IIMS PGDM READY ANSWERSHEETS – Debate and discuss the scope for adding more variables or changing the weights of a variable and appreciate the scope for interpretation bias
IIMS PGDM READY ANSWERSHEETS – Debate and discuss the scope for adding more variables or changing the weights of a variable and appreciate the scope for interpretation bias
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Financial Risk Management
Q1) Financial Risk Management at BP
On July 29, 2014, BP p.l.c. (BP) announced its second quarter results. The company reported a 34% jump in underlying replacement cost profit compared to the same quarter of the previous year (Refer to Exhibit I for second quarter summary). This was largely due to improved upstream production in high margin areas – mainly in the Gulf of Mexico – strong oil and gas realizations, and stronger contributions from Rosneft. Bob Dudley, the first American Chief Executive Officer (CEO) of the BP group, said, “This was another successful quarter, delivering both operational progress and robust cash flow.
However, the company warned the investors about the potential negative impact on business if the European Union and the United States imposed economic sanctions on Russia. According to the company, “This could (economic sanctions) have a material adverse impact on our relationship with and investment in Rosneft, our business and strategic objectives in Russia, and our financial position and
According to experts, DPDHL was not the only company to have been adversely affected by the currency fluctuation. Puma SE and SAP AG also were hurt by the strong euro. However, another group of experts believed that the currency effect would be nullified in the coming quarters as the company had a very strong risk management process to control currency and other risks. results of operations.
BP is one of the largest companies in the world with business interests beyond the hydrocarbon value chain. It has investments and operations in around 80 countries and an asset base of US$305 billion. Such a wide presence calls for effective management of risks. The case study discusses how BP came up with a comprehensive risk management framework to manage various risks. It gives a detailed picture of how the company proactively manages and reports the different kinds of financial risks it faces.
Questions: (30 marks)
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Understand BP’s business and risk management framework
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Identify the various financial risks faced by BP
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Analyze the various issues and challenges in financial risk management.
Debate and discuss the scope for adding more variables
Q 2) Modeling Sovereign Credit Score of US and UK
Sovereign Credit Ratings play a significant role in attracting foreign investments. Credit Rating Agencies (CRAs) specialize in assessing the creditworthiness of sovereign issuers. Moody’s Investors Service (Moody’s), Standard and Poor’s (S&P), and Fitch Ratings (Fitch) are the dominant CRAs. A rating upgrade is a positive change in a sovereign’s rating triggered by steady improvements in the political and economic environment whereas a downgrade for a country means a negative change, indicating a worsening economic and business environment. Investors see a downgrade as a risky bet and demand higher returns to lend to these governments.
CRAs are corporations specializing in assessing the credit risk of potential debtors by predicting their ability to pay back financial obligations and forecasting the probability of default. CRAs analyse various parameters or risks (economic and political) that affect the ability of debtors to pay their debts. These agencies reduce information asymmetry between investors and issuers regarding the creditworthiness of a corporation or a country.
Credit Rating Agencies (CRAs) play a crucial role in reducing the asymmetry in the information available to the issuer and the investor. This role gains even more significance when rating is for sovereign entities and their securities. The CRAs like S&P, Moody’s, and Fitch, which rate sovereign entities, consider several variables both qualitative and quantitative to assess the creditworthiness and rating of these entities and their securities. The case study gives a view of the sovereign credit rating industry, its major players, the industry issues and controversies.
The case also discusses the variables and parameters used by these big 3 agencies to rate sovereign entities. Most importantly, the case study helps the students to develop a basic model taking generally accepted variables to arrive at a credit score for two of the largest economies in the world – the US and the UK. This will help the student appreciate the various variables that go into sovereign credit rating apart from helping them to develop a basic model and analyse the creditworthiness of the two sovereign entities. The case also comes with Excel supplements.
Debate and discuss the scope for adding more variables
Questions: (30 Marks)
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Develop a revised model to arrive at rating scores for US and UK after COVID-19
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Explain the Variables / parameters used by major sovereign rating agencies like Fitch, S&P, Moody’s
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Debate and discuss the scope for adding more variables or changing the weights of a variable and appreciate the scope for interpretation bias, given the need to incorporate qualitative parameters.
Debate and discuss the scope for adding more variables
Q3) Financial Risk Management at Infosys Technologies Limited
Infosys Technologies Limited (Infosys), one of the leading Information Technology (IT) companies in India, had an ‘A-’credit rating for both local and foreign currency. This rating was higher than India’s sovereign rating (‘BBB ̶ ‘with a stable outlook) provided by Standard & Poor (S&P), a global credit rating provider. Experts stated that the higher than native country’s rating was a clear reflection of the credit worthiness, transparency, standards of corporate governance, and innovations in financial reporting of the company…
The global scenario of the Information Technology and Business Process Management (IT-BPM) industry had improved with the improvement in the world economic growth, which was around 3.7% for the year 2017 and was projected to firm up at 3.9 % for the year 2018 and 2020. It was expected that global digital spend would increase from US$180 billion in 2017 to US$310 billion by 2020.
Infosys Technologies Limited, India’s leading technology company, has clients around the world and faces numerous financial risks including currency risk. The case gives the participants the opportunity to discuss and debate the existing risk management systems at Infosys as well as assess the impact of these risks on the financials of the company.
Debate and discuss the scope for adding more variables
Questions: (40 Marks)
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Identify the various financial risks faced by Infosys.
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Explain the risk management system at Infosys.
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Examine the issues and challenges in financial risk management after COVID 19.
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Analyze the importance of financial risk management for the top line and bottom line of the company.
Debate and discuss the scope for adding more variables
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