...Risk Management Risk is inherent in our business and sound risk management is critical to our success. The major types of risk we face are credit risk, market risk (which includes liquidity risk and price risk) and operational risk. We have developed and implemented comprehensive policies and procedures to identify, monitor and manage risk throughout the Bank. Credit Risk Credit risk is the possibility of loss due to the failure of any counterparty to abide by the terms and conditions of any financial contract with us. We identify and manage this risk through (a) our target market definitions, (b) our credit approval process, (c) our post-disbursement monitoring, and (d) our remedial management procedures. Wholesale Credit Risk For our commercial banking products, we target the top end of the Indian corporate sector, including companies that are part of the private sector business houses, public sector enterprises, and multinational corporations and leading small and mid-sized enterprises (“SME”). As a result, a large part of our wholesale lending is generally concentrated among highly rated customers. In addition to market targeting, the principal means of managing credit risk is the credit approval process. We have policies and procedures to evaluate the potential credit risk of a particular counterparty or transaction and to approve the transaction. For our wholesale clients, we have a risk assessment and grading system that is applied to each corporate counterparty...
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...Systematic Risks (non-diversifiable) Systematic risks are risks that affect the entire market and not each single corporation; it is associated with the overall movement in the general market or economic. Systematic risk are also called as market risk, are non-diversifiable. According to Berk, DeMarzo and Harford (2012,p.337), systematic risks are risks that fluctuate through the market available news. These risks are difficult to be diversified even though the shareholder holds a portfolio since these risks affect the whole market. Systematic risks are included interest rate risk, inflation rate risk, market risk and exchange rate risk, recession, political risk, earthquake. Unsystematic Risks (diversifiable) Unsystematic risks are not affected by the economy but by the specific corporation. The fluctuation of share price of a particular corporation is due to the good or bad news announced by the corporation. It will increase when the corporation that had less earnings growth rate, and low morale or productivity of employees or a poor reputation of the corporation, vice versa. However, unsystematic risk can be diversified by shareholders who hold the portfolio when the stocks are negatively co-related. In fact, it means that when a particular event occurs that affects a specific corporation, the stock of other corporation will be unaffected and thus, the fluctuation of share price between two stocks can be offset. Unsystematic risks are included liquidity risk, operational...
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...Understanding the Concepts Trina Gray Strayer University Intro to Finance Professor Michael Hamuicka March13, 2013 Understanding the Concepts Understanding the concepts of business is to know how the world works as defined by mathematical formulas and other representations of cause and effect in the physical world. Using ratios to be able to observe the world reason and draw accurate and rational conclusions. To understand how small businesses differ than large businesses it’s based on the current situation and future possibilities using profit seeking activities to convert factors of production into goods and services for customers in the market to achieve the business objectives. Liquidity is the ability to meet obligations when they are due. To measure your liquidity or your company’s success by meeting its short term obligation current assets to current liabilities Current asset include inventory product you sell and accounts receivable are your credit accounts Converting balances to cash Inventory turnover ratios can tell you how fast or slow the inventory is selling. Accounts receivable ratios can tell you if your customers are paying you or not. You need more assets than liabilities on your balance sheet at all times. How much cash a business generates and how much cash from core operations. The company will struggle to succeed if it has less money. Finical ratios are tools used for internal and external evaluations of the business performance Its effectiveness...
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...Introduction RJR Nabisco LBO in 1988, a deal valued at $25 – billion US was well known as the largest company leverage buyout that ever happened in history which marked the end of 1980 decade of greed (Olive,1999). It was also viewed as the deal that was too big, too loud and too out of control (Burrough, 1999). The story was started when the market price of the company’s common stock was considered by the CEO of RJR Nabisco, F. Ross Johnson to be wildly undervalued and did not reflect its true value (Burrough & Helyar, 2009). When the share price of the company stayed at $56 per share, Johnson decided to take on a LBO of RJR Nabisco so that the market price of the stock could be increased (Ruback, 2006). Johnson then cooperated with Shearson Lehman Hutton as one of the candidates that participated in RJR Nabisco buyout (Bruner, 2004). RJR Nabisco has shown to become an attractive candidate for LBO. It is proved by the participation of some large companies such as Kohlberg, Kravis, Roberts and Co. (KKR), First Boston and Forstman Little that attracted to participate on the bid (Ruback, 2006). The various characteristics of the RJR Nabisco such as steady growth, minimum capital investments and also the small range of debt (Michel & Shaked, 1991) have made the company being targeted for good reputation and personal wealth (Ruback, 2006). The bidding process has undergone several steps. There were various factors and considerations that need to be made by the board of...
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...Axis Bank CMP: Rs1125 TP: Rs1441 Buy Particulars NII Operating Profit PAT 1QFY14 4QFY13 2,865 2665 2844 2800 1409 1555 % chg (QOQ) 7.5 1.6 (9.40) 1QFY13 2180 1964 1154 % chg (YOY) 31.4 44.8 22.1 CMP Target Price Investment Period Stock Information Sector Market Cap Beta NSE Code 52 Week High/Low ₹ 1,125 ₹ 1,441 12 Months Highlights: Axis Bank reported a 22.1% YOY earnings growth for the quarter. During 1QFY2014, the bank reported a moderate growth in business, with advances and deposits registering a growth of 15.8% and 7.1% YOY, respectively. Loan book growth was primarily driven by strong traction in the retail and SME advances, which grew by 39.7% and 27.5% YOY, respectively. Outlook and valuation: Axis Bank’s current valuations at 1.8x ABV is below longer term fair value estimates. In the near term, given the weak macro environment and cautious outlook for the sector, stocks such as Axis Bank may undershoot fair value estimates, but from a relative point-of-view compared to peers, it remains one of the preferred banks. Asset Quality: As on 30th June 2013, Gross NPAs and Net NPAs stood at 1.10% and 0.35%, as against 1.06% and 0.32% respectively as on 31st March 2013. The Bank held provision coverage of 80% as on 30th June 2013 (as a proportion of Gross NPAs including prudential write-offs). The provision coverage before accumulated write-offs was 89%. The cumulative value of assets restructured till 30th June 2013, stood at ₹4,211 crores against ₹4...
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...FORM 6 CONSENT TO COMMENCE BIDDING BY THE ELIGIBLE INSTITUTIONAL INVESTORS FOR PRICE DISCOVERY OF ISSUANCE OF 38,600,000 ORDINARY SHARES OF HAMID FABRICS LTD 6 GENERAL INFORMATION 8 2. DECLARATIONS AND DUE DILIGENCE CERTIFICATES 9 DECLARATION ABOUT THE RESPONSIBILITY OF THE DIRECTOR(S), INCLUDING THE MANAGING DIRECTOR OF “HAMID FABRICS LIMITED” IN RESPECT OF THE PROSPECTUS 9 CONSENT OF DIRECTOR(S) TO SERVE AS DIRECTOR(S) 10 DECLARATION ABOUT FILING OF PROSPECTUS WITH REGISTRAR OF JOINT STOCK COMPANIES AND FIRMS 10 DECLARATION BY THE ISSUER ABOUT THE APPROVAL FROM SECURITIES AND EXCHANGE COMMISSION FOR ANY MATERIAL CHANGES REGARDING PROSPECTUS OF HAMID FABRICS LIMITED 10 DECLARATION BY THE ISSUE MANAGER ABOUT THE APPROVAL FROM SECURITIES AND EXCHANGE COMMISSION FOR ANY MATERIAL CHANGES 10 DUE DILIGENCE CERTIFICATE OF THE ISSUE MANAGER 12 DUE DILIGENCE CERTIFICATE OF THE UNDERWRITER(S) 13 3. RISK FACTORS & MANAGEMENT’S PERCEPTION ABOUT RISKS 14 EXTERNAL RISK FACTORS 14 INTERNAL RISK FACTORS 17 4. ISSUE SIZE AND PURPOSE OF PUBLIC OFFERING 19 IPO SIZE AND ISSUE PRICE 19 USE OF IPO PROCEEDS 19 5. INFORMATION ABOUT THE COMPANY 20 PROFILE OF HAMID FABRICS LIMITED 20 NATURE OF BUSINESS 21 PRINCIPAL PRODUCTS AND SERVICES 21 PRODUCTS/SERVICES THAT ACCOUNT FOR MORE THAN 10% OF THE COMPANY’S TOTAL REVENUE 22 ASSOCIATES, SUBSIDIARY/RELATED HOLDING COMPANY AND THEIR CORE AREAS OF BUSINESS 22 DISTRIBUTION OF PRODUCTS AND SERVICES 22 COMPETITIVE CONDITION OF BUSINESS 22 ...
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...Chapter 6. Risk, Return, and CAPM Dollar return: Amount to be received-Amount invested Rate of return: Amount received-Amount investedAmount invested Stand-alone risk is the risk an investor has in just holding the one asset Expected rate of return: r=i=1npiri Where P is probability of i outcome and r is the rate of return The more leptokurtic the distribution, the more likely the actual outcome will be closer to the expected return. Measuring Standalone Risk: Standard Deviation 1. Expected Rate of return 2. Deviationi= ri-r 3. Variance=σ2=i=1n( ri-r)2Pi 4. Standard Deviation=σ=Variance 5. Or use Excel of Financial calculator Using Historical Data to Measure Risk: Realized Rates of Return: rAvg=t=1nrtn Standard Deviation of the Sample Returns: σ=S=t=1n(rt-rAvg)n-1 In Excel use =Average and =STDEV functions Measuring Standalone Risk: Coefficient of Variation Coefficient of variation = CV=σr Risk Aversion and Required Rate of Return Assume risk aversion for investors Textbook Example: Basic Food’s Price up to $150 from $100 Sale.com Price down to $75 from 100. Difference in return, 20%-10%= Risk Premium Risk in Portfolio Context Expected return on portfolio=Weighted expected return=rp=i=1nwiri Portfolio Risk Stocks can be combined into portfolios which then become less risky to riskless depending on the correlation of the assets. Stocks with a ρ=-1 are perfectly negatively correlated. The inverse is positively correlated. Expected...
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...increasingly relying on statistical models to measure and manage the financial risks to which they are exposed. These models are gaining credibility because they provide a framework for identifying, analyzing, measuring, communicating and managing these risks. Since models cannot incorporate all possible risk outcomes and are generally not capable of capturing sudden and dramatic changes, banks supplement models with ‘stress tests’. Sensitivity tests are normally used to assess the impact of change in one variable (for example, a high magnitude parallel shift in the yield curve, a significant movement in the foreign exchange rates, a large movement in the equity index etc.) on the bank’s financial position. Scenario tests include simultaneous moves in a number of variables (for example, equity prices, oil prices, foreign exchange rates, interest rates, liquidity etc.) based on a single event experienced in the past (i.e., historical scenario – for example, natural disasters, stock market crash, depletion of a country’s foreign exchange reserves) or a plausible market event that has not yet happened (i.e., hypothetical scenario - for example, collapse of communication systems across the entire region/ country, sudden or prolonged severe economic downturn) and the assessment of their impact on the bank’s financial position. Banks in India are beginning to use statistical models to measure and manage risks. Stress tests are, therefore, relevant for these banks. Further, the supervisory...
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...performance. In recent years, there has been significant technological development within the financial sector, which has enable banks to effectively manage their internal risk through the application of risk models. The use of models to measure risks is the preferred approach by most banks, for example Goldman Sachs applies the Value at Risk model. However, according to Office of the Comptroller of the Currency (2011, p1), “the expanding use of models in all aspects of banking reflects the extent to which models can improve business decisions, but models also come with costs”. Besides, in a recent study (Jorion 2009), it is argued that many financial institutions experienced large losses over the past few decades due to limitations of using sophisticated models. Therefore, it is essential for Andrew Bank Ltd. to have an in-depth understanding of disadvantages relating to using models and solutions to improve these model risks. 2. Analysis for problems associated with using models “Risks are uncertainties resulting in adverse variations of profitability or in losses”(Bessis 2002, p11). Banks exposes to following risks, credit risk, interest rate risk, market risk, liquidity risk, operational risk, foreign exchange risk and others. As a result, risk models such as the gap analysis, the Value at Risk (VaR) and pricing model are designed to measure and manage...
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...BASIC TOOLS OF FINANCE WHAT’S NEW IN THE SIXTH EDITION: There are two new In the News boxes on “A Cartoonist’s Guide to Stock Picking” and “Is the Efficient Markets Hypothesis Kaput?” LEARNING OBJECTIVES: By the end of this chapter, students should understand: the relationship between present value and future value. the effects of compound growth. how risk-averse people reduce the risk they face. how asset prices are determined. CONTEXT AND PURPOSE: Chapter 27 is the third chapter in a four-chapter sequence on the level and growth of output in the long run. In Chapter 25, we discuss how capital and labor are among the primary determinants of output and growth. In Chapter 26, we addressed how saving and investment in capital goods affect the production of output. In Chapter 28, we will show some of the tools people and firms use when choosing capital projects in which to invest. Because both capital and labor are among the primary determinants of output, Chapter 28 will address the market for labor. The purpose of Chapter 27 is to introduce the students to some tools that people use when they participate in financial markets. We will show how people compare different sums of money at different points in time, how they manage risk, and how these concepts combine to help determine the value of a financial asset, such as a share of stock. KEY POINTS: Because savings can earn interest, a sum of money today is more valuable than the same sum of money in the...
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...management to describe stock returns. Unlike the CAPM, which uses only the market risk factor, in the Fama and French Model, two more factors are identified that cause stocks to do better than the market as a whole – the size factor and the value factor. This paper will first describe the methodology behind the size and value factor calculations. We will then discuss possible explanations as to why the two factors explain stock returns. Finally, we determine on the basis of academic evidence whether the two factors capture systematic risk. The three-factor model is mathematically expressed as follows: Where: ------------------------------------------------- r = portfolio expected return ------------------------------------------------- Β3 = “three factor” beta (conceptually analogous to the CAPM beta but not equal to it due to the presence of the two other coefficients in the regression) ------------------------------------------------- (Km- Rf) = market risk premium ------------------------------------------------- bs = sensitivity of expected return to size factor ------------------------------------------------- SMB = Small (market capitalisation) minus big ------------------------------------------------- bv = sensitivity of expected return to value factor HML = high (book to market ratio) minus low Fama and French (1992a) found that the historical-average returns on stocks with small market capitalisations and higher book-to-market ratios are higher than...
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...Assignment 3 1. Design a multifactor model with at least 2 factors besides the market factor, and answer the following questions. a) What makes your choice of factor a “factor” in multifactor model? b) Does the factor of your choice co-move with the market factor? If yes, should you include it along with the market factor? c) Describe how the stock return would be affected when the factor of your choice changes. d) Describe a scenario where one can benefit from trading on the factor of your choice. a) There is a variety of factors that can determine the returns on security. The market based factor is the return on the broad market index such as S&P 500. This market return is one of the factors in the model. Other factors include the following: • GDP growth rate. This factors shows overall macroeconomic conditions that tend to affect a stock’s performance. • Risk free rate of return. • 10 year T-bond interest rate that shows the required return on 10-year government bonds. • A company’s ROE as an indicator of its profitability. Therefore, the model will look like this: [pic], where betas show the sensitivity of return to the factor, rm is the market rate of return, rf is the risk-free rate, T-bond is the 10-year T-Bond rate and ROE is the return on equity (ROE). Generally, GDP has a positive effect on a stock return. Higher economic growth leads to more business opportunities and...
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...(1952). This model was simultaneously and independently developed by John Lintner (1965), Jan Mossin (1966) and William Sharpe (1964). In equation form the model can be expressed as follows: E (Ri) = Rf + (i [E(rm) – Rf] = Rf +(im / (m (E(Rm) – Rf / (m) Where E(Ri) is expected return on asset i, Rf is the risk-free rate of return, E(Rm) is expected return on market proxy and (i; is a measure of risk specific to asset i. This relationship between expected return on asset i and expected return on market portfolio is also called the security market line. If CAPM is valid, all securities will lie in a straight line called the security market line in the E(R), (i frontier. The security market line implies that return is a linearly increasing function of risk. Moreover, only the market risk affects the return and the investor receive no extra return for bearing diversifiable (residual) risk. The set of assumptions employed in the development of the CAPM can be summarized as follows [Sears and Trennepohl (1993)]: 1. Investors are risk-averse and they have a preference for expected return and a dislike for risk. 2. Investors make investment decisions based on expected return and the variances of security returns, i.e. two-parameter utility function. 3. Investors behave in a normative sense and desire to hold a portfolio that lies along the efficient frontier. These three assumptions were also made in the development of the Markowitz and...
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...Questions: 1. Why do companies use stock options to compensate employees? What are the advantages of stock options relative to cash compensation? What, if any, are their disadvantages? 2. What, if any, risks do Dell’s shareholders face from Dell’s stock option program? Draw terminal payoff diagrams to illustrate the risk. Is this risk something that shareholders of Dell expect to bear when investing in Dell? 3. How does Dell remove, or hedge, the perceived risk of the stock options program for shareholders? Draw terminal payoff diagrams to illustrate. 4. Why does Dell transact in both call and put options? Use put-call parity to reformulate the put and call positions that Dell takes in terms of Dell’s stock and borrowing. What effectively does Dell’s call and put positions accomplish? Is risk management the primary motivation for Dell’s actions? A stock option is an offer by a company that gives employees the right to buy a specified number of shares in the company at an agreed upon price (usually lower than market) by a specific date. The benefit of granting options to employees is viewed as a good thing because it (theoretically) aligned the interests of the employees (normally the key executives) with those of the common shareholders. If a material portion of a CEO's salary were in the form of options, she or he would be incited to manage the company well, resulting in a higher stock price over the long term. The higher stock price would benefit both the executives...
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...Chapter Three: How Securities Are Traded........................................................................ 8 Chapter Six: Risk and risk aversion.................................................................................. 12 Chapter Seven: Capital Allocation between the Risky asset and the risk-free Asset ....... 17 Chapter Eight: Optimal Risky Portfolios:......................................................................... 20 Chapter Nine: The Capital Asset Pricing Model .............................................................. 24 Chapter Ten: Index Models: ............................................................................................. 28 Chapter Eleven: Arbitrage Pricing Theory and multifactor models of risk and return .... 32 Chapter Twelve: Market Efficiency and Behavioral Finance........................................... 35 Chapter Fourteen: Bond prices and yields ........................................................................ 43 Chapter Fifteen: The Term Structure of Interest Rates..................................................... 48 Chapter Sixteen: Managing Bond Portfolios .................................................................... 53 Chapter Eighteen: Equity Valuation Models .................................................................... 57 Chapter Twenty: Option Markets: Introduction ............................................................... 59 Chapter Twenty-one: Option...
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