SUSHANT UNIVERSITY, GURGAON
SCHOOL OF BUSINESS
END TERM EXAMINATION, December 2020
Course Code: 15MBA-0FR21E Course Name: Financial Risk Management
Program: MBA Semester: III
Time for submission (Same Day): 4.30 pm
Max Marks: 60
Instructions:
1. Section A: Attempt any two (2) of three (3) questions. Each question carries 15 marks.
2. Section B: Compulsory Question of 30 marks.
3. The answers to the questions, should be written in your own handwriting on A4 size
sheet/full register page, must be mailed as an attachment in pdf/image format/scanned copy.
4. Your answers to the questions should not match with that of other students. If found so, it will
be treated as a case of UFM.
5. The answer sheets must be sent to the concerned subject faculty within the stipulated time
through college email id only.
6. On the top right hand side write – Name, Roll Number and Date, Subject Name and Code.
7. Write your Name, subject and page number on each answer sheet before scanning.
8. Save the scanned copy of answer sheets in the following file name syntax: <Name >, <RollNo>,
<SubjectName>,<PageNo.>
9. All the exam activities are under electronic surveillance by AU IT cell.
SECTION A
Attempt any two (2) of three (3) questions. Each question carries 15 marks
Q1. Country ABC takes over the business of an MNC situated in ABC itself by giving inadequate
compensation. Host country ABC prevents the MNCs to get converted their earning from local currency
to foreign currency to repatriate the same to home country of MNCs. Due to this restrictions even
investors in MNCs business also suffer a lot.
ABC has enforced certain dramatic changes in Rule and Regulations governing the host country. These
sudden changes are of following types:
• Unanticipated increase in tax rates applicable for MNCs operating in the host country.
• Compulsion to hire local workforce.
• Compliances of stricter environmental standards.
ABC is also facing high level of red tapism and corruption at local and higher level and it pose a serious
risk for MNCs operating in the host country as it leads to uncertainty and high cost of oper ation.
The host country revokes earlier turnkey projects awarded by the Government of host country without
adequate consideration and damages. Highlight the type of risks being faced by a Multinational Company
(MNC) in country ABC.
Q2. Arun industries ltd. sold 10 machines to Bhanu Industries Ltd. in Germany on credit and invoiced €40
million payable in six months. Currently, the six-month forward exchange rate is $1.10/€ and the expected
spot rate is likely to be $1.07/€ in six months. What is the expected gain/loss from the forward hedging?
Q3. The ABC Bank Ltd. is a bank in India and has a credit portfolio of Rs. 10 billion. The key portfolio
features are :
The largest sector exposure is in construction, which accounted for 20% of the credit portfolio (others
sectors in the portfolio include cement/steel manufacturers, building material distributors, real estate
developers/builders, automobile manufacturers, tyre manufacturers and investment banks).
The two largest customers account for 30% (they belong to the construction and building materials sector).
All obligors in the credit portfolio are situated within India.
The credit products offered by the bank include both short and long term – but the majority is long term
exceeding one year, accounting for 60% of the portfolio.
Most of the funding sources are short term – i.e. short-term deposits and inter-bank borrowings, which
accounted for about 75% of the total funding requirements.
Although entire lending was in Rupees, 45% of the short-term deposits were in non-rupee currencies. The
only collateral it accepts is real estate.
Discuss the portfolio level risks in this portfolio. Is there any significant undiversified risk in this credit
portfolio?
SECTION B
Compulsory question of 30 marks.
Q4. Splendid Bank has given loan to several big companies. However, the credit appraisal system was very
liberal while granting the loan. Following mistakes are made by the bank, which makes it vulnerable to credit
risk.
(i) Lender organization should consider going through the credit scoring agencies to ensure the customer
has the paying ability. It always better to take the help of professionals during this step. During this
stage, credit evaluation is very critical. However, the bank didn’t take the help of a professional and
some loopholes were left while checking the credibility of the customers.
(ii) It’s important for the lender to understand who all have been given trade credit in the past and how old
are the relationship with such counterparty. This will establish a pattern to understand if the customer
has a tendency to maintain the business relation or it’s just a pure business. Also, asking reference
from the third party proves to be independent source to verify the commitment made by the customers.
But, the bank was a bit lackadaisical in its approach and didn’t consult the third parties.
(iii) When a lender is convinced to provide a line of credit to the customer, it is his duty to have proper due
diligence in place to ensure the line of credit is being placed in safe pair of hands. Irrespective of the
professionals’ involvement in due diligence process, lender still has the moral responsibility to
perform the due diligence on its own. This can be achieved by simply visiting the website, assessing
the market creditability etc. Basically, publically sourced information is pretty useful in such cases.
But, again the bank was negligent on this count.
(iv) Every effort should be made to ensure that the minimal cost of capital should be recovered from the
customer. This can be achieved by simply asking the borrower for a deposit or the collateral.
However, some of the collaterals taken by the bank were substandard.
The mistakes as mentioned above make the bank vulnerable to efficient recovery of the loan given by it.
1. Advise as to how the bank can mitigate its credit risk. (10)
2. What are the different KYC norms that are applicable today. (10)
3. In your opinion, who is at more risk- state banks or private banks? (10)