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Archive for May, 2012|Monthly archive page

The Economics of owning Samsung Galaxy S 3

In Finance, Uncategorized on May 31, 2012 at 5:58 pm

The Samsung launched its flagship Galaxy S 3 couple of days back in 28 countries. Talking about the smart phone and its great great features is increasing becoming one of the most talked about pub-talks. I don’t own a smart phone myself but my husband is a proud owner of iPhone 4. For last many months he is waiting eagerly for the next big thing ‘The iPhone 5’ (he even check the latest gossip on the proposed launched ……. I emphasize with him).

He is pasturing me for last one year to buy a smart phone. The launch of Samsung Galaxy S 3 tempted me to sneak peek the newest-must-own-gadget. Being finance professional, I always wonder on the economics of ownership. Alright let us begin ……

What would you choose ….. Paris or Galaxy S 3

First the let us understand straight cost of ownership of fully unlocked Galaxy S3 for 12 months:

  • 1 unlocked phone = USD 799 or Euro 645 or GBP 519 or INR 43000 (to keep it simple, I will use USD) = $ 799
  • Screen guard/pouch/accessories = $ 50
  • Insurance 12 months = $ 84
  • Average cost of new apps buy in 12 months (some of them you need, some of them you buy because it is on your friend’s phone) = $ 35
  • Data charge = $ 180
  • Total (A) = $ 1148

(Call charge not taking into consideration, you will need a phone regardless of it being smart or not)

Now let us add the cost you would ignore:

  • Productive working hours you will use fiddling your phone everyday, playing games, exploring apps and admiring photos (assumption taken on minimum wages) = 1 hour * 365 days * $7.25 = $ 2646.25
  • Total (B) = $ 2646.25
  • Assume you will sell the phone after 12 months of usage. The resell value of phone with generic wear-tear will be 40% of MRP = $ 319.6
  • COST OF OWNERSHIP = A+ B  – resell value = $ 1148 + 2646.25 – $ 319.6 = $ 3439. 65 (aaaaawwwwwww !!!)
  • Compared to this cost, if I want to take 1 week of luxurious holiday with my partner in Paris, it would be approx. = $ 2950

My husband would have chosen Samsung Galaxy S3 and I would have chosen an evening in Paris .

What would you do 🙂 ………. Please comment !!!!!

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Understanding types of Loan

In Banking, Finance on May 28, 2012 at 9:58 am

Money requirement changes over a period of time, some individuals require money to build house, some for marriage, buying an expensive car or it may be for kid’s education. Corporate houses have different requirements like starting a new business, expansion of existing business etc. These requirements can be fulfilled by selection of few options. First option is to self – fund, second option is to take loan (debt), third option is to raise equity and last is through partnership/joint venture and strategic arrangements. When self-funding is not available, corporate mostly avail a mix of debt and equity. Equity has lots of entry barrier and required large capital, individual go for taking a loan.

A loan is given by one party to another party with the agreement that money will be repaid after a certain period of time. In a loan contract, borrower (who takes the loan) pays certain percentage of the principal amount to lender (who gives the loan) as compensation for borrowing. Maturity date of the loan is the date by which the borrower must have paid the loan.

There are 2 types of loan – secured loans and unsecured loan.

When a loan which is guaranteed by collateral, it is termed as secured loan. Its best example is home loan – when a person buys a home, he/she make some amount as down payment to the builder and for rest amount he/she may take as home loan from a bank or financial institution. In case of default of the assets, lender (bank or financial institution) has right to seize home.

When borrower does not deposit any kind of asset against the loan, it is termed as unsecured loan. Personal loans, bank overdraft and corporate bonds are good example of this.

They are other very popular loans like business loans (type of secured loan) where borrower need to present a business plan, education loan (unsecured loan up to a specific amount) where borrower is a student and take this loan for higher education.

Now an interesting question arise in the mind how banks categorize whom to give loan or not. See my next blog on this.

 

How do you perceive risk

In Finance, Insurance, Risk Management on May 7, 2012 at 1:38 pm

Risk perception is the subjective assessment of the probability of a specified type of accident happening and how concerned we are with the consequences. To perceive risk includes evaluations of the probability as well as the consequences of a negative outcome. It may also be argued that as affects related to the activity is an element of risk perception.

how do you perceive risk

Perception of risk goes beyond the individual, and it is a social and cultural construct reflecting values, symbols, history, and ideology.” (Weinstein, 1989).

Risk Perception follows from the specificity and variability of human social existence that it should not simply be presumed that scores and ratings on identical instruments have the same meanings in different contexts” (Boholm, 1998).

Adams (1995) claimed that “the starting point of any theory of risk must be that everyone willingly takes risks”. He concluded that this was not in fact the starting point of most of the literature on risk.

Dodd and Mills, 1985 developed model FADIS (fear of accidental death and injury scale)

There is various perception of risk by key decision maker in insurance organization.

  • Risk perception for human factor – Some financial directors does not consider risk management importance, some consider it very seriously and spend lots of money in buying insurance. Some takes it as financial burden and in other cases it is out of his scope.
  • It depends upon Organization culture and competency.
  • Financial strength and scale of organization is key factor in determining level of loss. Example furniture manufacturing Organization is having higher risk of fire than a Software company.  It is very much possible that a Company like Microsoft, CSC has big risk management department because of its size rather than a small company which even might exposed to higher risk.
  • Culture of market place:  In Dubai, most of insurance company and banks have risk managers and Heads and follow most of the international standards if we see same in India, very few organization have them.
  • Flexibility: Flexibility within an organization that will enable it to meet urgent needs also taken into consideration.
  • Future effect of risk on various activities of organization also needs consideration

Reinsurance defined

In Finance on May 3, 2012 at 9:16 am

It is an insurance of insurance. Reinsurance is the process whereby one one party called the Reinsurer in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance which it has issued. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.

Various Parties and terms involved in reinsurance contract are –

  • Reinsurer – An insurer or reinsurer assuming the risk of another under contract.
  • Retention – The net amount of risk which the ceding company or the reinsurer keeps for its own account or that of specified others.
  • Retrocession – A reinsurance of reinsurance. Example: Company “B” has accepted reinsurance from Company “A”, and then obtains for itself, on such business assumed, reinsurance from Company “C”. This secondary reinsurance is called a Retrocession. The transaction whereby a reinsurer cedes to another reinsurer all or part of the reinsurance it has previously assumed.
  • Cede – When a company reinsures its liability with another, it “cedes” business.
  • Ceding Commission – The cedant’s acquisition costs and overhead expenses, taxes, licenses and fees, plus a fee representing a share of expected profits – sometimes expressed as a percentage of the gross reinsurance premium.
  • Ceding Company – The original or primary insurer; the insurance company which purchases reinsurance.

Insurance Defined

In Finance, Insurance, Legal on May 3, 2012 at 8:05 am

Insurance is a form of risk management primarily used to hedge against the risk of contingent loss. Insurance is a contract between two parties where in exchange of premium, the risk is transferred from one party to another party.

Insurance classical definition

Insurance is an agreement where, for a stipulated payment called the premium, one party (the insurer) agrees to pay to the other a defined amount upon the occurrence of a specific loss.  The party who pays the amount to the party on occurrence of specified loss is called Insurer. The party who pays a stipulated payment is called Insured. A defined amount which insured pay to Insurer is called Premium.

Financial definition of Insurance

Insurance is the financial mechanism by which cost of unexpected loss is redistributed. Here, loss expenses transferred to insurance pool and loss is redistributed to the members of pool.

We see losses at many stages in our day to day life whether it is corporate or individual. Losses may be of high or low severity, may affect single or group of persons. It may involve single region or multiple region and even countries. Sometimes losses are too low which can be ignored but on the other hand, it can be so severe that it can eat up whole life saving of a person.

For example:

Let’s take an example of Fire insurance pool where losses are redistributed among masses.

In the Mumbai Trombay area, many oil refining and petroleum units have high risk of fire. They transfer their fire risk by paying Rs 50,000 in fire pool. In total 50 units agreed and pool reached to the (Rs 2500, 000). Fire broke out in one of the unit of Trombay area and it affected the one adjoining unit also which resulted loss of Rs 2500,000. Now loss expense of 2 units can be paid from fire insurance pool. If no insurance pool existed, the unfortunate victims will loose 2500,000. Here loss expense incurred by two units will be redistributed among 50 corporates.

Legal definition

Insurance definition under Indian law: “Insurance is legal contract where one party agrees to pay another party an agreed amount to compensate its unfortunate losses.” Here ‘amount’ is called premium and contract is called policy.

Who are the parties affected by Risk in the organization?

In Risk Management on May 3, 2012 at 7:51 am

In every organization from top to bottom, senior to junior, creditor to customer every body is affected by risk.  Example – Satyam Computers, the liability arise for auditors to pay for misleading financial reports which ultimately affected whole organization and various parties involved with organization at different levels and overall affect country risk as well. The parties who affect insurance contract are –

  • Employees – Employees of the organization are affected in many ways. If a risk of fire arises then they need to safeguard the personal property, organizational property and liability risk. They provide information to external agencies. Daily wagers loose their jobs. Environment, pollution norms, safety norms and other regulatory guidelines are taken into consideration by employees.
  • Suppliers – Suppliers are affected when the supplies are suddenly stopped. Example – Due to fire, factory close down for 2 months. Therefore, supplies are closed down for 2 months.
  • Customers and other recipient of services – Customers are directly affected from the risk arise out of the organization. In the above example, the customers will not get the products from the company for next 2 months which will create shortage of the good.
  • Distributors –   Distributors face market competition and deals with retailers for product penetration. Distributor is a link between retailer and Company. Distributor is affected by delay in delivery, affect on quality, loss in reputation of the company due to risk arise.
  • Regulators – Regulators could be IRDA, RBI, Pollution control board, Waste disposal board which provides guidelines to reduce the risk from time to time.,
  • The Media – Media provides information to public regarding various risk and hazard related to companies.
  • Private investors – the shareholders and the private investors are affected by the valuation of the company. Various credit rating agencies analyse the risk of companies and publish the rating through the media which is used by private investor to analyze the risk of the companies.
  • Banking industry – The companies take debt from banking institution to run its business. Risk associated with the companies are first analysed by the banks before giving loans.
  • Business partners – Business tie ups, partners are affected by each and every risk associated with business as their reputation is also affected.
  • The environment – Risk and hazard in the organization affects environment. Example – Fire spread in the industry and resulted in burning of most of plant which produces chemical oil which resulted heavy pollution and produced gases harmful for masses.

Others – Risk from Politics, Industrial associations and competition also plays vital role.

What is Loss?

In Risk Management on May 2, 2012 at 11:12 pm

Loss explained as part of Risk Management

The meaning of loss is the act of losing someone or something or the disadvantage that result from losing something. Loss is a common experience that can be encountered many times during a lifetime; it does not discriminate for age, race, sex, education, economic status, religion, culture or nationality.

Property loss in which the insured peril is the proximate cause (an unbroken chain of events) of the damage or destruction. Most basic property insurance policies (such as the standard fire policy) insure against only direct loss and not indirect loss or consequential loss. For example, a fire within the wall structure of a house causes the party walls and clothes to catch fire, which in turn fans flames onto the furniture-a direct loss. An indirect loss would be inconvenience of the inhabitants, who would not be able to sleep in their home, thus causing a drop in their efficiency at work.

What is Risk Management?

In Risk Management on May 2, 2012 at 9:30 pm

Risk is in the roots of every business. People seek security. In the hierarchy of human needs security comes after food, shelter and medical care. There after, the people think about taking precaution, safety measures against the risk. Now first question arises in everyone’s mind to safeguard against the economic risk. Economic risk is the possibility of loosing economic security. In the other way, risk is the standard deviation of the possible outcome. Risk can be seen at many places in day to day life. For example-

A car driver faces the risk of accident of car. Theft, fire risk is present to every household and business house. A risk of explosion/ Implosion might arise in a steel factory.

Therefore, people seek to avoid, minimize, and prevent risks associated with their day to day life. Every human has different individual characteristics and the risk associated with each and every individual is based on different criteria like age, sex, occupation, habits, nature of work, experience etc. In the similar way, in industrial houses and business complexes, the risk depends upon nature of business, degree of hazard, exposure of units, surroundings, environmental and geographical locations as it can be easily found in day to day example that same units at different places may have different risk. Two individual with same age and height working in a same factory may have different risk due to their work.

In simple terms – Risk Management can be defined as:

Risk management is the combination of probability of an event and it consequences. In other way, Risk management is a systematic process of identifying, evaluating, analysis, controlling and reducing the risk involved at various levels of organization and individuals.