The International Monetary Fund (IMF) defines the Balance of Payments (BOP) as a statistical statement that systematically summarizes, for a specific time period, the economic transactions of an economy with the rest of the world. BOP data measures economic transactions include exports and imports of goods and services, income flows, capital flows, and gifts and similar one-sided transfer payments. The net of all these transactions is matched by a change in the country‘s international monetary reserves. The significance of a deficit or surplus in the BOP has changed since the advent of floating exchange rates. Traditionally, BOP measures were used as evidence of pressure on a country‘s foreign exchange rate. This pressure led to governmental transactions that were compensatory in nature, forced on the government by its need to settle the deficit or face a devaluation. Impact of Foreign Exchange Rate on Balance of Payments (BOP) The relationship between the 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.
Floating or Flexible Exchange Rate System
A floating or flexible exchange rate system is one in which the exchange rate between currencies is determined purely by supply and demand of the currencies without any government intervention. The rates depend on the flow of money between the countries, which may either result due to international trade in goods or services, or due to purely financial flows. Hence in case of a deficit or surplus in the balance of payments, the exchange rates get automatically adjusted and this leads to a correction of the imbalance. In a floating exchange rate system, economic parameters like price level changes, interest differentials, economic growth and government policies have an impact on the exchange rate as these factors influence the supply and demand of currencies. A purely floating exchange rate system is more of a theoretical benchmark rather than reality in practice. Most economies fall in between the two extremes — a Continue reading
Recent Developments in International Financial Markets
Recent financial market developments have also blurred the distinction between different segments of the financial markets. Creditors and investors now compete with each other for good financial transactions. In addition, borrowers can now structure the best deals available in the entire market rather than focusing on specific market segments. By borrowing in the most accessible financial market segment and then swapping aspects of the debt to other markets, successful borrowers tailor the currency, cost, maturity, and form of their financial transactions to their financial needs. These developments in international financial markets do entail some adverse consequences for developing country borrowers. Lenders and investors can be more selective in choosing their financial transactions, using swaps and other hedging techniques to pass on unacceptable risks. Given the present shortage of available financing, securitization provides flexibility and more accessible financing to creditworthy borrowers, limiting the options available to less creditworthy borrowers, such as Continue reading
Dollar Market: Some Basics
The US financial market or dollar market is the largest and the most versatile financial system in the world. It has the broadest range of funding options to offer and some of the most sophisticated and innovative financial institutions. The importance of this market is further enhanced by the dominant role played by the US dollar as the vehicle currency in international transactions, though over the years this has declined somewhat. At the same time, it is not a market that is readily accessible to borrowers from developing countries like India except perhaps those with the highest ratings and sovereign guarantees. In some ways the US financial system is perhaps the freest system. Institutions enjoy complete operational freedom in terms of products and instruments offered, pricing, etc. In other ways, it is subject to a host of supervisory regulations both, from the Federal and State authorities. The core of this Continue reading
International Bonds
International bonds are a debt instrument. They are issued by international agencies, governments and companies for borrowing foreign currency for a specified period of time. The issuer pays interest to the creditor and makes repayment of capital. There are different types of such bonds. The procedure of issue is very specific. All these need some explanation here. Types of International Bonds 1. Foreign Bonds and Euro Bonds International bonds are classified as foreign bonds and Euro bonds. There is a difference between the two, primarily on four counts. First, in the case of foreign bond, the issuer selects a foreign financial market where the bonds are issued in the currency of that very country. If an Indian company issues bond in New York and the bond is denominated in a currency other than the currency of the country where the bonds are issued. If the Indian company’s bond is denominated Continue reading
Foreign Exchange Risk or FOREX Risk
Foreign Exchange dealing is a business that one get involved in, primarily to obtain protection against adverse rate movements on their core international business. Foreign Exchange dealing is essentially a risk-reward business where profit potential is substantial but it is extremely risky too. Foreign exchange business has the certain peculiarities that make it a very risky business. These would include: Forex deals are across country borders and therefore, often foreign currency prices are subject to controls and restrictions imposed by foreign authorities. Needless to say, these controls and restrictions are invariably dictated by their own domestic factors and economy. Forex deals involve two currencies and therefore, rates are influenced by domestic as well as international factors. The Forex market is a 24-hour global market and overseas developments can affect rates significantly. The Forex market has great depth and numerous players shifting vast sums of money. Forex rates therefore, can move Continue reading