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INTERNATIONAL FINANCE

1) Foreign Exchange Risk: When different national currencies are exchanged for each other,
there is a definite risk of volatility in foreign exchange rates. The present International Monetary
System set up is characterized by a mix of floating and managed exchange rate policies adopted
by each nation keeping in view its interests.

2) Political Risk: Another risk that firms may encounter in international finance is political
risk. Political risk ranges from the risk of loss (or gain) from unforeseen government actions or
other events of a political character such as acts of terrorism to outright expropriation of assets
held by foreigners.

3) Expanded Opportunity Sets: When firms go global, they also tend to benefit from
expanded opportunities which are available now.

4) Market Imperfections: The final feature of international finance that distinguishes it from
domestic finance is that world markets today are highly imperfect. There are profound
differences among nations, laws, tax systems, business practices and general cultural
environments.

SCOPE OF INTERNATIONAL FINANCE

1) Foreign Exchange Market : The foreign exchange market is the place where money
denominated in one currency is cought and sold with money denominated in another currency.

2) 1 Currency Convertibility: The discussion of the foreign exchange market was based on
the assumption that the currencies of various countries are freely convertible into other
currencies.

A country’s currency is said to be freely convertible when the country’s government allows
both residents and non-residents to purchase unlimited amounts of foreign currencies with the
local currency.

3) International Monetary System: Monetary system facilitates trade and investment. India
has its own monetary policy that is administered by the Reserve Bank of India. Primarily, RBI
aims at controlling inflation and money supply and maintaining an interest rate regime that is
helpful to economic growth.

4) Balance of Payments: Balance of Payments (BOP) is a statistical statement that
systematically summarizes, for a specified period of time, the monetary transactions of an
economy with the rest of the world.

5) International Financial System: The international financial system consists of the
numerous rules, customs, instruments, facilities, markets, and organizations that enable
international payments to be made and funds to flow across borders.

EVOLUTION OF INTERNATIONAL MONETARY SYSTEM

Gold Standard (1876-1913) : In the early days, gold was used as storage of wealth and as a
medium of exchange. The gold standard, as an international monetary system, gained acceptance
in Western Europe in the 1870s and existed as a historical reality during the period 1875-1914.
The majority of countries got off poldin 1914 when World War I broke out. The classical gold
standard thus lasted for approximately 40 years The centre The international financial system
during this period was London reflecting its important position in international business and
trade.

1) Price-Specie-Flow Mechanism: The gold standard functioned to maintain equilibrium
through the so-called ‘price-specie-flow mechanism’ When a country’s currency inflated too
fast, the currency lost competitiveness in the world market. The deteriorating trade balance due
to imports being greater than exports led to a decline in the confidence of the currency.

As the country’s exports exceeded its imports, the demand for its currency pushed the value
toward the gold import point. By gaining gold, the country increased its gold reserves, enabling
the country to expand its money supply. The increase in money supply forced interest rates to go
lower, while heating up the economy. More employment, increased income and subsequently,
increased inflation followed.

2) Decline of the Gold Standard : Another rule is that the flow of gold between countries
cannot be restricted. The last rule requires the issuance of notes in some fixed relationship to a
country’s gold holdings. Such rules, however, require the nations willingness to place balance of
payments and foreign exchange considerations above domestic policy goals and this assumption
is, at best, unrealistic.

FEATURES OF GOLD STRANDARD :

Following are the features of gold standard:

1) Monetary unit is defined in terms of gold. For example, before World War I, sovereign was
the standard coin in the U.K. Its weight was 123. 17447 grains with 11/12 purity.

2) Other forms of money (e.g. token coins and paper money) are also in circulation. But they
are convertible into gold.

3) Coinage is unlimited and free of cost.

4) There is free and unlimited melting of gold coins.

5) The government buys and sells gold at fixed prices and thereby maintains parity between the
face value and intrinsic value of the standard coin.

6) There is free import and export and export of gold.

7) Gold is unlimited legal tender for all types of payments. All values are expressed in terms of
gold

INTER WAR YEARS (1914-1944) : The gold standard as an international monetary system,
worked well untill World War I interrupted trade flows and disturbed the stability if exchange
rates for currencies of major countries. There was widespread fluctuation in currencies in terms
of gold during World War I and in the early 1920s. The role of Great Britain as the world’s major
creditor nation also came to an end after World War I. The United States began to assume the
role of the leading creditor nation.

they made several attempts to return to the gold standard. exchange rates were supposed to move in a stepwise fashion 3) Capital Control : Capital control was tight. followed by another war. the international exchange of currencies and cross-border lending and borrowing.) 2) Adjustable Peg System: This means that exchange rates were normally fixed but permitted to be adjusted infrequently under certain conditions. In particular. 4) Macroeconomic Performance : Macroeconomic performance was good. when there was free capital mobility.As countries began to recover from the war and stabilize their economies. Although the US and Germany had relatively less capital account regulations. had vastly diminished commercial trade. By contrast. other countries imposed severe exchange controls. Revival of the system was necessary and the reconstruction of the post-war financial system began with the Bretton Woods Agreement that emerged from the International Monetary and Financial Conference of the united and associated nations in July 1944 at Bretton Woods. In particular.’ FEATURES OF BRETTON WOODS SYSTEM 1) US Dollar-based System: The Bretton Woods system was a gold-based system which treated all countries symmetrically. global price stability and high growth were simultaneously achieved under deepening trade liberalization. . and the IMF was charged with the responsibility to manage this system. This macroeconomic achievement was historically unprecedented. all other countries had the obligation to intervene in the currency market to fix their exchange rates against the US dollar. This was a big difference from the Classical Gold Standard of 1879-1914. As a consequence. New Hampshire. stability in tradable prices (wholesale prices or WPI) from the mid 1950s to the late 1960s was almost perfect and globally common. BRETTON WOODS SYSTEM (1945-1972) The depression of the 1930s.

Different Exchange Rate Regimes Fixed Exchange Rate System Floating Exchange Rate System . EXCHANGE RATE REGIMES The exchange rate regime is the way a country manages its currency in respect to foreign currencies and the foreign exchange market. led to strong economic growth around the world in 50s and 60s. 3) Ex-rate stability reduced currency risk. A country could agree or be pressured into devaluation. provided a stable IMS and facilitated international trade and investment. DISADVANTAGES OF BRETTON WOODS SYSTEM In long-run.ADVANTAGES OF BRETTON WOODS SYSTEM The advantages of Bretton Woods system of exchange rate are as follows: 1) Economizes on scarce resources (gold) by allowing foreign reserves ($s) to be used for IMS payments. 2) By holding $ instead of gold as reserves. but there was no way to “revalue” a currency upward (appreciate through concretionary' policy. or 2) Force a country' to revise its ex-rate upward. foreign central banks can earn interest versus non- interest bearing gold. It is closely related to monetary policy and the two are generally dependent on many of the same factors. Easier to transfer dollars versus shipping gold overseas under pure gold standard. There was no way to: 1) Devalue the reserve currency ($) even when it was over-valued. Bretton Woods (gold-exchange system) was unstable.

they shall need comparatively less of foreign exchange reserves to act as a buffer since such forces are usually self-regulatory. it provides an automatic adjustment and insulation against foreign disturbances. the authorities need not intervene at all. floating exchange rates do not require an international manager such as International Monetary Fund to look over current account imbalances. 3) BOP Adjustment: It helps in restoring balance of payments equilibrium. 4) Foreign Exchange Reserves: If the rate responds to market forces within limits.The fluctuating exchange rate regime. Here there is no parity to uphold. In a floating exchange rate regime. 5) No Need for International Management of Exchange Rate: Unlike fixed exchange rate based on a metallic standard. 2) Effectiveness of Monetary and Fiscal Policies: It increases effectiveness of monetary policy for domestic stability which can be achieved with less forceful monetary and fiscal measures. 6) No Need for Frequent Central Bank Intervention: Central banks frequently must intervene in foreign exchange markets under the fixed exchange rate regime to protect the gold parity. 7) No Need for Elaborate Capital Flow Restrictions: It is difficult to keep the parity intact in a fixed exchange rate regime while portfolio flows are moving in and out of the country. And even if they do. ADVANTAGES OF FLEXIBLE EXCHANGE RATE SYSTEMS The advantages of flexible exchange rate are as follows: 1) Shock Absorption: A flexible rate acts as an absorber of shocks originating from other countries. Under the floating system. which is also referred to as the floating / flexible exchange rate regime is one of several kinds or regime in which the value of a currency can fluctuates according to movement of the foreign exchange market. if a country has large current account deficits. but such is not the case under the floating regime. its currency depreciates. To a certain extent. the macroeconomic fundamentals of countries affect the exchange .

6) Tendency to Worsen Existing Problems: Floating exchange rates may aggravate existing problems in the economy. in an effort to manage their exposure to exchange rate risk. floating exchange rate regimes enhance market efficiency. each variation in H results in a multi fold variation in the supply of total money and credit. 3) Money Supply: In most countries. floating exchange rates may make the situation worse. it can cause severe economic disruption in the domestic economy. 2) Business Risk: In international transactions. 5) Use of Scarce Resources to Predict Exchange Rates: Higher volatility in exchange rates increases the exchange rate risk that financial market participants face. Additionally. CURRENCY BOARD . Therefore. affect portfolio flows between countries. If it fluctuates violently over a wide range. 4) Higher Volatility: Floating exchange rates are highly volatile. countries export their macroeconomic problems to other countries. is rising relative to that of the Euro-zone. Suppose that the inflation rate in the U. macroeconomic fundamentals cannot explain especially short-run volatility in floating exchange rates. they allocate substantial resources to predict the changes in the exchange rate. If the country is already experiencing economic problems such as higher inflation or unemployment.S. 8) Greater Insulation from Other Countries’ Economic Problems: Under a fixed exchange rate regime.rate in international markets. DISADVANTAGES OF FLEXIBLE EXCHANGE RATE SYSTEMS 1) Risk to the Economy: Exchange rate determined by free operation of market forces carries several risks for the economy. in turn. which. each contract is denominated in a single currency which is a foreign currency to at least one of the transacting parties. Therefore. supply of 'high-powered money' (H) varies in direct proportion to changes in foreign exchange reserves of monetary authorities.

6) Finally. 2) The board has an absolute control over the convertibility foreign currency in coins and notes at a fixed exchange rate in relation to the domestic rates. and there may be no restriction in the case of current or capital account transactions.. which induces a loss of competitiveness. the currency board cannot manipulate interest rates by applying discounts to certain banks. The pegging system is what controls the rates and keeps them closely aligned with the countries concerned. ' 5) The board cannot lend money to commercial banks. when the private sector assumes that it is repealed with a certain probability) or when the tax system is inefficient. 3) The board can earn profit through interest only from foreign currency held by it.A currency board is a monetary authority that issues notes and coins convertible into a foreign anchor currency at a fixed exchange rate. This problem occurs when the currency board is not completely credible (i. the country experiences a real appreciation. . 4) The currency board does not have any discretionary power and it cannot lend any money to the government. DISADVANTAGES OF CURRENCY BOARDS Following are the disadvantages of currency boards: 1) Real Appreciation: When the inflation rates after fixing the exchange rate under a currency board do not converge quickly and completely to the inflation rates of the anchor currency. Likewise. the government cannot print extra money for its expenses and has to acquire this through taxes or borrowing. FEATURES OF CURRENCY BOARDS 1) The first and foremost condition that has to be met by a national currency board is that the reserves foreign currency which it holds should be enough to convert all notes and coins held by them into atleast 110% to 115% of the base value.e.

2) Calming a Disorderly Market: Central banks intervene to calm the market and so it from becoming disorderly.. ^ REASONS FOR FOREIGN EXCHANGE MARKET INTERVENTION There are four broad based reasons why central banks intervene in the foreign exchange market: 1) Misalignment: Central banks intervene in the foreign exchange market to influence the level of exchange rate. Usually. Rapid movement in the exchange rate may at times threaten the orderly functioning of the market. i. In bad times. money flows in and the interest rate falls. The revenues of these assets are usually lower compared to that of a common central bank. Money flows-out. The currency board’s 100% backing-rule requires that the monetary base is completely backed by liquid reserve- currency assets. the opposite is true. 4) Seigniorage Problem: The last problem is the seigniorage problem. This action serves to discourage the market from becoming one-sided. which makes recession more severe. 3) Signaling/Accommodating Monetary Policy: Intervention may be used to signal future changes to monetary policy or possibly calm expectations if monetary policy is changed . how to solve the question where the foreign reserves come from to issue the own currency and fulfill the 100% reserve- backing criterion. leading to a widening of spreads and at times loss of liquidity. central banks believe that the market is driving the exchange rate away from its ‘equilibrium’ value and intervenes to break the momentum. interest rates rise and private demand is crowded-out. 3) Start-Up Problem: Another problem is the start-up problem. which also holds higher interest-bearing domestic assets and government bonds as reserves.e. this leads to more private consumption and investments and may contribute to an overheating of the economy. In good times.2) Procyclical Money Supply: A problem which is likely to appear under a currency board is that the money supply behaves procyclical.

TYPES OF FOREIGN EXCHANGE MARKET INTERVENTION There are foreign exchange market interventions which are as follows: 1) Sterilized Intervention 2) Unsterilized Intervention STERILIZED INTERVENTION It is a method used by monetary authorities to equalize the effects of foreign exchange transactions on the domestic monetary base by offsetting the purchase or sale of domestic assets within the domestic markets. In the case of heavy inflow of foreign currency resulting in build-up of foreign exchange reserves and the increase in money supply the Central Bank sterilizes the impact through pursuing tight monetary policies. This can take the form of: . repo/reverse repo rate. bank rate. sterilized intervention is a way for a country to alter its debt composition without affecting its monetary base. These can take form of: 1) Open market sale of government securities. i. 4) Reserve Building: Central banks intervene to maintain an inventory of net foreign currency assets.e. which might otherwise lead to a loss in confidence and thereby induce an unwarranted move in the exchange rate. impact of heavy outflow of foreign currency resulting in sharp depletion foreign exchange reserves and consequently sharp reduction in money supply is sterilized through pursuing easy monetary policy..unexpectedly. In other words. 2) Increase in the policy rate. and 3) Impounding of bank reserves through increase in CRR. On the other hand. This process limits the amount of domestic currency available for foreign exchange.

This is a passive approach to exchange rate fluctuation. 2) Reduction in the policy rate. MEANING OF EURO CURRENCY MARKET The Eurocurrency market consists of banks (called Eurobanks) that accept deposits and make loans in foreign currencies. 4) Regulatory Authorities: Eurocurrencies are outside the direct control of the regulatory' authorities but still they are subject to indirect controls by authorities since all the settlements in the currency have to take place in the country of issue.. The euro is divided into 100 cents. A Eurocurrency is a freely convertible currency deposited in a bank located in a country which is not the native country of the currency.e.1) Open market purchase of government securities. Electronic Funds Transfer: All intra-EU transfers in euro are considered as domestic payments and bear the corresponding domestic transfer costs. The European Commission then chose the design created by the Belgian Alain BilIiet. UNSTERILIZED INTERVENTION : Unsterilized intervention is an attempt by a country’s monetary authorities to influence exchange rates and its money supply by not buying or selling domestic or foreign currencies or assets. The European Commission also specified a euro logo with exact proportions and foreground/background color tones. repo/reverse repo rate. . 2) Payments Clearing. 3) Currency Sign: A special euro currency sign (€) was designed after a public survey had narrowed the original ten proposals down to two. and allows for fluctuations in the monetary base. The deposit can be placed in a foreign bank or in the foreign branch of a domestic US bank. i. FEATURES OF EURO CURRENCY MARKET 1) Coins and Banknotes: All euro coins have a common side and a national side chosen by the respective national authorities. bank rate. and 3) Releasing of bank reserves through reduction in CRR.

6) Floating Interest Rate: Another interesting feature of Eurocurrencies markets is the floating interest rate concept. INTERNATIONAL MONEY MARKET MEANING OF INTERNATIONAL MONEY MARKET . ADVANTAGES OF EURO CURRENCY MARKET Following are the benefits of euro currency market: 1) It has provided global short-term capital market. 4) It has enabled importers and exporters to obtain credit for financing trade at cheaper charge than otherwise available. 8) Euro-currency markets are becoming a major source of long-term investment capital for MNCs. This resulted in competition of the highest order and the players in the market operate on very thin margins. 6) It has promoted international monetary cooperation. owing to a high degree of mobility of the Euro-dollars.5) (Provide Free Access to New Entrants: Eurocurrency markets are highly sophisticated and provide free access to new entrants. 3) It has enabled the financial institutions to have greater elasticity in adjusting their cash and liquidity positions. 7) It is a major source of short-term loans to finance corporate working capital needs and foreign trade. 5) It has helped in plummet the profit margins between (deposit rates and lending rates. 2) Euro-dollars are useful for the financing of foreign trade.

The international money market is governed by the international monetary transactions between various nations currency. the markets expanded to facilitate banks’ foreign exchange transactions and to provide money market trading facilities. 6) Floating Rate Notes: The floating-rate note is. each bearing the signature of the President of the European Central Bank.S. The trading of one country’s currency for another one is also named as the foreign exchange currency trading or for ex trading. 2) Euro Credits: The term “Eurocredit” refers to loans in a currency that is not the lending bank’s national currency. 5) Euronotes: Euro Notes are the notes of the euro. the currency of the euro zone. as the name implies. Originally serving as a source of short-term funds for trade financing. In the international money market. . INTERNATIONAL MONEY MARKET INSTRUMENTS 1) Eurocurrency: The emergence of the Eurocurrency markets was one of the most important developments in post-war international banking. 4) Euro Commercial Papers: Commercial paper is a short term unsecured promissory note that is generally " sold by large corporations on discount basis to institutional investors and other corporates for maturities ranging from 7 to 365 days. an instrument whose interest rate floats with prevailing market rates. 3) Euro Certificate of Deposit: Certificate of deposit is a certificate issued by a bank evidencing receipt of money and carries the banks guarantee for the repayment of principal and interest. the transactions are carried-out mainly in gold or in U. They have been in '"circulation since 2002 and are issued by the European Central Bank (ECB). 7) Bankers’ Acceptances: This is an instrument widely used in the US money market to finance domestic as well as international trade.The international money market is the market that handles the international currency transactions between the various central banks of the nations. dollar. The international money market mainly handles the currency trading between the countries.

big multinational corporations. There are two components of international bank loans: i) Eurocredits: Eurocredits are bank loans to MNEs. Eurodollar bank loans are also called ‘Eurodollar credits’ or simply ‘Eurocredits’. The bonds are issued on behalf governments. bond is a debt security' issued by the borrower.TYPES OF INTERNATIONAL CAPITAL MARKET International Bond Markets International Equity Markets International Bond Markets Types of International Bond Market Following are the types of international bond market: 1) Foreign Bond Market: The foreign bond market is that in which bonds are brought-out by foreign borrowers. INTERNATIONAL DEBT SOURCES The international debt sources are as follows: 1) International Bank Loans: International bank loans have traditionally been sourced in the Eurocurreni markets. etc. 2) Eurobond Market: Euro bonds constitute a major source of borrowing in the Eurocurrency market. sovereign governments. The foreign bonds are normally designated in the local currency. ii) Syndicated Credits: The syndication of loans has enabled banks to spread the risk of very large loan among a number of banks. Syndication is particularly important because many large . international institution and banks denominated in Eurocurrencies and extended by banks in countries other than the country i whose currency the loan is denominated. The local market authorities look after the issuing and selling of foreign bonds. which is purchased by the investor and it involves in the process some intermediaries like underwriters merchant bankers etc.

iii) Euro Commercial Papers: It is an another attractive form of short-term debt instrument.MNEs need credit in excess of a single bank’s loan limit. ii) Euro Note Facilities: A major development in international money markets was the establishment of facilities for sales of short-term. The euro note market has four main components: i) Euro Notes: Euro notes are like promissory notes issued by companies for obtaining short- term funds They are denominated in any currency other than the currency of the country where they are issued They represent low-cost funding route. . negotiable. It is a promissory note like the short-term Euro notes although it is different from Euro notes in some ways. while the Euro notes are underwritten. 3) Euro Bonds: Following are the important kinds of bonds which are being issued to mobilize debt internationally: i) Straight Euro Bond: These bonds have fixed maturities and carry a fixed rate of interest Straight Eurobond are repaid by amortization or in a lump sum at the maturity date. iv) Medium-Term Euro Notes: Medium-term Euro notes are just an extension of short-term Euro notes as they fill the gap existing in the maturity structure of international financial market instruments. ii) Convertible Euro-Bond: These bonds are convertible into parent common stock and have become increasingly popular because the market for straight Euro-bonds has weakened. It is not underwritten. promissory notes-Euronotes. 2) Euro Notes Market: The Euro note market is the collective term used to describe short to medium-tern debt instruments sourced in the Eurocurrency markets. A syndicated bank credit is arranged by a lead bank on behalf c its client.

borrowers/companies. by non-U. U.S.S. The rate of return on these notes is adjusted at regular intervals. This bond can also be of any of the above kinds. to reflect changes in short-term market rates. ix) Stripped Bonds: These bonds are bearer form bonds. INTERNATIONAL EQUITY MARKET . government first issued these for foreign investors. viii) Floating Rate Bonds: These bonds are frequently called Floating-Rate Notes. vi) Yankee Bonds: Yankee bonds are a dollar bond issued in U.S. vii) Samurai Bonds: Samurai Bond is a yen denominated bond issued in Japan by non-Japanese companies. This is accomplished by combining various currencies as per some weighting process. corporations to sell bearer bonds to foreign residents. easy to sell. iv) Currency Option Bonds/Multiple Currency-Bonds: Currency option bond allows the bondholder receive the interest payment and the principle in any of the currencies specified in the bond. A warrant is an option to buy a Stated number of common shares at a stated price during a prescribed period.S. Treasury' regulations permit U. usually every six months. It may be any of the above kinds. The amount of each currency in basket generally remains constant but the value of the basket changes. v) Currency Cocktail or Currency Basket Bonds: Currency basket bonds have been developed to stabilize the purchasing power of the coupon. have no voting rights. and become worthless at expiration unless the price of the common stock exceeds the exercise price. Warrants pay no dividends.iii) Bond with Warrants: Some Euro-bonds are issued with warrants. as some of the currencies depreciate or appreciate relative to each other.

certificate issued by international bank.S. One is. It is a hybrid between bond and stock.” FUNCTIONS / ROLE OF INTERNATIONAL MONETARY FUND . unlike loans made in the Eurocurrency market. dollars or Euros.S. 2) Euro Credit Market: Euro credit market is the market where financial banking institutions provide banking services denominated in foreign currencies. financial markets. Global Depository Receipt is a bank certificate given in more than one country for shares in a foreign company. International Equity Sources 1) American Depository Receipts (ADRs): An American Depositary Receipt (or ADR) represents ownership in the shares of a non-U.S. which are owned by non-residents of the country. whose legal tender the currency is and which are lent by the owners. stock exchanges through the use of ADRs. “FCCB is a quasi-debt instrument that is issued in a currency different than the issuer’s domestic currency with options to either redeem it at maturity or convert it into issuing company’s stock. 2) Global Depository Receipt (GDRs): Global Depository Receipt (GDR) . It is a financial instrument used by private markets to increase capital denominated in either U.S. They may accept deposits and provide loans.Global equity market is the worldwide markets of funds for equity financing the stock exchanges throughout the world where investors and firm meets to buy and sell shares of stocks. to get the regular interest and principal and the other is to convert the bond in to equities. company and trades in U.S. The stock of many non-U. Loans provided in this market are medium-term loans. companies trade on U. 3) Foreign Currency Convertible Bond (FCCB): Foreign Currency Convertible Bond is just a convertible bond that is issued in foreign currency. It gives two options. TYPES OF INTERNATIONAL EQUITY/STOCK MARKET 1) Euro Currency Market: The term Eurocurrency describes deposits of currency.

It regulates exchange rate practices and international payments.F. the IMF offers medium . This stability in foreign exchange rates had the effect of promoting the flow of international trade among different countries.1) Regulatory Functions: In its regulatory aspect. different countries of the world often resorted to competitive currency devaluation to boost their exports which naturally produced strains in their economic and political relationship. 2) Scaling up a Multilateral Trade and Payments System: The establishment of the fund has given stimulus to the setting up of a multilateral trade and payments system. But after the existence of the IMF no member country has allowed to devalue its currency without the prior consent of the fund except under certain special circumstances. 5) Check in Competitive Currency Devaluation: Before the establishment of the fund. the IMF administers a code of good behavior in international payments. 3) Consultative Functions : As a consultant. 4) Stability of Foreign Exchange Rates: Till recently the fund had succeeded in attaining a certain amount of lability in foreign exchange rates. the fund helps them to eliminate short term disequilibrium in their balance of payments.M. 2) Financial Functions: As a financial institution. the IMF provides a forum for international cooperation and is a cource of counsel and technical assistance to its members ADVANTAGES OF INTERNATIONAL MONETARY FUND 1) Establishment of a Monetary Reserve Fund: Under this system. the member countries have been allowed to impose exchange control on commercial transactions. 3) Improvement is Short Term Disequilibrium in Balance of Payments: By lending foreign currencies to member countries against their national currency. .term loans to the national monetary authorities to enable them to make up their balance of payment deficits.-No doubt. has not circulated as much as they used to before its establishment. The rate of exchange under the I. the fund is able to accumulate a sizeable "¦¦stock of the national currencies of different countries.

Interest rates. It gives special concessions to western countries while neglecting the genuine interests of the backward and under developed countries. 2) No Elimination of Multiple Exchange Rates: The elimination of these exchange rates was one of the main objectives of the fond. But the fond has miserably failed to achieve this objective. the fund found it difficult to meet the foreign exchange requirements of its members because of its limited resources.6) No Interference in Domestic Economic Affairs: The fund does not interfere in the internal economic affairs of member countries nor does it try to influence their economic and monetary policies in any way. But. fees. 2) Special Leading Facilities and Policies: Supplemental Reserve Facility (SRF) was introduced in 1997 to supplement resources made available under Stand-By and Extended Arrangements in order to provide financial assistance for exceptional balance of payments difficulties owing to a large short-term financing need resulting from a sudden and disruptive loss of market confidence. DISADVANTAGES OF INTERNATIONAL MONETARY FUND 1) No Solution of the Liquidity Problem: One of the main objectives of the fund was to promote the international liquidity of its members by lending to them the required foreign currencies out of its stock. 3) Discriminatory Treatment: Another shortcoming is that the fund discriminates in favor of certain countries in its day-to-day functioning. . and other terms associated with the concessional facilities are significantly lower or easier to meet than the terms of regular facilities. IMF FINANCIAL FACILITIES AND POLICIES 1) Regular Lending Facilities: Regular facilities for IMF lending differ significantly from concessional facilities. such as occurred in the Mexican and Asian financial crises in the 1990s). in actual practice.

It was established 17 May 1930. . Among others. It is the oldest international financial organization. and was created to administer the transaction of money according to the Treaty of Versailles. particularly in regard to German reparations under the so-called Young Plan adopted at the 1930 Hague conference. The BIS fulfils this mandate by acting as: 1) A forum to promote discussion and policy analysis among central banks and within the international financeial community.markets. 2) A center for economic and monetary research 3) A prime counter party for central banks in their financial transactions. FUNCTIONS AND POWERS OF BIS The Statutes state that the objects of the Bank are “to promote the cooperation of central banks and to provide additional facilities for international financial operations. its main goals are to promote information sharing and to be a key center for economic research. and to act as trustee or agent in regard to international financial settlements entrusted to it under agreements with the parties concerned”. OBJECTIVES OF BANK FOR INTERNATIONAL SETTLEMENT 1) To act as trustee or agent in regard to international financial settlements.BANK FOR INTERNATIONAL SETTLEMENT Banks for international settlement (BIS) is an international organization fostering the cooperation of central banks and international monetary policy . and 4) Agent or trustee in connection with international financial operations. 3) To provide additional facilities for international financial operations. 2) To promote central bank cooperation.

syndication fees. then question is to which supervisory authority will have jurisdiction over these arise. Board of Directors : The Board of Directors has at present 18 members (January 2011). fluctuating rates of currencies of different countries can also pose problems giving rise to the need for hedging and other measures. It is a mechanism by which one can maintain bank accounts outside their country of residence. Factors Leading to the Growth of International Banks . and vote in the General Meetings. INTERNATIONAL BANKING MEANING & DEFINITION OF INTERNATIONAL BANKING International banking means opening of banks outside country of origin. letters of credit.. Italy and the United Kingdom. guarantees. loan processing. FEATURES OF INTERNATIONAL BANKING 1) Banking Activities are Carried across Different Geographical Borders: When branches and subsidiaries are carrying-out operations in different countries. Finance. 3) Non-Interest Income is Substantially more than Interest Income: Income from fund based activities like commission on bills. all of which are entitled to be represented. etc. and the Chairman of the Board of Governors of the U.General Meetings of Member Central Banks : The BIS currently has 56 member central banks. The Board has six ex officio directors. Each ex. comprising the Governors of the Central Banks of Belgium. 2) Risks in International Banking are both Pecuniary as well as Political: Apart from the financial risks v inherent in all business.S Federal Reserve System. The board alsoelects a Vice Chairman. Germany. and counseling fees.officie members may appoint another member of the same nationality. are more than the interest earned from lending operations. The Board of Directors elects a Chairman from among its members fora three-year term.

and the absence of tessitorial restrictions (that is. 3) Home Nation Information Services: Local firms in a foreign market may be able to obtain more complete information on trade and financial markets in the multinational bank’s home nation than is otherwise obtainable from foreign domestic banks.tourist. and deposit safety that can be used to attract clients abroad. 5) Regulation Advantage : Multinational banks are often not subject to the same regulations as demestic banks. and foreign business market. 4) Prestige : Very large multinational banks have high perceived prestige. 6) Wholesale Defensive Strategy : Banks follow their multinational customer abroad to prevent the erosion of their clientele to foreign banks seeking to service the multiinational’s foreign subsidiaries. lack of required deposit insurance and reserve requirements on foreign currency deposits. 2) Knowledge Advantage: The foreign bank subsidiary can draw on the parent bank’s knowledge of personal contacts and credit investigations for use in that foreign market. banks may reduce transction costs and foreign exchange risk on currency conversion if government controls can be circumvented. U. 9) Growth : Growth prospects in a home nation may be limited by a market largely saturated with the services offered by domestic banks.S. banks may not be restricted to state of origin). .The following are the reasons for the growth of international banking: 1) Low Marginal Costs: Managerial and marketing knowledge developed at home can be used abroad with low marginal costs. 8) Transaction Costs : By maintaining foreign branches and foreign currency balances. There may be reduced need to publish adequate finacial information. 7) Retail Defensive Strategy : Multnational banks prevent erosion by foreign banks of the travel’s check. liuidity.

Thus.10) Risk Reduction: Great stability of earnings is possible with international diversification.driven. banks with pUrely international character emerged on the global financial scene. It is not underwritten. For example. but they deal essentially in any currency other than the currency of the host country. if Euro bank is located in London. The Euro banks deal with both the residents and the non-residents. This new variety of banks came to be known as Euro banks. other than that of the country in which it is located. These Banks deal with both the residents and the non-residents but dealings are essentially in any currency other than the currency of the host country. . It accepts Euro currency deposits and gives Euro currency loans. The reason is that ECP is issued only by those companies that possess a high degree of rating. EURO COMMERCIAL PAPER (ECP) It is a promissory note like the short . Euro Banks are international banks with the minimum of host government interference any dealing in any convertible currency other than currency of the host country. The Euro banks emerged on a footing quite different from the traditionally known international banks. EURO BANK A Euro Bank is defined as ‘a financial intermediary that simultaneously bids for time deposits and makes loans in a currency or currencies. A Euro Bank’s balance sheet consists of deposits and loans in other currencies. Euro Bank refers to a function rather than an institution. However. in the late 1950s and especially in the early 1960s. while the Euro notes are underwritten. it will deal in any currency other than the British Pound.term Euro notes although it is different from Euro notes in some ways. A Bank in Singapore. accepting deposits of Euros by a British Company is called a Euro Bank. the ECP route for raising funds is normally inverstordriven. Offsetting business and monetary policy cycles across nations reduces the country specific risk of any one nation. Again. while the Euro note is said to be borrower .

3) Euro commercial papers are regarded as highly safe and liquid instrument. 5) Euro commercial papers are normally issued in a bearer form on dicount to face value basis. bank holding companies. ADVANTAGES OF EURO COMMERCIAL PAPERS Euro commercial papers provide the following advantages : 1) Cheaper Source of Funds. 6) Euro commercial papers are primarily issued by public utilities. insurance companies. transportation companies and finance companies. 2) Euro commercial papers are negotable by endorsement and delivery. Flexibility in limits determined by the issuer's cash flow requirements at any point of time. . absence of rating requirements 3) Flexible maturity. 4) Diversification of short term funding through market that is found attractive by wide variety of investors. 2) Simplicity in Documentation. 6) A successful Euro CP program will enhance the reputation of the issuer world wide among the investing community. low cost of arrangement.FEATURES OF EURO COMMERCIAL PAPERS Following are teh features of euro papers : 1) Euro commercial papers are unsecured as they are backed only by the general credit standing of the siiusing companies and by the lines of credit that they might be in a position to obtain from banks. 4) Euro commercial papers are also known to be a simple and flexible instrument in respect of documentation needed and the spread of maturities available.

which is purchased by the investor and it involves in the process some intermediaries like underwriters merchant bankers etc. 5) Euro bonds carry a convertibility clause allowing them to be converted into a specified number of shares of common stock. 4) Euro bonds are commonly denominated in a number of currencies. This feature appeals to many MNCs. This feature also means that the country of the ultimate owner of the bond is not a matter of public record. A bond is a debt security issued by the borrower. etc. big multinational corporations. which often do not wish to disclose detailed and highly sensitive information. The bonds are issued on behalf of governments. FOREIGN BONDS . exemption from tax-withholding provisions applicable to domestic and foreign bonds. 2) Euro bonds are issued in bearer form. 6) In euro bonds coupon payments are made yearly. 3) Euro bonds offer investors. with payment of interest and principal guaranteed by the parent company. This feature allows US MNCs to reduce their borrowing cost by having their offshore financing subsidiaries issue Eurodollar bonds. FEATURES OF EURO BONDS Following are the features of euro bonds: 1) Euro bond issues are not subject to the costly and time-consuming registration procedure. which facilitates their negotiation in the secondary market. EURO BONDS Eurobonds constitute a major source of borrowing in the Eurocurrency market. Eurobonds are bonds of international borrowers sold in different markets simultaneously by a group of international banks. Disclosure requirements are also less stringent than those which apply to domestic issues.

. such bonds are being issued also by companies. 5) They can be publicly issued or privately placed. By issuing global bonds. FEATURES OF FOREIGN BONDS A foreign bond has following characteristics: 1) The bond is issued by a foreign entity (such as a government. an issuing entity is able to attract funds from a vast set of investors and reduce its cost of borrowing. both of which regularly carry-out large fundraising exercises. FEATURES OF GLOBAL BONDS The speciabfeatures of the global bonds are: 1) They carry high ratings. Foreign bonds are regulated by the domestic market authorities and are usually given nicknames that refer to the domestic market in which they are being offered. in the domestic market's currency. and supra-national (an entity that is formed by two or more central governments through international treaties). Since 1992. corporations. These bonds are usually issued by large multinational organizations and sovereign entities. 4) Issuers of foreign bonds include national governments and their sub-divisions. These bonds are specifically designed to be traded in any financial market. municipality or corporation). 2) They are normally large in size. 2) The bond is traded on a foreign financial market. GLOBAL BONDS It is the World Bank which issued the global bonds for the first time in 1989 and 1990. 3) The bond is denominated in a foreign currency.Foreign bond is a bond that is issued in a domestic market by a foreign entity.

2) Global Bonds Improve the Rate of Return: Returns from global bonds are typically higher than returns offered by traditional government bonds and securities.3) They are offered for simultaneous placement in different countries. 4) They are traded on "home market" basis in different regions. at times. These taxes. BENEFITS OF GLOBAL BONDS Following are the benefits of global bond: 1) Global Bonds Help in Diversify ing an Investment Portfolio: Investment in global bonds helps reduce exposure to economic or political instability in a specific country and improves a portfolio's risk profile. They are comparatively a new instrument representing foreign portfolio equity investment. nor do they represent foreign direct investment. the investor gets the dividend and not the interest as in case of debt instruments. interest rates. it does not have the same pattern of voting right that it does have . EURO EQUITY International equities or the Euro-equities do not represent debt.S. returns to a U. In this case. On the other hand. 2) The risk of the issuer defaulting on interest and principal payments is high due to the lack of government data on these bonds. High taxes are levied on profits generated through these bonds. For example. make global bonds unattractive. investor who has invested in Japanese and European bonds will not be impacted by fluctuations in the U.S.1^ RISK ASSOCIATED WITH GLOBAL BONDS The risks associated with global bond investing are: 1) Capital gains can erode when an investor's domestic currency appreciates vis-a-vis the currency in which the bond is issued.

one ADR = two shares. These are: 1) Prospectus: The prospectus containing detailed information about the issue and the issuer. 2) A single ADR can represent more than one share. international equities are a compromise between the debt and the foreign direct investment. 3) Underwriting Agreement: The underwriting agreement concluded between the issuing company and the underwriter. 4) Agreement: A copy of the agreement concluded between the custodian and the depository is also enclosed. accompanies the issue. e. the rules followed for converting the shares into GDRs and back. 6) Agreement with the Listing Stock Exchange: A copy of the agreement with the listing stock exchange is annexed so that the investors are well aware of the secondary market for the issue. . (AMERICAN DEPOSITARY RECEIPTS (ADR'S) FEATURES OF ADRS The characteristics of ADR are as follows: 1) ADR can be listed on any American Stock Exchange.in the case of foreign direct investment. 5) Trust Deed: A copy of the trust deed is enclosed which provides for the duties and responsibilities of the trustee regarding servicing of the issue.. In fact.g. among other things. DOCUMENTATION OF EURO EQUITY There are many documents used in the process of the issue of international equity. 2) Depository Agreement: The agreement between the issuing company and the depository - that contains. 3) The holder of the ADRs can get them converted into shares. normally the lead manager.

and increase liquidity ii) ADRs can provide enhanced communications with shareholders in the United States. enhance a company's visibility.4) The holder of the ADRs has no right to vote in the company. or they can create new ADR.S. 1) Benefits to the Issuing Company: i) An ADR programme can stimulate investor interest. exchange.S. broaden its shareholder base.an ADR.-based broker/dealer purchases shares of the issuer from question in the issuer's home market. a U. The U. MECHANISM/PROCESS OF ISSUE OF ADR Investors can purchase ADRs from broker/dealers. 5) The dividend on them is similar to the dividend on shares. The bank then issues ADRs representing those shares to the broker/dealer's custodian or the broker-dealer itself. iii) Features such as dividend reinvestment programmes can help ensure a continual stream of investment into an issuer's programme. 6) ADRs are in U. These broker/dealers. To create . dollar denomination.S. broker/dealer then deposits those shares in a bank of that market.in turn can obtain ADRs for their clients in one of two ways: they can purchase already-issued ADRs on a U.S. which can then apply them to the client's account. 2) Benefits to the Investors: i) Depository Receipts are US Securities ii) Depository Receipts are easy to Buy and Sell iii) Depository Receipts are Liquid iv) Depository Receipts are Global .

mainly to financial institutions. they can be sold easily. It makes sufficient finance available to them.S. e. FEATURES OF GDR The characteristics of GDR are as follows: 1) GDRs can Be4isted oft any American and European Stock Exchange.. However. dollar denomination. ADVANTAGES OF GDRS The chief advantages of issuing GDR are the following: 1) Getting Foreign Capital: The Indian companies can get foreign capital through the medium of GDR. one GDR = two shares. Both these factors help in the economic development. the shareholders do have this right.. 2) One GDR can represent more than one share.v) Depository Receipts are Convenient to Own vi) Depository Receipts are Cost-Effective GLOBAL DEPOSITARY RECEIPTS (GDR'S) It is a global finance vehicle that allows an issuer to raise capital simultaneously in two or more markets through a global offering. . GDRs may be used in either the public or private markets inside or outside the US. 3) The bearer or holder of the GDRs can get them convened into sharesT 4) The holder of the GDRs has not right to vote in the company. 2) More Liquidity: There is more liquidity in the GDRs as compared to the shares because they are issued by the financially sound companies. In other words.g. They are marketed internationally. It thus increases the foreign exchange reserve in the country. 6) GDRs are in U. 5) The dividend on these GDRs is quite like the dividend on shares.

This reputation directly affects the sales of the company. 5) Better Share Price: A company earns more price by issuing GDR instead of issuing shares in the domestic market because the GDR is an indicator of the good financial position of the company. This ends the financial problem of the company and it comes to be recognized on global basis. 6) Scattered Shareholders: The issue of the GDR makes it possible for the shareholders to cross the domestic boundaries and spread far and wide.3) Increase in Goodwill of Company: A company that issues the GDR gains reputation in the market. . 4) Lower Floating Costs: A company has to bear less expense in issuing GDR as compared to the issuing of shares.