The Company and its project Aero Manufacturing Limited (AML) is a company presently engaged in manufacturing electronics parts for aircrafts and runs the project PUMA. The project PUMA is a passenger aircraft program and it is likely to reach the implementation stage soon. It is going to be India's first aircraft manufacturing Company. The Company is expecting its new project will be a game changer and would be in alignment with the growth story of the Indian aviation sector. This project has necessitated entering into agreements with more than 100 vendors. Most of the vendors have a long standing relationship with AML. Before this project was started, the Company gained extensive experience in aircraft manufacturing as a trusted partner of a leading public sector company that manufactures combat aircraft and has been a preferred vendor for aircraft manufacturers in France and the USA. Approximately 40% of the revenue is from export and 30% of procurement like chips etc. is imported. Risk management at AML As the Company is deeply involved in innovation there is less focus on aligning risk with the strategy. The Chief Executive Officer (CEO) believes that this is necessary for the Company as it allows flexibility which is necessary for innovation. He also backs his proposition based on past success. However, there are few directors who have a different view and they differ from the view of the CEO. During risk assessment procedures, AML discovered that appropriate security clauses around sensitive information related to the project PUMA have not been incorporated appropriately into the vendor contract. The legal team of AML and the procurement head is of the opinion that this is common practice and should not be worried as the cost of implementation of security protocol will make the contract costlier. When the vendor was requested to assess the contract cost impacts of incorporating the new security protocols, the cost was more than AML could bear. AML now has two options: Give a waiver to the vendors or Negotiate with prime vendors to meet the intent of the levied security protocols to ensure the protection of sensitive information while maintaining the cost impacts within budgetary constraints. On a review, it is evident that a waiver would have an irreparable impact and leave much sensitive information vulnerable to theft or misuse. The positive point is that the vendors are long-standing partners of AML. One of the consultants has suggested that training to vendor's workforce can minimise the cost to implement a new security protocol. Not everyone is convinced by this idea and the matter is unresolved even though there is an agreement to find a solution to this burning problem. Further, the Board is aware that defining and applying risk appetite is one of the more challenging risk principles. Also, there is no formal process for the identification and measurement of key risk indicators (KRIs) and associated risk tolerance ranges in AML. Despite dissent by a few directors, the majority of directors have decided to rope in a leading consultant in this area so that a comprehensive and complete risk appetite statement for AML can be developed. Treasury operations by AML The treasury of AML has been managing forex risk on a regular basis using currency options and currency futures. In very few instances currency forwards have been used as the head of the treasury believes that the forward currency contract market lacks liquidity in India. The financial performance has been spectacular during the last decade. Mr. Rakshit has recently joined the bank with which AML is dealing and has been asked to handle spot currency transactions related to AML. He has been given access to the Reuter Screen. The following quotes are available on the Reuter Screen: USD/INR 84.3245 / 46 USD/GBP 1.1298 / 02 In addition to the above the treasury has taken a long position in USD/INR call option. It is desired that a more detailed analysis is done on currency option positions in terms of delta, Vega, gamma, and theta. The Treasury has been using Black-Scholes Option Pricing Model (BSOPM) instead of the Binomial Trial Model for the valuation of interest rate derivatives. The auditors have raised concerns about the same. Multiple Choice Questions Choose the most appropriate answer from the given options.