Strategic financial Management Theory

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Publisher ICSI
Number of Pages 29
Available in all digital devices
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As a result of introduction of GDRs a considerable foreign investment has flown into India. QUESTION NO. 14 Write a short note on ARBITRAGE SFM Nov 2008 Meaning Arbitrage by definition is a financial transaction that makes an immediate profit without involving any risk. Arbitrage is a strategy to take advantage of price differential of a product in different markets.An arbitrageur makes money by buying an asset at low price in a market and selling it in any other market at a relatively higher price. For instance, If one can buy an asset for 5, sell it for 20 and make a profit of 15 that is arbitrage. The 15 gain represents an arbitrage profit. Arbitrage profits are the result of i the difference in exchange rates at two different exchange centres, ii the difference. due
to interest yield which can be earned at different exchanges. Thus depending upon the nature of deal, arbitrage may be of space and time arbitrage. The space arbitrage is because of separation of two exchange markets due to physical dispersion wherein the rates may vary while on the other hand in the time arbitrage an investor may gain by executing a spot and forward deal to buy and sell a currency. Types of Arbitrage i Geographical Space Arbitrage - It occurs when one currency sells for two prices in two different markets. ii Cross - Rate Arbitrage - In a given market, exchange rates for currencies A and B and for currencies A and C imply an exchange rate called a cross - rate between currencies B and C. If the rate implied for C does not match the actual rate between C in some other market, an arbitrage opportunity exists. iii Time Arbitrage - In time arbitrage, an investor may gain by executing a spot and forward deal to buy and sell a currency. QUESTION NO. 15 Write a short note on Financial Restructurings SFM Nov 2008 When a company cannot pay its cash obligations - for example, when it cannot meet its bond payments or its payments to other creditors such as vendors - it goes bankrupt. In this situation, a company can, of course, choose to simply shut down operations and walk away. On the other hand, it can also restructure and remain in business. What does it Mean to Restructure The process can be thought of as two-fold financial restructuring and organizational restructuring. Restructuring from a financial viewpoint involves renegotiating payment terms on debt obligations, issuing new debt, and restructuring payables to vendors. From an organizational viewpoint, a restructuring can involve a change in management,strategy and focus. Restructuring can take many forms. Some typical approaches to financial restructuring include i Vertical Restructuring ii Horizontal Restructuring iii Corporate Restructuring Financial restructuring refers to a kind of internal changes made by the management in Assets and Liabilities of a company with the consent of its various stakeholders. This is a suitable mode of restructuring for corporate entities who have suffered from sizeable losses over a period of time. Consequent upon losses the share capital or networth of such companies get substantially eroded. In fact, in some cases, the accumulated losses are even more than the share capital and thus leading to negative networth,

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