Paper 14- Advanced Financial Management - Institute of Cost

926 Pages·2014·9.2 MB·English

14
FINAL : PAPER -
ADVANCED FINANCIAL
MANAGEMENT
(AFM)
FINAL
STUDY NOTES
The Institute of Cost Accountants of India
CMA Bhawan, 12, Sudder Street, Kolkata - 700 016
First Edition : May 2013
Second Edition (Revised & Updated) : August 2014
Published by :
Directorate of Studies
The Institute of Cost Accountants of India (ICAI)
CMA Bhawan, 12, Sudder Street, Kolkata - 700 016
www.icmai.in
Printed at :
Das Printers
61, Surya Sen Street,
Kolkata - 700 009
Copyright of these Study Notes is reserved by the Insitute of Cost
Accountants of India and prior permission from the Institute is necessary
for reproduction of the whole or any part thereof.
Syllabus
Syllabus Structure
A Financial Markets and Institutions 30%
B Financial Risk Management 25%
C Security Analysis and Portfolio Management 20%
D Investment Decisions 25%
D
25% A
30%
C
20% B
25%
ASSESSMENT STRATEGY
There will be written examination paper of three hours.
OBJECTIVES
To provide expert knowledge on setting financial objectives and goals, managing financial resources,
financial risk management, thorough understanding of investment portfolios and financial instruments.
Learning Aims
The syllabus aims to test the student’s ability to :
 E valuate the role of agents and instruments in financial markets
 Interpret the relevance of financial institutions
 A nalyze the degree of risk for its effective management
 Advise on investment opportunities
Skill set required
Level C: Requiring skill levels of knowledge, comprehension, application, analysis, synthesis and evaluation.
Section A : Financial Markets and Institutions 30%
1. Agents in Financial Markets
2. Financial Market Instruments
3. Commodity Exchange
4. Infrastructure Financing
Section B : Financial Risk Management 25%
5. Capital Market Instruments
6. Types of Financial Risks
7. Financial Derivatives as a tool for Risk Management
8. Financial Risk Management in International Operations
Section C : Security Analysis and Portfolio Management 20%
9. Security Analysis & Portfolio Management
Section D : Investment Decisions 25%
10. (a)Investment Decisions under uncertainty
(b) Investments in advanced technological environment
(c) International Investments
SECTION A: FINANCIAL MARKETS AND INSTITUTIONS [30 MARKS]
1. Agents in Financial Markets
(a) Reserve Bank of India; SEBI; Banking Institutions
(b) Non-Bank Financial Corporation’s (NBFCs)
(c) Insurance, Pension Plans and Mutual Funds
2. Financial Market Instruments
(a) Call money, Treasury Bills, Commercial Bills, Commercial Paper; Certificate of Deposits,
Government Securities and Bonds, Repo, Reverse Repo and Promissory Notes
(b) Futures, Options, other Derivatives
(c) Money Market Instruments & Mutual Funds
3. Commodity Exchange
(a) Regulatory Structure, Design of markets
(b) Issues in Agricultural, Non-Agricultural Markets, product design, contract specifications, spot
price and present practices of commodities exchanges
(c) Intermediaries, Clearing house operations, risk management procedures and delivery related
issues
(d) Issues related to monitoring and surveillance by exchanges and regulator, Basic risk and its
importance in pricing
(e) Commodity options on futures and its mechanism
4. Infrastructure Financing
(a) Financial objectives, policies on financing, investments and dividends. Financial forecasting,
planning and uncertainties, interest rates, inflation, capital gains and losses exchange control
regulation, government credit policies and incentives statistics on production, price indices,
labour, capital market based on published statistical data
(b) Internal source, retained earnings, provisions etc, Issues in raising finance, legal form of
organisation, provisions of the companies Act, control of capital issues. Short term sources :
Trade credit, factoring, Bill of exchange, Bank Loan, Cash credit, overdraft, public deposit,
SEBI regulations, primary and secondary markets
(c) Securitization, Viability, GAP Funding
SECTION B: FINANCIAL RISK MANAGEMENT [25 MARKS]
5. Capital market instruments
(a) Primary and secondary markets and its instruments
(b) Optionally convertible debentures, Deep discount bonds
(c) Rolling settlement, Clearing house operations
(d) Dematerialization, Re-materialization
(e) Depository system
(f) Initial Public Offering (IPO)/ Follow on Public Offer (FPO); Book Building
(g) Auction, Insider trading
(h) Credit rating- objective, sources, process, credit rating agencies in India
6. Types of Financial Risks
(a) Asset based risk , Credit Risk, Liquidity Risk, Operational Risk
(b) Foreign investment risk, Market Risk
7. Financial Derivatives as a tool for Risk Management
(a) Forward & Futures – meaning, risks associated, difference, features, stock futures, benefits
of future market, components of future price, index and index futures, margin, hedging,
hedging risks and portfolio returns using index futures, hedge ratio, cross hedge, perfect and
imperfect hedge, stock lending scheme, forward rate interest, computation of appropriate
interest rate
(b) Options – meaning, types, call and put options, terms and timing of exercise in options
contract, determination of premium, intrinsic value and time value, strategy – spread, bull
spread, bear spread, butterfly spread, box spread, combination, straddle, strangle, strips
and straps, put-call parity, binomial tree approach, risk neutral valuation, Black-Scholes and
Merton, evaluation of option pricing – delta, gamma, vega/lambda, theta, rho.
(c) Swaps and Swaption – meaning, types, features, benefits, role of financial intermediaries,
interest rate swaps, valuation of different swaps
(d) Interest rate derivatives – meaning, interest rate caps, interest rate collars, forward rate
agreements, interest rate futures
8. Financial Risk Management in International Operations
(a) Forex market, equilibrium exchange rate, exchange rate arrangements, bid-ask rate and bid-
ask rate spread, cross rate, currency arbitrage: two-point and three-point, parity conditions
in International Finance: Purchasing Power Parity – Unbiased Forward Rate Theorem – Interest
Rate Parity – Fisher Effect – International Fisher Effect, arbitrage operations, covered interest
arbitrage
(b) Exchange rate risk management – forex hedging tools, exposure netting, currency forward,
cross currency roll over, currency futures, options, money market hedge, asset-liability
management
(c) Foreign Investment Analysis: International Portfolio Investment – International Capital
Budgeting.
(d) Sources of Foreign currency, debt route, depository receipts, American Depository Receipts
(ADRs) – sponsored, unsponsored, Global Depository Receipts (GDRs), Warrants, Foreign
Currency Convertible Bonds (FCCBs), Euro Issues, Euro Commercial Paper, Euro Convertible
Bonds, Note Issuance Facility, Participating Notes
(e) Foreign Investment in India, Joint Ventures, Foreign Technology
Taxation Issues in cross-border financing and investments,
International Transfer Pricing – Objectives – Arm’s length pricing – techniques, advance pricing
(f)
agreements, Maximization of MNC’s income through Transfer Pricing strategy
(g)
SECTION C: SECURITY ANALYSIS & PORTFOLIO MANAGEMENT [20 MARKS]
9. Security Analysis & Portfolio Management
(a) Security analysis, Fundamental analysis, Economic analysis, Industry analysis, Company analysis,
Technical analysis, Momentum analysis – arguments and criticisms
(b) Market indicators, Support and resistance level, Patterns in stock price
(c) Statistic models, Bollinger bands
(d) Portfolio Management – meaning, objectives and basic principles, discretionary and non-
discretionary portfolio managers
(e) Theories on stock market movements – Daw Jones Theory, Markowitz Model
(f) Risk analysis – types, systematic and unsystematic risk, standard deviation and variance,
security beta, market model, alpha
(g) Portfolio analysis – CAPM and assumption, Security and Capital market line, decision-making
based on valuation, risk return ratio, arbitrage pricing model, portfolio return, portfolio risk
co-efficient of variance, co-variance, correlation coefficient, correlation and diversification,
minimum risk portfolio, hedging risks using risk free investments, project beta, levered and
unlevered firms and proxy beta
SECTION D: INVESTMENT DECISIONS [25 MARKS]
10. (a) Investment decisions under uncertainty
(i) Estimation of project cash flow
(ii) Relevant cost analysis
(iii) Project reports – features and contents
(iv) Project appraisal steps – general, inflationary and deflationary conditions
(v) Techniques of project evaluation
(vi) Investment decisions under uncertainties
(vii) Difference in project life – EAC and LCM approaches, Capital Rationing, NPV vs. PI, NPV vs.
IRR
(viii) Social Cost Benefit Analysis, Break-even Analysis
(ix) Inflation and Financial Management
(x) Sensitivity Analysis, Certainty Equivalent Approach, Decision Tree Analysis, Standard Deviation
in Capital Budgeting
(xi) Hiller’s Model, Hertz’s Model
(xii) Discount Rate Component, Risk Adjusted Discount Rate
(xiii) Option in Capital Budgeting
(b) Investment in advanced technological environment
(i) Financial forecasting
(ii) Strategic management and Strategy levels
(iii) Interface of financial strategy with corporate strategic management
(iv) Completed financial plan, Corporate taxation and financing, Promoter’s contribution
(v) Cost of capital – cost of different sources of capital, weighted average cost of capital,
marginal cost of capital, capital asset pricing model
(vi) Debt financing – margin money, refinancing, bridge finance, syndication of loan and
consortium, seed capital assistance, venture capital financing, deferred payment guarantee
(vii) Lease financing – finance and operating lease, lease rentals, sale and lease back, cross-
border leasing
(viii) Debt securitization - features, advantages, factoring, forfeiting, bill discounting
(c) International Investments
(i) World financial markets
(ii) Foreign portfolio investments
(iii) Modern portfolio theory
(iv) Issues posed by portfolio investment
(v) Foreign portfolio trends in India – emerging trends and policy developments
Content
SECTION A – FINANCIAL MARKETS AND INSTITUTIONS
Study Note 1 : Agents in Financial Markets
1.1 Financial System 1.1
1.2 Reserve Bank of India (RBI) 1.13
1.3 Banking Institutions 1.25
1.4 Securities and Exchange Board of India (SEBI) 1.32
1.5 Non-Banking Financial Company (NBFC) 1.34
1.6 Insurance 1.45
1.7 Pension Plans 1.47
1.8 Mutual Funds 1.50
Study Note 2 : Financial Market Instruments
2.1 Financial Market 2.1
2.2 Money Market 2.2
2.3 Money Market Instruments 2.5
2.4 Government Securities and Bonds 2.21
2.5 Repo and Reverse Repo 2.29
2.6 Promissory Note 2.31
2.7 Futures, Options and Other Derivatives 2.31
2.8 Mutual funds 2.34
Study Note 3 : Commodity Exchange
3.1 Commodity Exchange 3.1
3.2 Commodities Exchanges in India 3.4
3.3 Commodity Exchange – Structure 3.13
3.4 Indian Commodity Market - Regulatory Framework 3.17
3.5 Indian Economy and Role of Agricultural Commodity 3.22
3.6 Unresolved Issues and Future Prospects 3.28
3.7 Contract Specifications (For Tutorial Reference only) 3.30
3.8 Instruments Available for Trading 3.31
3.9 Participants of Commodity Market 3.34
3.10 Intermediaries of Commodity Markets 3.35
3.11 Product Specification 3.36
3.12 How the Commodity Market Works 3.39
3.13 Clearing House Operations 3.41
3.14 Risk Management 3.46
3.15 Basis and Basis Risk 3.47
3.16 Market Monitoring and Surveillance 3.48
3.17 Commonly Futures and its Mechanism 3.51
3.18 Commonly Used Terms in Commodity Market 3.71
Study Note 4 : Infrastructure Financing
4.1 Introduction 4.1
4.2 Evolution of Financing Needs in Indian Infrastructure 4.4
4.3 Infrastructure Financing methods- Present Scenario 4.5
4.4 Project Financing versus Capital Financing 4.7
4.5 Risk Management in Infrastructure Projects 4.7
4.6 Financing Infrastructure Development: Recent Trends and Institutional Initiatives 4.8
4.7 SEBI regulations relating to Infrastructure Sector 4.13
4.8 Legal form of Organisation 4.17
4.9 Sources of infrastructure investment in India 4.20
4.10 Financial Objective 4.22
4.11 Projected Investment in the Infrastructure Sector during the Twelfth Plan 4.24
4.12 Investment and Dividend Decision 4.25
4.13 The Interest Rates have been recently revised by the Board 4.30
4.14 Issues in Infrastructure Financing 4.36
4.15 Need for an Efficient and Vibrant Corporate Bond Market 4.37
4.16 Measures taken by the Central Government 4.38
4.17 Price Indices 4.45
4.18 Internal Sources of Finanace 4.47
4.19 Short Term Sources 4.49
4.20 Issues and Challenges constraining Infrastructure Funding 4.51
4.21 Primary & Secondary Market Structure 4.53
SECTION B: FINANCIAL RISK MANAGEMENT
Study Note 5 : Capital Market Instruments.1
5.1 Capital Market 5.1
5.2 Primary and Secondary Markets and its Instruments 5.2
5.3 Optionally Convertible Debentures and Deep Discount Bonds 5.6
5.4 Rolling Settlement, Clearing House Operations 5.7
5.5 Dematerialisation & Rematerialisation 5.8
5.6 Depository System 5.10
5.7 Initial Public Offer (IPO)/ Follow on Public Offer (FPO); Book Building 5.13
5.8 Auction & Insider Trading 5.20
5.9 Credit Rating - Objectives, Sources, Process, Credit Rating Agencies in India 5.22
Study Note 6 : Types of Financial Risks
6.1 Financial Risk – Meaning and Nature 6.1
6.2 Asset Backed Risk, Credit Risk, Liquidity Risk, Operational Risk 6.10
6.3 Foreign Investment Risk & Market Risk 6.14
6.4 Financial Risk Identification based on the Balance Sheet Information 6.16
6.5 Hedging & Diversification 6.20
Study Note 7 : Financial Derivatives as a tool for Risk Management
7.1 Farward & Future 7.2
7.2 Options 7.65
7.3 Swaps & Swaption 7.128
7.4 Interest Rate Derivatives 7.143
Study Note 8 : Financial Risk Management in International Operations
8.1 Foreign Exchange Market 8.1
8.2 Foreign Exchange Rate Management 8.5
8.3 Parity Conditions in International Finance 8.14
8.4 Exchange Rate Risk Management 8.24
8.5 Foreign Investment Analysis 8.37
8.6 Sources of Foreign Currency 8.49
8.7 Foreign Investment in India 8.60
8.8 Taxation Issues in Cross-Border Financing and Investment 8.65
8.9 International Transfer Pricing 8.85