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To hedge against the exchange rate risk, Khazana bank can enter into a FCNR
Swap deal with the RBI. The RBI will accept dollar deposits during the swap
window and give Khazana bank the rupee equivalent. When the swap is
unwound, RBI will accept the rupee amount back plus 3.5% interest p.a. The
premium for getting into a currency forward contract is higher than the FCNR
swap deal. So, this will increase the banks margin.
6. a) In the first situation where the interest rate is expected to come down by a
minimum of 3% in the next 3-4 years and remain at that rate for the decades to
come I would advise Samrat to go for the floating rate loan which is indexed to
the banks base rate. He can go for the collar which comes at no additional cost
since, interest rates are not going to increase in the near future.
b) In the second situation where the interest rates are expected to very volatile it
is better for Samrat to go for a fixed rate loan of 10.5%. The benefit will be that
interest rate will be fixed irrespective of the market conditions and cash outflow
will be steady and certain.
7. To predict credit card defaulters most banks only concentrate on the customer
level and product level characteristics such as the size of the credit, payment
history, outstanding balances, etc. In order to increase the level of prediction
other macro factors should also be considered such as national unemployment
rate, performance of the stock market, the type of industry the customer is
employed in.
The model will also allow changes in variables as new information comes into
make the model more dynamic and to improve the accuracy of the model. Some
of the change inputs can be,
i.
ii.
iii.
If the model predicts a high probability of default, further credit can be declined
and the person has to followed-up regularly to make sure that he pays back the
outstanding amount before proving new credit.
8. Statistics plays a very important role in predicting the financial distress and
also the factors which leads to it. Predictive models can be used to decide who is
eligible for credit and on what terms. This is reduce the credit default risk.
It is very hard to device a mechanism which guarantees zero default because not
all inputs can be captured with 100% accuracy. Also, the variables considered for
the model need not be the only ones leading to default.
12. Consequences of Exchange Rate risk in the following cases:
i.
ii.
iii.
iv.
- Exporter &
- Exporter & Importer
- Exporters Bank
- Exporter
Challenges Post-Merger: