Masters in Business Administration-MBA Semester III MF0008 Merchant Banking & Financial Services 2 Credits Assignment Set-1Note: Each question carries 10 Marks. Answer all the questions. Bring out an overview of Indian financial system post 1950 period. The economy of India is the eleventh largest economy in the world by nominal GDP and the fourth largest by purchasing power parity (PPP).Following strong economic reforms from the socialist inspired economy of a post-independence Indian nation, the country began to develop a fast-paced economic growth, as free market principles were initiated in 1990 for international competition and foreign investment. India is an emerging economic power with a very large pool of human and natural resources, and a growing large pool of skilled professionals. Economists predict that by 2020, India will be among the leading economies of the world. Pre-colonial The citizens of the Indus Valley civilization a permanent settlement that flourished between 2800 BC and 1800 BC, practiced agriculture, domesticated animals, used uniform weights and measures, made tools and weapons, and traded with other cities. Evidence of well planned streets, a drainage system and water supply reveals their knowledge of urban planning, which included the world's first urban sanitation systems and the existence of a form of municipal government. The 1872 census revealed that 99.3% of the population of the region constituting present-day India resided in villages, whose economies were largely isolated and self-sustaining, with agriculture the predominant occupation. This satisfied the food requirements of the village and provided raw materials for hand-based industries, such as textiles, food processing and crafts. Although many kingdoms and rulers issued coins, barter was prevalent. Villages paid a portion of their agricultural produce as revenue to the rulers, while its craftsmen received a part of the crops at harvest time for their services. Religion, especially Hinduism, and the caste and the joint family systems, played an influential role in shaping economic activities. The caste system functioned much like medieval European guilds, ensuring the division of labour, providing for the training of apprentices and, in some cases, allowing manufacturers to achieve narrow specialization. For instance, in certain regions, producing each variety of cloth was the specialty of a particular sub-caste. Textiles such as muslin, Calicos, shawls, and agricultural products such as pepper, cinnamon, opium and indigo were exported to Europe, the Middle East and South East Asia in return for gold and silver. Assessment of India's pre-colonial economy is mostly qualitative, owing to the lack of quantitative information. One estimate puts the revenue of Akbar's Mughal Empire in 1600 at 17.5 million, in contrast with the total revenue of Great Britain in 1800, which totalled 16 million. India, by the time of the arrival of the British, was a largely traditional agrarian economy with a dominant subsistence sector dependent on primitive technology. It existed alongside a competitively developed network of commerce, manufacturing and credit. After the decline of the Mughals, western, central and parts of south and north India were integrated and administered by the Maratha Empire. The Maratha Empire's budget in 1740s, at its peak, was 100 million. After the loss at Panipat, the Maratha Empire disintegrated into confederate states of Gwalior, Baroda, Indore, Jhansi, Nagpur, Pune and Kolhapur. Gwalior state had a budget of 30M. However, at this time, British East India company entered the Indian political theatre. Until 1857, when India was firmly under the British crown, the country remained in a state of political instability due to internecine wars and conflicts. Colonial Calcutta, which was the economic hub of British India, saw increased industrial activity during World War II. Company rule in India brought a major change in the taxation environment from revenue taxes to property taxes, resulting in mass impoverishment and destitution of majority of

farmers and led to numerous famines. The economic policies of the British Raj effectively bankrupted India's large handicrafts industry and caused a massive drain of India's resources. Indian Nationalists employed the successful Swadeshi movement, as strategy to diminish British economic superiority by boycotting British products and the reviving the market for domesticmade products and production techniques. India had become a strong market for superior finished European goods. This was because of vast gains made by the Industrial revolution in Europe, the effects of which was deprived to Colonial India. The Nationalists had hoped to revive the domestic industries that were badly effected by policies implemented by British Raj which had made them uncompetitive to British made goods. An estimate by Cambridge University historian Angus Maddison reveals that "India's share of the world income fell from 22.6% in 1700, comparable to Europe's share of 23.3%, to a low of 3.8% in 1952". It also created an institutional environment that, on paper, guaranteed property rights among the colonizers, encouraged free trade, and created a single currency with fixed exchange rates, standardized weights and measures, capital markets. It also established a well developed system of railways and telegraphs, a civil service that aimed to be free from political interference, a common-law and an adversarial legal system.[41] India's colonisation by the British coincided with major changes in the world economy industrialisation, and significant growth in production and trade. However, at the end of colonial rule, India inherited an economy that was one of the poorest in the developing world,[42] with industrial development stalled, agriculture unable to feed a rapidly growing population, India had one of the world's lowest life expectancies, and low rates for literacy. The impact of the British rule on India's economy is a controversial topic. Leaders of the Indian independence movement, and left-nationalist economic historians have blamed colonial rule for the dismal state of India's economy in its aftermath and that financial strength required for Industrial development in Europe was derived from the wealth taken from Colonies in Asia and Africa. At the same time right-wing historians have countered that India's low economic performance was due to various sectors being in a state of growth and decline due to changes brought in by colonialism and a world that was moving towards industrialization and economic integration 2. Explain latest monetary policy of RBI? 1.The Monetary Policy for 2010-11 is set against a rather complex economic backdrop. Although the situation is more reassuring than it was a quarter ago, uncertainty about the shape and pace of global recovery persists. Private spending in advanced economies continues to be constrained and inflation remains generally subdued making it likely that fiscal and monetary stimuli in these economies will continue for an extended period. Emerging market economies (EMEs) are significantly ahead on the recovery curve, but some of them are also facing inflationary pressures. 2. India s growth-inflation dynamics are in contrast to the overall global scenario. The economy is recovering rapidly from the growth slowdown but inflationary pressures, which were triggered by supply side factors, are now developing into a wider inflationary process. As the domestic balance of risks shifts from growth slowdown to inflation, our policy stance must recognise and respond to this transition. While global policy co-ordination was critical in dealing with a worldwide crisis, the exit process will necessarily be differentiated on the basis of the macroeconomic condition in each country. India s rapid turnaround after the crisis induced slowdown evidences the resilience of our economy and our financial sector. However, this should not divert us from the need to bring back into focus the twin challenges of macroeconomic stability and financial sector development. 3. This statement is organised in two parts. Part A covers Monetary Policy and is divided into four Sections: Section I provides an overview of global and domestic macroeconomic developments; Section II sets out the outlook and projections for growth, inflation and monetary aggregates; Section III explains the stance of monetary policy; and Section IV specifies the

monetary measures.Part B covers Developmental and Regulatory Policies and is organised into six sections: Financial Stability (Section I), Interest Rate Policy (Section II), Financial Markets (Section III), Credit Delivery and Financial Inclusion (Section IV), Regulatory and Supervisory Measures for Commercial Banks (Section V) and Institutional Developments (Section VI). 4. Part A of this Statement should be read and understood together with the detailed review in Macroeconomic and Monetary Developments released by the Reserve Bank. 3. Explain the recent SEBI guidelines for merchant bankers? Merchant banking may be defined as an institution which covers a wide range of activities such as underwriting of shares, portfolio management, project counseling, insurance etc They render all these services for a fee ORIGIN : The term merchant banking originated from the London who started financing foreign trade through acceptance of bills Later they helped government of under developed countries to raise long term funds Later these merchants formed an association which is now called Merchant Banking and Securities House Association Recent SEBI guidelines for merchant bankers: Merchant Bankers have been barred from undertaking activities other than related to the securities market. The SEBI (Merchant Bankers) Regulations, 1992 have been amended on December 19, 1997 to provide that: the applicant should be a fit and proper person; a merchant banker has to seek separate registration for its underwriting or portfolio management activities; the categorisation of merchant bankers I, II, III and IV has been dispensed with; a merchant banker, other than a bank or a public financial institution, has been prohibited from carrying any activities not pertaining to the securities market; and the applicant should be a body corporate other than non-banking finance company. The Merchant Bankers Regulations were amended on January 21, 1998 to provide time upto June 30, 1998 to sever its activities or hive off its activities not pertaining to the securities market. The Reserve Bank of India has exempted merchant banking companies from the provisions of Reserve Bank of India Act, 1934 relating to compulsory registration (section 451A), maintenance of liquid assets (section 451B), creation of reserve fund (section 451C ) and all the provisions of the recent Directions relating to deposit acceptance and prudential norms. Merchant banking companies, to be eligible for the above exemption, are required to satisfy the following conditions: Such companies are registered with the SEBI under section 12 of the SEBI Act, 1992 and are carrying on the business of merchant banker in accordance with the Rules / Regulations framed by the SEBI; they acquire securities only as part of their merchant banking business; they do not carry on any other financial activities as mentioned in section 451 (c ) of the RBI Act, 1934; they do not accept / hold public deposits

Masters in Business Administration-MBA Semester III MF0008 Merchant Banking & Financial Services 2 Credits Assignment Set-2Note: Each question carries 10 Marks. Answer all the questions. 1. Explain the listing, trading and settlement issues in industrial securities market? The industrial securities market refers to the market which deals in equities and debentures of the corporates. It is further divided into primary market and secondary market. Primary market (new issue market):- deals with 'new securities', that is, securities which were not previously available and are offered to the investing public for the first time. It is the market for raising fresh capital in the form of shares and debentures. It provides the issuing company with additional funds for starting a new enterprise or for either expansion or diversification of an existing one, and thus its contribution to company financing is direct. The new offerings by the companies are made either as an initial public offering (IPO) or rights issue. Secondary market/ stock market (old issues market or stock exchange):- is the market for buying and selling securities of the existing companies. Under this, securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange. The stock exchanges are the exclusive centres for trading of securities. It is a sensitive barometer and reflects the trends in the economy through fluctuations in the prices of various securities. It been defined as, "a body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating and controlling the business of buying, selling and dealing in securities". Listing on stock exchanges enables the shareholders to monitor the movement of the share prices in an effective manner. This assist them to take prudent decisions on whether to retain their holdings or sell off or even accumulate further. However, to list the securities on a stock exchange, the issuing company has to go through set norms and procedures

2. Explain the role of credit rating agencies? A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings. In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market. A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued. (In contrast to CRAs, a company that issues credit scores for individual credit-worthiness is generally called a credit bureau or consumer credit reporting agency.) The value of such ratings has been widely questioned after the 2007/2009 financial crisis. In 2003 the U.S. Securities and Exchange Commission submitted a report to Congress detailing plans to launch an investigation into the anti-competitive practices of credit rating agencies and issues including conflicts of interest. Agencies that assign credit ratings for corporations include: A. M. Best (U.S.) Baycorp Advantage (Australia) Dominion Bond Rating Service (Canada) Fitch Ratings (U.S.)

Moody's Investors Service (U.S.) Standard & Poor's (U.S.) Egan-Jones Rating Company (U.S.) Japan Credit Rating Agency (Japan) Credit ratings are used by investors, issuers, investment banks, broker-dealers, and governments For investors, credit rating agencies increase the range of investment alternatives and provide independent, easy-to-use measurements of relative credit risk; this generally increases the efficiency of the market, lowering costs for both borrowers and lenders. This in turn increases the total supply of risk capital in the economy, leading to stronger growth. It also opens the capital markets to categories of borrower who might otherwise be shut out altogether: small governments, startup companies, hospitals, and universities

3. Explain call money market in India? The call money market is a mechanism that allows both dealers and brokers to locate and borrow funds that can be used for investment needs. The funds located through the money market can be utilized to provide financing for the purchase of securities that can be added to the portfolio of the investment firm, or as a resource that will cover the margin accounts of the firm s clients. As a means of securing financing for credit needs, the call money market provides a range of options. Chief among them is the ability to create and manage what is referred to as a call money loan. The call money loan essentially works in the same manner as a day to day loan. Call money loans provide funds that can be used to conduct transactions between banks, or with other money market dealers. Generally, these types of loans are paid off in a short period of time, allowing the broker to move on to secure new loans and continue to process orders on behalf of their clients. The loans may be secured or unsecured, depending on the terms and conditions of the loan, along with the duration and the credit rating of the debtor. Individual investors generally do not participate directly in the call money market. Instead, the investor will work through a brokerage firm. The broker will determine the best avenue to take in financing an investment, based on the individual circumstances of the client. This process is actually to the advantage of the investor, since the broker will be aware of sources of funding that may or may not be readily accessible to individuals who are looking for financial support to build a portfolio. The call money market crosses international lines, with funding opportunities located in a number of countries around the world. Because of the inclusion of international banking institutions, the role of the brokerage firm becomes even more vital to the individual investor. Brokers will be aware of applicable banking laws, and how those laws could impact the transaction. This knowledge regarding participants in the call money market allows the firm to pick and choose among possible avenues for funding with a level of efficiency that would be difficult for the individual

Masters in Business Administration-MBA Semester III MF0006 International Financial Management 2 Credits Assignment Set-1 (30 Marks)Note: Each question carries 10 Marks. Answer all the questions. Q.1 Give possible reasons by which the companies are encouraged to be an MNC?Some of the possible reasons are To broaden markets: Saturated home markets ask for market development abroad (Coca Cola, Mac Donalds etc.). Multinationals seek new markets to fill product gaps in foreign markets where excess returns can be earned. To seek raw materials: Multinationals secure the necessary raw materials required to sustain primary business line (Exxon; Wal Mart). Multinationals also seek to obtain easy access to oil exploration, mining, and manufacturing in many developing nations.

To seek new technologies: Multinationals seek leading scientific and design ideas. To seek production efficiencies by shifting to low cost regions (GE). To avoid political hurdles such as import quota, regulatory measures of governments, trade barriers, etc. To diversify i.e. to cushion the impact of adverse economic events. To postpone payment of domestic taxes. To counter foreign investments by competitors. Multiple operating environments: Multinationals operate under a diverse pattern of consumer preferences, distribution channels, legal frameworks and financial infrastructures. Political demands; political risks: Multinationals have to mesh corporate strategy with host country industrial development policies; thus there is a potential for conflict. Global competitive game: Multiple market access and various global scale economies allow companies new competitive strategic options. Currency fluctuations (foreign exchange risk): The economic performance of a multinational is measured in multiple currencies which result in accounting, transaction and economic exposure.

Q.2 What do you mean by International Trade Flows? Also explain various factors affecting international trade flows. International Trade Flows International trade is the exchange of goods and services across international boundaries. The world trade in goods and services has grown much faster than world GDP since 1960,global trade has grown twice as fast as the global GDP. The share of international trade in national economies has , in the most cases, increased dramatically over the past few decades, In most countries, international trade represents a significant share of GDP. Factors Affecting International Trade Flows Impact of Inflation: A relative increase in a countrys inflation rate will decrease itscurrent account, as imports increase and exports decrease. Impact of National Income: A relative increase in a countrys income level will decrease its current account, as imports increase. Impact of Government Restrictions: A gover n ment ma y r edu ce it s cou ntr ys imports by imposing a tariff on imported goods, or by enforcing a quota. Some trade restrictions may be imposed on certain products for health and safety reasons. Impact of Exchange Rates: If a countrys currency begins to rise in value, its current account balance will decrease as imports increase and exports decrease Q.3 (a) Define Swaps. Also explain various types of swaps.

Swaps A swap is an agreement to exchange cash flows at specified future times according to certain specified rules. The two counter parties in a swap agree to exchange or swap cashflows at periodic intervals The different kinds of swaps are: Interest Rate Swap An exchange of fixed-rate interest payment for floating-rate interest payments. Currency Swap An exchange of interest payments and principal in one currency for interest payment and principal in another currency. Cr oss C ur r ency I nt er est Rat e S wap An ex cha nge of f loa t ing r at e int er es t payment and principal in one currency for fixed rate interest payment and principal in another currency. (b) Define foreign bonds with their salient features. Foreign Bonds A countrys foreign bond market is that market in which the bonds of issuers not domiciled in that country are sold and traded. For example, the bonds of a German company issued in the U.s. or traded on the U.S. secondary markets would by part of the U.S. foreign bondmarket. The definition of foreign refers to the nationality of the issuer in relation to the market place. For example, a US dollar bond sold in the United States by the Swedish car pr odu cer Volvo is class if ied a s a f or eign b ond wh il e on e is s ued b y G ener a l M ot or s is domestic bond. Features of the Foreign Bonds: 1. Foreign bonds are sold in the currency of the local economy.2. Foreign bonds are subject to the regulations governing all securities traded in the national market and sometimes special regulations governing foreign borrowers (e.g., additional registration).3. Foreign bonds provide foreign companies access to funds they often use to finance their operations in the country where they sell the bonds.4. Foreign bonds are regulated by the domestic market authorities. The issuer mustsatisfy all regulations of the country in which it issues the bonds.

Masters in Business Administration-MBA Semester III MF0006 International Financial Management Assignment Set- 2Q.1 (a) Explain the responsibilities of IMF. IMF is the central institution of the international monetary system. The responsibilities of IMFare: To promote international monetary co-operation: prevent or manages financial crises. To facilitate expansion and balanced growth of international trade. To promote exchange rate stability. To assist in establishing multilateral system of payment. To lend to member countries experiencing balance of payment difficulties. The IMF gets its resources from the quota countries pay when they join the IMF and from periodic increases in this quota. The quotas determine a country s voting power and the amount of financing it can receive from the IMF. (b) Describe two types of exchange rates. Floating Exchange Rate (Flexible) Regimes: A fle xibl e e xch ang e r a te sy stem i s o ne where the value of the currency is not officially fixed but exchange market in this system, currencies are allowed to: Appreciate when currency becomes more valuable relative to other. Depreciate when the currency becomes less valuable relative to others. Fixed Exchange Rate Regimes: a fixed exchange rate system is one where the value of th e cur re n cy i s s et b y of fi ci al go ve rn me n t p oli cy. The ex cha ng e r a te i s de te rmi ne d b y government actions designed to keep rates the same over time. The currencies are altered by the government: Revaluation Government action to increase the value of domestic currency relative to other. Devaluation Government action to decrease the value of domestic currency. Q.2 Illustrate Political Exposure in Foreign Exchange Market? Management of Political Exposure Political risk stems from political action taken by political actors that affect business. The political actors may be the members of the government, political parties, public interest groups that are trying to affect the political process, supra-government entities (e.g. WTO,NAFTA) or other corporations that might act in a political way. Political action has a direct bearing when political actors change laws, regulations, etc. or take other actions that directly affect business. An example of such direct effect is the nationalization of business. The indirect effect of political action occurs when the political actors change the economic environment, the attitudes of the population, or some other factor that then indirectly affects specific businesses. An example of such indirect effect is when the local business lobbies the government against the entry of foreign companies. Country risk and political risk are sometimes used interchangeably. Country risk comprises all the socio-political and economic factors which determine the degree and level of ris kassociated with undertaking business transactions in particular country; the likelihood thatchanges in the business environment will occur that reduce the profitability of doing businessin a country.Examples of political risk: 1) Nationalization: Nationalization is the appropriation of private assets by a nationalgovernment. 2) Creeping Expropriation:

Creeping expropriation occurs when the government changes the rules and makes profit impossible. An example: The host government may require that the company sell its products only to the local enterprises and that export opportunities are not pursued. This limits the profit potential of company. 3) Contract Repudiation: Here, the terms of operating arrangements are changed of renegotiated once their operations are in place and have proved successful. Thus a d d i tio na l tax es m ay be i mp os e d. Co mp an ies wi th l arg e fi xe d i nve s tme n ts ar e vulnerable due to the hostage effect. They cannot credible threaten to withdraw. Companies with stable technologies are vulnerable because locals could take over the operation without need for continuing foreign technology transfer. 4) P olit ica l Pr ess ur e in a D emocr a t ic S yst em: Spread of democracy increases popular criticism of foreign investors. Opposition parties may use attacks on foreign investors as nationalistic position to gain voter support (but pro-business opposition ca n al s o a s ta ri ff i n cr ea se s). The re i s ev id en ce ma ny belie ve t ha t su p pr es sive authoritarian regimes are more favorable to business. 5) Threats from Local Business: Local business interests use political connections to secure favorable treatment over foreign companies or resist market liberalization. Many local business people become wealthy during the period of protected markets and do not want to eliminate protectionist policies. As a result of lobbying by local business, government may require foreign investors to have local partners or make laws that keep foreigners entirely away from some critical sectors or enact licensing procedures that delay investment. When liberalization occurs, local business still tries to create adverse political conditions. They try to prevent foreign companies form winning government contracts, or try to slow licensing and other approvals for foreign companies to decrease their relative efficiency. Q.3 Explain Trade deficits and Trade surplus in regard to Balance of Payments.Trade Deficits The trade balance is the difference between a countrys output and its domestic demand-the difference between what goods and services a country produce and how many goods and services it buys from abroad. A trade deficit occurs when, during a certain period, a nation imports more goods and services than it exports. A trade surplus occurs when a nation exports more goods and services than it imports .According to the BOP identity (Current Account+ Capital Account = Change in Official Reserve Accounts), any trade deficit must be offset by surpluses on other accounts. Since the official reserves are limited, a surplus on the Official Reserve Account (which means selling of the foreign exchange reserves by the central bank) can at best be a temporary measure. Thus the trade deficit must be financed by foreign income or transfers, or by a capital account surplus. A capital account surplus consists of capital purchases (stocks, bon ds e t c. ) by for e i gn n a t i on a l s. A ca pi t a l a c c oun t s ur pl u s (a n i n cr ea s e i n n et for ei gn investment) may result in an increase in the net outflow of income (dividend, interest) to foreign nationals could have intergenerational effects: they shift consumption over time, and future generations have to pay for the consumption by the present generation. However atrade deficit can also lead to higher consumption in the future, if for example, it is used to finance profitable domestic investment, which generates returns in excess of what is paid tothe foreign nationals on their investments in the country. Such a situation may arise if acountry experiences a gain in productivity as a result of these investments.A trade surplus implies an increase in the net international investment of residents of thecountry and shifting of consumption to future rather than current generations. Even tradesurpluses can be undesirable for a country. An example where a trade surplus was notbeneficial for the country is Japan in the 1990s. The positive trade balance that Japan hadwas partly due to the protectionist measures that were adopted by the Japanesegovernment. These measures caused the price of goods in Japan to be much higher thatwhat they would have been, had import been freely allowed. The foreign currency that theJapanese companies earned overseas were kept abroad and not converted into yen in order to keep the value of the yes low and maintain the competitiveness of Japanese exports.However, a weak yen also prevented Japanese consumers from importing goods fromabroad and benefiting from trade surplus. The foreign exchange earned abroad as a resultof the trade surplus was party squandered by spending it on real estate purchases in theUnited States that often proved unprofitable.

Master of Business Administration (MBA) Semester 4 MF0009 Insurance & Risk Management 2 Credits (Book ID: MF0009) Assignment Set 1 (30 Marks)Note: Each question carries 10 Marks. Answer all the questions.Risk can be classified into several distinct categories . Explain. Risk is defined as uncertainty concerning the occurrence of a loss. Objective Risk: the relative variation of actual loss from expected loss. Objective risk declines as the number of exposures increases. More specifically, objective risk varies inversely with the square root of the number of cases under observation. Subjective Risk :uncertainty based on a persons mental condition or state of mind. Categories of Risk: Pure and Speculative risks Types of Pure Risk Personal risk Risk of premature death or disability Risk of insufficient income on retirement Risk of unemployment Property risk Direct Loss Indirect or consequential loss Liability risk Fundamental and Particular Risks. Risk can be also categoried as following: 1. Operational Risk: Risks of loss due to improper process implementation, failed system or some external events risks. Examples can be Failure to address priority conflicts, Insufficient resources or No proper subject training etc. 2. Schedule Risk: Project schedule get slip when project tasks and schedule release risks are not addressed properly. Schedule risks mainly affect on project and finally on company economy and may lead to project failure 3. Budget Risk: Wrong budget estimation or Project scope expansion leads to Budget / Cost Risk. This risk may lead to either a delay in the delivery of the project or sometimes even an incomplete closure of the project. 4. Business Risk: Non-availability of contracts or purchase order at the start of the project or delay in receiving proper inputs from the customer or business analyst may lead to business risks. 5. Technical Environment Risk: These are the risks related to the environment under which both the client and the customer work. For example, constantly changing development or production or testing environment can lead to this risk. 6. Information Security Risk: The risks related to the security of information like confidentiality or integrity of customers personal / business data. The Access rights / privileges failure will lead to leakage of confidential data. 7. Programmatic Risks: The external risks beyond the operational limits. These are outside the control of the program. These external events can be Running out of fund or Changing customer product strategy and priority or Government rule changes etc. 8. Infrastructure Risk: Improper planning of infrastructure / resources may lead to risks related to slow network connectivity or complete failure of connectivity at both the client and the customer sites. So, it is important to do proper planning of infrastructure for the efficient development of a project. 9. Quality and Process Risk: This risk occures due to Iincorrect application of process tailoring and deviation guidelines New employees allocated to the project not trained in the quality processes and procedures adopted by the organization 10. Resource Risk: This risk depends on factors like Schedule, Staff, Budget and Facilities. Improper management of any of these factors leads to resource risk. 11. Supplier Risk: This type of risk may occurs when some third party supplier is involved in the development of the project. This risk occurs due to the uncertain or inadequate capability of supplier. 12. Technology Risk: It is related to the complete change in technology or introduction of a new technology. 13. Technical and Architectural Risk: These types of risks generally generally leads to failure of functionality and performance. It addresses the hardware and software tools & supporting equipments used in the project. The risk for this category may be due to Capacity, Suitability, usability, Familiarity, Reliability, System Support and deliverability.

2) Identify common misconceptions about risk management and explain why these misconceptions are developed.Three common misconceptions about risk management are: Downside: The first misconception is that risk is only about downside. The fact is, for risk to exist, positive and negative implications must coexist equally. Saying that risk is measurable only in the context of negative outcomes would be no different from saying that a balance sheet contains only liabilities and no assets. Event drive: The second misconception is that the definition of risk can be dependent only upon the occurrence of an event. As human beings, we undergo the aging process day-to-day and, inevitably, we die. Even if the passage of time is the only cause of our death, the risk of mortality statistically increases on a daily basis. There may never be a single event that raises the risk factor, but risk still exists without the presence of any significant precipitating event. Insurance: The third misconception is that risk is an item that affects businesses only in the context of insurance. Risk occurs everywhere. For example, any issue that involves governance and compliance is fundamentally based upon risk

3) What are the social values of insurance? What are the social costs? Explain.In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the insurance; an insured or policyholder is the person or entity buying the insurance policy. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice. The social values of insurance are: Risk Cover - Life today is full of uncertainties; in this scenario Life Insurance ensures that your loved ones continue to enjoy a good quality of life against any unforeseen event. Planning for life stage needs - Life Insurance not only provides for financial support in the event of untimely death but also acts as a long term investment. You can meet your goals, be it your children's education, their marriage, building your dream home or planning a relaxed retired life, according to your life stage and risk appetite. Traditional life insurance policies i.e. traditional endowment plans, offer in-built guarantees and defined maturity benefits through variety of product options such as Money Back, Guaranteed Cash Values, Guaranteed Maturity Values. Protection against rising health expenses - Life Insurers through riders or stand alone health insurance plans offer the benefits of protection against critical diseases and hospitalization expenses. This benefit has assumed critical importance given the increasing incidence of lifestyle diseases and escalating medical costs. Builds the habit of thrift - Life Insurance is a long-term contract where as policyholder, you have to pay a fixed amount at a defined periodicity. This builds the habit of long-term savings. Regular savings over a long period ensures that a decent corpus is built to meet financial needs at various life stages. Safe and profitable long-term investment - Life Insurance is a highly regulated sector. IRDA, the regulatory body, through various rules and regulations ensures that the safety of the policyholder's money is the primary responsibility of all stakeholders. Life Insurance being a long-term savings instrument, also ensures that the life insurers focus on returns over a long-term and do not take risky investment decisions for short term gains. Assured income through annuities - Life Insurance is one of the best instruments for retirement planning. The money saved during the earning life span is utilized to provide a steady source of income during the retired phase of life. Protection plus savings over a long term - Since traditional policies are viewed both by the distributors as well as the customers as a long term commitment; these policies help the policyholders meet the dual need of protection and long term wealth creation efficiently. Growth through dividends - Traditional policies offer an opportunity to participate in the economic growth without taking the investment risk. The investment income is distributed among the policyholders through annual announcement of dividends/bonus. Facility of loans without affecting the policy benefits - Policyholders have the option of taking loan against the policy. This helps you meet your unplanned life stage needs without adversely affecting the benefits of the policy they have bought. Tax Benefits-Insurance plans provide attractive tax-benefits for both at the time of entry and exit under most of

the plans. Mortgage Redemption- Insurance acts as an effective tool to cover mortgages and loans taken by the policyholders so that, in case of any unforeseen event, the burden of repayment does not fall on the bereaved family Social cost, in economics, is generally defined in opposition to "private cost". In economics, theorists model individual decision-making as measurement of costs and benefits. Rational choice theory often assumes that individuals consider only the costs they themselves bear when making decisions, not the costs that may be borne by others. With pure private goods, the costs carried by the individuals involved are the only economically meaningful costs. The choice to purchase a glass of lemonade at a lemonade stand has little consequence for anyone other than the seller or the buyer. The costs involved in this economic activity are the costs of the lemons and the sugar and the water that are ingredients to the lemonade, the opportunity cost of the labour to combine them into lemonade, as well as any transaction costs, such as walking to the stand. If there is a negative externality, then social costs will be greater than private costs. Environmental pollution is an example of a social cost that is seldom borne completely by the polluter, thereby creating a negative externality. If there is a positive externality, then one will have higher social benefits than private benefits. For example, when a supplier of educational services indirectly benefits society as a whole but only receives payment for the direct benefit received by the recipient of the education: the benefit to society of an educated populace is a positive externality. In either case, economists refer to this as market failure because resources will be allocated inefficiently. In the case of negative externalities, private agents will engage in too much of the activity; in the case of positive externalites, they will engage in too little. (The marginal rate of transformation in production will not be equal to the marginal rate of substitution in consumption due to the effect of the externality and as a result Pareto optimality will not occursee welfare economics for an explanation.)

Master of Business Administration MBA Semester 4 MF0009 Insurance and Risk Management Assignment Set 2Q.1.What is the nature of actuarial practice? Discuss the actuarial modeling principles? Nature of Actuarial Practice The primary focus of actuarial work is on the financial and economic consequences of events involving risk and uncertainty. Actuarial practice involves the management of these implications and their associated uncertainties. To gain insights about future possibilities, the actuary depends on observation and the wisdom gained through prior experience. The actuary uses these observations and this experience when constructing validating and applying models. Actuarial models are constructed to aid in the assessment of the financial and economic consequences associated with phenomena that are subject to uncertainty with respect to occurrence, timing, or severity. This requires: a) Understanding the conditions and processes under which past observations were obtained. b) Anticipating changes in those conditions that will affect future experience. c) Evaluating the quality of the available data. d) Bringing judgment to bear on the modeling process. e) Validating the work as it progresses. f) Estimating the uncertainty inherent in the modeling process itself. Actuarial Modeling Principles Principles abstract the key elements of the scientific framework. Principles are not prescriptions that specify how actuarial work is to be done, but are statements grounded in observations and experience. The concept of actuarial risk defines the subject matter of actuarial science. An actuarial risk is a phenomenon that has economic consequences and is subject to uncertainty with respect to one or more of the actuarial risk variables occurrence, timing and severity. Principle of Modeling or Actuarial risks This provides assurance that actuarial risk can be analyzed and that estimates of future behavior can be obtained. Actuarial risks can be stochastically modeled based on assumptions about the probability that will apply to the actuarial risk variables in the future, including assumptions about the future environment. A model described by this principle together with a present value model, if applicable, is called an actuarial model. Actuarial assumptions are those upon which an actuarial model is based. An actuarial model can be constructed using data from prior

experiments, data from related phenomena or judgment. Such a model can be validated by comparing its results to the actual outcomes to the phenomena being modeled. In certain circumstances, the actuary choice of assumptions may be constrained by regulations or by professional standards. In general, an actuarial model utilizes a present value model if it is intended to determine economic values. A present value model included in an actuarial model is often based on assumptions concerning aspects of the future environment, such as interest rates and inflation rates. The present value model can reflect the judgment of the actuary constructing the model or that of the actuary client. Although all actuarial risk is subject to timing considerations, a present value model directly addresses timing risk and is used if the time dimension is significant. Most actuarial models are representations of collection of related actuarial risks. For example, the actuarial risk of claims under Rs.100, 000 life insurance policies issued to selected 45-year-old male sand the actuarial risk of claims under Rs.200, 000 policies for similarly selected insured can usually be represented by the same actuarial model. The economic consequences in effect act as a scaling factor that relates these separate phenomena and allows the same model to apply to both. In other words, the economic consequences suggest exposure measures. This observation applies to most actuarial models, although the economic consequences and exposure measures may not be in exact proportion. Principle of Exposure For most actuarial models there exist one or more exposure measures that are approximately proportional to the economic consequences of one or more collections of the actuarial risks being modeled. The degree of accuracy of a mathematical model is based on a comparison of values calculated using the model with known values. As time passes and more known values are available for comparison, the degree of accuracy of the model may change. In the case of a model that is initially validated only judgmentally, it may become possible to determine the degree of accuracy. Actuarial modeling involves a feedback mechanism. As additional data emerge or the environment changes, the model may need to be changed. Principle of continued validity of Actuarial models The change over time in the degree of accuracy of an initially valid actuarial model depends upon changes in the: a. Nature of the right to receive or the duty to make a payment b.Various environments (for example, regulatory, judicial, social, financial, and economic) within which the modeled events occur financial, economic) within which the modeled events occur. c. Sufficiency and quality of the data available to validate the model.d. Actuary understands the environment.

2) Discuss the various methods of reinsurance. Explain with suitable examples.Reinsurance is insurance that is purchased by an insurance company (reinsurer) from an insurer as a means of risk management, to transfer risk from the insurer to the reinsurer. The reinsurer and the insurer enter into a reinsurance agreement which details the conditions upon which the reinsurer would pay the insurer's losses (in terms of excess of loss or proportional to loss). The reinsurer is paid a reinsurance premium by the insurer, and the insurer issues thousands of policies. For example, assume an insurer sells one thousand policies, each with a $1 million policy limit. Theoretically, the insurer could lose $1 million on each policy totaling to $1 billion. It may be better to pass some potential risk to a reinsurance company (reinsurer) as this will minimize the insurer's risk. There are two basic methods of reinsurance: Facultative Reinsurance is specific reinsurance covering a single risk. The reinsurer is reinsuring one insured on a specific policy. Each facultative risk is submitted by the insurer to the reinsurer. Treaty Reinsurance is a method of reinsurance requiring the insurer and the reinsurer to formulate and execute a reinsurance contract. The reinsurer then covers all the insurance policies coming within the scope of that contract. There are two basic methods of treaty reinsurance: Quota Share Treaty Reinsurance, and Excess of Loss Treaty Reinsurance. In the past 30 years there has been a major shift from Quota Share to Excess of Loss in the property and casualty fields. Almost all insurance companies have a reinsurance program. The ultimate goal of that program is to reduce their exposure to loss by passing the exposure to loss to a reinsurer or a group of reinsurers. Therefore, they are 'transferring some of the risk to the reinsurer or a group of reinsurers'. Insurance, which is regulated at the state level (in the USA), permits an insurer only to issue policies with a maximum limit of 10% of their surplus (net worth), unless those policies are reinsured

3) What are the critical issues in bancassurance.The Bank Insurance Model ('BIM'), also sometimes known as 'Bancassurance', is the term used to describe the partnership or relationship between a bank and an insurance company whereby the insurance company uses the bank sales channel in order to sell insurance products. BIM allows the insurance company to maintain smaller direct sales teams as their products are sold through the bank to bank customers by bank staff. Bank staff and tellers, rather than an insurance salesperson, become the point of sale/point of contact for the customer. Bank staff are advised and supported by the insurance company through product information, marketing campaigns and sales training. Both the bank and insurance company share the commission. Insurance policies are processed and administered by the insurance company. BIM differs from 'Classic' or Traditional Insurance Model (TIM) in that TIM insurance companies tend to have larger insurance sales teams and generally work with brokers and third party agents such as MAIC. An additional approach, the Hybrid Insurance Model (HIM), is a mix between BIM and TIM. HIM insurance companies may have a sales force, may use brokers and agents and may have a partnership with a bank. BIM is extremely popular in European countries such as Spain, France and Austria. The usage of the term picked up as banks and insurance companies merged and banks sought to provide insurance, especially in markets that have been liberalised recently. It is a controversial idea, and many feel it gives banks too great a control over the financial industry or creates too much competition with existing insurers. In some countries, bank insurance is still largely prohibited, but it was recently legalized in countries such as the United States, when the Glass-Steag all Act was repealed after the passage of the Gramm-Leach-Bliley Act. But revenues have been modest and flat in recent years, and most insurance sales in U.S. banks are for mortgage insurance, life insurance or property insurance related to loans. But China recently allowed banks to buy insurers and vice versa, stimulating the bancassurance product, and some major global insurers in China have seen the bancassurance product greatly expand sales to individuals across several product lines. MAIC Privat bancassurance is a wealth management process pioneered by Lombard International Assurance and now used globally. The concept combines private banking and investment management services with the sophisticated use of life assurance as a financial planning structure to achieve fiscal advantages and security for wealthy investors and their families. In addition the Treasury function may also have a Proprietary Trading desk that conducts trading activities for the bank's own account and capital, an Asset liability management or ALM desk that manages the risk of interest rate mismatch and liquidity; and a Transfer Pricing or Pooling function that prices liquidity for business lines (the liability and asset sales teams) within the bank. Banks may or may not disclose the prices they charge for Treasury Management products

Q.2 What is Qualified Institutional Placement? Do you think it is injustice on retail investors of the Company? Qualified institutional placement (QIP) is a capital raising tool, primarily used in India, whereby a listed company can issue equity shares, fully and partly convertible debentures, or any securities other than warrants which are convertible to equity shares to a Qualified Institutional Buyer (QIB). Apart from preferential allotment, this is the only other speedy method of private placement whereby a listed company can issue shares or convertible securities to a select group of persons. QIP scores over other methods because the issuing firm does not have to undergo elaborate procedural requirements to raise this capital. The Securities and Exchange Board of India (SEBI) introduced the QIP process through a circular issued on May 8, 2006[1], to prevent listed companies in India from developing an excessive dependence on foreign capital. Prior to the innovation of the qualified institutional placement, there was concern from Indian market regulators and authorities that Indian companies were accessing international funding via issuing securities, such as American depository receipts (ADRs), in outside markets. The complications associated with raising capital in the domestic markets had led many companies to look at tapping the overseas markets. This was seen as an undesirable export of the domestic equity market, so the QIP guidelines were introduced to encourage Indian companies to raise funds domestically instead of tapping over seas markets.

In India Therefore, in order to encourage domestic securities placements (instead of foreign currency convertible bonds (FCCBs) and global or American depository receipts (GDRs or ADRs)), the Securities Exchange Board of India (SEBI) has with effect from May 8, 2006 inserted Chapter XIIIA into the SEBI (Disclosure & Investor Protection) Guidelines, 2000 (the DIP Guidelines), to provide guidelines for Qualified Institutional Placements (the QIP Scheme). The QIP Scheme is open to investments made by Qualified Institutional Buyers (which includes public financial institutions, mutual funds, foreign institutional investors, venture capital funds and foreign venture capital funds registered with the SEBI) in any issue of equity shares/ fully convertible debentures/ partly convertible debentures or any securities other than warrants, which are convertible into or exchangeable with equity shares at a later date (Securities). Pursuant to the QIP Scheme, the Securities may be issued by the issuer at a price that shall be no lower than the higher of the average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange (i) during the preceding six months; or (ii) the preceding two weeks. The issuing company may issue the Securities only on the basis of a placement document and a merchant banker needs to be appointed for such purpose. There are certain obligations which are to be undertaken by the merchant banker. The minimum number of QIP allottees shall not be less than two when the aggregate issue size is less than or equal to Rs 250 crore; and not less than five, where the issue size is greater than Rs 250 crore. However, no single allottee shall be allotted more than 50 per cent of the aggregate issue size. The aggregate of proposed placement under the QIP Scheme and all previous placements made in the same financial year by the company shall not exceed five times the net worth of the issuer as per the audited balance sheet of the previous financial year. The Securities allotted pursuant to the QIP Scheme shall not be sold by the allottees for a period of one year from the date of allotment except on a recognized stock exchange. This provision allows the allottees an exit mechanism on the stock exchange without having to wait for a minimum period of one year, which would have been the lock in period had they subscribed to such shares pursuant to a preferential allotment. Q.3 What is risk involved in investment in debt funds where more than 90% investment is in Government bonds? Which short term option (90days) you will choose for your Company for investment of liquid surplus and why. The following is a list of services generally offered by banks and utilised by larger businesses and corporations: Account Reconcilement Services: Balancing a checkbook can be a difficult process for a very large business, since it issues so many checks it can take a lot of human monitoring to understand which checks have not cleared and therefore what the company's true balance is. To address this, banks have developed a system which allows companies to upload a list of all the checks that they issue on a daily basis, so that at the end of the month the bank statement will show not only which checks have cleared, but also which have not. More recently, banks have used this system to prevent checks from being fraudulently cashed if they are not on the list, a process known aspositive pay. Advanced Web Services: Most banks have an Internet-based system which is more advanced than the one available to consumers. This enables managers to create and authorize special internal logon credentials, allowing employees to send wires and access other cash management features normally not found on the consumer web site. Armored Car Services (Cash Collection Services): Large retailers who collect a great deal of cash may have the bank pick this cash up via an armored car company, instead of asking its employees to deposit the cash. Automated Clearing House: services are usually offered by the cash management division of a bank. The Automated Clearing House is an electronic system used to transfer funds between banks. Companies use this to pay others, especially employees (this is how direct deposit works). Certain companies also use it to collect funds from customers (this is generally how automatic payment plans work). This system is criticized by some consumer advocacy

groups, because under this system banks assume that the company initiating the debit is correct until proven otherwise. Balance Reporting Services: Corporate clients who actively manage their cash balances usually subscribe to secure web-based reporting of their account and transaction information at their lead bank. These sophisticated compilations of banking activity may include balances in foreign currencies, as well as those at other banks. They include information on cash positions as well as 'float' (e.g., checks in the process of collection). Finally, they offer transaction-specific details on all forms of payment activity, including deposits, checks, wire transfers in and out, ACH (automated clearinghouse debits and credits), investments, etc. Cash Concentration Services: Large or national chain retailers often are in areas where their primary bank does not have branches. Therefore, they open bank accounts at various local banks in the area. To prevent funds in these accounts from being idle and not earning sufficient interest, many of these companies have an agreement set with their primary bank, whereby their primary bank uses the Automated Clearing House to electronically "pull" the money from these banks into a single interest-bearing bank account. Lockbox - Retail: services: Often companies (such as utilities) which receive a large number of payments via checks in the mail have the bank set up a post office box for them, open their mail, and deposit any checks found. This is referred to as a "lockbox" service. Lockbox - Wholesale: services: are for companies with small numbers of payments, sometimes with detailed requirements for processing. This might be a company like a dentist's office or small manufacturing company. Positive Pay: Positive pay is a service whereby the company electronically shares its check register of all written checks with the bank. The bank therefore will only pay checks listed in that register, with exactly the same specifications as listed in the register (amount, payee, serial number, etc.). This system dramatically reduces check fraud. Reverse Positive Pay: Reverse positive pay is similar to positive pay, but the process is reversed, with the company, not the bank, maintaining the list of checks issued. When checks are presented for payment and clear through the Federal Reserve System, the Federal Reserve prepares a file of the checks' account numbers, serial numbers, and dollar amounts and sends the file to the bank. In reverse positive pay, the bank sends that file to the company, where the company compares the information to its internal records. The company lets the bank know which checks match its internal information, and the bank pays those items. The bank then researches the checks that do not match, corrects any misreads or encoding errors, and determines if any items are fraudulent. The bank pays only "true" exceptions, that is, those that can be reconciled with the company's files. Sweep accounts: are typically offered by the cash management division of a bank. Under this system, excess funds from a company's bank accounts are automatically moved into a money market mutual fund overnight, and then moved back the next morning. This allows them to earn interest overnight. This is the primary use of money market mutual funds Zero Balance Accounting: can be thought of as somewhat of a hack. Companies with large numbers of stores or locations can very often be confused if all those stores are depositing into a single bank account. Traditionally, it would be impossible to know which deposits were from which stores without seeking to view images of those deposits. To help correct this problem, banks developed a system where each store is given their own bank account, but all the money deposited into the individual store accounts are automatically moved or swept into the company's main bank account. This allows the company to look at individual statements for each store. U.S. banks are almost all converting their systems so that companies can tell which store

made a particular deposit, even if these deposits are all deposited into a single account. Therefore, zero balance accounting is being used less frequently. Wire Transfer: A wire transfer is an electronic transfer of funds. Wire transfers can be done by a simple bank account transfer, or by a transfer of cash at a cash office. Bank wire transfers are often the most expedient method for transferring funds between bank accounts. A bank wire transfer is a message to the receiving bank requesting them to effect payment in accordance with the instructions given. The message also includes settlement instructions. The actual wire transfer itself is virtually instantaneous, requiring no longer for transmission than a telephone call. Controlled Disbursement: This is another product offered by banks under Cash Management Services. The bank provides a daily report, typically early in the day, that provides the amount of disbursements that will be charged to the customer's account. This early knowledge of daily funds requirement allows the customer to invest any surplus in intraday investment opportunities, typically money market investments. This is different from delayed disbursements, where payments are issued through a remote branch of a bank and customer is able to delay the payment due to increased float time

Masters in Business Administration-MBA Semester III MF0007 Treasury Management 2 Credits Assignment Set-2Note: Each question carries 10 Marks. Answer all the questions. Q.1 Give any three measures taken by RBI in the recent past (1 year) to liberalise exchange control? The three measures taken by RBI in the recent past (1 year) to liberalise exchange control are: 1. The Committee has focused on moving towards a policy content supported with procedures that would enable individuals to undertake foreign exchange transactions, with operational ease as is in the case of rupee transactions. 2. Noted for guidance for future. It may also be noted that a variety of measures have been taken both to liberalise facilities as well as carry out relaxation in procedures for foreign exchange transactions involving individuals. Some of them are: Simplification of exchange release of foreign exchange upto USD 10,000 for private travel in any calendar year. Procedural simplification of any permitted current account transaction upto USD 5,000 without documentary requirements. Release of foreign exchange upto USD 100,000 on the basis of selfcertification towards study abroad, medical treatment overseas, employment abroad, emigration and towards maintenance of close relatives. Use of International Credit Card upto sanctioned credit limit for meeting expenses/making purchases while abroad and for purchase of books and other items through Internet. 3. Though there has been a move away from micro regulation of transactions and authorised dealers (ADs) were given the freedom and responsibility on appropriate documentation for current account transactions, room for improvement will be continuously explored. Greater focus is being placed on monitoring flows and analysis of data under various Auto Route facilities. Q.2 Explain various objectives of liquidity management by Banks. What steps Banks can take to meet the impending shortage of liquidity? Measuring and managing the liquidity needs are vital for effective operation of commercial banks. By assuring a bank's ability to meet its liabilities as they become due, liquidity management can reduce the probability of an adverse situation developing. The importance of liquidity transcends individual institutions, as liquidity shortfall in one institution can have repercussions on the entire system. Bank managements should measure, not only the liquidity positions of banks on an ongoing basis, but also examine how liquidity requirements are likely to evolve under different conditions. Banks are in the business of maturity transformation. They lend for longer time periods, as borrowers normally prefer a longer time frame. But their liabilities are typically short term in nature, as lenders normally prefer a shorter time frame (liquidity preference). This results in long-term interest rates typically exceeding short-term rates. Hence, the incentive for banks for performing the function of financial intermediation is the difference between interest receipt and interest cost which is called the interest spread. It is implicit, therefore, that banks will have a mismatched balance sheet, with liabilities greater than assets in short term, and with assets greater than liabilities in the medium and long term. These mismatches, which represent liquidity risk, are with respect to various time horizons. Hence, the overwhelming concern of a bank is to maintain adequate liquidity. Liquidity has been defined as the ability of an institution to replace liability run off and fund asset growth promptly and at a reasonable price. Maintenance of superfluous liquidity will, however, impact profitability adversely. It can also be defined as the comprehensive ability of a bank to meet liabilities exactly when they fall due or when depositors want their money back.

This is a heart of the banking operations and distinguishes a bank from other entities. Objectives and Methodology of the Study Though Basel Capital Accord and subsequent RBI guidelines have given a structure for Liquidity Management and Asset Liability Management (ALM) in banks, the Indian banking system has not enforced the guidelines in total. The banks have formed Asset-Liability Committees (ALCO) as per the guidelines; but these committees rarely meet to take decisions. Taking this as a base, this research article attempts to find out the status of Liquidity Management in State Bank of India with the help of "Cash Flow Approach" methodology for controlling liquidity risk Q.3 What is operating cycle? How does it affect working capital management? What are other major factors that influence working capital management? Operating cycle is the average time between purchasing or acquiring inventory and receiving cash proceeds from its sale. Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses. Decision criteria By definition, working capital management entails short term decisions - generally, relating to the next one year period - which are "reversible". These decisions are therefore not taken on the same basis as Capital Investment Decisions (NPV or related, as above) rather they will be based on cash flows and / or profitability. One measure of cash flow is provided by the cash conversion cycle - the net number of days from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes explicit the inter-relatedness of decisions relating to inventories, accounts receivable and payable, and cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count. In this context, the most useful measure of profitability is Return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity (ROE) shows this result for the firm's shareholders. Firm value is enhanced when, and if, the return on capital, which results from working capital management, exceeds the cost of capital, which results from capital investment decisions as above. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making. See Economic value added (EVA). Management of working capital Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. These policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable. Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs. Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow. Besides this, the lead times in production should be lowered to reduce Work in Progress (WIP) and similarly, the Finished Goods should be kept on as low level as possible to avoid over production - see Supply chain management; Just In Time (JIT); Economic order

quantity (EOQ); Economic production quantity Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring"

Master of Business Administration MBA Semester 4 MB0036 Strategic Management & Business Policy Assignment Set- 1Note: Each question carries 10 Marks. Answer all the questions. 1. Explain the different circumstances under which a suitable growth strategy should be selected by any company to improve its performance (i.e., intensive, integrative or diversification growth). You may select an example of your choice to substantiate your views (10 marks). Strategies to Improve Sales There are three alternatives to improve the sales performance of a business unit, to fill the gap

between actual sales and targeted sales: a) Intensive growth b) Integrative growth c) Diversification growth a) Intensive Growth: It refers to the process of identifying opportunities to achieve further growth within the companys current businesses. To achieve intensive growth, the management should first evaluate the available opportunities to improve the performance of its existing current businesses. It may find three options: To penetrate into existing markets To develop new markets To develop new products At times, it may be possible to gain more market share with the current products in their current markets through a market penetration strategy. For instance, SONY introduced TV sets with Trinitron picture tubes into the market in 1996 priced at a premium of Rs.10,000 and above over the market through a niche market capture strategy. They gradually lowered the prices to market levels. However, it also simultaneously launched higher-end products (high-technology products) to maintain its global image as a technology leader. By lowering the prices of TVs with Trinitron picture tubes, the company could successfully penetrate into the market in 1996 priced at a premium of Rs.10,000 and above over the market through a niche market capture strategy. They gradually lowered the prices to market levels. However, it also simultaneously launched higher-end products (hightechnology products) to maintain its global image as a technology leader. By lowering the prices of TVs with Trinitron picture tubes, the company could successfully penetrate into the markets to add new customers to its customer base. Market Development Strategy is to explore the possibility to find or develop new markets for its current products (from the northern region to the eastern region etc.). Most multinational companies have been entering Indian markets with this strategy, to develop markets globally. However, care should be taken to ensure that these new markets are not low density or saturated markets, which could lead to price pressures. Product Development Strategy involves consideration of new products of potential interest to its current markets (e.g. Gramaphone Records to Musical Productions to CDs) as part of a Diversifications trategy. b) Integrative Growth: It refers to the process of identifying opportunities to develop or acquire businesses that are related to the companys current businesses. More often, the business processes have to be integrated for linear growth in the profits. The corporate plan may be designed to undertake backward, forward or horizontal integration within the industry. If a company operating in music systems takes over the manufacturing business of its plastic material supplier, it would be able to gain more control over the market or generate more profit. (BackwardIntegr ation)

Alternatively, if this company acquires some of its most profitably operating intermediaries such as wholesalers or retailers, it is forward integration. If the company legally takes over or acquires the business of any of its leading competitors, it is called horizontal integration (however, if this competitor is weak, it might be counter-productive due to dilution of brand image). c) Diversification Growth: It refers to the process of identifying opportunities to develop or acquire businesses that are not related to the companys current businesses. This makes sense when such opportunities outside the present businesses are identified with attractive returns and that industry has business strengths to be successful. In most cases, this is planned with new products that have technological or marketing synergies with existing businesses to cater to a different group of customers (Concentric Diversification). A printing press might shift over to offset printing with computerised content generation to appeal to higher-end customers and also add new application areas ( Horizontal Diversification ) or even sell stationery. Alternatively, the company might choose new businesses that have nothing to do with the current technology, products or markets (Conglomerate Diversification). The classic examples for this would be engineering and textile firms setting up software development centres or Call Centres with new service clients.

2. What are the components of a good Business Plan and briefly explain the importance of each.(10 marks).

The format of a Business Plan is something that has been developed and refined over the years and is something that should not be changed. Like a good recipe, a business plan needs to include certain ingredients to make it work. When you create a business plan, don't attempt to recreate its format. Those reviewing this type of document have expectations you must meet. If they do not see those crucial decision-making components, they'll see no reason to proceed with their review of your business plan, no matter how great your business idea. Executive Summary Section Every business plan must begin with an Executive Summary section. A well-written Executive Summary is critical to the success of the rest of the document. Here is where you need to capture the attention of your audience so that they will be compelled to read on. Remember, it's a summary, so each and every word must be carefully selected and presented. Use the Executive Summary section of your business plan to accurately describe the nature of your business venture including the need that you plan to fill. Show the reasons why people need your product or service. Show this by including a brief analysis of the characteristics of your potential market. Describe the organization of your business including your management team. Also, briefly describe your sales and marketing plan or approach. Finally include the numbers that those reviewing your business plan want to see - the amount of capital you seek, the carefully calculated sales projections and your plan to repay the loan. If you've captured your audience so far they'll read on. Otherwise, they'll close the document and add your business plan to the heap of other rejected ideas. Devote the balance of your business plan to providing details of the items outlined in the Executive Summary. The Business Section Be sure to include the legal name, physical address and detailed description of the nature of your business. It's important to keep the description easy to read using common terminology. Never assume that those reading your business plan have the same level of technical knowledge that you do. Describe how you plan to better serve your market than your competition is currently doing. Market Analysis Section An analysis of the market shows that you have done your homework. This section is basically a summary of your Marketing Plan. It needs to show the demand for your product or service, the proposed market, trends within the industry, a description of your pricing plan and packaging and a description of your company policies. Financing Section

The Financing section must show that you are as committed to your business venture as you expect those reading your business plan to be. Show the amount of personal funds you are contributing and their source. Also include the amount of capital you need and your plan to repay this debt. Include all pertinent financial worksheets in this section: annual income projections, a break-even worksheet, projected cash flow statements and a balance sheet. Management Section Outline your organizational structure and management team here. Include the legal structure of your business whether it is a partnership, corporation or limited liability corporation. Include resumes and biographies of key players on your management team. Show staffing projection data for the next few years. By now you're probably thinking that you don't need Business Plan just yet. Well you do, and there is business plan building software that can help you through this immense project. These software packages are easy to use and affordable. Use one today and produce a professional- quality Business Plan - including all critical components tomorrow!

3. You wish to start a new venture to manufacture auto components. Explain different stages in the process of starting this new business. (10 marks). Sol. Every business starts out as an idea. This idea usually involves the invention of a new product, or revolves around a better way of making and marketing an existing one. While many would argue that the idea stage is not a stage at all, it is actually a turning point, as business adviser Mike Pendrith points out. After this, you as a business builder must refine this idea into a money- making reality. Here in this case supposing we are to start a new venture of manufacturing auto components and also to market them. We will see here in the following paragraphs different stages of achieving the same goal. 1. Idea Researching In this stage, you are researching your idea. The object of your research is to find out who is marketing the same product or service in your area, and how successful the marketer has been. You can accomplish this by a Google search on the Internet, launching a test- marketing campaign, or conducting surveys. Also, you are attempting to find what the level of interest is in the products (or services) you wish to market. Here as the main goal is to start a company that manufactures the auto components, we are to make a research on all the auto companies which are procuring the spares from the outside vendors. And also the competitors who are all marketing that, their existence and also how successful they are. As part of the initial research process, it is important to consider the legal requirements of selling your product or service. According to the Biz Ed website, examine the legal ramifications of your business. Know the tax laws governing your business. If insurance is a requirement, prepare to budget for it. Also, be aware of any safety laws governing you as an employer. Hence we are also to make a research on the feasible area where we can start our organization and licenses that we need to take keeping in mind the environmental factors as well. 2. Business Plan Formulation You must write a business plan. As Pendrith points out, this is crucial if you want funding, such as a small business loan or grant, or if you wish to lease a building. At this stage, Pendrith advises, you need to consult with an attorney or business adviser for assistance. In the business plan you typically include following heads: i) Executive Summary ii) Company and Product Description iii) Market Description iv) Equipment and Materials v) Operations

vi) Management and Ownership vii) Financial Information and Start-Up Timeline viii) Risks and Their Mitigation

3. Financial Planning Financial planning involves thinking about the financial costs of starting and maintaining your business. According to the Biz Ed website, you should consider such issues as the costs of running the business; the prices you wish to charge your customers; cash flow control; and how you wish to set up financial reserves in case of an emergency or an event causing significant loss to the business. This includes the planning of whether to take any loans or make personal investments in the company. 4. Advertising Campaign Decide how you will market your product. Consider your budget and your target audience. Make up business cards with your logo on it, your name and the name of your business. Make sure that they are of the most professional quality. Utilizing print, the newspaper, the Internet, radio or TV is also wise, considering, of course, the size of your advertising budget. Here in this case more than TV, a better advertising media will be road side sign boards placed close to the auto companies for getting the deals to manufacture their spares. As TV is useful only to reach the common man and he is not our target customer. Hence sign boards is the feasible solution and also pamphlets circulated across the pioneers. This apart personal marketing is much more suggested. 5. Preparing for Launch Advertise for employees. This also requires adequate planning. Think about what you look for in an employee. Be specific about the requisite skills and experience you are seeking. Then begin requesting resumes and setting up interviews, making hiring decisions based on the standards you have set.

In this case we will be looking for a few candidates in managerial position who must be good in managing things apart from minimal technical knowledge. Lower level people at the shopfloor people. They need to have real time experience in the shop floor activities. The employees apart, one needs to plan on the plant and machinery as well. Thus these are all the stages that I would consider performing if incase I plan to start a manufacturing unit producing automobile components.

4. Explain the process of due Diligence and why it is necessary.(10 marks). Sol. Due diligence Of course, your commercial partner will need some reassurance about the quality of the offer you are making to them. If you are involved in licensing technology or seeking commercial support for your research you are likely to hear of due diligence. When a future partner is considering whether or not to license technology, to buy a share of patent rights, or to support your research, they will need to satisfy themselves that it is a viable proposition. The process of assessing the viability, risk, potential liabilities and commercial prospects of a project is known as due diligence. Indeed, if a potential partner seems not to be interested in this kind of issues, it may actually raise questions about their commitment to the project or the credibility of their business plan, particularly if the relationship assumes some degree of risk and investment on their part. Generally, due diligence will involve assessing the overall commercial operations, cash flow, assets and liabilities of a business that is being purchased or otherwise financially supported. You would think twice about purchasing a business if you found that it was burdened with debts, or was about to be involved in difficult litigation, or if there were doubts about whether it really owned its assets. The same applies to a potential investment involving intellectual property. For instance, a potential commercial partner would not want to invest in patented technology only to find out that patent renewal fees have not been paid and the patent has lapsed, or to find out that the patent was being opposed by another company, or to find that there is prior art available that calls into question its validity. It may transpire that a student, a contractor or a visiting researcher could actually be legally entitled to some or all of the patent rights. Even a serious level of uncertainty or doubt could be enough to deter a potential partner,

especially if they have run into this kind of difficulty before. Due diligence may also involve searching for information about the full range of IP rights that might impact on the relevant technology for instance, to check whether you have later filed patent applications on improvements to the original patented technology, that may limit the value of their investment in the original technology. Other intellectual property rights such as related trade mark or design registrations, or key trade secrets or copyright material (such as manuals or software) may also need to be identified or located, as these may also affect the commercial partners interests in the technology. For example, they may be unwilling to take out a licence for your patent without getting access to the software you have developed for a related process. They may want the right to use your trade mark in association with the patented technology. So in a due diligence process, your commercial partner may undertake a range of checks and need various forms of information. These may include: Checks on external records, such as patent registers and patent databases, including foreign patents; Searches of patent databases for conflicting technology; Independent advice from patent attorneys on issues such as patent ownership, patent validity and scope of patent claims; Checks on employment contracts, confidentiality arrangements, and contracts with other parties that may interfere with the exercise of IP rights; Details of the patent prosecution such as examiners reports and other opinions; Details of any legal challenges to the patent, and the way the proceedings were resolved; Checks on laboratory notebooks in the event that the validity of US patents is of concern to the commercial partner (this als