IIMS PGDM READY ANSWERSHEETS – Explore various derivate instruments available for hedging market risk

IIMS PGDM READY ANSWERSHEETS – Explore various derivate instruments available for hedging market risk

 

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Investment Management

 

Q1) Real Estate Act, 2016- Fostering the growth of Private Equity Investments?
On March 15, 2016, the Indian Parliament approved the much-awaited Real Estate (Regulation and Development) Act, 2016 (Real Estate Act, 2016), which aimed to regulate and improve the efficiency of the real estate sector. Speaking on the occasion in Parliament, the Union Minister for Housing & Urban Poverty Alleviation, M. Venkaiah Naidu (Naidu), said the passage of the Act was a boon to the nation; he said the new Act would ensure that the common man’s desire of owning a house without any constraints would be fulfilled The real estate sector in India was characterized by uneven delays in the completion of projects, lack of quality in construction work, and unanticipated escalations in construction costs. In addition, the buyers faced many legal and regulatory hassles in the construction process and finally ended up accepting a low-quality product and facing legal challenges. Naidu said that the Real Estate Act, 2016, will not only address the operational challenges the buyers and developers are facing in the sector, but also encourages sustainable investments in the sector. The introduction of the Real Estate Act, 2016 created a benchmark in the history of the real estate sector in India. The sector was highly unorganized and consisted of different kinds of players. In the absence of a proper regulatory authority, the sector was beset with unethical and illegal activities, which finally took a toll on the buyers. In view of the prevailing circumstances and keeping in view the demand and necessity to foster growth of the sector, the Government of India introduced the Real Estate (Regulation and Development) Act, 2016 on March 15, 2016.
The Indian real estate sector has been attracting a large number of domestic as well as overseas private equity investors. Considering the growth and prospects of the sector, the Real Estate Regulation Act, if implemented properly, has the potential to turn the sector around and has the ability to attract even more investments and buyers.
The case helps to discuss about the opportunities of private equity investments in real estate sector, and how the improvement of confidence in buyers increases the investment opportunities in the sector.
Questions: (20 marks)
  1. Analyze Impact of Real Estate Act, 2016 on private equity investments.
  2. Investment opportunities in real estate sector after COVIS-19
Q2) Portfolio Hedging-The Case of ICICI Value Fund Series 7(D)
In 2017, ICICI Prudential Asset Management Company (AMC) Ltd. was one of the top AMCs in India. The AMC was a joint venture between ICICI Bank Limited, one of the leading private sector banks in India, and Prudential Plc., one of the largest players in the financial services sector in the United Kingdom. The AMC specialized in offering simple yet relevant investment solutions to its customers. It provided portfolio management and asset management services in other asset classes such as debt, equity, and real estate. Atul Patel (Patel), fund manager of ICICI Prudential Value Fund Series 7 (D) (hereafter referred to as “fund”), felt impatient. Though the fund had been performing well over the period, its Net Asset Value (NAV) had been adversely affected in the third quarter ended December 2016, due to the uncertain political and economic environment and the high volatility in the equity market in India. An experienced fund manager, Patel was well-versed with market volatility and was confident that the fund would be able to tide over the turbulent times and emerge stronger. However, he simply could not wait for the market to improve. He needed an alternative investment strategy in place to ensure that the fund offered a stable NAV to its investors at the end of the fourth quarter, which was going to end in March 2017… It was early January 2017 and the fund manager of ICICI Prudential Value Fund Series 7 (D), Atul Patel (Patel), was worried about protecting the Net Asset Value of his fund.
All the stocks listed in the fund portfolio had been chosen with care and he was sure that the fund was fundamentally strong. In fact, he wanted to hold the current positions at least for the next three months. However, his worry was that the prevailing market conditions, economic environment, and global political conditions could lead to fluctuations and adversely impact the fund portfolio value. The Net Asset Value of the fund had already been adversely affected in the face of the prevailing market volatility. Having been a successful fund manager all through, he was concerned about this issue. To buck this trend, he was looking for instruments to hedge against market risks associated with his fund portfolio. However, he was not very sure what type of hedging would provide him with the best possible result, subject to so many constraints.
Questions: (30 Marks)
  1. Explain the concept of Minimum Variance Hedge & index futures
  2. How fund managers measure the risk and return and style of a fund’s portfolio.
  3. Explore various derivate instruments available for hedging market risk.

 

Q3) Short-term Liquidity-An Insight into Hero Motor Corporation Limited
In March 2018, Pawan Munjal (Pawan), chairman of India-based Hero MotoCorp Ltd (HMCL), the largest two-wheeler manufacturer in the world, addressed investors and touched upon the initiatives taken by the management during the fiscal year 2017-18 to meet the ever-changing industry requirements. Amid growing challenges in terms of regulatory criteria – becoming compliant with Bharat Stage (BS) IV standards by April 01, 2020; investing in the development of new technologies; and needing to diversify to meet the increasing competition – the management of the company had been positive and clear in its objectives of meeting shareholders’ expectations, he said. Pawan also expressed confidence about the growth of the Indian automobile industry in future and hoped that its share would increase to 12% of the Gross Domestic Product (GDP) by the year 2026. However, he was of the view that in order to maintain the vibrancy of the overall industry environment in the coming years, efforts had to be made to sustain and improve the market position of the company. In March 2018, the Chairman of Hero Motor Corporation Limited, Pawan Munjal, briefed the stakeholders of the company on the future challenges and opportunities before the company. He spoke about HMCL’s strategy to expand its market position in the scooter and premium motor vehicle segment during the fiscal year 2018-19. The investors of the company went through the financial statements with a specific focus on the short-term solvency of the firm, which would be an indicator of the efficiency of the operations during the year and which could help them in taking a suitable decision on the investment position they should take in the company for the financial year 2018-19.
Questions: (30 Marks)
  1. The process of analyzing and interpreting the liquidity position of a company.
  2. The difference between various liquidity ratios.
  3. The liquidity position of Hero Moto Corp Ltd.
Q4) A Portfolio Restructuring Dilemma
Kapil Shah (Kapil), a 35-year-old working professional, was looking for advice from technical analysis experts for his stock portfolio. Kapil wanted to restructure his portfolio by exiting stocks with poor returns and buying new ones with potentially high returns, so that he could generate good returns from his portfolio, which he planned to liquidate wholly or in part to meet his future financial needs. Kapil had started investing in stock market in his mid-twenties. At that time, he used to invest in any stock only after doing Fundamental analysis. Kapil Shah (Kapil) had started investing in the share market in his mid-twenties and had seen some ups and downs over a decade. Kapil then decided to overhaul all his existing stock positions on the increasing prospects of the Narendra Modi led National Democratic Alliance coming to power in India in May 2014. On the election results day – May 16, 2014 – he bought ten stocks to ride the possible development wave agenda of the new government. However, by the end of February 12, 2016, his portfolio had generated a return of only 1.96%. Things became tough for Kapil as repayment for a
loan fell due on August 22, 2016. Kapil wanted someone’s help to ensure he generated good returns from his portfolio so that he could repay the loan by liquidating a part or even his complete stock portfolio. For this, he contacted Dhaval P Vyas Investment Research, one of the leading financial consultancy firms in India. Based on Kapil’s profile, Dhaval P Vyas suggested that Kapil drop six underperforming stocks and purchase six stocks which he expected would perform better in the future. What should Kapil do now?
Questions: (20 Marks)
  1. How to use various technical analysis tools and technical analysis software to recommend any stock to a client.
  2. How and why any technical analyst selects any particular stock to buy / sell.

 

IIMS PGDM READY ANSWERSHEETS – Explore various derivate instruments available for hedging market risk

IIMS PGDM READY ANSWERSHEETS – Explore various derivate instruments available for hedging market risk

 

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