sem 4 – FM
August/Fall 2012
Master of Business Administration – MBA Semester 4
Subject Code — MF0015
Subject Name — International Financial Management
4 Credits
(Book ID: B1316)
Assignment Set- 1 (60 Marks)
Note: Each question carries 10 Marks. Answer all the questions.
Q.1 What is meant by BOP? How are capital account convertibility and current account convertibility different? What is the current scenario in India?
Answer : The balance of payments(or BOP) of a country is a record of international transactions between residents of one country and the rest of the world over a specified period, usually a year. Thus, India’s balance of payments accounts record transactions between Indian residents and the rest of the world. International transactions include exchanges of goods, services or assets. The term “residents” means businesses, individuals and government agencies and includes citizens temporarily living abroad but excludes local subsidiaries of foreign corporations. The balance of payments is a sources-and-uses-of-funds statement. Transactions such as exports of goods and services that earn foreign exchange are recorded as credit, plus, or cash inflows (sources). Transactions such as imports of goods and services that expend foreign exchange are recorded as debit, minus, or cash outflows (uses).The Balance of Payments for a country is the sum of the Current Account, the Capital Account and the change in Official Reserves.
The current account is that balance of payments account in which all short-term flows of payments are listed. It is the sum of net sales from trade in goods and services, net investment income (interest and dividend), and net unilateral transfers (private transfer payments and government transfers) from abroad. Investment income for a country is the payment made to its residents who are holders of foreign financial assets (includes interest on bonds and loans, dividends and other claims on profits) and payments made to its citizens who are temporary workers abroad. Unilateral transfers are official government grants-in-aid to foreign governments, charitable giving (e.g., famine relief) and migrant workers’ transfers to families in their home countries. Net investment income and net transfers are small relative to imports and exports. Therefore a current account surplus indicates positive net exports or a trade surplus and a current account deficit indicates negative net exports or a trade deficit. The capital(or financial) account is that balance of payments account in which all cross-border transactions involving financial assets are listed. All purchases or sales of assets, including direct investment (FDI) securities (portfolio investment) and bank claims and liabilities are listed in the capital account. When Indian citizens buy foreign securities or when foreigners buy Indian securities, they are listed here as outflows and inflows, respectively. When domestic residents purchase more financial assets in foreign economies than what foreigners purchase of domestic assets, there is a net capital outflow.
If foreigners purchase more Indian financial assets than domestic residents spend on foreign financial assets, then there will be a net capital inflow.
A capital account surplus indicates net capital inflows or negative net foreign investment. A capital account deficit indicates net capital outflows or positive net foreign investment.
Current scenario in India
The official reserves account (ORA)records the total reserves held by the official monetary authorities (central banks) within the country. These reserves are normally composed of the major currencies used in international trade and financial transactions. The reserves consist of “hard” currencies (such as US dollar, British Pound, Euro, Yen), official gold reserve and IMFSpecial Drawing Rights (SDR). The reserves are held by central banks to cushion against instability in international markets. The level of reserves changes because of the central bank’s intervention in the foreign exchange markets. Countries that try to control the price of their currency (set the exchange rate) have large net changes in their Official Reserve Accounts. In general, a net decrease in the Official Reserve Account indicates that a country is buying its currency in exchange for foreign exchange reserves, to try to keep the value of the domestic currency high with respect to foreign currencies. Countries with net increases in the Official Reserve Account are usually attempting to keep the price of the domestic currency cheap relative to foreign currencies, by selling their currencies and buying the foreign exchange reserves. When central bank sells its reserves (foreign currencies) for the domestic currency in the foreign exchange market, it is a credit item in the balance of payment accounts as it makes available foreign currencies. Similarly, when a central bank buys reserves (foreign currency), it is a debit item in the balance of payment accounts. The Balance of Payments identity states that:
Current Account + Capital Account = Change in Official Reserve Account.
If a country runs a current account deficit and it does not run down its official reserve to cover this deficit (there is no change in official reserve), then the current account deficit must be balanced by a capital account surplus. Typically, in countries with floating exchange rate system, the change in official reserves in a given year is small relative tithe Current Account and the Capital Account. Therefore, it can be approximated by zero. Thus, such a country can only consume more than it produces (or imports are greater than exports; current account deficit) only if it has a capital account surplus (foreign residents are willing to invest in the country). Even in a fixed exchange rate system, the size of the official reserve account is small compared to the transactions in the current and capital account. Thus the residents of a country cannot have a current account deficit (imports exceeding exports) unless the foreigners are willing to invest in that country (capital account surplus).
Q.2 What is arbitrage? Explain with the help of suitable example a two-way and a three way arbitrage.
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Q3. You are given the following information:
Q.4 Explain various methods of Capital budgeting of MNCs.
Q.5 a. What are depository receipts?
b. Boeing commercial Airplane Co. manufactures all its planes in United States and prices them in dollars, even the 50% of its sales destined for overseas markets. Assess Boeing’s currency risk. How can it cope with this risk?
Q.6 Distinguish between Eurobond and foreign bonds? What are the unique characteristics of Eurobond markets?
August/Fall 2012
Master of Business Administration – MBA Semester 4
Subject Code — MF0015
Subject Name — International Financial Management
4 Credits
(Book ID: B1316)
Assignment Set- 2 (60 Marks)
Note: Each question carries 10 Marks. Answer all the questions.
Q.1 What do you mean by optimum capital structure? What factors affect cost of capital across nations?
Answer : The objective of capital structure management is to mix the permanent sources of funds in manner that will maximise the company’s common stock price. This will also minimise the firm’s composite cost of capital. This proper mix of fund sources is referred to as the optimal capital structure. Thus, for each firm, there is a combination of debt, equity and other forms(preferred stock) which maximises the value of the firm while simultaneously minimising the cost of capital. The financial manager is continuously trying to achieve an optimal proportion of debt and equity that will achieve this objective.
Cost of Capital across Countries
Just like technological or resource differences, there exist differences in the cost of capital across countries. Such differences can be advantageous to MNCs in the following ways:
1. Increased competitive advantage results to the MNC as a result of using low cost capital obtained from international financial markets compared to domestic firms in the foreign country. This, in turn, results in lower costs that can then be translated into higher market shares.
2. MNCs have the ability to adjust international operations to capitalise on cost of capital differences among countries, something not possible for domestic firms.
3. Country differences in the use of debt or equity can be understood and capitalised on hymns.
We now examine how the costs of each individual source of finance can differ across countries.
Country differences in Cost of Debt
Before tax cost of debt (Kid) = Fro + Risk Premium
This is the prevailing risk free interest rate in the currency borrowed and the risk premium required by creditors. Thus the cost of debt in two countries may differ due to difference in the risk free rate or the risk premium.
(a) Differences in risk free rate:
Since the risk free rate is a function of supply and demand, any factors affecting the supply and demand will affect the risk free rate. These factors include:
–Tax laws:
Incentives to save may influence the supply of savings and thus the interest rates. The corporate tax laws may also affect interest rates through effect son corporate demand for funds.
– Demographics:
They affect the supply of savings available and the amount of loan able funds demanded depending on the culture and values of a given country. This may affect the interest rates in a country.
– Monetary policy:
It affects interest rates through the supply of loan able funds. Thus a loose monetary policy results in lower interest rates if a low rate of inflation is maintained in the country.
– Economic conditions:
A high expected rate of inflation results in the creditors expecting a high rate of interest which increases the risk free rate.
(b) Differences in risk premium:
The risk premium on the debt must be large enough to compensate the creditors for the risk of default by the borrowers. The risk varies with the following:
– Economic conditions:
Stable economic conditions result in a low risk of recession. Thus there is a lower probability of default.
– Relationships between creditors and corporations:
If the relationships are close and the creditors would support the firm in case of financial distress, the risk of illiquidity of the firm is very low. Thus a lower risk premium.
–Government intervention:
If the government is willing to intervene and rescue affirm, the risk of bankruptcy and thus, default is very low, resulting in a low risk premium.
– Degree of financial leverage:
All other factors being the same, highly leveraged firms would have to pay a higher risk premium.
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Q.2 What is sub-prime lending? Explain the drivers of sub-prime lending? Explain briefly the different exchange rate regime that is prevalent today.
Q.3 What is covered interest rate arbitrage?
Assume spot rate of £ = $ 1.60
180 day forward rate £ = $ 1.56
180 day interest rate in U.K. = 4%
180 day U.S interest rate = 3%
Is covered interest arbitrage by U.S investor feasible?
Q.4 Explain double taxation avoidance agreement in detail
Q.5 Explain American depository receipt sponsored programme and unsponsored programme.
Q.6 Explain (a) Parallel Loans (b) Back — to- Back loans
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August/Fall 2012
Master of Business Administration – MBA Semester 4
Subject Code — MF0016
Subject Name — Treasury Management
4 Credits
(Book ID: B1311)
Assignment Set- 1 (60 Marks)
Note: Each question carries 10 Marks. Answer all the questions.
Q.1 Explain how organization structure of commercial bank treasury facilitates in handling various treasury operations. [10 Marks]
Answer : Treasury Organisation
The treasury organisation deals with analysing, planning, and implementing treasury functions. It deals with issues of profit centre, cost centre etc. The organisations managing interfaces with treasury functions include intragroupcommunications, taxation, recharging, measurement and cultural aspects.
Structure of treasury organisation
Figure depicts the structure of treasury organisation which is divided into five groups.
Fiscal: This group includes budget policy planning division, industrial and environmental division, common wealth state relationships, and social policydivision.Macroeconomic: This group deals with economic sector of the organisation. It includes domestic and international economic divisions, macroeconomic policy and modelling division.
Revenue: This group is concerned with the taxes in an organisation. It includes business tax division, indirect tax, international and treaties division, personal and income division, tax analysis and tax design division. Markets: This group mainly deals with selling of products in the competitive market. It includes competition and consumer policy, corporations and financial services policy, foreign investments and trade policy division. Corporate services: This group deals with overall management of the treasury organisation. It includes financial and facilities division, human resource division, business solutions and information management division.
Treasury as a profit centre
The implementation of treasury in the organisation gains profits in several aspects rather than considering it as a cost centre. It helps in providing market rates to the individual business units for the services provided and thereby making operating costs more realistic. The treasurer is motivated to ensure that more services are provided to make profits in market rate. Organisations also experiences the following disadvantages when considering treasury as a profit centre: Profit is a tempting factor to speculate as it sometimes encourages the organisation to invest in wrong direction that brings depreciation in economy as well growth of organisation. Most of the time is duly spent in arguing with business units with respect to charges over services. There may be excessive additional administrative costs.
Centralised and decentralised treasury management
Most of the multinational organisations face huge challenges in managing transactions globally. As the organisation expands geographically, it is difficult to access and track accurate and timely cash flow information. As the technology has been adversely developed, the need for centralising treasury has evolved; theoretically centralisation allows the treasurers to exercise greater control over operating organisations. The process of centralisation consists of: Providing centralised foreign exchange and interest rate risk management Dealing with cash management Providing fully centralised treasury including incoming and outgoing payments Centralising business treasury functions enhances the organisation to build economies of scale and rationalise costs during acquisition. Centralisation helps to achieve low cost debts, increase investment returns, reduce financial risks and ensure liquidity across the organisation. Decentralisation refers to the challenges of producing overall view of cash position and exposure to risk on a timely basis. Since the organisation contains various recording and reporting information methods, it will be difficult to construct a global risk position while combining information from different sources. In such cases it is impossible to make strategic decisions without access to timely and accurate information during the periods of economic volatility. In a decentralised environment, the company allows its subsidiaries to manage their own payables and payment processes. A lack of standardisation across subsidiaries and automation can lead to risks in transactions like incorrect payments and data redundancy.
Treasury management in banks
In recent days, most of the Indian banks have classified their business into two primary business segments like treasury operations (investments) and banking operations (excluding treasury).
The treasury operations in banks are divided into:
Rupee treasury: The rupee treasury carries out various rupee based treasury functions like asset liability management, investments and trading. It helps in managing the banks position in terms of statutory requirements like cash reserve ratio, statutory liquidity ratio according to the norms of the Reserve Bank of India (RBI). The various products in rupee treasury are:= Money market instruments Call, term, and notice money, commercial papers, treasury bonds, repo, reverse repo and interbank participation etc.= Bonds Government securities, debentures etc= Equities Foreign exchange treasury: The banks provide trading of currencies across the globe. It deals with buying and selling currencies. Derivatives The banks make foundation for Over the Counter (OTC). It helps in developing new products, trading in order to lay off risks and form apparatus for much of the industries self-regulation. The role of policies in strategic management was described in this section. The next section deals with inter-dependency between policy and strategy.
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Q.2 Bring out in a table format the features of certificate of deposits and commercial papers. [10 marks]
Q.3 Critically evaluate participatory notes. Detail the regulatory aspects on it. [10 Marks]
Q.4 What is capital account convertibility? What are the implications on implementing CAC? [10 Marks]
Q.5 Detail domestic and international cash management system [10 Marks]
Q.6 Distinguish between CRR and SLR [10 Marks]
August/Fall 2012
Master of Business Administration – MBA Semester 4
Subject Code — MF0016
Subject Name — Treasury Management
4 Credits
(Book ID: B1311)
Assignment Set- 2(60 Marks)
Note: Each question carries 10 Marks. Answer all the questions.
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Q.1 Explain any two major risks associated with banking organization. [10Marks]
Answer : Treasury exposure allows treasury management to various risks in the organisation. Following are the few treasury exposures in an organisation:
Financial exposure: The treasury management in the organisation are disclosed to the powerful analytics that enable to measure the global treasury operations and control financial market risks. It analyses the price and risk profile of financial dealings on a pre-dealing basis. The exposure in foreign exchange market is intense; hence hedging towards these risks by integrating business exposures and treasury transactions helps an organisation to manage financial risk and stay profitable.
Foreign exchange exposure: This occurs due to the low profits and adverse fluctuations in foreign exchange rates. Many organisations suffer from foreign exchange risk by making purchases or sales in foreign currency or by owning assets or liabilities in foreign countries. Hence a relevant course of action must be implemented to reduce exposures in business operations.
Currency exposure: It deals with future cash flows arising from domestic and foreign currencies that involve assets and liabilities and generating revenues which are susceptible to variations in foreign currency exchange rates. Hence the identification of existing potential currency relationship that arises from business activities includes hedging and other risk management activities.
Event exposure: This happens due to a sudden change in the financial market during an investment (an event) that has a detrimental effect on the value of that investment. It is often associated with corporate bonds.
Commodity exposure: This happens due to variations in the prices of commodities which change the future and magnitude of market values. The commodities depend on any production including foreign currencies, financial instruments or any physical substances. Hence treasury management is liable to deal with various risks like price, quantity, cost that are associated with commodities.
Need for risk management
Risk management helps in minimising the failure of business activities which are based on finance or performance in the organisation. It is the responsibility of the organisation to manage risk effectively and overcome hindrances affecting the overall growth of the organisation. Hence risk management is required in the organisation for the following purposes:
-To identify the risk in business activities and establish a plan to manage risk and minimise the negative effects.
– To improve the efficiency of strategic and business plans, and effective use of resources among the stakeholders in the organisation.
-It helps in increasing the ability to deliver products to the customers within the stipulated time and reduce the production cost.
-It helps to control the negative political, economic, and financial factors which may harm an organisations growth.
– To overcome sensitive internal environment, social or safety issues or regulatory and licensing conditions available in most of the organisations.
-To focus on internal audit process and robust contingency planning.
Corporate risks
Corporate risks include non-financial organisational risks that arise during challenging times in the economy. . The corporate risk varies for different organisations based on factors like size, diversity in business activities and sources of capital etc. According to the assumptions of Modigliani and Miller(1958), Corporate risk is a redundant activity. It is mainly concerned with progressive tax rate and expecting costs from financial distress. The value of an organisation depends on the changes in exchange and interest rates, and commodity prices. Hence the corporate risk manager quantifies the exposures occurring in the organisation to reduce risks that hamper the financial sector. Corporate risk is further divided into market, credit and operational risks. Credit risk experiences less challenges compared to operational and market risks. The operational risk occur due to certain factors like back office errors, fraud, natural disaster etc. The organisation faces market risk with respect to commodity price risk and foreign exchange risk.
Hidden risks
Hidden risks are related to cash and financial risk in an organisation. These risks might harm the growth of an organisation. Hence the manager irresponsible to identify the risk and implement relevant actions to eliminate it. Complete and accurate exposure calculation can eliminate the hidden risks. Hidden risks are also concerned with financial accounting. Financial risk is the probability when an actual return on an investment is lower than the expected return. They are the uncertainties in business leading to variations in expected profits and losses. Uncertainties related to several risks affect the net cash flow of any business organisation. Lower uncertainties have lower variations in net cash flow, and vice versa.
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Q.2 What is liquidity gap and detail the assumptions of it? [10 Marks]
Q.3 Explain loan able fund theory and liquidity preference theory [10 Marks]
Q.4 Explain various sources of interest rate risk [10 Marks]
Q.5 Detail Foreign exchange risk management and control procedure [10 Marks]
Q.6 Describe the three approaches to determine Vary [10 Marks]
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August/Fall 2012
Masters of Business Administration— Semester 4
MF0017 — Merchant Banking and Financial Services — 4 Credits
Book ID: 1318
Assignment Set- 1 (60 Marks)
Note: Each question carries 10 Marks. Answer all the questions.
Q.1 What do you understand by insider trading. What are the SEBI rules and regulations to prevent insider trading. [10]
Answer : An insider is a person who is connected with a company and who is expected to have access to unpublished sensitive information with respect to securities of the company. A person who has access to unpublished information which deals in securities and is involved in violations of the provisions will be guilty of insider trading. Insiders have access to confidential information of a company due to the position occupied by them in the company. They are in a position to manipulate the share prices to their own advantage and make huge profits. These actions cause major fluctuations in the prices of the securities. Considering the fact that the actions of insiders cause devastating effects on the functioning of stock exchange, SEBI has issued regulations to control such practices. Another problem that the stock market faces is unofficial trading in shares before listing of new companies. The company is not guilty of insider trading if the acquisition of shares was as per SEBI Substantial Acquisition of Shares and Takeover Regulations. If SEBI suspects that any person has violated the regulations of prohibition of insider trading, it can initiate an inquiry. For the prevention of insider trading, SEBI has introduced a policy on disclosure and internal procedure. According to this policy:
– All listed companies and organisations associated with the securities markets have to frame a code of conduct for internal procedure as per the specified model.
– Any person holding more than five per cent shares in any listed company has to disclose the number of shares held by him to the company, within 54 working days.
– Every listed company must disclose the information received about the initial and continual disclosures within five days to all the respective stock exchanges.
Any person other than a company violating the disclosure provisions would be liable for action under the SEBI Act. SEBI has prescribed a model code of conduct for prevention of insider trading for listed companies. According to this model, the listed company appoints a compliance officer who reports to the managing director and is responsible for setting the policies and procedures, monitoring adherence to the rules for the preservation of ‘price sensitive information’, pre-clearance of designated employees’ trade, monitoring of trades and implementation of the code of conduct. Preservation of price sensitive information is done by the employees and directors. They have to maintain confidentiality of all price sensitive information. The information must not be passed to any person directly or indirectly.
Regulatory provisions
Merchant bankers are administered by the SEBI (Merchant Bankers) Rules and Regulations, 1992. According to the rules and regulations, a merchant banker is a person who is engaged in the business of issue management either by buying, subscribing to securities as manager, consulting or rendering corporate advisory service in relation to issue management. The regulatory framework is designed to ensure that the merchant bankers have sufficient competence and follow diligence in their work so that the issuers comply with the statutory requirements concerning the issue. SEBI has emphasised on ensuring that all merchant bankers fulfil the eligibility criteria. As stated earlier, all merchant bankers must have a valid registration certificate. Merchant bankers must follow the general obligations, responsibility, code of conduct prescribed under the SEBI regulations. Under the regulations, the merchant bankers must submit periodical returns and other additional information to SEBI regularly. SEBI has the authority to conduct inspection of the accounts, records and documents of the merchant banker at any time if necessary.
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Q.2 What is the provision of green shoe option and how is it used by companies to stabilize prices. [10]
Q.3 Discuss the proportionate allotment procedure followed by the lead banker to allot shares. [10]
Q.4 What are the advantages of leasing to a company. [10]
Q.5 Discuss Accounting standard 19 for lease based on operating lease. [10]
Q.6 Given the various types of mutual funds, take any two schemes and discuss the performance of the schemes. [10]
August/Fall 2012
Masters of Business Administration— Semester 4
MF0017 — Merchant Banking and Financial Services — 4 Credits
Book ID: 1318
Assignment Set- 1 (60 Marks)
Note: Each question carries 10 Marks. Answer all the questions.
Q.1 What are the provisions for prevention of fraudulent and unfair trade practices by SEBI regulations. [10]
Answer : Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities
The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003 authorises SEBI to investigate into cases of market fraudulent and unfair trade practices. The regulations prohibit market manipulation, misleading statements to increase sale or purchase of securities, unfair trade practices relating to securities. The SEBI can conduct investigation by an investigating officer regarding conduct and affairs of any person dealing, buying, and selling securities. The investigating officer prepares a report based on this information. The SEBI can take action for cancellation or suspension of registration of an intermediary based on this report. Fraud is any act, expression or concealment committed by a person or his agent while dealing with securities in order to prompt the deal in securities. The regulations prohibit the dealing in securities in fraudulent method, it prohibits market manipulation, misleading statements that promote sale of securities and unfair trade practice related to securities. Any dealing in securities shall be considered to be fraudulent or an unfair trade practice if it involves fraud. The following are considered as fraudulent or an unfair trade practice if it:
– Indulges in an act which creates misleading or false impression of trading in securities market.
– Advances or agrees to advance any money to any person to induce other person to buy any security in any issue with an intention of securing the minimum subscription to such issue.
– Pays, offers, or agrees to pay directly or indirectly to any person, any money for inducing such person for dealing in any security with the object of depression or causing fluctuation in the price of such security.
– Acts to manipulate the price of security.
– Publishes reports, dealing in securities which are not true.
– Sells and deals with stolen security whether in physical or dematerialised form.
– Advertises misleading or containing information in a distorted manner which can influence the decision of the investors.
– Spread false or misleading news which induces sale or purchase of securities.
For restricting unethical trading practices, SEBI propagated the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market).
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Q.2 Discuss the method of price discovery using the book building process. [10]
Q.3 Discuss the role of a custodian of shares. [10]
Q.4 A company wishes to take machinery on lease. Study the lease options available to the company. [10]
Q.5 Give examples of various venture capital funds that are present and examples of some business ventures that have been successful with venture capital financing. [10]
Q.6 Mutual fund schemes can be identified by investment objective, List one scheme within each category. [10]
Answer : Mutual Fund Schemes or Products
Broad range of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations and so on. The schemes are as follows:
– Open ended and close ended schemes — An open-end fund is accessible for subscription throughout the year. These are not subjected to a fixed maturity. Investors can easily buy and sell units at Net Asset Value (NAV) related prices. The key quality of open-end schemes is liquidity.
– Close ended schemes have a pre-defined maturity period. At the time of the initial issue one can invest directly in the scheme. Depending on the arrangement of the scheme there are two exit options on hand to an investor after the preliminary offer period closes. Investors can buy or sell the units of the scheme on the stock exchanges where they are listed.
– Investment objective schemes — Mutual funds are also classified based on the objectives of the fund. The investor can invest in mutual funds based on these objectives. The types of investment objective schemes are as follows:
– Pure growth schemes — Pure growth schemes are also acknowledged as equity schemes. The intention of these schemes is to offer capital approval over medium to long term. These schemes usually invest a main part of their fund in equities and are keen to bear short-term turn down in value for possible future appreciation.
– Pure income schemes — Pure income schemes are also identified as debt schemes. The target of these schemes is to supply regular and steady income to investors. These schemes normally invest in fixed income securities such as bonds. Capital appreciation in such schemes possibly will be limited.
– Taxes saving schemes — Tax-saving schemes recommend tax rebates to the investors under tax laws approved from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.
– Balanced schemes — Balanced schemes aim to give both growth and income by occasionally distributing a part of the income and capital gains they earn. These schemes put in in both shares and fixed income securities.
– Miscellaneous schemes — The miscellaneous schemes include the following:
– Sector funds — These are the funds which put in the securities of only those sectors as specified in the offer documents. Examples of such funds are pharmaceuticals, software, fast moving consumer goods, and petroleum stocks and so on. The returns in these funds are reliant on the performance of the respective sectors. These funds have the potential to give higher returns but they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors and must exit at an appropriate time.
– Money market mutual funds — Money market mutual funds aim to present easy liquidity, conservation of capital and moderate income. These schemes commonly invest in safer, short-term instruments, such as bills of treasury, commercial paper, deposit certificates, and inter-bank call money.
Mutual Funds are always a good investment option in the financial portfolio. The returns are always more in these funds when compared to risk free investment options in banks. Also the risk in these investments is much less as compared to direct investments in shares.
Mutual funds can be called as diversified methods to invest our money and they offer numerous benefits to invest our hard earned money. But, before investing we should analyse the entire document provided by the concern mutual fund company as various risks are involved. Taxes and entry fees are also a part of mutual fund investments that reduces the returns on investments. The risk of losing the principal amount invested in a mutual fund is always there as the mutual funds are not guaranteed by the government. At the same time mutual funds present several advantages which made people to start investing in them. The first advantage is affordability which facilitates any kind of investor even without a huge capital to start investing in mutual funds to gain benefits for themselves. There are quite a lot of mutual funds schemes such as monthly payments, systematic investment plans and so on that can be customised based on the individual needs of the investor. The liquidity that mutual funds offer to the investors is more when compared to others. The investor can recover possession of the mutual funds whenever they want in the form of the current NAV per unit at that time but there will be a deduction of the charges from the net amount.
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August/Fall 2012
Master of Business Administration – MBA Semester 4
Subject Code — MF0018
Subject Name — Insurance and Risk Management
4 Credits
(Book ID: B1319)
Assignment Set- 1 (60 Marks)
Note: Each question carries 10 Marks. Answer all the questions.
Q.1 Explain chance of loss and degree of risk with examples [10 Marks]
Answer : 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.
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Q.2 Explain in detail Malhotra Committee recommendations [10 Marks]
Q.3 What is the procedure to determine the value of various investments?[10 Marks]
Q.4 Discuss the guidelines for settlement of claims by Insurance company [10 Marks]
Q.5 What is facultative reinsurance and treaty reinsurance? [10 Marks]
Answer : Facultative reinsurance
Q.6 What is the role of information technology in promoting insurance products [10 Marks]
Answer : Role of Information Technology in Insurance
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August/Fall 2012
Master of Business Administration – MBA Semester 4
Subject Code — MF0018
Subject Name — Insurance and Risk Management
4 Credits
(Book ID: B1319)
Assignment Set- 2 (60 Marks)
Note: Each question carries 10 Marks. Answer all the questions.
Q.1 Explain risk avoidance, risk reduction and risk retention [10 Marks]
Answer : What Is Risk Management?
The Board of Regents has approved a policy giving responsibility for the preservation of assets, both human and physical, to the Office of Risk Management. This is accomplished by identifying, evaluating, and controlling loss exposures faced by the University. Risk Management’s goal is to minimize the adverse effects of unpredictable events. For example, it is not known if a fire will ever occur in your office, but if it does, the adverse effect of that fire will be reduced if proper risk management tools have been utilized.
There are four main ways to manage risk:
- risk avoidance,
- risk transfer,
- risk reduction and
- risk retention.
Each is applicable under different circumstances. Some ways of managing risk fall into multiple categories. Multiple ways of managing risk are often utilized simultaneously.
Risk Avoidance (elimination of risk)
Completely avoiding an activity that poses a potential risk. While attractive, this is not always practical. By avoiding risk we forfeit potential gains, be it in life, in business or in with investments.
Risk Transfer (insuring against risk)
Most commonly, this is to buy an insurance policy. The risk is transferred to a third-party entity (in most cases an insurance company). To be more clear, the financial risk is transferred to a third-party. For example, a homeowner’s insurance policy does not transfer the risk of a house fire to the insurance company, it only transfers the financial risk. A house fire is still just as likely as before. Risk sharing is also a type of risk transfer. For example, members assume a smaller amount of risk by transferring and sharing the remainder of risk with the group.
Risk Reduction (mitigating risk)
This is the idea of reducing the extent or possibility of a loss. This can be done by increasing precautions or limiting the amount of risky activity. For example, installing a security alarm, smoke detectors, wearing a seat belt or wearing a helmet are ways of employing risk reduction. Diversification of assets and hedging are forms of risk reduction with investments. Investments in information are a way of mitigating risk because you are better informed, thus reducing the uncertainty. Another way of employing risk reduction is the safety in numbers approach. When discussing risk transfer, we spoke briefly about risk sharing. The larger the number of people sharing risk, the less severe the shared effects will be. Statistically, only a small number of individuals in the group will experience an unfortunate event. Insurance companies exist based on this concept.
Risk Retention (accepting risk)
Risk retention simply involves accepting the risk. Even if the risk is mitigated, if it is not avoided or transferred, it is retained. Retention is effective for small risks that do not pose any significant financial threat. The financial status of the family or individual will determine the acceptability of a risk. A couple of examples of risk retention: A billionaire may not have to worry about insuring his car. An individual may not be able to afford or obtain health insurance. Both individuals are retaining risk, one is because they’re able to, the other is because they have to. Risk retention augments risk transfer through deductibles. With a deductible, we retain or ‘self-insure’ small, frequent occurrences and only utilize insurance for needs over a particular dollar threshold, our deductible limit.
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Q.2 What are the challenges faced by Indian Insurance Industry and what measures are taken to overcome them? [10 Marks]
Q.3 What is premium accounting and claim accounting? [10 Marks]
Q.4 What factors indicate that there is a good potential for growth of insurance services in rural markets? [10 Marks]
Q.5 Critically evaluate the role of agents in insurance industry [10 Marks]
Q.6 Explain product design and development process in Insurance Industry [10 Marks]
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