Knowledge Builder Capsule-Iiml

8/12/2019 Knowledge Builder Capsule-Iiml

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An IIM Lucknow Students Initiative

Presents 2014

Indian Institute of

Management Lucknow

Knowledge Builder Capsule

CURRENTAFFAIRS

FINANCE&ECONOMICS

MARKETING

OPERATIONS


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An IIM Lucknow Initiative

E-Mail:[email protected],[email protected]

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Indian Institute of Management Tel: +91-522-2734101 - 23Prabandh Nagar, Off Sitapur Road,

Lucknow-226013 (U.P.) India

CURRENTAFFAIRS
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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Disclaimer: The list of questions/topics given below is not meant to be comprehensive. It is meant to provide

guidelines/pointers on certain focus issues. Wherever possible, the participants are expected to have their view on

the topics rather than knowing the facts as they are. Keeping abreast with the current affairs both in the nationaland international circles in the areas of polity, economy, business, sports, etc. are of paramount importance.

International

1. Death of Nelson Mandela2. Latvia becoming the 18thEurozone countryafter adopting the Euro3. Multiple bombings in Russiajust 6 weeks before the Winter Olympics in Sochi.4. 9thMinisterial Conference of the WTO and the signing of the Bali package5.

Chinese Spacecrafts (Change 3) soft landing on the moon(first since 1976)6. Pre-election violence in Bangladesh.

7. Trial against deposed Egyptian President Mohammad Morsiafter being removed in July 2013amidst huge protests

8. Irans striking of dealwith the 6 major powers and agreeing to complete UN inspection tohitherto inaccessible nuclear facilities

9. Chinas new air defence zone& the ongoing tensions over the Senkoku(Diaoyu) islands10.Saudi Arabias denial of an UN security council seat 11.Civil Wars in Africa(Mozambique, South Sudan, Somalia etc.)12.Typhoon Haiyandevastating Philippines and Vietnam and killing over 6000 people13.UN confirmation of the use of Chemical Weapons in Syria& the ongoing Syrian Crisis14.Chinese Politician Bo Xilaissentence to life imprisonment15.Croatia becoming the 28thmember of the EU16. Israel-Palestinian talks in Jerusalem17.Leakage of top secret information by former CIA employee Edward Snowden18.Andy Murraybecoming the first Brit to win the Wimbledon mens singles in 77 years19.Kate Middleton giving birth to the royal baby20.North Koreas nuclear test, UN sanctions and the threats of war with the US and South Korea21.Sir Alex Fergussons retirementas the manager and coach of Manchester United football club22.Death of Venezuelan President and leader Hugo Chavez23.UNs adoption of the Arms Trade Treatyto regulate the trade of conventional weapons


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24.Election of the first Pope from Latin America after the historic resignation (first since 1415) ofPope Benedict XVI

25.Xi Jinpingbecoming the new president of China26.Cyprus economic crisisand subsequent bailout by EU and IMF27.Boston Marathon Bombing28.Nobel Prizes 201329.Australia Whitewashing England in Ashes30.French Militarysintervention in Mali conflict

National

1.

Successful launch of GSLV-D5from the Satish Dhawan Space Research Centre, Sriharikota2. Arvind Kejriwalbecoming the CM of Delhi after the stupendous performance of AAP partyin

the Delhi assembly elections

3. Assembly elections in Delhi, Chhattisgarh, Rajasthan, Madhya Pradesh and Mizoram4. Parliament passing the Lokpal and the Lokayuktas Bill5. Indian diplomatDevyani Khobragadesarrest in USA and the subsequent diplomatic row

between India and the USA

6. The Supreme Court of India criminalising same sex relationships under section 377 of IPC7. The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act,

2013 came into effect

8. Sachin Tendulkars retirementfrom international cricket9. Bharatiya Mahila Bank,India's first all-women commercial bank, starting its operations10.Rajesh and Nupur Talwar getting life imprisonment in the 2008 Aarushi murder case11.Vishwanathan Anand losing title to Magnus Carlsen of Norway in the World Chess

Championship 2013in Chennai

12. ISROs Mars Orbiter Mission(MOM) successfully launched13.Telanganagetting Statehood14.Sebastian Vettel winning the 2013 Indian Grand Prixand cancellation of 2014 Indian Grand Prix15.Spot fixing scandalin IPL16.Communal riots in Muzaffarnagar, UP17.Tarun Tejpalof Tehelka Magazine getting arrested for alleged sexual assault on a women

journalist
mailto:[email protected]:[email protected]:[email protected]://en.wikipedia.org/wiki/Devyani_Khobragadehttp://en.wikipedia.org/wiki/Devyani_Khobragadehttp://en.wikipedia.org/wiki/Devyani_Khobragadehttp://en.wikipedia.org/wiki/The_Sexual_Harassment_of_Women_at_Workplace_(Prevention,_Prohibition_and_Redressal)_Act,_2013http://en.wikipedia.org/wiki/The_Sexual_Harassment_of_Women_at_Workplace_(Prevention,_Prohibition_and_Redressal)_Act,_2013http://en.wikipedia.org/wiki/Bharatiya_Mahila_Bankhttp://en.wikipedia.org/wiki/Bharatiya_Mahila_Bankhttp://en.wikipedia.org/wiki/Bharatiya_Mahila_Bankhttp://en.wikipedia.org/wiki/The_Sexual_Harassment_of_Women_at_Workplace_(Prevention,_Prohibition_and_Redressal)_Act,_2013http://en.wikipedia.org/wiki/The_Sexual_Harassment_of_Women_at_Workplace_(Prevention,_Prohibition_and_Redressal)_Act,_2013http://en.wikipedia.org/wiki/Devyani_Khobragademailto:[email protected]


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18. India test firing the indigenously developed ICBM, Agni V19.Dr Poonam Khetrapal Singh of India getting the post (after 44 years) of the Regional Director of

World Health Organisation's South East Asian Regional Organisation (SEARO)

20.The awarding of death sentences to the 4 convicts of the Delhi Gang Rape Case21.Serial Blasts in Bodh Gayaand inside the Maha Bodhi Temple22.BJPs announcement of Narendra Modias its Prime Ministerial Candidate for 2014 elections23.RaghuramRajanstaking over as the 23rdGovernor of the RBI24.National Food Security Billcoming into effect25. Indian Rupee hitting record low against the US Dollar26.Uttaranchal getting hit by massive landslides and flood27.Death of Manna Dey, Pran, Shakuntala Devi, Farooq Sheikh and Rituporno Ghosh28.Border confrontation with China; PLAentering the Indian territory in Ladakh and Arunachal

Pradesh29.Sworning in of Justice Sathasivamas the new Chief Justice of India30.Naxaliteattack on a congress fleet leading to the death of 27 people

Note:Participants are expected to have an idea of what is happening around the world in the

areas of economics, business affairs, politics, and sports. It is advisable to follow a newspaper or

a good magazine(The Hindu, Business Line or Economic Times, or Financial Express, India Today,

Forbes, Economist).


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FINANCEECONOMICS


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Opportunity Cost- Economics deals with choosing one alternative among various alternatives.

The decision process begins with ranking all alternatives on priority basis, and then choosing

the alternative which is on the top of the priority list. This choice implies sacrifice of other

alternatives; hence cost of this choice will be evaluated in terms of the sacrificed alternatives.

The cost of this choice is the benefit of the next best alternative foregone. This is called

opportunity cost. Therefore, opportunity cost is the highest valued benefit that must be

sacrificed as a result of choosing alternative.

Microeconomicsis the study of individual consumers and producers in specific markets. It

involves the determination of price through the optimizing behavior of economic agents, with

consumers maximizing utility and firms maximizing profits. Thus Microeconomics seeks to

answer questions related to supply & demand, pricing of output, production process, cost

structure and distribution of income & output.

Law of demand:Other things remaining the same, there is an inverse relationship between

price and quantity demanded. The amount of a good that buyers

purchase at a higher price is less because as the price of a good goes up,

so does the opportunity cost of buying that good. As a result, peoplewill naturally avoid buying a product that will force them to forgo the

consumption of something else they value more.

Law of Supply: It basically establishes the relationship between the

supply of a product and its price. It states that Supply ofa particular

product is directly proportional to its price keeping other factors

constant. Producers supply more at a higher price because selling a

higher quantity at higher price increases revenue.


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Equilibriumrefers to a situation in which the price has reached the level where the quantity

supplied equals the quantity demanded. As you can see on the chart, equilibrium price and

quantity are determined by the intersection of demand & supply curves. At this point, the price

of the goods will be p* and the quantity will be q*. These figures are referred to as equilibrium

price and quantity. Consumers can purchase all they want & producers can sell all they want at

the market-clearing pricei.e. p*.

Macroeconomicsis the study of the aggregate economy. It addresses many topical issues like:

Why does the cost of living keep rising? Why are millions of people unemployed, even when the

economy is booming? What causes recession? More specifically it is a study of national

economies and the determination of national income.

A variety of measures of national income and output are used in economies to estimate total

economic activity in a country or region.

Gross Domestic ProductThe monetary value of all the finished goods and services produced

within a country's borders in a specific time period, though GDP is usually calculated on an

annual basis. GDP is commonly used as an indicator of the economic health of a country, as well

as to gauge a country's standard of living. Critics of using GDP as an economic measure say the

statistic does not take into account the underground economy - transactions that, for whatever

reason, are not reported to the government. Others say that GDP is not intended to gauge

material well-being, but serves as a measure of a nation's productivity, which is unrelated.

They are the product (or output) approach, the income approach, and the expenditure

approach.

The expenditure method:

GDP = private consumption + gross investment + government spending + (exports imports), or

GDP = C + I + G + (X M)

The income method:


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GDP = compensation of employees + gross operating surplus + gross mixed income + taxes less

subsidies on production and imports

GDP = COE + GOS + GMI + TP & MSP & M

The product approach:

Gross Value Added = Value of output- Value of Intermediate Consumption.

Value of Output= Value of the total sales of goods and services + Value of changes in the

inventories.

The sum of gross value added in various economic activities is known as GDP at factor cost.

GDP at factor cost plus indirect taxes less subsidies on products is GDP at Producer Price.

Gross National ProductIt is an economic statistic that includes GDP, plus any income earned by

residents from overseas investments, minus income earned within the domestic economy by

overseas residents.

GNP is a measure of a country's economic performance, or what its citizens produced (i.e.

goods and services) and whether they produced these items within its borders.

Gross National Product (GNP) is the market value of all products and services produced in oneyear by labor and property supplied by the residents of a country.

GNP = C + G + I + NX +NFP

Consumption (C) is the actual consumption spending of the household sector.

Goods and services (G) is the next largest component of government purchases.

Investment spending (I) includes business spending that will improve the ability to produce in

the future


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Net exports (NX) component is equal to exports (goods and services purchased by foreigners)

minus imports (goods and services purchased by domestic residents).

Net factor payments (NFP) are the net amount of payments that an economy pays to foreigners

for inputs used in producing goods and services, less money the economy receives for selling

the same factors of production.

GNP Vs. GDP

GNP is the final value of goods and services produced by domestically-owned means of

production (using domestic labor and resources); GDP is the final value of goods and services

produced within a given country's border. Part of GNP, therefore, is earned overseas, while

some domestic production is added to GDP only.

Example involves U.S. Company Intel which manufactures silicon chips in Ireland. The

production from that facility is added to U.S. GNP, but not U.S. GDP. When U.S. residents earn

more abroad than foreigners earn in the U.S., GNP exceeds GDP and vice versa.

Purchasing Power Parity Purchasing power parity (PPP) is a measure of long-term equilibrium

exchange rates based on relative price levels of two countries. The concept is founded on the

law of one price, the idea that identical goods should (under certain conditions) sell for the

same price in two different countries at the same time. The absolute PPP exchange rate

equates the national price levels in two countries if expressed in a common currency at that

rate, so that the purchasing power of one unit of a currency would be the same in the two

countries. Relative PPP focuses on changes in the price levels and the exchange rate, rather

than the level.

The PPP exchange-rate calculation is controversial because of the difficulties of finding

comparable baskets of goods to compare purchasing power across countries.


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An example of one measure of law of one price, which underlies purchasing power parity, is the

Big Mac Index, which looks at the prices of a Big Mac burger in McDonald's restaurants in

different countries.

India stands 11th by Nominal GDP ($ 1.5 trillion) and 4th by PPP ($ 4.06 trillion).

Big Mac IndexGenerally PPP is measured by the cost of a basket of goods in different

countries. A famous indicator used to measure PPP is the Big Mac Index. This index was

proposed by The Economist. The Big Mac was chosen as it is available to a common

specification in many countries around the world thus enabling a comparison between many

countries currencies.

Fiscal &Monetary Policy- The government exerts its control over the nations economy using

two distinct set of policies. One is the monetary policy (the central bank manages this on behalf

of the government) and secondly the fiscal policy.

Fiscal policy is the use of government expenditure and revenue collection through taxation to

influence the economic activity. With the help of monetary policy the Reserve Bank of India

(RBI) attempts to stabilize the economy by controlling interest rates and spending. Monetary

policy comprises of various policy rates and reserve ratios.

Policy Rates & Reserve Ratio

Bank Rate- Bank Rate is the interest rate that is charged by a countrys central or federal bank

on loans and advances to control money supply in the economy and the banking sector. This is

typically done on a quarterly basis to control inflation and stabilize the countrys exchange

rates. A fluctuation in bank rates triggers a ripple-effect as it impacts every sphere of a

countrys economy. For instance, the prices in stock markets tend to react to interest rate

changes. A change in bank rates affects customers as it influences prime interest rates for

personal loans. This is the rate at which RBI lends money to other banks (or financial

institutions .The bank rate signals the central banks long-term outlook on interest rates. If the

bank rate moves up, long-term interest rates also tend to move up, and vice-versa. Banks make


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a profit by borrowing at a lower rate and lending the same funds at a higher rate of interest. If

the RBI hikes the bank rate (this is currently 6 per cent), the interest that a bank pays for

borrowing money (banks borrow money either from each other or from the RBI) increases. It, in

turn, hikes its own lending rates to ensure it continues to make a profit.

Repo RateA repurchase agreement, also known as a repo, RP, or sale and repurchase

agreement, is the sale of securities together with an agreement for the seller to buy back the

securities at a later date. The repurchase price should be greater than the original sale price,

the difference effectively representing interest, sometimes called the repo rate. The party that

originally buys the securities effectively acts as a lender. The original seller is effectively acting

as a borrower, using their security as collateral for a secured cash loan at a fixed rate of interest

Reverse Repo RateThe rate at which RBI borrows money from the banks (or banks lend

money to the RBI) is termed the reverse repo rate. Reverse repo rate signifies the rate at which

the central bank absorbs liquidity from the banks, while repo signifies the rate at which liquidity

is injected. The RBI uses this tool when it feels there is too much money floating in the banking

system. If the reverse repo rate is increased, it means the RBI will borrow money from the bank

and offer them a lucrative rate of interest. As a result, banks would prefer to keep their money

with the RBI (which is absolutely risk free) instead of lending it out (this option comes with a

certain amount of risk).Consequently, banks would have lesser funds to lend to their

customers. This helps stem the flow of excess money into the economy.

Cash Reserve Ratio (CRR)The portion (expressed as a percent) of depositors' balances banks

must have on hand as cash. This is a requirement determined by the country's central bank,

which in the U.S. is the Federal Reserve and in India is reserve bank. The reserve ratio affects

the money supply in a country.

For example, if the reserve ratio in the U.S. is determined by the Fed to be 11%, this means all

banks must have 11% of their depositors money on reserve in the bank. So, if a bank has

deposits of $1 billion, it is required to have $110 million on reserve.


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Statutory Liquidity Ratio (SLR)SLR indicates the minimum percentage of deposits that the

bank has to maintain in the form of gold, cash or other approved securities like treasury bills. It

regulates the credit growth in India.

The RBI reviews these rates and ratios on a monthly basis with intent to keep a check on money

supply and inflation rate in economy. In order to increase the supply of money in economy RBI

may decrease its policy rates and reserve ratios. The decrease will have the combined effect of

increasing the deposits available with the commercial banks which may be offered as loans to

general public thereby pumping more money into the economy.

Exchange rate regimes

The manner in which a country manages its exchange rate with other currencies in the world is

called as the exchange rate regime. There are many types of exchange rate regimes like Fixed,

Floating and Pegged float. Fixed exchange rate regime was prevalent before the 1970s when

there was a direct convertibility between different currencies of the world that is the exchange

rate is fixed in this regime. In a floating exchange rate, the market dictates movements in the

exchange rate. In pegged float, the central bank keeps the rate from deviating too far from a

target band or value, via policy actions. If the rate moves outside the band, the central bank

would intervene in the market by buying or selling the currency to bring the rate back to the

pegged value.

Inflation- Inflation is a rise in the general level of prices of goods and services in an economy

over a period of time. Consequently, inflation also reflects erosion in the purchasing power of

moneya loss of real value in the internal medium of exchange and unit of account in the

economy.

Inflation rate = (this years price index last year price index) / last years price index

The consumer price index (CPI) is the best know indicator of inflation. In India, Food Inflation is

a significant indicator since food expense is the major expense for most of the people in India.


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The quantity theory of money is widely accepted as an accurate model of inflation in the long

run. Consequently, there is now broad agreement among economists that in the long run, the

inflation rate is essentially dependent on the growth rate of money supply. However, in the

short and medium term inflation may be affected by supply and demand pressures in the

economy, and influenced by the relative elasticity of wages, prices and interest rates.

Today, most mainstream economists favor a low, steady rate of inflation. Low (as opposed to

zero or negative) inflation may reduce the severity of economic recessions by enabling the

labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap

prevents monetary policy from stabilizing the economy.

Central bank (RBI in India) has the role to encourage growth and control inflation. RBIs desired

level of inflation is 4-5 %, above which it becomes hawkish to check inflation.

Severe form of Inflation is called hyperinflation.

Currently, Indias Consumer price index is 9%, Wholesale Price Index is 8.5%, and Food Inflation

is 10% approximately.

DeflationDeflation is a decrease in the general price level of goods and services. Deflation

occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the

real value of money over time; conversely, deflation increases the real value of moneythe

currency of a national or regional economy. This allows one to buy more goods with the same

amount of money over time. Deflation is correlated with depressions.

Deflation results in a lower level of demand in the economy due to lower production capability

requirements of industry and this further leads to increased unemployment.

A deflationary spiral is a situation where decreases in price lead to lower production, which in

turn leads to lower wages and demand, which leads to further decreases in price. Since

reductions in general price level are called deflation, a deflationary spiral is when reductions in

price lead to a vicious circle, where a problem exacerbates its own cause. The Great Depression


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was regarded by some as a deflationary spiral. Japan is struggling with deflation since late

1980s where the prices are constantly decreasing.

StagflationStagflation is a situation in which the inflation rate is high and the economic

growth rate is low. Stagflation can happen due to two reasons. First, stagflation can result

when the productive capacity of an economy is reduced by an unfavorable supply shock, such

as an increase in the price of oil for an oil importing country. Such an unfavorable supply shock

tends to raise prices at the same time that it slows the economy by making production more

costly and less profitable. Second, both stagnation and inflation can result from inappropriate

macroeconomic policies. For example, central banks can cause inflation by permitting excessive

growth of the money supply, and the government can cause stagnation by excessive regulation

of goods markets and labor markets. Either of these factors can cause stagflation. Both types ofexplanations are offered in the US stagflation of the 1970s: it began with a huge rise in oil

prices, but then continued as central banks used excessively simulative monetary policy to

counteract the resulting recession, causing a runaway wage-price spiral.

FDI & FII

Foreign Direct Investment (FDI) refers to the investment by foreign investors in projects in the

country. This type of investment is more involved with the management, technology transfer

and other field expertise and knowhow in the project. FII refers to Foreign Institutional

Investors. These investors invest in the country indirectly by purchasing stocks of the

companies listed on the stock exchanges. The FII money inflows or outflows are also called hot

money flows.

Types of industry

Monopoly- It exists when a specific individual or an enterprise has sufficient control over a

particular product or service to determine significantly the terms on which other individuals

shall have access to it. Monopolies are thus characterized by the ability of a firm to raise price

without losing all its sales. Monopolies often arise as a result of barriers to entry.


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For Example, Indian Railway has monopoly in serving passengers through train as no other

player exists.

Perfect CompetitionIt describes markets such that no participants are large enough to have

the market power to set the price of a homogeneous product. A perfectly competitive market

has the following characteristics like there are many buyers & sellers in the market, the goods

offered by the various sellers are largely the same and firms can freely enter or exit the market.

A competitive market has many buyers and sellers trading identical products so that each buyer

and seller is a price taker. Buyers and sellers must accept the price determined by the market.

Perfect competition serves as a benchmark against which to measure real-life and imperfectly

competitive markets.

Oligopoly- An oligopoly is a market form in which a market or industry is dominated by a small

number of sellers. It is characterized by only a few sellers, each offering a similar or identical

product to the others. Because of the few sellers, the key feature of oligopoly is the issue

between cooperation and self-interest. At least some firm have large market shares and thus

can influence the price of the product.

Example: - Indian Petroleum Industries which is dominated by few players like HPCL, BPCL, IOCL

etc. and the decisions of the one influences the decision of the others.

Financial Markets

Difference and demarcation between money market and capital market is made on the basis of

maturity period of instruments and claims.

Capital Marketdeals with longer maturity financial assets and claims. Capital market includes

trading in the financial instruments such as shares (equity as well as preference), public sector

bonds and units of mutual funds. In case of capital market even a small individual investor can

deal by sale/purchase of shares, debentures or mutual fund units.


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Examples: Governments issue Treasury Bonds in the Bond Market, Company through its IPO,

taps the investing public for capital and is therefore using the capital markets

The capital market includes the stock market (equity securities) and the bond market (debt).

In primary markets, new stock or bond issues are sold to investors via a mechanism known as

underwriting.

In the secondary markets, existing securities are sold and bought among investors or traders,

usually on a securities exchange, over-the-counter, or elsewhere.

Money Market- Short-term instruments maturing within a period of one year are traded in

money market such as inter-corporate deposits, certificate of deposits, treasury bonds,commercial papers, commercial bills, etc. Money market is a wholesale market and the

participants in money market are large institutional investors, commercial banks, mutual funds,

and corporate bodies.

Money market consists of a number of sub-markets:

Call money market Commercial bills market or discount market Acceptance market Treasury bill market

Instruments of Money Market:

Certificate of Deposit - Time deposits, commonly offered to consumers by banks, thriftinstitutions, and credit unions.

Repurchase Agreements - Short-term loans - normally for less than two weeks andfrequently for one day - arranged by selling securities to an investor with an agreement

to repurchase them at a fixed price on a fixed date.

Commercial Paper - Unsecured promissory notes with a fixed maturity of one to 270days; usually sold at a discount from face value.


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Treasury Bills - Short-term debt obligations of a national government that are issued tomature in three to twelve months.

Bankers Acceptance - is a short term credit investment created by a non-financial firm. Repo Instrument - The securities holder - the cash taker - sells securities against cash,

simultaneously agreeing to repurchase the same or similar securities at a later date.

Money Market Mutual Fund - is an open-ended mutual fund that invests in short-termdebt securities such as treasury bills, commercial papers.

Shares:A unit of ownership interest in a corporation or financial asset. While owning shares in

a business does not mean that the shareholder has direct control over the business's day-to-

day operations, being a shareholder does entitle the possessor to an equal distribution in any

profits, if any are declared in the form of dividends. The two main types of shares are commonshares and preferred shares.

Debentures: The long-term requirements of capital are raised by the company primarily

through the issue of Shares and Debentures. While the shareholders are essentially the owners

of the enterprise, those who buy debentures are creditors for long-term funds and do not enjoy

voting rights. In brief all securities other than shares issued by a company will come under the

term debentures. A debenture like a share is also a movable property transferable in the

manner provided in the Articles of the company.

Some of the characteristics of debentures are as follows:

An instrument to acknowledge the creditors of the company A debenture holder is not a member but a creditor. Debenture carries a fixed rate of interest. A debenture holder cannot have voting rights. At the time of winding up debenture holders have a priority over the shareholders

regarding the return of amount due to them.


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Bonds:A debt investment in which an investor loans money to an entity (corporate or

governmental) that borrows the funds for a defined period of time at a fixed interest rate.

Bonds are used by companies, municipalities, states and U.S. and foreign governments to

finance a variety of projects and activities. Bonds are commonly referred to as fixed-income

securities and are one of the three main asset classes, along with stocks and cash equivalents.

Derivatives:

The term Derivative stands fora contract whose price is derived from or is dependent upon an

underlying asset. The underlying asset could be a financial asset such as currency, stock and

market index, an interest bearing security or a physical commodity. Today, around the world,

derivative contracts are traded on electricity, weather, temperature and even volatility.

Types of Derivative Contracts

Derivatives comprise four basic contracts namely Forwards, Futures, Options and Swaps. Over

the past couple of decades several exotic contracts have also emerged but these are largely the

variants of these basic contracts. Let us briefly define some of the contracts.

Forward Contracts: These are promises to deliver an asset at a predetermined date in future

at a predetermined price. Forwards are highly popular on currencies and interest rates. The

contracts are traded over the counter (i.e. outside the stock exchanges, directly between the

two parties) and are customized according to the needs of the parties. Since these contracts do

not fall under the purview of rules and regulations of an exchange, they generally suffer from

counterparty risk i.e. the risk that one of the parties to the contract may not fulfill his or her

obligation.

Futures Contracts: A futures contract is an agreement between two parties to buy or sell an

asset at a certain time in future at a certain price. These are basically exchange traded,

standardized contracts. The exchange stands guarantee to all transactions and counterparty

risk is largely eliminated. The buyers of futures contracts are considered having a long position

whereas the sellers are considered to be having a short position. It should be noted that this is


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similar to any asset market where anybody who buys is long and the one who sells in short.

Futures contracts are available on variety of commodities, currencies, interest rates, stocks and

other tradable assets. They are highly popular on stock indices, interest rates and foreign

exchange.

Options: It gives the buyer (holder) a right but not an obligation to buy or sell an asset in future.

Options are of two types - calls and puts. Calls give the buyer the right but not the obligation to

buy a given quantity of the underlying asset, at a given price on or before a g iven future date.

Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying

asset at a given price on or before a given date. One can buy and sell each of the contracts.

When one buys an option he is said to be having a long position and when one sells he is said to

be having a short position. It should be noted that, in the first two types of derivative contracts(forwards and futures) both the parties (buyer and seller) have an obligation; i.e. the buyer

needs to pay for the asset to the seller and the seller needs to deliver the asset to the buyer on

the settlement date. In case of options only the seller (also called option writer) is under an

obligation and not the buyer (also called option purchaser). The buyer has a right to buy (call

options) or sell (put options) the asset from / to the seller of the option but he may or may not

exercise this right.

In case the buyer of the option does exercise his right, the seller of the option must fulfill

whatever is his obligation (for a call option the seller has to deliver the asset to the buyer of the

option and for a put option the seller has to receive the asset from the buyer of the option). An

option can be exercised at the expiry of the contract period (which is known as European

option contract) or anytime up to the expiry of the contract period (termed as American option

contract).

Swaps: Swaps are private agreements between two parties to exchange cash flows in the future

according to a prearranged formula. They can be regarded as portfolios of forward contracts.

The two commonly used swaps are:


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Interest rate swaps: These entail swapping only the interest related cash flows between the

parties in the same currency.

Currency swaps: These entail swapping both principal and interest between the parties, with

the cash flows in one direction being in a different currency than those in the opposite

direction. Types of Traders in the Derivatives Markets

Types of Traders in the Derivatives Markets:

The traders in the derivatives markets are classified into three broad types, viz. hedgers,

speculators and arbitrageurs, depending on the purpose for which the parties enter into the

contracts.

Hedgerstrade with an objective to minimize the risk in trading or holding the underlyingsecurities. Hedgers willingly bear some costs in order to achieve protection against

unfavorable price changes.

Speculatorsuse derivatives to bet on the future direction of the markets. They takecalculated risks but the objective is to gain when the prices move as per their

expectation.

Arbitrageurstry to make risk-less profit by simultaneously entering into transactions intwo or more markets or two or more contracts. They profit from market inefficiencies

by making simultaneous trades that offset each other thereby making their positionsrisk-free.

IPOs and FPOs:

When a SEBI registered company wants to raise funds or capital for its expansion programs, it

floats an IPO for the first time related to that project. The IPO document will in detail inform

the investor of the project, its growth trajectory, and its profit potential. The risk factors are

also outlined. Based on his personal assessment, the investor may invest as a shareholder, by

buying shares at the face value as announced by the Company. Each investor who buys stocks

through the IPO gets dividend or profits based on the companys performance, as declared by


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the company. If the company faces losses, the equity holder also bears the losses. In uncertain

market situations, IPOs incur losses and so does each investor.

When a company floats its second or third public offering, its called FPOs or Follow-on Public

Offers.

FII or Foreign Institutional Investors:FIIs are funds that are active in both primary and

secondary markets, invest in stocks and aim at reaping short-term profits. Though they bring

foreign currency, the flight of the capital is sudden, at times leading to currency and monetary

fluctuations. FIIs are heavily involved in speculative practices like futures trade and short

selling. They indulge in heavy trading in times of crisis making the situation very volatile. Still,

FIIs push up the stock prices, enhance national reputation, increase the investment profits of

stock players, strengthen the stock exchange and generally increase the brand value of the

region.

Venture CapitalIt is the money available to a risky project. Financier is convinced of the idea,

its blue print, viability and execution. The financier is only involved in investing heavily. Any

management personnel, entrepreneur, individual or a small company can get funds through a

venture capitalist and start his/her project. The IT boom has been powered by venture capital.

Hedge FundsHedge funds are investment pools of some of the uber-rich or very high net

worth individuals across the wealth. The hedge funds have a certain tendency to aggressivelyinvest and usually their returns are typically higher than any other form of investment. Hedge

funds had initially reaped high returns in the US realty boom. They have been accused of short

selling. Much of their strategies remain secret. They operate high risk markets. Hedge funds

have this ability to return profits in both the bear and bull hugs.

Short sellingThe selling of a security that the seller does not own, or any sale that is

completed by the delivery of a security borrowed by the seller. Short sellers assume that they

will be able to buy the stock at a lower amount than the price at which they sold short.


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Participatory Notes: Participatory notes are a stock trade facilitating financial instrument in

the Indian stock exchange. As per SEBI guidelines only those individuals/companies registered

with SEBI can trade at the stock exchange. This has kept out a substantial category of high net

worth individuals who would not register/open shop in India. Since the ultimate stockholder is

not known, India did not encourage this. However, from late 1990s, under SEBI watch,

participatory notes were issued to non-registered individuals/companies to become stock

players after registering themselves through FIIs. Thus FIIs were in some way careful of the

players who entered bourses through their participatory notes.

Note: This list is not exhaustive. It has been prepared just to give you an idea about what you

can expect in an interview. People with relevant work experience in finance domain can expect

questions related to their job profile.

MARKETING


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The financial success of any organization often depends on how it markets its products and,

more importantly, the organization itself. For a firm to make profit or, what they call, meet its

bottom line there must be a top line.

Essence of marketing is exchange of value (win-win situation for both parties) and converting

societal needs into profitable opportunities.

Basic terminologies:

NeedIt is the state of deprivation of some basic satisfaction. Needs cannot be created. They

are physiological and psychological requirements.

WantThey are specific satisfiers of needs. Our wants are shaped and re-shaped by the

environment/society.

Demand- It is want backed by purchasing power i.e. the willingness and ability to buy.

Marketing will influence the demand based on 4 As:

Appropriate Product Attractive through Promotion


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Available at the right Place Affordable Price

ProductAnything that can be offered to the market to satisfy the needs and wants.

Product CategoryProducts satisfying a specific need or want. E.g. Detergent, Shampoo

Product FormType of product category E.g. Detergent can be in powder/ liquid/ bar.

BrandA name and/or symbol to identify the product of one seller and to differentiate it from

others.

Brand ValuationIt is the process of estimating the total financial value of a brand (both

tangible as well as intangible part).

Brand EquityA set of intangible assets that literary add value to the brand and to the firm as

a whole (goodwill).

CommodityProducts which have no names. E.g. wheat, sugar etc. sold from grocery where

there is no branding or assurance. Brands which cannot be differentiated are called commodity-

class.

Product ClassificationPhysical Goods, Services, Persons, Places, Organizations, Ideas

Product Life Cycle- Products have limited life. Sales pass through different stages where they

encounter different opportunities and challenges. Profits also vary at different stages. So the

products require different marketing and manufacturing strategies at different stages. There

are 4 stages in the PLC: Introduction, Growth, Maturityand Decline.


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Consumer Goods Classification-

What is marketing?- TheAmerican Marketing Associationdefines Marketing as the activity, set

of institutions, and processes for creating, communicating, delivering, and exchanging offerings

that have value for the customers, clients, partners, and society at large. In layman terms,

marketing is about finding need gaps, and creating, communicating and delivering value to the

consumer in a way that benefits the organization and its stakeholders.

Marketing conceptIt implies that an organization aims all of its efforts at satisfying its

customers profitably.

Selling vs. MarketingMarketing is not the art of selling products. In fact, the aim of marketing

is to understand the customer so well that the product fits him and sells itself, thus making

selling superfluous. Selling then remains as only the tip of the iceberg. In short the essence of

marketing is to make selling redundant.

Marketing Selling

Marketing is everything that a firm does to

reach its customers and to generate leads.Selling is everything a firm does to influence a

customer to buy a product or service, or in

ConsumerGoods

Non- durable goods (SoftGoods, < 3 years)

Semi- durablegoods (> 6 months)

FMCG (0-6 Months)

Durable Goods (HardGoods, >= 3 years)


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other words close the sale.

Marketing is often a longer process of building

a brand for the product and the company. It

involves finding the right product for satisfying

the customers needs.

Selling is the short term process of matching

the right customer to the value offered.

Marketing is a process comprising of six steps namely:

Understanding Technical Name

Understanding Customer Needs Marketing Research

Converting Needs into Products Customer driven engineering

Communication about the product Promotion

Marketing the product available Distribution

Transaction Selling

After sales service/feedback Customer support

As evident from the above table, selling is only one of the steps.

Advertising vs. MarketingAt the most fundamental level, marketing differs from advertising

in that marketing is to create a product that would satisfy prospective customer demands. The

role of advertising, on the other hand, is to create a demand for existing product.

Marketing MixIt is a set of tools that facilitate the marketing effort.

Product- Features, specifications, design, quality PriceValue for money, MRP, discounts, credit, installments, maintenance


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PlaceDistribution, warehousing, availability, coverage Promotion

As opposed to goods, services are intangible. People and process of delivery is important in

service. Clients presence is must, so ambience should be good.

PeopleAttraction, selection, training, motivation, retention of people Process Physical EvidenceInterior decoration, ambience

Priceonly ensures cash inflow, all other Ps results in cash outflow.

Difference between Price, value and satisfactionValue reflects the sum of perceived tangibleand intangible benefits and costs to customers. Value increases with quality and decreases with

price. However, other factors can also play a vital role in our perceptions of value. Satisfaction

reflects a persons judgments of products perceived performance in relation to expectations.

5Ms of AdvertisingMission, Money, Message, Medium, and Measurement

Note: A candidate should concentrate on having plausible answers for a few (indicative but not

exhaustive) questions substantiating his interest in marketing.

Why are you interested in marketing? How would you connect your graduation background with a prospective career in

marketing?

Which brand/product/advertisement has left a lasting impression upon you? Why do you think you would suit a marketing profile?


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Operations ManagementOperations Management deals with the design and management of

products, processes, services and supply chains. It considers the acquisition, development, and

utilization of resources that firms need to deliver the goods and services their clients want. The

purvey of OM ranges from strategic to tactical and operational levels. Representative strategic

issues include determining the size and location of manufacturing plants, deciding the structure

of service or telecommunications networks, and designing technology supply chains.Tactical

issues include plant layout and structure, project management methods, and equipment

selection and replacement. Operational issues include production scheduling and control,

inventory management, quality control and inspection, traffic and materials handling, and

equipment maintenance policies.

OPERATIONS


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Goods vs. ServicesThere are five essential differences between services and goods. The first is

that a service is an intangible process that cannot be weighed or measured, whereas a good is a

tangible output of a process that has physical dimensions. This distinction has important

business implications since a service innovation, unlike a product innovation, cannot be

patented. Thus, a company with a new concept must expand rapidly before competitors copy

its procedures. Service intangibility also presents a problem for customers since, unlike with a

physical product, they cannot try it out and test it before purchase.

The second is that a service requires some degree of interaction with the customer for it to be a

service. The interaction may be brief, but it must exist for the service to be complete. Where

face-to-face service is required, the service facility must be designed to handle the customer's

presence. Goods, on the other hand, are generally produced in a facility separate from thecustomer. They can be made according to a production schedule that is efficient for the

company.

The third is that services, with the big exception of hard technologies such as ATMs and

information technologies such as answering machines and automated Internet exchanges, are

inherently heterogeneousthey vary from day to day and even hour by hour as a function of

the attitudes of the customer and the servers. Thus, even highly scripted work such as found in

call centers can produce unpredictable outcomes. Goods, in contrast, can be produced to meet

very tight specifications day-in and day-out with essentially zero variability. In those cases

where a defective good is produced, it can be reworked or scrapped.

The fourth is that services as a process are perishable and time dependent, and unlike goods,

they can't be stored. You cannot come back last week for an air flight or a day on campus.

And fifth, the specifications of a service are defined and evaluated as a package of features that

affect the five senses.

Production processA production process is defined as a user of resources to transform inputs

into desired output. For a plant that manufactures tyres, raw material, labor and capital can be


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inputs while the finished rubber tyre will be the output. The steps through which the raw

material is converted into a finished good can be referred to as a process.

A simple parameter to measure efficiency of a process is productivity. In a broad sense,

productivity is the ratio of goods/services produced to resources used (output to input).

BottleneckA point of congestion in a system that occurs when workloads arrive at a given

point more quickly than that point can handle them. The inefficiencies brought about by the

bottleneck often create a queue and a longer overall cycle time.

The primary objective of a manager in the operations department is to eliminate the bottleneck

that exists in the process. By removing this inefficiency, the manager can increase profits by

reducing time to produce.

Inventory ManagementInventory management refers mainly to when a firm strives to attain

and uphold an optimal inventory of goods while also taking note of all orders, shipping and

handling, and other associated costs.Inventory management is mainly about identifying the

amount and the position of the goods that a firm has in their inventory. Inventory management

is imperative as it helps to defend the intended course of production against the chance of

running out of important materials or goods.

Inventory management also includes making essential connections between the replenishment

lead time of goods, asset management, the carrying costs of inventory, future inventory price

forecasting, physical inventory, available space for inventory, demand forecasting and much

more.

By balancing these competing requirements, a company will discover their optimal inventory

levels. This is an ongoing process, as the firm will need to shift and adjust as it changes and

expands.

Planning & ForecastingPlanning is defined as The establishment of objectives, and the

formulation, evaluation and selection of the policies, strategies, tactics and action required to


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achieve them. Planning comprises long term/strategic planning and short term/operational

planning. The latter is usually for a period of up to one year.

Forecasting is an attempt to estimate the future. It is based on available past data, the

extrapolation of trends and the application of judgement. There are 3 basic models of

forecasting:

Time series analysis and projection Qualitative Techniques Casual Methods

As an operations manager, material requirement planning or demand estimation needs to be

done on a regular basis. This is to ensure that the company meets the customers requirements

within time. The plans may be short-range plans (less than 3 months) or long-range plans (over

1 year). Efficient planning will lead to reduction in costs due to sudden variations in demand.

Planning and scheduling is a popular exercise undertaken by companies that manufacture

seasonal products.

SCMSupply chain management is the management of a network of all business processes and

activities involving procurement of raw materials, manufacturing and distribution management

of finished goods. SCM is also called the art of management of providing the Right Product, At

the Right Time, Right Place and at the Right Cost to the Customer.

JITJust in time (JIT) is a production strategy that strives to improve a business return on

investment by reducing in-process inventory and associated carrying costs. The philosophy of

JIT is simple: inventory is waste & all efforts are made to eliminate waste also known as Muda.

Lean Manufacturing:Lean Manufacturing is also called Just in Time (JIT). It is based on the

principle of doing more less inventory, fewer workers, less space. It is about smoothing the flow

of material to arrive just as it is needed. So, JIT and Lean Manufacturing are used

interchangeably.


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KanbanKanban is one of the many methods through which JIT is achieved. It is a scheduling

system for lean and just-in-time (JIT) production that helps determine what to produce, when

to produce it, and how much to produce.

TQMTotal Quality Management (TQM) is a comprehensive and structured approach to

organizational management that seeks to improve the quality of products and services through

ongoing refinements in response to continuous feedback.

Kaizen- The Japanese word "Kaizen" means improvement, improvements without spending

much money, involving everyone from managers to workers, and using much common sense.

The Japanese way encourages small improvements day after day, continuously. The key aspect

of Kaizen is that it is an on-going, never-ending improvement process. It's a soft and gradual

method opposed to more usual western habits to scrap everything and start with new.

TOCTheory of Constraints (TOC) is a holistic way of thinking about a system (i.e. optimize the

system globally and not locally). Traditional cost accounting and productivity measure may

promote local optimization. TOC recognizes that the bottlenecks or constraints are present in

the system which limits system output.

Note: It is advisable to go through subjects like Industrial Engineering if taught to you. If not,

you need to know why you are interested in Operations Management, some related concepts

to your work (if relevant) and why you want to shift to a career in Operations.


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Disclaimer:The information shared is purely to help the candidates prepare for their GD/PI

process and IGNICION team shall not be held responsible for the misuse of any information

provided.

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