IIBM Institute of Business
Management
Examination Paper
MM.100
Managing the Lodging Operations
Section A: Objective Type (30 Marks)
•
This section consists of Multiple
Choice Questions and Short Questions
• Answer all the questions
• Part one carry 1 mark each and Part 2 questions carry 5 marks each.
Part One:
Multiple Choices:
1. are usually
in a suburban or isolated
rural location, with special recreation facilities
a. Convention Hotels c. Resort
Hotels
b.
Suite
Hotels
d.
Full‐
Service Hotels
2. Which
of the following is not a part of Court‐ Mandated Security Standards a. Physical or property related c.
Operational related
b. Personal related d. Administrative related
3.
LEARN
stands for
a.
Listen, Empathize, Apologize, React, Notify b.
Learn,
Empathize, Apologize, React,
Notify
c. Learn, Empathize, Apologize, Reward,
Notify
d.
Listen, Evaluate, Apologize, Reward, Notify
4. is a maintenance that requires
advance planning, significant time, specialized equipment and co‐ordination between several departments
a. Routine maintenance c. Preventive maintenance
b.
Contract maintenance d. Scheduled maintenance
5. Which
of the following is not a
component to Linen cost control
|
a.
|
Replacement cost
|
c. Purchasing cost
|
|
b.
|
Loss and Theft
|
d. Processing cost
|
6. Is a result of employees
being given insufficient information or training to perform their jobs
a.
Role
Ambiguity c. Role Conflict
b. Self‐Monitoring d. Job Unfit
7. A leadership setup having 10‐ year vision to be “the Premier
Worldwide Provider of Luxury
Travel
and Hospitability Products and Services” is a definition proposed by a. NIST
c.
The Ritz‐Carlton
b. Baldrige d. Maslow
8.
Which method
is
used
to promote the most expensive
or high priced rooms to the customers
a.
Bottom‐up Method
c.
Cross Method
b. Rate‐category Alternatives d. Top‐down Method
9. involves passing on some of the traditional functions of management to the employee
a.
Management by functions c.
Job Enrichment
b. Job Design d. Delegation of Authority
10. Which of the following is a
Performance Dimension
a. Teamwork c. Responsibility b. Recognition d. Commitment
Part Two:
1.
Discuss about the steps involved in ‘Budgetary
Control processes?
2.
Define
‘Capital Budgeting’?
3.
Differentiate between Suggestive Selling
and Cross‐Selling?
4.
Define
‘Employee Empowerment’?
End of Section A
Section B: Caselets (40 Marks)
•
This section consists of Caselets
• Answer all the questions
• Each Caselet carries
20 marks each.
• Detailed information should form the part of your answer (Word limit 150 to 200 Words)
Caselet 1
The Pierre has been able to maximize profitability through a sales program
that realigned its sales
mix. The Pierre, a luxury hotel in New York City, experienced high demand and periods of limited availability. An analysis of the business indicated that gross operating
profit was not as much as it could be because
groups were occupying rooms at
discounted rates during peak periods of
the year. As a result, new track
rate business (nondiscounted) was often turned away.
It was calculated that The Pierre sells out for at least 100 days a year. During these dates the
hotel could command rack rate. Group business
was then targeted for the shoulder
and softer time periods. Based on historic
patterns of business, a limitation was placed on the number of rooms set
aside for groups for each
day of the year. A maximum
of
10 percent of all rooms are set aside for groups during high‐
pressure time periods.
A second strategy involves going after new business. Analysis of existing
demand determined that the hotel had relied heavily on Wall Street business. That segment of the market was weak during poor
economic times. As a result,
the hotel looked at business from the entertainment and fashion
industries. Specially, the Los Angeles area was targeted.
Noting that average rates in cities such as London and Paris are high, management sought to increase
the number of international
guests. This segment is more accustomed to paying higher rates. A sales
manager was hired for the Japanese market.
The downside is that the higher the rates guests pay, the more they (rightfully) demand in services.
A full‐time training
manager was hired and an additional half‐ time position added to ensure that the desired level of service
was reached. Attitude is the number one factor in hiring for most positions.
Major press tours in Europe are very important in bringing
in
new
business by issuing personal invitations to journalists and travel agents to visit the hotel on familiarization tours. A second strategy
the hotel has found useful is to reorganize the sales office such that every sales manager performs account management for both individual and group sales.
Another
organizational change is to switch the responsibilities of selling the hotel and managing
the inventory from the reservations manager to senior management. Because of the increased importance of this function, senior managers
get more involved in
analyzing the demand in the
city as well as for the
past five years of
hotel occupancy, and keeping tight tabs
on room sales, yield,
and revenue per available room (REVPAR).
Questions:
1. Would this kind of plan work for any sort of hotel chain?
2. Does this type of strategy
helps in increasing the revenues of the hotel.
Caselet 2
The climate dimensions described relates to a specific management strategy.
Clarity:
ƒ Dana Corporation has a corporate policy that, in part, says “The people
who know best how the job
should be done are the ones doing it.”
Commitment:
•
Boston’s
New England Securities
Corporation issues T‐shirts
to its employees with the slogan
“See it,
Do
it, Own it.”
• To develop
a shared vision, United Technologies
Corporation says:
ƒ Talk honestly and directly to employees about their performance;
ƒ Give people
the information they need to do the job;
ƒ Let employees influence
their own performance objectives;
ƒ Walk around‐be visible;
ƒ Listen to others before
evaluating their ideas;
ƒ Demonstrate high performance standards in your own behavior;
ƒ Let people
know your long‐term direction.
Standards:
•
The quality of written
reports increased after the CEO of Winter
Gardens Salad Company
stamps
“Read by Harry” on the report before
sending it back to employees.
• Supervisors at the Mirage Treasure Island Hotel tell employees
what has to be
done and the reason why. Employees
can refuse to perform
the job if they are not satisfied with the
explanation.
• Once a month
any employee of Chef Allen’s
restaurant can take a friend or spouse out to dinner
at a competing restaurant and the owner of Chef Allen will pay up to $50 of the bill. In return
the employee must prepare a one‐page written
report on the experience and present
a verbal report to the entire
staff. Employees learn to see things
from the customers’ perspective.
Responsibility:
•
MCI says “We don’t
shoot people who make mistakes, we shoot people
who don’t take risks.”
• When Rockwell Semiconductor
increased the spending limit for employees from $25 to $200, spending dropped 60 percent. People looked at the money as if
it was their own.
• At Parisian’s department stores the only person
who can say “No” to a
customer is the store
manager.
• Lyondell Petrochemical removed layers of supervision and replaced the chain of command with
encouragement to let employees
react to what is happening and just make their own decisions.
• The Clarion
Hotel in Virginia Beach has employees play for prizes as they participate in a
monthly version of the game “The Price Is Right” using items in the hotel. Employees become
more aware of the cost of various
items they use on a daily basis.
• Instead of waiting
for price checks, cashiers at Target ask customers what the price is on unmarked items. If the figure seems reasonable, it is
entered without supervisory approval.
• Any Ritz‐Carlton employee has the authority
to spend up to $2,000 to take care of a guest
complaint.
Recognition:
•
Original
Copy Centers give all employees personalized business cards.
Team Work:
• Advanced Micro Devices
bans executive perks such as executive dining rooms and reserved
parking places.
• When employees have to work overtime, BurJon
Steel Service Center
sends flowers and free dinner coupons to the spouses or significant others of the employees.
Questions:
1.
How does the organizational climate in a hotel translate
into total satisfaction of guests?
2. What
can managers do to ensure
that such a climate is being created in his or her operations?
End of Section B
Section C: Applied Theory
(30 Marks)
•
This section consists of Long Questions
• Answer all the questions
• Each question carries 10 marks
each.
• Detailed information should form the part of your answer (Word limit 200 to 250 Words)
1. What are the elements
of the Malcolm Baldrige Quality
Award Program?
2.
Describe the terms:
•
Management by objectives
• Job Redesign
• Positive Reinforcement
• Teamwork
3.
Describe the steps involved in developing a
marketing plan?
IIBM Institute of Business Management
Examination Paper MM.100
Quality
Control
Section A: Objective Type (30 marks)
This
section consists of Mixed Type questions & Short Answer type questions.
Answer all the questions.
Part
One questions carries 1 mark each & Part Two questions carries 5 marks
each.
Part
One:
Multiple Choices:
1. A curve that shows the amount inspected
by both the consumer and the producer for different
percent nonconforming values.
a. ASN curve
b. ATI curve
c. AOQ curve
d. None of the above
2. The producer’s risk is represented by
the symbols
a. Alpha
b. Beta
c. Gamma
d. None of the above
3. The International Committee of Weights
and Measures revised the metric system in
a. 1970
b. 1960
c. 1950
d. 1999
4. ASRS stands
for……………………………………………………………………..
5. A recent survey of retail customers by
the ……………………………………………..
6. A cause-and-effect diagram was developed
by ………………………………………
7. Variables that exhibit gaps are called
………………………………
8. How many techniques used to discard
data.
a. One
b. Two
c. Three
d. None of the above
Examination Paper of Quality Management
IIBM Institute of Business Management 8
9. Deviation charts are also called
a. Difference chart
b. Nominal chart
c. Target chart
d. (a), (b), & (c)
10. Dodge-Romig Tables developed by
a. H.F. Dodge
b. H.G. Romig
c. H.K. Fleming
d. Both (a) & (b)
Part
Two:
1. Write short note on “Group Chart”.
2. What is “Measures of Dispersion”.
3. What is “Collection of Data”.
4. Write short note on “Binomial Probability
Distribution”.
END OF SECTION A
Section B: Caselets (40 marks)
This
section consists of Caselets.
Answer all the questions.
Each
caselet carries 20 marks.
Detailed information should form the part of your answer (Word limit 200 to 250
words).
Caselet 1
It is 7:00 a.m. and the siren sounds high
at Kandivli (a suburb of North Mumbai) plant of Mahindra &
Mahindra’s (M&M) Tractor division,
signaling the starting time of the morning shift. Hardly any
workers have turned up. Reporting late on
duty is a norm for the workers here. Seldom does the
morning shift start before 7:30 a.m. During
the day shift, it was an ominous scene to find workers
stretching out under the trees and relaxing
during the working hours. The union leaders hung around
the factory without doing any work at all.
A few days back, the workers in the night shift had beaten
up a milkman for creating a lot of noise in
the week hours of the morning and thus, disturbing their
sleep during their working hours. Things
were worse at the other plant of M&M in Nagpur. But this
was all in the 1980s. M&M has come a
long way since then – it has won the most coveted Deming
prize for quality, and started a farming
equipment assembling plant in the U.S.A. After the huge
success there, the company opened a second
assembly plant and a distribution centre in Georgia.
Now, the company is in the process of
establishing assembling units in Canada to locally produce and
market a range of low horsepower cab
tractors with features such as AC heater (keeping in view the
cold weather conditions for the farmers
there), personal stereo, and even a sun roof. It has also Examination Paper of
Quality Management
IIBM Institute of Business Management 9
acquired Jiangling Tractors in China, which
it would use to develop low cost products suited to
plough deeper into the US farm equipment
market. Now, the fourth largest tractor company in the
world, M&M, has four tractor plants in
India (Mumbai, Nagpur, Rudrapur in Uttranchal, and Jaipur).
It has been maintaining its market
leadership for the past two decades. During the late 1980s, the
company tried to apply TQM concepts such as
quality circles without getting any success. M&M was
the market leader in the tractors segment
at that time, but in view of the looming multinational threat
in the near future, its internal situation
was very fragile. During 1990-94, the company started the use
of the statistical process control and
tried to perform business process reengineering. Its journey
towards the Deeming prize was initiated in
1994, with the appointment of Prof. Yasutoshi Washio, a
Japanese expert, in the implementation of
the Deeming guidelines. The same year, the company was
rechristened M&M Farm Equipment Sector
(FES).
Initially, Prof. Washio was skeptical about
the Indian companies and workers. He felt that the
Indian companies are more like the American
companies, which feel that results are important. On the
other hand, for the Japanese, the process
is more important. Moreover, he had serious doubts about
the attitude of the Indian workers with
respect to teamwork – a Deeming prerequisite – as he felt that
Indian were individualistic. He has proved
wrong by the M&M workers. In his own words, ‘The
Indians can be good team workers, much
better than the young in Japan today and, in that sense,
perhaps, Deeming is better suited to Indian
companies’. In the initial few years of interaction with the
management of FES, Washio found himself
isolated due to disagreements on various fronts. Washio
had major difficulties in making most of
the Indian companies understand the importance of
implementation over creating a perfect
framework. In his own words, ‘Indians are very good with
framework and the big picture, but are poor
with implementation. The kaizen is weak.’ Kaizen means
gradual, orderly, and continuous
improvement in work processes. It took a while for Washio to make
the FES personnel understand that good
kaizen hinges on implementation, so there is no need to
spend too much time creating a perfect
framework. Once you start implementing these, the rest will
happen automatically. The FES created a
team to implement the team to implementing the Deeming
guidelines. The team identified eleven key
areas to be fulfilled:
1. Top management leadership and
involvement
2. Creating and maintaining TQM frameworks
3. Quality assurance
4. Management system
5. Human resource development
6. Effective utilization of resources
7. Understanding TQM concepts and value
8. Use of scientific method
9. Organizational power
10. Relationship with stakeholders
11. Enabling the unique TQM activities
In addition, there is another Deming
must-do: eliminate dependence on inspection to achieve quality
by building quality into the product in the
first place. The system at FES earlier was that at the end of
the assembly process or at the customer’s
place, there used to be a final inspection. If a product
showed serious flaws then, it was sent
again to the shop floor. This wasted a lot of time and effort,
and it did not add to the improvement in
the quality of the manufactured product. In order to change
this system, computers were installed on
the shop floor for showing the standard operating procedure
(SOP) of a particular process to make the
workers understand the various steps in a process. This
reduces the chances of human error and acts
as a natural check. At the end of every complete process,
a check is performed by a trained worker,
who also follows an SOP. Employee involvement is the
first step in ensuring the success of any
quality initiative. At FES, the workers would dictate terms to
the shift supervisor by saying that they
would not do different tasks on many machines. The Examination Paper of Quality
Management
IIBM Institute of Business Management 10
management took time to conceive them by
giving them examples such as: if your wife can do
multiple tasks of cleaning the house,
feeding the children, and washing the cloths, why can’t you do
the same? The workers were explained the
multinational threats looming large. They were told that, if
they did not mend their ways, the company
might shut down the factory, or even worse, a
multinational may take it over and would
invariably lay off all the problem creating workers.
Examples of companies shut down in Mumbai
due to the changed scenario were given. The entire
programme was termed ‘Ashwamedh’ and
analogies were drawn from mythology and the current
competitive situation. This brought a
complete transformation in the workforce that was now willing
to perform multiple tasks, double their
productivity, and maintain shift discipline by reporting on
time. The workers were informed by the
management about every difficulty faced by the company in
beating the competition in the market
place. Some of the workers were sent with the marketing staff
to meet the farmers using the company’s
product and facing problems. This was called ‘Operation
Hamla’. The workers came back chastised and
sobered when they realized that a small mistake on the
shop floor could cost a farmer his season’s
crop. The company even sent some of the union leaders
for short training courses in the USA and
UK.
This sustained effort on part of the
company has paid rich dividends. Costs are down by 15% and
the market share has risen by one percent
to 27.3% (10% higher than its closest competitor), despite
an overall decline in the tractor demands.
The break-even point for a new model of a tractor has
decreased to 30,000 -32,000 from the 54,000
tractors three years ago. The worker productivity levels
have increased by 100%. Tractor exports
from the company have increased 100% over the past 10
years, with 70% to the USA alone. The
quality of tractors has improved drastically with the number
of complaints per 1000 tractors dropping
from 228 to 90. The rejection rate for components bought
from vendors, rejection and rework in
machining, and rejection at final testing have all been brought
down to near zero levels. FES has
introduced 15 new models in accordance with the requirements in
the international markets. The journey to
world-class quality is not over yet. The company now aims
at matching the world benchmarks in
productivity and quality to establish a cost leadership in the
Indian industry.
1. If you were a part of the top management
at M&M FES, how would you have involved the
workers in the Deming programme?
2. Do you think that M&M FES has a
strategic quality management system in place?
Caselet 2
In 1965, a Yale University undergraduate
student Frederick W. Smith wrote a term paper about the
passenger route systems used by most
airfreight shippers, which he viewed as economically
inadequate. Smith wrote of the need for
shippers to have a system designed specifically for airfreight
that could accommodate time sensitive
shipments such as medicines, computer parts, and electronics.
In August 1971, following a stint in the
military, Smith bought controlling interest in Arkansas. While
operating his new firm, Smith identified
the tremendous difficulty in getting packages and other
airfreight delivered with in 1 – 2 days.
This dilemma motivated him to do the necessary research for
resolving the inefficient distribution
system. Thus, the idea for Federal Express was born – a company
that revolutionized global business
practices and now defines speed and reliability. Federal Express
was so named due to the patriotic meaning
associated with the word ‘federal’, which suggested an
interest in nationwide economic activity.
At that time, Smith hoped to obtain a contract with the
Federal Reserve Bank and, although the
proposal was denied, he believed the name was a particularly
good one for attracting public attention
and maintaining name recognition.
Examination Paper of Quality Management
IIBM Institute of Business Management 11
Company Growth
Though the company did not show a profit
until July 1975, it soon became the premier carrier of
high-priority goods in the marketplace and
the standard setter for the industry it established. In the
mid-1970s, Federal Express took a leading
role in lobbying for air cargo deregulation that finally
came in 1977. These changes allowed Federal
Express to use larger aircraft (such as Boeing 727s and
McDonnell-Douglas DC-10s) and spurred the
company’s rapid growth. Today FedEx express has the
world’s largest all-cargo air fleet, including
McDonnell-Douglas MD-11s and Airbus A-300s and A-
310s. The planes have a total daily lift
capacity of more than 26.5 million pounds. In a 24-hour
period, the fleet travels nearly 500,000
miles while its couriers log 2.5 million miles a day- the
equivalent of 100 trips around the earth.
The company entered its maturing phase in the first half of
the 1980s. Federal Express was well
established. Competitors were trying to catch up with a company
whose growth rate was compounding at about
40% annually. In the fiscal year 1983, Federal Express
reported $1 billion in revenues, making
American business history as the first company to reach that
financial hallmark inside 10 years of
start-up without mergers or acquisitions.
Overseas Expansion
Following the first several international
acquisitions, intercontinental operations began in 1984 with
service to Europe and Asia. The following
year, FedEx marked its first regularly scheduled flight to
Europe. In 1988, the company initiated
direct-scheduled cargo service to Japan. The acquisition of
Tiger International, Inc. occurred in
February 1989. With the integration of the Flying Tigers network
on 7 August 1989, the company became the
world’s largest full-service, All-cargo Airline, Included
in the acquisition were route to 21
countries, a fleet of Boeing 747 and 727 aircraft, facilities
throughout the world, and Tigers’ expertise
in international airfreight. Federal Express obtained
authority to serve China through a 1995
acquisition from evergreen International Airlines. Under this
authority, Federal Express became the sole
US-based, All-cargo carrier with aviation rights to the
world’s most populous nation. Since then,
the company’s global reach has continued to expand,
resulting in an unsurpassed worldwide
network. FedEx Express today delivers to customers in more
than 210 countries.
Evolving Identify
The first evolution of the company’s
corporate identify came in 1994 when Federal Express officially
adopted ‘FedEx’ as its primary brand,
talking a cue from its customers, who frequently referred to the
company by the shortened name. By that
time, customers used the term as a verb, meaning, ‘to send
an overnight shipment’. It did not take
long for the meaning to catch on, and today it is common
terminology to ‘FedEx’ a package. The
second evolution came in 2000 when the company was
renamed ‘FedEx Express’ to reflect its
position in the overall FedEx Corporation portfolio of services.
This also signified the expanding breadth
of FedEx Express – specific service offerings as well as a
FedEx that was no longer just overnight
delivery.
FedEx Firsts
Throughout its existence, FedEx has amassed
an impressive list of ‘firsts’, most notably for leading
the industry in introducing new services
for customers. Federal Express originated the Overnight
Letter and was
the
first transportation company dedicated to overnight
package delivery,
the
first to offer next-day delivery by 10:30 a.m.,
the
first to offer Saturday delivery, Examination Paper of Quality Management
IIBM Institute of Business Management 12
the
first express company to offer time define service for
freight, and
the
first in the industry with money-back guarantees and free proof of performance
– services that
now extend to its worldwide network.
Being a ‘first’ company resulted in many
firsts for awards and honors, too. In 1990, Federal Express
became the first company to win the Malcolm
Baldrige National Quality Award in the service
category. It also received ISO 9001
registration for all of its worldwide operations in 1994, making in
the first global express transportation
company to receive simultaneous system-wide certification.
Today, FedEx Express is the largest
operating company in the FedEx family, handling about 3.2
million packages and documents every
business day.
People-Service-Profit
Federal Express’s ‘people-service-profit’
philosophy guides management policies and actions. The
company has a well-developed and thoroughly
deployed management evaluation system called SFA
(survey/feedback/action), which involves a
survey of employees, analysis of each work group’s
results by the work group’s manager, and a
discussion between the manager and the work group to
develop written action plans for the
manager to improve and become more effective. Data from the
SFA process are aggregated at all levels of
the organization for use in policymaking. Training of
front-line personnel is a responsibility of
managers and ‘recurrency training’ is a widely used
instrument for improvement. Teams regularly
assess training needs and a worldwide staff of training
professionals devices programs to address
those needs. To aid these efforts, Federal Express has
developed an interactive video system for
employee instruction.
An internal television network, accessible
throughout the company, also serves as an important
avenue for employee education. Consistently
included in listings of the best US companies to work
for, Federal Express has a ‘no lay-off’
philosophy, and its ‘guaranteed fair treatment procedure’ for
handling employee grievances is used as a
model by firms in many industries. Employees can
participate in a program to qualify
front-line workers for management positions. In addition, Federal
Express has a well-developed recognition
program for team and individual contributions to company
performance. Over the last five years, at
least 91% of the employees responded that they were ‘proud
to work for Federal Express’.
Service Quality Indicators
To spur progress toward its ultimate target
of 100% customer satisfaction, Federal Express recently
replaced its old measure of quality
performance-percent of on-time deliveries – with a 12 component
index that comprehensively describes how
customers view its performance. Each item in the service
quality indicator (SQI) is weighted to reflect
how significantly it affects the overall customer
satisfaction. Performance data are gathered
with the company’s advanced computer and tracking
systems, including the SuperTracker, a
hand-held computer used for scanning a shipment’s bar code
every time a package changes hands between
pick-up and delivery. Rapid analysis of data from the
firm’s far-flung operations yields daily
SQI reports transmitted to workers at all Federal Express sites.
The management meets daily to discuss the
previous day’s performance and tracks weekly, monthly,
and annual trends. Analysis of data
contained in the company’s more than 30 major database assist
the quality action teams (QATs) in locating
the root causes of problems that surface in SQI reviews.
Extensive customer and internal data are
used by cross-functional teams involved in the company’s
new product introduction process. To reach
its aggressive quality goals, the company has set up one
cross-functional team for each service
component in the SQI. A senior executive heads each team and
assures the involvement of front line
employees, support personnel, and managers from all parts of
the corporation when needed. Two of these
corporate-wide teams have a network of over 1,000 Examination Paper of Quality
Management
IIBM Institute of Business Management 13
employees working on improvements. The SQI
measurements are directly linked to the corporate
planning process, which begins with the CEO
and the COO and an executive planning committee.
Service quality indicators from the basis
on which corporative executives are evaluated. Individual
performance objectives are established and
monitored. Executives bonuses rest upon the performance
of the whole corporation in meeting
performance improvement goals. In the annual employee survey,
if employees do not rate management
leadership at least as high as they rated them the year before, no
executive receives a year-end bonus.
Employees are encouraged to be innovative and to make
decisions that advance quality goals.
Federal Express provides employees with the information and
technology they need to continuously
improve their performance. An example is the digitally assisted
dispatch system (DADS), which communicates
to some 30,000 couriers through screens in their vans.
The system enables quick response to
pick-up and delivery dispatches and allows couriers to manage
their time and routes with high efficiency.
Since 1987, overall customer satisfaction with Federal
Express’s domestic service has averaged
better than 95%, and its international service has rated a
satisfaction score of about 94%. In an
independently conducted survey of air-express industry
customers, 53% gave Federal Express a
perfect score, as compared with 39% for the next-best
competitor. The company has received 195 of
nearly 600 businesses and organizations have visited its
facilities.
1. What lessons can Indian companies take
from FedEx?
2. What are the factors that have gone
against India and why did FedEx not start its operations here?
END OF SECTION B
.
Section C: Practical Problems (30 marks)
This
section consists Long Questions.
Answer all the questions.
Each question carries 15 marks.
1. An electrician testing the incoming the
voltage for a residential house obtains 5 readings: 115,
113, 121, 115, 116. What is the average?
2. A single sampling plan is desired with a
consumer’s risk of 0.10 of accepting 3.0%
nonconforming product and a producer’s risk
of 0.05 of not accepting 0.7% nonconforming
product. Select the plan with the lowest
sample size.
Risk Management and
Financial Institutions
Part One:
Multiple Choices:
1. The options that come into existence or disappear when the price of the underlying asset
reaches a certain barrier.
a. Asian Options
b. Barrier options
c. Basket Options
d. Binary Options
2. The volatility of this model is changes with the passage of time:
a. EMWA Model
b. GAMMA Model
c. VEGA Model
d. GARCH Model
3. The office which consists of risk managers who are monitoring the risks being is taken is called
a. Front Office
b. Middle Office
c. Back Office
d. None of the above
4. A separate issue from the number of exceptions is:
a. Bunching
b. Grouping
c. Stress testing
d. None
5. This simulation is a very popular approach for estimating VaR:
a. Historical Simulation
b. Accuracy
c. Extensions
d. None of the above
Examination Paper: Risk Management
IIBM Institute of Business Management 8
6. Out of the following which rate is defined as the square of the volatility?
a. Standard Deviation
b. Variance
c. Mean
d. Median
7. Risk measures satisfying all four conditions are referred to as:
a. Time Horizon
b. Auto Correlation
c. Confidence level
d. Coherent
8. Only bonds with ratings of Baa or above are considered to be:
a. Investment grade
b. Internal Credit Ratings
c. Altman’s Z- Score
d. None of the above
9. The by- product of any program to measure & understand operational risk is likely to be the
development of:
a. Risk & Control self assessment
b. Key Risk Indicators
c. Operational risk Capital
d. Casual Relationship
10. The Securities that are subject to a discount are known as a:
a. Collateralization
b. Downgrade Trigger
c. Haircut
d. None of the above
Part Two:
1. Explain ‘Collateralization’.
2. Briefly explain the ‘Linear Model’.
3. Explain the ‘GARCH-MODEL’.
4. Explain the Concept of ‘Exchange-Traded Markets’.
5. Differentiate between the Systematic vs. Nonsystematic Risk.
Part One:
Multiple Choices:
1. The options that come into existence or disappear when the price of the underlying asset
reaches a certain barrier.
a. Asian Options
b. Barrier options
c. Basket Options
d. Binary Options
2. The volatility of this model is changes with the passage of time:
a. EMWA Model
b. GAMMA Model
c. VEGA Model
d. GARCH Model
3. The office which consists of risk managers who are monitoring the risks being is taken is called
a. Front Office
b. Middle Office
c. Back Office
d. None of the above
4. A separate issue from the number of exceptions is:
a. Bunching
b. Grouping
c. Stress testing
d. None
5. This simulation is a very popular approach for estimating VaR:
a. Historical Simulation
b. Accuracy
c. Extensions
d. None of the above
Examination Paper: Risk Management
IIBM Institute of Business Management 8
6. Out of the following which rate is defined as the square of the volatility?
a. Standard Deviation
b. Variance
c. Mean
d. Median
7. Risk measures satisfying all four conditions are referred to as:
a. Time Horizon
b. Auto Correlation
c. Confidence level
d. Coherent
8. Only bonds with ratings of Baa or above are considered to be:
a. Investment grade
b. Internal Credit Ratings
c. Altman’s Z- Score
d. None of the above
9. The by- product of any program to measure & understand operational risk is likely to be the
development of:
a. Risk & Control self assessment
b. Key Risk Indicators
c. Operational risk Capital
d. Casual Relationship
10. The Securities that are subject to a discount are known as a:
a. Collateralization
b. Downgrade Trigger
c. Haircut
d. None of the above
Part Two:
1. Explain ‘Collateralization’.
2. Briefly explain the ‘Linear Model’.
3. Explain the ‘GARCH-MODEL’.
4. Explain the Concept of ‘Exchange-Traded Markets’.
5. Differentiate between the Systematic vs. Nonsystematic Risk.
END OF SECTION A
Each Question carries 10 marks. •
1. In the 1980s, Bankers Trust developed index currency option notes (ICONs). These are
bonds in which the amount received by the holder at maturity varies with a foreign
exchange rate. One example was its trade at maturity varies with a foreign exchange rate.
One example was its trade with the Long Term Credit Bank of Japan. The ICON
specified that if the yen/US dollar exchange rate, ST , is greater than 169 yen per dollar at
maturity (in 1995), the holder of the bond receives $1,000. If it is less than 169 yen per
dollar, the amount received by the holder of the bond is 1,000- max [0, 1,000 (169 - 1)
ST When the exchange rate is below 84.5, nothing is received by the holder at maturity.
Show that this ICON is a combination of a regular bond and two options.
2. Suppose that the risk-free zero curves is flat at 7% per annum with continuous
compounding and that defaults can occur halfway through each year in a new 5- year
credit default swap. Suppose that the recovery rate is 30% and the default probabilities
each year conditional on no earlier default are 3%. Estimate the credit default swap
spread. Assume payments are made annually.
3. Suppose that 6- month, 12-month, 18-month, 24-month, and 30-month zero rates are 4%,
4.2%, 4.4%, 4.6%, and 4.8% per annum, respectively, with continuous compounding.
Estimate the cash price of a bond with a face value of 100 that will mature in 30 months
and pays a coupon of 4% per annum semiannually.
4. Suppose that the economic capital estimates for two business units are as follows:
Business Unit
1 2
Market risk 10 50
Credit risk 30 30
Operational risk 50 10
The correlation between market risk and credit risk in the same business unit is 0.3. the
correlation between credit risk in one business unit and credit risk in another is 0.7. the
correlation between market risk in one business unit and market risk in the other is 0.2.
All other correlations are zero. Calculate the total economic capital. How much should be
allocated to each business unit?
END OF SECTION B
Detailed information should from the part of your answer (Word limit 200 to 250 words). •
1. A Bank is considering expanding its asset management operations. The main risk is
operational risk. It estimates that the expected operational risk loss from the new venture
in one year is $2 million and the 99.97% worst-case loss (arising from a large investor
law suit) is $40 million. The expected fees it will receive from investors for the funds
under administration are $12 million per year and administrative costs are expected to be
$5 million per year. Estimate the before-tax RAROC? Also explain the two different
ways in which RAROC can be used?
2. Why is there an add-on amount in Basel I for derivatives transactions? “Basel I could be
improved if the add-on amount for a derivatives transaction depended on the value of the
transaction.” How would you argue this viewpoint?
3. “A long forward contract subject to credit risk is a combination of a short position in a
no-default put and a long position in a call subject to credit risk.” Explain this statement.
S-2-210311
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