A letter of credit is a written undertaking issued by buyer’s bank to pay a certain sum of money within a stipulated period against a specified set of documents. It is a conditional undertaking. It undertakes to pay a certain amount of money on presentation of stipulated documents and the fulfillment by the exporter of all the terms and conditions incorporated in the L/C. The Letter of credit is a separate and distinct contract from the underlying sale contract, and the bank is not responsible for the fulfillment of the terms of the sale contract. The essential and basic provisions of the sale contract must be incorporated in the letter of credit. In addition, the amount of credit, its expiry date, the tenor of the draft to be drawn, party on whom the draft is to be drawn, the documents to be presented, brief description of the goods, must be 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.
International Equity Investments – Euro Equities
International equities or the Euro equities do not represent debt, nor do they represent foreign direct investment. They are comparatively a new financial instruments representing foreign portfolio equity investment. In this case, the investor gets the dividend and not the interest as in case of debt instruments. On the other hand, it does not have the same pattern of voting right that it does have in the case of foreign direct investment. In fact, international equities are a compromise between the debt and the foreign direct investment. They are the instruments that are presently on the preference list of the investors as well as the issuers. Benefits to Issuer/ Investor The issuers issue international equities under certain conditions and with certain objectives. First, when the domestic capital market is already flooded with its shares, the issuing company does not like toad further stress to the domestic stock of shares since Continue reading
Translation Exposure in Terms of Foreign Exchange Risk
Consolidation of financial statements, which involve foreign currency denominated assets and liabilities automatically, gives rise to translation exposure, sometimes termed as accounting exposure. Consolidation of foreign subsidiaries account into group financial statements denominated in home currency requires the application of a rate or rates of exchange to foreign subsidiaries accounts, in order that they may be translated into the parent currency. Both balance sheets and income statements must be consolidated and they both give rise to translation exposure. Translating foreign currency profit and loss accounts at either the average exchange rate during the accounting year or at the exchange rate at the end of the accounting year (both methods are currently permissible as per British accounting procedures) will mean that expected consolidated profit will vary as the average or that the expected closing rate changes. So the whole amount of profit earned in the foreign currency is exposed to translation Continue reading
The Current Scenario of Exchange Rate Regimes
Now the IMF classifies member countries into eight categories according to the Exchange rate regime they have adopted. A brief summary of IMF’s classification is given below: 1. No Separate Legal Tender Arrangement This group includesa) Countries which are members of a currency union and share a common currency like the twelve members of the European Currency Union (ECU), who have adopted Euro as their common currency orb) Countries which have adopted the currency of another country as their currency. IMF’s 1999 Annual Report on Exchange Arrangements and Exchange Restrictions indicates that 37 countries belong to this category. 2. Currency Board Arrangement A regime under which there is a legislative commitment to exchange the domestic currency against a specific foreign currency at a fixed exchange rate coupled with restrictions on the monetary authority to ensure that this commitment will be honored. This implies constraints on the ability of the monetary Continue reading
Pre-shipment Finance
Pre-shipment is also referred as “packing credit”. It is working capital finance provided by commercial banks to the exporter prior to shipment of goods. The finance required to meet various expenses before shipment of goods is called pre-shipment finance or packing credit. DEFINITION: Financial assistance extended to the exporter from the date of receipt of the export order till the date of shipment is known as pre-shipment credit. Such finance is extended to an exporter for the purpose of procuring raw materials, processing, packing, transporting, warehousing of goods meant for exports. IMPORTANCE OF FINANCE AT PRE-SHIPMENT STAGE: To purchase raw material, and other inputs to manufacture goods. To assemble the goods in the case of merchant exporters. To store the goods in suitable warehouses till the goods are shipped. To pay for packing, marking and labelling of goods. To pay for pre-shipment inspection charges. To import or purchase from the Continue reading
Investment Banking in India
For more than three decades, the investment banking activity was mainly confined to merchant banking services. The foreign banks were the forerunners of merchant banking in India. The erstwhile Grindlays Bank began its merchant banking operations in 1967 after obtaining the required license from RBI. Soon after Citibank followed through. Both the banks focused on syndication of loans and raising of equity apart from other advisory services. In 1972, the Banking Commission report asserted the need for merchant banking activities in India and recommended a separate structure for merchant banks totally different from commercial banks structure. The merchant banks were meant to manage investments and provide advisory services. The SBI set up its merchant banking division in 1972 and the other banks followed suit. ICICI was the first financial institution to set up its merchant banking division in 1973. The advent of SEBI in 1992 was a major boost to Continue reading