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Finance
The IUP Journal of Financial Risk Management

March' 11
Focus

The present issue brings forth three papers. The first paper, “A Review of Real Option Practices Followed by Corporate for Expansion and Deferral Decision”, by Urvashi Varma, tries to capture different types of real options and their valuations.
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A Review of Real Option Practices Followed by Corporate for Expansion and Deferral Decision
50
Revisiting the Valuation of Bank Credit Agreements
50
A Linear Programming Model for Assessing Asset-Liability Management in Banks
50
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A Review of Real Option Practices Followed by Corporate for Expansion and Deferral Decision

-- Urvashi Varma

Real option is synonymous with financial flexibility. Traditional valuation has always ignored this flexibility and has provided inappropriate estimate of the projects for decisions. This paper tries to capture different types of real options and their valuations. The Black-Scholes model as suggested by many researchers can be applied only to European option, but in this paper studies that have valued American option using Black-Scholes approach with slight modification are also found. The binomial lattice model is an alternative to value American option, but to avoid complexity binomial tree is more preferred. Given the priori probabilities, decision tree approach provides a simplistic method to value real options.

© 2011 IUP. All Rights Reserved.

Article Price : Rs.50

Revisiting the Valuation of Bank Credit Agreements

-- Marco Realdon

This paper proposes a valuation model for revolving credit agreements and loan commitments. Drawdowns and repayments are only partially predictable by the bank. The bank can claim the material adverse change condition. The firm can cancel the credit agreement by stopping the payment of usage fees. Contract complexity, uncertain drawdown and repayment give banks scope for `strategic' valuation of credit agreements for financial reporting and Tier 1 bank capital requirements. The requirement of measuring credit agreements at `the payoff from immediate drawdown', rather than at `fair value' as per IAS 37 and IAS 39, would reduce the scope for `strategic' valuation.

© 2011 IUP. All Rights Reserved.

Article Price : Rs.50

A Linear Programming Model for Assessing Asset-Liability Management in Banks

-- Mihir Dash and Ravi Pathak

Bank Asset-Liability Management (ALM) has gained increasing relevance in recent years, especially with the implementation of the Basel II norms for the regulation of Indian banks by the Reserve Bank of India, and particularly in the wake of the global financial crisis. At the heart of ALM is the fundamental trade-off between liquidity, profitability and interest rate risk. The present study proposes a linear programming model for ALM, which seeks to maximize the rate of return/profit, subject to constraints dictated by liquidity and statutory requirements. The model was applied to a sample of banks operating in India, resulting in a recommended optimal asset-liability mix of the banks in the sample. Using these results, the study assesses the nature of ALM of different bank groups, in terms of its implications on liquidity, profitability and interest rate sensitivity.

© 2011 IUP. All Rights Reserved.

Article Price : Rs.50
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Automated Teller Machines (ATMs): The Changing Face of Banking in India

Bank Management
Information and communication technology has changed the way in which banks provide services to its customers. These days the customers are able to perform their routine banking transactions without even entering the bank premises. ATM is one such development in recent years, which provides remote banking services all over the world, including India. This paper analyzes the development of this self-service banking in India based on the secondary data.

The Information and Communication Technology (ICT) is playing a very important role in the progress and advancement in almost all walks of life. The deregulated environment has provided an opportunity to restructure the means and methods of delivery of services in many areas, including the banking sector. The ICT has been a focused issue in the past two decades in Indian banking. In fact, ICTs are enabling the banks to change the way in which they are functioning. Improved customer service has become very important for the very survival and growth of banking sector in the reforms era. The technological advancements, deregulations, and intense competition due to the entry of private sector and foreign banks have altered the face of banking from one of mere intermediation to one of provider of quick, efficient and customer-friendly services. With the introduction and adoption of ICT in the banking sector, the customers are fast moving away from the traditional branch banking system to the convenient and comfort of virtual banking. The most important virtual banking services are phone banking, mobile banking, Internet banking and ATM banking. These electronic channels have enhanced the delivery of banking services accurately and efficiently to the customers. The ATMs are an important part of a bank’s alternative channel to reach the customers, to showcase products and services and to create brand awareness. This is reflected in the increase in the number of ATMs all over the world. ATM is one of the most widely used remote banking services all over the world, including India. This paper analyzes the growth of ATMs of different bank groups in India.
International Scenario

If ATMs are largely available over geographically dispersed areas, the benefit from using an ATM will increase as customers will be able to access their bank accounts from any geographic location. This would imply that the value of an ATM network increases with the number of available ATM locations, and the value of a bank network to a customer will be determined in part by the final network size of the banking system. The statistical information on the growth of branches and ATM network in select countries.

Indian Scenario

The financial services industry in India has witnessed a phenomenal growth, diversification and specialization since the initiation of financial sector reforms in 1991. Greater customer orientation is the only way to retain customer loyalty and withstand competition in the liberalized world. In a market-driven strategy of development, customer preference is of paramount importance in any economy. Gone are the days when customers used to come to the doorsteps of banks. Now the banks are required to chase the customers; only those banks which are customercentric and extremely focused on the needs of their clients can succeed in their business today.

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