Strategic Financial Management

(SFM) for CA Final

KHETAN EDUCATION

Archana Khetan
BA, CFA (ICFAI), M.S. (Finance), CFA (US) level 1

Hi Friends! Archana Khetan holds a Masters degree in finance (M S Finance) and CFA. An academician at heart she brings years of in depth ind stry e!perience ha"ing #or$ed #ith %eligare Fin"est as Manager& 'n"est ban$ing. As a professional in"est ban$er she has e!tensi"e e!perience in debt syndication& '() (re*placement& corporate finance& instit tional sales of m t al f nds& "al ation and analysis for mergers +ac, isitions. She has been closely associated #ith -'%C& 'CA' and is being in"ited as g est fac lty for SFM since last fi"e terms. Her teaching style is a good combination of base b ilding thro gh foc s on f ndamental concepts& rigoro s practice and de"elopment of problem sol"ing s$ills. She has gained a lot of pop larity among st dents in Mumbai for ma$ing the to ghest of topics simplistic and sol"ing them thro gh basic easy to remember th mb r les. .he same being a pre*re, isite from the instit tes point of "ie# and the standard of papers being set according to the latest trends. /o can contact her0 A CHANA KHETAN 123*2245637873 9MA':* archana.$hetan525;gmail.com

!T"i# B$$% i# n$& mean& '$( #ale. T"i# i# '$( )(iva&e ci(cula&i$n $nl*.

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Last Day Revision theory

1. Explain the significance of LIBOR in international financial transactions. LIBOR stands for ondon !nter "an# $ffered %ate& $ther feat'res of !"$% are as follo(s) a& !t is the base rate of e*change (ith respect to (hich most international financial transactions are priced& b& !t is 'sed as the base rate for a large n'mber of financial prod'cts s'ch as options and s(aps& c& "an#s also 'se the !"$% as the base rate (hen setting the interest rate on loans+ sa,ings and mortgages& d& !t is monitored by a large n'mber of professionals and pri,ate indi,id'als (orld(ide& 2. Foreign Instit tional Invest!ent "FIIs# $eaning% F!! means an entity established or incorporated o'tside !ndia (hich proposes to ma#e in,estment in !ndia& !ndia is being described as magnet to F!!s in,estments& A&vantage of FII in,ests in !ndia ) "a# -nhanced flo( of e.'ity capital+ "'# !mpro,ing capital mar#ets+ "c# "etter corporate go,ernance+ and "&# Foreign in,estors confidence in !ndia attracting F/!& Disa&vantage of FII in,estments in !ndia ) "a# Fear of management control+ "'# Potential capital o'tflo(s0foreign capital is hot money+ it may lea,e any time0 and "c# Foreign portfolio in,estment is described as notorio'sly ,olatile&

(. F))B "Foreign ) rrency )onverti'le Bon&s# $eaning) A type of con,ertible bond iss'ed in a c'rrency different than the iss'er1s domestic c'rrency& !t acts li#e a bond by ma#ing reg'lar co'pon and principal payments+ b't these

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bonds also gi,e the bondholder the option to con,ert the bond into stoc#& 3he in,estors recei,e the safety of g'aranteed payments on the bond 4 are also able to ta#e ad,antage of any large price appreciation in the company1s stoc#& A&vantages of F))Bs a) 3he con,ertible bond gi,es the in,estor the fle*ibility to con,ert the bond into e.'ity at a price or redeem the bond at the end of a specified period+ b) Companies prefer bonds as it defers the dil'tion of e.'ity and earnings per share& c) -asily mar#etable as in,estors en5oys option of con,ersion into e.'ity if res'lting to capital appreciation& *. +ent re )apital Financing. $eaning% 3he +ent re )apital Financing refers to financing of ne( high ris#y ,ent'res promoted by .'alified entreprene'rs (ho lac# e*perience 4 f'nds to gi,e form to their ideas& $etho&s of +ent re )apital Financing% i& -.'ity Financing ii& Conditional oan) iii& !ncome 6ote) i,& Participating /ebent're ) Eligi'ility criteria (hich may be applied to find o't the eligibility of an 'nderta#ing for 7ent're Capital Financing "i#3he ,ent're m'st be a technically feasible proposition"ii#!t sho'ld be commercially ,iable"iii#3he entreprene'rs m'st be technically competent 4 ha,ing managerial s#ill "iv#3he 'nderta#ing m'st ha,e a long r'n competiti,e ad,antage

,. -hort note on three for!s of Efficient $ar.et /ypothesis0 3he E$/ theory is concerned (ith speed (ith (hich information affects the prices of sec'rities& As per the st'dy carried o't technical analyst it (as obser,ed that information is slo(ly incorporated in the price and it pro,ides an opport'nity to earn e*cess profit& 8o(e,er+ once the information is incorporated then in,estor can not earn this e*cess profit&

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According to FAMA+ there e*ist three le,els of mar#et efficiency): ; 1ea. for! efficiency < Price reflect all information fo'nd in the record of past prices and ,ol'mes& ; -e!i 2 -trong efficiency < Price reflect not only all information fo'nd in the record of past prices and ,ol'mes b't also all other p'blicly a,ailable information& ; -trong for! efficiency < Price reflect all a,ailable information p'blic as (ell as pri,ate& 3. Explain the Ran&o! 1al. 4heory to 5ortfolio $anage!ent. Many in,estment managers and stoc# mar#et analysts belie,e that stoc# mar#et prices can ne,er be predicted beca'se they are not a res'lt of any 'nderlying factors b't are mere statistical 'ps and do(ns& 3his hypothesis is #no(n as %andom =al# hypothesis (hich states that the beha,ior of stoc# mar#et prices is 'npredictable and that there is no relationship bet(een the present prices of the shares and their f't're prices& 6. 1rite a short note on 5ortfolio Re'alancing !t means the ,al'e of portfolio as (ell as its composition the relati,e proportion of bond and stoc#s may change as stoc# and bonds fl'ct'ate in response to s'ch changes& Portfolio rebalancing is necessary& 3here are three policies of portfolio rebalancing: "'y and hold policy Constant mi* policy Constant proportion portfolio ins'rance policy (CPP!) 5 rpose of Re'alancing "i# For increasing ret'rns 4 "ii# Maintaining ris# profile 7. 1hat are the f nctions of the -toc. Exchanges0 i.'idity and Mar#etability of Sec'rities) Fair Price /etermination) So'rce for ong term F'nds) 8elps in Capital Formation) %eflects the >eneral State of -conomy

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8. /o9 is a stoc. !ar.et in&ex calc late&0 In&icate any t9o i!portant !ar.et in&ices. Calc'late mar#et capitali@ation of each indi,id'al company comprising the inde*& Calc'late the total mar#et capitali@ation by adding the indi,id'al mar#et capitali@ation of all companies in the inde*& Comp'ting inde* of ne*t day re.'ires the inde* ,al'e and the total mar#et capitali@ation of the pre,io's day and is comp'ted as follo(s) !nde* 7al'e 1:. 1rite a short note on ;REE< -/OE O54IO< ";-O# !t is an option that allo(s the 'nder(riting of an !P$ to sell additional shares if the demand is high& !t can be 'nderstood as an option that allo(s the 'nder(riter for a ne( iss'e to b'y and resell additional shares 'p to a certain predetermined .'antity& !n the !ndian conte*t+ green shoe option has a limited connotation& S-"! g'idelines go,erning p'blic iss'es contain appropriate pro,isions for accepting o,er:s'bscriptions+ s'b5ect to a ceiling+ say+ A9 per cent of the offer made to p'blic 3he name comes from the fact that >reen Shoe Company (as the first entity to 'se this option& 11. Boo. B il&ing Boo. ' il&ing refers to the process of generating+ capt'ring+ and recording in,estor demand for shares d'ring an !P$& "oo# "'ilding is so called beca'se the collection of bids from in,estors are entered in a Bboo#C& 3hese bids are based on an indicati,e price range& 3he iss'e price is fi*ed after the bid closing date& 12. 1hat are the f nctions of the -toc. Exchanges0 i.'idity and Mar#etability of Sec'rities

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Fair Price /etermination So'rce for ong term F'nds 8elps in Capital Formation %eflects the ;eneral -tate of Econo!y

1(. 1rite a note on =)re&it Rating= in In&ia. )re&it Rating is an act of assigning ,al'es to credit instr'ments by assessing the sol,ency i&e& the ability of the borro(er to repay debt& 3h's Credit %ating is An e*pression of opinion of a rating agency& 3he opinion is in regard to a debt instr'ment& 3he opinion is as on a specific date& 3he opinion is dependent on ris# e,al'ation& 3he opinion depends on the probability of interest and principal obligations being met timely& 1*. 1rite a short note on )re&it Rating 5rocess %e.'est from iss'er and analysis %ating Committee Comm'nication to management and appeal Prono'ncement of the rating Monitoring of the assigned rating %ating =atch Confidentiality of information %ating Credibility %ating Co,erage %ating Scores 1,. 1rite a short note on )A$EL $ODEL I< )REDI4 RA4I<;. )A$EL -tan&s for )apital> Assets> $anage!ent> Earnings an& Li? i&ity& ; ; )apital < Composition of %etained -arnings and -*ternal F'nds raised& Assets < %e,en'e generating capacity of e*isting E proposed assets+ fair ,al'es+ obsolescence+ lin#age of asset ,al'es to

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; ;

t'rno,er+ Si@e+ ageing and reco,erability of recei,ables and its lin#age (ith t'rno,er& $anage!ent < -*tent of in,ol,ement of management personnel+ team:(or#+ a'thority+ timeliness+ effecti,eness Earnings < Absol'te le,els+ trends+ stability+ adaptability to cyclical fl'ct'ations ability of the entity to ser,ice e*isting and additional debts proposed& Li? i&ity < -ffecti,eness of (or#ing capital management+ corporate policies for stoc# and creditors+ management and the ability of the corporate to meet their commitment in the short r'n&

13. 4REA-@RA BILL- "4Bs# ; $eaning% 3:"ills are short term instr'ments iss'ed by %"! on behalf of the >o,ernment of !ndia to tide o,er short term li.'idity shortfalls& ; 5erio&icity% 3he periodicity of the 3:"ills is A2 days+ 2F days+ GA days+ AF2 days 4 3?2 days& ; Iss e 5rice% 3reas'ry "ills are iss'ed at a disco'nt and redeemed at face ,al'e& ; Aiel& B Ret rn% 3he ret'rn from 3:"ills is in the form of Capital Profit i&e& difference bet(een iss'e price ((hich is at a disco'nt) 4 redemption price (at par)& 3heir yields can be calc'lated (ith the help of the follo(ing form'la) C HI Hield+ F I Face 7al'e+ P I !ss'e PriceEP'rchase Price+ M IMat'rity 16. 17. 1rite a short note on $oney $ar.et Operations0 3he money mar#et is a mar#et for short term financial assets that are close s'bstit'tes for money& 3he important feat're of money mar#et instr'ment is that it is li.'id& 3his is mar#et for borro(ing and lending Short:term f'nds&

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Money mar#et instr'ment are those instr'ments (hich ha,e a mat'rity period of less than one year & !t is a collection of mar#ets s'ch as 3reas'ry "ills+ Certificate of /eposits+ Commercial Paper+ %epo etc&

18. )allB<otice $oney 3he core of the !ndian money mar#et str'ct're is the interban# call money mar#et (hich is centrali@ed primarily in M'mbai+ b't (ith s'b:mar#ets in /elhi+ Calc'tta+ Chennai and Ahmadabad& $eaning% Call money or inter:ban# call money is the medi'm thro'gh (hich the sched'led commercial ban#s lend+ borro( or call at short notice to manage the day:to:day s'rpl'ses and deficits in the cash flo(& 3he money that is lent for one day in this mar#et is #no(n as Jcall money1 and if it e*ceeds one day (b't less than A9 days)+ it is referred as Jnotice money1& 5articipants% 3he participants in the mar#ets are commercial ban#s+ cooperati,e ban#s and primary dealers (ho can borro( and lend f'nds& arge m't'al f'nds promoted by nationali@ed ban#s+ pri,ate sector m't'al f'nds and all !ndia financial instit'tions can participate in the mar#et as lenders only& "ro#ers are not permitted in the mar#et

2:. I<4ERDBA<K 5AR4I)I5A4IO< )ER4IFI)A4E "IB5)# An IB5) is a deed of transfer thro'gh (hich a ban# sells or transfers to a third party (transferee) a part or all of a loan made to its clients (borro(ers)& !n other (ords 3he !nter "an# Participation Certificates are short term instr'ments to e,en o't the short term li.'idity (ithin the "an#ing system partic'larly (hen there are imbalances affecting the mat'rity mi* of assets in "an#ing "oo#& !t is called a participation certificate beca'se thro'gh it+ the PC holder participates in a ban# loan+ and so also in the interest+ the sec'rity of the loan+ and ris# of defa'lt on a proportionate basis&

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3he primary ob5ecti,e is to pro,ide some degree of fle*ibility in the credit portfolio of ban#s 4 to smoothen the consorti'm arrangements& 3he !"PC can be iss'ed by sched'led commercial ban# and can be s'bscribed by any commercial ban#

21. )O$$ER)IAL 5A5ER ")5# CP is an 'nsec'red debt instr'ment in the form of a promissory note iss'ed by highly rated borro(ers for tenors ranging bet(een A9 days to one year for meeting (or#ing capital re.'irement directly from the mar#et instead of borro(ing from ban#s& CP has to be iss'ed at a disco'nt to face ,al'e& /isco'nt rate has to be freely determined by the mar#et Benefits of )5 to the Iss er% o( interest e*penses+ Access to short term f'nding+ Fle*ibility and li.'idity+ !n,estor recognition+ -ase and lo( cost of establishment& Benefits of )5 to the Investor% 8igher yield+ Portfolio di,ersification+ Portfolio di,ersification+ Fle*ibility+ i.'idity& 22. )ER4IFI)A4E OF DE5O-I4- ")Ds# $eaning% )ertificate of /eposit (C/) is a front ended negotiable instr'ment+ iss'ed at a disco'nt and the face ,al'e is payable at mat'rity by the iss'ing ban#& 3here is a loc#:in:period of A9 days+ after (hich they can be sold& Eligi'le Iss ers Of )D : C/s can be iss'ed only by sched'led commercial ban#s e*cl'ding %egional %'ral "an#s (%%"s)& %ecently Financial !nstit'tion (F!s) has also been allo(ed to iss'e C/s& - 'scri'ersBInvestors to )Ds% C/s can be iss'ed to indi,id'als+ corporations+ companies+ tr'sts+ f'nds+ association+ etc& 6on:%esident !ndians (6%!s) may also s'bscribe to C/s+ b't only on non:repatriable basis (hich sho'ld be clearly stated on the Certificate& S'ch C/s cannot be endorsed to another 6%! in the secondary mar#et&

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$ini! ! siEe of iss e% C/s can be iss'ed for minim'm amo'nt of %s& 9 la#hs to a single in,estor& C/s abo,e %s& 9 la#hs sho'ld be in m'ltiples of %s& A la#h& 3here is ho(e,er no limit on the total .'ant'm of f'nds raised thro'gh C/s&

2(. RE5O vBs RE+ER-E RE5O Rep rchase Agree!ent "or repo# is an agreement of sale of a sec'rity (ith a commitment to rep'rchase or b'y the sec'rity bac# at a specified price and on a specified date& Reverse repo is a term 'sed to describe the opposite side of a repo transaction& %e,erse %epo is a p'rchase of sec'rity (ith a commitment to sell at a pre:determined price and date& Accordingly+ there are t9o possi'le !otives for entering into a reverse repo% short:term in,estment of f'nds+ or to obtain temporary 'se of a partic'lar sec'rity& ReposBReverse Repos are se&% "i# to meet shortfall in cash position "ii# a'gment ret'rns on f'nds held "iii# to borro( sec'rities to meet reg'latory re.'irement+ "iv#An S % s'rpl's ban# and a C%% deficit ban# can 'se the %epo deals as a con,enient (ay of of ad5'sting C%%ES % positions sim'ltaneo'sly "v#%"! 'ses %epo and %e,erse %epo deals as a con,enient (ay of ad5'sting li.'idity in the system&

2*. 1rite a short note on External )o!!ercial Borro9ings "E)B#0 3he foreign c'rrency borro(ings raised by the !ndian corporate from confirmed ban#ing so'rces o'tside !ndia are called B-*ternal Commercial "orro(ingsC (-C"s)& 3hese Foreign C'rrency borro(ings can be raised (ithin -C" Policy g'idelines of >o,t& of !ndiaE %eser,e "an# of !ndia applicable from time to time& -*ternal Commercial "orro(ings (-C") is defined to incl'de+ 1. Commercial ban# loans+ 2. "'yer1s credit+ (. S'pplier1s credit+ *. Sec'riti@ed instr'ments s'ch as floating rate notes+ fi*ed rate bonds etc& ,. !n,estment by Foreign !nstit'tional !n,estors (F!!s) in dedicated debt f'nds

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Benefits% a) 5ro,ides the foreign c'rrency f'nds (hich may not be a,ailable in !ndia& b) 3he cost of f'nds at times (or#s o't to be cheaper as compared to the cost of r'pee f'nds& c# -C" enco'rage infrastr'ct'reEcore and e*port sector financing (hich are cr'cial for o,erall gro(th of the economy&

2,. ;DR ";lo'al Depository Receipts# Or I!pact of ;DRs on In&ian )apital $ar.et L A >lobal /epository %eceipt or >lobal /epositary %eceipt (>/%) is a certificate iss'ed by a depository ban#+ (hich p'rchases shares of foreign companies and deposits it on the acco'nt& >lobal /epository %eceipts facilitate trade of shares+ and are commonly 'sed to in,est in companies from de,eloping or emerging mar#ets& Se,eral international ban#s iss'e >/%s+ s'ch as MPMorgan Chase+ Citigro'p+ /e'tsche "an#+ "an# of 6e( Hor#& >/%s are often listed in the Fran#f'rt Stoc# -*change+ '*embo'rg Stoc# -*change and in the ondon Stoc# -*change+ (here they are traded on the !nternational $rder "oo# (!$")& >/% are negotiable instr'ments iss'ed to $,erseas /epository "an# on behalf of an !ndian Company to raise f'nds abroad& 23. A!erican Depository Receipts "ADR# $eaning% An American /epositary %eceipt (abbre,iated A/%) represents o(nership in the shares of a non:N&S& company that trades in N&S& financial mar#ets& 3he stoc# of many non:NS companies trade on NS stoc# e*changes thro'gh the 'se of A/%s& A/%s enable N&S& in,estors to b'y shares in foreign companies (itho't the ha@ards or incon,eniences of cross: border 4 cross:c'rrency transactions& A/%s carry prices in NS dollars+ pay di,idends in NS dollars+ and can be traded li#e the shares of NS:based companies&

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3he first A/% (as introd'ced by MPMorgan in AG2D+ for the "ritish retailer Selfridges& Fo'r ma5or commercial ban#s that pro,ide depositary ban# ser,ices : MPMorgan+ Citiban#+ /e'tsche "an# and the "an# of 6e( Hor# Mellon&

26. In&ian Depository Receipts"IDRs# !/% means any instr'ment in the form of depository receipt created by the domestic depository in !ndia against the 'nderlying e.'ity shares of the iss'ing foreign company & Companies incorporated o'tside the co'ntry can no( raise reso'rces from the !ndian capital mar#et thro'gh the iss'e of !ndian /epository %eceipts (!/%s)& An !/% is a financial instr'ment similar to a >lobal /epository %eceipt (>/%) and American /epository %eceipt (A/%)+ the ob5ecti,e of (hich is to pro,ide a platform to foreign firms to directly raise capital in !ndia& For !ndian in,estors+ Recent Exa!ple) Standard Chartered "an# became the first foreign company to list !/% in !ndia& 3he largest foreign ban# in !ndia+ (hich reeled in a billion dollar of profit from domestic operations last year (!ndia is its most profitable 'nit after 8ong Kong)+ (ill sell 22 crore !/%s thro'gh a p'blic iss'e& 27. $o&es of 4a.eover 3he t(o types of ta#eo,ers are) Friendly ta#eo,er& 8ostile ta#eo,er& 28. 1hat is a 4a.eover 'y Reverse Bi& or Reverse 4a.eover0 $eaning% !t is the act of a smaller company gaining control o,er a larger one &!n ordinary case+ the company ta#en o,er !s the smaller companyO in a J%e,erse 3a#eo,er1+ a smaller company gains control of a larger one& 4ests For In&entifying 4a.eover 'y Reverse Bi& % a) 3he three tests in a ta#eo,er by re,erse bid that are re.'ired to be satisfied are+ namely)

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b) 3he assets of the transferor company are greater than the transferee company+ e.'ity capital to be iss'ed by the transferee company p'rs'ant to the ac.'isition e*ceeds its original iss'ed capital& c) 3he change of control in the transferee company thro'gh the introd'ction of a minority holder or gro'p of holder1s ratio increases+ the e.'ity portion of the ac.'isition financing shrin#s to a le,el (:. 1hat a short note on LBO0 $eaning% A Leverage& ' yDo t "LBO# is an ac.'isition of a company in (hich the ac.'isition is s'bstantially financed thro'gh debt& 3ypically in the "$ GKP or more of the p'rchase price is financed (ith debt& Attractive can&i&ate for ac? isition thro gh leverage& ' yo t sho'ld possess three basic attrib'tes ) a) !f firm ha,e a good position in its ind'stry (ith a solid profit history and reasonable e*pectations of gro(th& b) 3he firm sho'ld ha,e a relati,ely lo( le,el of debt and a high le,el of ban#able assets that can be 'sed as loan collateral& c) !t m'st ha,e stable and predictable cash flo(s that are ade.'ate to meet interest and principle payment of the debt& (1. 1hat are <BF)sF0 1hat are the &ifferent for!s of <BF)s0 $eaning of <BF) "<on Ban.ing Financial )o!panies# ) a) 6"FC stands for 6on:"an#ing financial instit'tions+ and these are reg'lated by the %eser,e "an# of !ndia 'nder %"! Act+ AG32& b) 6"FC1s principal b'siness is recei,ing of deposits 'nder any schme or arrangement or in any other manner or lending on any other manner& 3hey normally pro,ide s'pplementary finance to the corporate sector& Different categories of <BF) 1. oan companies 2. !n,estment Companies& (. 8ire P'rchase Finance Companies& *. -.'ipment easing Companies& ,.

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M't'al "enefit Finance Companies& 3. 8o'sing Finance Companies 6. Miscellaneo's Finance Companies& (2. 1rite a short note on Rolling -ettle!ent0 $eaning% A rolling settlement is that settlement cycle of the stoc# e*change+ (here all trades o'tstanding at end of the day ha,e to settled+ (hich means that the b'yer has to ma#e payments for sec'rities p'rchased and seller has to deli,er the sec'rities sold& Exa!ple% S'ppose if (e ha,e 3Q2 settlement cycles it means that a transaction entered into on /ay A has to be settled on the /ay AQ2 (or#ing days& For e&g& Man A Man 2 Man 3 Man 2 Man 9 Man ? Man D Man F Mon 3'e =ed 3h' Fri Sat S'n Mon Stoc#s p'rchasedEsold on Man A sho'ld be settled on Man 3& Stoc#s p'rchasedEsold on Man 2 sho'ld be settled on Man F& (6ote that Sat 4 S'n+ being holidays are again e*cl'ded for the 3Q2 co'nts)& Benefits of Rolling -ettle!ent% "a# payments are .'ic#er than in (ee#ly settlements& "'# !t #eeps cash and for(ard mar#ets separate& "c# Pro,ide for a higher degree of safety&"&# From an in,estorRs perspecti,e+ rolling settlement red'ces delays& ((. Explain ;eneral 5rinciples An& $etho&s Of 4echnical Analysis0 3he /o( 3heory) Mar#et !ndicators a) "readth !nde*) b) 7ol'me of 3ransactions) c) Confidence !nde*) d) %elati,e Strength Analysis) e) $dd : ot 3heory) f) S'pport and %esistance e,els g) Mo,ing A,erages h) "ollinger "ands

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(*. Do9 Gones theory 3he /o( Mones theory classifies the mo,ements of the prices on the share mar#et into three ma5or categories) 5ri!ary $ove!ents% 3hey reflect the trend of the stoc# mar#et 4 last from one year to three years+ or sometimes e,en more& a) /'ring a "'ll phase+ the primary trend is that of rise in prices& b) /'ring a "ear Phase+ the primary trend is that of fall in prices& -econ&ary $ove!ents% 3hese mo,ements are opposite in direction to the primary mo,ements and are shorter in d'ration& 3hese mo,ements normally last from three (ee#s to three months& Daily $ove!ents% 3here are irreg'lar fl'ct'ations (hich occ'r e,ery day in the mar#et& 3hese fl'ct'ations are (itho't any definite trend& (,. 1rite a short note on Asset Allocation -trategies0 Many portfolios containing e.'ities also contain other asset categories+ so the management factors are not limited to e.'ities& 3here are fo'r asset allocation strategies) Integrate& Asset Allocation% Nnder this strategy+ capital mar#et conditions and in,estor ob5ecti,es and constraints are e*amined and the allocation that best ser,es the in,estor1s needs (hile incorporating the capital mar#et forecast is determined& -trategic Asset Allocation% Nnder this strategy+ optimal portfolio mi*es based on ret'rns+ ris#+ and co:,ariances is generated 'sing historical information and ad5'sted periodically to restore target allocation (ithin the conte*t of the in,estor1s ob5ecti,es and constraints& 4actical Asset Allocation% Nnder this strategy+ in,estor1s ris# tolerance is ass'med constant and the asset allocation is changed based on e*pectations abo't capital mar#et conditions&

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Ins re& Asset Allocation% Nnder this strategy+ ris# e*pos're for changing portfolio ,al'es ((ealth) is ad5'stedO more ,al'e means more ability to ta#e ris#&

(3. Exchange 4ra&e& F n&s "E4Fs# -*change 3raded F'nds (-3Fs) (ere introd'ced in NS in AGG3 and came to !ndia aro'nd 2KK2& -*change 3raded F'nds (-3Fs) are m't'al f'nd schemes that are listed and traded on e*changes li#e any other stoc#s& /i,ersification of an inde* f'nd& -*pense ratios for most -3Fs are lo(er than those of the a,erage m't'al f'nd& 6o paper (or# in,ol,ed for in,esting in an -3F !nstant di,ersification+ lo( cost and the fle*ibility& (6. Lea&ing An& Lagging ; 3his techni.'e is 'sed by s'bsidiaries for optimi@ing cash flo( mo,ements by ad5'sting the timing of payments to determine e*pectations abo't f't're c'rrency mo,ements& ; M6Cs accelerate (lead) or delay (lag) the timing of foreign c'rrency payments thro'gh ad5'stment of the credit terms e*tended by one 'nit to another& ; !t helps in minimi@ing foreign e*change e*pos're& ; 3a#es ad,antage of e*pected re,al'ations and de,al'ations of c'rrency mo,ement& (7. -hort note on <etting ; <etting refers to offsetting e*pos'res in one c'rrency (ith -*pos'res in the same or another c'rrency+ (here e*change rates are e*pected to mo,e in s'ch a (ay that losses or gains on the first e*posed position sho'ld be offset by gains or losses on the second c'rrency e*pos're& ; O'Hective% 3he ob5ecti,e of the e*ercise is to offset the li#ely loss in one e*pos're by li#ely gain in another& !t is a techni.'e of optimi@ing cash flo( mo,ements (ith the combined efforts of

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the s'bsidiaries thereby red'cing administrati,e transaction costs res'lting from c'rrency con,ersion&

and

(8. -hort note on Exchange Rate Forecasting0 $eaning% 3he amo'nts traded each day in the foreign e*change mar#et are no( h'ge& Corporate need to do the e*change rate forecasting for ta#ing decisions regarding hedging+ short:term financing+ short:term in,estment+ capital b'dgeting+ earnings assessments and long:term financing& 4echni? es of Exchange Rate Forecasting% ; 4echnical Forecasting% !t in,ol,es the 'se of historical data to predict f't're ,al'es& For e*ample time series models& Spec'lators may find the models 'sef'l for predicting day:to: day mo,ements& ; F n&a!ental Forecasting% !t is based on the f'ndamental relationships bet(een economic ,ariables and e*change rates& ; $ar.etDBase& Forecasting% !t 'ses mar#et indicators to de,elop forecasts& 3he c'rrent spotEfor(ard rates are often 'sed+ since spec'lators (ill ens're that the c'rrent rates reflect the mar#et e*pectation of the f't're e*change rate& ; $ixe& Forecasting% !t refers to the 'se of a combination of forecasting techni.'es and forecast is a (eighted a,erage of the ,ario's forecasts de,eloped& *:. Interest Rate 5arity "IR5# ; $eaning% !nterest rate parity is a theory (hich states that Jthe si@e of the for(ard premi'm (or disco'nt) sho'ld be e.'al to the interest rate differential bet(een the t(o co'ntries of concernC& or !n other (ords !n,estment $pport'nity in any t(o gi,en co'ntry (ill al(ays be same& ; )overe& Interest Ar'itrage% =hen interest rate parity e*ists+ co,ered interest arbitrage is not feasible+ beca'se any interest rate ad,antage in the foreign co'ntry (ill be offset by the disco'nt on the for(ard rate& 3h's+ the act of co,ered interest

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arbitrage (o'ld generate a ret'rn that is no higher than (hat (o'ld be generated by a domestic in,estment& ; For! la%

*1. 5 rchasing 5o9er 5arity"555# % 5 rchasing 5o9er 5arity theory foc'ses on the Jinflation < e*change rate1 relationship& 3here are t(o forms of PPP theory): a. 3he A"S$ N3- F$%M+ also called the J a( of $ne Price1 s'ggests that Bprices of similar prod'cts of t(o different co'ntries sho'ld be e.'al (hen meas'red in a common c'rrencyC& !f a discrepancy in prices as meas'red by a common c'rrency e*ists+ the demand sho'ld shift so that these prices sho'ld con,erge& '. 3he %- A3!7- Form For %elati,e Form+ -.'ation is gi,en by): i&e& in e.'ilibri'm the rate of change in e*change e.'als interest rate differential& !t is generally fo'nd that PPP is more closely appro*imated in the long r'n than in the short r'n+ and (hen dist'rbances are p'rely monetary in character& *2. ,:. -hort note on Foreign Exchange Expos re Expos re refers to those parts of a company1s b'siness that (o'ld be affected if e*change rate changes& Foreign e*change e*pos'res arise from many different acti,ities& For e*ample+ an importer #no(s foreign c'rrency payable b't home c'rrency e.'i,alent is 'n#no(n& 4ypes of Expos re% 3he foreign e*change e*pos're may be classified 'nder three broad categories) 1. 4ransaction Expos re% !t meas'res the effect of an e*change rate change on o'tstanding obligations that e*isted before e*change rates

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changed b't (ere settled after the e*change rate changes& 3h's+ it deals (ith cash flo(s that res'lt from e*isting contract'al obligations& 2. 4ranslation Expos re) Also #no(n as acco'nting e*pos're+ it refers to gains or losses ca'sed by the translation of foreign c'rrency assets and liabilities into the c'rrency of the parent company for acco'nting p'rposes& (. Econo!ic Expos re% !t refers to the e*tent to (hich the economic ,al'e of a company can decline d'e to changes in e*change rate& !t is the o,erall impact of e*change rate changes on the ,al'e of the firm& *(. -hort note on E$BEDDED DERI+A4I+E$eaning% An embedded deri,ati,e is a deri,ati,e instr'ment that is embedded in another contract : the host contract& 3he host contract might be a debt or e.'ity instr'ment+ a lease+ an ins'rance contract or a sale or p'rchase contract& -&g& an $ptionally con,ertible debent're **. Interest Rate -9aps $eaning% An !nterest %ate S(ap is a transaction in,ol,ing an e*change of one stream of interest obligations for another& !n an interest rate s(ap+ no e*change of principal ta#es place b't interest payments are made on the notional principal amo'nt& !nterest payments can be e*changed bet(een t(o parties to achie,e changes in the calc'lation of interest on the principal+ for e*ample )"a#Floating to fi*edO"'#Fi*ed to floatingO"c# !"$% to prime : basedO"&#Prime to !"$%O 4ypes of Interest Rate -9aps "a# Lia'ility -9ap : =here there is an e*change of interest obligation i&e&+ interest is to be paid+ the s(ap is liability s(ap& "'# Asset -9ap : =here there is an e*change of interest receipts i&e&+ interest is to be recei,ed+ the s(ap is asset s(ap&

*,. I<4ERE-4 RA4E )A5

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An interest rate cap is a deri,ati,e in (hich the b'yer recei,es payments at the end of each period in (hich the interest rate e*ceeds the agreed stri#e price& L!t is a type of -'ropean Call $ption and for this b'yer is re.'ired to pay premi'm& *3. I<4ERE-4 RA4E FLOOR An interest rate floor is a deri,ati,e in (hich b'yer of the floor recei,es money if on the mat'rity+ the interest rate is belo( the agreed stri#e price of the floor& L!t is a type of -'ropean P't $ption and for this b'yer is re.'ired to pay premi'm& *6. I<4ERE-4 RA4E )OLLAR )ollar can 'e create& in t9o !anners% "'y a collar ((hereby yo' b'y a cap and sell a floor both (ith the same e*piry b't different stri#e prices and notional)& Premi'm is recei,ed by selling a Floor and Premi'm is paid by "'ying a Cap& Sell a collar ((hereby yo' sell a cap and b'y a floor both (ith the same e*piry b't different stri#e prices and notional) *7. 4ype of Leasing ) 3he different leasing options may ho(e,er+ be gro'ped in by t(o broad categories as 'nder) Operating Lease% Feat res of Operating Lease !t is a short:term arrangement and the lease term is significantly less than the economic life of the e.'ipment& !t can be cancelled by the lessee prior to its e*piration date& 3he lease rental is generally not s'fficient to f'lly amorti@e the cost of the asset& 3he cost of maintenance+ ta*es+ ins'rance is the responsibility of the lessor& 3he lessee is protected against the ris# of obsolescence& 3he lessor has the option to reco,er the cost of the asset from another party on Comp'ters 4 other office e.'ipments are ,ery common assets (hich form s'b5ect matter of any operating lease&

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*8. Financial Lease) Feat res of Financial Lease a. !n case of !t is a long:term arrangement and d'ring the primary lease period+ the lease cannot be cancelled& 3he lease is more or less f'lly amorti@ed d'ring the primary lease period& '. 3he lessee is re.'ired to ta#e the ris# of obsolescence& 3he lessor is only the Financier and is not interested in the asset& c. 3he lease term generally co,ers the f'll economic life of the e.'ipment& &. 3he cost of maintenance+ ta*es+ ins'rance etc& is to be inc'rred by the lessee 'nless the contract pro,ides other(ise& ,:. -hort <ote on )ross Bor&er Leasing. )rossD'or&er or international lease+ the lessor and the lessee are sit'ated in t(o different co'ntries+ it is called cross:border lease& Benefits Of )ross Bor&er Leasing% AKKP f'nding off:balance sheets financing F'nding for long period and at fi*ed rate internationally 3a* benefits can be shared by the lessee or lessor Choice of assets for cross border lease is different than domestic lease beca'se those assets may find here attracti,e bargain (hich are internationally mobile+ ha,e ade.'ate resid'al ,al'e and en5oy 'ndisp'ted title& ,1. 1rite a short note on -ocial )ost Benefits Analysis -ocial )ost Benefit Analysis is a systematic e,al'ation of an organi@ation1s social performance as disting'ished from its economic performance& Social Cost "enefits Analysis is an approach for e,al'ation of pro5ects& !t assesses gainE loss to the society as a (hole& =e ha,e to (rite abo't the effects of the pro5ect on society li#e poll'tion+ 5ob creating opport'nities+ effect on nat'ral habitat and so on&

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,2. Iero Date Of 5roHect $anage!ent Iero Date of a Pro5ect means a date is fi*ed from (hich implementation of the pro5ect begins& !t is a starting point of inc'rring cost& 3he pro5ect completion period is co'nted from the @ero date& Pre:pro5ect acti,ities sho'ld be completed before @ero date& 4he preDproHect activities are) "a# !dentification of pro5ectEprod'ct "'# /etermination of plant capacity "c# Selection of technical helpEcollaboration "&# Selection of site& "e# Selection of s'r,ey of soilEplot etc& "f# Manpo(er planning and recr'iting #ey personnel "g# Cost and finance sched'ling&

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