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POF-P08
PGDM 2008-10: Term-VI
Practice of Finance
(1.5 credit)
Prof. Sanjeev Pandiya
(Session plans to be modified)
Course Objective:
The course is designed with the broad objective of bringing home to the student, that his analytical framework of Finance is incomplete without a behavioural perspective on various Financial issues. It helps outline the ‘philosophy of Finance’ (as opposed to the nuts and bolts). The idea that Finance is more than just numbers; and giving students the ‘power of context’ to understand Finance.
Course Content:
A critique of Classical Finance/ Economics and its assumptions; a basic understanding of Behavioural Finance and its applications, with some examples and Case Studies. Examine the drivers of evolving ‘cycles’ as various kinds of human behaviours play out the ‘historical process’ in price discovery, covering small and large movements in Financial markets. Apply to small (micro) markets and large (macro) markets.
Practice of Finance
1) Discuss the role of Finance in a co, a market and society-at-large. Mention the asset allocation function, and the role that ‘sentiment’ plays in Finance.
Draw a distinction between left-brain (analytical) function and the right-brain (emotional) function of a Finance man. Ask why analysis usually fails as a predictor of the future (eg, the McKinsey/ DCF method as a predictor of the Value of a Firm).
Bring in the definition of the Practice of Finance (as opposed to the Theory of Finance). Introduce basic concepts of Behavioural Finance.
Point out a few behavioural anomalies that do not lend themselves to any theoretical scrutiny (Mental Accounting, Richard Thaler’s/ Tversky’s work, etc.)
Discuss live examples of behavioural anomalies in global markets. Present detailed exposition of Stephen Roach’s commentary on US- China trade, Dollar decline and the handling of the Bubble 2000. Link up to impact on commodities (including Gold), Forex flows, and consequent impact on asset markets (equity/ debt and real estate).
Ask how you can have a concept called the “Risk Free” rate, when real rates are negative. Ask for the drivers of Beta, and whether Beta is static. Ask about “expected Rate of Return”, and why all of them change. Therefore, is there anything called the “Cost of Capital”, and why do all its components change? The causative factors behind the “cost of capital”……..how does Berkshire Hathaway have a “negative cost of capital”?
Project:
analyse a market (for a stock, commodity, debt, forex, or derivative) from a behavioural perspective (as opposed to an Industry Scan that is done in Corporate Finance & Strategy). It is like naming the players on a football field Vs. describing their behaviour on the same football field. Give examples to show how you can come to remarkably different conclusions about future direction, based on the 2 views. Explain that this is why most ‘Finance’ people fail, because they see themselves as Analysts and not Forecasters. The job of a CFO is to
anticipate
the future, not analyse the past/ present.
Explain the Law of Large Cycles, and the role of greed and fear. Kondratieff Cycles, business cycles, the principle of ‘reversion to the mean’. Explain that without a behavioural view of a market trend, your view is incomplete, just like the names (and vital statistics and past track records) of a set of football players tells you nothing about how the game will go.
Explain the role of Monetary Policy, credit cycles, cash-collateral cycles and bankruptcy cycles (in economies). The role of Inflation (in building asset-price bubbles) and the role of Deflation (in product prices and asset prices). Explain with reference to the US/ China/ Asia situation how they can co-exist. Why this distinction is extremely important in working out the debt stance of a co, and its debt-mix policy. Show how this is a differentiator in all commodity markets (how Balrampur, Hindalco have emerged as superior performers because of their understanding of debt).
Linkages and ‘spillover effects’ between markets: Forex, commodities, equities, debt and derivatives. Explain with reference to the Dollar, Gold, US/ Indian stocks, Fed Rates and derivative positions in Gold and Dollar.
Bibliography:
1. “A History of Risk” by Peter Bernstein
2. All my articles in
www.valueresearchonline.com
3.
Corporate Finance & Strategy
1) Various schools of strategy, ie. Planning school, Bureaucracy school, Conglomerate school (Krishna Palepu), Behavioural school, Intrapreneurial school, Economic school (Buffet strategy).
Make the point that these schools are constantly evolving, and no single school is the perfect one. Finally, these are cafeterias of alternate managerial strategies, which one has to choose from.
The formal schools are from Mintzberg, Ahlstrand & Lampel, as follows:
i. Design school
ii. Positioning school
iii. Planning school
iv. Entrepreneurial school
v. Cognitive school
vi. Learning school
vii. Power school
viii. Cultural school
ix. Environment school
x. Configuration school (a combination of all schools)
2 session
2) Practical examples of each school of strategy. Debate on whether “strategy follows structure”, or “structure follows strategy”. Discussion to cover all aspects of business, ie. Business dynamics, strategy and then business structure again. Take practical examples from evolving industries, eg. Steel, Polyester Films, sugar, etc.
1 session
3) Role of Corporate Finance in Strategy. Refer to environmental school, and role in Commodity industries, in particular. Give practical examples like Commodity and Intt Rate Hedges in Aluminium, and other similar structures in non- tradeable commodities (gas and fertilizers).
The Network Model of Li & Fung (also SRF’s FNT business). Asset – intensive strategy vs. market – intensive strategy. The Low Cost Mfg Model. Vertical integration vs. fragmented value chains (the PC industry example). Horizontal integration (eg. Integrated sugar model). The role of GE Capital (Treasury) in the evolution of GE the Conglomerate, the role of the Treasury in evolution of Reliance.
4 session
4) Role of Treasury in corporate disasters. Give the details of the SRF story, its insolvency and subsequent recovery. Discuss the role of Hindalco and Balrampur in Treasury outperformance.
Working capital management, fund management, interest rate hedges, etc. The importance of view- taking, and the role of accurate views, eg. Indo Rama’s turnaround as a Treasury story (view on Dollar).
Mention disaster like the famous P & G losses, SRF itself………..!
2 session
5) Do a class exercise on scanning one industry, and its evolving strategy. Take any commodity industry (sugar, packaging, BOP films, Ref gases, steel, etc.) Bring out the role of Treasury in strategy on the ground.
Evaluate the impact of strategy with a financial analysis. Ask relevant questions on behalf of each player, his options and his constraints. Make out a “field map”, both current and projected (after, say, 5 years).
Bring out the role of a “Strategy Map” in understanding an industry thoroughly. Explain how this is important in planning investments and equity trends.
1 session + offline discussions in groups
6) The structure of a good Strategy function. How it is done, the various skills needed, the activities involved, and why Treasury & Strategy are increasingly fused together. The role of Investor Relations, and description of the function, its importance and its impact on Strategy. The relationship of Strategy with the CEO.
2 sessions
7) Risk Management & Strategy. Why Treasury is important to Risk Management, with practical examples. Various kinds of risk. A thorough delineation of the history of risk.
3 sessions
Bibliography:
a) Michael Porter: “Competitive Advantage”
b) Mintzberg, Ahlstrand & Lampel
c) The McKinsey Quarterly
Created By:
Debasis Mohanty
on
10/28/2009
at
10:31 AM
Category
:
PGDM-II
Doctype
:
Document
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