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Finance CIA1 - Ankita
Finance CIA1 - Ankita
2000910700007
CIA 2 – Assignment
PART-A
Answer 1
Accounting exposure is the exposure of financial statements to exchange rate. The risk that a
company may suffer a reduction in value because a change in exchange rates reduces the
value of its accounts or assets denominated in foreign currencies.
Answer 2
The forward margin is the difference between the forward rate less the spot rate, or, in the
event of a discount rate, the spot rate minus the forward rate.
Answer 3
American-style options may exercise at any time before the option expires.
Answer 4
A reporting currency is the currency in which your company prepares financial statements.
Answer 5
PART-B
Answer 6 (A)
Exchange risk refers to the losses that an international financial transaction may incur due to
currency fluctuations. It is also known as currency risk.
Transaction risk
Translation risk
Economic risk
It can be managed to make and receive payments only in your own currency. Foreign
exchange risk can be managed by spot transaction, forward exchange contract, natural hedge,
foreign currency bank account.
Answer 6 (B)
Settlement Settled at the end of maturity. No cash Daily settled. Profit/Loss are paid in cash
exchange prior to delivery date
Margin Usually, no margin money required Margins are required of all the
participants
Credit Risk There is credit risk for each party. The exchange's clearing house becomes
Hence, credit limits must be set for each the opposite side to each futures
customer. contract, thereby reducing credit risk
substantially
Example A Gold merchant make a contract to TCS Future that expire 23 June.
buy gold at the beginning of month
when Price is low, he expects that price
Will Increase then Get gold at low price
and sell them at market price
Futures are more popular than forward because Future are Standardized contract and traded on
organized exchange.
Answer 7 (A)
Forward contract: A forward contract is a customized contract between two parties to buy
or sell an asset at a specified price on a future date.
It can be executed through a customer under forward exchange contract knows in advance the
time and amount of foreign exchange to be delivered and the customer is bound by this
agreement.
PART C
Answer 9 (B)
PART A
Answer 1
Option
It is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying
asset at a specific price on or before a certain date.
Answer 2
Spread option
Spread option is a type of option that derives its value from the difference, or spread,
between the prices of two or more assets.
Answer 3
Covered call
Covered call refers to a financial transaction in which the investor selling call options owns
an equivalent amount of the underlying security.
Answer 4
Commodity bullions are where the precious metals like gold and silver are traded. Bullion
refers to physical gold and silver of high purity that is often kept in the form of bars, ingots,
or coins.
Answer 5
Commodity option
It is a contract giving the holder the right but not the obligation to buy (for a call) or sell (for
a put) a future contract on a certain stated commodity at a given strike price on or before the
expiration date.
PART- B
Answer 6 (A)
Answer 6 (B)
An unfunded line of credit is one that a bank issues to a borrower, but is not borrowed upon at the
moment it is issued. The bank or lending institution will honor any future draws upon the unfunded
line of credit, but does not need to make any money available until the moment the customer
requests it.
Answer 7(b) Options provide right and not obligation to the buyer of an option whereas
the writer is always under obligation, if buyer desires so”.
According to option contract a buyer has the right but not the obligation, to buy or sell an
underlying asset at a specific price on or before a certain date.
Answer 8(A)
X has sold a put option. You have agreed to buy 100 IBM shares for 10,000 per share if the
party on the other side of the contract chooses to excercise his or her right to sell for this
price. The option will only be exercised when the price of IBM is below Rs 10,000. Suppose
counter party exercises when the price is Rs 9000 you have to buy at Rs 10,000 shares that
are worth Rs 9000. X loss Rs 1000 per share or Rs 10,000 in total. If counter party exercises
when price is Rs 8000 per share X loses Rs 2000 per shares because he is buying at Rs
10,000, which is worth of 8000 per share
PART C
.
A letter of credit, or "credit letter," is a letter from a bank guaranteeing that a buyer's
payment to a seller will be received on time and for the correct amount.
Answer 2
Quasi credit facilities it is a type of debt, when a company incurs a liability or agree to incur
such a liability in circumstances when the director is under an obligation to reimburse the
company for the amount involved.
Answer 3
Deferred Payment Guarantee is a guarantee for a payment usually on installments which has
been deferred or postponed.
Answer 4
Risk refers to the degree of uncertainty and/or potential financial loss inherent in an
investment decision.
Answer 5
The audit of systems involves the review and evaluation of controls and computer systems, as
well as their use, efficiency, and security in the company, which processes the information.
PART B
Answer 6
Answer 7 a
Letter of credit- A letter of credit, or "credit letter," is a letter from a bank guaranteeing that
a buyer's payment to a seller will be received on time and for the correct amount.
Sight credit- The Borrower can take the lender’s funds by showing a bill of exchange and
sight letter of Credit.
Revocable & Irrevocable Credit - Revocable Letter of Credits is the one that can be revoked
or canceled by the issuing bank without prior notice to any party.
Irrevocable Letter of Credit cannot be revoked or canceled by the issuing Bank. So once the
LOC is generated, Bank will have to honor the letter.
Confirmed Credit - In this type of Credit, a bank other than the issuing Bank confirms the
Letter of Credit by adding its confirmation.
Back-to-Back Credit - Under this type of Credit, the exporter requests the Bank to offer an
LC to his/her local supplier.
The assessment LC/LG limits are fixed by banks based on annual consumption of raw
material to be purchased against LC or LG. The raw material holding in terms of
consumption is worked out as under.
Answer 7 B
Answer 8 b
In other words it is the process of pooling and repackaging of homogenous illiquid financial
assets into liquid marketable securities that can be sold to investors.
Securitizations are often structured as a sequential pay bond, paid off in a sequential
manner based on maturity.
Structure of securitization:
Securitization structures are most appropriate for a company that seeks financing but is
unable to tap funding sources for the desired tenor and funding cost because of its
perceived credit risk. In general, any asset class with relatively predictable cash flows can
be securitized.
Answer 9 A
Management Risk -Management risk is the financial risk, ethical, or otherwise associated
with ineffective, destructive, or underperforming management.
Management risk can be a factor for investors holding stock in a company. In other words
the risk associated with managing an investment fund.
As per the case management can evaluated the risk by following this process:
Answer 9 B
As per the above statement Mr. and Mrs. A thought that taking a further loan must be the
best way of tackling the situation, since it had been suggested by the bank. It hadn’t
occurred to the couple to seek advice from anyone else on other ways of dealing with their
predicament.
In our view, the bank should have made it much clearer that it was not in a position to
advise the couple about their debts. Under the Banking Code, it should also have made
them aware of organizations that were able to offer debt advice, free of charge. We were
particularly concerned about the bank’s actions in providing Mr. and Mrs. A with an
additional loan in November. It should have been perfectly clear from the bank’s knowledge
of the couple’s income and outgoings that they could not afford the repayments for this
further loan.
Mr. and Mrs. A readily agreed that they should bear some responsibility for their borrowing.