Sovereign Wealth Funds (SWFs), investment vehicles of Governments are increasingly seen in action through acquisition of either natural resources like oil and gas fields or equity holdings in MNCs. While the reasons for establishing a SWF may vary from commercial to strategic ones, SWFs’ influence on the countries and corporate is substantial. Since they mostly stay invested for a long-term they do not pose threat of pulling out in the short term and creating huge volatility in the financial markets. Since their investment corpus run to billions, by staying invested for a long time, they have a stabilizing effect on the capital market even during crashes and short term fluctuations. However, regulations and guidelines of the SWF also needs to be put in place in order to avoid it from exercising any soft control or strategic moves that may affect the sovereignty of the country allowing investments. Sovereign Wealth Funds Continue reading
International Finance
International finance is the branch of economics that studies the dynamics of foreign exchange,foreign direct investment and how these affect international trade. Also studies the international projects, international investment and the international capital flow .International Finance can be broadly defined, as the study of the financial decisions taken by a multinational corporation in the area of international business i.e. global corporate finance. International finance draws much of its background from the preliminary studies in the topics of corporate finance such as capital budgeting, portfolio theory and cost of capital but now viewed in the international dimension.
Booking of Forward Exchange Contracts and Exchange Control Regulations
Forward exchange contract is a device which can afford adequate protection to an importer or an exporter against exchange risk. Under a forward exchange contract a banker and a customer or another banker enter into a contract to buy or sell a fixed amount of foreign currency on a specified future date as a predetermined rate of exchange. Our exporter, for instance, instead of groping in the dark or making a wild guess about what the future rate would be, enters into a contract with his banker immediately. He agrees to sell foreign exchange of specified amount and currency at a specified future date. The banker on his part agrees to buy this at a specified rate of exchange. The exporter is thus assured of his price in the local currency. In our example, the exporter may enter into a forward contract with the bank for 3 months delivery at Continue reading
Exchange Rate Pass-Through
According to Bhagawati (1991) the phrase “pass-through” was first used in economics literature by Steve Magee (1973) in his paper while explaining the impact of currency depreciation. Since then the concept has been widely used in the literature. In the case of international trade the suppliers of commodities deal with two currencies, the domestic currency against which commodities are procured, and the destination currency, the currencies of the importing country. Similarly, the importers of the commodities also face two currencies. With the breakdown of the Bretton Woods System in 1973, the international financial system opted largely for the flexible exchange rate system. Along with this world has witnessed an increasing degree of volatility. When a particular currency depreciates vis-Ã -vis US dollar, then the prices of traded goods denominated in the depreciation currency will increase. Suppose the depreciating currency is the Indian rupee and the Continue reading
Cancellation and Extension of Forward Exchange Contracts
The customer may approach the bank for cancellation when the underlying transactions becomes infructrious, or for any other reason he wishes not to execute the forward contract. If the underlying transaction is likely to take place on the day subsequent to the maturity of the forward contract already booked, he may seek extension in the due date of the contract. Such requests for cancellation or extension can be made by the customer on or before the maturity of the forward contract. Cancellation on Due Date When the forward purchase contract is cancelled on the due date, it is taken that the bank purchases at the rate originally agreed and sells the same back to the customer at the ready TT rate. The difference between these two rates is recovered from/paid to the customer. If the purchase rate under the original forward contract is higher than the ready TT selling rate, Continue reading
Features of Forward Exchange Contract
The following are the features of a forward exchange contract. FEDAI has also laid down certain guidelines defining certain aspects of forward exchange contract. a) Parties: There are two parties in a forward exchange contract. They can be, A bank and a customer. Two banks in the same country. Two banks in different countries. b) Amount: forward exchange contracts are entered into for a definite sum expressed in foreign currency. c) Rate: the rate at which the conversion of foreign exchange is to take place at a future date is agreed upon at the time of signing the forward contract which is known as the contracted rate and is to be mentioned in the contract. d) Date of Delivery: Date of delivery in a forward contract means the future date on which the delivery of foreign exchange is to take place and is computed from the spot date or date of Continue reading
Fixed Exchange Rate System
A fixed (or pegged) exchange rate system is one where governments or central banks set official exchange rates and defend the set rates through foreign exchange market intervention and monetary polices. Under this system, the currency is pegged to another currency (or basket of currencies) and the central bank promises to exchange currency at a specified rate against the other currency. Each central bank actively buys or sells its currency in foreign exchange market whenever its exchange rate threatens to deviate from its stated par value by more than an agreed-upon percentage. For example, India pegs its Rupee to the U.S. dollar at a rate of 45 rupee per dollar. The Reserve Bank of India(RBI) must always be willing to buy rupee with dollars or to buy dollars with rupee in any amount at the fixed rate of 45 rupee per dollar. Otherwise, there could be excess supply of or Continue reading