When computing exchange rates for merchant transactions, the cover or the base rate at which the cover transaction can be undertaken in the Forex market is first computed, thereafter the profit margin as allowed by the Foreign Exchange Dealer’s Association of India (FEDAI) is taken and the rate rounded off as per FEDAI Rule. In case of forward contracts, the procedure is similar except that while computing the base rate, the forward margin has to be appropriately taken. The forward margin is the extent to which the forward rate for a currency differs from its spot rate against a second currency. The forward margin when it tends to make a currency cheaper is called a ‘Discount’ while if it makes it costlier it is called a ‘Premium.’ Obviously if one currency is getting cheaper in the forward against another, the second should be getting costlier against the first. Thus while 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.
Comparison and Features of Future and Forward Markets
A Comparison Between Future and Forward Markets As a common trend and general preference, it is most unlikely that the investors would ever involve in the forward market, it is important to understand some of the attitudes, particularly as a good deal of the literature on pricing futures contracts typically refers to those contracts interchangeably. Specially differences resulting from liquidity, credit risk, margin, taxes and commissions could cause futures and forward contracts not to be priced identically. For example, in dealing with price risk, futures contracts have several advantages of transaction in comparison to forward contracts. Sequential spot contracts, which is also known as spot contracts where the terms of the contract are re negotiated as events unfold, do not inject any certainty into the transaction. Such a method of contracting is particularly liable to the hazards of opportunism and may deter investment because of the relatively high probability that Continue reading
European Economic and Monetary Union (EMU)
The basis of the European Economic and Monetary Union (EMU) was the American desire to see a united Western Europe after the World War II. This desire started taking shape when the Europeans created the European Coal and Steel Community, with a view to freeing trade in these two sectors. The pricing policies and commercial practices of the member nations of this community were regulated by a supranational agency. In 1957, the Treaty of Rome was signed by Belgium, France, Germany, Italy, Luxembourg and the Netherlands to form the European Economic Community (EEC), whereby they agreed to make Europe a common market. While they agreed to lift restrictions on movements of all factors of production and to harmonize domestic policies (economic, social and other policies which were likely to have an effect on the said integration), the ultimate aim was economic integration. The European countries desired to make their firms Continue reading
The World Bank or The International Bank for Reconstruction and Development (IBRD)
The International Bank for Reconstruction and Development (IBRD) or the World Bank was established on December 27, 1945 following international ratification of the Bretton Woods Agreement of 1944 , which emerged from the United Nations Monetary and Financial Conference (July 1-22,1944).to assist in bringing about a smooth transition from a war time to peace time economy. It is the sister institution of IMF. Since its inception in 1944, the World Bank has expanded from a single institution to an associated group of coordinated development institutions. The Bank’s mission evolved from a facilitator of post-war reconstruction and development to its present day mandate of worldwide poverty alleviation, social sector funding and comprehensive development framework. The term ‘World Bank’ now refers to World Bank Group which includes International Bank for Reconstruction and Development (IBRD) established in 1945 for providing debt financing on the basis of sovereign guarantees. International Financial Corporation (IFC) established Continue reading
Difference Between Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)
Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are the two most important terms of the market. The major difference between the two could be explained as one takes the form of investment and other financing. They are usually adopted by most developing countries. The measurement criteria for both the terms lie in the capital contribution made in the particular company or market. The most advantageous thing is the ignorance of debt creation. This is why these terms are preferred than External Commercial Borrowings which creates a debt trap for most of the countries. Foreign Direct Investment (FDI) could be defined as an investment by non-residents mostly the business entities to establish business operations in a country with the proper management of equipment’s, machineries, marketing, personnel etc. In the established company the non-resident entity takes over a considerable stake to get the ownership rights and enjoys the management control Continue reading
Demand and Supply for Foreign Exchange
The foreign exchange rate is determined in the free foreign exchange markets by the forces of ‘demand and supply for foreign exchange’. To make the demand and supply functions to foreign exchange, like the conventional market demand and supply functions, we define the rate of exchange as the price of one unit of the foreign currency expressed in terms of the units of the home currency. The Demand for Foreign Exchange Generally, the demand for foreign currency arises from the traders who have to make payments for imported goods. If a person wants to invest his capital in foreign countries, he requires the currency of that country. The functional relationship between the quantity of foreign exchange demanded and the rate of foreign exchange is expressed in the demand schedule for foreign exchange (which shows the different rates of foreign exchange). It is understood from the demand schedule that the relationship, Continue reading