Master of Business Administration - MBA Semester 4

MF0015 – International Financial Management

ASSIGNMENT-
Marks 60
Roll No. 1208030663
Student Name: Parth Sarthi
Q-1. A) Explanation of Measuring exchange rate movements: Exchange rates respond quickly
to all sorts of events - both economic and noneconomic.
The movement of exchange rates is the result of the combined effect of a number of factors that
are constantly at play. Economic factors, also called Fundamentals are better guides as to how a
currency moves in the long run. Short-term changes are affected by a multitude of factors which
may also have to be examined carefully.

All the factors can be classified in three classes:

(1) Purchases and sales for trading purposes;
(2) Speculative deals by professional dealers;
(3) Protective movements by substantial holders.

Foreign exchange markets and exchange rates are quite sensitive to movements
in interest rates. This is because financial markets were becoming more closely
linked due to
(i) Growing interest in international investment;
(ii) Elimination or constraints on mobility of capital to a large extent;
(iii) More rapid means of communications.

B) Explanation of factors that influence exchange rates: The following are the factors which
influence exchange rates:
i) Focus on the Demand-Supply Model
 The demand factor: At the most primary level, a change in the price of a currency will
occur because of more or less demand for it.
 The supply side factor: A basic economic principle of supply says that a currency's value
will change with the rise and fall of the levels of supply.
ii) Long term vs. short term
A time period of a year or more signifies a long-term supply and demand. Short-term
is generally thirty days or less than that. The currency prices in both the
time periods can be affected by the same factors.

iii) Factors affecting Currency Trading

iv) Economic factors: These include the economic policy of the government which is
made known through various government agencies and the central bank of the
country, and economic conditions, generally revealed through economic reports.
Economic conditions include:
 Inflation levels and trends
 Economic growth and health
 Government budget deficits or surpluses
 Balance of trade levels and trends
v) Political conditions: Internal, regional and international political conditions and
issues can profoundly affect currency markets.
Q2. The key component of the financial system is the money market that acts as a fulcrum of
monetary operations. Write down the important points under each category mentioned
below.
A) Functions performed by money market :
B) International interest rates: Money market rates are interest rates used by banks for
operations among themselves. Money market enables the banks to trade their surpluses
and deficits. This rate is also commonly known as inter-bank rate. The rates for various
countries vary substantially. The reason for this substantial difference in rates is due to
the interaction of supply or availability of short term funds (bank deposits) in a
particular country versus the demand by borrowers for short term funds in that country.
C) Standardized Global Market regulations.
Q3. Hire purchase is one of the important concept. There are certain features of hire
purchase agreement so explain the points of it. Differentiate between hire purchase
and leasing.
A) Concept of hire purchase : In a hire purchase system, the buyer acquires the property by
promising to pay in monthly, quarterly and half-yearly installments. The period of
payment has to be fixed while signing the hire sale agreement. Though the buyer
acquires the asset after signing the agreement, the title of ownership remains with the
vendor until the buyer pays the entire liability. When the buyer pays the entire
installment and any other obligation according to hire purchase agreement, only then
the title of ownership of goods would be transferred to the hirer. If the hirer makes any
default in the payment of any installment, the hire vendor has the right to reposses the
goods. In this case, the amount that is already paid so far by the hirer will be forfeited.
B) Differences between hire purchase and leasing :
 Ownership: In leasing ownership is never transfer to the lessee even after the payment
of last lease rentals. But in hire purchase, after the payment of last installment ownership
is transferred to the buyer of the goods.
 Repayment amount: Generally in lease, repayment is called lease rentals and that in
case of hire purchase is called installments.
 Advantage of tax deductibility: In lease financing lease rentals are tax deductible
expenses. However, in hire purchase arrangement only the amount of interest is tax
deductible not the full installment.
 Depreciation: Lessee cannot claim depreciation as he is not the owner of the asset. In
hire purchase the buyer can have the claim of depreciation with other expenses.
 Realization of salvage value: Lessee cannot realize salvage value of the leased asset
after the end of the lease contract. The hirer can claim salvage value.
 Magnitude of funds involved: In leasing, magnitude of funds involved is very large
because these contracts are generally for capital goods such as plant and machinery,
ships, among others. In the case of hire purchase, the magnitude of funds involved is
low. Generally, these contracts are for the purchase of office equipments, automobiles,
furniture among others.
 Nature of Expenditure: In lease, rentals paid by the lessee are entirely revenue
expenditure of the lessee. But, only interest element included in the HP installment is
revenue expenditure.
  Components: Lease rental comprises two elements: (1) finance charge and (2) capital
recovery. In case of Hire Purchase, HP installments comprise three elements (1) normal
trading profit (2) finance charge and (3) recovery of cost goods/assets.

Q4. Explain the concept of Depository receipts. Write down the difference between American
Depository Receipts (ADR) and Global Depository Receipts (GDR) also mention the issues
involved in ADR/GDR.

A) Explanation of Depository Receipts: Depository receipts are securities that are traded in
foreign currency. These receipts are issued by the foreign bank or institution which acts
as a depository of shares issued by a domestic company. Depository receipts can be
classified into sponsored and unsponsored ones.
1. Sponsored depository receipts: It is created by a single depository which is appointed
by the issuing company under rules provided in a deposit agreement. The issues of
sponsored ADR/GDR require prior approval of the Ministry of Finance.
2. Unsponsored depository receipts: These are issued without any formal agreement
between the issuing company and the depository, although the issuing company must
consent to the creation of the ADR/GDR facility.

B) Differences between ADR and GDR: The following are the main points of difference
between ADRs and GDRs.
(i) The ADRs are issued by the companies to raise funds from the US markets and
GDRs are issued by the companies to raise funds from international markets.
(ii) Even though both are negotiable instruments, ADRs are negotiable in the US
markets only and GDRs are negotiable in international markets.
(iii) The GDRs can be used as a substitute of ADRs, but ADRs cannot be substituted
for GDRs.
(iv) Companies prefer to issue GDRs in comparison to ADRs due to wider scope to
access the international markets by GDRs.
(v) ADRs are found in three forms from level-I to level-III, but GDRs are already
called in high preference receipt of level-II and level-III.
C) Issues involved in ADR/GDR:

Q5. What is Online Trading? Explain the process of online trading.

A) Measuring and explanation of Online Trading: Online trading is one of the crucial
financial services provided by financial institutions and merchant bankers. Online
trading is completed through Bombay Stock Exchange (BSE) and National Stock
Exchange (NSE). Online trading leads to smoother and quicker transaction on these
exchanges. In 1995, in a span of fifty days BSE was converted into an electronic trading
system from an open outcry floor trading exchange system. In the new electronic trading
system, there is an automated screen-based trading platform which is known as BOLT
(i.e. BSE online trading system) and at present it has an ability of eight million orders a
day. This system enables an investor to trade from any part of the world. This system is
 the world’s first centralized exchange-based internet trading system called
BSEWEBx.co.in.
Both NSE and BSE have switched over to computerized online trading system from
open outcry trading system. BSE has BOLT (BSE Online Trading) and NSE has NEAT
(National Exchange Automated Trading). With these highly efficient online trading
systems, efficiency and transparency of BSE and NSE have increased dramatically.
With the online trading systems it is very easy to do online trading with just a PC and an
internet connection. All an investor needs to do is open a demat account and a trading
account with a depository participant or DP. DP connects a depository to investors.
Depository is the individual who stores shares in an electronic form. In India, there are
two depositories, NSDL and CDSL.

B) Explanation of process of Online trading: Online trading can be defined as the

procedure through which transaction of financial securities, currencies and commodities
takes place through the internet. The settlement cycle in India is T+2 days i.e. trade + 2
days. The trading and settlement process in India has been listed below:
 Orders are placed at the trading depots by investors.
 It is the responsibility of the broker houses to confirm the orders and then certify
them to the exchange (BSE or NSE as per the client’s choice).
 Order corresponding at the exchange.
 Trade confirmation information is provided by brokers to the investors.
 The clearing corporation obtains the particulars of trade from the exchange.
 The clearing corporation conveys the particulars of trade to clearing
members/custodians who validate it. Based on the validation, the clearing
corporation decides the duties and responsibilities.
 Understanding of duties and responsibilities and pay-in advice of funds/
securities by the clearing corporation.
 The clearing corporation orders the clearing banks to make funds available by
pay-in time.
 The clearing corporation orders the depositories to make securities available by
pay-in-time.
 Pay-in of securities: The clearing corporation recommends the depository to
debit pool account of custodians/clearing members and credit its (clearing
corporation’s) account and depository does the same.
 Pay-in of funds: The clearing corporation recommends the clearing banks to
debit account of custodians/clearing members and credit its account and
clearing bank does the same.
Q6. Write short notes on:

A) Depository Participants: All the functions performed by depositories are actually

executed by the depository participants (DPs). All activities related to recording of
allotment of securities, transfer of securities etc. are executed through depository
participants and no investor can directly open an account with a depository. A
depository can enter into an agreement with various depository participants who would
work as agents of the depository. Depository Participant works as an intermediary
between the investor and depository and they are called as agents of the depository. The
 Depositories Act, 1996, and SEBI (Depository & Participants) Regulations, 1996, specify
the relationship between a depository and depository participant. Any issue related to
the governance of relationship between the depository and DPs will be in accordance
with the Depositories Act and SEBI regulations. A depository participant is always
registered with SEBI and is a legal entity. Once a depository participant obtains a
certification of registration with SEBI after that it can start giving its depositories-related
services.
B) Benefits of Depository Systems: In the depository system, the ownership and transfer
of securities takes place by means of electronic book entries. At the outset, this system
rids the capital market of the dangers related to handling of paper. NSDL provides
numerous direct and indirect benefits like:
 Removal of bad deliveries
 Removal of all hazards associated with physical certificates
 No stamp duty
 Immediate transfer and registration of securities
 Speedy settlement cycle
 Faster pay-out of non cash corporate benefits like rights,bonus, etc.
 Decrease in brokerage by many brokers for trading in dematerialized securities
 Periodic status reports
 Removal of problems related to change of address of investor
 Removal of problems related to transmission of demat shares
 Removal of problems related to selling securities on behalf of a minor