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Knowledge Builder Capsule

CURRENTAFFAIRS

FINANCE ECONOMICS

MARKETING OPERATIONS

An IIM Lucknow Students Initiative 2015 Presents

Indian Institute Of Management

Lucknow



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Indian Institute of Management, Prabandh Nagar, Off Sitapur Road, Lucknow-226013 (U.P.) India

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An IIM Lucknow Initiative

E-Mail: [email protected], [email protected]

CURRENT

AFFAIRS



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Disclaimer: The list of questions/topics given below is not meant to be comprehensive. It is meant to provide

guidelines/pointers on certain focus issues. Wherever possible, the participants are expected to have their view on

the topics rather than knowing the facts as they are. Keeping abreast with the current affairs both in the national

and international circles in the areas of polity, economy, business, sports, etc. are of paramount importance.

Global economics:

Slow global economic recovery;

eurozone crisis;

U.S. economy jobless recovery and growth pangs;

Japan and Abenomics;

Economic, military & political power rise of China, and

BRICS why Russia and Brazil are in recession.

Indian economy:

Current state of the economy;

Reasons behind slow GDP growth;

Faltering reforms process;

Infrastructure bottlenecks, including in railways;

FDI (especially in multi-brand retail, insurance);

NITI Aayog;

SMART Cities plan;

Swachh Bharat, and

Make in India and industrial clusters.

Global politics:

China - political & military muscle-flexing;

Syrian crisis Role of the Islamic State;

Rise of Islamic State in Iraq and Syria;




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Israel-Palestine imbroglio;

Rising authoritarianism in Turkey;

Korean peninsula North Korea versus South Korea;

Iranian nuke plans and P+1 deal;

Terrorism in Afghanistan & Pakistan;

Russia Ruble crisis; also Russia-Ukraine crisis;

Post-Arab Spring situation in Egypt, Libya, & Tunisia;

Ebola crisis in West Asia, and

Nigeria - terrorism & Boko Haram

National political & social issues:

Recent Assembly elections impact on national polity;

J&K elections, Article 370, & Jammu-Valley tussle;

Naxalism origin, ideology, reach, methods;

Social Media - freedom of speech & curbs;

Black Money - menace of corruption;

Gender-related issues, including safety issues, and

Religion conversions & reconversions debate.

Some Important Links:

Ebola

http://www.vox.com/cards/ebola-outbreak-2014/why-is-ebola-in-the-news

ISIS

http://www.vox.com/cards/things-about-isis-you-need-to-know/what-is-isis




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Ukraine crisis

http://www.bbc.com/news/world-middle-east-26248275

http://www.vox.com/cards/ukraine-everything-you-need-to-know/what-is-the-ukraine-crisis

Ghar wapsi

http://indianexpress.com/article/india/india-others/ghar-wapsi-not-a-govt-programme-shah/

Make in India

http://www.makeinindia.com/

NITI Aayog

http://pmindia.gov.in/en/news_updates/government-establishes-niti-aayog-national-institution-for-

transforming-india-to-replace-planning-commission/

http://www.thehindu.com/news/national/sindhushree-khullar-named-niti-aayog-

ceo/article6775518.ece?homepage=true

Sri Lanka Election

http://www.thehindu.com/opinion/editorial/editorial-democracy-wins-in-sri-

lanka/article6772537.ece?homepage=true

http://www.livemint.com/Politics/fygTRVQHiY3JatdxYfxN0M/What-Sirisenas-win-in-Sri-Lanka-means-

for-India.html

Boko Haram

http://www.nytimes.com/2014/11/11/world/africa/boko-haram-in-nigeria.html

Net neutrality-Airtel Controversy:

https://www.youtube.com/watch?v=fpbOEoRrHyU




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http://knowmore.washingtonpost.com/2014/04/25/this-hilarious-graph-of-netflix-speeds-shows-the-

importance-of-net-neutrality/

http://articles.economictimes.indiatimes.com/2015-01-04/news/57663450_1_net-neutrality-google-

india-rajan-anandan

ECONOMY

Falling Oil Prices

http://www.economist.com/blogs/economist-explains/2014/12/economist-explains-4

http://www.vox.com/2014/12/16/7401705/oil-prices-falling

Russian rouble-economy collapse

http://www.economist.com/news/leaders/21636747-collapse-rouble-caused-vladimir-putins-

belligerence-greed-and-paranoia-ye

http://www.businessweek.com/articles/2014-12-16/no-caviar-is-not-getting-cheaper-everything-you-

need-to-know-about-the-russian-ruble-collapse

E commerce boom-Amazon, Flipkart, Snapdeal

http://www.livemint.com/Opinion/3aE8AROQgWy3vbr6e83nWN/2014-the-year-in-review--The-rise-

and-rise-of-ecommerce.html

http://www.livemint.com/Companies/jsYNvJSmfB6tbWKqRL9vhK/Flipkart-raises-700-million-in-fresh-

funds.html

http://www.bjnocabbages.com/2015/01/the-best-way-to-crack-gwpi-at-indias.html




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Taxi services: Uber, Ola, Taxi For Sure. Rapid growth. Problems theyre facing. Rape case, subsequent

bans.

http://www.livemint.com/Politics/F7FMDVEdVkMqsRHGNeVbHO/Ban-on-all-appbased-cabs-to-

continue-Delhi-govt-in-HC.html

Softbank funding

http://www.livemint.com/Companies/vY3bTBWPzyprsgj6QZaIFJ/SoftBank-to-invest-in-Housingcom-as-

real-estate-becomes-nex.html

http://gadgets.ndtv.com/internet/news/snapdeal-ola-cabs-to-raise-funds-from-japans-softbank-613085

Monetary policy-Interest rates

http://in.reuters.com/article/2014/12/02/india-economy-rates-idINKCN0JF38720141202




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Miscellaneous: India test firing the indigenously developed ICBM, Agni V

Dr. Poonam Khetrapal Singh of India getting the post (after 44 years) of the Regional Director

of World Health Organizations South East Asian Regional Organization (SEARO) The awarding of death sentences to the 4 convicts of the Delhi Gang Rape Case Serial Blasts in Bodh Gaya and inside the Maha Bodhi Temple BJPs announcement of Narendra Modi as its Prime Ministerial Candidate for 2014 elections Raghuram Rajans taking over as the 23rd Governor of the RBI National Food Security Bill coming into effect Indian Rupee hitting record low against the US Dollar Uttaranchal getting hit by massive landslides and flood Death of Manna Dey, Pran, Shakuntala Devi, Farooq Sheikh and Rituporno Ghosh

Border confrontation with China; PLA entering the Indian territory in Ladakh and

Arunachal Pradesh Sworning in of Justice Sathasivam as the new Chief Justice of India Naxalite attack on a congress fleet leading to the death of 27 people

Note: Participants are expected to have an idea of what is happening around the world in the areas of

economics, business affairs, politics, and sports. It is advisable to follow a newspaper or a good

magazine (The Hindu, Business Line or Economic Times, or Financial Express, India Today, Forbes,

Economist).




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FINANCE &

ECONOMICS




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E-Mail: [email protected], [email protected] Opportunity Cost- Economics deals with choosing one alternative among various alternatives.

The decision process begins with ranking all alternatives on priority basis, and then choosing

the alternative which is on the top of the priority list. This choice implies sacrifice of other

alternatives; hence cost of this choice will be evaluated in terms of the sacrificed alternatives.

The cost of this choice is the benefit of the next best alternative foregone. This is called

opportunity cost. Therefore, opportunity cost is the highest valued benefit that must be

sacrificed as a result of choosing alternative.

Microeconomics is the study of individual consumers and producers in specific markets. It

involves the determination of price through the optimizing behavior of economic agents,

with consumers maximizing utility and firms maximizing profits. Thus Microeconomics seeks

to answer questions related to supply & demand, pricing of output, production process, cost

structure and distribution of income & output.

Law of demand:Other things remaining the same, there is an inverse relationship between price and quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes

up, so does the opportunity cost of buying that good. As a result,

people will naturally avoid buying a product that will force them to

forgo the consumption of something else they value more.

Law of Supply: It basically establishes the relationship between the

supply of a product and its price. It states that Supply of a

particular product is directly proportional to its price keeping other

factors constant. Producers supply more at a higher price because

selling a higher quantity at higher price increases revenue.




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Equilibrium refers to a situation in which the price has reached the level where the quantity

supplied equals the quantity demanded. As you can see on the chart, equilibrium price and

quantity are determined by the intersection of demand & supply curves. At this point, the

price of the goods will be p* and the quantity will be q*. These figures are referred to as

equilibrium price and quantity. Consumers can purchase all they want & producers can sell all

they want at the market-clearing price i.e. p*.

Macroeconomics is the study of the aggregate economy. It addresses many topical issues like:

Why does the cost of living keep rising? Why are millions of people unemployed, even when the

economy is booming? What causes recession? More specifically it is a study of national

economies and the determination of national income.

A variety of measures of national income and output are used in economies to estimate total economic activity in a country or region.

Gross Domestic ProductThe monetary value of all the finished goods and services produced within

a country's borders in a specific time period, though GDP is usually calculated on an annual basis.

GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a

country's standard of living. Critics of using GDP as an economic measure say the statistic does not

take into account the underground economy - transactions that, for whatever reason, are not

reported to the government. Others say that GDP is not intended to gauge material well-being, but

serves as a measure of a nation's productivity, which is unrelated.

They are the product (or output) approach, the income approach, and the expenditure

approach.

The expenditure method:

GDP = private consumption + gross investment + government spending + (exports imports), or

GDP = C + I + G + (X M)

The income method:




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GDP = compensation of employees + gross operating surplus + gross mixed income + taxes less subsidies on production and imports

GDP = COE + GOS + GMI + TP & M SP & M

The product approach:

Gross Value Added = Value of output- Value of Intermediate Consumption.

Value of Output= Value of the total sales of goods and services + Value of changes in the inventories.

The sum of gross value added in various economic activities is known as GDP at factor cost.

GDP at factor cost plus indirect taxes less subsidies on products is GDP at Producer Price.

Gross National Product It is an economic statistic that includes GDP, plus any income earned

by residents from overseas investments, minus income earned within the domestic economy

by overseas residents.

GNP is a measure of a country's economic performance, or what its citizens produced (i.e. goods and services) and whether they produced these items within its borders.

Gross National Product (GNP) is the market value of all products and services produced in one year by labor and property supplied by the residents of a country.

GNP = C + G + I + NX +NFP

Consumption (C) is the actual consumption spending of the household sector.

Goods and services (G) is the next largest component of government purchases.

Investment spending (I) includes business spending that will improve the ability to produce in the future




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Net exports (NX) component is equal to exports (goods and services purchased by foreigners) minus imports (goods and services purchased by domestic residents).

Net factor payments (NFP) are the net amount of payments that an economy pays to

foreigners for inputs used in producing goods and services, less money the economy receives

for selling the same factors of production.

GNP Vs. GDP

GNP is the final value of goods and services produced by domestically-owned means of

production (using domestic labor and resources); GDP is the final value of goods and services

produced within a given country's border. Part of GNP, therefore, is earned overseas, while

some domestic production is added to GDP only.

Example involves U.S. Company Intel which manufactures silicon chips in Ireland. The

production from that facility is added to U.S. GNP, but not U.S. GDP. When U.S. residents earn

more abroad than foreigners earn in the U.S., GNP exceeds GDP and vice versa.

Purchasing Power Parity Purchasing power parity (PPP) is a measure of long-term

equilibrium exchange rates based on relative price levels of two countries. The concept is

founded on the law of one price, the idea that identical goods should (under certain

conditions) sell for the same price in two different countries at the same time. The absolute

PPP exchange rate equates the national price levels in two countries if expressed in a

common currency at that rate, so that the purchasing power of one unit of a currency would

be the same in the two countries. Relative PPP focuses on changes in the price levels and the

exchange rate, rather than the level.

The PPP exchange-rate calculation is controversial because of the difficulties of finding comparable baskets of goods to compare purchasing power across countries.




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An example of one measure of law of one price, which underlies purchasing power parity, is

the Big Mac Index, which looks at the prices of a Big Mac burger in McDonald's restaurants in

different countries. India stands 11th by Nominal GDP ($ 1.5 trillion) and 4th by PPP ($ 4.06 trillion).

Big Mac Index Generally PPP is measured by the cost of a basket of goods in different

countries. A famous indicator used to measure PPP is the Big Mac Index. This index was

proposed by The Economist. The Big Mac was chosen as it is available to a common

specification in many countries around the world thus enabling a comparison between

many countries currencies.

Fiscal &Monetary Policy - The government exerts its control over the nations economy using

two distinct set of policies. One is the monetary policy (the central bank manages this on

behalf of the government) and secondly the fiscal policy.

Fiscal policy is the use of government expenditure and revenue collection through taxation

to influence the economic activity. With the help of monetary policy the Reserve Bank of

India (RBI) attempts to stabilize the economy by controlling interest rates and spending.

Monetary policy comprises of various policy rates and reserve ratios. Policy Rates & Reserve Ratio

Bank Rate - Bank Rate is the interest rate that is charged by a countrys central or federal bank on

loans and advances to control money supply in the economy and the banking sector. This is

typically done on a quarterly basis to control inflation and stabilize the countrys exchange rates. A

fluctuation in bank rates triggers a ripple-effect as it impacts every sphere of a countrys economy.

For instance, the prices in stock markets tend to react to interest rate changes. A change in bank

rates affects customers as it influences prime interest rates for personal loans. This is the rate at

which RBI lends money to other banks (or financial institutions .The bank rate signals the central

banks long-term outlook on interest rates. If the bank rate moves up, long-term interest rates also

tend to move up, and vice-versa. Banks make




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a profit by borrowing at a lower rate and lending the same funds at a higher rate of interest. If

the RBI hikes the bank rate (this is currently 6 per cent), the interest that a bank pays for

borrowing money (banks borrow money either from each other or from the RBI) increases. It,

in turn, hikes its own lending rates to ensure it continues to make a profit.

Repo Rate A repurchase agreement, also known as a repo, RP, or sale and repurchase

agreement, is the sale of securities together with an agreement for the seller to buy back the

securities at a later date. The repurchase price should be greater than the original sale price,

the difference effectively representing interest, sometimes called the repo rate. The party that

originally buys the securities effectively acts as a lender. The original seller is effectively acting

as a borrower, using their security as collateral for a secured cash loan at a fixed rate of interest

Reverse Repo RateThe rate at which RBI borrows money from the banks (or banks lend

money to the RBI) is termed the reverse repo rate. Reverse repo rate signifies the rate at which

the central bank absorbs liquidity from the banks, while repo signifies the rate at which liquidity

is injected. The RBI uses this tool when it feels there is too much money floating in the banking

system. If the reverse repo rate is increased, it means the RBI will borrow money from the bank

and offer them a lucrative rate of interest. As a result, banks would prefer to keep their money

with the RBI (which is absolutely risk free) instead of lending it out (this option comes with a

certain amount of risk).Consequently, banks would have lesser funds to lend to their

customers. This helps stem the flow of excess money into the economy.

Cash Reserve Ratio (CRR) The portion (expressed as a percent) of depositors' balances banks

must have on hand as cash. This is a requirement determined by the country's central bank,

which in the U.S. is the Federal Reserve and in India is reserve bank. The reserve ratio affects

the money supply in a country.

For example, if the reserve ratio in the U.S. is determined by the Fed to be 11%, this means

all banks must have 11% of their depositors money on reserve in the bank. So, if a bank has

deposits of $1 billion, it is required to have $110 million on reserve.




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Statutory Liquidity Ratio (SLR) SLR indicates the minimum percentage of deposits that the

bank has to maintain in the form of gold, cash or other approved securities like treasury bills.

It regulates the credit growth in India.

The RBI reviews these rates and ratios on a monthly basis with intent to keep a check on

money supply and inflation rate in economy. In order to increase the supply of money in

economy RBI may decrease its policy rates and reserve ratios. The decrease will have the

combined effect of increasing the deposits available with the commercial banks which may be

offered as loans to general public thereby pumping more money into the economy. Exchange rate regimes

The manner in which a country manages its exchange rate with other currencies in the world

is called as the exchange rate regime. There are many types of exchange rate regimes like

Fixed, Floating and Pegged float. Fixed exchange rate regime was prevalent before the 1970s

when there was a direct convertibility between different currencies of the world that is the

exchange rate is fixed in this regime. In a floating exchange rate, the market dictates

movements in the exchange rate. In pegged float, the central bank keeps the rate from

deviating too far from a target band or value, via policy actions. If the rate moves outside the

band, the central bank would intervene in the market by buying or selling the currency to

bring the rate back to the pegged value.

Inflation- Inflation is a rise in the general level of prices of goods and services in an economy

over a period of time. Consequently, inflation also reflects erosion in the purchasing power

of money a loss of real value in the internal medium of exchange and unit of account in the

economy. Inflation rate = (this years price index last year price index) / last years price index

The consumer price index (CPI) is the best know indicator of inflation. In India, Food Inflation is a

significant indicator since food expense is the major expense for most of the people in India.




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The quantity theory of money is widely accepted as an accurate model of inflation in the

long run. Consequently, there is now broad agreement among economists that in the long

run, the inflation rate is essentially dependent on the growth rate of money supply. However,

in the short and medium term inflation may be affected by supply and demand pressures in

the economy, and influenced by the relative elasticity of wages, prices and interest rates.

Today, most mainstream economists favor a low, steady rate of inflation. Low (as opposed to

zero or negative) inflation may reduce the severity of economic recessions by enabling the

labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap

prevents monetary policy from stabilizing the economy.

Central bank (RBI in India) has the role to encourage growth and control inflation. RBIs desired level of inflation is 4-5 %, above which it becomes hawkish to check inflation.

Severe form of Inflation is called hyperinflation.

Currently, Indias Consumer price index is 9%, Wholesale Price Index is 8.5%, and Food Inflation is 10% approximately.

Deflation Deflation is a decrease in the general price level of goods and services. Deflation

occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the

real value of money over time; conversely, deflation increases the real value of money the

currency of a national or regional economy. This allows one to buy more goods with the

same amount of money over time. Deflation is correlated with depressions.

Deflation results in a lower level of demand in the economy due to lower production capability requirements of industry and this further leads to increased unemployment.

A deflationary spiral is a situation where decreases in price lead to lower production, which in

turn leads to lower wages and demand, which leads to further decreases in price. Since

reductions in general price level are called deflation, a deflationary spiral is when reductions in

price lead to a vicious circle, where a problem exacerbates its own cause. The Great Depression




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was regarded by some as a deflationary spiral. Japan is struggling with deflation since late 1980s where the prices are constantly decreasing.

Stagflation Stagflation is a situation in which the inflation rate is high and the economic

growth rate is low. Stagflation can happen due to two reasons. First, stagflation can result

when the productive capacity of an economy is reduced by an unfavorable supply shock, such

as an increase in the price of oil for an oil importing country. Such an unfavorable supply shock

tends to raise prices at the same time that it slows the economy by making production more

costly and less profitable. Second, both stagnation and inflation can result from inappropriate

macroeconomic policies. For example, central banks can cause inflation by permitting

excessive growth of the money supply, and the government can cause stagnation by excessive

regulation of goods markets and labor markets. Either of these factors can cause stagflation.

Both types of explanations are offered in the US stagflation of the 1970s: it began with a huge

rise in oil prices, but then continued as central banks used excessively simulative monetary

policy to counteract the resulting recession, causing a runaway wage-price spiral. FDI & FII

Foreign Direct Investment (FDI) refers to the investment by foreign investors in projects in the

country. This type of investment is more involved with the management, technology transfer

and other field expertise and knowhow in the project. FII refers to Foreign Institutional

Investors. These investors invest in the country indirectly by purchasing stocks of the

companies listed on the stock exchanges. The FII money inflows or outflows are also called

hot money flows. Types of industry

Monopoly - It exists when a specific individual or an enterprise has sufficient control over a

particular product or service to determine significantly the terms on which other individuals

shall have access to it. Monopolies are thus characterized by the ability of a firm to raise

price without losing all its sales. Monopolies often arise as a result of barriers to entry.




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For Example, Indian Railway has monopoly in serving passengers through train as no other player exists.

Perfect Competition It describes markets such that no participants are large enough to have

the market power to set the price of a homogeneous product. A perfectly competitive market

has the following characteristics like there are many buyers & sellers in the market, the goods

offered by the various sellers are largely the same and firms can freely enter or exit the market.

A competitive market has many buyers and sellers trading identical products so that each

buyer and seller is a price taker. Buyers and sellers must accept the price determined by the

market. Perfect competition serves as a benchmark against which to measure real-life and

imperfectly competitive markets.

Oligopoly - An oligopoly is a market form in which a market or industry is dominated by a

small number of sellers. It is characterized by only a few sellers, each offering a similar or

identical product to the others. Because of the few sellers, the key feature of oligopoly is the

issue between cooperation and self-interest. At least some firm have large market shares and

thus can influence the price of the product.

Example: - Indian Petroleum Industries which is dominated by few players like HPCL, BPCL, IOCL etc. and the decisions of the one influences the decision of the others.

Financial Markets

Difference and demarcation between money market and capital market is made on the basis of maturity period of instruments and claims.

Capital Market deals with longer maturity financial assets and claims. Capital market includes

trading in the financial instruments such as shares (equity as well as preference), public

sector bonds and units of mutual funds. In case of capital market even a small individual

investor can deal by sale/purchase of shares, debentures or mutual fund units.




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Examples: Governments issue Treasury Bonds in the Bond Market, Company through its IPO, taps the investing public for capital and is therefore using the capital markets

The capital market includes the stock market (equity securities) and the bond market (debt).

In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting.

In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere.

Money Market - Short-term instruments maturing within a period of one year are traded in

money market such as inter-corporate deposits, certificate of deposits, treasury bonds,

commercial papers, commercial bills, etc. Money market is a wholesale market and the

participants in money market are large institutional investors, commercial banks, mutual

funds, and corporate bodies. Money market consists of a number of sub-markets:

Call money market Commercial bills market or discount market Acceptance market Treasury bill market

Instruments of Money Market:

Certificate of Deposit - Time deposits, commonly offered to consumers by banks, thrift

institutions, and credit unions.

Repurchase Agreements - Short-term loans - normally for less than two weeks and frequently for one day - arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.

Commercial Paper - Unsecured promissory notes with a fixed maturity of one to 270 days; usually sold at a discount from face value




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Treasury Bills - Short-term debt obligations of a national government that are issued to

mature in three to twelve months.

Bankers Acceptance - is a short term credit investment created by a non-financial firm. Repo Instrument - The securities holder - the cash taker - sells securities against cash,

simultaneously agreeing to repurchase the same or similar securities at a later date.

Money Market Mutual Fund - is an open-ended mutual fund that invests in short-term debt securities such as treasury bills, commercial papers.

Shares: A unit of ownership interest in a corporation or financial asset. While owning shares in

a business does not mean that the shareholder has direct control over the business's day-to-

day operations, being a shareholder does entitle the possessor to an equal distribution in any

profits, if any are declared in the form of dividends. The two main types of shares are common

shares and preferred shares.

Debentures: The long-term requirements of capital are raised by the company primarily

through the issue of Shares and Debentures. While the shareholders are essentially the owners

of the enterprise, those who buy debentures are creditors for long-term funds and do not enjoy

voting rights. In brief all securities other than shares issued by a company will come under the

term debentures. A debenture like a share is also a movable property transferable in the

manner provided in the Articles of the company. Some of the characteristics of debentures are as follows:

An instrument to acknowledge the creditors of the company

A debenture holder is not a member but a creditor. Debenture carries a fixed rate of interest.

A debenture holder cannot have voting rights.

At the time of winding up debenture holders have a priority over the shareholders regarding the return of amount due to them.




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Bonds: A debt investment in which an investor loans money to an entity (corporate or

governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds

are used by companies, municipalities, states and U.S. and foreign governments to finance a

variety of projects and activities. Bonds are commonly referred to as fixed-income securities and

are one of the three main asset classes, along with stocks and cash equivalents. Derivatives:

The term Derivative stands for a contract whose price is derived from or is dependent upon

an underlying asset. The underlying asset could be a financial asset such as currency, stock and

market index, an interest bearing security or a physical commodity. Today, around the world,

derivative contracts are traded on electricity, weather, temperature and even volatility. Types of Derivative Contracts

Derivatives comprise four basic contracts namely Forwards, Futures, Options and Swaps. Over

the past couple of decades several exotic contracts have also emerged but these are largely the

variants of these basic contracts. Let us briefly define some of the contracts.

Forward Contracts: These are promises to deliver an asset at a predetermined date in future

at a predetermined price. Forwards are highly popular on currencies and interest rates. The

contracts are traded over the counter (i.e. outside the stock exchanges, directly between the

two parties) and are customized according to the needs of the parties. Since these contracts do

not fall under the purview of rules and regulations of an exchange, they generally suffer from

counterparty risk i.e. the risk that one of the parties to the contract may not fulfill his or her

obligation.

Futures Contracts: A futures contract is an agreement between two parties to buy or sell an asset

at a certain time in future at a certain price. These are basically exchange traded, standardized

contracts. The exchange stands guarantee to all transactions and counterparty risk is largely

eliminated. The buyers of futures contracts are considered having a long position whereas the

sellers are considered to be having a short position. It should be noted that this is




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similar to any asset market where anybody who buys is long and the one who sells in short.

Futures contracts are available on variety of commodities, currencies, interest rates, stocks

and other tradable assets. They are highly popular on stock indices, interest rates and foreign

exchange.

Options: It gives the buyer (holder) a right but not an obligation to buy or sell an asset in future.

Options are of two types - calls and puts. Calls give the buyer the right but not the obligation to

buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying

asset at a given price on or before a given date. One can buy and sell each of the contracts.

When one buys an option he is said to be having a long position and when one sells he is said

to be having a short position. It should be noted that, in the first two types of derivative

contracts (forwards and futures) both the parties (buyer and seller) have an obligation; i.e. the

buyer needs to pay for the asset to the seller and the seller needs to deliver the asset to the

buyer on the settlement date. In case of options only the seller (also called option writer) is

under an obligation and not the buyer (also called option purchaser). The buyer has a right to

buy (call options) or sell (put options) the asset from / to the seller of the option but he may or

may not exercise this right.

In case the buyer of the option does exercise his right, the seller of the option must fulfill

whatever is his obligation (for a call option the seller has to deliver the asset to the buyer of

the option and for a put option the seller has to receive the asset from the buyer of the

option). An option can be exercised at the expiry of the contract period (which is known as

European option contract) or anytime up to the expiry of the contract period (termed as

American option contract).

Swaps: Swaps are private agreements between two parties to exchange cash flows in the

future according to a prearranged formula. They can be regarded as portfolios of forward

contracts. The two commonly used swaps are:




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Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency.

Currency swaps: These entail swapping both principal and interest between the parties,

with the cash flows in one direction being in a different currency than those in the opposite

direction. Types of Traders in the Derivatives Markets Types of Traders in the Derivatives Markets:

The traders in the derivatives markets are classified into three broad types, viz. hedgers,

speculators and arbitrageurs, depending on the purpose for which the parties enter into

the contracts.

Hedgers trade with an objective to minimize the risk in trading or holding the

underlying securities. Hedgers willingly bear some costs in order to achieve protection

against unfavorable price changes.

Speculators use derivatives to bet on the future direction of the markets. They

take calculated risks but the objective is to gain when the prices move as per their

expectation.

Arbitrageurs try to make risk-less profit by simultaneously entering into transactions in

two or more markets or two or more contracts. They profit from market inefficiencies

by making simultaneous trades that offset each other thereby making their positions

risk-free. IPOs and FPOs:

When a SEBI registered company wants to raise funds or capital for its expansion programs, it

floats an IPO for the first time related to that project. The IPO document will in detail inform

the investor of the project, its growth trajectory, and its profit potential. The risk factors are

also outlined. Based on his personal assessment, the investor may invest as a shareholder, by

buying shares at the face value as announced by the Company. Each investor who buys stocks

through the IPO gets dividend or profits based on the companys performance, as declared by




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the company. If the company faces losses, the equity holder also bears the losses. In uncertain market situations, IPOs incur losses and so does each investor.

When a company floats its second or third public offering, its called FPOs or Follow-on Public Offers.

FII or Foreign Institutional Investors: FIIs are funds that are active in both primary and

secondary markets, invest in stocks and aim at reaping short-term profits. Though they bring

foreign currency, the flight of the capital is sudden, at times leading to currency and

monetary fluctuations. FIIs are heavily involved in speculative practices like futures trade and

short selling. They indulge in heavy trading in times of crisis making the situation very volatile.

Still, FIIs push up the stock prices, enhance national reputation, increase the investment

profits of stock players, strengthen the stock exchange and generally increase the brand

value of the region.

Venture Capital It is the money available to a risky project. Financier is convinced of the idea,

its blue print, viability and execution. The financier is only involved in investing heavily. Any

management personnel, entrepreneur, individual or a small company can get funds through a

venture capitalist and start his/her project. The IT boom has been powered by venture capital.

Hedge Funds Hedge funds are investment pools of some of the uber-rich or very high net

worth individuals across the wealth. The hedge funds have a certain tendency to aggressively

invest and usually their returns are typically higher than any other form of investment. Hedge

funds had initially reaped high returns in the US realty boom. They have been accused of short

selling. Much of their strategies remain secret. They operate high risk markets. Hedge funds

have this ability to return profits in both the bear and bull hugs.

Short selling The selling of a security that the seller does not own, or any sale that is

completed by the delivery of a security borrowed by the seller. Short sellers assume that they

will be able to buy the stock at a lower amount than the price at which they sold short.




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Participatory Notes: Participatory notes are a stock trade facilitating financial instrument in

the Indian stock exchange. As per SEBI guidelines only those individuals/companies registered

with SEBI can trade at the stock exchange. This has kept out a substantial category of high net

worth individuals who would not register/open shop in India. Since the ultimate stockholder is

not known, India did not encourage this. However, from late 1990s, under SEBI watch,

participatory notes were issued to non-registered individuals/companies to become stock

players after registering themselves through FIIs. Thus FIIs were in some way careful of the

players who entered bourses through their participatory notes.

Note: This list is not exhaustive. It has been prepared just to give you an idea about what you

can expect in an interview. People with relevant work experience in finance domain can

expect questions related to their job profile.

MARKETING




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The financial success of any organization often depends on how it markets its products and,

more importantly, the organization itself. For a firm to make profit or, what they call, meet

its bottom line there must be a top line.

Essence of marketing is exchange of value (win-win situation for both parties) and converting societal needs into profitable opportunities.

Basic terminologies:

Need It is the state of deprivation of some basic satisfaction. Needs cannot be created. They are physiological and psychological requirements.

Want They are specific satisfiers of needs. Our wants are shaped and re-shaped by the environment/society.

Demand - It is want backed by purchasing power i.e. the willingness and ability to buy.

Marketing will influence the demand based on 4 As: Appropriate Product

Attractive through Promotion




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E-Mail: [email protected], [email protected] Available at the right Place

Affordable Price

Product Anything that can be offered to the market to satisfy the needs and wants.

Product Category Products satisfying a specific need or want. E.g. Detergent, Shampoo

Product Form Type of product category E.g. Detergent can be in powder/ liquid/ bar.

Brand A name and/or symbol to identify the product of one seller and to differentiate it from others.

Brand Valuation It is the process of estimating the total financial value of a brand (both tangible as well as intangible part).

Brand Equity A set of intangible assets that literary add value to the brand and to the firm as a whole (goodwill).

Commodity Products which have no names. E.g. wheat, sugar etc. sold from grocery where

there is no branding or assurance. Brands which cannot be differentiated are called commodity-

class.

Product Classification Physical Goods, Services, Persons, Places, Organizations, Ideas

Product Life Cycle - Products have limited life. Sales pass through different stages where

they encounter different opportunities and challenges. Profits also vary at different stages.

So the products require different marketing and manufacturing strategies at different stages.

There are 4 stages in the PLC: Introduction, Growth, Maturity and Decline.




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Consumer Goods Classification -

Consumer Goods

Non- durable goods (Soft Durable Goods (Hard

Goods, < 3 years) Goods, >= 3 years)

Semi- durable FMCG (0-6 Months)

goods (> 6 months)

What is marketing? - The American Marketing Association defines Marketing as the activity, set

of institutions, and processes for creating, communicating, delivering, and exchanging offerings

that have value for the customers, clients, partners, and society at large. In layman terms,

marketing is about finding need gaps, and creating, communicating and delivering value to the

consumer in a way that benefits the organization and its stakeholders.

Marketing concept It implies that an organization aims all of its efforts at satisfying its customers profitably.

Selling vs. Marketing Marketing is not the art of selling products. In fact, the aim of marketing

is to understand the customer so well that the product fits him and sells itself, thus making

selling superfluous. Selling then remains as only the tip of the iceberg. In short the essence of

marketing is to make selling redundant.

Marketing Selling

Marketing is everything that a firm does to Selling is everything a firm does to influence a reach its customers and to generate leads.

customer to buy a product or service, or in




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other words close the sale.

Marketing is often a longer process of building

a brand for the product and the company. It Selling is the short term process of matching

involves finding the right product for satisfying the right customer to the value offered.

the customers needs.

Marketing is a process comprising of six steps namely:

Understanding Technical Name

Understanding Customer Needs Marketing Research

Converting Needs into Products Customer driven engineering

Communication about the product Promotion

Marketing the product available Distribution

Transaction Selling

After sales service/feedback Customer support

As evident from the above table, selling is only one of the steps.

Advertising vs. Marketing At the most fundamental level, marketing differs from advertising

in that marketing is to create a product that would satisfy prospective customer demands.

The role of advertising, on the other hand, is to create a demand for existing product.

Marketing Mix It is a set of tools that facilitate the marketing effort. Product- Features, specifications, design, quality

Price Value for money, MRP, discounts, credit, installments, maintenance




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E-Mail: [email protected], [email protected] Place Distribution, warehousing, availability, coverage

Promotion

As opposed to goods, services are intangible. People and process of delivery is important in

service. Clients presence is must, so ambience should be good.

People Attraction, selection, training, motivation, retention of people

Process

Physical Evidence Interior decoration, ambience

Price only ensures cash inflow, all other Ps results in cash outflow.

Difference between Price, value and satisfaction Value reflects the sum of perceived tangible

and intangible benefits and costs to customers. Value increases with quality and decreases with

price. However, other factors can also play a vital role in our perceptions of value. Satisfaction

reflects a persons judgments of products perceived performance in relation to expectations. 5Ms of Advertising Mission, Money, Message, Medium, and Measurement Note: A candidate should concentrate on having plausible answers for a few (indicative but not exhaustive) questions substantiating his interest in marketing.

Why are you interested in marketing?

How would you connect your graduation background with a prospective career in marketing?

Which brand/product/advertisement has left a lasting impression upon you? Why do you think you would suit a marketing profile?




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OPERATIONS




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Operations Management Operations Management deals with the design and management of

products, processes, services and supply chains. It considers the acquisition, development, and

utilization of resources that firms need to deliver the goods and services their clients want. The

purvey of OM ranges from strategic to tactical and operational levels. Representative strategic

issues include determining the size and location of manufacturing plants, deciding the

structure of service or telecommunications networks, and designing technology supply

chains.Tactical issues include plant layout and structure, project management methods, and

equipment selection and replacement. Operational issues include production scheduling and

control, inventory management, quality control and inspection, traffic and materials handling,

and equipment maintenance policies.




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Goods vs. ServicesThere are five essential differences between services and goods. The first is

that a service is an intangible process that cannot be weighed or measured, whereas a good is

a tangible output of a process that has physical dimensions. This distinction has important

business implications since a service innovation, unlike a product innovation, cannot be

patented. Thus, a company with a new concept must expand rapidly before competitors copy

its procedures. Service intangibility also presents a problem for customers since, unlike with a

physical product, they cannot try it out and test it before purchase.

The second is that a service requires some degree of interaction with the customer for it to be

a service. The interaction may be brief, but it must exist for the service to be complete. Where

face-to-face service is required, the service facility must be designed to handle the customer's

presence. Goods, on the other hand, are generally produced in a facility separate from the

customer. They can be made according to a production schedule that is efficient for the

company.

The third is that services, with the big exception of hard technologies such as ATMs and

information technologies such as answering machines and automated Internet exchanges, are

inherently heterogeneousthey vary from day to day and even hour by hour as a function of

the attitudes of the customer and the servers. Thus, even highly scripted work such as found in

call centers can produce unpredictable outcomes. Goods, in contrast, can be produced to

meet very tight specifications day-in and day-out with essentially zero variability. In those

cases where a defective good is produced, it can be reworked or scrapped.

The fourth is that services as a process are perishable and time dependent, and unlike goods, they can't be stored. You cannot come back last week for an air flight or a day on campus.

And fifth, the specifications of a service are defined and evaluated as a package of features that affect the five senses.

Production process A production process is defined as a user of resources to transform inputs

into desired output. For a plant that manufactures tyres, raw material, labor and capital can be




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inputs while the finished rubber tyre will be the output. The steps through which the raw material is converted into a finished good can be referred to as a process.

A simple parameter to measure efficiency of a process is productivity. In a broad sense, productivity is the ratio of goods/services produced to resources used (output to input).

Bottleneck A point of congestion in a system that occurs when workloads arrive at a given

point more quickly than that point can handle them. The inefficiencies brought about by

the bottleneck often create a queue and a longer overall cycle time.

The primary objective of a manager in the operations department is to eliminate the

bottleneck that exists in the process. By removing this inefficiency, the manager can increase

profits by reducing time to produce.

Inventory Management Inventory management refers mainly to when a firm strives to attain

and uphold an optimal inventory of goods while also taking note of all orders, shipping and

handling, and other associated costs.Inventory management is mainly about identifying the

amount and the position of the goods that a firm has in their inventory. Inventory

management is imperative as it helps to defend the intended course of production against the

chance of running out of important materials or goods.

Inventory management also includes making essential connections between the

replenishment lead time of goods, asset management, the carrying costs of inventory, future

inventory price forecasting, physical inventory, available space for inventory, demand

forecasting and much more.

By balancing these competing requirements, a company will discover their optimal

inventory levels. This is an ongoing process, as the firm will need to shift and adjust as it

changes and expands.

Planning & ForecastingPlanning is defined as The establishment of objectives, and the

formulation, evaluation and selection of the policies, strategies, tactics and action required to




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achieve them. Planning comprises long term/strategic planning and short term/operational planning. The latter is usually for a period of up to one year.

Forecasting is an attempt to estimate the future. It is based on available past data,

the extrapolation of trends and the application of judgement. There are 3 basic

models of forecasting:

Time series analysis and projection Qualitative Techniques Casual Methods

As an operations manager, material requirement planning or demand estimation needs to be

done on a regular basis. This is to ensure that the company meets the customers

requirements within time. The plans may be short-range plans (less than 3 months) or long-

range plans (over 1 year). Efficient planning will lead to reduction in costs due to sudden

variations in demand. Planning and scheduling is a popular exercise undertaken by companies

that manufacture seasonal products.

SCM Supply chain management is the management of a network of all business processes

and activities involving procurement of raw materials, manufacturing and distribution

management of finished goods. SCM is also called the art of management of providing the

Right Product, At the Right Time, Right Place and at the Right Cost to the Customer.

JIT Just in time (JIT) is a production strategy that strives to improve a business return on

investment by reducing in-process inventory and associated carrying costs. The philosophy of JIT is

simple: inventory is waste & all efforts are made to eliminate waste also known as Muda.

Lean Manufacturing: Lean Manufacturing is also called Just in Time (JIT). It is based on the

principle of doing more less inventory, fewer workers, less space. It is about smoothing the flow

of material to arrive just as it is needed. So, JIT and Lean Manufacturing are used

interchangeably.




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Kanban Kanban is one of the many methods through which JIT is achieved. It is a

scheduling system for lean and just-in-time (JIT) production that helps determine what to

produce, when to produce it, and how much to produce.

TQM Total Quality Management (TQM) is a comprehensive and structured approach to

organizational management that seeks to improve the quality of products and services

through ongoing refinements in response to continuous feedback.

Kaizen- The Japanese word "Kaizen" means improvement, improvements without spending

much money, involving everyone from managers to workers, and using much common sense.

The Japanese way encourages small improvements day after day, continuously. The key aspect

of Kaizen is that it is an on-going, never-ending improvement process. It's a soft and gradual

method opposed to more usual western habits to scrap everything and start with new.

TOCTheory of Constraints (TOC) is a holistic way of thinking about a system (i.e. optimize

the system globally and not locally). Traditional cost accounting and productivity measure

may promote local optimization. TOC recognizes that the bottlenecks or constraints are

present in the system which limits system output.

Note: It is advisable to go through subjects like Industrial Engineering if taught to you. If not,

you need to know why you are interested in Operations Management, some related

concepts to your work (if relevant) and why you want to shift to a career in Operations.




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E-Mail: [email protected], [email protected] Disclaimer: The information shared is purely to help the candidates prepare for their

GD/PI process and IGNICION team shall not be held responsible for the misuse of any

information provided.

ALL THE BEST!

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