Ch 8: INTRODUCTION TO DATA SCIENCE FOR BUSINESS DECISION-MAKING (PAGES 555-570) — Previous Year Exam Questions (PYQ)

1(a): Digitization of Data and Information

5 Marks

You are given the following information by your banker: Spot ₹/$ : 60.50/61.00/£ : 96.15/98.30 6 month forward ₹/$ : 62.00/63.10/£ : 98.20/100.15 6 month $ interest rates : 5.90/6.10 [per annum] Required: Compute 6 month £ interest rates to prevent arbitrage.

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1(b): Communication of Information for Quality Decision-making

5 Marks

(i) Price discovery; (ii) Liquidity; and (iii) reduction of transaction costs. (b) Sharpe's ratio = (RP - RF) / σ = [ 13 -10 ] / 16 = 0.19 Treynor's ratio = (RP - RF) / β = [ 13 -10 ] / 0.90 = 3.33 (c) IBPCs are short-term instruments. The objective is to even out the short-term liquidity within the banking system particularly when there are imbalances affecting the maturity mix of assets in banking book- thus, they provide a degree of flexibility in the credit portfolio of banks. (d) Rolling settlement is the settlement cycle of the stock exchange', where all trades outstanding at the end of the day have to be settled, i.e. the buyer has to make payments for securities purchased and the seller has to deliver the securities sold. Here, settlement refers to the process in which traders who have made purchases make payments while those who have sold shares, deliver them. (e) Forward price of securities = ₹ 160 × e(0.09)(0.50) = ₹ 160 × e0.045 = ₹ 160 × 1.046028 = ₹ 167.3645. (f) The synthetic rate for $ / £ is to be calculated. Here, rupee, the price currency (i.e. common currency) is the cheapest among the three currencies involved in the quotes. The formula is : $ / £ = [(₹ / £bid)/ (₹ / $ask)]: [(₹/ £ask)/(₹/ $bid )] = [100.68/ 62.87]: [102.95/61.86] = 1.6014 :1.6642 ; So, $/£ = $1.6014 - $ 1.6642 (quote). (g) βp is to be ascertained as - = [βequity + E / (D +E) ] + [βdebt + E /(D + E)] = (1.30 × 0.70) + (0 × 0.3) =0.91 Computation of return from the project = RF + βp (RM - RF) = 0.10 + 0.91 × (0.18 - 0.10) = 0.1728 = 17.28 %. (h) )] x W x x W x ( 2 ) W x ( ) W x [( AB B B A A B B A A AB          = 0.6 0.5 0.8 0.5 0.6 0.5 0.8 0.5 0.5           = 0.61 (Risk of the portfolio) (i) Applications of the Behavioral Finance Theory (any two): (i) Learning to recognize mistakes (ii) Understanding and adapting to other people’s decision making processes. (iii) Evaluating market trends (iv) Facilitating the planning process (v) Impacts of events on the market (vi) Promoting products to consumers (j) Lease rent = [8,00,000/PVIFA8 years, 20%] = 8,00,000/3.837 = ₹ 2,08,496 p.a. 2.

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2(a): Communication of Information for Quality Decision-making

5 Marks

(ii): Process of credit rating: The steps are – 1. Rating request - The customer [prospective issuer of debt instrument] makes a formal request to the rating agency. The request spells out the terms of the rating assignment and condition analysis of the issue, viz. historical performance, competitive position, business risk profile, business strategies, financial policies and evaluation of outlook for performance. Information are met through various sources like references, reviews experience, etc. 2. Formation of rating team - The credit rating agency forms a team, whose composition is based on the expertise and skills required for evaluating the business of the issuer. 3. Initial analysis - On the basis of information gathered, the analyst submits the report to the rating team. The authenticity and validity of the information submitted influences the credit rating activity. 4. Evaluation of rating committee - Rating committee is the final authority for assigning ratings. The rating team makes a brief presentation about the issuer's business and the management. All the issues identified during discussion are analysed. 5. Actual rating - Rating is assigned and all the issues, which influence the rating, are clearly spelt out. 6. Communication to issuer -Assigned rating together with the key issues is communicated to the issuer's top management for acceptance. The ratings which are not accepted, are either rejected or reviewed. The rejected ratings are not disclosed and complete confidentiality is maintained. 7. Review of rating - If the rating is not acceptable to the issuer, he has a right to appeal for a rating. These reviews are usually taken up only if the issuer provides fresh inputs on the issues that were considered for assigning the rating. Issuer's response is presented to the rating committee. If the inputs are convincing, the committee can revise the initial rating decision. 8. Surveillance / monitoring - Credit rating agency monitors the accepted ratings over the tenure of the rated instrument. Ratings are reviewed every year, unless warranted earlier. During this course, the initial rating could be retained, upgraded, or downgraded.

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2(b): Meaning, Nature, Properties, Scope of Data

5 Marks

The following data relate to JB Ltd's share price: Current Price: ₹ 3,000 per share 6 months' future price = ₹ 3,500 per share It is possible to borrow money in the market for transactions in securities at 12% p.a. Consider continuous compounding of interest. Assume that no dividend was paid in the intervening period. You are required to calculate the theoretical minimum price of a 6 months' forward purchase and explain the possible arbitrage opportunity.

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3(a): Transformation of Data to Decision Relevant Information

5 Marks

An Indian exporter has sold handicaraft items to an American business house. The exporter will be receiving US dollar 1 lakh in 90 days. Premium for a dollar put option with a strike price of ₹ 71.00 and a 90 days settlement is ₹ 1. The exporter anticipates the spot rate after 90 days to be ₹ 69.50. (i) Should the exporter hedge its account receivable in the options market ? (ii) If the exporter is anticipating a spot rate to be ₹ 70.50 or ₹ 71.50 after 90 days, how would it affect the exporter’s decision ?

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3(b): Communication of Information for Quality Decision-making

5 Marks

A silver merchant requires in three months’ time, 3000 kg of silver for making silver articles during a wedding season. He expects the price to increase. Silver sells at spot rate of ₹ 5,100 per kg. Each silver futures contract (for 50 kg), expiring in three months sells at ₹ 5,200 per kg. The merchant wants to hedge half his requirement through futures and leave the remaining half uncovered. Explain his position and the gains/losses in the spot and futures market, the number of futures to trade in, the effective price per kg for his entire requirement if after 3 months, (i) Spot rate is ₹ 5,250/kg and futures is at ₹ 5,400 per kg. (ii) Spot rate is ₹ 5,000/kg and futures is at ₹ 4,900 per kg.

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