Q1. “Financial institutions are an important component of a financial system. They specialise in financial and monetary activities at the both retail and commercial segment.” These financial institutions manage the capital flows in the financial market. Explain the various categories of financial institutions with examples according to the activities they undertake in detail. (10 marks)
Ans:
Introduction:
Participation from various financial organizations is required to achieve a smoothly operating monetary system. These organizations help move money from savers to borrowers, expanding the economy. They provide services to both the private and business segments of the market, and the range of their products and services includes everything from simple savings accounts to complex financial products like derivatives.
Concept & Application:
Commercial Banks: Banks that participate in commercial transactions are referred to as commercial banks. Commercial banks are the type of financial organization found in most locations. Customers can make payments, and the business then makes loans to other individuals. In addition, they provide companies with a range of services, such as credit cards, overdraft allowances, loans, and a selection of other financial products. The nation’s central bank is in charge of overseeing commercial banks. It is authorized to require those institutions always to maintain certain reserves in their accounts.
Conclusion:
To summarize, financial institutions are necessary to complete any economic system. They play a critical role in bringing together savers and borrowers, essential for the economy’s expansion. Numerous financial organizations offer various financial products and services, each of which is aimed at serving a particular market segment. The general public can obtain these products and services.
Q2. At WSN wealth advisors, the clients are offered the most appropriate investment strategies. For their wealth management segment, WSN has to prepare a portfolio of any five mutual fund schemes that can be advised to their client to invest in with a low-risk appetite for a time period of 5 years. Advise any five mutual fund schemes with their characteristics, benefits and disadvantages for a low-risk appetite client. (10 marks) –
Ans :
Introduction:
WSN Wealth Advisors is a well-known financial advisory company that offers its customers various investment strategies to meet their monetary objectives. One of their primary services is wealth management, which entails assisting customers in diversifying their wealth holdings by depositing them in various financial vehicles, such as mutual funds. WSN must assemble a portfolio of five different mutual fund schemes for a customer with a low-risk appetite looking for consistent returns over a more extended period.
Concepts and Applications:
It is essential to consider the investment objective, fund category, historical performance, expense ratio, and any other relevant factors when choosing mutual fund schemes for clients with a low appetite for risk. The following is a list of five different mutual fund schemes that may be appropriate for clients with a modest appetite for risk:
Axis Bluechip Fund –
This particular investment strategy for a mutual fund chooses to put its money into large-cap companies, which tend to be less volatile than mid-and small-cap stocks. This strategy can underperform during a bull run in mid-and small-cap stocks, which is a disadvantage of the method. It has a proven track record of reliable performance and is well-suited for clients with a low appetite for risk-seeking stability.
Conclusion:
To summarize, selecting appropriate mutual fund schemes for clients with a low appetite for risk requires careful consideration of some variables, including investment objective, fund category, historical performance, and expense ratio. If you have a low-risk need and want to invest in the financial market for five years, consider supporting one of the five mutual fund schemes discussed above.
Q3a. “Financial derivatives are financial instruments whose value is derived from the underlying asset.” In light of the above statement, explain various types of derivative contracts with examples. (5 marks)
Ans:
Introduction:
Financial instruments known as derivatives get their worth from the underlying asset on which they are based. The value of the fundamental asset establishes the price of these derivatives, which are traded on exchanges or over-the-counter (OTC) markets.
Concepts and Applications:
The real help may be anything, including commodities, currencies, stocks, or indexes, among other possible choices. Futures contracts are a type of derivative that binds the buyer to the obligation of purchasing an underlying asset and the vendor to the responsibility of selling that asset at a future date and price that has been predetermined.
Conclusion:
In sum, derivatives are defined as financial instruments on which the value is generated from the asset they are based. Futures, options, swaps, and forward contracts are the most common derivative contracts.
Q3b. “A merchant banker works as a financial advisor, management counsellor and an entrepreneur.” Explain briefly the role and functions of a merchant banker in the financial market. (5 marks)
Ans:
Introduction:
A merchant banker is a type of banker who works in the financial market and offers their services to corporate customers and investors. A merchant banker’s primary responsibilities include serving as a client’s economic adviser, management counselor, and business consultant, offering advice and assistance regarding various financial issues.
Concepts and Applications:
Capital Raising: One of the primary responsibilities of a merchant banker is to assist businesses in raising money for their various initiatives. A merchant banker assists a company in locating potential investors, negotiates with those investors, and makes sure the company receives the best deal possible.
Underwriting: In issuing securities, a commercial banker often serves as an underwriter. The process of underwriting ensures the successful sale of securities by first purchasing them from the seller and then offering them for sale to the general public.
Conclusion:
To summarize, a merchant banker is an essential participant in the global financial market who offers various financial services to corporate customers and individuals. Merchant bankers are financial advisors who assist businesses and individuals in accomplishing their monetary targets by applying their knowledge and experience.
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