Chapter 5: Pricing

Question 1

FUNDAMENTAL VS TACTICAL PRICING

Answer 1

MR LaNCe

Fundamental = theoretical from a model
Tactical can deviate from this:
* Markdown management: pricing reduced from the “normal price”
* Revenue management: set around managing revenue
* List pricing
* Non-linear pricing: Pricing not directly proportional to amount purchased
* Customised pricing: based on customer

Question 2

INTERNAL FACTORS FOR PRICING

Answer 2

• FINANCIAL HURDLES
• STRATEGIC OBJECTIVES
• SYSTEM FUNCTIONALITY

Question 3

EXTERNAL FACTORS

Answer 3

• COMPETITION
• REGULATION
  1. NCA (fair pricing regulation + limits)
  2. TCF (unfair discrimination)

Question 4

STRUCTURE BY TYPE OF BANKING :
RETAIL BANKING

Answer 4

COMMODITISED AND COMPETITIVE
* PRICING STRUCTURES OVER PRODUCT LIFE CYCLE
* VALUE ADDED PRODUCTS

Question 5

STRUCTURE BY TYPE OF BANKING :
CORPORATE BANKING

Answer 5

LARGER AND TO MORE SOPHISTICATED CUSTOMERS

Question 6

STRUCTURE BY TYPE OF BANKING :
INVESTMENT BANKING

Answer 6

• TRANSACTIONAL → HIGHLY COMMODITISED AND COMPETITIVE
• POOLED INVESTMENTS → LESS COMPETITIVE
• ADVICE → LESS COMPETITIVE

Question 7

INCOME MUST BE PRICED TO COVER…

Answer 7

F#C#N PeRfeCT

• FUNDS TRANSFER PRICING/COST OF FUNDS
• CREDIT RISK
• NON-INTEREST EXPENSES
• PROFIT
• RETURN ON THE CAPITAL
• COST OF CAPITAL
• TAX

Question 8

SETTING LOAN RATES:
DISCOUNTED CASHFLOW MODEL

Answer 8

INCOME:
* INTEREST INCOME
* NON-INTEREST INCOME
* RETURN ON CAPITAL DEPLOYED

EXPENSES:
* FTP
* CREDIT LOSSES
* NON-INTEREST EXPENSES
* TAX
* COST OF CAPITAL

PAYOFF PROFILE
* CONTRACTUAL STRUCTURE (PAYMENT TERM)

DISCOUNT RATE
* RISK FREE YIELD CURVE GENERALLY USED
* ROC CAN ALSO BE USED
* HURDLE RATE SET FOR PRODUCTS DEPENDING ON RISK PROFILE OF PRODUCT AND BORROWER