Financial Modelling
Financial modeling is the task of building an abstract representation of a real world financial
situation. This is a mathematical model designed to represent the performance of a financial
asset or portfolio of a business, project, or any other investment.
Corporate Finance
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Corporate finance encompasses the strategies, tools, and structures that
enable corporations to grow from start-ups to large and powerful enterprises.
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Corporate finance focuses on how corporations can use long- and short-term
financial planning and other strategies to source funding, structure capital,
make investments and employ accounting techniques to
maximize shareholder value. It focuses both on day-to-day cash flow and
on long-term planning.
Quantitative Modelling
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the practice of organizing and interpreting data sets with mathematical
formulas to identify trends in the broader markets. Because raw data isn't always
decipherable, quantitative analysts will rearrange data into visual representations that
communicate meanings and patterns
importance - help us understand systems and behaviors in a number of useful ways
that help navigate this ambiguous environment.
Private equity and Venture capital
venture capital (VC) is a form of private equity.
venture capital, growth equity, and buyouts
Venture capital (VC) is a type of private equity investment made in an early-stage startup.
Venture capitalists give the company a certain amount of seed funding in exchange for a
share of it. Venture capitalists typically don’t require a majority share (over 50 percent),
which can be attractive to founders.
Venture capital investing is inherently risky because startups—many of which are little more
than ideas at the time of a pitch—haven’t yet proven their ability to turn a profit. Like with any
investment, venture capital’s return on investment is never a guarantee. Yet, when a startup
turns out to be the next big thing, venture capitalists can potentially cash in on millions, or
even billions, of dollars.
Venture capitalist firms are usually formed as limited partnerships (LPs) where the partners
invest in the VC fund
Derivatives
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The four major types of derivative contracts are options, forwards, futures
and swaps
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Options are a form of derivatives, which gives holders the right, but not the
obligation to buy or sell an underlying asset at a pre-determined price, somewhere in
the future. When you take an option to buy an asset it is called a ‘call’ and when you
obtain the right to sell an asset it is called a ‘put’.
A swap is an agreement between two parties to exchange cash flows on a
determined date or in many cases multiple dates. Typically, one party agrees to pay a
fixed rate while the other party pays a floating rate.
Forwards and futures are very similar as they are contracts which give access to a
commodity at a determined price and time somewhere in the future. A forward
distinguish itself from a future that it is traded between two parties directly without
using an exchange. The absence of the exchange results in negotiable terms on
delivery, size and price of the contract. In contrary to futures, forwards are usually
executed on maturity because they are mostly use as insurance against adverse price
movement and actual delivery of the commodity takes place.
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Cryptocurrency
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Cryptocurrency is a virtual currency whose transaction details are stored in
blockchain. This blockchain technology is based on the decentralised systems
concept, meaning that no single person/company has the sole authority. Also, the
data stored in these blocks are immutable, so the chances of data loss are negligible.
Facts
 Indias population 1.3 billion+, predicted to exceed China’s population
by the year 2024
 In the business world, a unicorn is a startup that reaches a valuation
of $1 billion.
 Non-Fungible Tokens (NFT) are units of data that are stored on a blockchain. Nonfungible means they cannot be replaced by another identical item, which means
they are unique.
 financial assistance provided
 essential drugs and medicines
 vat, excise duty
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Disposible income, savings
Shitcoin
Soonicorns.
Firewall and antivirus programmes
Repo Rate – 5.4% +50bps
It is the interest rate at which the central bank of a country lends money to commercial
banks. Will control inflation
Reverse Repo Rate – 3.35%
SLR – 18%
CRR – 4%
Capitalism
Capitalism is an economic system that focuses on a free market to determine the most efficient allocation
of resources and sets prices based on supply and demand.
Socialism
Socialism is often presented as the opposite of capitalism whereby there is no free market and the
allocation of resources is determined by a central body.
Financial Markets
1.
2.
3.
4.
5.
Stock Markets
Over-the-Counter Markets
Bond Markets
Money Markets (certificates of deposit (CDs), municipal notes, Treasury bills)
Derivatives Markets
A derivative is a contract between two or more parties whose value is based on an agreed-upon
underlying financial asset (like a security) or set of assets (like an index)
6. Forex Markets
7. Commodities Markets
8. Cryptocurrency market
FSA Analysis of UCO And
IDFC Bank
Arindam Banerrji, Executive Vice President and Managing Director, Wells Fargo.
Wells Fargo & Company is a leading financial services company that has approximately $1.9 trillion in
assets, proudly serves one in three U.S. households and more than 10% of small businesses in the
U.S.,
We provide a diversified set of banking, investment and mortgage products and services, as well as
consumer and commercial finance, through our four reportable operating segments: Consumer
Banking and Lending, Commercial Banking, Corporate and Investment Banking, and Wealth and
Investment Management.
Wells Fargo ranked No. 37 on Fortune’s 2021 rankings of America’s largest corporations. We ranked
fourth in assets and third in the market value of our common stock among all U.S. banks at
December 31, 2021.
1. Operations
2. Technology
3. Analytics
4.
Risk Management
A general thumb rule:
Company Category
Large Cap
Mid Cap
Small Cap
Safety
High
Medium
Low
Return Potential
Low
Medium
High
Portfolio
Free float – amount of company capital which is with public
BANKING SECTOR
To understand Banks - https://byjus.com/free-iasprep/types-banks-india/
For a developing country like India, it is essential to have a strong monetary strength. It can be analysed
with its banking sector development
Banks have 2 functions which is to accept deposits and provide loans, it bridges the gap between the
person who needs money and the one who has extra money. The modern economy cannot function
without the banking industry. As the main source of credit, it provides funding for individuals to purchase
homes and vehicles as well as for businesses to acquire equipment, grow their operations, and pay
their employees.
Banks provide credit cards, debit cards, and checking accounts to help with a variety of daily
transactions. They also support e-commerce, which mostly excludes the use of currency. Banking
system provides financial security to the people by providing loans at competitive rates, paying reliable
remittance services, etc. It helps people save their money and invest it in different financial instruments
like government securities, long-term bonds, etc.
Over the years Banking sector has been grown quite well and it is continuing to be growing at a good
pace and it is also one of the most watched sectors. Nifty banking index is also popular a index people
use to trade.
If regulated properly they will be a great asset for the country. As banks have direct contact with the
customer in terms of credit giving or taking deposits so, RBI banks with the help of CRR and SLR control
the money supply of the economy.
HDFC BANK
HDFC Bank Limited is an Indian banking and financial services company headquartered in Mumbai. It
is India's largest private sector bank by assets and world's 10th largest bank by market capitalisation
as of April 2021. Being a private bank, the company has earned absolute trust from its customers and
gained a huge customer base throughout the country. HDFC Bank provides a number of products and
services including wholesale banking, retail banking, treasury, auto loans, two-wheeler loans, personal
loans, loans against property, consumer durable loan, lifestyle loan and credit cards. HDFC Bank has
been revolutionary with its terms of deposits and loan disbursements, which keeps it at the top of the
Finance sector market. I am personally interested in studying this company because it is leading and
known for its exceptional quality service which it provides. Even if it has low interest rate and high fees
people believe in the service of the bank which it provides to the customers. it has focused on enhancing
its digital capabilities and providing a more seamless experience for customers. HDFC manages to
keep its NPA in check and It is among the few banks of national importance which have zero debt
exposure to Kingfisher Airlines. It also has its base in rural areas and been successful where most of
the bank fail to manage. It has made sure to ride over any waves of uncertainty and downturns.
PNB BANK
Punjab National Bank (abbreviated as PNB) is an Indian public sector bank headquartered in Delhi.
The bank was founded in May 1894 and is the second largest government-owned bank in India, both
in terms of its business volumes and its network. The Bank was established by the spirit of nationalism
and was the first bank purely managed by Indians with Indian Capital. During the long history of the
Bank, 9 banks have been merged/ amalgamated with PNB. PNB's principal commercial banking
activities include deposit-taking, lending, bills discounting, trade finance, foreign exchange dealings,
fund transfers, remittance servicing, asset management, a full range of retail banking and trust services,
and treasury operations. I am personally interested in studying this bank because as people have total
trust in public banks and leading one in India is SBI, so being the second how it is competing against
its competitors and what more it is offering to its customers which makes people trust this bank and
unique. I personally have my bank account in this bank so I also want to know the fundamentals about
this bank. It has also able to recover the trust even after the Nirav modi scam and Vijay Malia scam in
which its employees were involved.
CONGLOMERATE SECTOR
Conglomerate is a corporation of several companies that function under one parent company which
has the controlling rights. The parent company holds a majority stake in the businesses and may
overlook critical business decisions.
Conglomerate includes Aditya Birla Group, Hinduja Group, ITC Limited, JSW Group, Bajaj Group,
Godrej Group, United Breweries Group, Tata Group. With a population of 1.4 billion India is the
second largest populated country and with huge population it gives the opportunity to cater to have a
big business catering to every need of the consumer. India being popular with the conglomerates
named in the top richest people.
The biggest conglomerate in terms of revenues, profits and market value remains the Tata Group,
followed by Mukesh Ambani's Reliance Industries.
By participating in several unrelated businesses, The parent corporation can cut expenses by using
fewer inputs that can be shared among subsidiaries and by diversifying business interests by
investing in a number of unrelated businesses. As a result, the dangers of doing business in a single
market are reduced. It results in the reduction of the prices of the products or services offered as
compared to any new compared offering the same product/Service.
Advantages of conglomerate
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Diversified Business
Diverse Employee
Greater Profits
Access to resources
Mitigated Risk
Cross Selling
Grasim Industry
Grasim Industries Limited is a flagship company of the global conglomerate Aditya Birla Group, ranks
amongst the top publicly listed companies in India. Incorporated in 1947, it started as a textile’s
manufacturer in India. . It is a leading global producer of Viscose Staple Fibre, the largest Chlor-Alkali,
Linen and Insulators player in India. Through its subsidiaries, UltraTech Cement and Aditya Birla
Capital, it is also India's largest cement producer and a leading diversified financial services player. I
am personally interested in studying this company because less people know abut this company
existence and it is a big company under Aditya Birla and it has evolved into a leading diversified
player with leadership presence across many sectors. Through its subsidiaries, UltraTech Cement
and Aditya Birla Capital, it is also India’s largest cement producer and a leading diversified financial
services player.
Voltas Ltd
Voltas Limited is an Indian multinational home appliances and consumer electronics company
headquartered in Mumbai, Maharashtra, India. It designs, develops, manufactures and sells products
including Air Conditioners, Air Coolers, Refrigerators, Washing
machines, Dishwashers, Microwaves, Air purifiers, Water dispensers. The company was incorporated
on 6 September 1954 in Mumbai, as a collaboration between Tata Sons and Volkart Brothers. I am
personally interested in studying this company because It is a six-decade old brand. The Unitary
Products Business Group of Voltas has pioneered the concept of Air Conditioning & Refrigeration in
India and have series of first launches throughout our period of existence.
Investment Banking – HSBC is a
global investment bank
1. FSA – Financial
Statement Analysis
2. Valuation
3. Industry Analysis
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Front Office
Middle Office - Research
Back Office –
Compliance, Operations
Alternative Investment Fund – AIF – Hedge
funds
ESG Funds – Environmental, Social and Governance funds.
Book Value – Intrinsic Value on paper
Market value –
Intrinsic Value – subjective, difficult to estimate, this measure is arrived at by means of an objective
calculation or complex financial model. However, comparing it to that current price can give investors
an idea of whether the asset is undervalued or overvalued.
Net Worth - calculated by subtracting all liabilities from assets can be called book worth or
shareholders’ equity.
NAV – Net Asset Value – used by Mutual Funds, ETF – (Assets- Liabilities)/No. of Shareholders –
calculated end of day.
EVA = NOPAT - (Invested Capital * WACC) – Economic Value Added - incremental difference in
the rate of return (RoR) over a company's cost of capital.
The general concept of Accrual accounting is that accounting journal entries are made when a good
or service is provided rather than when payment is made or received.
The Matching principle is an accounting concept that dictates that companies report expenses at the
same time as the revenues they are related to.
The Pecking order theory states that a company should prefer to finance itself first internally
through retained earnings. If this source of financing is unavailable, a company should then finance
itself through debt. Finally, and as a last resort, a company should finance itself through the issuing of
new equity.
Agency theory attempts to explain and resolve disputes over the respective priorities between
principals and their agents. The difference in priorities and interests between Agent’s (company
executives) and Principals (Shareholders) is known as the principal-agent problem. Resolving the
differences in expectations is called "reducing agency loss."
An Agency cost is a type of internal company expense, which comes from the actions of an agent
acting on behalf of a principal. Agency costs typically arise in the wake of core inefficiencies,
dissatisfactions, and disruptions, such as conflicts of interest between shareholders and
management. The payment of the agency cost is to the acting agent.
Market Efficiency Theory - https://www.investopedia.com/terms/m/marketefficiency.asp - Market
efficiency refers to how well current prices reflect all available, relevant information about the actual
value of the underlying assets.
Information Asymmetry – one party possess more info than the other
Price discovery is the overall process, whether explicit or inferred, of setting the spot price or the
proper price of an asset, security, commodity, or currency. The process of price discovery looks at a
number of tangible and intangible factors, including supply and demand, investor risk attitudes, and
the overall economic and geopolitical environment. Simply put, it is where a buyer and a seller
agree on a price and a transaction occurs.
Book building is the process by which an underwriter attempts to determine the price at which an
initial public offering (IPO) will be offered. The investment bank invites investors, normally large-scale
buyers and fund managers, to submit bids on the number of shares that they are interested in buying
and the prices that they would be willing to pay. It is highly recommended by all the major stock
exchanges as the most efficient way to price securities.
The term Market Maker refers to a firm or individual who actively quotes two-sided markets in a
particular security by providing bids and offers (known as asks) along with the market size of each.
Market makers provide liquidity and depth to markets and profit from the difference in the bid-ask
spread. They may also make trades for their own accounts, which are known as principal trades.
Open Outcry – Earlier when trading happened with the brokers shouting the prices
A company's real QOE - Quality of earnings can only be revealed by spotting and removing any
anomalies, accounting tricks, or one-time events that skew the numbers.
- An increase in net income without a corresponding increase in cash flow from operations is a
red flag.
- Tracking activity from the income statement through to the balance sheet and cash flow
statement is a good way to gauge quality of earnings.
Operating Leverage –
 High Fixed cost and low Variable Cost means High Operating Leverage
 Low Fixed cost and High Variable Cost means Low Operating Leverage
 A company with high operating leverage depends more on sales volume for profitability.
 Degree of operating leverage (DOL) tells us how the profits will change with respect to
change in sales.
 DOL = % change in operating income / % change in sales.
Rent, advertising, interest expense, depreciation and administrative costs are examples of fixed
costs, while examples of variable costs include raw materials, sales commissions, and packaging.
Financial leverage results from using borrowed capital as a funding source when investing to expand
the firm's asset base and generate returns on risk capital.
Systematic and Unsystematic Risk
Bullish Strategy
https://canvas.krea.edu.in/courses/1815/files/folder/Prof.%20Srinivasan?preview=187860
Bull Call Spread or Long Call Spread– 39
Bull Put Spread or Long Put Spread -
BASEL NORMS (Banking for International Settlements)
The banks to have enough capital to absorb any kind of losses or shocks
Basel 1 – credit risk and RWA – 8%
five categories as per credit risk, carrying risk weights of
0% - cash, central govt, home country debt etc
10%: Public sector debt, depending on the debtor.
20% - securitisations such as mortgage-backed securities with the highest AAA rating,
50% - municipal revenue bonds, residential mortgages
100% - corporate and retail debt and some with no rating
Tier 1
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Common equity Tier 1 (CET1): This is the highest quality of Tier 1 capital and includes
common shares, retained earnings.
Additional Tier 1 (AT1): This type of capital is less permanent than CET1 but is still
considered to be high quality. AT1 instruments include perpetual contingent convertible
(CoCos) and other hybrid instruments, Revaluation reserves, Subordinated debt,
Undisclosed reserves
Tier 2
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Undisclosed reserves: These are reserves that are not disclosed to the public and are not
included in Tier 1 capital.
Revaluation reserves: These are reserves that arise from the revaluation of assets to their fair
market value.
Subordinated debt: This is debt that is subordinated to the claims of depositors and other
creditors in the event of a bank failure.
Hybrid capital instruments: These are instruments that have both debt and equity features.
Tier 3 – not there in Basel III
Basel 2 - focused on strengthening the capital requirements of banks by establishing three goals
Operational credit and market risk,
 Make a banks capital more risk sensitive
 promote enhanced risk management tactics among larger banks
 Create a common means for evaluating banks from one country to another
o Minimum capital requirement - RWA, CAR – 8%
o CET1 – 2%
o tier 1 – 4%
2. Supervisory review – RBI,
3. Disciplinary action,
Main objective – preventing bank from bankrupt is more important than saving depositors money after
a bank becomes bankrupt
3 buffers
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CAR – capital adequacy ratio – 10.5% (8+2.5)
o CET1 – 4.5%, 5.5%
o Tier 1 – 6%
Liquidity Coverage Ratio (LCR) – (high quality liquid asset/Net cash outflow for the next 30
days) – short term resilience
NSFR – Net Stable Funding ratios – long term resilience – safe funding to give out in loans –
(the amount of Available Stable Funding (ASF) / the amount of Required Stable Funding
(RSF)) over a one-year horizon.
CCCB - Counter Cyclical Buffer – CE – (0 – 2.5%) so total max 9.5% - central bank
Capital conservation buffer CCB - 2.5% -maintained in form of CE so total 7%. – stressed
situation
T1/Capital asset – 3%
Hedge Funds – protect money – take money from clients, take high level of risk, high return, use a lot
leverage, charge high fees, 2%fees 20% return, invest specific area.
Private equity – take money from companies then invest in specific company sector and wait for 1015 yrs then sell, long term investment, management fee, carried interest.
Investment Banking –
1. Merger & Acquisition – give advice
2. Equity Capital Market – help them raise money
3. Debt Capital Market - help them raise money, clients are massive corporations where interest
is in millions.
4. Restructuring - scrutinize & analyse the structure
5. Leveraged Finance – risky debt
Asset management – management of money acc to risk appetite and calls of their clients ,clients –
govt, local authorities, key roles – sales – manage inv. And product specialist – investment and hr
finance support, Long Term
Taking money from private or wealthy ind. Private wealth management
Private Markets - Investment which r not available for everyone.
Private equity – buy private equity firms shares
MEZZANINE Financing – middle floor -it is combination of debt and equity,
Venture capital – venture is risky or daring, inv. – early stage, exit strategy – take a portion of ur
company – exit strategy
CDO Collateralized default obligation – used to repackage individual loans, bonds, or other debt
instruments into diversified portfolios, which are then sold to investors. These securities are divided
into different tranches (or segments) with varying levels of risk and return. tranches high,
mezzanine, low
Credit Default Swap (CDS)
PE Firm - https://www.youtube.com/watch?v=tbRkdm80cFs
Free cash flow to the firm (FCFF) is the cash flow available to all investors, including debt holders
and shareholders. It is calculated by subtracting capital expenditures and working capital changes
from earnings before interest, taxes, depreciation, and amortization (EBITDA).
Free cash flow to equity (FCFE) is the cash flow available to equity holders after debt payments. It is
calculated by subtracting interest expense and net debt issuance (repayments) from FCFF.
The key difference between FCFF and FCFE is that FCFF includes the impact of interest expense,
while FCFE does not. This is because interest expense is a financing expense that benefits debt
holders, not equity holders.
Both FCFF and FCFE can be used to value companies using discounted cash flow (DCF) models.
However, FCFF is typically used to value companies with significant debt, while FCFE is typically
used to value companies with little or no debt.
FCFF = EBIT(1-Tc) + Dep – Capex – CINCWC / PAT + Int(1-Tc) + Dep – Capex – CINCWC
FCFE = EBIT(1-Tc) + Dep (Tc) – Capex – CINCWC – Int(1-Tc) + Net borrowings / PAT + Dep – Capex –
CINCWC + Net borrowings
Enterprise value = Market Cap + Debt – Cash
Var - VAR = Daily Loss * Z Score* square root of Time in Days
VAR = EAD * LGD * POD
Probability of default - is the likelihood that a borrower will default on a loan.
Exposure at default - is the amount of money that a financial institution is exposed to in the event that a
borrower defaults on a loan
Loss given default - is the percentage of the EAD that a financial institution expects to lose in the event of
a default.
Cvar – Conditional - also known as expected shortfall (ES), is a risk measure that shows the average
loss above a certain percentile of the loss distribution, ES=E (Loss | Loss >VaR)
Svar Stressed Value-at-Risk - technique used in finance to assess potential losses in a portfolio
during periods of financial stress or market crises. It is a variant of traditional Value-at-Risk (VaR) that
takes into account extreme market conditions which might not be adequately captured by regular VaR
models
BCBS - The Basel Committee on Banking Supervision
is the primary global standard setter for the prudential regulation of banks and provides a forum
for regular cooperation on banking supervisory matters. Its 45 members comprise central banks
and bank supervisors from 28 jurisdictions.
BIS -Bank for International Settlements, BASEL – SWITZERLAND
https://www.youtube.com/watch?v=ZZI0QW-MJgc
INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP)
&
STRESS TESTING
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Classification of financial assets: IFRS 9 classifies financial assets into three categories:
1. Amortized cost: Financial assets that are measured at amortized cost are those that
are held to maturity, loans and receivables, and certain other financial assets that
meet specific criteria.
2. Fair value through other comprehensive income (FVOCI): Financial assets that are
measured at FVOCI are those that are held for trading, available-for-sale equity
instruments, and certain other financial assets that meet specific criteria.
3. Fair value through profit or loss (FVTPL): Financial assets that are measured at
FVTPL are those that are designated as FVTPL, certain derivatives, and certain other
financial assets that meet specific criteria.
IFRS 9 establishes a new accounting framework for financial assets and financial liabilities. It
is designed to provide more timely and transparent information about the financial risks
faced by an entity. IFRS 9 also introduces a new approach to accounting for expected credit
losses, which is intended to be more forward-looking and to result in more timely recognition
of credit losses.
Tier 1 capital,
Additional tier 1 capital,
Tier 2 capital,
Total capital,
RWA
How Market risk RWA is calculated, Credit risk RWA is calculated
How Credit risk RWA is calculated
How Operational risk RWA is calculated
state and explain equity and debt related instruments that are part of banks capital,
minimum capital requirement as per basil,
leverage ratio of banks
liquidity ratio of banks.