de jure Exchange Rate Regimes The de jure exchange rate regimes can be defined as what a countries government ‘claims’ to do and in regard with the bipolar view, supports it and shows that countries are generally moving towards either corner of the bipolar view of fixed exchange rate or floating exchange rate. The de jure exchange rate regimes are important as a way of what the central bank communicates to the public as this is likely to have bearing on the outcome. By having a de jure fixed exchange rate and a de facto floating exchange rate, the breach of commitment will likely have negative consequences. On the other hand, having a de jure floating exchange rate and a de facto fixed exchange rate does not breach its commitments. de facto Exchange Rate Regimes The de facto exchange rate regime can be defined as what a countries government actually 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.
An Overview of Depositary Receipts
Equity investment by foreign investors into a country can occur in one or more of three ways. Foreign investors can directly purchase shares in the stock market of the country e.g. investment by Foreign Institutional Investors (FIIs) in the Indian stock market. Or, companies from that country can issue shares (or depositary receipts) in the stock markets of other countries. Finally, indirect purchases can be made through a mutual fund which may be a specific country fund or a multi-country regional fund. The Depositary Receipts Mechanism The volume of new equity issues in the international markets increased dramatically between 1983 and 1987 and again after 1989. The 90’s saw a growing interest in the emerging markets. From the side of the issuers, the driving force was the desire to tap low-cost sources of financing, broaden the shareholder base, acquire a spring board for international activities such as acquisitions and generally Continue reading
Types of Buying Rates in Foreign Exchange Markets
In a purchase transaction the bank acquires foreign exchange from the customer and pays him in Indian rupees. Some of the purchase transactions result in the bank acquiring foreign exchange immediately, while some involve delay in the acquisition of foreign exchange. For instance, if the bank pays a demand drawn on it by its correspondent bank, there is no delay because the foreign corresponded bank would already have credited the nostro account of the paying bank while issuing the demand draft. On the other hand, if the bank purchases on “On demand” bill from the customer, it has first to be sent to the draws place for collection. The bill will be sent to the correspondent bank for collection. The correspondent bank will present the bill to the drawee. Depending upon the tine of realization of foreign exchange by the bank, two types of buying rates are quoted in India. Continue reading
Benefits of Forward Exchange Contracts
Forward exchange rates, like spot exchange rates are determined by the demand for and the supply of forward exchange. If the supply of forward exchange exceeds the demand for it, the forward rates will be quoted at a discount over the spot rate i.e., forward exchange rate will be lower than the spot exchange rate. On the other hand, if the demand for forward exchange exceed its supply, the forward rates will be quoted at a premium over the spot rate i.e., forward rate will be quoted at a premium over the spot rate i.e., forward rate will be higher than the spot rate. The demand for forward exchange arise, mainly, from: Imports, Outflow of capital, Arbitrage operation and Bullish speculation. An importer of foreign goods having to make payment after a certain period of time may contract to purchase foreign exchange in advance to avoid the risk of changes Continue reading
Foreign Currency Accounts
While dealing in any transaction in foreign currency, be it a purchase of commercial documents, retirement of a bill of exchange under a letter of credit or a remittance, a bank must have accounts (normally current accounts) in foreign currencies with its overseas correspondents through which the transactions in relevant — Currencies can be put. The balances of such foreign currency accounts — debit or credit — are taken into overall financial position of the banks involved. These accounts are known as ‘Nostro’ Vostro’ and ‘Loro’ accounts. ‘Nostro’ accounts mean current accounts of banks maintained in the books of their branches or correspondents in foreign centers in terms of the latter’s currency. For example, in order to meet its requirements for transactions in pound sterling, AB Bank, Cochin maintains an account in pound sterling with its correspondent in the UK, say XY Bank, London. Such an account would be designated Continue reading
Country Risk in International Investments
Country risk is defined as the exposure to a loss in cross-border lending caused by events in a particular country. These events must be, at least to some extent, under the control of the government of that country; they are definitely not under the control of an enterprise or individual. All cross-border lending in a country – whether to the government, a bank, a private enterprise or an individual – is exposed to country risk. Country risk is thus a broader concept than sovereign risk, which is the risk of lending to the government of a sovereign nation. Further, only events that are, at least to some extent, under the control of the government, can lead to the materialization of country risk. A default caused by bankruptcy is country risk if the bankruptcy is the result of the mismanagement of the economy by the government. It is commercial risk if Continue reading