Chapter 36

Question 1

Why do individuals need capital?

Answer 1

Survive fin consequences of future events like unemployment
To save to cover large expenses

Question 2

Why do companies need capital?

Answer 2

Start-up capital (hire staff, obtain premises, equipment)
Deal with adverse fin events
To manage cfs for trading companies (goods +services), bc need to pay suppliers before selling= timing mismatch

Question 3

Why do financial product providers need capital?

Answer 3

Start-up capital (hire staff, obtain premises, equipment)
Deal with adverse fin events
To manage cfs for trading companies (goods +services), bc need to pay suppliers before selling= timing mismatch
To support risk of not having enough assets accumulated @time of liability obligation
Timing mismatch for expenses due to new business strain (initial expenses)
Strategic aims
New business ventures
Merges and Acquitions
Smoothing dividents and with-profits benefits
Mismatch risk

Question 4

In the event of a merger, why would capital be needed?

Answer 4

• Need capital for merger costs like legal fees, integration costs and IT systems change
• Need capital for post-merger integration costs to: align systems, expansions, retaining talent, etc.
• Need capital to dominate merger negotiations
• Capital is used as a buffer in case the synergies take time to realize or integration causes losses in the short-term

Question 5

Why would capital be needed for an acquisition?

Answer 5

• More Capital available-> more Risk appetite->More likely to enter new markets
• Capital needed to increase negotiation power compared to other bidders
• More capital -> more acquisitions
• Ready access to capital -> deal can close faster ->buyer more attractive

Question 6

Does the state need capital?

Answer 6

Don’t need capital, can just print money, raise tax or borrow
Prefer tax and to borrow bc of quantity theory
Fluctations in economic cycle and balance of accounts
Use commodities and foreign currencies

Question 7

How do providers meet capital needs?

Answer 7

Retained profits
Instead of distributing divs or bonuses
Equity capital
Only for proprietary companies, not mutuals
Debt capital
Proprietary companies have access to capital markets
Mutuals don’t, they raise subordinary debt
The State
For microinsurance
Benefit scheme sponsor
Altruistic reasons, for initial costs of setting up the fund
Reinsurance
_ Capital requirement
Acts as source of capital by providing commission
This is to contribute towards initial capital strain
They could also use FinRe, contingent capital, derivatives

Question 8

What are the benefits of securitisation?

Answer 8

SECURE
Sells risk to third parties
Enhances liquidity
Creates new funding source
Reduces capital strain
Enables off-balance sheet treatment

Question 9

Define capital management

Answer 9

It involves ensuring that financial product providers has sufficient solvency and liquidity to meet their liabilities and future aspirations. It also involves maximising reported profits

Question 10

What need capital for merges and acquisitions?

Answer 10

Merges:
- IT systems, integration costs, legal fees
- I synergies take long to realise
- If there are losses incurred from intergration
Acquisitions
- Negotiation power
- More acquisitions
- Higher risk appetite to move into new markets
- Ready capital -> attractive buyer