Assignment Set – 1

Q.1. Critically analyze the role, significance, and need of treasury management in modern organizations. Evaluate how its key functions contribute to effective liquidity management, risk mitigation, and financial decision-making in a dynamic business environment. (10 Marks)

Ans 1.

Treasury management is the systematic management of a company’s finances, assets as well as funding and financial risk to enhance the company’s financial performance as well as ensure its continued ability to fulfill financial obligations. Modern organizations operate in the volatile world of markets, treasury management has evolved from a cash management back-office function to become an integral business partner with strategic value that greatly influences the performance of corporate finances.

Role and Significance of Treasury Management

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Q.2. Analyze the functions of financial markets and apply them to explain how financial markets facilitate efficient allocation of resources and capital formation in an economy. (10 Marks)

Ans 2.

Financial markets are a system of exchange that allow buyers and sellers to exchange financial assets, including stocks, bonds, currencies as well as derivatives and commodities. They perform several critical economic tasks that allow the efficient allocation of savings from investors to the most profitable investing opportunities within an economic system, which drives the creation of

Q.3. Explain the concept of treasury management and liquidity. Apply these concepts to illustrate how effective treasury management helps an organization maintain liquidity and ensure smooth financial operations. (5+5 = 10 Marks)

Ans 3.

Concept of Treasury Management

Treasury management encompasses both the operations and strategy-based management of the company’s cash as well as funding, liquidity, investment and exposures to financial risks to maximize financial performance and ensure the organization meets its financial obligations. As a fundamental aspect, treasury management ensures that the right amount of cash is available at

Assignment Set – 2

Q.4. Explain any two techniques used for measuring business risks in treasury management. How does an organization use these techniques to evaluate its financial risk exposure? (5+5 = 10 Marks)

Ans 4.

Technique 1: Value at Risk (VaR)

Value at Risk is an approach to statistical analysis that is used to quantify the maximum potential loss in the value of any portfolio or trade over a specified time horizon for a specific confidence level. For example, a daily VaR of 1 crore. 10 crore at 99 percent certainty means there is a 1 percent possibility that your portfolio would drop more than. 10 crore in a single day. Treasury

Q.5. Describe the concept of interest rate risk and discuss the various methods used to decrease it. Illustrate how these methods help organizations protect themselves against fluctuations in interest rates. (5+5 = 10 Marks)

Ans 5.

Concept of Interest Rate Risk

In the case of interest rate risk, it can result in negative changes in the market value of assets and liabilities, as well as in the liquid flows of financial instruments that result from movements in market interest rates. Organizations face interest rate risk through two primary ways. Price risk can affect the value of fixed rate loan and bonds. When interest rates increase and the current value of cash flows falls, reducing the market value of fixed rate assets and potentially triggering

Q.6. Explain the various risk factors involved in forex trading and describe how each of these risks can affect traders and organizations dealing in foreign exchange. (10 Marks)

Ans 6.

Forex trading is the process of exchange of a particular currency against another and is the world’s most diversified and most liquid market for financial transactions and has daily volumes of trading over seven trillion US dollars. However, despite its ease of use, forex trading is a risk to both professionals and organisations that handle exposure to currencies. Risks in multiple

Assignment Set – 1

Q.1. Given the following details:

Cost of equity = 11%; Return on investment = 12%

Earnings per share = ₹15; Using the Gordon Model, find the price per share when the dividend payout ratio is:

1. a) 10% b) 30%.

Ans 1.

Gordon’s Growth Model is a commonly used method of valuing dividends that estimates the value of equity shares on the basis of anticipated future dividends, and consistent growth. The model highlights the relationship between dividend payout as well as retained earnings, growth rates, as well as shareholder wealth. It is especially useful for making long-term investments.

Gordon’s Growth Model

Gordon’s Dividend Discount Model (DDM), developed by Myron J. Gordon, is a essential model

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Q.2. Elaborate on the strategies to overcome psychological biases. (10 Marks)

Ans 2.

Psychological biases result from systematic behavioral and emotional faults that affect financial decision-making as investors are prone to deviation from rational behaviour and make suboptimal investing decisions. Behavioural finance has discovered a variety of such biases including overconfidence, shedding, loss aversion anchoring, confirmation bias, and the disposition effect. These biases are embedded in human psychology there are a number of

Q.3. Explain the key errors that occur in investment management practices. (10 Marks)

Ans 3.

Investment management is a very complex task that requires the integration an analysis of finances, portfolio creation as well as risk management and behavioural discipline. While there is a wealth of modern techniques and frameworks, managers and individual investors consistently fail to avoid the common errors that can affect portfolio performance. Knowing these flaws is the

Assignment Set – 2

Q.4. a) DEF Enterprises has a common stock that just paid its annual dividend today. It is projected to pay a ₹30 dividend one year from now, with dividends growing at a rate of 6% annually for the foreseeable future. If stocks of comparable risk earn 12% effective annual return, what is the price of a share of DEF Enterprises stock?

1. b) Explain the role of factor sensitivities in determining the expected return of an asset according to the Arbitrage Pricing Theory.

Ans 4.

1. a) Cost of DEF Enterprises Stock (Dividend Discount Model)

The Dividend Discount Model (DDM) estimates a company’s value as the present value of the expected future dividends. If the stock has continuous growth in dividends the Gordon Growth Model formula is used: : P₀ = D₁ / (ke – g), The D1 value is the anticipated dividend at beginning of the first year and ke represents the minimum rate of return while g is the recurring growing rate for dividends.

Given: D₁ = ₹30, g = 6% = 0.06, ke = 12% = 0.12

Q.5. Suppose we have a stock, ABC Ltd., and the market index is represented by the Nifty 50. Market return (Rm) is 6%. The stock has a beta coefficient (βi​) of 1.5 and a specific return (αi​) of 2%. Calculate the expected return of ABC Ltd.

Ans 5.

The Single Index Model (Sharpe’s Market Model)

The Single Index Model is a financial model that estimates the anticipated return of the security through linking it with overall market performance. Developed in the late William Sharpe, the model clarifies how market risk as well as corporate-specific variables affect the returns of stocks. It is widely used in the analysis of portfolios and in investment decisions.

The Single Index Model (Sharpe’s Market Model)

The Single Index Model (SIM) invented by William Sharpe, is a simplified model for estimating

Q.6. An investor is considering two securities, A and B.

• Security A has an expected return of 12% and a risk (measured by standard deviation) of 20%.
• Security B has an expected return of 20% and a standard deviation of 30%.
• The correlation between the returns of the two securities is -0.5.

If the investor allocates 60% of the total investment in Security A and 40% in Security B, calculate:

1. a) The expected return of the portfolio
2. b) The overall risk (standard deviation) of the portfolio

Ans 6.

Portfolio Return and Risk (Markowitz Framework)

Modern Portfolio Theory (MPT), developed in 1952 by Harry Markowitz in 1952, is a proof that investors should invest in diversified portfolios instead of individual securities, because combining assets reduces total portfolio risk by diversifying it, but not necessarily reducing the anticipated returns. The most important point is that what is important for portfolio risk is not just the individual asset risks but the correlations between them. In the event that assets are not in