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
International Trade 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
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
Comprehensive Income Taxation
The comprehensive income tax system also known by other synonyms as global income tax, unitary income tax or synthetic income tax is the most used taxation system in western European countries. It has got its name due to the fact that all income types are seen as a one and therefore are added together and taxed as one whole income. It was seen as the ideal tax system in Europe because in its original form it could align fully with the “ability to pay principle” and to both tasks of simplicity and fairness. This method is composed as a system which adds together all the taxpayer’s income (from labor, capital, rent and business) in a single measure and taxes it with a single progressive tax. Labor income is usually defined as income earned from activities as an employed individual. Capital income can take a variety of forms such as dividends, Continue reading
Trends in International Trade and Cross Border Financial Flows
When a firm operates only in the domestic market, both for procuring inputs as well as selling its output, it needs to deal only in the domestic currency. As companies try to increase their international presence, either by undertaking international trade or by establishing operations in foreign countries, they start dealing with people and firms in various nations. Since different countries have different domestic currencies, the question arises as to which currency should the trade be settled in. The settlement currency may either be the domestic currency of one of the parties to the trade, or may be an internationally accepted currency. This gives rise to the problem of dealing with a number of currencies. The mechanism by which the exchange rate between these currencies (i.e., the value of one currency in terms of another) is determined, along with the level and the variability of the exchange rates can have 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