BA (Hons) International Business and Finance BAIBF 10017

END-SEMESTER EXAMINATION
JANUARY 2022 B
Module Code: BAIBF10017

Module Title: Strategic Risk management

Date: 27th January 2022

Morning / Afternoon: Morning
Start Time: 09:30 a.m. GST / 11:00 a.m. IST
Duration: 3 hours 30 min (210 minutes) - 3 hours for writing the

BAIBF 10017
exam and 30 minutes for scanning and uploading.
Total Marks: 100
Set No:

Exam Type: Closed-Book Assessment

Warning: Candidates are warned that possession or use of any
electronic devices in the examination is a serious
assessment offence.

Instructions to Question paper consists of 5 questions. Only FOUR to

Candidates: be attempted

Information to be provided on the answer booklet

• Name of the student

• Banner ID
• Module name
• Module Code
• Set No
• Page Numbers on top of each page

Zoom Video should be "ON" during the entire time till

the answer script is uploaded to the Platform

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BA (Hons) International Business and Finance BAIBF 10017

SECTION-A
Compulsory Question

Question 1
Harek was appointed as chief executive officer of ROTOY, a company listed on a European
stock exchange, six months ago. He arrived at a time when the company was struggling to
survive following the abandonment of an ill-advised and unprofitable capital investment project.
He believes that ROTOY is now much more secure. The board has re-considered its risk
appetite, business strategy has been reviewed and the company now has a portfolio of
attractive medium-risk businesses.

He thinks that he can now turn his attention from business strategy to internal control. Several
incidents in the past few months have concerned him and he believes that the internal control
system of ROTOY needs to be improved.

a) The company has been found guilty of issuing misleading advertising for one of its products,
and has breached the country’s advertising code. It has been required to pay a substantial
fine by the government regulators. Over the last few years the marketing department has
run successful campaigns for other products, and the marketing team has been rewarded by
substantial bonuses. However these campaigns have been controversial, and ROTOY was
reported to the government regulator on a previous occasion, although that time the
complaint was dismissed.
b) The financial forecast for the year was revised by a significant amount after it was
discovered that a member of the accounting department had made a mistake in estimating
the level of irrecoverable trade receivables. As the staff member’s work was not reviewed
within the accounting department, the mistake was not identified. Hans Trek has also
noticed that the accounting department is staffed largely by untrained young staff.
c) The head of IT had reported his suspicion that a rival company had successfully hacked into
the ROTOY’s database and acquired the technological details of a new product and a new
processing system that ROTOY has been developing.

At a recent board meeting, Hans Trek expressed his concerns about weaknesses in internal
control and recommended that an internal audit section should be established by the company
with specific responsibility for monitoring internal control in ROTOY. The Chairman of the audit
committee argued that the company’s external auditors could be appointed to do this work,
without the cost of a full-time internal audit section, but the board finally agreed with the
recommendation of Hans Trek. He has been authorised to establish an internal audit unit, in
consultation with the Finance Director (FD) and the Chairman of the audit committee. The job
description they have drawn up for the Head of Internal Audit (HIA) states that the HIA will
report to the FD.

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BA (Hons) International Business and Finance BAIBF 10017

Required:
a) Define the ‘control (internal) environment’ and analyse what the recent problems and
developments illustrate about the current control environment at ROTOY. (10 marks)
b) Explain, with reference to ROTOY as appropriate, how an internal audit department
can contribute to improvements in internal control. (10 marks)
c) Construct the argument against appointing the external audit firm to carry out a
review of internal control in ROTOY. (5 marks)

Question 2
Your firm has recently been approached by Frigate Co to carry out a business risk analysis.
Three and a half years ago, Frigate purchased exclusive rights to operate a car and passenger
ferry route for nine years. This offers an alternative to driving an additional 150 kilometres via
the nearest bridge crossing. There have been several ambitious plans to build another crossing
but they have failed through lack of public support and government funds.

Frigate refurbished two 20-year-old roll on, roll off (“Ro-Ro”) boats to service the route. The
boats do not yet meet the emission standards of Environmental Protection Regulations which
come into force in 18 months’ time. Each boat makes three return crossings every day of the
year, subject to weather conditions, and has the capacity to carry approximately 250
passengers and 40 vehicles. The Frigate service carried just 70,000 vehicles over the last 12
months (prior year: 58,000 and 47,000 two years ago). Hot and cold refreshments and travel
booking facilities are offered on the one hour crossing. These services are provided by
independent businesses on a franchise basis.

Frigate currently receives a subsidy from the local transport authority as an incentive to increase
market awareness of the Frigate service and its efficient and timely operation. The subsidy
increases as the number of vehicles carried increases and is based on quarterly returns
submitted to the authority.

Frigate employs 20 full-time crew members who are trained in daily operations and customer-
service, as well as passenger safety in the event of personal accident, collision or breakdown.

The management of Frigate is planning to apply for a recognised Safety Management

Certificate (SMC) in 12 months’ time. This will require a ship audit including the review of safety
documents and evidence that activities are performed in accordance with documented
procedures. A SMC valid for five years will be issued if no major non-conformities have been
found.

Required:
a) Identify and explain the business risks facing Frigate Co which should be assessed.
(15 marks)
b) Describe the processes by which the risks identified in (a) could be managed and
maintained at an acceptable level by Frigate Co. (10 marks)

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BA (Hons) International Business and Finance BAIBF 10017

(Total 25 marks)
Question 3
Gone is a travel business, offering different types of holiday products. It provides holidays for
families with children aged up to their late teens. These are typically for accommodation in
hotels where Gone’s representatives are stationed. Gone also caters for people aged mainly
between 20 and 30, who want relatively cheap adventure based holidays such as trekking,
sailing and cycling or who wish to go on inexpensive backpacking holidays, mainly in Europe
and Asia. In recent consumer surveys, Gone has consistently received a very high overall
customer satisfaction rating.

Recently there has been unrest in a country that had been a popular holiday destination for
Gone’s customers for many years. The unrest included protests, fighting with the police, and the
destruction of government offices throughout the country. Initially the unrest was in the capital
city but it later spread to other towns throughout the country, including the holiday resort towns.
None of Gone’s customers were injured during the unrest.

When the unrest started a large number of customers who had booked to travel to that country
contacted Gone to seek advice. Gone reassured them, on the basis that there had been no
violence in any of the country’s holiday resorts, and advised that they should go on holiday as
planned. Gone’s home government had not advised its citizens against travelling to the holiday
resorts in the country in question.

During the peak holiday season there was an unexpected series of violent protests in the
country’s major holiday resorts. Gone advised its customers to remain within their hotels during
the protests and that flights would be provided to bring them home as soon as order had been
restored. Most customers were brought home before their original scheduled return date, but
some were delayed and did not return home until several days after their due date.

Gone has been criticised by consumer groups representing customer interests on the grounds
that it should have been able to assess the risk to customers and advise them of the probability
of trouble occurring.

Required
a) Explain the difference between subjective and objective risk assessment and explore
the factors that meant that Gone’s assessment of the likelihood and impact of civil
unrest was subjective. (8 marks)

b) Recommend procedures that Gone should have in place to ensure that risks to its
customers arising from civil unrest are reduced to levels that are as low as
reasonably practicable. (10 marks)

c) Assess the extent to which the risk of Gone losing its reputation for providing high
levels of customer satisfaction is correlated with the risks of political unrest in the
destinations where its customers take holidays. (7 marks)

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BA (Hons) International Business and Finance BAIBF 10017

(Total 25 marks)
Question 4
PDFC is a large banking and financial services group that is listed on both the London Stock
Exchange and the New York Stock Exchange. The group has over 20 million customers
throughout the world and operates in 35 countries on four continents. The PDFC Group is
composed of a mix of retail and commercial businesses that include corporate and investment
banking, private banking and commercial banking.

Trends within the Financial Services Sector

Although PDFC has not received any UK or US government help during the recent financial
downturn, the directors believe that the bank may be affected by changes in government and
central bank policy and volatility in worldwide markets. At present the governments and central
banks of both countries are under pressure to revive their economies by stimulating demand.

The Board of Directors of PDFC is aware that a number of trends within the sector will also
require the bank to review its business strategy and substantially re-design a number of its
operating and information systems. Current issues that are having an impact on the financial
services sector include:
• The elimination within the UK of the use of personal signatures as the authorisation for
credit and debit card transactions and their replacement with personal identification (PIN)
numbers.
• The increasing use, by personal customers, of both telephone and internet banking
services. Over 40% of bill payments, standing order amendments and balance transfers by
such customers were processed in this way during the last 12 months compared with 28%
the previous year.
• A growth in the number of cases being sent to the financial ombudsman or the financial
industry regulator relating to claims of mis-selling or incorrect advice on the part of financial
services companies in the supply of a range of savings and investment products.
• As a result of threats of terrorist activity, money laundering legislation has been introduced
or tightened in all of the countries in which PDFC has banking operations.

The board is currently reviewing future investment policy and the future opportunities and
threats facing each business, with a view to deciding priorities across the group for use of the
surpluses available to invest.

Required
a) Using information from the case, explain the main categories of risk that are faced by
a bank such as PDFC. (8 marks)
b) Construct a case for risk categorisation being an essential part of a risk management
system. (5 marks)
c) For every one of the four issues identified in the question, recommend the controls
that might be introduced to minimise PDFC's exposure to such risks. (12 marks)
(Total = 25 marks)

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BA (Hons) International Business and Finance BAIBF 10017

Question 5
Because of a general lack of business confidence in the country of Xenon, its major banks had
severely restricted new lending. This lack of lending extended to small and large businesses,
and also to individuals in society. Press statements from the banks often referred to the need to
mitigate financial risks and the need to maintain capital adequacy. Over time, the lower lending
produced some negative consequences in the wider Xenon economy.

Responding to these problems, the Xenon finance minister remarked that, 'financial risks may
not only cause companies to fail but they can also cause problems in wider society. Banks, in
particular, need to be more aware of their financial risks than most other sectors of the
economy. They have to manage a unique set of risks and I strongly urge the directors of banks
to institute robust risk management systems as part of their corporate governance.'

'As finance minister, however, I also believe that banks have a vital role in supporting the
economic strength of this country. They hold cash deposits and make short and long-term
loans, which are vital to other businesses. Taking risks is a normal part of all business
operations and our banks need to accept this risk when it comes to lending.'

Roy, the chief executive of Yess Bank, Xenon's largest bank, said that continuous and ongoing
risk assessment was necessary. He said that despite the finance minister's call for higher
lending, his only duty was to Yess Bank's shareholders and it was this duty that guided Yess
Bank's reduced lending.

Required
a) Explain the meaning of 'risk assessment' as used by Roy and discuss, in the context
of the case, the need for risk assessment to be 'continuous and ongoing'. (8 marks)

Roy believed that his 'only duty' as Yess Bank's CEO was to the Yess Bank shareholders.
b) Describe 'fiduciary duty' in the context of the case and critically evaluate the issues
raised by Roy's belief. (7 marks)

c) Explain the term 'financial risk' and discuss how management of these risks can be
embedded in a large organisation such as Yess Bank. (10 marks)
(Total = 25 marks)

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