liquidity ratio according to the norms of the Reserve Bank of India (RBI). and notice money. It helps in developing new products.
25 lakh. The ceiling amount of CPs should not exceed the working capital of the issuing company. forex market and call money market. The interest rate of CPs depends on the prevailing interest rate on CPs market.Q. The attractive rate of interest In any of these markets. Ans:Features of commercial papers CPs is an unsecured promissory note. affects the demand of CPs. individuals.2 Bring out in a table format the features of certificate of deposits and commercial papers. . CPs can be issued for a maturity period of 15 days to less than one year. The investors in CPs market are banks. business organisations and the corporate units registered in India and incorporated units. 4. The NRIs can subscribe to CDs on repatriation basis CDs have to bear stamp duty at the prevailing rate in the markets 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. 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 . They have no lock-in period.5 Crores. The minimum size of the issue is Rs.5 lakh. CPs is issued in the denomination of Rs.
. (ICRA) respectively The current ratio of the issuing company should be 1.33:1. The issuing company has to be listed on stock exchange.The company should have a minimum credit rating of P2 and A2 obtained from Credit Rating Information Service of India (CRISIL) and Investment Information and Credit Rating Agency of India Limited.
Banks provide opportunities to brokers in order to increase or decrease the rate of buying or selling foreign currencies. companies and individuals.Q. Detail the regulatory aspects on it. . and multinational corporations. Large volume of transactions consists of banks dealing directly among themselves and smaller transactions usually consists of intermediary foreign exchange brokers. They operate in market by trading currencies for their clients. Central banks get involved in forex market to regain price stability of exchange rate. and support economic goals like inflation and growth. exporters. Exchange brokers have a tendency to specialise in unusual currencies but also manage major currencies. In India. many banks deal through recognised exchange brokers or may deal directly among themselves. companies and individuals. They operate in market by buying or selling currencies within the framework of exchange control regulations. The other participants include RBI and its authorised dealers. It deals with banks and their clients to form retail segment of forex market. Exchange brokers – They ensure the most favourable quotations between the banks at a low cost in terms of time and money. protect certain levels of price in exchange rate. international investors.The participants in forex market are the RBI at the apex. Commercial banks – They play an important role in forex market. authorised dealers (ADs) licensed by forex market.3 Critically evaluate participatory notes. importers. Central bank – It plays a vital role in the country‟s economy by controlling money supply. The major participants of foreign exchange market are: Corporates – They mainly include business houses. exporters. importers. Ans:.
The Committee on Capital Account Convertibility (Chairman: Shri.4 What is capital account convertibility? What are the implications on implementing CAC? Ans:. but they do retain some regulations for influencing inward and outward capital flow. A few counties backtracked and re-imposed capital controls as part of crisis resolution. The cost and benefits from capital account liberalisation is still being debated among academics and policy makers. . It means freedom of currency conversion in terms of inflow and outflows with respect to capital account transaction. Initially open the inflow account and later liberalise the outflow account. social. CAC enhances growth and welfare of country. The different ways of implementing CAC are as follows: Open the capital account for residents and non-residents. These developments have led to considerable caution being exercised by EMEs in opening up capital account. Tarapore) which submitted its report in 1997 highlighted the benefits of a more open capital account but at the same time cautioned that CAC could pose tremendous pressures on the financial system. making CAC either ineffective or unsustainable. India has cautiously opened its capital account and the state of capital control in India is considered as the most liberalised it had been since late 1950‟s. Approach to simultaneously liberalise control of inflow and outflow account. Most of the countries have liberalised their capital account by having an open account.S. human cost and even extensive presence of capital controls creates distortions. both in trade and finance. S. Crisis such as economic.Q. Due to global integration. which went through currency and banking crises in 1990‟s. The perception of CAC has undergone some changes following the events of emerging market economies (EMEs) in Asia and Latin America.Capital Account Convertibility (CAC) refers to relaxing controls on capital account transactions.
payable periods. The reasons for which the firms expand into other countries are as follows: Seeking new markets and raw materials Seeking new technology and product efficiency. During multinational cash management system payments by customers to company‟s branches are basically handled through a local bank. Preventing the regulatory obstacles.. The multinational cash management programme effectively achieve its goals by using excess cash flow from some units across the globe to extend cash needs in other units which is called in-house banking and by relocating funds for tax and foreign exchange management through repricing and invoicing. Several factors which distinguish multinational cash management from domestic cash management are as follows: Different currency denominations Political risk and other risk. import duties. Decision making within the corporation is centralised in the home country or decentralised across the countries where the organisation does its business. Role of governments Language and cultural differences. Economic and legal complications.Q. The main goal of multinational cash management is the utilisation of local banking and cash management services. The payments between the branches and the parent company . Multinational companies are those that operate in two or more countries. Difference in tax rates.The strategy of a company which has its businesses in many nations and efficiently manages its cash and liquidity is called multinational cash management programme. The principle objective of multinational cash management programme is to maximise a company‟s financial resources by taking benefits from all liability provisions. Retaining customers and protecting its processes Expanding its business.5 Detail domestic and international cash management system Ans.
For example.are managed through the branches. The exchange rates are determined by a structure which is called the international monetary system. head office to branches and so on. use of lockboxes or intercept points. Wincor Nixdorf played an innovative role in enhancing cash handling between various countries. The multinational cash management system involves exchange rate risk which occurs when the cash flow of one currency during transformation to another currency the cash value gets declined. Through the use of electronic reporting systems a parent company observes cash balances in its foreign local banks. correspondents or associates of the parent company. negotiated value range. Wincor‟s focus was on the entire process chain which started from head office to stores. Wincor Nixdorf‟s served several countries with its innovative hardware and software elements. crediting to the retail company‟s account. . Multinational cash management programme specifically evaluate its techniques by timing of billing. It occurs due to the change in exchange rates. IT services to side operations and consulting services to develop custom optimised solutions.
The RBI increases the SLR to control inflation. There are some statutory requirements for placing the money in the government bonds. 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 country‟s economy. RBI practices this method. These reserves are considered to meet the withdrawal demands of the customers. increases CRR rate to drain out excessive money from banks. An organisation that holds reserves in excess amount is said to hold excess reserves. gold and securities like Government Securities (G-Secs). then the banks‟ available cash drops. 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. extract liquidity in the market and protects customers‟ money. The CRR in the economy as declared by RBI in September 2010 is 6 percent. If RBI decides to increase CRR. RBI determines the percentage of SLR. Increase in SLR also limits the bank‟s leverage position to drive more money into the economy. that is. the RBI arranges the level of SLR. The maximum limit of SLR is 40 percent and minimum limit of SLR is 25 percent.Cash Reserve Ratio Cash Reserve Ratio (CRR) is a country‟s central bank regulation that sets the minimum reserves for banks to hold for their customer deposits and notes.6 Distinguish between CRR and SLR Ans:. After following the requirements. The reserves are in the form of authorised currency stored in a bank treasury (vault cash) or with the central bank. As gold and government securities are highly liquid and safe assets they are included along with cash.Q. It means the percentage of demand and time maturities that banks need to have in forms of cash. . The following are the effects of CRR on economy: CRR influences an economy‟s money supply by effecting the potential of banks CRR influences inflation in an organization CRR stimulates higher economic activity by influencing the liquidity Statutory Liquidity Ratio Statutory Liquidity Ratio (SLR) is the percentage of total deposits that banks have to invest in government bonds and other approved securities. In India.
(Book ID: B1311) .investopedia.asp SMU manual on Treasury Management.com/university/.wikipedia.htm www.oecd.. 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 Reference: http://en./moneymarket3.cpim.cengage. then it is penalized by RBI.org/site1/pd/2006/0402/04022006_eco.org/countries/vietnam/35239688.pdf www.pdf http://www.org/wiki/Statutory_liquidity_ratio http://academic.. The nonpayer bank pays an interest as penalty which is above the actual bank rate.If any Indian bank fails to maintain the required level of SLR.com/resource_uploads/downloads/0324288417_68106.
Name: Dromor Tackie-Yaoboi Roll Number: 531110332 Learning Centre: 02544 Course & Semester: MBA Semester IV Subject: Merchant Banking and Financial Services Assignment No. 2013 .: 1 Subject Code: Mf0017 Date of Submission at the Learning Centre: 27 February.
Insider trading refers to transactions in a company‟s securities. It is the trading that takes place when those privileged with confidential information about important events use the special advantage of that knowledge to reap profits or avoid losses on the stock market. Although insider trading typically yields significant PROFITS. Insider trading takes place legally every day. affect the prices of such securities. by corporate insiders or their associates based on information originating within the firm that would. is due to their need for cash or to balance their portfolios. What are the SEBI rules and regulations to prevent insider trading. or sometimes rank-and-file employees) or whose privileged access to the firm‟s internal affairs (as large shareholders. Among others issues. Oreamuno). though. . Ans:"Insider trading" is a term subject to many definitions and connotations and it encompasses both legal and prohibited activity. on a forthcoming cut in dividends by the board of directors (Cady. and on an unanticipated increase in corporate expenses (Diamond v. etc. Famous examples of insider trading include transacting on the advance knowledge of a company‟s discovery of a rich mineral ore (Securities and Exchange Commission v. it had invited senior officials of the Securities and Exchange Commission to tell us how it tackled the menace of insider trading. Almost eight years ago.). Corporate insiders are individuals whose employment with the firm (as executives. such as stocks or options. once publicly disclosed. directors or employees – buy or sell stock in their own companies within the confines of company policy and the regulations governing this trading. Roberts & Co. The above definition of insider trading excludes transactions in a company‟s securities made on nonpublic “outside” information.Q.) gives them valuable information. such as the knowledge of forthcoming marketwide or industry developments or of competitors‟ strategies and products.). Such trading on information originating outside the company is generally not covered by insider trading regulation. lawyers.1 What do you understand by insider trading. Much trading by insiders. Texas Gulf Sulphur Co. accountants. these transactions are still risky. when corporate insiders – officers. India's capital markets watchdog – the Securities and Exchange Board of India organised an international seminar on capital market regulations. to the detriment of the source of the information and to the typical investors who buy or sell their stock without the advantage of "inside" information. consultants. directors.
you have triggered a ban of six months. "). you can still exercise ESOPs. Recollect that specified persons were banned from carrying out opposite transactions "(banned transactions") for six months of original buy/sale ("original transactions"). The reasoning given is that the ban is only on transactions in secondary market. the "clarifications" have no formal standing or reference. Thus. you don't trigger a ban and if you are banned for six months. taking all things into account. by acquiring shares under ESOPs. But it seeks to "clarify" and giving meaning to the Regulations that have legal standing and where such "meaning" is quite contrary . the "clarifications" mostly relaxes the requirements and hence. nor a notification. I had felt that "However. one should not examine them in the mouth too closely! Let us see the clarifications given. On this aspect.SEBI rules and regulations to prevent insider trading. even if you are under a ban.(Incidentally. nor even a press release. perhaps the intention is not to cover shares acquired under ESOPs Schemes. SEBI had amended the Insider Trading Regulations 1992 vide a Notification dated November 19. But sale of shares acquired through ESOPs is covered but it will only be deemed to be a "original transaction" and not a "banned transaction". I had opined on some of these issues in my earlier posts referred to above and hence me update on what are the clarifications so given. SEBI has now released a set of "Clarifications" on 24th July 2009 on certain issues arising out of the amendments made. being gift horses.as we will see . It is neither signed nor dated.to the plain reading of the text. It is clarified that exercise of ESOPs will neither be deemed to be "original transaction" nor "banned transaction". In other words. I do not understand the basis of clarifying that the sale of shares acquired . The question was whether acquisition of shares under ESOPs scheme and sale of such shares would be considered as transactions that trigger off such ban and whether these themselves are banned. Curiously. you can still sell shares acquired under ESOPs but once you sell such shares. It is neither a circular. Having said that. 2008 which I had discussed it here and here.
will the amendment create ban in respect of them too . this means that the ban period is from 2nd Febuary till 15th September. it is clarified that every later transaction triggers a fresh six month ban. There is also no provision under which even SEBI could grant exemption.under ESOPs scheme will not be an "original transaction" . A crucial clarification is that the ban on "sale" of shares for personal emergencies is permisible by waiver by the Compliance Officer.the logic of covering secondary market transactions should apply here also. there is a ban now till 15th September. On a similar note. What about transactions before this amendment . A purchase on 1st February results in ban till 1st August. This is not evident from a plain reading of the provision and I had opined that "This bar on such transactions is total. However. if there is a fresh purchase on 15th March. But SEBI thinks it is so evident and hence let us accept this gift without creating legal niceties! Note that this clarification applies only to sales and there can be no purchases within these six month ban period . unwinding of positions in derivatives held on the date of this amendment is possible. It is clarified though that the transactions before the amendment are not to be considered. Then.obviously there cannot be any personal emergency to purchase shares! .this is an academic issue now at least as the six month period is now complete.". There are no circumstances – whether of urgent need or otherwise – under which the bar can be lifted. Effectively.
Green Shoe Manufacturing now called Stride Rite Corporation. When there is already an established market and the company is simply selling more of their non-publicly traded stock. to purchase shares from the open market using the funds collected from the over-subscription of shares. Oversubscription is a situation when a new stock issue has more buyers than shares to meet their orders. to permit underwriters to use this practice in its offering. When the stock offering is the first time the stock is available for public trading. a new stock issue has fewer buyers than the shares available.Q. which is usually an underwriter or a lead manager. Ans:. it is called an IPO (initial public offering). . Issuers will sometimes not permit a green shoe on a transaction when they have a specific objective for the offering and do not want the possibility of raising more money than planned.Green Shoe Option (GSO) is an option where a company can retain a part of the oversubscribed capital by issuing additional shares. The over-allotment refers to allocation of shares in excess of the size of the public issue made by the stabilizing agent out of shares borrowed from the promoters in pursuance of a GSO exercised by the issuing company. The stabilizing agent stabilizes the price for a period of 30 days from the date of listing as authorised by the SEBI. The term comes from the first company. Green shoe option agreement allows the underwriters to sell 15 percent more shares to the investors than planned by the issuer in an underwriting. There is another situation called under subscription. An issuing company appoints a stabilizing agent. The green shoe option is popular because it is the only SEC-permitted means for an underwriter to stabilize the price of a new issue post-pricing.2 What is the provision of green shoe option and how is it used by companies to stabilize prices. The green shoe option is also known as over-allotment option. This excess demand over supply increases the share price. The mechanism by which the green shoe option works to provide stability and liquidity to a public offering is described in the following example: A company intends to sell 1 million shares of its stock in a public offering through an investment banking firm (or group of firms which are known as the syndicate) whom the company has chosen to be the offering's underwriter(s). it is called a follow-on offering. Some issuers do not include green shoe options in their underwriting contracts under certain circumstances where the issuer funds a particular project with a fixed amount of price and does not require more funds than quoted earlier. In under subscription.
The underwriters function as the broker of these shares and find buyers among their clients. then the underwriter has oversold the offering by 15% and is now technically short those shares. the underwriter is able to support and stabilize the offering price bid (which is also known as the "syndicate bid") by buying back the extra 15% of shares (150. which can lead to further selling and hesitant buying of the shares. they would not need to exercise any of the green shoe. But if they were only able to buy back some of the shares before the stock went higher.15 million shares are "effective" (become eligible for public trading). they do not trade below the offering price. This is where the over-allotment (green shoe) option comes into play: the company grants the underwriters the option to take from the company up to 15% more shares than the original offering size at the offering price. To manage this possible situation.15 million shares of stock to its clients. . A price for the shares is determined by agreement between the company and the buyers. the underwriter initially oversells ("shorts") to their clients the offering by an additional 15% of the offering size. and would incur a loss on the transaction. When a public offering trades below its offering price. This creates the perception of an unstable or undesirable offering. the offering is said to have "broke issue" or "broke syndicate bid". the underwriter would be buying back those shares at a higher price than it sold them at. In this example the underwriter would sell 1. as they are simply "covering" (closing out) their 15% oversell short. One responsibility of the lead underwriter in a successful offering is to help ensure that once the shares begin to publicly trade. If the underwriters were able to buy back all of its oversold shares at the offering price in support of the deal. When the offering is priced and those 1. They can do this without the market risk of being "long" this extra 15% of shares in their own account. then they would be able to completely cover their 15% short position by exercising the full green shoe. If they were to go into the open market to buy back that 15% of shares.000 shares in this example) in the market at or below the offer price. then they would exercise a partial green shoe for the rest of the shares. If they were not able to buy back any of the oversold 15% of shares at the offering price ("syndicate bid") because the stock immediately went and stayed up. If the offering is successful and in strong demand such that the price of the stock immediately goes up and stays above the offering price.
The post-issue Lead Merchant Banker shall ensure that moneys received pursuant to the issue and kept in a separate bank (i. date of completion of despatch of refund orders. Proportionate Allotment Procedure The allotment shall be subject to allotment in marketable lots.3 Discuss the proportionate allotment procedure followed by the lead banker to allot shares. value and percentage of applications received along with stockinvest.5) Post-issue Lead Merchant Banker shall ensure that in all issues. date of despatch of certificates and date of filing of listing application is released within 10 days from the date of completion of the various activities at least in an English National Daily with wide circulation. Clause 11. Post-issue Lead Merchant Banker shall ensure that issuer company / advisors / brokers or any other agencies connected with the issue do not publish any advertisement stating that issue has been oversubscribed or indicating investors' response to the issue. during the period when the public issue is still open for subscription by the public.e. the Executive Director/Managing Director of the Designated Stock Exchange along with the post issue Lead Merchant Banker and the Registrars to the Issue shall be responsible to ensure that the basis of allotment is finalised in a fair and proper manner in accordance with the following guidelines:. Provided. in the book building portion of a book built public issue notwithstanding the above clause.3. as per the provisions of section 73(3) of the Companies Act 1956. advertisement giving details relating to over-subscription. Post-issue Advertisements -(Clause 7. Basis of Allotment -(Clause 7. basis of allotment. number.6) In a public issue of securities.Q. Ans:.5 of Chapter XI of these Guidelines shall be applicable. Bankers to an Issue). on a proportionate basis as explained . Advertisement stating that "the subscription to the issue has been closed" may be issued after the actual closure of the issue. one Hindi National Paper and a Regional language daily circulated at the place where registered office of the issuer company is situated. number. value and percentage of successful allottees who have applied through stockinvest. is released by the said bank only after the listing permission under the said Section has been obtained from all the stock exchanges where the securities were proposed to be listed as per the offer document.
000 Number of times over-subscribed . b. All the applications where the proportionate allotment works out to less than 100 shares per applicant. ii.3 Proportionate allotment to category . Number of the shares to be allotted to the successful allottees shall be arrived at on a proportionate basis i.000 c. The total number of shares to be allotted to each category as a whole shall be arrived at on a proportionate basis i.500 Total number of shares applied for . total number of shares applied for by each applicant in that category multiplied by the inverse of the over-subscription ratio.1. Schedule XVIII of basis of allotment procedure may be referred to.1.50.e. Number of shares applied for by – 100 each applicant Number of times oversubscribed – 3 Proportionate allotment to each successful applicant .below: a.000 x 1/3 = 50. If the proportionate allotment to an applicant works out to a number that is more than 100 but is not a multiple of 100 (which is the marketable lot). the number in excess of the . the allotment shall be made as follows: i.50. e. and The successful applicants out of the total applicants for that category shall be determined by drawal of lots in such a manner that the total number of shares allotted in that category is equal to the number of shares worked out as per (ii) above. Applicants shall be categorised according to the number of shares applied for. Each successful applicant shall be allotted a minimum of 100 securities.100 x 1/3 = 33 (to be rounded off to 100) d. the total number of shares applied for in that category (number of applicants in the category x number of shares applied for) multiplied by the inverse of the over-subscription ratio as illustrated below: Total number of applicants in category of 100s .1.e.
e. it shall be rounded off to the lower multiple of 100. the applicant shall be allotted 200 shares. If the shares allocated on a proportionate basis to any category is more than the shares allotted to the applicants in that category. the balance available shares for allotment shall be first adjusted against any other category. it may be necessary to allow a 10% margin i. g. . remaining after such adjustment shall be added to the category comprising applicants applying for minimum number of shares. where the allocated shares are not sufficient for proportionate allotment to the successful applicants in that category. the final allotment may be higher by 10 % of the net offer to public.multiple of 100 shall be rounded off to the higher multiple of 100 if that number is 50 or higher. h. The balance shares if any. If that number is lower than 50. As the process of rounding off to the nearer multiple of 100 may result in the actual allocation being higher than the shares offered. All applicants in such categories shall be allotted shares arrived at after such rounding off. j. If however the proportionate allotment works out to 240. As an illustration. if the proportionate allotment works out to 250. i. the applicant would be allotted 300 shares. f.
Leasing has many advantages for the lessee as well as for the lessor. Ans:. lease finance can be arranged fast and documentation is simple and without much formalities. except for his margin money investment. High profit is expected as the rate of return increases Return on equity is elevated by leveraging results in low equity base which enhance the earnings per share. Enhances the working capital position. This gives the option to the lessee to replace the equipment with latest technology The following are the benefits offered by lease financing to the lessor: The lessor‟s ownership is fully secured as he is the owner and can always take possession in case of default by the lessee. The lessor being the owner of the asset bears the risk of obsolescence and the lessee is free on this score. Offers tax benefits which depend on the structure of the lease. . Enables lessee to pay rentals from the funds generated from operations as lease structure can be made flexible to suit the cash flow. When compared to term loan and institutional financing. Offers restriction free financing without any unduly restrictive covenants. Facilitates the availability and use of equipments without the necessary blocking of capital funds. Tax benefits are provided on the depreciation value and there is a scope for him to avail more depreciation benefits by tax planning. Provides finance without diluting the ownership or control of the lessor.Q.4 What are the advantages of leasing to a company. Lease financing offers the following benefits to the lessee: One hundred percent finance without immediate down payment for huge investments. Acts as a less costly financing alternative as compared to other source of finance.
High growth potential is maintained even during periods of depression. .
. plays. Accordingly. A rental agreement is a lease in which the asset is a substantial property. is not applicable in respect of such assets. patents and copyrights. video recordings. such as oil. metals and other mineral rights. Operating lease – A lease for which the lessee acquires the property for only a small portion of its useful life. and Licensing agreements for items such as motion picture films. however. Leases.4. the „Guidance Note on Accounting for Leases‟ issued by the Institute in 1995. is issued by the Council of the Institute of Chartered Accountants of India.Q.2001 and is mandatory in nature from that date. gas . Finance lease – A lease which transfers all the risks and rewards incident to ownership of an asset. and Lease agreements to use property such as lands.5 Discuss Accounting standard 19 for lease based on operating lease.Accounting Standard (AS)-19. Earlier application of this Standard is. Non-cancellable lease – A non-cancellable lease is a lease that can be abandoned only: Inception of lease – The inception of lease is the former date of the lease agreement and the commitment date by the parties to the principal provisions of the lease. Scope The right accounting policies and disclosures in relation to finance leases and operating leases should be applied in accounting for all leases other than the following: Lease agreements to explore or to use natural resources. encouraged. timber. Related definitions The following terms are used in this statement: Lease – A lease is an agreement calling for the lessee (user) to pay the lessor (owner) for use of an asset for an agreed period of time. Lease term – The lease term is the non cancellable period for which the lessee has agreed to take on lease asset together with future periods. manuscripts. Ans:. This standard comes into force with respect of all assets leased during accounting periods commencing on or after 1.
Guaranteed residual value – It is guaranteed by the lessee or by a party on behalf of the lessee to pay the maximum amount of the guarantee. the part of the residual value which is guaranteed by the lessee or on behalf of the lessee. Contingent rent – It is the portion of the lease payments that is not permanent in amount but is based on a factor other than just the passage of time. Gross investment in the lease – It is the sum of the minimum lease payments within a finance lease from the lessors‟ view and any unguaranteed residual value accumulating to the lessor. Minimum lease payments – It is the regular rental payments excluding executory costs to be paid by the lessee to the lessor in a capital lease. Residual value – The value of a leased asset is the estimated fair value of the asset at the end of the lease term. Unguaranteed residual valued of a lease asset – It is the value of a leased asset that is the total amount by which the residual value of the asset exceeds its guaranteed residual value. Useful life – Useful life of a leased asset is either the period over which leased asset is expected to be useful by the lessee or the number of production units expected to be gained from the use of the asset by the lessee. Unearned finance income – Any income that comes from investments and other sources unrelated to employment services. and in the case of the lessor. Net investment in the lease – Net investment in the lease is the gross investment in the lease less unearned finance income. Economic life – The outstanding period of time for which real estate improvements are expected to generate more income than operating expenses cost. percentage of sales. Implicit interest – An interest rate that is not explicitly stated. . but the implicit rate can be determined by use of present value factors. For example. The lessee informs that an asset and liability at the discounted value of the future minimum lease payments. or an independent third party who is financially able of discharging the obligations under the guarantee. Fair value – The expected value of all assets and liabilities of a owned company used to combine the financial statements of both companies.
The current value of the least lease payments is equal to substantially all of the fair value of the asset. The following are some of the situations where an individual or in combination.Classification of leases The lease can be classified as either a finance lease or an operating lease based on different accounting treatments as required for the different types of lease. Risks include loss from idle capacity. would usually direct to a lease being an operating lease: . Losses or gains from changes in the fair value of the residual value of the asset add to the lessee. The leased resources are of a specialized nature such that only the lessee can use them without significant modification. it is important to recognize the essence of the agreement and not just its legal form. else if it does not then it is an operating lease. The lease term is for a key part of the financial life of the asset. technological obsolescence. Conditions in the lease may specify that an entity has only a limited disclosure to the risks and benefits of the leased asset. Rewards include the rights to sell the asset and gain from its capital value. This classification is based on the extent to which risks and rewards of ownership of leased asset are transferred to the lessee or remain with the lessor. While classifying a lease. The commercial reality is always important. even if title to the asset is not transferred. The following are some of the situations where an individual or in combination. The lessee has the option to continue the lease for a secondary term at significantly below market rent. Leases are classified as a finance lease if it transfers considerably all the risks and rewards of ownership to the lessee. would usually direct to a lease being a finance lease: Transfer of ownership to the lessee by the end of the lease term. and variations in return. The lessee has the choice to purchase the asset at a cost that is expected to be lower than its fair value and such that the option is likely to be exercised.
Leases of land. Any initial direct costs of the lessee are included to the amount identified as an asset. the lessee‟s incremental borrowing rate can be used. Leases in the financial statements of lessors This section analyses leases in the financial statement of lessors. the lease payments are assigned between the repayment of the outstanding liability and the finance charge in order to reflect a constant periodic rate of interest on the liability. then the shorter of the lease term and the useful life must be used. Operating lease In an operating lease. and the lessee is likely to exercise such an option. The discount rate in calculating the current value of the minimum lease payments is the interest rate contained in the lease. If the title to the land is not likely to pass to the lessee. If there is no reasonable certainty that ownership will transfer to the lessee. unless another organised basis is more representative of the pattern of the user‟s benefit. if lower. then the rewards and risks of ownership has not substantially passed. using rates for similar assets. If the allocation is not be made reliably. the lease payments are recognised as an expenditure on a straight-line basis over the lease term. Else. If there is an option to cancel. if this is possible to determine. lessees identify finance leases as assets and liabilities in their balance sheets on sum equal to the value of the leased asset or. The lowest lease payments need to be allocated between the land and the building component in proportion to their relative fair values of the lease holding interests at the beginning of the lease. If the lessor experiences the risk associated with a movement in the market value of the asset or the use of the asset. . These need to be properly noticed over the lease term from its commencement. Leases in the financial statements of lessees Let us now discuss about leases in the financial statement of lessees. on the current value of the minimum lease payments. The asset needs to be depreciated over its expected useful life under IAS 16. if title is not transferred. then both leases are treated as finance leases or as operating leases. Finance lease At the initiation of the lease term. The incentives in operating leases will be in the form of up-front payments and rent-free periods. After the initial recognition.
Operating lease Lessors present assets under operating leases in their balance sheets based on the nature of the asset. Lease income from operating leases is identified in income on a straight-line basis over the lease term. unless another organised basis is more representative of the pattern in which user benefit derived from the leased asset is reduced. Costs incurred by manufacturer or dealer lessors associated with negotiating and arranging a lease will be recognised as an expense when the selling profit is identified. selling profit will be restricted which would apply if a market rate of interest were charged. and depreciation is calculated in accordance with International Accounting Standard (IAS 16 and IAS 38). The identification of finance income is based on a pattern showing a periodic rate of return on the lessor‟s net investment in the finance lease. Finance lease Lessors recognise assets held under a finance lease in their balance sheets and present them as a receivable on an amount equal to the net investment in the lease. If low rates of interest are quoted. The dealer lessors recognise selling profit or loss in the period. The depreciation policy for depreciable leased assets will be consistent with the lessor‟s normal depreciation policy for related assets. . based on the policy followed by the entity for outright sales.
Growth schemes are good for investors having a long-term . Such schemes normally invest a major part of their corpus in equities. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. Ans:.term. and the investors may choose an option depending on their preferences. either repurchase facility or through listing on stock exchanges. Close-ended Fund/ Scheme A close-ended fund or scheme has a stipulated maturity period e. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i. The fund is open for subscription only during a specified period at the time of launch of the scheme. Such schemes may be classified mainly as follows: Growth / Equity Oriented Scheme The aim of growth funds is to provide capital appreciation over the medium to long. take any two schemes and discuss the performance of the schemes.6 Given the various types of mutual funds. or balanced scheme considering its investment objective. In order to provide an exit route to the investors. The mutual funds also allow the investors to change the options at a later date. The investors must indicate the option in the application form. Such funds have comparatively high risks. The key feature of open-end schemes is liquidity. These schemes do not have a fixed maturity period.g. These mutual funds schemes disclose NAV generally on weekly basis. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices.Q. capital appreciation. Open-ended Fund/ Scheme An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. Such schemes may be open-ended or close-ended schemes as described earlier.e.Different types of mutual fund schemes Schemes according to Maturity Period: A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period. etc. 5-7 years. These schemes provide different options to the investors like dividend option. Schemes according to Investment Objective: A scheme can also be classified as growth scheme. income scheme.
preservation of capital and moderate income. opportunities of capital appreciation are also limited in such funds.outlook seeking appreciation over a period of time. certificates of deposit. Index Funds Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index. Gilt Fund These funds invest exclusively in government securities. commercial paper and inter-bank call money. Balanced Fund The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. . These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods. However. These funds are not affected because of fluctuations in equity markets. However. They generally invest 40-60% in equity and debt instruments. Returns on these schemes fluctuate much less compared to other funds. government securities. These schemes invest exclusively in safer short-term instruments such as treasury bills. Such funds are less risky compared to equity schemes. If the interest rates fall. The NAVs of such funds are affected because of change in interest rates in the country. Government securities and money market instruments. Income / Debt Oriented Scheme The aim of income funds is to provide regular and steady income to investors. NAVs of such funds are likely to be less volatile compared to pure equity funds. long term investors may not bother about these fluctuations. However. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index. Such schemes generally invest in fixed income securities such as bonds. Government securities have no default risk. Money Market or Liquid Fund These funds are also income funds and their aim is to provide easy liquidity. These are appropriate for investors looking for moderate growth. NAVs of such funds are likely to increase in the short run and vice versa. S&P NSE 50 index (Nifty). These funds are also affected because of fluctuations in share prices in the stock markets. etc. corporate debentures. etc These schemes invest in the securities in the same weightage comprising of an index.
The NAVs are also available on the web sites of mutual funds. How to know the performance of a mutual fund scheme? The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. 1 year. . All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) www. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges. the investors should decide when to enter or exit from a mutual fund scheme. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index. etc. The NAVs of mutual funds are required to be published in newspapers.com and thus the investors can access NAVs of all mutual funds at one place The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time i. many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance.e. Investors can also look into other details like percentage of expenses of total assets as these have an affect on the yield and other useful information in the same half-yearly format. Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis.though not exactly by the same percentage due to some factors known as "tracking error" in technical terms. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds. S&P CNX Nifty. 5 years and since inception of schemes. Investors can compare the performance of their schemes with those of other mutual funds under the same category. On the basis of performance of the mutual funds. The mutual funds are also required to send annual report or abridged annual report to the unitholders at the end of the year. Apart from these.amfiindia. 3 years. last six months. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.
” Michigan Law Review 80 (1982): 1051–1071.. Victor.html Brudney. “The Effect of Insider Trading Rules on the Internal Efficiency of the Large Corporation.org/library/Enc/InsiderTrading.. Book ID: 1318 http://www.bizhelp24. Dennis W. Fischel. and Thomas H.org/journals/index. Outsiders. Hu.php/AAEF/article/.com/money/business-finance/leasing-in-business-advantages-disadvantages./571 SMU Manual on Merchant Banking and Financial Services.. Haft. Carlton. Jie.Reference: http://www. “The Insider Trading Debate. Robert J. Noe. Mark. “Mainstream Economics and the Case for Prohibiting Insider Trading.” Harvard Law Review 93 (1979): 322–376.” Stanford Law Review 35 (1983): 857–895. Klock. “The Regulation of Insider Trading.” Federal Reserve Bank of Atlanta Economic Review 82 (4th Quarter 1997): 34–45.” Georgia State University Law Review 10 (1994): 297–335. “Insiders. worldsciencepublisher. and Daniel R.html .econlib. and Informational Advantages Under the Federal Securities Laws.
Name: Dromor Tackie-Yaoboi
Roll Number: 531110332
Learning Centre: 02544
Course & Semester: MBA Semester IV
Subject: Insurance and Risk Management Assignment No.: 1
Subject Code: Mf0018
Date of Submission at the Learning Centre: 27 February, 2013
Q.1 Explain chance of loss and degree of risk with examples Ans:- Chance of loss Loss is the injury or damage borne by the insured in consequence of the happening of one or more of the accidents or misfortunes against which the insurer, in consideration of the premium, has undertaken to assure the insured. Chance of loss is defined as the probability that an event that causes a loss will occur. The chance of loss is a result of two factors, namely peril and hazard. Hazards are further classified into the following four types: Physical hazard – This is a danger likely to happen due to the physical characteristics of an object, which increases the chance of loss. For example defective wiring in a building which enhances the chance of fire. Moral hazard – It is an increase in the probability of loss due to dishonesty or character defects of an insured person. For example, Burning of unsold goods that are insured in order to increase the amount of claim is a moral hazard. Morale hazard – It is an attitude of carelessness or indifference to losses, because the losses were insured. For example, careless acts like leaving a door unlocked which makes it easy for a burglar to enter, or leaving car keys in an unlocked car increase the chance of loss. Legal hazard – It is the severity of loss which is increased because of the regulatory framework or the legal system. For example actions by government departments restricting the ability of insurers to withdraw due to poor underwriting results or a new environment law that alters the risk liability of an organisation. Degree of risk Degree of risk refers to the intensity of objective risk, which is the amount of uncertainty in a given situation. It can be assessed by finding the difference between expected loss and actual loss. The formula used is Degree of risk = Degree of risk is measured by the probability of adverse deviation. If the probability of the occurrence of an event is high, then greater is the likelihood of deviation from the outcome that is hoped for and greater the risk, as long as the probability of loss is less than one. In the case of exposures in large numbers, estimates are made based on the likelihood of the number of losses that
will occur. With regard to aggregate exposures the degree of risk is not the probability of a single occurrence but it is the probability of an outcome which is different from that expected or predicted. Therefore insurance companies make predictions about the losses that are expected to occur and formulate a premium based on that.
Regulatory body The Insurance Act must be changed. which was a part of finance ministry. Every state must have only one state level life insurance company. An Insurance Regulatory body must be formed. The report submitted by the committee in 1994 is given below: Structure Government risk in the insurance Companies to be decreased to 50%. Malhotra (former Finance Secretary and RBI Governor).Q.2 Explain in detail Malhotra Committee recommendations Ans:. Better freedom of operation for insurance companies. This was formed to analyse the Indian insurance industry and propose the future course of the industry.Recommendations of Malhotra committee The major reforms in Indian industry started when the Malhotra committee was formed in 1993 headed by R. Companies should not use a single entity to deal with life and general Insurance. The committee recognised the importance of insurance in financial systems and designed suitable insurance programs. . It modified the financial sector to design a system appropriate for the changing economical structures in India. Postal life insurance must be permitted to work in the rural market. should be allowed to work independently. N. Insurance controller. Competition Private companies who have initial capital of Rs 1 billion must be permitted to work in the insurance industry. Foreign companies may be permitted to work in the Indian insurance industry only as partners of some domestic company. GIC must be taken under the government so that the GIC subsidiaries can work independently.
Every insurance company with an initial capital of Rs. further reforms were made by introducing the plan for Insurance (Laws) Amendment . The company should have an initial paid capital of at least Rs. GIC and its subsidiaries should not be allowed to hold more than 5% in any company.100 crores can act as an independent company with economic motives. the Insurance Regulatory and Development Authority Act.200 crores to provide reinsurance. All insurance companies should be encouraged to create unit linked pension plans. The insurance companies should promote and fulfil customer services. support and ensure a structured growth of the insurance industry. Customer service LIC must pay interest if it delays any payments beyond 30 days. The company should only provide life. They should also extend the insurance coverage areas to various sectors. The insurance industry should be computerised and the technologies must be updated. The company should have an initial paid capital of at least Rs. The total capital share by a foreign company held by itself or by through sub sectors of the company should not exceed 26% of the capital paid to the Indian insurance industry.Investments The mandatory investments given to government securities from the LIC Life Fund must be reduced from 75% to 50%. but had to follow the conditions given below: The company must be registered under the Companies Act. Later in 2008.100 crores to provide life insurance. Since then there is a competition between the private and public sectors of insurance. 1999 (IRDA Act) was formed to control. 1956. general insurance or reinsurance. The private sector insurance companies were allowed to work along with the public sector. The committee allowed only a limited competition in this sector as any failure on the part of new players could ruin the confidence of the public to associate with this industry.
These amendments influenced the Indian insurance industry in a huge way. Insurance Act 1938. The Insurance (Laws) Amendment Bill .2009. . General Insurance Business (Nationalisation) Act 1972 (GIBNA) and Insurance Regulatory and Development Authority Act 1999.2008 amended three other acts namely.Bill .2008 and The LIC (Amendment) Bill .
Equity securities and derivative instruments that are traded in active markets · Limited equity securities and derivative instruments that are traded in active markets must be measured at a fair value according to the balance sheet date.Q. · The insurer can assess the balance sheet date to check whether an impairment of the listed equity security instruments has occurred. Residual value is considered zero and no reevaluation is allowed. The lowest of the last estimated closing price of the stock exchanges where securities are listed can be considered for estimating the fair value. a detailed procedure has been prescribed for determining value of various investments like real estate. · All impairment losses are recognised as expense in the Revenue/Profit and Loss account. The change in the carrying amount of the investment property shall be taken to Revaluation Reserve.3 What is the procedure to determine the value of various investments? Ans:Procedure to determine the value of investments According to this sub clause of the Regulations. Debt securities Debt securities that include the government securities and the redeemable preference share must be considered as “held to maturity” securities and can be measured at an historical cost that is subjected to amortisation. debt securities and equity securities. · The insurers can asses at every balance sheet date to check whether an impairment of the investment property has occurred. Real estate · Investment property – The investment property can be valued at a historical cost after deducting the accumulated depreciation and impairment loss. .
In addition to this. The following need to be disclosed as notes to the Balance Sheet: · Contingent liabilities: .Partly paid-up investments.Outstanding underwriting commitments. Loans Loans can be calculated at a historical cost that is subjected to impairment provisions. .Guarantees provided by or on behalf of the company. Catastrophe reserve Catastrophe reserve can be created according to the norms. . if any prescribed by the authority. while declaring dividends. any debit balance in the Fair Value Change Account can be reduced from the profits or free reserves. · Unrealised gains or losses that arise due to the change in the fair value of listed equity shares and derivative instruments can be considered under the heading “Fair Value Change Account” and reported in Profit or Loss account. · The balance in Fair Value Change Account or any part thereof cannot be distributed as dividends.Claims not judged as debts. Further it is clarified that this reserve is created to meet the losses that may arise because of some unexpected set of event and not any definite known reason. . Fund investment out of catastrophe reserve can be made according to the instruction given by the authority. . The profit or loss on sale of such investments can include the accumulated changes of the fair value that was previously recognised under the heading Fair Value Change Account with respect to a particular security and recycled to Profit and Loss Account on actual sale of that listed security. it has normal willing buyers and sellers and the prices are available publicly.· An active market means the market where the securities that are traded are homogenous.
· Amortisation basis of debt securities. · Ageing of claims. · Encumbrances to company assets (inside and outside India) · Obligations made for loans. · Recognition of premium income extent based on different risk patterns. · Historical costs of valued investments on a fair value basis.. less reinsurance. investments and fixed assets. · Premiums. · Fair value of investment property and its basis. · Sales where payments are not settled. · The credit balance in Fair Value Change account is not available for distribution when realisation is pending. · Unrealised gains or losses due to fair value changes of equity shares and derivative instruments. . .Reinsurance commitments. · Contract values with respect to investments. · Operational expenditures of the insurance business. · Procurements where deliveries are delayed and pending. · Claims settled and outstanding claims for a period of more than six months on the balance sheet date. · Calculation of remuneration of managers.Others (to be specified).Statutory demands. .
· Segregation of performing and non performing investments for income purpose as per the directions issued by authorities. important policies mentioned in Part I of Accounting Principles. profits and losses. · Percentage of business sector-wise. dividends and rents among revenues. . Other accounting principles of an insurer are stated according to Accounting Standard AS 1 by ICAI. · Summarised financial statements of last five years prescribed by authorities.The following accounting policies form an integral part of financial statements: · All important accounting policies with respect to accounting standards issued by ICAI. The following information also needs to be disclosed: · Investments made according to statutory requirements need to be disclosed separately together with its amount. · Allocation of interests. security and special rights inside and outside India. · Any departure from the accounting policies as abovementioned need to be separately revealed with reasons. · Accounting ratios provided by authorities.
a consultant having technical expertise assists the surveyor.Q. Appointment of surveyor The Insurance Act states that surveyor should survey claims above Rs. Proposal for insurance The proposals for insurance are: · In all cases to claim insurance. Guidelines for Settlement of Claims by IRDA 1. The appointing letter of the investigator o mentions all the reference terms to perform. Therefore. a proposal for grant of cover should be submitted with proof (a written document). These guidelines are general in nature. One surveyor can be used for various jobs. The prospect is to fill the . But a written proposal form is not required for marine insurance markets.4 Discuss the guidelines for settlement of claims by Insurance company Ans:General guidelines for claims’ settlement There are some guidelines that must be followed while settling the claims. and are not compiled to be the same always. · Depending on the circumstances of the claim. if technical expertise is required. Appointment of investigator Depending on circumstances.000. The surveyor‟s appointment should be based on the following points: The surveyor should have a valid license. forms and documents in the grant of cover can be made available in the languages recognised by the constitution of India. if the surveyor‟s competence is good for both. Depending on the situation. the claim settling authority uses discretion and records reasons. The surveyor selected should consider the type of loss and nature of the claims. 20. it is necessary to appoint an investigator for verifying the claim version of loss.
like appointing nominee or any facility based on the terms of act or conditions of policy. · The provision for loan keeping the policy as the security and the rate of interest on the loan amount is to be mentioned at the time of taking the loan. concerning the facilities available. . · The terms and conditions of the contract. · If a proposal form is not used. benefits payable and contingencies on which the benefits are payable. All the decisions and confirmations should not exceed 15 days from the receipt of proposal by the insurer. · The dates of commencement of the policy. the insurer has to record the information obtained. surrender value. · The time gap to pay premiums. orally or in writing. If any information is not recorded. the amount of premium. The implications of not paying premium and the provisions of a surrender value. · Policy requirements for converting the policy into paid-up policy. the grace period to pay premium. · The insurer has to process the proposal quickly and efficiently. · The insurer is to educate the proposer. its terms and conditions. under the guidance of the provisions of section 45 of the Insurance Act. 2. · Whether participating in profits or not. the burden of the missing information lies on the insurer. Matters to be stated in life insurance policy A life insurance policy should clearly state the following: · The name of plan in the policy. nonforfeiture and to revive lapsed policy. and confirmation is to be done by the insurer within 15 days. benefits availing date and maturity date. if participating.form of proposal. simple or compound bonus. in case he claims that the insured is suppressing information or is providing misleading information. · The profits such as cash bonus deferred bonus.
must be done not later than 6 months. and clarifying within 30 days from the date of receipt. is to be raised within a period of 15 days of the receipt claim. 2. · All the documents to avail claim under a policy. if needed. by giving relevant reasons. · When acting under regulations to forward policy to the insured. A life insurance policy should state all the documents to be submitted by a claimant. according to the rate at the beginning of the financial year. the insurer has to inform that the letter forwarded has a time span of 15 days from the date of receipt. 5. . to support a claim. If there is a delay in payment from the part of the insurer. With respect to the policy coverage. The insured is entitled to refund the premium which is subjected to a deduction with respect to a proportionate risk premium. they can return the policy stating the reasons for objection. initiations and completions of investigations. the insurer should verify the age before issuing the policy document. 3. the insurer is to obtain the proof of age as soon as possible. in case. has to process the claim. then the insurance company has to pay the claim amount at a rate two percent above the bank rate. Any additional document. to review the terms and conditions of the policy. 4. that is.· The address of the insurer to communicate with regard to the policy. the insurer has to hold the amount for the benefit of the payee. All investigations. If a claim is ready for payment. 3. and earn interest at the rate applicable to a savings bank account. if the premium charge depends on age. but the payment is not made because of reasons related to proper identification of the payee. If. Claims procedure of life insurance policy The claims procedures with respect to life insurance policy are: 1. If the premium charge does not depend on age. in which the claim is reviewed. the insured do not agree. A life insurance company on receiving a claim. in processing a claim. A claim under a life policy has to be paid or disputed.
When any primary insurer wants reinsurance for a specific coverage. One advantage of facultative reinsurance is it is flexible as a reinsurance contract is arranged to fit any kind of cases. It reduces the risk exposure of the ceding company against a particular policy.Q. Facultative reinsurance It is a type of reinsurance that is optional. Reinsurance moves the huge losses of the insurers to the reinsurer and thus helps the insurer. The insurance company does not have any commitments to cede insurance and also the reinsurer has no commitments to accept the insurance. Facultative reinsurance is used when a huge amount of insurance is preferred and while considering a specific risk involved in an individual contract. 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. and bargains with different reinsurance companies for the amount of coverage and premium. 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. it enters the market. Facultative reinsurance is the reinsurance of a part of a single policy or the entire policy after negotiating the terms and conditions. According to most of the contracts. Facultative reinsurance is not mandatory.5 What is facultative reinsurance and treaty reinsurance? Ans:The two different types of reinsurances are: Facultative reinsurance. The ceding insurer will not know in advance whether a reinsurer will agree to pay any part of the insurance. Treaty reinsurance Treaty reinsurance is one in which the primary insurer agrees to cede the insurance policy to the . the reinsurer pays a ceding commission to the insurer to pay for purchase expenses. Treaty reinsurance. It helps the insurance companies in writing large amount of insurance policies. looking out for a better value. One main disadvantage of facultative reinsurance is that it is not reliable. Before issuing the insurance policy the insurer looks for reinsurance and speaks to many reinsurers. However if the insurance company find a reinsurer who is willing to take the insurance policy then they can enter into a contract.
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. The treaty reinsurance is not advantageous to the reinsurer. There are different types of treaty reinsurance arrangements which may differ according to the liability of the reinsurer. The treaty reinsurance provides many advantages to the primary insurance company. Surplus–share treaty. 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. Excess–of–loss treaty. Therefore the reinsurer undergoes a loss if the risk selection of the primary insurer is not good and they charge insufficient rates. The primary insurer may pay insufficient premium to the reinsurer. Reinsurance pool. It is automatic. and there is no delay in issuing the policy.reinsurer and the reinsurer has to accept it. The amount of insurance that the primary insurer sells and those policies where both the parties provide the service is specified in the contract. 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. It includes a standing agreement with a specific reinsurer. They are: Quota–share treaty. It is also more cost effective as there is no need to shop around for reinsurers before writing the policy. 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. . All the business that comes under the contract is automatically reinsured according to the conditions of the treaty. It is a type of reinsurance that is preferred while considering the groups of homogenous risks. more reliable.
accounting. and so on. and to print the policies high speed printers are utilised. Developments in technology allow actuaries to examine risks more precisely. Policy management . Insurance industry uses information technology for internal administration. The method of creating documents is accomplished by technicians and typists. Customer data is accessed by computer systems. In most of the cases. By using automated systems. by replacing billions of files with folders of information. financial management. The use of information technology in insurance industry has an impact on the efficiency of the organisation as it reduces the operational costs. the competition in the insurance sector has become immense.Q. Indian insurance organisations are rapidly growing as „technology-driven‟ organisations. The role of IT in different fields of insurance like: Actuarial investigation . this task is generally completed by using new technology.Most of the insurance policies are printed and conveyed to policy owners through mail every year. After many private players entered the insurance industry. underwriters can compare an individual‟s risk profile with their data and customise policies according to the individual‟s risk profile. in order to focus on the key areas of insurance business. Insurance organisations are using new technologies. to analyse the claims and policyholder‟s data for providing connection between risk characteristics and claims. To assemble the policies. Underwriting – Underwriters can use knowledge based expert systems to make underwriting decisions. Insurers are heading towards the technological enhancements. and maintained in huge folders. reports.Insurers depend on the rates of actuarial models to decide the quantity of risks which create loss.6 What is the role of information technology in promoting insurance products Ans:The rapid developments in information technology are posing serious challenges for insurance organisations. in order to renew each policy. complex software packages are used. Front end operations: CRM (Customer Relationship Management) packages are used to integrate the different functional processes of the insurance company and provide . Information technology has helped in enhancing the insurance business.
org/wiki/Risk www.information to the personnel dealing with the front end operations.com/pdfs/Research/Claims%20Management. CRM facilitates easy retrieval of customer data.com/fl2921/.htm http://www.frontlineonnet.wikipedia.pdf SMU Manual on Insurance and Risk Management (Book ID: B1319) . Reference: en..niapune. LIC is using CRM packages to handle its front end operations../20121102292101300.
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