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Financial Institutions and Markets
April 2025 Examination
Q1. Mr. Arjun is the Chief
Financial Officer (CFO) of ABC Bank, a leading private sector bank. Recently,
the banking sector has been grappling with increasing non-performing assets (NPAs)
and financial instability. ABC Bank is also expected to release its quarterly
financial results in the coming weeks, which indicate a significant rise in
NPAs. Mr. Arjun, being privy to sensitive financial data, shares this
information with a close associate, who then liquidates their significant
holdings in the bank's stocks to avoid losses from the anticipated market reaction.
Upon investigation, the Reserve Bank of India (RBI) uncovers the violation and
penalizes both Mr. Arjun and his associate for breaching ethical and legal
standards under banking regulations.
In light of the above case, explain
the importance of the Reserve Bank of India (RBI) and discuss its key functions
in regulating and supervising the banking and financial sectors. (10 Marks)
Ans 1.
Introduction
The
Reserve Bank of India (RBI), established in 1935 under the Reserve Bank of
India Act, is the central banking institution of India, entrusted with the
responsibility of regulating and supervising the nation's financial system. Its
primary objective is to ensure monetary stability, maintain public confidence
in the financial system, and foster economic growth. In the given case, Mr.
Arjun's unethical dissemination of sensitive financial information underscores
the critical role of RBI in maintaining the integrity of the banking system.
RBI's regulatory framework aims to prevent such malpractices, safeguard
investor interests, and enhance financial stability. Through
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Q2. Mr. Ajay, a risk-averse
investor, is considering Treasury Bills (T-bills) as a secure financial asset
that offers guaranteed returns. However, he is unfamiliar with the details of
this instrument. Could you explain Mr. Ajay about the Treasury Bills, Its
features and functions in detail. Also, explain how T-bills contribute to
economic stability. (10 Marks)
Ans
2.
Introduction
Treasury
Bills (T-bills) are short-term financial instruments issued by the Government
of India to meet its short-term borrowing needs. They are considered one of the
safest investment options as they are backed by the sovereign guarantee of the
government. T-bills are issued at a discount to their face value and redeemed
at par upon maturity, with the difference representing the investor's return.
These risk-free securities are popular among conservative investors like Mr.
Ajay,
Q3a. Mr. Ravi, working in the
portfolio management department of Alpha Ltd., was tasked with training new
recruits about the risks inherent in the financial market. Recognizing the
importance of understanding both returns and risks, he decided to broadly
classify risks into two categories and explain each type to the trainees. As
part of the session, he focused on systematic risk and its various types. If
you were Mr. Ravi, how would you explain the different types of risks
associated with systematic risk? (5
Marks)
Ans 3a.
Introduction
Systematic
risk refers to the inherent risk that affects the entire financial market or
economy, influencing all investments within the market. Unlike unsystematic
risk, which is specific to a company or industry, systematic risk cannot be
eliminated through diversification. It is caused by macroeconomic factors such
as inflation, interest rates, geopolitical events, and economic recessions.
Understanding systematic risk is crucial for investors and financial managers
as it impacts the overall market and influences investment returns,
necessitating effective risk
Q3b. Illustrate one real-world
example of unsystematic risk, explaining its cause, impact on the company, and
how it could have been mitigated through diversification. (5 Marks)
Ans 3b.
Introduction
Unsystematic
risk is the risk specific to a company, industry, or sector that does not
impact the entire financial market. It arises from internal factors such as management
decisions, operational inefficiencies, or competitive pressures. Unlike
systematic risk, unsystematic risk can be mitigated through diversification. A
real-world example illustrates how unsystematic risk can impact a company’s
financial performance and how a well-diversified investment portfolio could
minimize the
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