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International Business 1

International Business 1

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Published by Rahul Dewakar

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Published by: Rahul Dewakar on Feb 05, 2013
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International Business

International monetary Fund Emergence of Euro World financial markets Concerns of developing countries Exchange rates International financial intermediaries

profit-making public limited companies. firms. namely the banking system that creates deposit money and a central bank that issues notes and coins Banks are financial institutions in the money market. They also want to borrow money. banks are some of the biggest and profitable corporations in the world . They are just like any other business except the product they supply is money. and government need a place to keep there money safe. Business organisations that provide these services are called financial institutions Money market is no different from any other market. in the form of loans and other financial products Most but not all banks are large. In fact. it is made up of those people and organisations that want money. and all other people and organisations willing and able to supply money.Financial institutions      Money is the commodity that is generally accepted as an exchange for goods and services In modern society people. make investments and exchange the money to the money of other countries to make payments overseas.

Fees for various services 3. Investing in shares of other companies . Making Loans and charging interest on them 2.Financial institutions Banks earn profit for there shareholders in a number of ways: 1.

not for profit) 4. they also advice on M&A) 6. HNI’s etc. Savings Banks ( owned and run by on behalf of small depositors. Savings and loan associations ( Building societies for the purpose of homes for low income. Merchant banks ( type of investment bank originally they helped merchants finance the sle and transportationof goods overseas. Commercial Banks ( earlier called High-Street banks) 2. Now they provide funds to large corporations through the purchase of shares rather then as loans) 7. Credit unions ( co-operative not for profit to provide low cost loans to members) 5. not for profit) 3.Financial institutions Types of banks 1. Investment banks ( help large corporations in raising money from various sources like stock market. Islamic banks ( as per Sharia’a Law these cannot charge interest they are allowed to charge a fee and depositers will get a share in profit) .

PPF) Insurance companies Investment and unit trusts ( Make investments in shares of companies and make profit for it’s shareholders) .Financial institutions       Other money market institutions Finance houses ( Hire purchase companies) Venture capitalists ( risky and new ventures usually in return for some ownership and control of the new business) Pension funds ( EPF.

It’s main functions are to maintain the stability of the national currency and the money supply in it’s country or in it’s group member states. Reserve Bank of Australia and the European central bank . such as EU It is the sole issuer of notes and coins It is the government’s banker It manages the nation’s gold and foreign exchange reserves It manages national debt It regulates and supervises the banking system It is the lender of last resort It sets the monetary policy through interest rate managementcontrols inflation and exchange rate Some examples of central banks are US federal reserve. Bank of Mexico. RBI. It is the government’s banker and the bankers bank. Bank of England. Bank of Japan.Role of central bank           The central bank sits in the centre of the banking system in an economy. Bank of Canada.

funds available on credit and debit cards. bank deposits and other short term claims Exchange rate is the price of a currency. It is the number of units of one currency that buys one unit of another currency .Foreign exchange     Foreign exchange is money denominated in the currency of another nation or a group of nations The market in which these transactions take place is the foreign exchange market Foreign exchange can be in the form of cash. traveler’s checks.

Switzerland owned and controlled by 55 member central banks 2.Foreign exchange Players in the foreign exchange markets are: 1. Other financial institutions are commercial banks excluding money centre banks. pension funds. Reporting dealers or money centre banks are large banks like HSBC. Non. and the like 4.financial customers are governments and companies that participate in the foreign exchange markets . money market funds. Deutsche bank etc who are primary members and very large dealers in foreign exchange 3. Bank of International settlements ( BIS) a central banking institution in Basel. hedge funds.

and London international financial futures and options exchange (LIFFE). investment banks and financial institutions 2. the Philadelphia stock exchange. OTC ( over the counter ) market is composed of commercial banks. Exchange trades market is composed of securities exchanges such as CME group (Chicago mercantile exchange).Foreign exchange The foreign exchange market has two major segments 1. where exchange-traded futures and options are traded .

Spot transactions involve the immediate exchange of currency. This rate is called spot rate 2. A futures contract is an agreement to buy or sell foreign exchange between two parties as specified in the standard contract of the specific exchange . The first leg is a spot transaction and the second leg is a future transaction. Currency swaps deal with interest-bearing financial instruments (like bonds) and they involve the exchange of principal and interest payments 6. In addition to the traditional instruments there are derivatives such as currency swaps. It is a single purchase or sale of a currency for future delivery. which is generally made on the second business day after the date on which the two foreign-exchange dealers agree on the transaction. options are both OTC and traded on exchanges and futures are exchange traded instruments 5. Options are the right but not the obligation to trade foreign exchange in the future 7. This rate is called the forward rate 3. Outright forward transactions involve the exchange of currency a future date. options and futures. Although a FX swap is a spot and a forward transaction it is accounted for as one 4. Currency swaps are OTC instruments. FX swap: in FX swap one currency is swapped for another on one date and then swapped back on a future date.Foreign exchange Foreign exchange instruments: 1.

upon receipt of these documents through the sellers bank the buyers bank makes payment to the seller Revocable letter of credit is one where any party can change the terms of L/C Irrevocable L/C is one where changes can be made only if both parties consent Confirmed letter of credit is one where a third bank which is acceptable to both parties confirms the credit worthiness of the buyer . Here the exporter gives all the required documents of the transaction to the buyers bank through their bank along with a bill of exchange or draft asking for payment Letter of credit is an instrument where the buyer specifies the documents he requires.Foreign exchange       Modes of payment in international transaction are: Commercial bill of exchange/ documents through bank.

It started financial operations on March 1st 1947 29 countries initially signed the IMF agreement currently there are about 185 member countries The objectives of IMF are: To promote international monetary co-operation.International monetary fund (IMF)    1. IMF was formed in Dec. exchange stability and orderly exchange arrangements To foster economic growth and high levels of employment To provide temporary financial assistance to countries to help ease balance-of-payments adjustment . 27th 1945 to bring economic stability and growth to the post war world. 3. 2.

Because the value of USD was fixed at $35 per ounce of gold. the value would be the same whether USD or gold was used as the basis This par value became the benchmark by which each country’s currency was valued against other currencies Par values were done away with when IMF moved to greater exchange-rate flexibility .International monetary fund (IMF)     Bretton Woods and the principle of Par value The bretton Woods agreement established a system of fixed exchange rates under which each IMF member country set a par value for it’s currency based on gold and the US dollar.

SDR is the unit in which IMF keeps it’s records Assistance programs: In addition to identifying exchange rate regimes. the IMF provides financial assistance to member countries provided they agree to adopt certain policies which will stabilise the economy and save it from distress Flexible exchange rates: The Jamaica agreement in 1976 formalised the break from fixed exchange rates. As part of this move. Quota also determines the voting rights of member countries SDR are IMF currency. It is an international reserve asset created to supplement members existing reserve assets with the IMF.IMF today     The quota system: When a country joins the IMF. It is also the basis on which the IMF allocates special drawing rights (SDRs). it contributes a certain sum of money called quota based on it’s economic position relative to other countries. the IMF began to permit countries to select and maintain an exchange rate arrangement of their choice and keep the IMF informed . The quota is a pool of money that the IMF can draw on to lend to countries and it is the basis of how much a country can borrow from IMF.

debt. Only 5 of the 27 EMU countries have adopted the Euro in 2008. today there are 17 countries who have adopted the euro Euro is governed by the European Central Bank (ECB) . It was set up as a means of creating exchange rate stability within the European community (EC) A series of exchange rate relationships linked the currencies of most members through a parity grid As the countries narrowed the fluctuations in their exchange rates the stage was set for the replacement of EMS with the European Monetary union (EMU) In order to join the EMU countries have to comply to several criteria relating to deficit. interest rates and exchange rate regime.The EURO       The European Monetary Union has it’s roots in the European Monetary system (EMS) put in place in 1979. inflation.

Determining exchange rates    Currencies that float freely respond to supply and demand conditions free from govt. intervention In this case exchange equilibrium is achieved based on market forces In practice however governments through their central banks do intervene in the market .

5 billion USD The first two and a half years of the first Clinton administration the FED intervened on only 18 days and spent 12. irrespective if the currency considered to be freely floating or not US is a good example: In 1989 George H. policies change over time depending on economic conditions and the attitude of the prevailing administration in power.Bush administration intervened on 97 days in the year and sold 19.5 Billion USD During the first term of George W Bush the FED hardly intervened.W.Different approaches to intervention        Govt. They let the USD slide as the hoping that the weakening of the dollar will change the trade deficit in it’s favour Worried with the falling dollar The Bank of Japan intervened in the market but despite all efforts the Yen gained 11 % between 2003 and 2004 The dollar continued to weaken leading both the EU and Japan to threaten further intervention as their exports to the US to fall .

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