Forward exchange is a device to protect traders against risk arising out of fluctuations in exchange rates. A trader, who has to make or receive payment in foreign currency at the end of a given period, may find at the time of payment or receipt that the foreign currency has appreciated or depreciated. If the currency moves down or gets depreciated the trader will be at a loss as he will get lesser units of home currency for a given amount of foreign currency, which he was holding. Similarly, an importer, who was contracted to make payment of a given amount in dollar at the end of a given period, may find that at the time of payment, the rupee dollar rate is higher. He would then have to pay more in rupees than what it would have been at the time when the contract was made. To protect traders Continue reading
International Business Finance
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
Understanding the Role and Impact of Green Bonds on the Financial Sector
Socially responsible investment has become an important role of financial services in the world. One of the latest investments that are available in the market is called “green bonds”, its popularity has taken off the recent years. A green bond is a bond specifically earmarked to be used for environmental and climate activities, meaning green bonds are used to fund projects with clear environmental benefits. To elaborate, green bonds are intended to encourage climate-friendly projects that aimed at pollution control, sustainable agriculture and wastewater management system, clean transportation, climate change adaptation, etc. Green bond market is open to different types of issuers such as government bodies, corporates, and financial institutions. The market for green bonds has expanded significantly over the past decade. In 2020, the cumulative green bond issuance crossed over $1 trillion and stood at $1.05 trillion, an average annual growth of 60% since 2015. Last year, the United States led Continue reading
Euro Notes and Euro Commercial Paper
Euro Notes Euro Notes are like promissory notes issued by companies for obtaining short term funds. They emerged in early 1980s with growing securitization in the international financial market. They are denominated in any currency other than the currency of the country where they are issued. They represent low cost funding route. Documentation facilities are the minimum. They can be easily tailored to suit the requirements of different kinds of borrowers. Investors too prefer them in view of short maturity. When the issuer plans to issue Euro notes, it hires the services of facility agents or the lead arranger. On the advice of the lead arranger, it issues the notes, gets them underwritten and sells them through the placement agents. After the selling period is over the underwriter buys the unsold issues. The Euro notes carry three main cost components: Underwriting fee; One time management fee for structuring, pricing and Continue reading
Advantages of Fixed Exchange Rate System
A nation’s choice as to which currency regime to follow reflects national priorities about all factors of the economy, including inflation, unemployment, interest rate levels, trade balances, and economic growth. The choice between fixed and flexible exchange rates may change over time as priorities change. Read More: Fixed Exchange Rate System Flexible Exchange Rate System At the risk of over-generalizing, the following points partly explain why countries pursue certain exchange rate regimes. They are based on the premise that, other things being equal, countries would prefer fixed exchanges rates. Fixed exchange rates provide stability in international prices for the conduct of trade. Stable prices aid in the growth of international trade lessens risks for all businesses. Fixed exchange rate system reduces the possibility of competitive depreciation of currencies, as it happened during the 1930s. Also, deviation from the fixed rates is easily adjustable. Fixed exchange rate provides stability in the Continue reading
Purchasing Power Parity (PPP) Theory of Exchange Rate
Purchasing Power Parity Theory (PPP) holds that the exchange rate between two currencies is determined by the relative purchasing power as reflected in the price levels expressed in domestic currencies in the two countries concerned. Changes in the exchange rate are explained by relative changes in the purchasing power of the currencies caused by inflation in the respective countries. The concept of Purchasing power parity theory (PPP) is traced to David Ricardo, but the credit for stating the law in an orderly manner is given to the Swedish economist Gustav Cassel who proposed it in 1918 as a basis for resumption for normal trade relations at the end of First World War. The Purchasing Power Parity Theory is stated in two versions : The stronger absolute version of Purchasing Power Parity, and The diluted relative version of Purchasing Power Parity. Absolute Version of Purchasing Power Parity The absolute version of Continue reading