A forward exchange contract is a mechanism by which one can ensure the value of one currency against another by fixing the rate of exchange in advance for a transaction expected to take place at a future date. It is a tool to protect the exporters and importers against exchange risks. The uncertainty about the rate which would prevail on a future date is known as exchange risk. From the point of an exporter the exchange risk is that the foreign currency in which the transaction takes place may depreciate in future and thus the expected realization will be less in terms of local currency. The importer also faces exchange risks when the transaction is designated in a foreign currency. In this case the foreign currency may appreciate and the importer may be compelled to pay an amount more than that was originally agreed upon in terms of domestic currency. 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 Exchange Rate Systems Era
The Floating Rate Exchange Systems Era: 1973-onwards This period of floating rates experienced a relatively high volatility of the exchange rates. The US dollar surged ahead against all major currencies till 1984 and then the intervention of G-10 countries helped the sliding down of the dollar. The period also witnessed two quick shocks due to the excessive hike of the petroleum prices in 1973 and 1977 and that induced inflation in the world and changed the terms of trade of the petroleum importing countries. The major characteristics of this period can be put in order. The USA experienced a large current deficit, which touched $ 100 billion in 1990 with a very low saving-income ratio at the domestic level. On the other hand Germany and Japan experienced large current account surplus. There has been a global insolvency problem as a large number of countries became unable Continue reading
Is there an Optimal Exchange Rate Regime?
Starting from the gold standard regime of fixed rates, passing through the adjustable peg system after the Second World War, it has finally ended up with a system of managed floats after 1973. Since 1985, the pendulum has started swinging, though very slowly and erratically, in the direction of introducing some amount of fixity and rule based management of exchange rates. Despite these empirical facts, there is a school of thought within the professional which argues that in the years to come there will be only two types of exchange rate regimes: truly fixed rate arrangements like currency unions or currency boards, or truly market determined, independently floating exchange rates. The “middle ground” — regimes such as adjustable pegs, crawling pegs, crawling bands and managed floating — will pass into history. Some analysts even predict that three currency blocks — the US dollar block, the Euro block and the Yen Continue reading
Fixed-Rate Currency Swaps and Currency Coupon Swaps
Fixed-Rate Currency Swaps A fixed rate currency swap consists of the exchange between two counter-parties of fixed rate interest in one currency in return for fixed rate interest in another currency. Following are the main steps to all currency swaps: Initial Exchange for the Principal: The counter-parties exchange the principal amounts on the commencement of the swap at an agreed rate of exchange. Although this rate is usually based on the spot exchange rate, a forward rate set in advance of the swap commencement date can also be used. This initial exchange may be on a notional basis of alternatively a physical exchange. The sole importance of the initial exchange on being either on physical or notional basis, is to establish the quantum of the respective principal amounts for the purpose of (i) calculating he ongoing payments of interest and (ii) the re-exchange of principal amounts under the swap. Ongoing Continue reading
Post-Shipment Finance
Post shipment finance is provided to meet working capital requirements after the actual shipment of goods. It bridges the financial gap between the date of shipment and actual receipt of payment from overseas buyer thereof. Whereas the finance provided after shipment of goods is called post-shipment finance. DEFINITION: Credit facility extended to an exporter from the date of shipment of goods till the realization of the export proceeds is called Post-shipment Credit. IMPORTANCE OF FINANCE AT POST-SHIPMENT STAGE: To pay to agents/distributors and others for their services. To pay for publicity and advertising in the over seas markets. To pay for port authorities, customs and shipping agents charges. To pay towards export duty or tax, if any. To pay towards ECGC premium. To pay for freight and other shipping expenses. To pay towards marine insurance premium, under CIF contracts. To meet expenses in respect of after sale service. To pay Continue reading
The Asian Development Bank (ADB)
Origin During the 1950s, it was strongly felt that there should be a bank for Asia like the World Bank to meet the development needs of this region. This view was suggested for the first time at the ministerial Conference on Asian Cooperation held at Manila in December 1963. The Conference constituted a working group of experts which submitted its report to the UN Economic commission for Asia and Far East (ECAFE) at its session held at Wellington in March 1965. It was on the basis of this report that an Agreement Establishing the Asian Development Bank was drafted and adopted at the Second Ministerial Conference on Asian Economic Cooperation at Manila in November-December 1965. By January 1966, 33 countries had signed its Charter and the Asian Development Bank was set up on December 19, 1966 with its headquarters at Manila in the Philippines. Objectives The main aim for the Continue reading