Financial Institutions and Markets
Q1. Ms. Vijaya, after completing her graduation, has recently joined a bank. With a steady income now and good growth prospects for her career, she intends to save regularly and increase the amount of savings gradually over the years. Her colleagues in the bank have advised her investing in Mutual Funds (MFs), as a suitable option for her. However, Ms. Vijaya is not at all familiar with MFs and has some queries such as:
a) What are mutual funds and why should she be investing through mutual fund?
b) What are the various types of mutual funds? Prepare a detailed answer for her queries.
Q2. Mr. Sudhindra Kumar, aged 60, has been an investor in stock market for the last 35 years. When he initially started investing in late 1980s, he used to take positions in the stock markets after studying the annual reports of the company. He used to scan financial newspaper everyday to spot a scrip for buying or selling. He used to generate better returns on his investments than his other colleagues who would solely rely on the trends in stock prices to choose the stock. However, by the end of late 1990s, Mr. Sudhindra realized that he is not able to spot as many investment opportunities through his existing methods. He observed that her junior colleague, Ms. Rama was generating better returns than him. Ms. Rama also shared with Mr. Sudhindra that she picks up stocks based on the recommendation of his stock-broker friend. His recommendations have been a hit as he is very well connected to many corporates, financial intermediaries and other brokers. He seems to get to know about the corporate and market developments ahead of the many investors. Mr. Sudhindra requested Ms. Rama to share such invest tips with him as well in future. Using these tips judiciously along with his old methods of investing, he continued to generate handsome returns on his investment. After various stock-market scams, in the early and mid 2000s, various regulations were brought in place by SEBI to curb manipulation of stock prices and bring more transparency of information, especially for the small investors. As a result, the flow of reliable and worthy investment tips through Ms. Rama dried up and once again. Today, Mr. Sudhindra finds that his older methods of investing are not as effective as they used to be in past, in identifying an investment-worthy stock. All the information related to any stock is almost instantaneously and simultaneously available to the whole market, with the help of technology. Hence, opportunities to beat the market in generating returns have become far lesser than in past. Based on the above information, what are your observations regarding the market efficiency of Indian market since 1980s? Put your commentary/conclusions with your rationale for the same.
Q.3 DEF Limited is an Indian company, engaged in export oriented trading of various manufactured items. The company buys products manufactured in India and sells its products primarily in US. The company pays to its vendors/sellers in Indian rupee and it receives payment in USD after 90 days of dispatching its products. Also, the company borrows money in Indian Rupee for working capital purposes. The cost of borrowing for the company is around 14%-15%. The company aims to reduce its borrowing cost and is exploring options for the same.
a) How can DEF limited manage/mitigate the forex risks?
b) What kind of Swaps instruments DEF Limited can use to manage the forex related risks and reduce borrowing costs?
Q1. Ms. Vijaya, after completing her graduation, has recently joined a bank. With a steady income now and good growth prospects for her career, she intends to save regularly and increase the amount of savings gradually over the years. Her colleagues in the bank have advised her investing in Mutual Funds (MFs), as a suitable option for her. However, Ms. Vijaya is not at all familiar with MFs and has some queries such as:
a) What are mutual funds and why should she be investing through mutual fund?
b) What are the various types of mutual funds? Prepare a detailed answer for her queries.
Q2. Mr. Sudhindra Kumar, aged 60, has been an investor in stock market for the last 35 years. When he initially started investing in late 1980s, he used to take positions in the stock markets after studying the annual reports of the company. He used to scan financial newspaper everyday to spot a scrip for buying or selling. He used to generate better returns on his investments than his other colleagues who would solely rely on the trends in stock prices to choose the stock. However, by the end of late 1990s, Mr. Sudhindra realized that he is not able to spot as many investment opportunities through his existing methods. He observed that her junior colleague, Ms. Rama was generating better returns than him. Ms. Rama also shared with Mr. Sudhindra that she picks up stocks based on the recommendation of his stock-broker friend. His recommendations have been a hit as he is very well connected to many corporates, financial intermediaries and other brokers. He seems to get to know about the corporate and market developments ahead of the many investors. Mr. Sudhindra requested Ms. Rama to share such invest tips with him as well in future. Using these tips judiciously along with his old methods of investing, he continued to generate handsome returns on his investment. After various stock-market scams, in the early and mid 2000s, various regulations were brought in place by SEBI to curb manipulation of stock prices and bring more transparency of information, especially for the small investors. As a result, the flow of reliable and worthy investment tips through Ms. Rama dried up and once again. Today, Mr. Sudhindra finds that his older methods of investing are not as effective as they used to be in past, in identifying an investment-worthy stock. All the information related to any stock is almost instantaneously and simultaneously available to the whole market, with the help of technology. Hence, opportunities to beat the market in generating returns have become far lesser than in past. Based on the above information, what are your observations regarding the market efficiency of Indian market since 1980s? Put your commentary/conclusions with your rationale for the same.
Q.3 DEF Limited is an Indian company, engaged in export oriented trading of various manufactured items. The company buys products manufactured in India and sells its products primarily in US. The company pays to its vendors/sellers in Indian rupee and it receives payment in USD after 90 days of dispatching its products. Also, the company borrows money in Indian Rupee for working capital purposes. The cost of borrowing for the company is around 14%-15%. The company aims to reduce its borrowing cost and is exploring options for the same.
a) How can DEF limited manage/mitigate the forex risks?
b) What kind of Swaps instruments DEF Limited can use to manage the forex related risks and reduce borrowing costs?
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