INDEX

STRATEGIC FINANCIAL MANAGEMENT

Chapter Name Page No

financial Policy and corporate strategy 2 7

8 24
Security Analysis
Security valuation 25 36

1 Portfolio Management 37 43

Mutual funds 44 50

Foreign Exchange Exposure and Risk Management 51 57

I International financial
Management 58 61

8 Interest Rate Risk Management 62 67

Corporate Valuation 68 71

1 Merger Acquisition a corporate

Restructuring 72 82

startup finance 83 99
2 Securitization 100 109

3 Risk Management 110 118

4 Derivatives n sis a valuation 119 122
 Financial Policy & Corporate Strategy

Is what are the 3 fundamental essential elements of

Business SFM
a
Clear and Realistic strategy S
b F Financial Resources and systems
c Right Management team and processes
M

I briefly the key decisions which

Discuss
fall within the

scope of financial strategy

OR
As financial strategist
a will depend on certain
you
key financial decisions Discuss
it financial Decisions with mode
deal
offinancing
min of and debt
on
equity capital capital
Ii Investment Decisions These decisions involve the

profitable utilization of firm's fund investment

deci ions
necessarily involve risk

Iii Dividend Decisions Determine the division

of
between payments to shareholders and
earnings
reinvestment in the Ampang
Iv Portfolio Decisions involve evaluation
of
inve tments
based on their contribution to the
aggregate
performance of entire corporation

13 what the functions strategic financial

are
of
Management
OR
The investment and involve
financial decisions functions
many functions explain
a continual search best investment opportunities
for
b selection
of best profitable opportunities
I Determination
of optimal mix offunds for
the opport
d
Analysis of results for future decision making
04 Explain the
strategies at different hierarchy levels
There are 3 levels of strategy

1 Corporate level strategy

It is concerned with selection
of business
Corporate level strategy should be able to answer
three basic questions
1
suitability
2
Feasibility
3
Acceptability
b Business unit Level
Strategy
It is about practical coordination of operating units
e functional Level strategy
It is related to functional business processes and value
chain like R D operations manufacturing finance
and human resources

of financial
d5 what are the components
Planning

financial Planning is the backbone of the business

and corporate
planning planning
here are 3
major components of financial Planning FR FT FG
Financial Resources FR
financial Tools Ft
financial Goals FG

Qb Financial Financial Tools and financial

Resources
Goals are outcomes
of financial Planning Do you
agree with this statement
OR

Explain the outcomes

of financial Planning
 of financial Planning
outcomes are

Financial Objectives financial objectives are to

be decided at the outset to that nest
very of
the decisions can be taken accordingly

Financial Decision making It helps in

analyzing
the financial problems that are being faced by the
corporate the course action to
accordingly of
be taken by it

Financial Measures It includes ratio analysis

cash
flow statement etc to evaluate the
analysis of
performance of the
company

07 Explain the interface financial Policy and

of
strategic management
It is based that the starting point of an
on the fact
organization
is and end point is also
money money
sources of finance and capital structure are the
most important dimensions
of strategic plan
Other important dimensions ane investment and fund
allocation decisions AND dividend
Policy
 be
Thus company cannot
a
financial policy of
worked out in isolation of other functional policies

corporate strategy is the cause and financial policy

is the effect and sometimes financial policy is
the cause and corporate strategy is the
effect

08 How financial goals can be balanced vis a vis

sustainable
growth
OR
Write short note
Balancing financial goals vis
a on

a vis sustainable Growth

OR
Discuss on vis a vis
Balancing financial goals
growth sust inable
OR
xp lain Balancing financial vis a vis sustainable growth

concept of sustainable growth can be helpful for planning

healthy corporate growth

This requires to set sales goals that are

growth
consistent with the and financial policies
operating
of the
firm
 Sustainable growth is important to enterprise
long term
development Too
fast or too slow growth will go against
enterprise growth and development

Sustainable is the maximum

growth Rate SGR of firm
a

rate
of growth in sales at given level of profits
dividend payout and debt ratios
Sar ROE x I Dividend payment Ratio

09 what makes an
organization financially sustainable
to be must have
financially sustainable
an on
organist
More than one
of income
source
more than one income
way of generating
Adequate financial systems
Good public image

010 what makes an sustainable

organisation
To be sustainable an must
organisation
have clear strategic direction
have adequate infrastructure
able to identify opportunities

get community support

 Security Analysis

91 what do mean
you by Security Analysis
It involves risk and return
systematic analysis of of
various securities
Two approaches are used for carrying out security analesis
a Fundamental Analysis
b Technical Analysis

92 Explain Fundamental Analysis FAD

It is based on adssumption that shave prices depend on
future dividends
It use Dividend Growth Model or PE Multiple Model on
their variations
for estimating fundamental price of
security
To out fundamental Analysis Some factors to
carry
be
analysed are economy wide factors industry wide
factors and company specific factors

3 Explain factors affecting economic

analysis
some the economic
of factors affecting analysis
are discussed below GM
2
Growth Rates of National Income Related Measures
 for most purposes what is
important is the diff
b w the nominal
growth
rate quoted by GDP and the
real into account
growth after taking inflation
2
Growth Rates of Industrial sector
The
growth rates in various industries are estim
ated based on the estimated demand for its products

3
Gnfation
Inflation is measured in terms of either whole
sale prices on retail prices The demand in
some industries the consumer products
particularly
industries is influenced by the
rate infl tion
significantly

4 Omonsoon
Monsoon is
of great concern to investors in the
stock market because of and
the strong forward
backward linkages

Qu Explain the various indicators that can be

used to assess the performance an
of economy
OR BAE
Discuss the various techniques used in Economic Analys

O
a
Anticipatory Surveys
an opinion about
They help investors to form
the

future state of the economy

It incorporates expert opinion on construction
act vities
expenditure on plant and machinery
levels of inventory

b DBanometer Indicator Approach

various indicators are used to find out how
the
economy
shall perform in the
future
Indicators have been classified as under
i Leading Indicators
it Roughly coincidental factors
i Indicators
Lagging

e EOconomic Model
Building Approach
seeps used in this approach are

lil
Hypothesize total economic demand
ki forecasting
individual components of GNP
Ii Add individual components of GNP to obtain total
forecasted GNP
N Compare total GNP with individual components
of
GNP
A 5 Explain factors affecting Industry Analysis
ane
Following factors
a
pusecitecycle
An industry exhibits
high profitability in the initial
medium in the
stage profitability maturity stage
and a sharp decline in last stage
of growth
b
Enderby 9k
Execs supply reduces the profitability of the
industry
while insufficient supply tends to improve the

profitability
e Barrier to
Entry
An industry with high profitability would attach
fresh investments The potential entrants to the
industry face different types of barriers to entry

d Government Attitude
The attitude of gov towards an industry is
crucial
very
06 Discuss various techniques used in
Industry
Analysis
a Investor diagnoses the
regression Analysis
factors determining the demand for output
of
the demand analysis
industry through product
factors to be considered are GNP disposable
income and per capita income

b
Input output Analysis
It reflects the flow of goods and services
the
through economy

Qt Explain the factors affecting company Analysis

a net worth and Book value

Net worth is an share capital
of equity pug
Shane capital and less intangible assets
free reserves
and losses
any canny forward of
The total net worth divided the no shares
by of
is Book value a shave
of
b Sources and uses
of funds
 the is
of funds flow analysis
one
of major uses

to find out whether the

firm has used short term
investments
sources
of funds
to
finance long term

e Size and
Ranking
A size and
rough idea regarding ranking of the
the
would investment
company help the
manager in assessing
the risk associated with the company

d Growth Record
net income and
growth in
The sales earnings per
share
of the company in past few years should be
examined

08 Discuss various techniques used in company

Analysis Dtc

it or relation
Regression Analysis
Main advantage in such the determination
analysis is
the forecasted values along with testing the
of
of the
reli bility
estimates

I rend Analysis
he relationship of one variable is tested over time using
egression analysis

O
 ii Decision Tree Analysis
Information relating to the
probability of occurrence of the

forecasted value is considered useful

09 write Technical Analysis

assumptions
the
of
Technical based
Analysis is on
following assumptions
Market value demand stock
a
of stock depends on supply of
b demand
supply and is governed by several factors
4 stock prices move in trends
generally
d Technical Analysis relies upon chant
analysis
910 the principles of Technical Analysis
Explain
Technical is based on 3 principles
Analysis
a
Market discounts everything
Technical Analysts have the view that a
generally
company's share price includes everything including
the fundamentals a
of company
b Price moves in Trends
A stock price is to continue a
more
likely a
past trend than in
move
different
dire tion
 to repeat itself
History tends
e

Technical Analysts believe that history tends to

repeat itself Technical Analysis uses chant

patterns to analyze subsequent market mover
cuts to understand trends

Qu Explain Dow Jones

Theory
It is one
of the oldest and most famous technical
theories

It is originated by Charles Dow It determines

the relative the stock market
strength of
It can also be used as a barometer of business
The movements
of market are divided into 3
classifications the primary re the
secondary daily
fluctuations

Primary movement is the main trend which lasts

from 1 year to 36 months
Secondary movement is shorter than primary movement
It lasts
from 2 weeks to a month
are movements from
Daily fluctuations
narrow

day to day
012 Explain the Elliot Theory of technical Analysis
This
theory is inspired by the Dow Theory
Ralph Elliot formulated Elliot wave
theory
It is based on 75 stock
analysis of years price movement
and chants
It defines price movements in terms of waves

wave is
movement in price in a direction resulted
a

from buying and selling impulses emerging from demand

and supply

waves can be classified into two parts

a Basic waves
Impulsive patterns
on this pattern there will be 304 5 waves given direction
in a

going upward or downward These waves shall move in the

direction the basic movement

of
b Corrective Patterns Reaction waves
These 3 waves are against the basic direction of the basic
movement

013 Explain Random walk

Theory
It is based on
following assumptions
Prices of shares in stock market can never be predicted
 Reason is that the price trends represent only statistical
expression of past data

There be periodical ups or downs in shave prices

may
but no connection can be established b w two successive

peaks high price and low price

troughs
014
Explain Chanting Techniques
OR
Technical Analysts use four types of chants for analyzing
data Explain L BJP
a Qinechat In a line chant lines are used to connect
The each penio
successive day's prices closing price for
is plotted as a point these points are joined by a

line to form a chant

I Bak Chait In this a bar represents the lowest to

the highest price with a short horizontal line representing
both the opening a the period
closing prices for
e Fapanese Candlestick chat It more visualizes the trend
as
change in
the opening a closing prices is indicated by
the color the candlestick
of
d Point and figure chant
There are more complex than line or bar chants They are

used to detect reversals in a trend for plotting a point a

figure chant decide the box size and

we have to
first
the reversal criterion

015 Explain various Market Indicators

I Breadth Index It is an index that covers all securities

traded It is computed by dividing the net advances on
declines in the market by the issues traded
no
of
It either supports or contradicts the movement of Dow Jones Averages
volumeof transactions
The volume of shares traded in the market provides useful
clues on how the market would behave in the near
future
A rising price with increasing volume would signal buy behaviour
A falling price with increasing volume signals a bear market

A rising market with decreasing volume indicates a bull market

while a falling market with decreasing volume indicates a bear
market

I confidence Inden

It is to reveal how investors to take

willing the are
supposed a

chance in the market

It is the ratio bond yields to low gradebondyields
of high grade
 It is used by market analysts as a method of trading on
the purchase on sale
timing of stock
x Odd lot theory
This is aopinion theory
theory contrary
It is used primarily to predict tops in bull markets
but also to predict reversals in individual securities

016 Explain support and Resistance Levels

I when price goes down from peak the peak becomes

resistance levels
when price rebounds from though subsequently the
lowest value is the support level

17 There are numerous price patterns documented

by Technical Analysts Explain

a Channel of uniformly changing tops and

A series
bottoms
gives rise to a channel formation

I wage A wedge is formed when the tops and

bottoms in opposite direction or when
change they
same direction at different rates
changing in
are the

over time
 c Head Shoulders It is a distorted
drawing of
a
human
form with a
large lump in the middle
of two
smaller humps

I Triangle on coil formation

his formation represents a pattern of uncertainty is difficult
to
predict which the price will break out
way
018 Explain decision using Data Analysis
Technical Analysts do simple statistical analysis of

price data using moving Average Analysis

a Arithmetic Moving Avenge AMA
b EMA
Exponential Moving Average

Buy sell signals provided by Moving Average Analysis

019 what is the difference between Buy signals a

sea signals
BOY SIGNAL SELL SIGNAL
I stock price line rise through the stock price line falls through movi
moving average line when graph of the average line when graph of the

moving average line is flattering out moving average line is flattening

out
line falls below moving stock price line rises above
stock price

line which is moving average line which is

average rising
falling
 line which is above stock price line which is
I stock price
moving average line falls
but begins slow moving line
average
to rise
again before reaching the rises but begins to fall
moving average line again before reaching the
line
moving average

020 Differentiate between and

fundamental Analysis
Technical Analysis

Fundamental Analysis Technical Analysis

By analyzing predicts future prices and

economy's
macro factors their direction using historical
such as GDP inflation data such as price move
Rate Tut rate growth rate ments
etc

Company's micro factors like

sales profit assets Iab
etc

I prices of shame discounts Price captures everything

everything

It is shout
3 It is
useful for long term useful for
team
investing investing
021 Explain the Efficient Market Theory in and what
are about this
major misconceptions theory
It is developed Fama
by Gen
It States that all available price sensitive information
is reflected in securities prices
fully
It States that no beat the market
one can Hence it
is impossible to outperform the market

Misconceptions about Efficient Market

Theory
Efficient market theory implies that market prices
include all available information
Although price tends to fluctuate they
cannot
reflect their value
fair
Inability of portfolio managers to achieve superior
performance implies that they lack competence in
efficient market
Random movement of stock prices suggests that
stock market is irrational

022 Explain the levels Market Efficiency

of
There are 3 levels of Market
Efficiency
it weak from efficiency Price reflect all information
 record
found in the
of past prices and volumes
il semi strong efficiency Price reflect not only an
information found in the record of past prices re volumes
but also all other available information
publicly
i
strong form efficiency Price reflect all available
information public as well as private

023 There are 3

types of tests to verify weak form of
Efficient Market
Theory
a
Seal Errunton Test
8 test in stock price changes one has to look
for randomness
at serial correlation Price
change in one period has to be
correlated with price change in some other period Price
changes are considered to be
serially independent
b
Retest
her a series stock price changes each price change is
of
designated if it represents an increase and
Y it
a decrease repres nts
4 fiteralestest
If price of stock increases by at least Nf buy it
the

when the price decreases at least Nf or more sell it

If the behaviour of stock price changes is random

filter rules should not apply in such a buy a hold
strategy
24 Explain the to Efficient Market Mill
challenges Theory

1 Information Inadequacy
Information is neither freely available nor rapidly trans
witted to all participants in the stock market

b
limited Information processing capabilities
Tainan information
sharply limited
are
procuring capabilities
Bottle necks of the perpetual apparatus does not admit more
than thousand bits per seconds less
possibly much

e Irrational Behaviour
It is believed that investor's
rationality will ensure a
generally
lose correspondence b w market prices intrinsic values

I Monopolistic Influence
A market is regarded as highly competitive No single buyer
on seller is supposed to have undue influence over prices
925 In efficient market technical analysis
an no
may
work
perfectly However with imperfections in effect
encies and irrationalities which characterises the
real world technical analysis be helpful Critically
may
the statement
analyse
Yes the statement is correct

Arguments for technical analysis

It helps in identifying these trends which is
early
decision
helping making

Shift in demand a
supply is gradual It helps in
deleting
this shift

Arguments against technical analysis

Technical not able to
are
offer a
convincing explanation
for tools employed
by
them

By the time trendssignaled by technical analysis

are

trends have
already taken place
 Security Valuation

01 Explain Term Structure Theories LE P

It explains the relationship b w int rates or bond
yields
and different teams or maturities
Three team structure theories are as follows

a OExpectation
theory
can be used to forecast short
hong team int rates term
int rates in the future as long term int rates are
assumed to unbiased estimator
of short term int rate in
future

bOhiquidity
Preference Theory
Asper this investors are risk averse want
theory they
a
premium for taking risk
bonds have higher int rate risk because
long team of
higher maturity hence term int rate should have
long
risk
a premium for such a

Hefeared Habitat Theory Or Market Segmentation Theory

different investors
This theory states that though as
per
be shorter a longer
may having different preference for
maturity periods a therefore they have their own preferred
habitat
 why should the duration of bon
2 a coupon
carrying
always be less than the time to its maturity
I It is average time taken by investor to collect his investment
7 If investor receives a pout of his investment over the time
on
specific intervals before maturity then the
dur tion
will be leeser than the maturity of the bond
I Higher the coupon rate lesser be the duration

03 write short notes on Zeno coupon Bonds

These bonds do not interest
pay
Zeno coupon bonds issued at discounted
are
price to
their value
face
At maturity investor will receive lump sum facevalue
Maturity dates on zero coupon bonds are
usually
long term
Zeno coupon bonds are issued by banks govt re private
sector companies

04 There are various types

of instruments of money
market Explain
It important source of finance
is
for meeting short term
requirements
al Call I Notice
Money
Call inter bank call
market
money is
on a
money
market scheduled commercial
segment of the money
banks lend or borrow on call or at short notice to

manage the day to day surpluses deficits in their

cash flows

b Bills TBS
Treasury
TBS provide a temporary outlet shout team sweepus
for
as also provide financial instruments varying shortof
term maturities to facilitate a
dynamic asset liabilities
management

c Commercial Bills
It is one which arises out of a trade transactio
genuine
i e credit transaction

d CCDs
Certificate of Deposit
CDs are team deposits accepted
negotiable
e Commercial Paper CP
CP has its origin in the financial markets
of America
and Europe It provides cheap source of funds for corporate
sector
 I Repurchase options Repo Reverse Repurchase Agreement
Reverse Repo
The term Repo Reverse Repo
type of transaction
refer to a
a

in which money market participant raises funds

by selling
securities simultaneously agreeing to repurchase the same
after a specified time re at a specified price

95 Differentiate between Repo and Reverse Repo Rate

Repo Rate Reverse Rate
It is the rate at which RBI It is the rate at which Comm
tends to commercial Banks encial Banks tend to RBI

Repo is to Purpose of Repo rate is to reduce

Purpose of fulfill
excels in the economy
deficiency of funds liquidity
It is
comparatively high Reverse repo rate is
compa
low atively
It strives to contain inflation It aims to control
money
in the
economy supply in the economy

96 Describe the salient features

of foreign Currency
convertible Bonds FCB
FCB is a bond denominated in a foreign
currency
issued an Indian company which can be converted
by
into shares of the Indian denominated in
company
Indian Rupees

Prior permission of department of economic

affairs
govt of India Ministry of finance
is required
for
heir issue

There will be a domestic and a

foreign custodian
bank involved in the issue

Tan FCB shall be as per provisions

on Indian Tan
ation haves and Tan will be deducted
of at source

07 Explain how cash I

w based
approach of valuation is
different from Income based approach re also explain
the steps involved in this approach
briefly
As opposed to Income based approaches cash flow
approach takes into account the quantum of free cos
that is available in future periods
There 5 steps involved in this approach
are

1
Arriving at the free cash flow
i forecasting cash flows
of future
I Determine the discount rate based on the cost
of capital
I finding out the terminal value
v1 finding out P V of both the free cash flows a Tv
 Derivatives Analysis and valuation

01 Differentiate between forward and future contract

Basis forward Futures

Trading Traded on personal basis Traded in a

compet tivearena

size of contract No standard size standardized quantity

on amount

organized exchange Traded in over the counter Traded on organized

market exchanges
settlement
Settlement on
agreed date Daily

02 Discuss Futures Trading Us stock trading

advantage of
OR
Reasons
for stock Inden futures is most popular financial
Derivatives over stock futures

Stock index futures add flexibility

Stock inden futures create possibility of speculative gains
Stock in den futures one cost efficient hedging device
It cannot be easily manipulated a can be settled in cash
in stock index futures
Regularity complexity is much less
93 Discuss cash settlement in Derivative contracts and
its advantage
In Cash settlement of derivative not deliver
seller
the
underlying asset but transfers the cash

Main advantage is liquid derivativ

high liquidity Also
market facilitates speculation

4 Discuss
Physical settlement in Denivate contracts and its
and disadvantage
advantage
Physical settlement means underlying assets are actually
delivered on specified delivery date

Advantage of physical settlement is that no manipulated

by both parties in the derivative contract

Disadvantage is that it is impossible to short sell a

stock

05 write a short note Market

on
Marking to
It is the process investments in securities at
ofrecording
market value on
reporting date
In derivatives trading future contracts are marked to market 0
daily basis
Mauling to market means all outstanding contracts at the end of a
rading session are repriced at the settlement price of that session
 Any loss on
profit on
repricing would be debited on credited to

the margin account

Thus futures contracts provide better risk management

06 State the assumptions Black Scholes Model

of
The the model
following assumptions accompany
European options are considered
No transaction costs

Shout team int rates are known

stocks do not
pay dividend

07 Define the team Greeks with respect to options

Greeks collection statistical values in 1 that
are
of
overall view how stock is performing
give of
These statistical values helps in deciding best options strategies
Statistics show trends based on past performance
These trends can change drastically

08 Discuss
types of commodity swaps
the

There are 2
types of commodity swaps
a
Fined Floating swaps They are like fined floating
just
ways in the int rate swap market with the exception that boh
 ndices are
commodity based indices

I commodity for Tnt Swaps are similar to the

They equity
swap in which a total return on the
commodity in question is

exchanged for some market rate

money

99 State the
advantages of commodity futures
Some advantages of commodity futures are
the
of
Easiest y cheapest to invest in commodities
way
3
major categories like Agricultural products fibres grains
food livestock Energy crude oil heating oil natural gas
and Metals aluminum silver platinum
copper gold

commodity markets
010 State the advantages
of
Some commodity markets
the are
of of
advantages
Most to
money managers prefer derivatives tangible
com odities
Less hassle etc
delivery
Allows indirect investment in real assets that could provide an

additional hedge against inflation risk

011 Characteristics commodity Derivatives

Benefits of
entain special characteristics benefits of commodity derivatives
trading are
 To complement investment in companies that use commodity
To invest in a production
country's consumption
No dividends increases
only returns from price

912
Necessary conditions commodity Derivatives
to introduce
considered crucial
The
following
attributes are
for qualifying
derivatives trade
for the
a a
commodity should be durable it should be possible to
store it
b units must be homogeneous
c the commodity must be subject to frequent price fluctuations

supply and demand must be large

I supply must flow naturally to market there must be
breakdowns in an existing pattern of forward
contracting

013 Discuss the factors value

affecting of an option
a Price Movement of the
underlying
The value of calls and puts are affected in
by changes
the stock price in a
underlying relatively straightforward
manner
when stock pricegoes up gain in value he put decrease
calls

when stockprice falls 7 Calls drop a put increases

 I
b Time till expiry
The option's future expiry at which time it become
may
worthless is
imp an a
key factor of every option
trategy Ultimately time can determine whether your option
decisions are
trading profitable

e
volatility in stock prices
be understood via a measure called statistical
volatility can
volatility or
so
for short Su is a statistical measure of
the past price movements
of the stock

d Interest Rate
Another feature which affects the value of an option is the
time value of money The greater the int rates the present
value of the future exercise price are less

14 State the uses Inden Futures

advantages of stock
Investors use stock enden
futures to change the
1 commonly
weightings or risk exposures of their investment portfolios

stock inden futures also allow investors to separate market

market selection decisions
inning from
Investors can also make money from stock in den futures through
nd en arbitrage also referred to as program
trading as it is
carried out through use of computers
I Investors often use stock inden futures to hedge the value

of their portfolios
Portfolio Management

01
Briefly explain the objectives of Management
some of the important objectives of Management are

I
security safety of Principal Amount i

Security not only involves keeping the principal same intact

but also its purchasing power

i
stability of Income
To facilitate more
accurately systematically th
planning
reinvestment or consumption of income

H
capital growth
It be attained by reinvesting in growth securities on
can

through purchase of growth securities

in nearness to
liquidity money
It is desirable the investor so as to take
for advantage of
attractive opportunities upcoming in the market
04 Briefly explain the phases
of Portfolio management
a
Security Analysis
The securities available to an investor for investment are
in number nu erous
of various types The securities are
normally classified on the basis of ownership of securities such
as equity shares pref shares debentures re bonds

b Portfolio Analysis
investment have been identified the next
securities
nee the
for
step is to combine these to form a suitable portfolio
Each Such portfolio has its own specific risk a return
char cteristics
4 Portfolio Selection
investor is to identify the efficient
The
goal of rational
a

portfolios out of the whole set of feasible portfolios

An efficient portfolio has the highest return having same
or lower risk on has the lower risk or has the lowest
risk having same or higher return

d
Portfolio Revision
Once an optimal portfolio has been constructed it becomes

investor to constantly monitor the

necessary for the

portfolio to ensure that it does not lose it optimality

 Portfolio Evaluation
e

This process is concerned with assessing the performance

of
the portfolio over a selected period of time in terms
of
return a risk it involves quantitative measurement

of actual return realized re the risk borne the portfolio

by
over the period of investment

03 assumptions of Markowitz Model

Discuss the
of Risk
Return optimization
Return summarises outcome of investment

Probability of return can be visualised

All investors are risk averse

Investors are rational

Return is suitable measure
of monetary inflows
04 Discuss the CAPM its relevant assumptions

Capital Asset Pricing Model distinguishes b w risk of holding a

single asset and holding a portfolio assets There is a

of
trade off b w risk return

CAPM is based on some assumptions

Efficient market

Rational investment goals

 Risk aversion is adhered
CAPM assumes that all assets are divisible liquid
securities face no
insolvency

05 write
of CAPM
the advantages
CAPM can be listed as
Advantages of
I Eisenadjusterern
Provides a reasonable basis for estimating the required return
on an investment which has risk in built into it

i No dividend company

t is useful in the cost a

company which
computing of equity of
does not declare dividend

06 write the CAPM

disadvantages of
a Beta
Reliability of
It not be possible to determine the cost of equity of all
may
firms using All shortcomings
CAPM that apply to Beta value
applies to CAPM too

b other Risks

By emphasing on systematic risk only unsystematic risks one

who do not possess a diversified
of importance to shareholders
portfolio
e Information Available
It is extremely obtain important information on
difficult to
risk free int rate expected return on market portfolio

07 write short note on

factors affecting decision of investment
in fined income securities
OR
selection of fined Income securities 1 Bonds
The followingfactors have to be evaluated in selecting
income avenues
fined
a Yield to
maturity The
yield to
maturity for a
fined
income rate
avenues represent the of return earned by
the investor

b Risk Of
Default To assess such risk on a bond one has
to look at the credit the bond
rating of

A Tar Shield In past fined income avenues

several
shields but at present only a
offers tore few ofthem
do so

d
Liquidity the fined income avenues can be
of
converted wholly on
substantially into
cash at a
fairly
short notice it possesses a liquidity of a high order
08 Asset Allocation strategies
Briefly explain the

a
Integrated Asset allocation under this strategy capital
market conditions investor objectives are examined re
allocation that best serves the investor's needs is determined

strategic Asset allocation this strategy optimal

under

portfolio mixes based on returns risk a co variances is

generated to restore target allocation

c under this strategy investor's

Tactical Asset allocation
risk tolerance is assumed constant se the asset allocation
conditions
changed based on expectations about capital market

d Insured Asset allocation Under this strategy risk exp

o sure
for changing portfolio values is adjusted more value
means more to take risk
ability

09 State the approaches used in valuation Real

of
estates
a salescomparison approach
1 Income Approach
c Cost
approach
1 Discounted After tan cash
flow approach
010 Characteristics that make valuation of Real Estate
complex Discuss
1
Inefficient market Information may not be freely
available as in case
of financial securities
I liquidity Real Estates are not as liquid as that of
financial instruments
31
Comparison to other properties
Approximately comparable

High Transaction cost Transaction Management

cost is quite

high

011 features of Alternative Investments

a
High fees
b Less
Transparency
e Limited historical Rate

d
is not good
liquidity
 Mutual Funds

Q1 Explain how to establish a Mutual Fund

Mutual fund is required to be registered with SEBI
before it can collect funds from public
It is established through medium of sponsor
Role of sponsor is same as promoter of company who
provides initial capital appoints trustees
body corporate in
business
sponsor should be of financial
Leewices
for minimum 5 years
Mutual
fund has to be established as Trustee company
on Trust
to be
management company is required
Asset appointed
to manage the affairs of the Mutual fund

sponsor should contribute at least not in net worth of

AMC

At least 43rd of directors of Trustee company must be

independent Also 501 of directors AMC must be

of
independent
AMC
may change Management Advisory fees from mutual
fund
Mutual fund also appoints custodian to have custody
of
securities held by mutual fund
 What in Mutual funds
2 are the
advantages of investing

a Professional Management
The funds are managed
by skilled
a
professionally exper
ineed
managers

I Diversification
Mutual funds offer diversification in portfolio which
reduces the risk

c convenient Administration
There are no administrative risks
of share transfer as
the Mutual funds offer services in a demat
many of
form which save investor's time re delay

d other Benefits
Mutual fund provide
regular withdrawal a systematic
investment plans
according to the need of the investors

93 what are the drawbacks Mutual fund

of
a
Costfactor Mutual funds a price tag While
carry when
nesting
has to pay for
one
entry load leaving he
has to pay for exit wad
b Taxes when decisions about
making your money fund
manager do not consider your personal tare situations

e sometimes the mutual fund positi

Inansferdifficulties
ons have to be closed out before a transfer can happen

liquidating a mutual fund portfolio increase risk

may
fees and commissions

d selection ofProper fund It be easier to select th

may
right share rather than the night fund In case of
mutual
funds past performance is the only criteria
to back upon but past cannot the future
fall predict
04 write a short note Exchange Traded Funds ETF
on

They were introduced in US in 1993 came to India

around 2002
It is hybrid product that combines features of index
a

mutual fund a stock and it is also called as inden

Shares
Elf can be a sold time at prices closer
bought any
to NAV
There is no paper work involved

5 Features of Exchange Traded funds

2
Benefit of investing in commodity without physically
purchasing it like gold sugar
etc

It is launched by asset management company

no need to physically store the

commodity
It combines the valuation feature und
of mutual fund Ole
investment trust

06
Briefly explain the types of ETF products available
in the market
1 Index ETFs Most ETFs are index funds that hold
securities
2 ETF ETFs invest in commodities
Commodity Commodity
Such as precious metals a futures
3
Bond ETFs invest in
Exchange traded funds that
bonds are known as Bond ETFs

4
Currency ETFs The funds are total return products
where the investor access to the FX spot change
get
local int rates a a collateral yield
07 Write a short note on Side Pocketing in Mutual
funds
It leads to separation of risky assets
from other
investments a cash holdings to make sure that
money
gets locked until fund
invested in stressed all its
recovers the
money
It is beneficial wish to hold units
for investors who

for long term

It is quite common
internationally
08 write a short note on Expense Ratio
It is the f of the assets that were spent to run a

mutual fund
It includes things like management a
advisory fees
travel costs and consultancy fees

09 what do understand Trail Commission

you by
It is the amount that a mutual fund investor pays
to his advisor each
year
The purpose this commission from the
of changing
investor is to provide incentive to the advisor to
review their customer's holdings
910 write a short note on Entry load and Exit
toad

Entry toad
It is investor purchases the
changed at the time
an
units of a scheme

load is added to the

Entry percentage prevailing NAV
at the time of allotment of units

Exitwad
It is
changed at the time of redeeming
The exit load percentage is deducted from the NAV
at the time
of redemption
011 Write a short note on Hedge Fund
A hedge fund is a lightly regulated investment fund
that escapes most a sort of a
regulations by being
private investment vehicle being offered to selected
clients

It does not reveal anything about its operations

publicly
changes
a performance fee
012 Functional classification of Mutual Funds
funds are divided into

2 Open Ended Funds In this scheme the investor can

make
entry exit at time Also the capital of the
any
fund is unlimited the redemption period is indefinite

2 Close Ended funds In this scheme the investor can

buy into the scheme during initial public offering on from

he stock market
after the units have been listed
013 the types
Briefly explain of Equity funds

theyFatthopivide term capital appreciation to

long
be investor re are best to long term investors

they ÉÉfupen
is inves
made ment
startups
for
in
normal returns
IPOs a
which
speculative
shares

thane Itf investors seeking ment income

014 State
types of Debt funds

I Bondfunds invest in fined income securities

They
bonds corporate debentures convertible
e.g govt
debentures money market

2 invested in Govern
Gittfunds They
are
mainly
ment securities

Forex
Q1 write a short note on Purchase Power
Parity
PPP
Theory
It focuses on rate relationship
inflation exchange
There are 2 PPP
forms of theory
Absolute form also called Law Price
of one

Relative form
Formula for computing forward rate
using inflation
rates is F S It in Itis

Where F forward Rate S spot Rate

in Domestic Inflation if Inflation rate in foreign
Rate currency
PPP theory States that exchange rate reflects the relative punch
asing Power of two countries
Q2 what do mean Nostro Nostro and Loro
you by
Accounts

foreign currency account maintained in foreign country

by the bank is known as Nostro Account on our

country with you

Vostro account is the local account maintained

currency
bank It is also called account with us
by foreign Your
Loro account is account wherein bank remits funds in

foreign currency to another bank credit to

for accoun

a third bank
of
93 operations in foreign exchange market are exposed
number Discuss
to a
of risks
OR
Types of foreign Exchange Exposures

ftp eyctog exchange

rate
change
on ols obligate

ons that are settled after change in exchange rate

It deals with the changes in the cashflow

This is the most common exposure all the exposures
amongst
 Into Exposurem

Also known as
accounting exposure
It means gain or loss due to translation
of foreign
assets

It anis due to the need

curr ncy
liabilities
to translate financial statements
of foreign subsidiaries

Emme Exposure
It means extent to which economic value
of company
declines due to in exchange rate
change
of economic exposure is that change in exchange
Essence

rate significantly alter the cost

of inputs re prices outputs of

04 the strategies
Briefly explain for
exposure Management
There are 4 separate strategy options which are feasible

for exposure management

I how Risk Low Reward
This strategy involves automatic hedging in
of exposures
he
forward market as soon as they arise
I Low Risk Reasonable Reward
his strategy requires selective hedging of exposures whenever
forward rates are attractive but keeping exposures open
whenever are not
they
3
High Risk Low Reward

It is the worst strategy as it leave all exposures unhed

This strategy does not involve time effort
ged any
4 High Risk High Reward
This strategy involves active trading in market
currency
through continuous cancellations re bookings
offorward
contracts

05 Differentiate between options futures

options futures
only the seller is obliged to Both the parties are obliged to
perform perform

Premium is paid by the buyer no premium is paid

by any
to the seller at inception
of party
the contract

Loss is restricted while there There is risk

for unlimited
is unlimited gain potentialfor gain loss for the futures buyer
the option buyer
 An American option contract A futures contract has to be
can be exercised time
any
honoured
by both the parties
during its period by the buyer only on the date specified

Qb Differentiate b w futures and forward contracts

Feature I forward contract futures contract
Amount Flexible Standard Amount

withest Maturity open 12 months forward

Date
werencies Traded All currencies Majors
Price fluctuations No
daily limit in many Daily price limit set
currencies by exchange
Risk Depends on counterparty minimal due to many
requirements
07 Explain Money Market Hedging its advantages
It is an agreement to exchange a certain amount of one

at
currency for a fixed amount of another
currency
a

particular date

Advantagesofmoney
Iketedging
a fines the future rate thus eliminating downside risk
exposure
b
flexibility with regard to the amount to be covered
a Money market hedges
may be feasible as a way of hed
ging for currencies where forward contracts are not
available

08
Disadvantages of Money Market Hedge
a More complicated to organise than a forward contract

b fines the future rate no opportunities to benefit from

movements in exchange rates

09 Briefly explain the techniques Rate

of Exchange forecasting

a
Ihcal Forecasting It involves the use of historical data
to predict future values

b
fundamental forecasting at is based on the fundamental
relationships b w economic variables a
exchange rates

4 Monet bed forecasting at uses market indicators to

develop forecasts

I Mixed forecasting It
refers to the use
of combination of
forecasting techniques
010 Briefly explain how a centralized cash manage
ment system helps MNCs in their manage treasury
ment
A centralized cash Mncs in
management system helps
their treasury management as follows
a
To maintain minimum cash balance during the
year
ITo aid the centre to mani mum returns by
generate
nesting all cash resources optimally
e Tomake manimum utilization of transfer
pricing mechanism
so that the fume enhances its and
profitability growth
d To the centre
manage liquidity requirements of
911 There exists a vast difference between Project a Parent
what
Briefly discuss
cash flow are these factors
Answer
 International Financial Management

A1 complexities involved in International capital Bud

geting
Factors which a ane comply
affect foreign project
in nature than domestic projects are

cash flows from foreign projects have to be converted

into
currency of parent organization
Parent cash flows are
quite different from project
cash
flow
Profits remitted are subject to tan in both home
re host
country
Foreign exchange risk in cash flow
Political Risk

02 write a short note on Instruments

of Internat
ion al Finance

Foreign currency convertible Bonds FCCBs

 A type of convertible bond issued in
currency
different than issuer's domestic
currency
American Depository Receipts ADRs
issued company in USA is
Depository Receipts by
known as ADRs

ADR is created by depositing securities United

of nonCustodian
States with a custodian bank
company
bank informs the depository in US that ADRs can
be issued

Global Depository Receipts GDR

Most GDR are denominated in USD Euro Pound

stealing
Depository
Receipts issued in us are called ADRs
outside of USA these are called GDR

Euro convertible Bonds ECB

A convertible bond denominated in two which gives
holders
of bond an option to convent into a
fin no
of equity
shares
of the company

Other Sources
Eww Bonds
 Euro bonds with equity warrants
Syndicated bank loans
foreign Bonds
Grew Commercial Paper
Credit Instruments

03 what is the impact of GDR on Indian capital

market
Indian stock market is to
shifting from Bombay
Luxemburg
There is arbitrage possibility in GDR
Indian stock market is no longer independent from res
of the world
Indian retail investors are
completely sidelined

04 write the characteristics of GDR

1 Holders GDR participate in the economic benefits
of
shareholders
of being ordinary
Ii The instrument are freely traded
in ADRs are listed on the Luxemburg stock exchange

v1 Trading takes place between professional market

makers on an OTC over the counter basis
05 Netting helps in minimising the total volume of inter
company fund flow Explain
It is technique of optimising cash flow movements
a
with the combined efforts of the subsidiaries thereby
costs
reducing administrative
re transaction

Adu
tages dfometting systemics
It reduces the no of cross border transactions
bw subsidiaries

It reduces the need

for foreign exchange convex
sion a hence decreases transaction costs

Improves cash
flow forecasting since net cash
made at the end each period
transfers are
of
Gives an accurate report and settles accounts
co ordinated efforts all subsidiaries
through among
 Interest Rate Risk Management
Q1 write a short note on forward Agreements
FRA is between parties through which
two
agreement
borrower lender protects itself from changes to int
rate
are main features FRA
Following of
Used to
fin int costs
off balance sheet instruments
Settled at maturity in cash
1 Of LIBOR FR the seller owes the payment to the
if LIBOR CFR the owes the seller
buyer buyer
1 Differential amount is discounted at actual int
rate as it is settled in not at
beginning of the period

Q2 State the uses

of swaptions
It is tool
a
useful for hedging
It is used for speculation or
hedging
1 It is useful to target acceptable borrowing rate
It provide protection on collable
I putt able bond
03 write the Principal features of Swaptions
2
Swpation is option on
forward start IRS
2 option period means time between transaction date re

expiry date
I swap ti on premium is expressed as basis points

I Swaptions can be cash settled

Qu what do you understand by Interest Rate swaptions

I It is an option on interest rate swap
1 It gives holder the right to enter in interest rate
swap at specific date in future at fined rate
for specified team
There are 2
types of swaption contracts
a
fined rate payer swaption
owner the
night to enter in swap
gives of swaption
where
they pay fined leg receive
floating leg
b rate receiver
fined swaption
the to enter in swap in
gives owner
of swaption night
which will receive fined leg re
pay floating leg
they
5
Briefly explain the types of swap
a
Placenta w Also called
generic swap on
it involves the exchange
coupon swap re of a fined
rate loan to a floating rate loan over a period of time
 that too on notional principal

b Biases Also called non generic swap

me in
Similar to plain vanilla swap with the difference that
payments is based on the difference b w two different
variable rates

a
Asst swath It is the
exchange fined rate
investments
such as bonds which a coupon rate with
pay guaranteed
floating rate investments such as an inden

d Amelining Gap An int rate swap in which the

notional the interest payments declines
principal for
the
during the
life of swap

06 characteristics
of fined I floating swap
la fined interest rate
I a variable or floating int rate which is periodically reset
I a notional principal amount upon which total int
pay
ments are based

I the team of the agreement

07 What do understand cheapest to Deliver in

you by
context of Interest Rate Futures
 CTD is the bond that minimizes difference b w spot
price bond
of futures settlement price
It is called CTD bond because it is least expensive

profit of seven
of futures
futures settlement price x Conversionfactor spotpriceBond
I boss of seller
of futures
C spotpricebond futures settlement price x conversion factor
CTD bond means which maximizes the or mi
profit
nimizes the loss

08 Explain conversion factor in content

of Interest Rate
futures
All the deliverable bonds have different maturities
coupon rates
To make them comparable to each other also
with the notional bond RBI introduced conversion for
for
conversion factor x future price actual
delivery price
for a
given
bond
deliverable
 NOTE

09 write a short note on Asset and

liability Management
ALM
I ALM is one
of the important tools of risk management in
commercial banks of India
I Indian Banking industry is exposed to a no risks
of
prevailing in the market
1 It is a comprehensive dynamic framework for
me suring
monitoring re managing the market risk
of
risk
a ban

1 The Alm functions extend to liquidity

management manag
market
of ment risk trading risk
and
management profit planning

010 what is net interest position Risk and price Risk

 Meteresthitionfisk
where banks have more
canning assets than paying liabilities
ht rate risk arises when the market into rate adjust down w
auds

I Thus banks with positive net into positions will experience

a reduction in NIL as the market int rate declines
increases when into rate rises

Puicefisk
Price risk occurs when assets are sold before their stated
maturities
It is closely associated with the book which is
trading
created formaking profit out of short term movements in
interest rates

911 what is Yield curve Risk and Reinvestment Risk

Yield Curve Risk

a no win

4 The movements in yield curve are rather frequent when th

business cycles
economy moves through
Banks should evaluate the movement in yield awes se th
m
pact of that on the portfolio values a income

InvetmentRisk
Uncertainity with regard to int rate at which the future cash
 lows could be reinvested is called reinvestment risk

Corporate Valuation

A1 Differentiate between EVA and MVA

Economic Value Added EVA Market value Added MUA

St means economic contribution It means current market
value
of company to society
of the firm minus
in ested
capital

core concept behind EVA is that It is alternative to

gauge
way
company generates value only
relurs are in excess cost
if performance efficiencies of
enter
of of prise
capital invested

EVA is a derived value Mu A is true value

added added

Negative Eva means is not

co

generating value from the funds

invested
Positive Eva shows co is produci
invested
ng value from funds
Objective is to show management

efficiency in generating returns

formula is
NOPAT Invested capital X W Acc

NO PAT capital change

Net operating
profit after tan
EBM tan expense

Q2 Relative valuation is the method to aweive at a

relative value
using
a companitive analysis to its
peer to similar enterprises Elaborate this statement

Financial valuation also to

Analysts
are
using relative
validate the intrinsic value
1 It is also referred as valuation by multiples because
it uses financial ratios to derive at the multiples then
compare those with comparable firms
Thus we canconclude that Relative valuation is
comp rative
driven approach that assumes that value of similar
firms is a
good indicator of value of our
firm
3 write the assumptions inherent to Relative valuatio
Model
 Market is efficient
function between fundamentals re multiples are linear
Comparable firms are similar to structure risk

growth pattern

4 write the steps for Relative valuation

I find out drivers that will be best representative

for
deriving at the multiple
Determine results based on drivers through financial
ratios
find out comparable firms re perform comparative aura
yeis
Iterate the value
of the
firm obtained
05 write a shout note on shareholder value Analysis

SUA tweaks the value analysis

by considering certain
drivers that can expand the horizon
of value creation
key drivers considered are earnings investment
oppor unities
following steps are involved in SVA computations
Arrive at future cash flows value drivers
by using
Discount these FCF using w Acc
I Add terminal value to present value computed in
step b
I Add market value core assets
of non

I Reduce value of debt

from result of step d to arrive
at value
of equity
06 write a short note chop shop Method
on

This approach an attempt is made to buy assets below

their replacement value
involves following steps
1This approach

steps Identify the firm's various business segments re

calculate the average capitalisation ratios
forfirms in
those industries

Stefan calculate a theoretical market value based upon

each the ratios
of average capitalization

Stefan Average the theoretical market value to determe

the chop shop value the
of firm
 Merger & Acquisition

A Briefly explain the types forms of Mergers

a
horizon henge
when two companies which have merged one in the Same

industry
It creates monopoly to avoid competition

b
real Mega
when two companies that have buyer seller relation
ship come
together

4 Engenerate Mingus
such involve firms engaged in unrelated type
mergers
of business operations

Congeneric
r un Menger
r un
are
mergers acquirer
In these
target companies
related through basic technologies production processes
on markets

1
Reese Magee
co
mergers involve acquisition of public by private
Such
f Agenition
This to purchase interest by lo
refers of controlling one

in shame capital of an
existing company

2
Explain synergy in the content of Mergers and
Acquisitions
means V AB U A T V B
Synergy
combined value shall be more
of two firms than
their individual value
is the increase in performance
Synergy of combine
irm due to complimentary services
scale is also
Economies
of large one the reasons
for
synergy benefits because large
scale
production results
in lower average cost of production
Other factors
for
synergies are as follows
Diversification
Tarnation
Growth
Consolidation
of
Production capacities increasing market
power

03 What is an curve out How does it differ

equity
from a
spin off
EQUITY CARVE OUT
 This is like spin off However the
market So this
some shares
of
new co are sold in brings cash

Companies are come outs to boost sh

using equity
alee holder value
Carve out is a
strategic avenue a
parent firm may
take when one
of its subsidiaries is faster
growing
carrying higher valuations than other businesses
owned the parent
by
New legal entity of carve out has separate board
0th firms have common shareholders

SPIN off
A part of business is separated a created as a

separate firm
shareholders
Existing get proportionate ownership
So there is no
change in ownership
does not cash
Spin off being fresh
The reasons
of spin off may be
Separate identity of division
To avoid the takeover
To create a
separate Regulated unregulated
lines business
of
Qu LBO
Leveraged Buyout
Acquisition which is financed
of company
as
on

leveraged
entir
partially using
buyer
ty borrowed funds is teamed

Target company no longer remains public after ten

hence the transaction is also
eraged buyout
known as going private

95 what is the purpose of Leveraged Buy out

Intention behind LBO is to improve the operational

efficiency of firm by increasing the cash
flow of
This extra will need
the firm cash
flow be
debt in L B 0
to
pay back the

LBO is
After target entity managed by pain
ate investors

LBO do not
stay permanent once debt is paid
it will
go public again
06 write a short note on
Management Buyouts
MBO
Buyouts initiated by the
management team of
are
C mpany
known as
management buyout

In this type of acquisition is bought

company
by its
own
management team

It is a
useful strategy for exiting from divisions
business enti
that do not
form part of core
of
07 A number
target company can adopt a of
tactics takeover
to defend itself
from hostile
a tender offer Explain
through
Divestiture The co divests or spins
target
off some of its businesses in the form of
an

independent subsidiary company

Crown jewels when a uses the
target
is
company
to
said
tactic of divestiture it
sell the
crown
jewels
Poison Pill The tactics used the
by acquiring
to make unattractive to a
company itself potential
bidder is called poison pills
 Poison Put In this target company issue bonds
case the

that encourage holder to cash in at higher prices

Greenmail incentive offered by

It refers to an
the
target company to
the potential
management of
bidder for not pursuing the takeover

White knight In this to be

a
target company offers
acquired by to escape a hostile
from
a
friendly company
takeover

Golden parachutes when a

company offers hefty
compensations to its managers if they get ousted due
to takeover the is said to offer golden
company
parachutes

Pac defense This strategy aims at the target

man

company making
a counter bid
for the acquired
company

08 the takeover
Briefly explain strategies
a This to technique where
StetSweep refers the
the accumulates no
acquiring company longer of
hares in a
target before making an open offer
I Bung
when the
acquirer threatens the tan

get company to
make an open
offer the board
settlement with the
of target company agrees to
a

acquirer for change of control

Alliance This involves disarming the

c
Strategic
acquired by offering
a
partnership rather than a

buyout

this refers to
entering into an
g Beaked
Leep woeful brands to displace the
brands and as a
target's
result
buyout the
weekend
company
09 takeover Bid
by Reverse
the
Briefly explain
On Reverse
Merger
In case the taken over is
ordinary company
smaller
company
Ju reverse takeover smaller
company gains contro
one
of larger
Three tests should be fulfilled before an
arrange
ment can be teamed as reverse takeover
Assets
of transferor one
greater than transferee
 issued
Equity capital by transferee for acquisition
exceeds its original issued capital
control in transferee
Change of
It is also known as back door
listing
It is alternative to public issue without incurring
huge expenses a cumbersome process
It has following benefits for acquiring company
Easy access to capital market
Increase in visibility of company in corporate world

Tare benefits losses

carry forward
on

Cheapen a easier route to become public company

010 which issues are addressed under
financial
Evaluation 9
a what is the maximum price that should be
the
for target company
b what Risk
are the
principal areas
of
c What are the cash balance sheet
flow re

of theimpl cations
acquisition
I what is the best
way of structuring the acquisition
911 Rationale and Acquisitions
for Mogens
Oru
Explain the reasons
for Mergers Acquisition
Synergistic operating economics Synergy may be defined
as V AB U A U B
follows
The combined value two on companies shall
of firms
be more than their individual value
synergy

Diversification In case between two

of merger
unrelated companies would lead to reduction in
business risk which in turn will increase the market
value consequent upon the reduction in discount rate
required rate of return

I
of losses as
per Income Tan Act
may
be
i
another

Growth Merger Acquisition mode enables the firm

to grow at a rate faster than the other mode viz

organic growth
Consolidation Production capacities
market
of re
increasing
power
912 Explain different forms of divestitures

a
013 unrelated companies came
together to form
an
entity
what this relationship is called Discuss the
briefly
this entity
features of
Such relationship is called conglomerate
merger

Emre
al There are no important common factors between the
companies in production marketing R D
b Such
mergers are unification of different kinds of
businesses under one
flagship company
e
Purpose of merger remains utilization of financial
recoveries and
synergy of managerial
functions
 Startup Finance
91 innovative for
Explain some
of the sources
a stout up
funding
lil Personal Financing This is important because most
the investors will not put into a deal
of money if
they see that you have not contributed any money
from your personal sources

Iii Personal credit lines

qualifies for personal
one
credit line based on one's personal credit efforts
Banks provide credit cards facility when the
only
business has enough cash
flow to repay the line of
credit

it and friends These are the people who

Family gener
believe in
ally you
However loan
obligations to friends relatives shout
be in
writing as promissory note
a
always
iv Peen to In this process
peer lending group of
people come together lend to each other
money
small and ethnic business
Many
sim lar
groups having
interest generally support each other in their
 p
start ups

v1 It is the use small amounts

Crowdfunding of of
capital from a large no of individuals to finance a
new business initiative

Vi Microloans are swell loans that are

They given
lower interest to new business
by individuals at a a

ventures

vill in which
financing It is the form of financing
vendor
a lends to one of its customers so
company money
that he can
products the its e
buy from company

Viii Purchase order

financing The most common scaling
problem faced by startups is the inability to find a lag
new order Purchase order
financing companies often
advance the required funds directly to the supplier
This allows transaction
the completion
of profit
flows up to the new business

villi accounts receivables In this method a

factoring
is to the seller who has sold the
facility given good
credit to his receivables till the is
on
fund www.it
 that meet his
fully received to a
startup can
day
day expenses
to

02 what are the

priorities and challenges which
start ups in India are
facing

The is on more more smaller

priority bringing
irms into existence So the focus is on need based
instead opportunity based entrepreneurship
of

Main challenge with the startup firms is getting the

right talent Further startups had to comply with
cost
numerous
regulations which escalate its

A 3 Explain the start up and

difference between a

entrepreneurship

Startup Entrepreneurship
It is a
part of enterprenen It is broader concept
rship

Main aim is to conceptualise Main aim is to attain

the idea which it has deve opportunities
loped
Entrepreneurship concern
Started does not have
major financial motive operates on
financial
motive

04 what do
you
mean
by Pitch Presentation in
content stout up business
of
Pitch presentation is a shout and brief presentation
to investors about prospects the company and
of why they
should invest into the startup business

It be made to online
can
during face face meetings on

meetings
Methods on how to approach a
pitch presentation
Introduction first step is to account of
give a
brief
Melfi nteroduction should be short and sweet

Team Next step is to introduce the audience the

people behind the scenes Investors are not putting
towards the idea but are also in
money they investing
the team

Problem The promoter should be able to explain the

emblem he is to solve Investors should be
going
that the con inced
newly introduced product or service
will solve the problem

Solution It is very important to describe in the pitch

presentation as to how the company is planning to
solve the problem

salt The market size of the product must be

Muang
communicated to the investors This can include profiles of
target customers
but one should explain how the promo
ter is to attract the customers
planning
If business is
already selling goods the promoter can

also belief the investors about

growth

Projections or Milestones Projected financial statements

can be prepared which idea
gives an organization a brief
about where is the business
heading

Financial Projections include 3 basic documents that

make up a business's financial statements

Income statement
Cash flow statement
Balance sheet
 Competition business
Every organization has to face
competition even if the product or service offered is
a unique It is to
necessary to highlight as
new

how the products or services are different from the

competitors

Business Model It includes business

core aspects of a

business purpose customers

purpose target strategies
and policies culture
including

Finance a
Ifstartup business firm has raised money it
is preferable to talk about how much
money has already
been raised who invested into the business
has been raised till date
If no
money
an
explanation
an be made how much work has been comple
regarding
ed with minimum funding

95 what the advantages

are venture capital
of bringing
in the company

It injects term
long equity finance
venture capitalist is a business partner
shaving both
the risks and rewards
Venture capitalist also has network contacts
a
of
 cape of
also a trade sale
They
can
facilitate
write the stages
as
OR
for funding for venture
capital
on a venture capitalist while the risk is different in each
stage of financing so the risk Perception a activity to be
Explain the statement fina ced
Seed Money how level
financing
stand up Early stage funding for expenses

First Round sales and

Early manufacturing funds
Second Round
working capital
Third Round Also called Mezzanine financing this
is expansion
money
Fourth Round bridge financing
Also called to fin
once the
going public process

07 Write a short note on venture capital funds

venture capital funds made available for startupfirms
and small businesses
Venture capital is who
money provided by professionals
 invest in rapidly growing companies

venture capitalists purchase securities

generally equity

venture capitalists assist in development new products

of
or services and add value to the
company through
active participation

081
Briefly explain
the structure
of venture capital
in India
fund
Three main types of fund structure enist one
for
domestic funds a two
for offshore ones
d Domestic funds

Domestic vehicle
investor
for the pooling of funds from the

a separate investment adviser that carries those

duties asset
of manager
b alternatives available
offshore funds Two common
to offshore investors are

OFFSHORE STRUCTURE UNIFIED STRUCTURE

under this structure an when domestic investors ane
n vestment vehicle makes expected to participate in the
investments directly into fund a unified structure is
Indian used
portfolio companies
A9 What are the basic characteristics venture capital
of financing
Of
Venture capital financing is a uniqueway of financing a start
up Discuss
1 Time horizon The fund would invest with a
Long long
time horizon in mind

i
of liquidity when ve invests
Lack it takes into
account the
liquidity factor

in High Risk ve would not hesitate to take risk It

works on principle of high risk and high return

Equity Participation Most of the time ve would be

This
investing in
a
the
form of equity of company
would help the ve participate in the management and
help the company
grow
910
capital Investment
the venture Process
Briefly explain
The entire ve investment process can be
segregated into
the following steps

Deal origination VC operates directly on

through
 intermediaries Here would
give a detailed
company
bus ness
plan which consists of business model financial plan
and exit plan

I screening once the deal is sourced the same would be

sent for screening
by the
ve once
screening happens it
would select the company
for further processing

3
Due Diligence VC would now carry out due diligence
his is mainly the process by which the ve would to
try are
the documents taken
paid the VC
ver fy fees of due diligence gen
rally by
4 Deal Now the case the deal
structuring go through
is structured in a that both parties
structuring It way
win In structures to facilitate the emit the UC
many may
put a condition that promoter has to sell part of its
stake with the ve Such a clause is called
along tag
along clause

5 Post Investment Activity VC nominates its nominee in

the board of the company If milestone has not been met
the has to explanation to the ve
company give
6 Exit Plan At the time of investing the Vc would ask th
 uomo ter or
company
to spell out in detail the exit plan
911
Briefly explain the modes of financing for stout ups

Ingelonvestors

They invest in small startups

Angel Investors are enterpreneur's family n

friends
Angel Investors provide more favorable terms compared
to other lenders

are alto called informal investors angel funders

They
private investors on
business
angels
They use their own money

Bootstrapping
Individual is said to be
bootstrapping when he builds a

company from personal finances

or
from operating revenues

of the new company

Investment in startup from their own savings leads to
cautious approach

some the methods in which

of a
startup firm can bootstrap
a
Ide credit when a person is starting his business
suppliers are give trade credit A way out
reluctant to
in this situation is to prepare a well crafted financial
plan next step is to pay a visit to supplier's office a
convinced about the financial plan

b
This is accounts
Encing a
financing method where

organization is sold
receivable a business to a
of
commercial finance company to raise capital
The factor then accounts receivable
got hold of
a
of
usiness re assumes the task
organization of collecting
the receivables as well as paperwork

c Another method is to take the equipment on

Lying reduce
lease rather than
purchasing it It will the cap
ital cost re also help lessee to claim tare exemption
012 Explain startup India Initiative
OR
Explain the conditions that need to be met for considering
an entity to be called as a startup

India scheme initiated

Startup was
by the
gov
of India on 16th of January 2016

startup means an
entity
 date
upto yes from incorporation
10 Ty is registered
it
as a
private limited company on partnership firm or
LLP in India

Turnover
for any financial years since incorporation not ex
ceded 100 crore rupees

working towards innovation development deployment of

new
products processes on services

Entity should not be formed by splitting up or

reconst uction
ceases to be
Entity startup if its turnover exceeded E 100m
or it has completed co date
yrs from incorporation
Startup is eligible for tax benefits only after obtaining
certificate from Tuten Ministerial Board

013 Explain the term Cyber Risk

Cyber Risk can be defined as the risk of damages due
to lawsuits compensation on account a victim
of being
attack due to which data customers or
of cyber of
other counter panty can be leaked to an
any
entity una thorized
014 Describe the guidelines of SME re its benefits
listing
i
capital Post issue face value capital should not
exceed 25m

Iii Erecting size

Minimum application and lot size shall
trading
not be less than 10000

Minimum depth shall be 100000 and at point

time it shall not be less than 100000 any
of
Investors with less than 100000 shall be
holding
allowed to their offer to the market value
holding
in one lot

iii The members

Rci pants existing of
the
exchange
shall be
eligible to participate in SME
Platform
in The issues shall be 1001 under w ri
Hen and
Keeling
Merchant Bankers shall underwrite 151
in their own account

Benitezofminting insane
it Easy to capital BSE SME
access provides an avenue
to raise capital through equity infusion for growth
oriented SME's

I Enhanced and
Prestige The SME's benefit by
visibility
greater credibility and enhanced financial status leading
to demand in the company's shares a higher valuation

of the company
Ii
Encourages Growth of SMEs Equity financing provides
growth opportunities like expansion mergers
a acquisi
tions thus being a cost effective re tan efficient
mode

it Ensures Tan Benefits In case

of listed securities shout
team tan is 151 re there is absolutely no long
gains
term capital gains tax

915 hist Medium

arrange finance for
the to small
ways
Enterprises OR
Describe the process in the
MS ME
for arrangement of finance
case of
Need
for finance can be classified into following types
hong
and medium term loans
Shout team on working capital requirements
Risk capital
 Seed capital Marginal Money
a loans
Bridge

Banks also finance team loans This type of financing is needed

to fund purchase land construction of factory
of building
The short term loans are
required for working capital
requirements The commercial banks also sanction comp
osite won
comprising of working capital a team loan up
to a loan limit of 2 1a

For loans commercial

from financial institutions and
banks application needs to be made A
a
formal
its
sanction or rejection is issued bank
by after assess
ment
of the application

After receiving a sanction letter applicants need to indic

ate in conditions
writing their acceptance of terms
laid down by FI Banks

016 can a with no commercial operations

company
raise capital via an IPO Discuss
 Securitization
Q1 Explain Securitization Process
It involves creation
of pool of assets from illiquid
assets such finreceivables
as ncial or loans which are

marketable
 In other wordsit is process
of repackaging illiquid
assets into marketable securities

A 2 Differentiate between PTS and PIC

PICS PTS
the entire To overcome the limitation
Originator transfers
in there is another
receipt
of cash the form of of pics
interest on principal repaym structure i e Pts
cut
from the assets sold

It is a direct route Spu debt securities are

any
prepayment of principal is backed the assets and
by
also proportionately distrib hence it restructure diff
can

uted securities event tranches

among the
holders

Skewness cash flows occurs It also provides the freedom

of
in principals to issue several debt tran
early stage y
are
repaid before scheduled ches with
varying mature
time ties

93
Explain the pricing of securitized Instruments
 Price should be acceptable to both originators and
investors

Pricing of securities can be divided into two

following
categories

from originator's Angle

Instruments can be priced at a rate at which origi
nator has to incur an
outflow

From Investor's Angle

from Investor's Angle security price can be determined

by discounting best estimate expected future cash flow
of
to
using rate
of yield maturity of a security of compare
ble security with respect to credit quality average
life of the securities

04 write a short note on stripped securities

These are created cash flows of underlying
by dividing
securities into two or more new securities
Two securities are as follows
Interest only lo securities
Principle only Po securities
As each investor receives a combination of principal a
int it can be stripped into it Principal
 10 securities receives
The holder of only interest while
Po security holder receives only principal

If yield to maturity rises Po price tends to fall

In contrast value
of Io's securities increases when
interest rate goes up
5
Briefly explain the benefits of securitization
OR
while pricing securitized instruments it is important that it shouldbe
acceptable to both originators as well as to investors Explain
Enron theangle of originator
a
Off Balance sheet financing off Balance sheet financing

leading
to improved liquidity position which helps in
business
expanding
the
of the company
b more specialization in main business
By transferring
the assets the entity could concentrate more on core
business as
servicing of loan is transferred to Spu

e
Helps to improve financial ratios in case
Especially
of financial Institutions and Banks it helps manage
to

capital to weighted asset ratio effectively

I Reduced
borrowing
cost securitized papers can also be
issued at reduced rate as of debts a hence originator
earns a spread resulting in reduced cost of borrowings
 Fromme
themanglef Investor
a Risk Purchase of securities backed
Diversification of by
different types of assets provides the diversification of
portfolio resulting in reduction of risk

I Regulatory requirement Acquisition of asset backed

belonging to
a
particular industry helps banks to meet
requirement
re ulatory
e Protection against default In case of recourse
if
originator
arra gement
there is
shall
any default by any third party then
make
good the least amount
06
Briefly explain
the
features of securitization
OR
Secunitisation is the process of repackaging or re bundling of
illiquid into marketable securities Explain
when all assets are combined
Bundling Unbundling
in one
pool it is bundling when these are broken into
instruments it is
unbundling
Tool of risk Management Securitization process acts
as risk management as the risk of default is shifted

Trenching Portfolio of different receivable or loan on

asset ane into several parts based on risk return
split
called Tranche
they

Homogeneity Under each tranche the securities issued

nature
one
of homogenous

97 what are the main problems faced in securitisation

especially in Indian content

StampLuty
Under Transfer of Property Act 1882 a
mortgage debt
stamp duty which even goes upto 121 in some states of
of India
In India recognizing the special nature of securitized
instruments in some States has reduced the stamp
duty
on them

Tarnation
In absence
of any specific provision relating to securized
instruments in Income Tan Act expert's opinion differ a
lot

Accounting It is another area

of concernAlthough
securitization is slated to be an off balance sheet instrument
 but removed
actually receivables are
from originator's
balancesheet

Latif Laudization
Every originator following
his own format for document ate
administration lack
on
having of standardization
08 Discuss the steps in securitization mechanism

I free of foolofassets
Process of securitization begins with creation of pool of assets
assets in terms of int rate risk and
y segregation of
maturity

I
Immersesee
nee assets have been pooled are transferred to special
they
purpose vehicle Spu especially created for
this purpose

ii
seed
sentizedPape s based
Pv designs the instruments on nature
of int risk
tenure etc based on pool of assets
These instruments can be Pass or
Through Security Pay
Through Certificates
G Administrant
of assets in subcontracted back originator
The administration to
which collects principal and interest from underlying assets
and transfer it to SPU

Renee toriginator
Performance of securitized papers depends on the performance of
underlying assets

09 Discuss about the

Primary Participants in the
process securitization
of
11 Originator It is the initiator deal or can be
of
termed as securitized
It is
entity which sells the assets lying in its
an
books and receives the funds
generated through the
sale of assets

Iii Special Purposevehicle Also called Spu it is created

for the purpose of executing the deal Originator

legal title of these
holds the assets
Main objective of cheating Spr is to remove the ant
from the Balance sheet of originator
 Ii The Investors Investors are the buyers of securiti
zed papers which be an individual
inst tutional
an
may
investor such as mutual funds Pfs etc

010 Describe various securitization instruments

securitized Instruments can be divided into following 3

categories
Pass Throng certificates PTCs

Pay Through Security Pls

Stripped securities

011 Explain securitization in India

It is the Citi Bank who introduce the concept
of securitization
in India by auto loans in securitized instruments
bundling of

In order to out
encourage securitization the government has come
of financial
with securitization a Reconstruction Assets a
enfor
cement SARFAEst Act 2002
of
It has become an
important source
of funding for micro
inane companies

Important highlight of the scenario of securitization in

Indian market is that it is denominated by few players
e g HDFC Bank 144 Bank
 12 Besides the participants other parties are ads
primary
involved in the process secunitisation Explain
of
I Ebligors They are main source
of whole securitisation

process They are the panties who owe money to the firm
and are assets in the Balance sheet originator of
i since the securitization is based on
Berg Agency
the pools assets rather than the originators the
of
assets have to be assessed in terms its credit
of quality
and credit support available

agent RPA
ii Also called service
Receiving and Paying
or distrait Coutts
paymtut due from obligor s
and passes it to SPU

A Agentortrustee Trustees are appointed to oversee that

all panties to the deal
perform in the true spirit of
teams of agreement

013 Describe the characteristics

of financial Instruments
a It provide
hindity liquidity These can be easily a
quickly converted
into cash
b It facilitate easy the market
Marketing trading on
e
Lumenal it It can be pledged
for getting loans
d It involve buying a selling cost The buying
Extinct
a selling costs are called transaction cost

014 Explain the team Business Model with illustration

Answer

915 Explain briefly the concept of credit rating

Credit Rating is
t
An expression of opinion
of a rating agency
1 The opinion is in to a debt instrument
regard
7 The opinion is as on a specific date
The opinion is dependent on risk evaluation
 Risk Management
1
Describe value at Risk and its application
OR
Explain the significance VAR
of
VAR can be applied
to measure maximum possible loss
to limits individuals dealing
fin for
to decide trading strategies
as tool
for Asset and liability Management
021 The financial Risk can be viewed
from different
Explain pers ective
OR

Explain financial risk from the point of view of stakeholder

company and the government

From stakeholder's point

of view
Major stakeholders of a business are equity shareholders
they view financial gearing as risk since in event of
least prioritized
winding up of company they will be
a

From Company's point view

of
view
company borrows
a excess
mom
Ivel
company's point of if
y ou lend to someone who defaults then it can be
forced to go into liquidation

from Government's point of view

from government's point of view the financial risk can
be viewed as failure of any bank or
any financial
leading inspread
to titution
of distrust among society
at

large
3 value at Risk
Explain the features of UAR

a 3 components
components of calculations
Time Period
Confidence Level a 99 t
generally 951
Loss in percentage or in amount

b Statistical Method
It is tool based
a
type of statistical
on standard deviation

4 Time Horizon VAR can be applied for different time

horizons say one one week one month so on
day
I Z score it indicates how
many
standard deviation

away from
mean
Ou and
Briefly explain counter party risk the
various techniques to this risk
manage
Hints counter risk are as follows
of party
failure to obtain
necessary resources

Regulatory restrictions from government

Let down
by
third part
Become Insolvent

Techniques to manage this risk are as follows

Know exposure limits
your
Rapid action in case of defaults
use guarantee
carry
out Due Diligence before
dealing with third party
5 Explain some of the parameters to identify the cure
Risk
ency

it Goenment Aeon The has

govt action of any country
visual impact in its currency

I Eton Rate Purchasing Power parity theory impact

the value
of currency
 Any natural calamity can have
agile calamities
v1 Change
of government The change of government and
its Tattitude Io
Tdfreign investment also helps to
identify the risk
currency
A6 How should
company assess political risk and how
this risk can be identified
OR
Explain how an interested in
in inves mentscountry
organisation
foreign country can assess
making
risk a
mitigate the risk
from the following actions by
the
government of the
host country this risk can be identified

Insistence on resident investors or labour

Restriction on conversion
Price
of currency
fixation of the products
Expropriation of foreign assets by
the local govt

Techniques can be used to mitigate the risk

Local sourcing of raw materials and labour
local
financing
 Prior negotiations
into ventures
Entering joint
should
company assess
country risk
By referring political ranking published by different
business magazines

By evaluating country's macro economic conditions

By analysing the current a

popularity of govt
assess their
stability

By taking advises from the embassies of the home

in the host countries
country

Q7 Risks are and integral part of market

inherent
Yes Risk is an integral part of market this is a

type of systematic risk that affects prices of any

particular share

A general rise in share prices is referred to as a balli

Sh trend whereas a general fall in share prices is

referred to as a bearish trend

 easily seen in the move me
The market movements can be

of share price indices such as Bst sensitive Juden BSE

National Sinden etc

08 Explain the main risk that can be

faced by an

overseas investor
Risk that can be faced by an overseas investor ane

Destruction of overseas properties

Restriction as to
borrowings
Price control of products

Invalidation of Patents

99 write short note on VAR

a
VAR is a measure risk of investment
of
It estimates how much investment might lose in a

set
of period in
the normal market condition
VAR answers two basic questions
What is worst case scenario
what will be loss

910
Explain the types of Risk by an
organization
 Risk Risk in which company's strategy beom
Strategic
es less effective

Compliance Risk Business needs to comply with rules

Non compliance leads to fines a penalties
regulations

operational Risk Internal Risk People Risk Process Risk

failure to
cope with day to day operational problems

financial Risk Unexpected changes in financial conditions

such as prices exchange rate credit a int
rating
rate etc It can be divided into following categories
counter party risk credit Risk
Political Ak
Interest Rate Risk
Currency Risk
Liquidity Risk
meet it liabilities whenever
Inability of organization to
they become due
Risk mainly arises when organization is unable to
generate adequate cash
This type of risk is more prevalent in banking business

All Write a short note on Interest Rate Risk

 This risk occurs due to in interest rate result
change
and liabilities
ing in change in asset
Interest Rate are of two types
fined floating
It is identified from the following

Monetary Policy
Economic Growth
Industrial Data
stock market
changes

912 write a short note on currency Risk

This risk
mainly affects
the
organization dealing with
foreign exchange as their cash flows changes with the
movement in the rates
currency exchange
Note In this answer write to parameters to identify the
risk as written above in ques 5
currency

Derivatives Analysis
Q1 write short note on Embedded Derivatives
a

Derivatives is a contract with

characte istics following

Settled at a
future date
 No initial
investment
Its value changes in response to underlying asset
Common derivatives are
currency forwards futures
options etc

Embedded derivative is a derivative that is embe

dded in another contract the host contract

Derivatives are required to be marked to market

through the income statement

02 Differentiate between forward and future con
tract

Features forward Futures

Traded on personal Traded in a
Trading basis competitive arena

size
of contract No standard size standardized
qu ntity
amount
on

settlement on agreed date

Daily settlement

Margins not required Required

03
Advantages of Futures
Trading Us stock Trading
OR
stock Juden
Reasons
for futures is most popular
financial Derivatives over stock

stock index
futures add flevibility
Stock in der futures create possibility of speculative gains
stock inden futures can be settled in cash

Stock index
futures cannot easily manipulated
be

4
write the assumptions Black Scholes Model
of
a
European options are considered
b No transaction costs
c
short term interest rates are known
d variance is constant

95 write a short note on to Market

Marking
in
It is the process
of recording invest cuts
at market secur ties
value
reporting date
on

In derivatives trading futures contracts are marked

to market on
daily basis
 It means all contracts at the end of a
outstanding
session are
repriced at the settlement price
trading
that session
of
Thus futures contracts better risk management
provide
06
Define the teams Greeks with respect to options
Greeks are collection of statistical values that give
overall view
of how stock is performing
These statistical values helps in deciding best options
strategies

Statistics show trends based on

past performance

These trends can

change drastically
At
Define cash settlement and Physical settlement in
Derivative contracts and their relative advantages
disadvantages
assets are
Physical settlement means underlying

In cash settlement
act ally
delivered on specified delivery date

not
seller derivative deliver the
of
underlying asset but transfer the cash
main advantage of cash settlement is high
liquidity

Advantage of Physical settlement is that

no manipulation

both parties in the derivative contract

by
Main disadvantage of Physical
delivery is that it is
impossible to shout sell a stock

Therefore it can be concluded that physical settlement

curb manipulation but also affects the liquidity