TYBAF SEM V JMPC

UNI
T-I
1.I
NTRODUCTI
ONTOI
NTERNATI
ONALFI
NANCE
Meani
ng:
-
I
nter
nat
ionalfi
nancialmanagementi
sawel l-
knownter
mi ntoday’swordanditi
sal soknownas
i
nter
nat
ionalf
inance.I
tmeansfi
nanci
almanagementi
nanint
ernat
ional
busi
nessenv
ironment
.
I
nter
nati
onalfi
nancei
sthebranchofeconomicsthatst
udi
est
hedy
nami
csofexchanger
ates,f
orei
gn
i
nvest
ments,andhowtheseaff
ecti
nter
nati
onaltr
ade.
Fundament alsofI nternati
onalFi nancedealwi ththest
udyoff orei
gninv est
ment s,thechangesi nthe
forei
gnexchanger ates,andhow i nternat
ionaltradeisinfl
uencedbyt hem.I nternat
ionalfi
nancealso
foll
owst echni
quesf orall
ocationoff undsandr esourceininter
nati
onaltrade.Howev er,i
tfacescertai
n
hindrancesregar di
ngmobi l
ityofcapi t
alandf oreigncurrenci
es,aswel last hef orei
gnalsot r
iesto
solvet heproblem ofhumanr esourceexpl oi
tati
oncar r
iedoutbyMNCi nthepooranddev el
oping
count r
ies by apply i
ng its own pr incipl
es,three conceptuall
y dist
inctbuti nter
rel
ated part
s are
i
dent i
fiabl
eininternationalf
inance.
I
nternat
ionalFi
nanci
alMarkets:Concerned Wit
hI nt
ernati
onalFinancial
/Invest
mentsInstr
ument s,
Forei
gnExchangeMarket
s,I
nternat
ional
Banking,I
nter
national
Securit
iesMarketsFi
nanci
alDeri
vat
ives
Etc.

FEATURESOFI
NTERNATI
ONALFI
NANCE:

1)ExpandedOppor
tuni
tyToBusi
ness:
-duet
ogl
obal
i
zat
ioni
nbusi
nesst
her
eisanexpanded
oppor
tuni
tyt
othebusi
ness.Busi
nesscanr
aisemor
efundst
hroughl
esscostofcapi
tal
.

2)For
eignExchangeRi
sk:
-ItI
sFi
nanci
alRi
skThatExi
stsWhenAFi
nanci
alTr
ansact
ionI
s
Denomi
nat
esI
nACur
rencyOt
herThanThatOfTheBaseCur
rencyOfTheCompany
.

3)I
mper
fectMar
ket
:-Duet
odi
ff
erencei
nlawandcust
omsamongt
hecount
ri
es,
taxsy
stem,
cult
uraldif
ference,busi
nesspracti
ces,therei
sdist
incti
onbetweeninternati
onalbusi
ness
practi
ces,t
hereisdisti
ncti
onbetweeninternati
onalbusi
nesspract
ice,therei
sdisti
ncti
on
betweeninter
nationalbusi
nesspracti
ces,therei
sdisti
ncti
onbetweeninternati
onalfi
nanceand
domest i
cfi
nance.so, i
tissai
dthatthereisalwaysanimperfectmarket.duetoimperfect
ioni
n
mar ket
.

4)Pol
i
tical
Risk:
-Int
ernat
ional
Financi
alSy
stem Af
fect
edByGov
ernmentPol
i
ciesAndPol
i
tical
I
ssues.SoTher
eIsARiskOfPoli
ti
calPol
ici
es,I
nter
nati
onalFi
nanceCanBeAff
ect
ed.Si
mil
arl
y
AFavorabl
ePol
it
ical
Deci
sionCanIncr
easeInt
ernat
ionalFi
nanci
alSt
abi
li
ty.

SCOPEOFI
NTERNATI
ONALFI
NANCE
Current
ly,
Internati
onalFi
nanceHasBecomeMor eComprehensivePrBroaderInScopeAndI sDealing
WithMat t
ersRel at
edToGl obal
izat
ion,
FairTradeMul
ti
nationalBanki
ng,
AndMul t
inat
ional
Cor porati
on.
I
nternat
ionalFinanceConsi stOfForei
gnExchangeMar ket,Curr
encyConvert
ibil
i
ty,BOP,Internati
onal
Fi
nanceAndI nt er
nati
onalMonet arySystem.SoThereI sA Bi gScopeI nt
ernati
onalFinance.I tIs
Di
scussesBel ow:
1)I
nternati
onalMonet ary Syst
em: -ForBet terEconomi
c Growth And To Do Tr ade And
I
nvestmentsEf fi
cientl
y,ACount r
yNeedToHav eItsOwnMonetarySystem AndAnAut hori
ty
WhoCanCont rolTheSy stem.ForExampl e,RBIIdI
ndi
aControl
sOverTheMonet arySystem
OfIndiaThroughCont rol
li
ngOv erInf
lat
ion,
SupplyOfMoneyAndMaint
ainingInt
erestRate.

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC

2)I
nter
nati
onalFi
nancialSy
stem:-TheGrowthInWordTrade,Liberal
izat
ionAndGlobali
zat
ionIn
Busi
nessBroughtTremendousChangeInInter
nati
onalFinancialSyst
em.ItOrgani
zati
onAnd
Cust
omsWhi chEnabl eTheInter
nat
ionalPaymentsAndRecei pts BetweenThe Count r
ies.
Compari
ngToPast ,
TheVol umeOfTransact
ionHasIncr
easedI nInter
nati
onal
Finance.

3)Forei
gnExchangeMarket
:-ThisIsAMarketWher
eOneCountr
y’s Cur
rencyDenominat
edIn
ThatCurrencyCanBePurchaseThroughSal
esOfAnot
herCountr
y’sCurr
ency
.Int
ernat
ional
Fi
nancial
Sy st
em Pr
ovi
desThisFaci
l
ity
.

4)Curr
ency Converti
bil
i
ty:-TheCurrencyOfACountr
yIsFreelyConv
erti
bleWhenTheResident
OrNorResi dentOfTheCount r
yAr eAll
owedToConv er
tTheLocalCur r
encyInForeign
Curr
ency.ButTheGov ernmentsOfTheCountryRestr
ict
sTheResidentsAndNon-Resi
dents
ToDoThi s.Vari
ousCount r
iesDoNotAl l
ow Conver
ti
ngTheCur r
encyFreel
y.ItMakesThe
I
nter
nati
onalBusinessDi f
fi
cult
.

5) Bal
anceofPay ment:BalanceOfPay ment(BOP)OfA Count ryIsDef
inedAs,“Systemati
c
Record OfAllEconomic Tr ansacti
on With The Resi dents OfA Report
ing Count
ry And
Resi
dentsOfForei
gnCountriesDur i
ngAGi v
enPer iodOfTi me”-Ki
ndl
eBerger
.ThusBalanceOf
PaymentsIncl
udesAllVisibleAndNon- Vi
sibl
eTr ansacti
onsOfA Count r
yDur i
ngA Given
Peri
od,Usual
lyAYear.ItRepr esent
sASummat ionOfCount ry’
sCurr
entDemandAndSuppl y
OfTheClaimsOnForeignCur renci
esAndOfFor eignCl ai
msOnI t
s.

I
MPORTANCEOFI
NTERNATI
ONALFI
NANCE
I
nter
nat
ionalFi
nancePlaysA Cr
iti
calRol
eInInt
ernat
ionalTradeAndInt
er-
EconomyExchangeOf
GoodsAndServ
ices.I
tIsI
mpor
tantForANumberOfReasons;TheMostNot
ableOnesAr
eList
edHere:
1)I
nter
nat
ional
financehel
pskeepi
nter
nat
ional
issuesi
nadi
sci
pli
nedst
ate.
2)I
nternati
onalfi
nanceisani mport
anttooltofindtheexchanger at
es,compareinf
lat
ionrat
es,
getani deaaboutinvest
inginint
ernat
ionaldebtsecur
it
ies,ascert
aintheeconomicstat
usof
othercountr
iesandjudgethefor
eignmarkets.
3)I
nter
nat
ionalfinance helps i
n cal
culati
ng exchange r
ates whi
ch arev er
yimpor
tanti
n
i
nter
nat
ional
finance,
ast heyl
etusdeterminet
her el
ati
veval
uesofcur
renci
es.
4)Vari
ous economicfact
ors hel
pi n maki
ng i
nter
nati
onali
nvestment
s deci
sions.Economic
fact
orsofeconomicshelpi
ndet er
mini
ngwhetherornoti
nvest
orsmoneyissafewithforei
gn
debtsecur
it
ies.
5)Uti
li
zi
ngIFRSisani mportfactorforanyst
agesofi nt
ernat
ionalfinance.f
inanci
alfactorfor
many stagesofi
nternat
ionalfi
nance.fi
nancialstat
ement s made byt hecountr
iesthathave
adoptedi
frsar
esi
mi l
ar.i
thelpsmanycount r
iest ofoll
owsimilarr
eporti
ngsy st
ems.
6)I
RFSsyst
em’whi
ch i
sapartofint
ernat
ionalfi
nance’al
sohel
psi
nsav
ingmoneybyf
oll
owi
ng
t
herul
esofr
epor
ti
ngonasi
ngleaccount
ingstandard.

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
7)I
nter
nat
ional Fi
nanceHasGr ownI nNatur
eDueToGl obal
izat
ion.I
tHel
psUnderst
andThe
Basi
cOfAllI
nter
nati
onal
Organizat
ionAndKeepsTheBal
anceInt
actAmongThem.
8)AnInt
ernati
onalFi
nanceSyst
em Mai
ntai
nsPeaceAmongTheNat i
ons.Wi t
houtASolidFi
nance
Measures,All Nat
ionsWouldWorkForThei rSel
f-
Int
erest
.Int
ernat
ionalFinanceHelpsIn
Keepi
ngThatIssueAtBay.

PRI
NCI
PLESOFI
NTERNATI
ONALFI
NANCE:
1)Adv
antagesToBecomeInter
nat
ional:
-TheI
nter
nat
ional
i
zat
ionAdv
ant
agesAt
tractCompani
es
ToI
nvestDir
ect
lyI
nFor
eignCountr
ies.
2)Compar
ativeMer i
ts:
-EveryCountryI
sSpeciali
zedI nSomePr oductOfHasSomePr oductOf
HasSomeSpeci alFeat
ure.ThroughInt
ernat
ionalTradeExchangeOfVerit
yOfGoods,Cult
ure
AndSer
vicesTakesPlaceThroughTrade.ItI
ncreasesTheStandardOfLi
vi
ng.
3)Economi
cOfScale:Sy
nergi
sti
cEffectDi
rectToEconomiesofScal
e.WhenTheWhol
eIsMor
e
Prof
it
abl
eThanThePartOfItThanSyner
gisti
cEf
fectExi
sts.
4)Ef
fectOfPor tf
oli
o:AsPerThePr inci
plesOfPort
foli
oItI
sSai
dThatTheRi
skI
sDi
vert
edBy
I
ncreasingThePor t
fol
io.I
nSameWayTheCompanyCanDi v
ersi
fyI
tsRi
skByWor
kingOn
Gl
obal Level
RatherThanRest
ri
cti
ngInDomesticLevel
.
5)Perf
ectCompletion:-Int
ernati
onalTradeAl
l
owsEv er
yCount
rytoEntr
yInTheMarketAndExist
From TheMar ketFreely
.UnderThisCondit
ionGoodsAndServ
icesAreFr
eel
yTr
ansferabl
e.So,
theBalanceofCostnoRet ur
nExists.
6)Ri
skAndPr of
it
abi
li
tyTradeOff:
-ItIsWellKnownThatTher
eIsACl oseRel
ati
onBet
weenRisk
AndProf
it
abil
it
y.ButTheTrade-OffBetweenRiskAndProf
it
abi
l
ity Deci
desTheMaximi
zat
ion
Bal
anceBetweenRiskAndProf
itabi
li
ty.
7)Val
uat
ionOfAsset
s:-ThisPri
nci
pleSaysThatTheValueOfAnAssetIsTheExpect edEar
ning
OfTheAsset
.ForMNC’sBett
erMarket
abil
i
ty,Ear
ningMoreProfi
t,Capi
tal
izati
onAtLowerRate
Compari
ngToDomesticCompani
esLeadsToHi gherPri
ceEarni
ngsRatioAndLowerRequired
Rat
eOfRetur
n.So,TheVal
ueOfMNCI sMor eThanTheDomest i
cCompani es.

ADVANTAGESOFI
NTERNATI
ONALFI
NANCE:
1)Promoti
on:- Int
ernat
ionalFi
nance Hel
psTo Pr
omot
e Domest
icI
nvest
ment
sAnd Gr
owt
h
ThroughCapi
talMarket.
2)Bett
erBanki
ngSystem:-I
nter
nat
ionalFi
nanceHel
psToHeal
thyCompet
it
ionDueToWhi
chI
t
Provi
desBett
erBanki
ngSystem.
3)MoreEqual
it
y:-I
tHel
psToIntegr
ateTheEconomyOfTwoCountri
esAndAsyFlowOfCapi
tal
.
DueToFreeFlowOfCapi
tal
Result
sInt
oMor eEqual
i
tyBet
weenTheCount
ri
es.
4)Ef
fecti
veCapi
talAll
ocat
ion:
-ItHel
psToAll
ocat
eTheCount
ry’
sCapi
talEf
fect
ivel
yByPr
ovi
ding
I
nformati
onRelat
edToDi f
fer
entAreas.
5)Capi
talInneed:
-ItHel
psToAccessTheCapi
talMar
ketAroundTheWor
dWhi
chEnabl
esThe
Countr
yToLendMoneyI nGoodTi
mesAndBorrowCapi
tal
IjnNeed.
6)Cor
rect
iveMeasures:
- DueToWorl
dwideCashFlowsI
nter
nat
ionalFi
nanceHel
psToTake
Cor
rect
iveMeasur
estoBadGover
nmentPol
i
cies.

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC

2.BALANCEOFPAYMENT
I
NTRODUCTI
ON:
-
Meaning:
TheBal anceofPaymentofacountr
yis“asystematicrecordofal
leconomictr
ansact
ions
bet
weent heresi
dentsofther
eport
ingcount
ryandtheresidentsofforei
gncountr
iesdur
ingagiven
per
iodoftime”.
Li
keall
doubl
eent
rybookkeepi
ngaccount
sital
way
sbal
ancesi
.e.sum ofcr
edi
tent
ri
es&sum ofdebi
t
ent
ri
es.
I
notherwordst
hebal
anceofpaymentstat
ementisadev
icef
orrecor
dingal
leconomi
ct r
ansact
ions
wi
thi
nagivenperi
odoft
imebetweentheresi
dent
sofacount
ryandtheresi
dent
sofothercount
ries.

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC

COMPONENTSOFTHEBOPACCOUNT:
Theanal
ysi
sofBal
anceofPay
mentcanbedonei
nter
msofi
tsmaj
orsub-
div
isi
ons:
(
a)Cur
rentA/
c
(
b)Capi
tal
A/c
(
a)Cur
rentA/
c:I
tcanbebr
okendowni
ntot
wopar
tsv
iz.
,Bal
anceoft
rade&Bal
anceofSer
vices.
Bal
anceoft
radedeal
sonl
ywi
thexpor
t&i
mpor
t,mer
chandi
se(
ori
nvi
sibl
eit
ems)
;Iti
snotnecessar
y
t
hatbal
anceoft
radeal
way
sbal
ances;mor
eof
ten,i
twi
l
lei
thershowasur
plusoradef
ici
t.Asur
plus
ont
radebal
ancemaybemat
chedwi
thasur
plusoradef
ici
tonser
vicebal
ance.I
fthesur
pluson
ser
vicebal
anceequal
sthedef
ici
tont
radebal
ance,
thecur
rentA/
cshowanetbal
ance.
(
b)Capi
talA/
c:Si
mil
arl
y,t
hecapi
tala/
crepr
esent
str
ansf
erofmoneyandot
hercapi
tali
tems&
changesi
nthecount
ry’
sfor
eignasset
s&l
i
abi
l
iti
esr
esul
ti
ngf
rom t
het
ransact
ionsr
ecor
dedi
nthe
cur
renta/
c.I
tincl
udesl
oans,
inv
est
ment
s,i
ssueofbonds,
etc.
*
Reser
veA/
c:Thedef
ici
tont
hecur
renta/
corcapi
talt
ransact
ionscanbef
inancedbyext
ernal
assi
stance,
drawi
ngsf
rom I
MF&al
l
ocat
ionsoft
heSDR’
s.
Bal
anceofPay
menti
saDoubl
eent
ryA/
c.hencei
tal
way
sbal
ances.Ther
emaybedef
ici
torsur
plusi
n
cur
rentaccountandcapi
tala/
coranysubaccount
.Butf
inaladj
ust
menti
smadebyi
ncr
easi
ngor
decr
easi
ngf
orexr
eser
ves.
HenceBOPasawhol
eal
way
sbal
ances.
{
X–M >0=Cur
rentA/
cSur
pluse.
g.Chi
na}
{
X–M <0=Cur
rentA/
cDef
ici
te.
g.I
ndi
a}
{
X–M =0=Cur
rentA/
cBal
ance}
*
**FACTS*
**
 USAhasmaxi
mum def
ici
tagai
nstChi
na.
 25%ofGl
obal
GDPcomesf
rom USA
 NoI
ndi
ancompanymanuf
act
uresai
rcr
aft
.Weonl
yimpor
t
BOI
NG=Amer
icanCompany
AI
RBUS=Eur
opeanCompany

BALANCEOFTRADE:
-
Balanceoft rade(BOT)isdescr i
bedast hediff
erencebet weenthev al
ueofmer chandise(goods)
exportsandt heval
ueofmer chandi
seimports.I
tcanal sobedescr i
bed asthe‘goodsbalance’orthe
“balanceofmer chandi
setrade”.Thi
sbalanceisr efl
ectst hecountry’
scapaci
tytopr ovi
demat erial
requirementsofthepopulati
on.Anact i
ve(positi
ve)or‘ passive’(
negati
ve)BOTr epr
esentsthenet
tradeintangi
bles.

FACTORSAFFECTI
NGBALANCEOFTRADE:
1)Thecostofproducti
on)l
and.Labour
,capi
tal
,taxes,i
ncent
ives,et
c.)i
ntheexpor
ti
ngeconomy
vi
s-à-
vi
sthoseintheimpor
ti
ngeconomy;

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
2)Thecostandav
ail
abi
l
ityofr
awmat
eri
als,
int
ermedi
ategoodsandot
heri
nput
s;
3)Exchanger
atemov
ement
s;
4)Mul
ti
lat
eral
,bi
l
ater
alanduni
l
ater
alt
axesorr
est
ri
cti
onsont
rade;
5)Non-
tar
if
fbar
ri
erssuchasenv
ironment
al,
heal
thorsaf
etyst
andar
ds;
6)Theav
ail
abi
l
ityofadequat
efor
eignexchangewi
thwhi
cht
opayf
ori
mpor
ts;
and
7)Pr
icesofgoodsmanuf
act
uredathome(
inf
luencedbyt
her
esponsi
venessofsuppl
y)

BALANCEOFVI
SIBLETRADE:
-
Bal anceofv isi
bletr
adeisalsoknownasbal anceofmer chandi
setr
ade,anditcoversal
ltr
ansacti
ons
rel
at edt omov ablegoodswher etheownership ofgoodschangesf rom r
esidentstonon-r
esi
dents
(expor t
s)andf rom non-
resi
dentstoresi
dent
s( i
mports)
.Thev al
uat
ionshoul
dbeonFOBbasi ssothat
i
nt ernationalfrei
ghtandinsurancearetr
eat
edasdi sti
nctservi
cesandnotmer gedwi t
hthevalueof
goodst hemselves.
Exportval
uedonFOBbasi sarethecredi
tentri
es.Dataforthesei temsar eobtainedfrom thevari
ous
for
mst hattheexpor t
ers havef i
l
landsubmi tt
ed tothedesi gnatedaut hor
it
ies.ImportsvalueatCIF
arethedebitent
ries.Valuat
ionCIFthoughinappri
atebetweent hetotalofdebit
sandcr edit
sappearsin
the“NET”coloum.Thi sisthe‘balanceofvisi
bletr
ade.’I
nv i
sibletradeifthereceipt
sf rom expor
tsof
goods,wedescribedt hesit
uati
onasoneofzer o’goodsbalance.’Balance.
Depending on whetherwe hav
erecei
ptsexceedi
ng pay
ment
s(posi
ti
ve)orpay
ment
sexceedi
ng
recei
pts(negat
ive)
.

BALANCEOFI
NVI
SIBLETRADE:
-
Justasacountr
yexpor t
sgoodsandimportsgoodsacount r
yalsoexpor
tsandimport
swhatar
ecal
l
ed
asservices(
inv
isibl
es).Theser
vicesaccountrecor
dsal ltheserv
icesexpor
tedandimport
edbya
countr
yinayear.Unl
ikegoodswhichar
etangibl
eorvisi
bleservi
cesarei
ntangi
ble.
Accordi
nglyservi
cestransacti
onsareregar
dedasi nvisi
blei
temsintheBOP.Theyareinvi
sibl
einthe
sensethatserv
icesreceipt
sandpay mentsarenotr ecor
dedattheportofent
ryorexi
stasinthecase
wit
hthemer chandisei
mpor tsandexport
srecei
pts.
UNI
LATERALTRANSFERS:
I
ti saneconomi ctransacti
onsbetweenr esi
dentsoftwonat i
onsov erast i
pulat
edperi
odoftime,
usuall
yacalanderyear.Typi
cal
ly
,thesetransact
ionconsistofgi
ftexchanges,pensi
onpayment
sand
theli
ke,butt
heycanencompassot hergoodsandservicesaswell
.

ERRORSANDOMI
SSI
ONS:
Error
sandomi ssi
onsisa“stat
ist
icalresi
due.”I
tisusedtobal ancet hestat
ement
sbeacausesin
pract
iceiti
snotpossibl
etohavecompleteandaccuratedat
af orrepor
tedit
ems andbeacauset
hese
cannot,t
heref
oreordi
nar
il
yhaveequalentri
esfordebi
tsandcredit
s.

OVERALLBALANCE:
-
Theov eral
lBOPi sdeter
minedbycomput ingthecumul ati
vebalanceofpay mentsincl
udi
ngthecurrent
account,capi
talaccount,andt hestati
sti
caldi scr
epancies.Theov er
allBOPissignifi
cantbecauseit
i
ndicatesdiscrepanci
es.Theov er
allBOPi ssignif
icantbecausei ti
ndicat
esacount ry’
sint
ernati
onal
paymentgapt hatmustbef inancedbyt hegovernment s’
soffi
cial
reserv
et r
ansacti
ons.
I
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TYBAF SEM V JMPC

ACCOMMODATI NG (
BELOW THELI
NEI
NBOP)ANDAUTONOMUS(
ABOVETHELI
NEI
NBOP)
FLOW CONCEPT:
Anautonomustr
ansacti
onisat ransacti
onundert
ackeni
nthenormalcour
seofbusi
nessi
nresponse
tothegivenenvi
ronmentofpr i
cel evel
s,exchangerat
es,i
nter
estrat
esetc.i
tdoesnottakeinto
accountt
heequi
l
ibri
um aspectoftheBOP.

THEBOPALWAYSBALANCES:
WhethertheBOPi sinsurplusordefi
citdependsont hebalanceoft heautonomousi t
ems.TheBOPi s
sai
dt obeinsurplusifautonomousr ecei
ptsaregreaterthantheaut onomouspay mentsandi ndefi
cit
i
fv i
cev er
sa.Autonomoust r
ansacti
onar eviewedas‘ abovet heline’.Eff
ecti
velyal
ltheel ementsof
curr
encyflowscapt uredinthebalance ofpay ment sgetr ecordedi nei
therthe currentorcapital
accountwhicht
oget herconsti
tut
ethe‘autonomoustransacti
ons’.

3.EVOLUTI
ONOFI
NTERNATI
ONALMONETARYSYSTEM
Theint
ernati
onalmonet arysystem i
sthef ramewor kwithi
nwhichcount r
iesborr
ow,lend,
buy,sel
land
makepay mentsacr esspol i
ticalfr
ontiers.Thef ramewor kdeter
mi neshow balanceofpay ments
di
sequi
li
brium i
sresolved.Numer ousframewor ksarepossi
bleandmosthav ebeentri
edinoneforms
oranot
her.Theint
ernationalmonetarysy stem canbebroadlycl
assi
fiedasbelow:

I
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ONALFI
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TYBAF SEM V JMPC

PREBWSPERI
OD:
GOLDSTANDARDSYSTEM:
Gol
dSt
andar
dSy
stem (
1870-
1914)
:
The gold st
andard was t
he fir
stuniversal
lyimplement ed sy
stem forv al
uing currenci
es.Itwas
promotedbybanksofEngl and.I
twasanexchanger at
ei nwhichgoldcoinswer efreel
ymi nt
edbyt he
centr
albankofacount r
y.Thegol dst
andar dwasadopt edbyUKi n1821,germanyi n1875,francein
1878,usin1879,andRussi ain1897.Thegol dst
andardsy stem has3v ar
iants:
1)t hegoldspecie2)
thegoldexchangeand3)thegoldbull
ion.
Thegoldstandardisasystem inwhichint
ernati
onalcurr
enci
esareti
edtoaspeci fi
camountofgol d.
Almostfr
om t hedawnofthehi st
orygoldwasconsi der
edast hemedium ofexchangebecausegold
wasdurable,stor
abl
e,por
tableandeasil
ydivisi
ble.
thegoldst
andar
d,goldjwel
lerycoul
dbeconv er
ted
i
ntogoldcoinsandusedasl egalt
ender
.
Underrelati
vegoldstandard,goldwasconsider
edast hecur
rencyst
andar
dandeachcur r
encywas
convert
ibl
eintogoldasaspeci f
iedr
ate.Thusexchangerat
ebet
wenntwocurrencywasdet
ermi
nedby
thei
rrel
ativ
econverti
blerat
es.
Theoff
ici
alcent
ralexchanger
atebet
weent
wocur
renci
esr
emai
nedconst
antsi
ncet
heof
fi
cialpr
ices
ofgol
dwasconstant

GOLDEXCHANGESTANDATD(1925-
1933)
Anot herversi
onofgol dst andardsystem wast hegol dexchangest andard,wher
eonecount ry’
s
currencywasexpr essed intermsofanothercountr
y’scurrency
,whichwasongol dbull
ionstandar
d.
Theadv antagewast hatonlythecount
ryongoldbull
ionstandardhadtomai ntai
ngoldreserv
eandt he
othercountryneededtosimplyholdreserv
esofthecurrencytowhichit
scur r
encywaslinked.
Underthissystem,thecurr
encyi nusewasmadeofgol dorwasconv er
ti
bleint
ogoldataf i
xedrat
e.
Thev al
ueofthecurrencyunitwasdefinedintermsofcert
ainwei
ghtofgold,t
hatis,
somanygr ai
nsof
goldtotherupee,thedoll
ar,thepound,etc.thecent
ralbankofthecountrywasalwaysreadytobuy
andsellgoldatt hespecifiedpr i
ce.Ther ateatwhichthestandar
dsmoneyoft hecountr
ywas
convert
ibl
eintogoldwascalledthemintpri
ceofgold.

FEATURESOFGOLDSTANDARDSSYSTEM:
1)Eachcountr
ywasr equir
edtoestabl
i
shacent
ralbankwi
thanexcl
usi
veaut
hor
it
ytopr
intand
i
ssuethei
rrespect
ivecurr
encynot
es.
2)Thecount
ri
esgol
dreser
veswer
erequi
redt
obei
ncust
odyofcent
ral
bank.
3)Eachcentr
albankwasrequi
red t
o announceanof f
ici
alpri
ceofgold and t
o pr
ovi
dean
i
rrev
ocabl
eguar
anteet
obuyandsel
lunli
mitedquant
it
yofgoldatof
fi
cial
pri
ce.
4)Eachcur
rencynot ewasrequir
edtocontai
nani
rr
evocabl
epr
omi
set
oredeem t
henot
eon
demandagainstspeci
fi
edquant
it
yofgol
d.
5)Thetot
alval
ueofcurrencynotesinci
rcul
ati
onwasr
equir
edtobel
imi
tedt
otheval
ueofgold
wit
hthecentr
albank.Theref
orether
e wasa1:1rel
ati
onbet
weengol
dwit
hcent
ralbankand
moneysuppl
yincir
culat
ion.

ADVANTAGESOFGOLDSTANDARDS:
-
1)I
tisv
eryeasysy
stem t
oimpl
ementandoper
ate.
2)I
tpr
ov i
dedf
ull
ysecur
edpay
mentandset
tl
ementsy
stem t
hrought
ransf
erofgol
dfr
om def
ici
t
t
osurpl
uscount
ry.
3)I
tpr
ovi
dedf
orav
eryhi
ghl
evel
ofst
abi
l
ityi
nexchanger
ateswhi
chpr
omot
edi
nter
nat
ional
trade

I
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ONALFI
NANCE
TYBAF SEM V JMPC
andi
nvest
ment
.
4)I
tprov
idedaninbuil
dmechani
sm f
orachi
evi
ngequi
l
ibr
ium i
nani
nter
nat
ionalt
radecal
l
ed
“
pri
cespeci
esadj
ust
ment
smechani
sm”(PASM)

DI
SADVANTAGEOFGOLDSTANDARD:
1)I
tdidnotpr
ovi
def
orr
evi
sionofgol
dpr
icei
nkeepi
ngwi
tht
hei
ncr
easi
ngmanuf
act
uri
ngcostof
gol
d.
2)Itwasav er
yinf
lexi
blesystem duetowhichitwasdi
ffi
cul
ttoadjustmoneysuppl
ydur
ing
economystr
essi
nsituat
ionsuchasnatur
aldi
sast
er,
war
,economydepressi
onet
c.
3)PSAM wasi
nef
fect
ivei
nsi
tuat
ionwher
eacount
ryhadr
ecur
ri
ngt
radedef
ici
t.
4)I
tcontri
but
ed torecessi
ons due to whi
ch def
ici
tcount
ri
es suf
fer
ed f
rom l
owerl
ower
i
nvest
mentsandemploymentoppor
tuni
ti
es.

BRETTONWOODSSYSTEM:
Becauseoft hebreakdownofgol dstandar
dsy stem,thewor l
dmonet ar
ysystem wasinav erychaoti
c
posit
ion.Hencet hepol icymakerofUS,UKandot heralliesinit
iatedwi ththeprocessofr evi
vi
ngand
rest
ructuringthewor ldmonet arysyst
em asitwasur gentlyrequiredtor evamptheeconomi esaft
erthe
destructi
oncausedbywor l
dwarI I
.Henceinjuly1944,r epresentati
vesof44maj oreconomiesmetat
bret
tenwoods,at owni nHampshi reinUS tof i
nali
zeanew sy stem forcurrencyvalueandnew
i
nternationalf i
nancialar chit
ectur
et o be implement ed dur i
ng t his conf
erence,two mul ti
l
ateral
i
nsti
tutionwer eestablished:
FEATURESOFBWS:
1)UsdAsUniver
salReserv
eAsset
:-TheUSDWasGi venTheStat
usOfUni
versalReser
veAssetIn
Addi
ti
onToGol d.Thi
sMeansCountr
iesCoul
dIssueCurr
encyNot
esAgainstAReserveBasket
Cont
aini
ngBothGoldAndUsd.
2)Fixi
ngVal
ueOfGoldInUsd:
-TheVal
ueOfUSDWasFi
xedAt1OunceGol
dIsEqualToUSD35
(1OzGold=Usd35)
3)Uncondi
ti
onalGuar
ant
eeByUsFeder alReserveBank:UsFeder
alReser
veBankProvidedAn
Uncondi
ti
onalGuar
ant
eeToBuyAndSel lUnli
mitedQuant
it
yOfGoldAtTheFixedPr
ices.Thi
s
WasKnownAsGol dConv
ert
ibi
l
ityCl
ause.
4)PeggingAndPar
it
yConcept
:NoOtherCount
ryWasRequi
redToVal
ueI
tsCur
rencyI
nTer
msOf
Gold.TheVal
ueOfEachCurr
encyWasFoxedAgai
nstUSD.
5)ParValueMechani
sm:Effect
ivel
yAThreeWayRel
ati
onshi
pWasCr
eat
edBet
weenGol
d,Usd
AndIndiv
idual
Cur
rency
.ThisWasCal
ledParVal
ueMechani
sm.
6)Pari
tyRat
eSuppor
tPoints:Curr
encyRatesWereAll
owedToMoveI
nANar r
owRangeInBoth
TheSidesOfPari
tyRatesUpTo+/ -1%.TheExt
remePoint
sOfVar
iat
ionZoneWer
eCalled
Suppor
tPoint
sOrI
nter
ventionPoint
s.
7)CentralBankPar ti
cipat
ion:Exchange Rat
es Were Expect
ed To Be Contr
oll
ed Wi
thi
n The
Vari
ation Zone Through Int
erventi
on.Thi
s ConceptMeans The CentralBank Pr
oacti
vel
y
Part
icipat
esInDomest icForei
gnExchangeMarketByBuy i
ngAndSell
ing Forei
gnCur
rencySo
AsToI nfl
uenceTheExchangeRat e.
8)I
MF Assistance:
IMF Pr
ovi
ded The Under
taki
ng To Fi
nanci
all
yAssi
stAl
lMember
s Fpor
I
nter
vent
ion.

I
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ONALFI
NANCE
TYBAF SEM V JMPC
9)Curr
ency Dev
alut
ion Li
mit
:In Case OfStr
uctur
alImbalance I
n Count
ri
es BOP The I
MF
Undert
ookToHelpMembersToDev al
ueThei
rCurr
encyApproxi
matel
y.
10)I
nter
nat
ionalVechi
cleCurrency
:-Int
ernati
onalPay
ment sCoul
d BeMadeEitherInGol
dOrI
n
USDoll
ars.Of
fi
cial
l
yDollarBecameAnInter
nati
onalReserv
eCurr
encyAndVehicl
e

ADVANTAGESOFBWS:
1)TheadvantageofBret
tonwoodssy
stem wast
hatt
henumbercount
ri
eshadtomaint
ainonl
y
ther
eserv
eofdollar
swhichhel
pedt
hem i
nover
comi
ngthepr
obl
em ofmai
ntai
ngol
dreserv
e.
2)Thecount
ri
escoul
dal
soear
nint
erestont
hei
rdol
l
arr
eser
veunl
i
kei
nthegol
dreser
vesy
stem.
3)TheBr
ett
onwoodssy
stem soughtt
osecur
etheadv
ant
ageoft
hegol
dst
andar
dwi
thouti
ts
adv
ant
age.
4)The gold st
andar
di mposed monetar
y di
sci
pli
ne on the countr
ies i
nvol
ved.Any count
ry
exper
ienci
nginfl
ati
onwoul dhavelostgol
dandt her
eforewoul dhavehadadecr eei nthe
amountofmoneyav ai
labl
etospend.
5)Thegold st
andard mai
ntai
ned f
ixed exchangerat
es.Fixed exchanger
ateswer
eseenas
desi
rabl
ebecausetheyr
educedt
her i
skoft r
adingwi
thot
hercountries.
6)Theuni
tedstateshademergedfrom wor
ldIIasthestr
ongesteconomyinthewor
ld.Unl
i
ke
Eur
opeandjapan,t
heuni
tedstat
eshadexper
iencedver
yli
tt
ledest
ructi
ononi
tsownl
and.
7)Thebenef
it
softheBr
ett
onwoodssy
stem wereasigni
ficantexpansi
onofi
nter
nat
ionalt
rade
andi
nvest
mentaswel
lasanot
abl
emacroeconomi
cperformance.

DI
SADVANTAGEOFBWS:
1)Weaknessesoft
hesy st
em wer
ecapit
almov ementrest
ri
cti
onst
hroughouttheBrett
onwoods
year
s,gover
nmentneededt
oli
mitcapi
tal
flowsinordert
ohaveacert
ainextentofcont
rol
2)Anothernegat
iveaspectwasthepressureBret
tonwoodsputontheuni
tedstat
es,whi
chwas
notwill
ingtosupplytheamountofgol dtherestoftheworl
ddemanded,becaui
sethegol
d
reser
vedecli
nedanderodedtheconfi
danceinthedol
lar
.
3)Ther
ewasnotenoughgoldav
ail
abl
etoall
owpeopl
etobuyallt
henewgoodsandservi
cet
hat
coul
dbepr
oduced.
andthegol
dthatwasavai
l
abl
ewasmainl
ylocat
edi
nthesovi
etuni
on.
4)ThesuccessofBret
tonwoodssy
stem wasessent
ial
lybasedontheuncondit
ionalsuppl
yof
doll
arsbyUS.Howev
erUScoul
dnotdoitforal
ongtimeasitwassti
l
lunderthesytem ofgol
d
standar
d.

REASONFORFAI
LUREOFBWS:
1)TheBWSwasmer el
yav
ari
antofgol
dexchangesy
stem andassuchi
twasal
soconst
rai
nedby
avai
l
abi
l
ityofgol
d.
2)Asi
nthecaseofgol
dst
andar
d,t
hissy
stem al
sodi
shnotpr
ovi
dedf
oranyr
evi
sioni
nthepr
ice

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
ofgol
d.Duet
oinf
lat
ion,
itbecameuneconomi
cal
topr
oducegol
d.
3)Thesyst
em di
dnotpr
ovi
deforanyreval
uati
onofpart
iesdurt
owhi chsur
pluscount
ri
essuchas
westGer
manyandJapancont
inuedtoenjoyexpor
tcompeti
ti
venessagai
nsttheUSeconomy.
4)Thesystem di
dnotprov
ideforar
evisi
oninthepri
ceofgoldint
ermsofUSD.Duet
othi
s,i
twas
notpossibl
etodev
aluetheUSdol
larcont
inuedtr
adedefi
cit
.
5)Ever
ymembercount ryhadtheri
ghtt
oaccumulatedoll
arr
eser
veandf
ort
hatobv
iousl
ythey
hadtoconsi
stent
lyhaveaposi
ti
vebal
anceoft
radewit
hUS.
6)ThesuccessofBr
etonwoodssystem wasessenti
all
ybasedont
heuncondit
ionalsuppl
yof
dol
l
arsbyUS.Howeev erUScoul
dnotdoitf
oral ongtimeasi
twasst
il
lunderthesystem of
gol
dstandar
ds.
7)Theconti
nuedt r
adedefi
citoft
heUScr eat
edanov er
-suppl
yofUSD i
nthei
nter
nat
ional
fi
nanci
almarket
swhichr
educedt
heaccept
abi
li
tyoft
heUSD.

FI
XEDEXCHANGERATES:
Thef i
xedexchangerateisthesy st
em inwhichthemonet aryauthorit
yf i
xesthev al
ueoft hedomest i
c
curr
encyt oaforei
gn currencyort oabasketofcur r
encies.Itisalsocal l
edashar dpegorr i
gidpeg
andwhenonecur r
encyi speggedt oaf orei
gncurrencyandi tsv alueissetatr egularint
erval
s
accordi
ngt osomepr esetcrit
eri
aoft heaverageexchanger ateovert heprevi
ousf ew mont hsinthe
for
eignexchangemar ketwhi chmakest hesy st
em mor er esponsivet othemar ketvalueoft he
domest i
ccurr
encythi
ssy stem ofdeter
mini
ngt heva;
ueofcur rencyiscalledascrawli
ngpegsy st
em.

ADVANTAGEOFFI
XEDEXCHANGERATESYSTEM:
1)Cont
ributetot hestrengt
hofthedomesti
ccurrency
:sincether
eisnopani
cofcur r
enci
es
fl
uct
uations,
fixedexchanger
atecr
eat
esassur
anceinthestr
engt
hoft
hedomest
iccur
rency
2)Contr
ibuti
ng toint
ernat
ionaleconomicintegr
ati
on:fi
xed exchanger
ateisapar tofmore
uni
versalargumentfornat i
onaleconomic poli
ciescont
ribut
ingtoint
ernat
ionaleconomi
c
i
ntegr
ation.
3)Cont
rolofi
nfl
ati
on:
ascompar
edtofloati
ngsyst
em,
therei
scontr
oloninf
lat
ionascent
ral
bank
cont
rol
sthemoneysuppl
yandther
eforekeepst
hei
nfl
ati
onundercont
rol
.
4)El
iminati
on ofdepreci
ati
on ofcurr
enci
es:underthe fi
xed exchange system t
hereis no
unheal
thypract
iceofdepreci
ati
onofcur
renci
estocapt
ureint
ernati
onaltradeli
kethefl
oat
ing
syst
em.
5)Encouragelong-t
erm capit
alflows:since uncer
taint
yandriskofexchanger
ateofexchange
rat
esv ol
ati
l
ityisrar
ei ncaseoffixedexchangeratesvol
ati
l
ityi
srar
eincaseoffi
xedexchange
rat
e,henceitencourage-
longterm capit
alf
lows.
6)Encour
ages i
nter
nat
ionalt
rade:commi
tmentt
o a si
ngl
efi
xed exchange r
ate encour
age

I
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ONALFI
NANCE
TYBAF SEM V JMPC
i
nter
nat
ional
tradebymaki
ngpr
icesofgoodsconcer
nedi
ntr
ademor
epr
edi
ctabl
e.
7)Monit
orresponsi
blefi
nanci
alpol
ici
es:f
ixed exchange r
ate ser
ve asa commentat
orand
i
mposesadi sci
pli
neonmonetar
yauthor
iti
estomoni torr
esponsibl
efi
nanci
alpol
i
cieswi
thi
n
count
ri
es.
8)Nofearofunfavourabl
eef f
ectofspecul
ati
on:si
ncether
eisno-
fearofcur
renciesf
luct
uati
ons,
fi
xedexchangeratecreatesconfi
danceinthest
rengt
h ofthedomesti
ccurrencyandther
eis
nofearofadver
seef f
ectofspecul
ati
onontheexchangerat
e.
9)Rel
ati
vel
ysimplersystem:i
tisarel
ati
vel
ysimpl
ersy
stem andcanber
eli
eduponast
her
ear
e
nofr
equentf
luctuat
ionsint
heexchanger
ate.
10)Compar at
ivel
ymorest
abl
e:t
heexchanger
atesr
emai
ncompar
ati
vel
ymor
est
abl
ethant
he
fl
exi
bleexchangerat
e

DI
SADVANTAGEOFFI
XEDEXCHANGERATESYSTEM:
1)Af
fectsdomest
iceconomicst
abi
lit
y:fi
xedexchangeratepossi
blywi
l
lachi
eveexchanger
ate
st
abil
i
tybutatt
hecostofdomest
iceconomicstabi
li
ty.
2)Restr
ict
iononmonetar
ypol
icyf
ormulati
on:monet
aryaut
hor
it
iesl
oset
hef
reedom ofmonet
ary
pol
icyformul
ati
ont
opreser
veexchangerat
estabi
l
ity
.
3)Managingforei
gnexchangereser
ve:t
hecentr
albankmayhav
etomai
ntai
nadequat
ereser
veof
t
heforeigncurr
encyeveryt
imeleadi
ngtoidl
eresour
ces.
4)Mi
sall
ocati
on ofresour
ces:fi
xed exchange r
ate syst
em need di
ff
icul
texchange cont
rol
mechani
sm whichmayleadtomisal
locat
ionofresour
ces.
5)I
nter
nat
ionaltradenotpr omoted byfi
xed r
ates:theargumentthatfixed exchangerates
pr
omoteinter
national
tradei
snotsuppor
tedbyhist
ori
cal
factsofi
nter
-warorpost-warper
iod.
6)I
nter
nati
onali
nvest
mentnotpromot
edbyf i
xedrates:thear
gumentthatl
ong-
ter
mint
ernat
ional
i
nvest
mentsareencour
agedunderf
ixedexchangeratesyst
em i
snotvali
d.
7)Fi
xedratesnotnecessar
yforcurr
encyar
ea:thisstabl
eexchanger
atesarenotnecessar
yfor
anysyst
em ofcurr
encyareas.
thest
erl
i
ngblockfuncti
onedsmoothl
yduri
ngthethi
rt
iesinspi
te
ofthefl
uctuat
ingr
atesofthemembercountr
ies.
8)Specul
ati
onnotprevent
edbyf i
xedrates:t
hemai nweaknessoft hestabl
eexchanger
ate
syst
em i
sthati
nspit
eofthest
ri
ctexchangecont
rol
,cur
rencyspecul
ati
oni
sencour
aged.

9)Regul
ari
nter
vent
ionoft
hecent
ralbank:t
hissy
stem r
equi
resr
egul
ari
nter
vent
ionofcent
ral
banktostabi
l
izether
ate;howev
er,under
lyi
ngpr
obl
emsoft
heweakeconomycoul
dnotbe
sol
vedthr
oughthi
smethod.

FLUCTUATI
NGEXCHANGERATES:
Fi
xedexchanger at
eregimeisrarel
ypracti
cedbyanycountryatpresent
.Al
mostal
lcountr
ies,at
present
,haveadoptedsomef ormsoff lexi
bleexchanger
atepolicy
.Inspi
teofmakingsev eral
attempts,whenthevar
iousway sofst
abili
zi
ngtheexchangerateswentfut
il
e,I
MFproposedt he
fl
exibl
eexchangerat
esystem i
n1978.
Thesecondamendmenti
nIMFarti
clesanditprovi
dedthemonet
aryauthor
it
iest
oint
roduceanew
exchangerat
esyst
em whi
chshoul
dbei ndepentedi.
ewhichi
snotbasedongoldval
uati
on.

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
Whentheexchangerat
eofacountryi
sdeter
mi nedbythemarketfor
cesi.
ethedemandandsuppl
y
oft
hecurr
ency,i
tiscal
ledasf
loat
ingorf
lexi
bleexchanger
ate.Iti
scall
edasfr
eefl
oatorcl
enfl
oat
.

ADVANTAGEOFFLOATI
NGEXCHANGERATE:
1)Autonomyofmonetar
yauthori
ti
es:aut
onomyofmonet ar
yaut
hori
tiespr
eser
veunderf
loat
ing
exchanger
atesy
stem ast
herei
snot ar
getexchanger
atet
omaint
ain.
2)Boostinternat
ionall
iqui
dit
y:t
hesystem offl
exi
bleexchangerat
eseradi
cat
edtheneedfor
off
ici
alforei
gnexchangereser
ve,
ift
heindi
vi
dualgover
nmentsdonotemptyst
abi
l
izat
ionf
unds
toi
nfluencetherate.
3)Equil
i
bri
um provi
dert o balanceofpayment :fl
uct
uati
oni ntheexchanger atecanpr ovide
automat
icadjust
ment sf orcount
ri
eswi thal ar
gebalanceofpayment sdef i
cit
.Balanceof
paymentson curr
entaccountdi sequil
i
brium can aut
omatical
l
yber estored t
o equil
ibr
ium
fl
oati
ngexchanger at
er egimeandt hescarci
tyorsurplusofanycurrencyeli
mi nat
edunder
fl
oati
ngexchangerateregime.
4)Flexi
blemonetar
ypoli
cy:fl
oati
ngexchangeratesgivesthegov ernment
/monetaryaut
hor
it
ies’
fl
exibi
li
tyi
ndetermini
ngint
erestRtes.Thi
sisbecausei nt
erestratesdonothavetobesetto
keepthevalueoft
heexchangeratewithi
npredeter
mi nedbands.
5)I
mprovementi
ncurrentaccountposi
ti
ons:thissyst
em pr
ovidesforanautomati
cmechani
sm
t
odealwit
hcountr
y’scurr
entaccountdefi
cit
swilll
eadt
ofallint
hev al
ueofcur
rencywhi
chwil
l
makei
mportscost
li
erandexportscheaper
.
6)Marketfor
cesofdemandandsuppl
y:underthefl
exi
bleexchangerat
esyst
em t
hef
orei
gn
exchanger
atesar
edet
ermi
nedbyt
hemarketf
orcesofdemandandsuppl
y.
7)Opt
imum ut
il
izi
ngofmonetaryr
esources;f
lexi
bleexchangerat
eenablesquickeradj
ust
ment
s
i
ntherat
esdependi
nguponthechangesintheeconomicfact
orsincount
ry.
8)Prot
ects domesti
c economy:a fl
uctuat
ing exchange r at
e syt
em protectsthe domest
ic
economyf r
om t
heshocksproducedbythetur
moi lgener
atedinot
hercount
ries.
9)Refl
ect
st hetrueposit
ion ofa country
:itr
efl
ect
st het r
uepositi
on ofa countryasthe
fl
uct
uati
oni nt
heexchangerateiscausedbyt
hechangesint hemacro-
economi
cf act
oesand
i
sdeterminedbyt
hemar ketfor
cesofdemandandsupplyofthecur
rency
.
10)suppor
tpl anned economic dev
elopment
:t he f
lexi
ble exchange r
ate sy
stem pr
omot
es
economicdevelopmentandhel
pstoachi
evefull
employmentinthecountr
y.

DI
SADVANTAGEOFFLOATI
NGEXCHANGERATE:
1)I
ncreasesexchanger at
ev ol
ati
l
ity:marketfor
cesmayfai
ltoresov
etheappropri
ateexchange
rat
eandhencef l
oati
ngexchanger at
eregimemaynotprovi
dethedesi
redr
esultandmayal so
gui
det omisal
locati
onofresources.
2)Incr
easestheexchanger
ateri
sk:unl
esssoundhedgi
ngmechani
sm i
sther
e,t
hei
mpor
ter
sand
export
ersmayfaceuncer
tai
nexchangerat
erisk.
3)I
nfl
ati
onar
ypr
essur
es:f
lexi
bleexchanger
atesy
stem i
nvol
vesgr
eat
erchanceofi
nfl
ati
onar
y

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
ef
fectofexchangedepr
eci
ati
onondomest
icpr
icel
evel
ofacount
ry.I
nfl
ati
onar
yri
se.
4)Makest heeconomymor ev ul
nerabl
e:i
tisunfeasi
bletohaveanexchanger
atesystem wi
thout
off
ici
alinter
vent
ion.Governmentmaynoti nter
vene,howeverdomesti
cmonetarypoli
cyand
fi
scalpoli
cywoulddefi
nit
elyinf
luencet
heexchanger at
e.
5)Monetarydi
sorderi
ntheeconomy:thi
ssyst
em t
houghhasauto-mechanism t
ocorrectcur
eent
accountdef
ici
ts,butfort
hecountri
eswheredemandforcertai
npr oduct
sisinelasti
c,huge
i
mpor t
smayl eadtoheavydefi
cit
swhi chmayinducei
nfl
ati
onandmonet ar
ydisorderinthe
economy.
6)Reducethevol
umeofi
nternat
ionaltr
ade:vol
ati
l
eexchangerat
eint
roducessi
xeabl
euncer
tai
nty
i
nexportandimpor
tpr
icesandar esul
ttoeconomi
cdev el
opment.
7)Seri
ousimpactontheeconomicstr
uctur
e:t
hesystem offl
exibl
eexchangerat
eshasser i
ous
i
mpactont heeconomicst
ruct
ureofthecompany
.Fluctuat
ingexchangerat
escausechanges
i
nt hepri
ceofimportedandexport
edgoodswhi ch,i
nt ur
n,destabi
li
zetheeconomyoft he
countr
y.
8)Speculati
ve capitalmovements:specul
ati
ve capi
talmovements caused by f
luct
uati
ng
exchanger atescausechangesinthepri
ceofimpor t
edandexpor
tedgoodswhich,inturn,
destabil
i
zet heeconomyofthecount
ry.
9)Worsenthebal
anceofpayment
sdefi
cit
;theelast
ici
tyi
nthei
nter
nat
ionalmar
ket
sistool
owf
or
exchanger
ate,
vari
ati
onst
ooperat
eeff
ectivel
yinbri
ngi
ngaboutaut
omat i
cequi
l
ibr
ium.

DI
STI
NCTI
ONBETWEENFI
XEDORFLUCTUATI
NGEXCHANGERATES.

Fi
xedexchanger
ate Fl
oat
ingexchanger
ate
Val
ueofcur
rencywasdeci
debycent
ralbank Valueofcur
rencydeci
dedbymar
ketdemand
oft
hecount
ry supply

Exchanger
ateswer
efi
xed Exchanger
ateswer
efl
exi
ble

Changes i
n exchange r
atet
ook pl
ace by Changeinexchangerateisbymar
ketact
ion
off
ici
al acti
on cal l
ed deval
uati
on or r epr
esent
edbydepreciat
ion
rev
aluat
ion

Duetostabi
li
ty,useofderi
vat
ivesandr
isk Duetov ar
iabi
l
ityinexchanger
ate,theuseof
managementsyst
em di
dnotexi
st der
ivati
onandr iskmanagementt echni
ques
i
scriti
cal

Stabi
li
tyofexchange r
ate pr
omot
ed t
rade Thewr
eisnosuchconcepti
nthi
ssy
stem
andinvest
ment

Byimpli
cati
oncentr
albankwerer
equi
redt
o Ther
ei s no mandator
y r equir
ementf
or
par
it
yratesthr
oughi
nter
vent
ion cent
ral
banktoPart
ici
patei
nmar ket
.

Val
ueofgoldwasfi
xedi
.ei
twasconsi
der
ed Val
ueofgol
disv
ari
abl
e,now consi
der
edas
afi
nanci
alcommodi
ty i
nvest
ment
scommodi
ty.

Rat
eswerecal
cul
ateasr
ati
oofgol
dcont
ent Exchange r
ates ar
e calcul
ated t
hrough a
i
n2curr
enci
es processofcrossi
ngusingv ehi
clecurrency
mechanism.

Asbasketsecur
ingt
hecur
rencycompr
ises Curr
entassetbasketsecuringissueofINR
ofgol
dandUSD cont
ainsgold,f
oreign cur
rencyasset.SDR

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
andgov
ernmentsecur
it
ies.

CURRENCYAREAS:
Inthewakeofthecol
lapseoftheBret
tonwoodsexchanger at
esy st
em,t heI
MFappoi
nted t
he
commit
teeoft
went
ythatsuggest
edf
orvari
ousopt
ionf
orexchangerat
earrangement
.
Nowaday sawi devari
etyofarr
angementsexistandcountriesadoptthemonetarysy
stem according
totheirownwhi msandf anci
es.That
’swhysomeanal y
stsar ecal
li
ngisamonet ary“
non-syst
em”de
j
ure arrangements st
ands forexchange ar
rangementa memberofI MF noti
fi
es t
ot he fund in
accordancewithart
icl
eIV,secti
on2(b)ofthef unds’
sarti
clesofagreement
-anddef acto(observed)
arr
angement s.
TheIMFsy st
em classi
fi
esexchangeratear
rangement
spri
mari
l
yonhebasi softhedegreet
owhich
theexchangerat
eisdetermi
nedbyt hemarketrat
hert
hanbyoff
ici
alact
ion,wit
hmarket-det
ermi
ned
rat
esbeingonthewholemoreflexi
ble.

EUROPEANMONETARYSYSTEM:
EMSst art
edin1979:t hedeci
sionwastakenin1978bytheGermanchancell
orandFrenchpresi
dent
.
Eur
opeanmonet arysy st
em (EMS)wasam ar r
angementestabl
ishedin“1979undertheJenkins
Eur
opeancommi ssionwheremostnat i
onsoftheEuropeanEconomi cCommuni
ty(EEC)li
nkedthei
r
cur
renciestopr
ev entl
argefl
uctuat
ionsr
elat
ivet
ooneanother
.
AllEur
opeancommuni
tycount
ri
sar
edef
act
omember
sofEMShowev
er;t
her
eisanopt
ionalel
ement
ofEMS:
Thebasi
cel
ement
soft
hear
rangementwer
e:
1)ECu:wi
ththi
sar
rangement
.Membercurrenci
esagr
eedtokeepthei
rfor
eignexchanger
ateswi
thi
n
agr
eedbandswi
thanarrowbandof+/-2.25%andawidebandof+/-
6%.
2)anexchanger
atemechani
sm (
ERM)
3)anext
ensi
onofEur
opeancr
edi
tfaci
l
iti
esand
4) t
heEuropeanmonetarycooper
ati
onfund:cr
eatedinOctober1972andal
l
ocat
esEUt
omember
s
cent
ral
banksinexchangeforgol
dandUSdollardeposi
ts.

CURRENTEXCHANGERATEARRANGEMENTS:
Int hewakeofthecollapseoftheBr et
tonwoodsexchanger at
esystem,t heIMFappoi nt
edthe
commi t
teeoftwentythatsuggestedforv ar
iousopti
onsforexchanger atearrangements.Those
suggeti
onswereapprovedatjamaciaduringFebr
uary1976answer eformallyi
ncorporatedint
othe
textoft
hesecondamendmentt ot
hearti
clesofagreementt
hatcameint
of orcefr
om apri
l 1978.
1)Fl
oat
ing-
independenceandmanaged.
2)Peggi
ngofcur
rency
.
3)Cr
awl
i
ngpeg.

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
4)Tar
get
-zonear
rangement
s.
TheIMFsy stem cl
assi
fi
esexchanger at
ear rangementsprimaril
yont hebasi
softhedegr eetowhi ch
theexchangerateisdeter
minedbyt hemar ketratherthanbyof fi
cialacti
on,wit
hmar ket-determined
rat
esbeing ont hewhol emoreflexibl
e,thesy stem dist
ingui
shamongf ourmajorcategories:hard
pegs (such as exchange arr
angement s);sof t pegs ( includi
ng conv enti
onalcurrency boar d
arr
angements,peggedexchangerateswithinhorizont
albands, crawlingpegs,
stabl
izedarrangement s,
andcrawl-
li
kearrangements.
(
1)Hardpegs:est abl
ishi
ngaf i
xedexchangerat
ebetweenonenati
onalcurrencyandanother
nati
onalcurrencyiscall
edthe‘har
dpeg’ofacurr
ency.Ahardpegi sgeneral
lyadopt
edby
countr
ies.Asperthedefact
oclassi
fi
cat
ionbyt
heI
MF,25count
ri
esfol
lowahar dpeg.Har
dpeg
comprisi
ngof
1)Ex
changear
rangement
swi
thnosepar
atel
egal
tendor(
13)
2)Cur
rencyboar
dar
rangement
s(12)

(
2)Softpeg:apeggedexchanger
ate,wit
houtastrongcommi tmentbythecent
ralbanktoall
ow
themoneysupplytovar
yasnecessar
ytomaintaini
t,iscal
l
edasoftpeg.Asoftpegisf
oll
owed
by82countr
iesaroundt
heworl
d.Softpegsconsist
ingof
1)Conv
ent
ional
peggedar
rangement
s,(
45)
2)Peggedexchanger
ateswi
thi
nhor
izont
albands,
(1)
3)Cr
awl
i
ngpegs,
(2)
4)St
abi
l
izedar
rangement
s,(
19)
5)Cr
awl
-l
ikear
rangement
s;(
15)

3)Float
ingr egi
mes:underthi
sr egi
met heexchanger ateisfl
oatedagai
nstcurr
enci
es.It
compr i
sesofmanagedf l
oat
ingandindependentf
loat
ing.Atpr
esent65count
ri
esareunder
thefl
oatingexchanger
atesyst
em.

4)Ar esi
dualcategoryot hermanagedar rangement s(
19):theseabov ement ionedcat egories
arebasedont hef lexi
bil
it
yofthear rangement sandt hewayi toperatesi npracti
ce---thatis,
thedef actor egimei sdescr i
bed,r at
hert hant hedej ureorof fi
cialdescr i
pti
onoft he
arr
angement.Ef fectiv
eFebr uary2,2009,t heclassifi
cationmet hodol ogywasr ev isedt o
all
ow forgr eaterconsi st
ency and obj ectiv
ely ofclassf i
cat
ions acr oss count r
ies and
i
mpr ovedtr
anspar ency,inthecontextoft heIMF,sbil
ateralandmul ti
l
at eral
surveil
lance.

I
NTERNATI
ONALFI
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TYBAF SEM V JMPC

4.I
NTRODUCTI
ONTOEXCHANGERATE
EXCHANGERATEQUOTATI
ONS:
Af orei
gnexchanger at
eisthepr
iceofafor
eigncurr
ency
.Af orei
gnexchangequotat
ionorquot
ei sa
statementofwill
ingnesst
obuyorsellatanannouncedrat
e.Inter
bankquotat
ionsaregi
venas“ bid”
and“ ask”
.
Abidi stheexchangerat
ei nonecur rencyatwhichadealerwi
llbuyanothercurr
ency.Anaski st
he
exchanger at
eatwhichadealerwillsellt
heothercur
rency
.Dealer
sbuyatt hebidpri
ceandsellatt
he
askprice,profi
ti
ngfr
om thespreadbet weenthebidandaskprices:bi
d<ask.Bidaskquotati
onsare
complicatedbythef
acethatthebidforonecurrencyi
stheaskforanothercur
rency.
Theexchanger atesincludetwonumbers:t
hebidandt
heoff
er.Thebid(orbuy)isthepri
ceatwhicha
bankorfinancialser
v i
cesf i
rmiswil
li
ngtobuyaspeci
fi
ccurr
ency.Theask(orofferorsell
),wi
l
li
ngto
sellt
hatcurrency.Typicall
y,t
hebidorthebuyi
salway
scheaperthanthesel
l;banksmakeapr ofi
ton
thetr
ansacti
onsf rom thatdif
fer
ence

TYPESOFFOREI
GNEXCHANGEQUOTATI
ON
1)Bidandaskpr
ice:
-inf
orei
gnexchangemarkett
her
earebuy
ersandsel
ler
s,onepar
tybuyand
onepart
ysal
e.Quotesaremadeinthefor
m ofbuyandsal
e.Buymeansbidandsalemeans
ask.
2)Dir
ectquote:dir
ectquoteal soknownaspr icequot ati
onsundert hedirectquotat
ion,t
he
var
iati
onsoftheexchangeratesar
einv
ersel
yrelat
edtot hechangeintheval
ueoft hedomesti
c
curr
ency.Whenthevalueofthedomesti
ccurr
encyrises,theexchangerat
eisfall
.
3)Forwardquot
e:f
orwardquot
eisarat
ewhi chappl
iesinfor
eignexchangeforsomet r
ansacti
ons
ofpurchaseorsaleonaspecifi
edfuturedate.Thebuy ersandsel l
eragreetodot hethe
tr
ansacti
onsonafutur
edateandtherat
ewi l
lbefixednowf ort
hetransact
ion,
irr
especti
vethe

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
r
ateont
hatf
utur
edat
e.
4)Indi
rectquot
e:i
ndir
ectquotei
salsoknownasthequanti
tyquot
ati
on.Underi
ndi
rectquot
ati
on,
theriseandfal
lofexchanger
atesar
edirect
lyr
elat
edtothechangesinval
ueofthedomestic
curr
ency
5)I
nter-bankquote:themostprofessi
onalwaytodof or
eignexchanget r
ansacti
onisinter
-bank
quote.Inthi
ssy st
em mostoftheprofessi
onalbr
okergi
v esquote,Eur
opean ter
msar eat er
m
whereont hecomput erscr
eenthetr
adingscr
eenappears.Itshowathatthenumberofunitsof
for
eigncurrencyappears.
6)Midquote:thi
squotealsoknoenasreferencerat
e.Whenconv
ert
ibi
l
ity
.Condit
ionexi
ststhen
thecent
ralbanksfol
lowsthemidquote.
itisthequot
eorpri
cewhi
chist heav
erageofthebid
andskquotorprice.
7)Spotquote:spotquot
ebasicall
yusefullwhenther
eispurchaseorsal
et akesplacei
nfor
eign
exchangeandt hepaymentorr ecei
ptsaremadeont hespot,generall
ywithinver
yshort
specif
iedper
iod,t
heni
tiscall
edasspotquot e.
8)Cr
osscurr
encyrate:whenstocksareexchangedbyusi
ngdiffer
entcurr
encywhi
charenot
of
fi
cial
cur
rencywheret
heexchangequot
eingivent
henacrosscurr
encyquot
ecanbeused.
9)Spreadquote:t
hisisal
soknownasbi d-off
erspread.I
tisaquoteatwhi chthepar
ti
cipant
swil
l
tobuyorsalegoodsorservices.Iti
sdividedindir
ectspreadandindi
rectspreadwhentheask
pri
ceisgreaterthanbi
dpricet henitisdirectspr
eadquot ebutwhent hebidpri
ceisgreat
er
thanaskpri
cetheniti
scal
ledasi ndir
ctspreadquote.

FOREXTRANSACTI
ON
I
nterbankmar ketdeal
sareconduct
edmainl
yov ert
hetel
ephone.I
ft hepri
cequot edisacceptabl
e,t
he
dealbetweent r
aderswil
lmovefurt
heri
nter
msofamountbought / sol
d,priceidenti
tyofthepart
yetc.
i
nt hei
rrespecti
vebankswil
lset
tlet
hetr
ansact
ionswit
hboththesides.Classif
icati
onofratesint
erms
ofsettl
ement.
Thedayonwhi chtheset r
ansfer
sareeffect
ediscal
l
edt
heset
tl
ementdat
eort
hev
aluedat
e.
Classi
fi
cat
ionoftr
ansact
ionsbasedonv
aluedate.
1)Cash:cashrateorreadyratei
stherat
ewhentheexchangeofcur
renci
est
akespl
aceont
he
dat
eoft hedeali
tsel
f.Ther
eisnodel
ayinpay
mentatal
l.
2)Tom:itst
andsfortomorr
owrate,whi
chi
ndi
catesthattheexchangeofcurr
enci
est
akespl
ace
onthenextwor
kingdayaft
ert
hedateoft
hedeal,
andt her
efor
erepresent
edbyT+1.
3)Spot:whentheexchangeoft
hecurrenciest
akesplaceontheseconddayaft
erthedat
eof
thedeal(
T+2)
,iti
scall
edasspotr
ate.Itappl
i
estointer
banktr
ansact
ionst
hatr
equi
redel
i
ver
y

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
onthepurchasecurrenci
eswi
thi
ntwobusi
nessday
sinexchangef
ori
mmedi
atecashpay
ment
fort
hatcurr
encies.
4)Forwar
d:thef
orwar
dratei
scontr
act
ualratebet
weenaf or
eign-exchanget
raderandt
he
tr
ader’
scl
i
entf
ordel
i
ver
yoff
orei
gncur
renci
essometi
mesi
nthefutur
e.

FACTORSAFFECTI
NGEXCHANGERATES:
1)Bal
anceofpay
ment:
sur
plusl
eadst
ost
rongercur
rency
.
2)Economi
cgr
owt
hrat
es:
high/
lowgr
owt
hrat
e.
3)Fi
scal
/monet
arypol
i
cy:
def
ici
tfi
nanci
ngl
eadst
odepr
eci
ati
onofcur
rency
.
4)I
nter
estr
ates:
cur
rencywi
thhi
gheri
nter
estwi
l
lappr
eci
atei
ntheshor
tter
m.
5)P[
oli
ti
cal
issues:
pol
i
tical
stabi
l
ityl
eadst
ost
abl
erat
es.

2)Techni
cal
Reasons:
A)Gov
ernmentCont
rol
CanLeadToUnr
eal
i
sti
cVal
ue.
B)Fr
eeFl
owOfCapi
tal
From LowerI
nter
estRat
eToHi
gherI
nter
est Rat
es.
C)Specul
ati
on:
HigherTheSpecul
ati
onHi
gherTheVol
ati
l
ityI
nRat
es

Det
ermi
nant
sOfExchangeRat
es:
1)Demandf orandsupplyofforei
gnexchange: t heforei
nexchangerat
eisdeter
minedby
demandforandsuppl
yoffor
eignexchange.Therateest
abli
shedatapoi
ntwher
edemandand
suppl
yar
eequaliscal
l
edequil
ibri
um r
ateofexchange.
2)I
nflat
ion:infl
ati
on is one of t he most important fact or
st hat af
fect t
he exchange
rat
e.t
heoret
ical
lyalowinfl
ati
onratescenar
iowil
lshowar i
singcurrencyr
ate,ast
hepurchasi
ng
powerofthecurrencywil
li
ncreaseascomparedtoot hercurrency.
3)I
nter
estrat
es:infl
ati
onandi
nter
estr
atesar
ev er
ymuchcorrel
ated.Hi
gheri
nfl
ati
onusuall
y
meanshigheri
nter
estrat
esi
naneconomy .
thecent
ralbankcheckonanymaj orcur
rency
f
luct
uat
ion.
4)Currentaccountdef
ici
ts:t
hecurr
entaccountist
hebal
anceoftr
adebetweent wocountri
es.I
t
ref
lectsallpay
menmt sandreci
ptsbet
weent het
wocountr
iesf
orgoods,ser
vices,
int
erestand
div
idents.

For
eignBankNot
eMar
ket
:
1)Nostr
oMeans“ Our
”InLati
nWor l
d.Nost
roIsAccounti
ngTermsUsedToDisti
ngui
shAn
AccountHel
dForAnot
herEnti
tyFr
om AnAccountAnot
herEnt
it
yFr
om AnAccountAnot
her

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
Enti
tyHolds.ANost
roAccountI
sOneWhichI
sHeldWit
hinAForei
gnCountr
y.TheseAccount
s
AreUti
li
sedForFaci
li
tat
ingTheSet
tl
ement
sOfFor
exAndForei
gnTrades.
2)VOSTROMeans“ Your
s”I
nLati
nWord.Thi
sAl
soAnAccountingTer
msUsedToDist
ingui
shAn
AccountHel
dForAnot
herEnt
it
yFr
om AnAccountAnot
herEnti
tyHol
ds.AVOSTROAccountI
s
OneWhi chI
sHel
dDomesti
cCountr
y
3)ALor
oAccount(“Thei
rs”)
,Whi
chI sARecordOfAnAccountHel dByASecondBankOhBehal f
OfAThi
rdParty
;ThatIs,MyRecordOfTheirAccountWithYou.I
nPract
iceThi
sIsRar
elyUsed,
TheMai
nExceptionBeingComplexSyndi
catedFinanci
ng.I
nTheSameSt yl
eAsAbove:ALoro
I
sOurAccountOfThei
rMoney ,
HeldByYou.

UNI
T-I
I

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC

5.FOREI
GNEXCHANGEMARKET
I
ntr
oduct
iont
ofor
exmar
ket
: f
orei
gnexchangemar
keti
sthemostl
argestandl
i
qui
dfi
nanci
al
mar ketintheworld.Iti
srefferedtoforei
gncurr
encymarket,wher
eapartyofacountrypurchasesome
quant i
tyofacur r
encyi nexchangeofpay ingsomequantit
yofanothercur
rency
.basi
call
ylargebanks,
speculatorofcurrency,cent
r albanks,gover
nmentandotherfi
nanci
ali
nsit
it
uesareinvol
vedi ntr
adi
ng
i
nf oreignexchangemar ket.

NEEDTOFOREI
GNEXCHANGEMARKET
Thef orei
gnexchangemar ketisacr uci
alinternat
ionalmarketandistheworld’
smostr
espect
ed
fi
nancialinsti
tut
ion.Onadai l
ybasis,thefor exexchanget r
adeswithappr
oxi
matelyt
wot
ril
l
ionus
doll
arsforeignexchanget
ransact
ionarecent
r altogl
obal commerce.
1)Prot
ecti
onofcur rency
:toaccumulat
ethereserv
egovernmentspr
otectsthecurr
encytr
adeby
thehelpoff orei
gnexchangemarket
.Itaff
ectsbyvalueofthecurrency.
anditiseasytodo
payments.Ifeconomychangesthencent
ralbankcanensur
esthereservesar
eenought oface
thesi
tuati
on.
2)Joboppor t
unit
ies:wi
tht
heincr
easeduseoft heinternet,onl
i
neforexexchangehasbecomea
prominentfeaturesi
nthef or
eign exchangemar ket.Manypeopl eern al i
ving byt
radi
ng
curr
enciesonl
ineonadail
ybasiswhichinturnincreasingthejoboppor
tunit
ies.
3)Hedgi
ngfacil
i
tator:for
exisahedgingfacil
i
t at
or.Her
eheadingmeanspr ot
ect
ingthebusi
ness
fr
om ri
sk.Itprovidesbusinessownerswi thmechanism withmechanism t
hatguardthem
agai
nsti
ncurr
inglossesintheeventt
hatvaluesofthecur
renci
est
heytradeinf
luct
uate
4)Faci
li
ti
esinter
nati
onaltr
ade:theneedforacquiri
ngcurr
encyt
otradeari
seswhent hebusi
ness
dealwit
hot hercountr
yinvestor
s.Transf
erofpur chasi
ngisfaci
li
tat
edbyf or
eignexchange
amongt hecount
ri
es.Byacquiri
ngcapit
alpurchasi
ngpowercanbeenhanced.
5)Curr
encyli
qui
dit
y:thef
orei
gnexchangemarketpr
ovidesl
i
qui
dit
yforcurr
enci
es.Li
qui
dit
yist
he
easewit
hwhichitcanconv
ertafor
eigncur
rencyi
ntoadomest
iccurr
ency.
6)Credi
tprov
isi
on:ithasafaci
li
tyofcredi
tprovisi
on.Ithel
pstoenhancethegrowt
hoffor
eign
tr
ade.Mostinvestor
sdeal
ingwithint
ernat
ionaltradedependonthecredi
tfaci
li
ti
est
hatare
advancedt
othem byfor
exmarkets.

CHARACTERI
STI
CSOFFOREI
GNEXCHANGEMARKETS:
1)Superi
orliqui
dit
y:-i
naf orexmarket,t
radersarefreetobuyandsellcurr
enciesoft
hei
rown
chhosi
ng.The super i
orl i
qui
dit
yoft he forexmar ketenabl
es t
rader
st o easi
l
yexchange
curr
encieswit
houtaffect
ingthepri
ceofthecurrer
enciesbei
ngtr
aded.
2)Str
ongmarkett
rends:for
ext
radermakemoneybyget
ti
ngaccur
atemar
ketdat
aandt
hen
anal
yzi
ngt
hedir
ecti
onthemar
ketstakes.
3)Pur
chasingpower:
-f
orei
gnexchangemar
ketai
msatt
ransf
err
ingt
hepur
chasi
ngpowerofone
cur
rencytoanot
hercurr
ency
.
4)Lowertradingcosts:
-anyonecanopenami nifor
exaccountbyinvesti
ngsmal lamountof
i
nvest
ment .Becauset hecostoftr
adingislow comparingt
ootherinvestmentopti
ons.The
l
owertradingcost
si nthefor
exmarkethasmadei tpossi
blef
orevensmallindi
vi
duali
nvest
ors
tomkakedecentpr ofi
tsfr
om for
extr
ading.Ei
thlowercostst
hepossi
blelossesareal
somuch
l
ower.
5)I
nter
medi
aryf
unct
ion:
-buy
ersandsel
l
erscomet
odobusi
nessi
nfor
eignexchangemar
ket
.So

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
i
tgi
vesapl
atf
ormf
orbusi
nessandf
orei
gnexchangemar
ketact
swor
ksasi
nter
medi
ary
.
6)Elect
roni
cmar ket
:for
eignexchangemarkettransact
iont akesplacet
hroughelect
roni
cal
l
y
l
inkednetwor
kbanks,wheret
hebuy er
sandsel
l
ercomet ogethert
odofor
eignex
change.
7)Credi
tprovisi
on:forexpr
ovi
dest hefaci
li
tyofcr
edi
tprov
isontothebuy er
si nthef
orm of
banker
’sacceptanceandl
ett
erofcredi
t.I
thel
pst
hetr
adesi
nint
ernat
ional
mar ket
.
8)Besttranspar
ency:t
heexcel
lentt
ranspencyoft
hef
orexmar
ketmeanst
hatf
orext
radershave
morecont roloverthei
rinv
estmentsandcandecidewhattodobaseont heinfor
mation
avai
lable.

FUNCTI
ONSOFFOREI
GNEXCHANGEMARKETS:

1) Tr
ansferofpur chasing power:
- f
orex al
l
ows t
ransf
err
ing the pur
chasi
ng poweror
conservat
ionofonecur rencyt
oanot
hercurr
encyi
nthemar kettocomplet
ethebusiness
betweentwocount r
ies.
2)Provi
sionofcredi
t:
-topromot
ef or
eigntr
adebet weenthecountri
es,forei
gnexchange
marketprovi
descredi
ttothet
radebothnati
onalandint
ernat
ional
.Ithelpsthet
raderto
tr
adeeasil
y.
3)Minimizi
ngf orei
gnexchangerisk:-forei
gnexchangemar ketminimi
zingtheriskoft
rade.
Forei
gnt ransacti
onaredonemi ni
mizest her
iskoft r
ade.Foreignt
ransact
ionsaredone
thr
ought hepay mentandrecei
ptsofforei
gncurrencyexchange.

PARTI
CIPANTSOFFOREI
GNEXCHANGEMARKET:
-
1)Retail
ers:basical
l
yr et
ail
ers use forei
gn exchange fort he pur
pose of oper
ati
ng t
hei
r
business.
theybuyorsal
ebyplacingorderswi
thcommer cial
banks.
2)Commer ci
albanks:-commer i
cialbanksar
edir
ect
lyi
nvol
vedinbuyi
ngandsel
l
ingofforei
gn
curr
encyinorderoftheirr
etai
lclient
sandfort
hei
rownpropr
iet
aryt
radi
ngf
ort
hepurposeof
str
uctur
ingthei
rassetsandli
abili
ti
es.
3)For
eignexchangebroker
s:-for
eignexchangebrokersplayagoodroleinforei
gnexchange
market
.Theycoll
ectnumberofquotat
ionsfordi
ff
erentcur
renci
esf
rom sev
eral
banksandthey
pl
acesmostfavorabl
equotat
iontothebanks.
4)Cent
ral
banks: cent
ralbankspl
ayagoodr ol
einthi
s.Theyf
requentl
yint
erv
enet obuy
andsal
ethecur
rencyt
hroughbidwhi
chinf
luencesther
ateatwhi
chthecurr
encyist
raded.
5)I
nvestor
sandspecul
ator
s:i
nvest
orsandspeculat
orsrequi
recurr
encyexchangewhenev
ert
hey
deali
nanyfor
eigni
nvest
mentsarei
tequt
ies,bonds,bankdeposi
te,
orrealest
ate.
6)Authori
zeddealer:atraderwhobuysandsellscur
renci
esforexample,afor
eignexchange
dealerr
atadif
ferentexchanger
ate.Thedeal
erprof
it
sf r
om t
hediff
erencei
nexchangerates
betweencur
rencies.
7)Marketmake:-amar ketmakerorliqui
dityprovi
dercanbecompanyoranindi
vi
dual
.Theyquote
both abuyand asel lpri
cei n afinanci
alintr
umentsorcommodi tyhel
di ninvent
ory
.A
designat
ed pri
mar ymar ketmaker( DPM)i sa special
i
zed mar
ketmakerappr ov
ed byan
exchangetoguar anteethattheperongwi l
ltaketheposi
tioni
napart
icul
arassi
gnedsecuri
ty,
opti
onoroptionindex.

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
8)Moneychanger :amonychangeri sapersonwhoexchanget hecoi
nsorcur r
enci
esofone
countryf
orthatofanot
her.Thi
stradei
sthoughtgener
all
ytobet heori
ginofmodernbanki
ngi
n
Europe.Thei
rwor kistochangei nemarket,mostl
argetransact
ionweredonenotbycash/
coi
nsbutbyt ransf
eror
deroffundsonthebookskeptatthelocalmoneychanger
(s)
.

ROLEOFFOREI
GNEXCHANGEBROKERSI
NFOREI
GNEXCHANGEMARKET:
1)Wor
ksonbehal f:
-for
eignexchangemar keti
sanOTCmar keti
nwhichthebrokerchar
gesafee
f
orbri
ngingtogetherabuy erandsell
er.Howeverhi
srol
eisquit
ediff
erentfr
om adealerwho
mai
nlycarr
ioesoutthetransact
ion.
2)Technicalanalysts:
-a forei
gn exchange marketbrokeralso under
tackesa good dealof
techni
calanalusis.Theyusechartstoext
rapolat
ef ut
uret
rends from pastmov
ementsont he
assumpt i
ont hatmov ementsinexchanger at
esr efl
ectmarketbeli
efsandpastpatt
ernsan
rati
onall
ypredictfor
thcomingupsanddowns.
3)Gooddealprovi
der;
-throughthef
orei
gnexchangebrokeri
tisv
eryeasyt
ogett
hebestdeali
n
exchangemarket
.Sot heactasabestdeal
provi
der
.

I
NTERNATI
ONALPAYMENTANDSETTLEMENTSYSTEM:
Int
ernati
onalpaymentandset
tl
ementsy st
em istheenti
retyofpay menti
nst
ruments,ofcommonr ul
es,
proceduresand support
ivet
echnicalofcommonr ul
es,pr ocedur
esand support
ivetechni
caland
program faci
li
ti
esf
orimplement
ationofclear
ing,t
ransferpay mentsoff
unds andexecuti
onsoff i
nal
sett
lement ,
whichi
susedtoprovi
derapaymentt oabenef i
ciary.
Thepay
ment
ssy
stemsoft
hecent
ral
bankar
e:-

 Gr
osspaper
-basedpay
ment
ssy
stem

 Gr
ossel
ect
roni
cpay
mentsy
stem

 Netset
tl
ement
ssy
stem

 Gov
ernmentsecur
it
iesaccount
ingandset
tl
ementsy
stem.

STRUCTUREOFFOREI
GNEXCHANGEMARKET:
1)Retai
lmarket
:ther
ear
etwotypesofli
censei
ssuedbyRBIi
nr etai
lmarkett
odothetransact
ion.
Oneisfull
yfl
edgedmoney changes-whocanundert
ake purchaseandsalet
ransacti
onwi t
h
thepubl
i
c.
2)Wholesalemarket
:-wholesalemarket
sisst r
ucturedthrought hel
argebanksthatarehavingthe
powertoenterdir
ectl
yi nthefor
eignmar ketanddot het ransact
ions.I
tisaninter
bankmar ket
wheret hetr
ansacti
ont 5akespl
acet hr
ought ransfer
sonecount rydenominat
edcurrenciesto
anot
hercountri
escurrencies.

 I
nter
bankmar
ket
:ini
nter
bankmar
ketsy
stem banksquot
ebuy
ingandsel
l
ingpr
icesbet
ween

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
eachotherbanks.Thesearecal
ledasdecent
ral
i
zed,cont
inues,openbi
d,doubl
eauct
ion
market
.Thi
siscall
edasdir
ectmar
ket.

 Centr
albank:-cent
ralbankplaysgoodr olei
nthist
heyfrequent
lyinter
venetobuyandsal
ethe
cur
renci
est hroughbidwhichinf
luencestherat
eatwhichthecurrencyistr
aded.

TYPESOFFOREI
GNEXCHANGEMARKET:
1)Spotmarket
:thespotmarketorcashmar keti
sapubl
icfi
nancialmarketi
nwhi
chf
inancial
i
ntst
rumentsorcommoditisaretradedf orimmedi
atedel
iver
y.Itcontr
ast
swit
haf ut
ures
marketi
nwhichdel
iv
eryi
sdueatal aterdate.
Aspotmar
ketcanbeanor
gani
zedmar
ket
,anexchangeorov
ert
hecount
er.

2)Forwardmarket
:theforwadmarketi
st heinfor
malover
-thecount erf
inancialmarketbywhich
contr
actsforfutur
edel i
ver
yareent ere4d i
nto.St
andardized f
orward contract
sarecalled
fut
urescont
ract
sandt r
adedonaf ut
ureexchangecontractsenteredi
ntoint hefor
wardmarket
arebindi
ngonthepart
iesinv
olv
ed.

6.I
NTERNATI
ONALPARI
TYRELATIONSHI
PSANDFOREI
GNEXCHANGE
RATE

INTERETRATEPARI TY:
Int
erestrat
epar i
ty(IRP)i sanarbitr
agecondi ti
ont hatmusthol dwhen i nternati
onalf
inancialmar kets
areinequil
ibri
um.ittendst ocreatearel ati
onshipbetweent heinter
estratesoft wocount r
iesandt hei r
for
war dexchanger atepr emium ordi scount.I ti
nvolvesinvesti
ngi naf oreigncountryandcov ering
againstt
heexchanger ateri
sk.
IRPtheorystat
est hatst hatexchanger atebetweencur renci
esisdirect
lyaffectedbytheiri
nterestrat e.
Int
erestrat
epar i
tyisone oft hemosti mportantfundament aleconomicr elat
ionrel
atingdiffer
ent ial
i
nterestr
ateandf orwar dexchanger at
ebet weenapai rofcurr
encies.

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
Inotherwor
ds,t
heinter
estr
atespaidontwocur
renci
esshouldbeequaltot
hedi
ffer
encebetweenthe
spotandforwar
drates.Wewilldealwi
thpr
acti
calsi
tuat
ionswit
hrespectt
othi
sconceptinthenext
chapter
.

FISHERSPARI TY:
Internationalf i
sheref fectpost ulatest hatt heest imat edchangei nt hecurrentexchanger atebet ween
anyt wocur renci esisdi rectl
ypr opor ti
onal tot hedi f
fer encebet weent hetwocount ri
esnomi nal i
nterest
ratesatapar ti
cul artime.I not herwor ds,theper cent agechangei nt hespotexchanger ateov erti
mei s
gov ernedbyt hedi ff
erencebet weent henomi nal interestr atefort het wocurrencies.
Thei nternationalf i
sher ’
sef fectr elatest henomi nal i nterestr atebet weent wocur renciesoft wo
count ri
esandt hemov mentofexchanger atebet weent wocount ri
esandt hemov ementofexchange
ratebet weent hecur renciesoft wocount ries.Iti ndicat est hatt hecount rywi t
hl owernomi nal(hiher)
i
nt erestr atewi llappreci atecompar edt ot heot hercur rency .Ifthespotr atei sINR40/USDand1y ear
i
nt erestr ateis12%and8%i nindiaandUSr espect ively,t henI NRi sexpect edtodepreciateorUSDi s
except ed t o appr eci
at e.The % appr eciation and depr eciati
on wi l
lbe gov erned byi nterestr ate
differential.
Accor dingt opr of .fi
sher ,t
herear et wot ypesofi nterestr at es
1)r ealinter estrates:r ealinterestr ates:2) nomi nali nterestr ateisalsocal l
edasmoneyi nterest
rate,alsor eferredasout -of-pocketi nterestr at e.

Thei
nter
estthati
sactual
l
ygi
ven/r
ecei
vedi
snomi
nal
int
erest
.Accor
dingt
odi
ngt
opr
of.f
isher
,
nomi
nalrat
eofinter
est

PURCHASI NGPOWERPARI TY:

Thet heor yofpur chasi
ngpowerpar ityist heol destandmostext ensi
velyaccept edtheoryofal l
exchanger at
edet erminationt heori
es.Thebasi cideaofPPPor igi
natedwi thschol arsattheuniver
si t
y
ofSalamanca, theoldestuni versi
tyinspain,int he16thcent ury
Whent hel ow ofonep[ riceisappl iedi nt
ernationall
yt oast andar dcommodi t
ybasket ,weobtaint he
theoryofpur chasingpowerpar i
ty(PPP) .Thistheor ystat est hatt heexchanger atebetweencurrencies
oftwocount ri
esshoul dbeequal tother ati
ooft hecount riespr icelevels.
Mostexchanger atedet erminat i
ont heori
eshav ePPPel ement sr ootedwi t
hint heirfr
ameworks.PPP
calcul
ationandel ement sr ootedwi thintheirframewor ks.PPPcal culati
onandf orecastarehowev er
andsigni f
icantdat achallengesi nest i
mation.PPPt heoryi sbasedont heconceptof“ l
owofonepr ice”
thepriceoft hecommodi tyshallbet hesamei nt womar ket s.Ifitwerenott rue,arbitr
ageurswouldbuy
i
ncheapermar ketandsel linexpensi vemar kett omaker iskl essgai n.Itasenunci atedbyaSwedi sh
economi st,gustavcassel in1918.
Inthisabsol utev ersi
on,pur chasingpowerpar itystatest hatpr i
celev el
sshoul dbeequalwor l
dwi de
whenexpr essedinacommoncur rency .I
not herwor ds,auni tofhomecur rency(HC)shoul dhavet he
samepur chasingpowerar oundwor l
d.

DRAWBACKSOFPURCHASI NGPOWERPARI TYTHEORY:

1)Ignoresgov er
nmenti nt
erventi
on:thePPPt heorydoesnotconsi dergov ernmentorcent r
albank
i
nt erventi
oni nexchanger atedeterminati
on.I fdomest iccurrency depr eciat
est oomuch,t he
cent r
al bankinter
venesasi tcanhav eadverseef fectsoneconomyi ntervenesi nexchangear t
e.
2)Ignoresspeci ali
zati
on:PPPt heoryignoresspeci ali
zationeffectininternat i
onalt r
ade.Countri
es
specializeinthoseitemsi nwhicht heyenjoysuper i
orcostadv antageandaccor dingl
yproduce
suchi tems.
3)Ignorest heeffectofchangei nexchanger ateonpr i
cel evel
:PPPt heoryi gnoresspeciali
zat
ion
effectini nt
ernati
onaltr
ade.Count r
iesspeci al
izeintosei temsi nwhi cht heyenj oysuperi
orcost
adv antageandaccoedi nglyproducepowerofcur renciesforasi mi l
arbasketofgoodsand

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
serv i
ces.
4)Ignor esqual it
yofgoods: -pppi gnoresqual it
yofgoodswhi l
edet er miningpr icesqual i
tyof
goodsi ntwodi fferentcount r
iesmaybedi fferent .Thi spr ev entstheequal i
zationofpr i
cesthus
i
ti sdi ffi
cultt
oar r
iv eatequi l
ibri
um exchanger ate.
5)Faul t
yassumpt ion: PPPt heor yisbasedonf aultyassumpt ionsuchasl ackoft ransportcost,
l
ackoft radebar rierssuchascust om dut iesandquot aset c.i nr eali
tyint ernati
onalt r
ade
i
nv olv eshighert ranspor tationcostandi sal soaf fect edbyt r adebarriers.
6)Doesnotconsi derspecul ationi nf or eignexchangemar ket:
- now aday st her ei slotof
specul ati
oninf orei gnexchangemar ket , whi chaf fectst heexchanger ate.pppt heor ydoesnot
consi derspecul at i
oni nf oreignexchangemar ket.
7)Limi t
ed appl i
cation t ol ar ge count r
ies:f orl ar ge count r i
es like india,chi na,USA et c.the
appl i
cat ionoft hist heor yi sl i
mited,t hepppt heor ymayhav eappl i
cabi l
itytosmal lcountri
es
wher eal argepar tofnat i
onal i
ncomecomesf rom i nternational trade.
8)Negl ect scapitaltransf er:pppt heoryt akesi ntoaccountonl ytr
adei nmer chandise.I texcl
udes
tradei nser vi
ces,capi talt ransfersAl lsuchi temscr eat edemandf orandsuppl yorf orei
gn
exchange.Byexcl udi ngsuchf actors,thet heor yhasl i
mi tedr el
evance.
9)Toomuchemphasi sonpur chasingpower :pppt heor ypl acest oomuchmuchemphasi son
pur chasi ng poweras a det ermi ni
ng f actorofr ate exchange.I ti gnores f actors such as
reciprocaldemandoft radingcount ri
eswhi chcani nf
luencet herateofexchangeev enwi thno
changei npri
cel ev els.

FORCASTI NGEXCHANGERATES:
Severaldeci
sionsofMNCsr equi
reanassessmentoft hef ut
ur e.Futur
eexchanger at
eswi l
laffectal
l
cri
ti
calcharacter
isti
csofthef i
rm suchascost sandrevenues.
Exchanger ateforecastspal yaf undamentalrol
ei nnear l
yal laspectsofi nt
ernati
onal f i
nanci
al
managementi nternati
onaltr
ansact ionareusuall
ysettl
edint henearf uture.Exchanger at
ef or
ecasts
arenecessarytoev al
uatetheforeigndenominatedcashf l
owsi nvolvedininter
nati
onaltransacti
ons.

METHODSOFFORECASTINGEXCHANGERATES:
Thenumerousmet
hodsavai
l
abl
eforf
orecast
ingexchanger
atescanbecat
egor
izedi
ntof
ourgener
al
groupsbel
ow:

Eff
icientmar ketapproach:
-fi
nancialmarket
saresai dt
obeef f
ici
enti
fthecurr
entassetpr
icesful
l
y
ref
lectal ltheavai
lableandrelev
antinformati
on.Theeffi
eci
entmarkethypot
hesi
s(EMH)i slar
gel
y
att
ributabletoprof
essoreugenefamaoft heuniver
sit
yofChi
cago.

ADVANTAGEOFMARKETBASEDMODELSARE:
1)Easytousedataarereadi
l
yobserv
abl
e.
2)Costl
esstouse:dat
aar e“
free”

DI
SADVANTAGEOFMARKETBASEDMODELS:
1)Concept ual
:model sdon’
tforceustothinkaboutforceswhichmayaccountforfuturemoves
i
nexchanger ates.
2)Ev enifweassumet hesemodel sprovidedlongterm unbiasedpredi
cti
orsther
ear etimes,
especi
all
yov ertheshortr
un,whentheymaypr oducelargesi
ngleper
iodfor
ecasti
ngerror
s.
3)I mpli
cat
ionsf orglobalfi
rmsandgl obalinv
estors:
-usewi thcauti
on,giventhepotent
ialfor
l
argeshorttermf or
ecasti
ngerror
s.

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
FUNDAMENTALAPPROACH: -
Fundament alf
orecastingi sbasedonunder lyi
ngr el
ationshipsthatarebeliv
edtoexistsbetweenoneor
morev ariablesandacur rency’sv alue.Givent heser el
ati
onships,achangei noneormor eoft hese
vari
ableswi lll
eadtoaf orecastoft hecur r
encyv al
ue.
Evenifaf undament alr elat
ionshipsexi sts,itisdi ff
icul
ttoaccur at
elyquant i
fythatrel
ati
onshipina
for
m appl i
cabletof orecast i
ng.Eveni fther el
ationshipscouldbequant i
fied,t
hereisnoguaranteethat
thehistoricalrel
ati
onshi pswi llpersistint hef uture.Itisdiff
icul
ttodet ermi
net helaggedimpactof
somev ar
iables.I
tisalsocal leddifficultt
oi ncorporatesomequal i
tat
ivefactor
sintothemodel.

7.CURRENCYOPTI
ONSANDI
NTERESTRATEFUTURES

I
ntr
oduct
iont
ocur
rencyopt
ions:
Cur
rencyopti
onisafinanciali
ntrumentsthatgivesitsholderari
ghthutnoobli
gati
ont obuyorsella
cur
rencysometi
meint hefutur
e.Optionsaretradedonov erthecount
er(OTC)aswellasonorganized
market.OTCmarketandwhol esalemarket.Ther et
ailmarketconsi
stsofi
ndiv
idualcl
ient
saswellas

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
enterpr
iseswhobuyopt i
onsf rom bankst ocov eragai nstexchanger isk.Theseclient sar egeneral
ly
fi
onancialinst i
tution and por tfol
io manager s,apar tf rom bi g enter
prises.The whol esale market
compr i
sesofcommer cialbanksandi nvestment sbanks.Theyoper ateonOTC opt ionmar ketare
carri
edoutbyt elephoneorbyt hesy st
em ofr eut erort el
er ateandmayt akepl aceroundt heclock
1)Cal lopt ion:anopt i
ongi vingthebuy eroft heopt i
on,t
her i
ghtoutnott heobl i
gat iontobuya
currency .
2)Putopt ion:anopt iongi vingthebuy erofanopt ion,t
her i
ghtbutnott heobligat i
ont oSELLa
currency .
3)St ri
kepr ice:thef i
xedpr ice,atwhi ch, thebuy erofopt ioncont r
actcanexer cisehi soptionto
buy/Sel l thecur rency .
4)Expi rydat e:thel astdat eonwhi cht heopt ionmaybexer ci
sed.
5)Eur opeanopt ion: anopt ionwhi chcanbeexer cisedonlyont hespecifieddate.
6)Amer i
canopt ion: anopt ionwhi chcanbeexer cisedonmaydat euptoexpirydat e.
 Der i
vativesmar keti sl eadeconomi cindi cat or
s.
 Lowert ransact i
oncost s
 Pr ovi
desl iqui di
ty, enablespr icediscov eryi nunder lyingmarket
 I ncent i
vet omakepr ofit
swi thmi nimal amountofr i
skcapital
 El iminatesecur ityspeci ficrisk.
 Ar bi
tragebet weenunder l
yi
ngandder i
vat i
v emar ket .

I
NTERESTRATEFUTURES:

I
tisnotj
ustfi
nanci
alsect
or,
butal
sothecorporateandhouseholdsector
sthatareexposedt
oint
erest
r
ateri
sk.Banksinsur
ancecompaniespri
marydealersandpr ovi
dentfundsbearsigni
fi
cant
sint
erest
r
ateri
skonaccountofthemismat
chinthetenureofthei
rassetsandli
abil
it
ies.

These ent i
ti
es t her
efor
e need a cr edibl
ei nstit
utionalhedging mechani sm.I nterestr ater i
sk is
becomi ngincreasingl
yimpor t
antfort hehousehol dsectoraswel l,si
ncethei nt
erestr at
eexposur eof
severalhousehol dareri
singonaccountofi ncreasei sthei
rsavingsandinv estments aswel lsloans.
Moreov er,i
nterestrat
epr oduct
sar etheprimar yinstrumentsavail
abletohedgei nfl
ationr i
sk,whi chis
typi
call
yt hesignalmosti mportantthatthefinancialsystem pr
ov i
desdiff
erentagent soft heeconomy
agr eateraccesst ointerestrater i
skmanagementt ool
ssuchasexchanget r
aded i nterestrate
deri
vatives.

PURPOSEOFTRADI NGI NINTERESTRATEFUTURES:

1)Takingav iewoni nt
erestr ates:tradi
nginvolvesent eri
ngintopositi
onsinthefut uresmarketfor
thepurposeofmaki ngapr of i
t,assumingthatmar ketdev elopmentsareforecastpr oper
ly.
2)Hedging:peopl eholdingapor t
foli
oofbondsori nvestment ssubj
ecttointerestr ateri
skcan
reducearisingoutofi nterestr atevolat
il
it
ybyhedgi ng.
3)Arbit
rage:st r
ategieswhi cht akeintoaccountt hepr i
cedifferencebetweenthef uturespri
ceand
theubder l
yingpr i
ce.
4)Spreading:spr eastradingi sat r
adingmet hodf ort r
aderwhoobser vemispri
cingi nterelat
ive
valueoftwodi ff
erentcont racts.

BENEFI
TSOFI RF:
1)Standardi
zation:
only cont
ract
s with standardi
zed f
eatur
es are al
l
owed t
ot r
ade on the
exchange.st
andardizati
on improv
es liqui
dityi nthe market
.The f ol
l
owi
ng f
eat
ures are
standar
dized.
a)onl ycertainexpir
ydatesareall
owedi nindiavi
z.l
astworki
ngdayofthemont
hsofmarch,

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
june,Sept emberandDecember .
b)Thesi zeofcont ractcanonl ybei nmul tipl
esofacer tai
nnumbercall
edt helotsi
ze.Thelot
sizecur r
entlyinindi aisRs.2l akhs.
c) Onl ysomespeci ficbondscanbeusedf ordeli
ver y.
2)Transparency :transpar encyi sensuredbydi ssemi nati
onofor der
sandt r
adesf orallmarket
parti
cipants.Alsocompet iti
ve.Transparencyi mprov estheeff
ici
encyoft
hemar keti
nt er
msof
di
scov eryofcompet iti
vepr iceandl i
quidit
y.
3)Count er-
partyrisk:-count erpart
yr i
skismi tigatedbyt heexchange.Thecreditguaranteeofte
cl
ear i
nghouseaddr essescount erpar t
yr i
skt herebyi mprov
ingtheconfidanceofi nvest
ors
l
eadingt owi derpar t
icipation.

Ty
pesofint
erestr
atef ut
ures:i
nter
estrat
efut
urescanbeboughtandsol
dthr
ought
het
radi
ng
member
softhenat
ional
stockexchange.

SHORTTERM I NTERESTRATEFUTURES( STIRs)

Shortter
mi nterestratefutur
es”areoneoft helargestfi
nanci
almarketsint heworld.Inter
estrate
futuresint
erestr atefutureswereint
roducedbyt heChicagoboardoftradein1975.I nindiaitst
arted
tradinginj
une2003.
Ther earefuturesonshor tandlong-t
ermi nt
erestrate.Butthelar
gesttradingvolumei sin2-year
treasurynotes.Fut ur
esonshott erminter
estratesarewidel
yusedbybanksandi nvest
ment sbankst o
priceandhedget heiropent r
adi
ngpositi
onandt hei
rcustoms-madeOTCder iv
at i
ves

Adv
ant
ageofsti
rs:
1)Theshortter
mi nt
erestf
uturecontr
actsar
emor eli
qui
d.
2)STIRsareexteremelyusefuli
nlookingint
heyiel
dtobepai
dtoni
nvest
orsori
nter
estr
atet
obe
paidwhenbor r
owi ngmoneybet weentwoper
iods.

HEDGI NGWI THINTERESTFUTURES:

HEDGI NG istechni quedesi gnedtor educeorel iminat
ef inanci
alrisk.Hedgingi sthecal cul
ated
i
nstall
ati
onofpr otectionandi nsur
ancei nt
oapor tfol
ioinor dertooffsetany unf avourablemov es.
Crosshedgingisal sousef ullinopti
ont r
adingmarket.Usingt hi
stechniquesomesui tabl
er esultsare
fi
ndout ,whenat raderneedapar ti
cularcurr
encyf orhedgingbutint hemar ketthatcurrencyi snot
avai
lablethentraderusecr osshedgi ngmeanst heycanuseanot hercurrencythent r
aderusecr oss
hedgingmeanst heycanuseanot hercurr
encythatisposit
ivecorrel
atedwi t
hrequir
edcur r
ency .Andon
buyingthatcur
rencyi treducer i
sk.

a)Inter
estr
ateswap
b)Inter
estr
atecapsandf
loor
s
c) I
nter
estr
atecol
lar
s

I
nt er
estrateswap:
Ani nter
estrateswapisanagreementtoexchangeint
erestpayment
sonanat i
onall
oan,normal
lyat
regulari
nterval
sfortheter
m oftheswap.swapsareov er-
thecount
erinst
rumentsandani mport
ant
i
nst r
ument sforal
argecompaniest
omanagel ongt
erminterestr
ater
iskandlongter
m cur
rencyri
sk.

UNI
T-II
I
8. EUROCURRENCYBONDMARKETS

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC

INTRODUCTI ONTOEUROCURRENCYMARKET:
Int
roduct ion:-
Eurocur rencymar keti
sadl larorotherfr
eelyconv
erti
blecurrencydepositedinabankout sideits
countr yofor igin.Itmeansanycurrencybankedoutsi
dei tscount r
yofor i
gin.Example:adeposite
denomi natedinJapanesey enheldi
naBr azil
i
anbankisaeur ocurrencydepisi
te.Theeurocurr
encies
mar keti sut i
li
zedbybanks,MNCs,mut ualfundsandhedgef undst hatwisht oavoidregulat
ory
requirement s,taxlawsandint
erestr
atecapsoftenpr
esentindomest icbanki
ng.

Charact
eri
st icsofEur ocur r
encymar ket:
1)Thet r ansact i
onsi neachcur rencytakepl aceoutsidethecountryoforigi
noft hatcur rency.
2)Eur o- cur rencymar ketisdi sti
nctf rom thef or
eignexchangemar ket.I
tisamar ketf ordeposite
andf orl oansbet weenbanksandbet weenbanksandt hei
rcustomer s.Iti
samar keti nwhich
for
ei gncur r
enciesar el entandbor r
owedwher easint heforeignexchangemar ket ,forei
gn
currenci esar eboughtandsol d.
3)Themar ketisessent iall
yunr egulat
ed becauseofwhi ch thedeposi tsint hismar ketare
unsecur ed.
4)Deposi tar ereceivedonl yonshor tter
m basi smostoft hedeposi tar
einter
bank, andt heytend
tobev eryshor tterm.Thi sl eadst oconcer naboutr i
sk.
5)I ti
sessent i
all
yawhol esalemar ketdeal i
ngonl yisstandar
dizeddeposi tammount .Leadi ngin
thi
smar ketisthereforedoneonaconsor ti
um basis.
6)Theeur ocurrencymar ketexi stforsav i
ngandt i
medeposi trat
hert handemanddeposi t.Thatis,
i
nstitut iont hatcr eateEur odol l
ardeposi tcurr
encyi nordert
obuygoodsandser vices.

Di
ff
erencebet weeneur o-curr
encymar ketanddomest icmoneymar ket:
 Theeur ocurrencymarketispur elywholesal
emar ketascompar edtodomesti
cmar ketwhichis
retailbanki
ngmar ket
.
 Theeur ocurrencymar kethasgotr el
ativefreedom from regul
ati
onascompar edtodomest i
c
mar kets.
 Ther earenumberofpr oblemsi neurocurrencymar ketascompar edtodomesticmar ketsuch
asj uri
sdict
ion,theacceptabili
tyofaf r
eezeondeposi ti
nonecount r
ybyanothercountry.
 Theeur ocurrencymar ketisalmostexcl usiv
el yconcernedwithmatcheddepositdeal
ing.That
iseachdeposi tofani nternati
onalbankwi lltendtobemat chedbyanassetoft hesame
currencyandofsi mil
armat uri
ty.

FACTORSRESPONSI BLEFORGROWTHOFEURO-CURRENCYMARKETS:
Theincent i
v et oest ablisht heEur ocur r
encymar ketcamef rom r egul
ationint heBr iti
shandAmer i
can
marketst hataddedt othecostofdoi ngbusi nessonshor e.InBr i
t ai
n,thebankofEngl andrestr
ictedt he
useofst erl
ingt of i
nancef or eignt radeandext ernal loans.
1)Lesswi lli
ngnesst ohol ddol larsinUSA- basedbank: -manyeconomi cswer elesswi l
li
ngt ohol d
deposi tindol l
arsandt heyst artedput ti
ngt heirear ningsinLondonbanks.
2)Regul ation‘ Q’:ther egul at i
on‘ Q’ ofthef eder alreser veactwhi chcomposedacei l
ingoni nterest
ratest hatcoul dbepai dondeposi tbybanksi nt heUS.Thi senableEur opeanbankst oat tract
USdol l
ardeposi tsbyof feringbet terinterestr ates.
3)Regul ation ‘ M’:r egul ation ‘ M’oft he feder alr eser v
e actwhi ch stipulated reservet o be
mai nt ainedagai nstdeposi tsaccept edbybanksi nt heUS.
4)I nsur edeposi t:themandat or yrequirementonal lbanksi ntheUSt oinsur edeposi t
saccept ed
byt hem f rom t hepubl ic.Theeur ocur r
encymar keti sunr egulatedwhi chmeanseur obanks
wer eundernoobl igat i
ont oi nsureeur o-currencydeposi ts.Thisreducedt heircostondeposi ts
5)Thei nter estequal i
zat i
ont ax:itwasi ntr
oducedbyt heUSmonet aryauthor it
yin1963r esul t
edi n
i
ncr easi ngt heef fectivecostofbor r
owi ngi nt heuni tedst atesfornon-residentent i
ti
es.
6)Thev olunt aryr estraintpr ogr am:i twasi ntroduced i nt heUS i n1965 i nt ermsofwhi ch,
bor rowi ngi nt heUSf orf inanci nginternational projectswasr estr
icted.
I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
7)Ful
lcapi
talaccountconv er
ti
bili
ty:ther
ehadbeenful
lcapi
talaccountconver
ti
bil
it
yadoptedby
manydev el
opednations,whichallowedthem t
oconductt
ransacti
onsoflocalf
inanci
alasset
s
i
ntofor
eignfinanci
alassetfreel
y.

EUROBONDMARKET:

I
ntr
oduct
ion:
a)Domest icbonds: -i ssuedl ocal
lybyadomest icbor rowerusual lydenomi nat edint helocal
currency.Forexampl e, aJapanesecompanyissui ngbondsi nYencur rencyinj apan.
b)For eignbonds:i ssuedi nal ocalmarketbyaforeignbor rower-usuall
ydenomi natedint hel
ocal
currency.Forexampl e,aJapanesecompanyi ssui ngUS- doll
ardenomi natedbondsi ntheUS
mar ket.
c) Eurobonds:pl acedmai nl
yi ncountri
esothert hant heonei nwhosecur rencyt hebondi s
denomi nated.Foraexampl eAJapanesecompanyi ssuingy endenomi natedbondi nthetheUS
mar ket.
AEur obondi sani nternat
ionalbondthati
sdenomi natedinacur r
encynotnat i
v etothecountry
wher eitisissued.Eg.Cocacol aissui
ngaU. Sdol lardenomi natedbondi nEur ope.Itcanbe
categorizedaccor dingt othecurr
encyinwhichi
ti sissued.

CHARACTERI
STI
CSOFEUROBONDS:
1)Eurobondsar enotregulatedbyt hecount r
yoft hecur r
encyinwhi chtheyaredenomi nat
ed.
2)Eurobondsar e“bearerbonds” ,i.e,theyar enotr egi
steredany wherecent r
all
y,sowhomev er
holds.Thebondi sconsi deredt heowner .Bearerst atusalsoenabl esEur obondst obeheld
anony mousl y
.
3)TheEur obondmar ketisl argelyawhol esale wi thbondshel dbyl argeinsit
uti
oins.Pensi
on
fundsinsurancecompani es,mut ualfunds.
4)Sincet heyar edenomi natedi nanof fshorecur rency,invest
orsi nEur o-
bondsassumebot h
creditandf or
eignexchanger isks
5)Somepubl i
callyof
feredEur obondst radeonst ockexchangenor mallyinLondonorl uxembourg.
Othersar eplaceddir
ectlywi t
hinst i
tuti
onalinvestorswithoutalisti
ng
6)Wi t
hholdingtaxesarenoti mposedonEur obondcouponpay ments.

ADVANTAGEOFEUROBONDFI NANCI NG:

1)Issuershav ethef reedom t oissuebondsi nacount ry.Regi onoft heirchoice.Theyalsohav e
thechoi ceofcurrencyi nf l
oati
ngt heEur obond
2)Eurobondsgi vesi ssuer stheoppor tunityt otakeadv antageof f avourabl
er egul
atoryand
l
endingcondi ti
onsi not hercount ri
es.
3)Obtainingfinanci
ngbyi ssui
ngEur obondsi sof t
encheapert hanEur obondmr ketascompar ed
tootherdebtmar kets.
4)Itisawayf orcompani estoobt ainf inancinginaneconomywher ef i
nancingisdiffi
cul
tt o
obtain.
5)Issui
ngeuobondgi vescompani eswi deraccesst ot hei nternati
onalmar ketwhichtheymay
normal l
ynotbeabl et oaccess.
6)Itwoul dpreventr epeatedf inancialcristst hatcreat
ingadest abi
li
zingeconomi candpol i
ti
cal
environment .

I
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DI
STI
NGUI
SHBETWEENEUROBONDSANDFOREI
GNBONDS:
# Headi
ng Eur
obonds For
eignbonds

1. Meani
ng Abondi saninternati
onali
na Abondi ssuedbyaf orei
gnborr
ower
curr
ency not nat i
ve to the i
nt he curr
ency ofthe count
ryin
countr
ywhereitisissued whi
chitissold

2. Cur
rency I
ssuedincur r
encyotherthan I
ssuedi
nlocal
cur
rency
the one in whose cur
rency
bondisdenominat
ed

3. Ty
pes Str
aight Eur
obonds, fl
oati
ng Samurai bul
l
dogsov
erei
gn,y
ankee
rat
ebondnot es,zer
o-coupon bonds,et
c.
convert
ibl
ebonds,
etc

4. I
ssuedby Usual
l
yaEur obondisissued Afor
eign bondismostoft
enissued
byanint
ernat
ionalsy
ndi
cate byaforei
gnfirmtor
aisecapi
tali
na
domesti
cmar ket

5. Exampl
e Japanesecompanyissui
ngUS Japanese company issui
ng yen
-dol
l
ardenomi nat
edbondsin denominat
edbondint
heUSmarket.
theUSmar ket

TYPESOFEUROBONDS:
1)Conv entionalorst raightEur obondshav eaf i
xed coupon and mat uri
tydatewhen al lthe
pri
nci pl
ei srepaid.
2)Fl
oat ingr atebondnot es( FRN)ar eusuall
yshorttomedi um term bondissues,wi t
hacoupon
i
nterestr at
et hat“floats”i .egoesupordowni nr el
ati
ont oabenchmar kr ateplussome
additional “
spread”basi spoi nts
3)Zerocouponbondsdonothav eint
erestpyments.Theinvest
orinthistypeofEur obondmaybe
l
ooki ngforsomeki ndoft axadv ant
age.
4)Conv erti
blbondscanbeex changedforanotheri
nstruments,usual
lyanor di
naryshareofdhare
ofthei ssuingorganizat i
on.
5)Highy i
eldbondsar eal sopar toft heEurobondmar ket
,acl assofbondswhi chindi
vi
dual
i
nv estorsmayencount er.

INNOVATION I
N THEEURO BOND MARKET:Fr om abaseofzer ointhelate1950s,theEurobond
markethasgrownt oanannualv olumeofnew i ssuesthatoft
ennnearsorsurpassestheannual
vol
umeofnewUScor poratebondi ssues.
Throughi
nnovationsinmar ketprocessesandproductoffer
ingst
heEurobondmarkethascarv
edout
animport
antplaceintheint
er nat
ionalcapit
almarketprov
idi
ngbenef
it
stoinvest
orsandborr
owers.

1)Pay
-In-
KindBonds:-I
nThi
sCase,TheI
ssuer
sOfBondsMayChooseToPayI nt
erestEit
herI
nCash
OrInAdditi
onalBondsWit
hTheSameFaceValue,Ther
ebyGiv
ingTheI
ssuerAnOpportunit
yToDel
ay
ThePay mentOfTheBonds,AtTheTi
meOfMaturi
tyOfTheBond.

2)Rev
erseFloat
ers:
-TheeAreTheFloat
ingRateBondsWherebyTheCouponRat
eOnTheBondsFal
l
s
WhenGeneralLevel
OfInt
erestRat
esInTheEconomyRises.

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3)Fi
nanci
alPer
for
mane:E.GWal tDi
sneyHasI
ssuedBondsWi
thCouponRatesTiedToTheFi
nanci
al
Perf
ormanceOfSever
alOfI
tsFi
l
ms.IfIt
sFil
msDoWellAndGoFinanci
all
ySt
rong.

4)IssuerAl
soIssue‘Di
sast
erBonds’
:
-BasedOnTheHappeni
ngOrNotHappeningOfAnEvent
.For
Example,El
ect
rol
uxOnceIssuedABondWithAFi
nalPay
mentThatWasDependedOnWhet
herThere
HasBeenAnEar t
hquakeInJapan.

5)IndexedBonds:MakePay ment
sThatAr eTiedToAGeneralPri
ceIndexOrThePri
ceOfAPart
icul
ar
Commodi ty.ForExample,Mexi
coHasI ssuedBondsWit
hPay mentsThatDependOnThePr
iceOfOil
.
6)SwapAgr eement:
-I
nSwap,TwoBor rower sRai
seMoneySeparatel
yAndThenAgreeToMakeEach
Other;
SInterestPayments,
OneInFixedAgr eeToMakeEachOther’
sInter
estPay
ments.

7)Fl
oat
ingRat
eNotes(Frn):
-AreDebtI
nstrumentsWit
hACouponThatChangePer
iodi
cal
l
yAccor
ding
ToSomePredet
ermi
nrdInterestRat
eBenchmark.Li
keLibor
,Mi
borEt
c.

8)ZeroCouponBondsAr eSingl
e-Pay
ment
sLong-
Term Secur
it
iesThatDoNotCallForPeri
odi
c
I
nter
estPay
ments.TheseBondsAreSoldAtADi
scountFr
om Par,AndTheI
nvest
orEnt
ir
eRetur
nIs
Real
i
zedAtMatur
it
y.

9)Dept
-Equi
tyHy
bridInst
rument
sAr eCor
porat
eBondsThatGiveTheI
nvest
orTheRight
,ButNotThe
Obl
igat
ion,
ToConvertTheBondInt
oAnotherSecur
it
y,Usual
l
yInt
oShar
esAtAPriceFi
xedOnIssue.

10)Der
ivat
iveI
nstr
uments,Li
keForwar
ds,Fut
uresContr
acts,Opti
onContr
act
sAnd Swap,WhichCan
BeUsedByBorrowersAndInvest
orsToEit
herProt
ectThemselvesAgai
nstAdver
seFor
eignExchange
RateMovements

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9.I
NTERNATI
ONALEQUI
TYMARKETSANDI
NVESTMENTS

Introduct i
ont oint
ernationalequitymar ket:
Introduct i
on:-
Internationalequitymar ketsareani mpor t
antplatf
ormf orglobalf i
nance.
theynotonl yensur est he
par t
icipationofawi dev ariet
yofpar ti
cipantsbutalsoofferglobal economiestoproposer.Internat
ional
fundr aisingusedt obet hedomai nofMNCs.
Theynotonl ysourcerawmat erialacrossthewor l
dorsel lproductsatmanygeogr aphicalregions,they
alsosear chforcapitalalloverthewor ldandr ai
secapit
alwher everiti
scheaper.
Ataf asterspeed.Ev enr el
ativ
elysmal lercompaniesaresour cingcapitalf
rom for
eigncount r
iesanddo
notwantt oremainrestrictedaswel lasdonotwantt odependont hedomesticequit
ymar ket.

El
ementsofi nt ernat ional equi tymar ket:
1)Cross- list i
ng: -cr oss- l
istingr eferst ohav ingt hesal esl i
stedononeormor ef orei gnex change.I n
particul ar ,MNCsdot hisgener ally,butnon- MNCsal socr oss-l
ist.Af i
rm maydeci detocr oss- l
ist
i
tsshar esf ort hef ollowi ngr easons:
a)Cr oss- listingpr ov i
desawayt oexpandt hei nvestor’sbase,t huspot entiallyincreasi ngi ts
demandi nanewmar ket.
b)Cr oss- listingof fersr ecogni tionoft hecompanyi nanew capi talmar ket,thusal lowi ngt he
fi
rmt osour cesnewequi tyordebtcapi talfrom l ocalinv
estor s.
c) Cr oss- listingof fersmor ei nv estors.Int ernationalpor tf
oliodi versi
ficationi spossi bl efor
i
nv est orswhent heyt r
adeont heirownst ockexchange.
2)Yankeest ockof fering:i n1990s,manyi nternationalcompani es,i ncludingt hel atinamer i
cans,
hav el ist edt hei rst ocksonU. Sexchanget opr i
memar ketf orf utur
ecapi talt oU. Spubl ic
i
nv est or s.
3)Amer icanandgl obaldeposi toryr eceipts(ADR&GDR):anADRi sar eceiptt hathasanumber
off or eignshar esr emai ningondeposi twi ththeU. Sdeposi t
or y’scust odian i nthei ssuer ’s
homemar ket .
 ADRar edenomi natedi ndol lars,tradeonaUSst ockexchange,andcanbepur chasedt hr ough
theinv est or sregul arbr oker.Thi si seasiert hanpur chasingandt radingi nUSst ocksbyent eri
ng
theUSexchange.
 ADRt radescl eari nt hreebusi nessday sasdoU. Sequi ti
es,wher easet tl
ementofunder lyi
ng
stocksv ar yinot hercount ries.
 ADRpr icequot esar ei nU. Sdol lars.
4)Globalr egi ster edshar es( GRS) :GRSar eashar et hatar etr
adedgl oball
y ,unliket heADRst hat
arer ecei ptsoft hebankdeposi tsofhomemar ketshar esandar et radedonf or eignmar kets.

Internati
onalequit
ymar ketbenchmarks
Oneoft hemostcommonway stoev aluateinvest
mentsper for
mancei snotcompar eperf
ormance
againstt heret
urnsofanappr opri
atemar ketbenchmark.equit
ymar ketbenchmarkal
lowaninv est
ors
tomeasur etheaverageperfor
manceofgl obalequit
ymar ket
s.Therearesev er
alst
ockmarketindexes
thatar eusedtobenchmar ktheperfomaneofagi venmar ket
.
1)Thecent r
aladvantageofusingt hebenchmar kedisthewi demarketbreadt
hofthecompani es
i
ncl
udedinthebenchmar kindex.

I
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ONALFI
NANCE
TYBAF SEM V JMPC
2)Mar ketbenchmar ks all
ow i nvestorst o make i nformed decisi
ons regardi
ng act
ivev ersus
passiv eal
ter
natives.
3)Investorscanbetterunder standwher et hei
rratesofr eti
rnsarecomingf r
om.
4)Ensur esadvi
sor/inv est
orsar eaccount ablefortheirinvest
mentsdecisions.
5)Themar ketbenchmar kdat aisr eadi
lyaccessi bl
e.Thev al
uesoft heseindexesaredisplayed
everydaybyf inancialmedi aoutletsal
l overthewor ld.

(
A)Internat ionalst ocki ndex es:
1)DJI A:t hedow j onesi ndust rialav erage( DJIA) cont ains30 oft hel argestand most
i
nf l
uent i
alcompani esi nt heU. S
2)S&P500:t hemai ndr awbackoft heDJI Aist hatitonl ycont ai
ns20compani estheS&P500
i
mpr ovesont heDJI Ai nthisr espectbyi ncluding500compani es.
3)NASDAQ Composi tei ndex :theNASDAQ composi tei ndexr epresentsal lthest ockst hat
tradeont heNASDAQst ockmar ket.Ther ecentsur gei npopul arit
yoft echnol ogi
calst ocks
hasl aunchedt heNASDAQi ntot hespot li
ght.
4)MSCIEAFE:MSCIst andsf ormor ganSt anleycapi tali nternationalandEAFEst andsf or
Eur ope,Aust r
alasi a,andt hef arest .MSCIEAFEi ndexi sanequi tyindexwhi chcapt ures
l
ar geandmi d-capr epr esent ationacr ossdev elopedmar ketscount r
iesaroundt hewor l
d.
5)MSCIwor ldi ndex:t heMSCIwor ldinexi sabr oadgl obalequi tybenchmar kt hatrepresents
l
ar geandmi d-capequi typer for manceacr oss23dev el opedmar ketscountries.
6)TheBBC gl obal30:i ti sawor l
dwi dest ockmar keti ndex,r un asagl obaleconomi c
bar omet er.
(
B)Domest icindexes:
Locali ndeesar ewi del yusedbydomest i
cinv estorstocal culateper f
ormance,mar ketbeat s,
hedger ati
os, etc.pr ivat eint ernationali nvestorsof tenpref erdomest i
cindexesf ort hefollowing
reasons:

Riskandreturnf r
om f ori
gnequit
yinvest
ment s:
Intr
oducti
on:-investorsandcompani esputmoneyi nf orei
gnequit
yi nvestmentstoearnar et
urnon
theirmoney,butof tentheyrecei
velessthanexpect ed--
-indeed,sometimest her
eturncanbenegati
ve
whent heinvestors,receivel
esstheinit
iali
nv est
ment s.withsomeinvestment st
heentir
einvest
ments
canbel ost.I
nv estment sri
skisthechancethathewi llreceiv
elessthant heexpect
edr et
urnfr
om an
i
nv est
ments,anddi ffersaccordi
ngtothetypeofi nv
est ment .

Risk-r
eturntradeoff
:
Investorsdifferintheirr
isktoler
ance,whichi st heriskt hatani nvest
oriswi ll
i
ngtotakeori s
comf ortabl
ewi t
hinthehopeiofgetti
nghigherretur
ns.Investorswhoar eri
skav er
sedon’
twantt
or i
sk
muchi nexchangeforthei
rli
tt
leornorisk,t
heywi l
learnverylitt
leasaretur
nattheopposi
teendofthe
spectrum thereareinvest
ments,suchasopt i
ons,wher erisk-seeki
nginvestor
scanearnsever
althei
r
i
nv estmentswi t
hinashotti
meorl osetheenti
reinvest
ment s.

Typesofinvestmentsrisk:
Riskcanbedef inedast hechancet hataninv
est mentsact ualreturnwil
lbediffer
entthatexpected.
Riskmeanst hepossibil
ityoflosi
ngsome, orevenal l
,oftheorigi
nal i
nvest
ments.Lowl ev
elsofri
skar e
associ
atedwi t
hlowpot ent
ialret
urnsandv i
cev ersa.Therisk/returntr
adeoffi
sthe balancebetween
thedesi
reforthel owestpossi bl
eriskandthehi ghestpossibl
er etur
ninvest
mentsr i
skcanbedi vi
ded
i
nt ot
wocategor i
es:systemat i
candunsy st
ematic.

Sy
stemat
icr
isk:al
soknownasmar
ketr
iskor“
un-
div
ersi
fi
abl
eri
sk”
’sy
stemat
icr
iski
stheuncer
tai
nty

I
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ONALFI
NANCE
TYBAF SEM V JMPC
i
nher
enttot
heenti
remarketorenti
remarketsegment
.Al
sor
efer
redt
oasv
olat
il
it
y,sy
stemat
icr
iski
s
t
hedaytodayf
luct
uat
ionsinastock’
spr
ice.

Unsystematicrisk:
-alsoknownasspecifi
cr isk“ di
ver
sif
iableri
sk” orr esi
dualrisk”thi
stypeof
uncert
aintycomes wi ththe companyori ndustr
yone i nvest
si n and can be reduced t
hrough
di
versi
ficat
ion.Forexampl
e,newsthati
sspecifi
ctoasmal lnumberofstocks,suchasasuddenst ri
ke
bytheempl oyeesofacompanyonehassharesi n,
i
sconsideredtobeunsystematicr
isk.

Ty
pesofrisk
1)Credi
tordef
aultri
sk:-
credi
tri
skist
heri
skthatacompanyori
ndi
vi
dualwi
l
lbeunabl
etppayt
he
contr
act
uali
nterestorpri
nci
pleoni
tsdebtobl
igat
ion.
2)Count
ryri
sk:
-countr
yriskr
eferstotheri
skthatacountr
ywontbeabletohonouri
tsfi
nanci
al
commitment
s.Whenacount r
ydefault
sonitsfi
nanci
alcommitment
s.Whenacountr
ydefaul
ts
onit
sobli
gati
onitcanharmt heper
formanceofallot
herfi
nanci
ali
nst
rument
sinthatcount
ry
aswell
asothercount
ri
es.
3)Foreign-
exchangeri
sk:
-wheninvesti
ngi nfor
eigncountr
iesonemustconsiderthefactt
hat
currencyexchangerat
escanchanget hepri
ceoft heassetaswell
.For
eignexchanger i
sk
appliest
oallfi
nanci
ali
nst
rument
st hatarei
nacurrencyot
herthant
hedomesticcurr
enci
es.
4)I
nter
estrat
erisk:
-int
erestrat
eri
ski
sther
iskt
hatani
nvest
ment
s’sv
aluewi
l
lchangeasar
esul
t
ofachangeinint
erestrat
es.
5)Poli
ti
calri
sk:
-pol
i
ticalr
iskrepresent
sthe f
inanci
alr
iskt
hata count
ry’
sgov ernmentwill
suddenl
ychangei
tspoli
cies.Thisisamajorreasonwhydev
elopi
ngcountr
ieslackforei
gn
i
nvestment
s.

 Taxexdi
ffer
enttypesofinvest
ment
sar et
axeddif
ferent
ly.Thet
yprofaccountaninvest
ments
i
shel din and at axpay
er’
staxbracketal
so aff
ecttheamountbywhi ch taxexdimini
sh
i
nvestmentret
urns.
Meani
ngofdeposi
tor
yrecei
pts:
Deposit
oryrecei
ptsareat ypeofnegotiabl
efinanci
alsecuri
tyr
epr
esenti
ngasecur it
y,usuall
yinthe
for
m ofequity,i
ssuedbyaf orei
gnpubli
cly-
li
stedcompany.HoweverDRsaret r
adedonal ocalst
ock
exchangethoughthefor
eignpubli
cli
stedcompanyi snott
radedonthel
ocalexchange.
I
nternat
ionalcapit
almarketcomprisesofdebtandequitymarket
.Debtmarketi
ncludesi
nternat
ional
bondmar ketandt heequit
ymar ketincl
udesinter
nati
onalequi
tymarket
.Thei nter
nat
ionalequity
marketcanfurtherbedi
videdint
ovariousdeposi
tor
yrecei
pts-
ADR,GDRandIDR.
(
1)ADR-Amer
icandeposi
tor
yrecei
pts:
-
Amer icandepositor
yr ecei
ptspopul arl
yknownasADRswer ei ntr
oduced i
ntheAmer i
can
mar ketin1927.ADRi ssecuri
tyissuedbyacompanyout si
detheU. Swhichphysi
cal
lyremains
i
nt hecount r
yofissue,usuall
yinthecustodyofabank,buti
stradedonU. S.st
ockexchangein
otherwor ds,ADRisast ockthattradesintheuni
tedst
atesbutreprentsaspeci
fi
ednumberof
sharesi naforei
gncorporat
ion.
AnADR:

 I
sanegot
iabl
ecer
ti
fi
cat
eissuedbyaU.
Sbank

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC

 Repr
esent
saspeci
fi
ednumberofshar
esofaf
orei
gncompany

 ADRsar
edenomi
nat
edi
nU.
Sdol
l
ars

 Owner
shi
pint
heshar
esofanon-
U.Scompanyandt
radesi
nU.
Sfi
nanci
almar
ket
s

 ADRsar
eli
stedonUSst
ockexchange:
NYSE,
AMEX,
orNASDAQ.

Di
ff
erentt
ypesofADRpr
ogr
ams:
AsponsoredADRi sappr
ovedandbackedbythef
orei
gncompanybehindtheshar
es.ani
nvest
or
l
ookingatanOTCADRshoul dver
if
ywhethert
heADRsharesaresponsor
edandmaywanttostay
cl
earofunsponsor
edshar
es.
SponsoredADRisanADRi ssuedbyabankonbehal fofthefor
eigncompanywhoseequi
tyser
vesas
theunderl
yi
ngasset.AsponsoredADRcreatesalegalrel
ati
onshipbet
weentheADRandt hef
orei
gn
companywhichabsorbst
hecostofissui
ngthesecur
ity.
Anunsponsor edADRanADRi ssuedbyadeposi tarybankwithoutt heinv
olvementorpar ti
cipat
ion-or
event heconsent-oftheforeignissuerwhosest ockunderl
iest heADRt heissuertherefor
ehasno
cont
r olov eran unsponsored ADR,i n contrastt o a sponsor ed ADR wher eitr et
ains cont r
ol.
Unsponsor edADRsar eusual l
yest abl
ishedbydeposi t
arybanksi nresponset oinvestordemand.
Shareholderbenef
it
sandv otingrightsmaynotext endedtothehol dersoftheseparti
cularsecurit
ies.
Unsponsor edADRsgeneral
lytradeov er
-the-
counter(OTC)rat
hert hanonUni t
edSt at
esexchanges.

SOPONSOREDADR UNSPONSOREDADR

I
ssued wi
th cooper
ati
on ofthe company I
ssued by– br oker/dealerordeposi
tor
y
whosest
ockwil
lunderl
i
etheADR bank wi
thoutthe invol
vementofcompany
whosestockunderli
estheADR

Compl
ywi
thr
egul
ator
yrepor
ti
ng Nor
egul
ator
yrepor
ti
ng

Li
sti
ng on i
nter
nat
ionalSt
ock Exchanges Tr
adeonOTCmar
ket
al
l
owed.

Lev
elsofADR:
(
a)Level1ADRs:level1ADRsar ethelowestl
evelofsponsoredADRsandalsothesi
mplest
methodforcompani
est opacestheUScapit
almarket
slevel1ADRsar
etradedi
ntheov
er-
the-
counter(
OTC)market.Theissui
ngcompanydoesnothavetocompl
ywit
hUSmar ket
.
(
b)LevelIIADRs:levelI
IADRsenablecompaniestoli
stt
hei
rADRsonNASDAQ,t heAmerican
stockexchangethenewYor
kst ockexchangeandt
heAmer
icanst
ockexchange,
thenewYork
stockexchangeandtheAmeri
can
l
evelIIADRsrequi
reaf
orm 20-Fandform F-
6tobefi
l
ledwiththeSEC,aswellasmetingt
he
l
i
stingrequi
rement
sandfi
l
li
ngalist
ingappl
i
cati
onwi
ththedesi
gnatedst
ockexchange.
(
c)LevelI
IIADRs:
-levelII
IADRsenabl ecompaniestol isttheirADRsonNASDAQ,t heAmex,the
NYSEort heOTCbullet
inboar dandmakeasi multaneouspubl i
cof feri
ngofADRsintheunit
ed
stat
es.Thebenefi
tsofl evelII
IADRsar esubst
ant i
al;i
tallowst heissuertor
aisecapi
taland
l
eadst omuchgr eerv i
sibil
it
yi nt
heUSmar ket.Lev elII
IADRpr ogramsmustcompl ywit
h
vari
ousSEC rul
es,includingt heful
lregi
str
ati
on andr eport
ingrequi r
ement
soft heSEC’s

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
exchangeAct
.

1)GDR-Gl
obal
deposi
tor
yrecei
pts:
Thesearesimi l
artot heADRbutar eusuall
ylistedonexchangesoutsi
detheU. S,suchas
LuxembourgorLondon Di v
idendsareusual
l
ypai dinU.S.dol
lar
s.GDRall
owsinvestorsofany
countryto purchase and sel
lshares ofa company i n any ot
hercount
ry,ent i
tl
ing t
he
sharehol
der
st opartakei
nthedivi
dendandcapit
algainsofthatf
orei
gncompany.
AGDRi ssetupwhenacompanyf
rom onecount
ryi
ntendst
oli
sti
tspubl
i
cly
-tr
adedshar
esi
n
anyf
orei
gncount
ry.

2)I
DR-
Indi
andeposi
tor
yrecei
pts:
IDRi sanexactr everseoft heADR/ GDRi ssue.I DR’sall
ow foreigncompani est omobi lizi
ng
fundsf r
om Indi
a mar ketsthesefor
eigncompani esgetli
stedonI ndianst ockexchange.IDRi s
af inanci
alinst
rument sdenomi nat
edi nI ndianr upeesint hef orm ofadeposi tor
yr eceipt
createdbyadomest ic deposit
oryagai
nstt heunder l
yingequityofissuingcompanyt oenabl e
foreign t
he underl
ying shares woul d accrue tot he deposit
oryr eceiptsholdersinI ndia.
Standard chart
ered PLC became t he fir
stgl obalcompanyt of i
l
ef oran i ssue ofI ndian
depositoryr
eceipt
sinI ndi
ainjune2010.IDRneedst ober egi
steredwi t
hSEBI .

 SEBIhassetRs.
50cr
oreast
hel
owerl
i
mitf
ort
heI
DRst
obei
ssuedbyt
heI
ndi
ancompani
es.

 Mor
eov
er,themi
nimum i
nvest
ment
srequi
redi
ntheI
DRi
ssuebyt
hei
nvest
orhasbeenf
ixedat
Rst
wolakh.

 Also,
theIDRissui
ngcompanyshoul
dhavegoodtrackrecor
dwit
hrespectt
osecuri
ti
esmarket
regul
ati
onsandcompaniesnotmeet
ingt
hecrit
eri
awi l
lnotbeal
lowedtorai
sefundsfr
om the
domesticmarket
.

Par
ti
esi
nvol
vedi
nADR/
GDRi
ssue:
1)Theissuecompanyi sthefirstpar
tythi
sistypi
call
yalargefor
eignbasedcor
porat
ionthatis
al
readyli
stedonalocalfor
eignexchange.Rat
herthanduall
i
stit
ssharesoni
tshomeex change
andonaU. Sexchange.
2)Cust
odianbankisthesecondpart
yinthispr
ocess.Theyacceptal
ltherel
evantdocuments
fr
om theissuingcompanyandkeept hem i
ncustody.Theyacceptsthesharesfrom the
companystoresal
loft
hem ini
tsv
ault
.
3)Deposit
orybank:-theoverseasbankbyacceptingtheissui
ngcompany’
ssharesandsel
li
ng
repr
esentat
ivecert
ifi
cat
est oinv
estors.I
tisasubsi
diar
yofacommer ci
albanklocat
edi
nthe
countr
ywheretheDR’ saretobeissued.
4)Astockexchange:
-theyli
stt
hebankcer
ti
fi
catefort
radi
ngal
l
owi
ngi
nvest
orst
obuyandsel
l
ADR/GDRunitsj
ustastheywoul
dnor
malshares.

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
5)Leadmanager
:-
theyaremerchantbanker
sfort
hei
ssui
ngcompany.Theyhel
pinsmoothi
ngthe
DRissuepr
ocess.Thecompanyhast ochoseacompetentl
eadmanagertomanager
susuall
y
char
geafeeaspercentoft
heissue.
Adv
ant
ageofADRs/
GDRsi
ssue:

 Fori
ndiv
idual
s,adrs/GDRsar eaneasyandcostef fect
ivewayt obuysharesofaf orei
gn
company.The i
ndivi
dualare ableto save consi
der
able moneyand energybyt r
ading i
n
ADR’
s/GDRs,asi
treducesadminist
rat
ivecost
sandav oi
dsforei
gntaxexoneachtr
ansact
ion

 I
tgi
vesat
tr
act
ivepr
ici
ngt
othei
ssuer
.

 I
tpr
ovi
desdi
ver
sif
icat
ionoppor
tuni
tyt
othei
nvest
ors

 ADRs/
GDRscanbel
i
stedonanyoft
heov
erseasst
ockexchanges.

 Capi
tal
canbeeasi
l
yrai
sedf
rom f
orei
gnmar
ket
s.

 I
thel
psenhanci
ngt
hei
mageofcompanygl
obal
l
y.
Di
sti
ngui
shbet
weenADRandGDR:

# Headi
ng ADR |
GDR

1 Acr
ony
m American deposi
tor
y Gl
obal
deposi
tor
yrecei
pt
recei
pt

2 Meani
ng ADR i s a negot iable GDR is a negot i
able
i
nstrumentsissuedbya i
nst r
ument i ssued by t he
US bank, r epresenting i
nt er
nationaldeposi
tor
ybank,
non-us company st ock representi
ng f
oreign
tr
ading i
nt he US stock company ’
s st ock t rading
exchange globall
y.

3 Rel
evance Forei
gn compani
es can Foreigncompani
escant r
ade
tr
adeinUSstockmar
ket inanycount r
y’sstockmarket
other than the US stock
mar ket
.

4 I
ssuedi
n Unit
ed st
ates domest
ic Eur
opeancapi
tal
mar
ket
capi
tal
market

5 Li
stedi
n Amer i
can st
ock Non-USstockexchangesuch
exchangesuchasNYSE asLondonstockexchangeor
orNASDAQ Luxembourgst
ockexchange.

6 Negot
iat
ion I
nAmer
icaonl
y Al
lov
ert
hewor
ld

7 Di
scl
osur
erequi
rement St
ri
ngentdocumentat
ion Less st
ri
ngent
-l
imi
ted
&fi
li
ngrequi
rement
s document
ati
on

8 Leadt
imer
equi
red 5 t o 6 mont hs t o Maxi
mum 3- 4 months t
o
complet
e process compl
etedocument
ati
on
documentat
ion

9 Mar
ket Ret
ail
inv
est
orsmar
ket I
nst
it
uti
onal
mar
ket
.

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
.

10. I
NTERNATI
ONALFOREI
GNEXCHANGEMARKETS
MEANI
NGOFI
NTERNATI
ONALFOREI
GNEXCHANGEMARKETS:
-
Thef orei
gnexchangemar ketisthemar ketinwhichpar ti
cipantsareabletobuysell,exchangeand
speculateoncurr
encies.Therearemanycount r
iesinthewor ldandeachcountryhasit
sowncur r
ency-
whichr esul
tinnumer ouscur r
enciesthoughtthegl obeinint er
nati
onalt r
ad,buyer
scount r
yhasto
makepay mentt
othesel l
ercountryaccordingtothecurrencyofthesell
er.Exchanger
ateisr equi
redt
o
converttheonecurr
encyint opi
cture.
Thef or
eignexchangemar keti
smadeupofav
astnumberofpar
ti
cipant
s.Thepr
oduct
str
adedont
he
for
eignexchangemar ketarecurr
enci
es.
Di
sti
ngui
shBet
weenFDI&FPI
.
Sr
.no. Poi
nt FDI FPI
Ont
heot
herhand,
 
FPIr
epr
esent
s
FDI r
efer
s t
o i
nter
nat
ional passi
vehol
dingsofsecur
it
iessuch
1 Meani
ng i
nvest
ment i
n whi
ch t
he asf
orei
gnst
ocks,bonds,orot
her
i
nvest
or obt
ains a l
ast
ing f
inanci
alasset
s,none of whi
ch
i
nter
est i
n an ent
erpr
ise i
n ent
ail
s act
ive management or
anot
hercount
ry. cont
roloft
hesecur
it
ies'i
ssuerby
t
hei
nvest
or.
No act
ive i
nvol
vement i
n
2 I
nvol
ved i
n managementand management
. I
nvest
ment
I
nvol
vement-
owner
shi
p cont
rol
;long-
ter
m i
nst
rument
sthatar
e mor
e easi
l
y
di
rector
i
nter
est t
raded,l
essper
manentanddonot
i
ndi
rect
r
epr
esentacont
rol
l
ingst
akei
nan
ent
erpr
ise.
I
tisf
air
lyeasyt
osel
lsecur
it
iesand
3 Sel
lof
f I
tismor
edi
ff
icul
ttosel
lof
for pul
loutbecauset
heyar
eli
qui
d.
pul
lout
.
Comesf
rom mor
edi
ver
sesour
ces
4 e.
g.asmal
lcompany
'spensi
onf
und
Tendst
obeunder
takenby ort
hroughmut
ual
fundshel
dby
Comesf
rom
Mul
ti
nat
ional
organi
sat
ions i
ndi
vi
dual
s;i
nvest
mentv
iaequi
ty
i
nst
rument
s(st
ocks)ordebt
(
bonds)ofaf
orei
gnent
erpr
ise.
I
nvol
vest
het
ransf
erofnon- Onl
yinv
est
mentoff
inanci
alasset
s.
5 Whati
s f
inanci
alasset
se.
g.
i
nvest
ed t
echnol
ogyandi
ntel
l
ect
ual
capi
tal
,i
naddi
ti
ont
ofi
nanci
al

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
asset
s.
6 St
andsf
or For
eignDi
rectI
nvest
ment For
eignPor
tfol
i
oInv
est
ment
7 Vol
ati
l
ity Hav
ingsmal
l
eri
nneti
nfl
ows Hav
ingl
argerneti
nfl
ows
8 Pr
oject
sar
eef
fi
cient
ly Pr
oject
sar
elessef
fi
cient
ly
Management
managed managed
“
Not
hingi
nthewor
ldi
sev
ercompl
etel
ywr
ong.Ev
enast
oppedcl
ocki
sri
ghtt
wiceaday
.”

PRACTI
CALPROBLEMSOFI
NTERNATI
ONALFI
NANCE

DI
RECTQUOTE

I
denti
fythel
ocat
ionwher
ethef
oll
owi
ngquot
ati
onsar
edi
rectandcal
cul
ate
t
heindir
ectf
orm:
a)1GBP=SGD2.
8272-
82

b)1AUD=EUR0.
6733–43

c)CHF1.
2325–35perUSD

d)100I
NR=JPY198.
2350–50

e)I
NR45.
8335–65=1USD

I
NDI
RECTQUOTE
I
denti
fythel
ocat
ionwherethef
oll
owingquot
ati
onswoul
dbecl
assi
fi
edas
I
ndi
rectandconver
tthem t
odir
ectfor
m:
a)100I
NR=CHF2.
5858–68

b)1EUR=CAD1.
4317-27

c)USD0.
1616–23perSEK

d)1AUD=SEK4.
9350–50

e)USD0.
7000–10/
SGD

CROSSRATE

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC

a)1USD=CHF1.2325–35
1USD=CAD1.1285–95
Cal
cul
atev
alueof1CADi
nter
msofCHF

b)AUD1.1818–28/USD
SGD1.4343–53/USD
Cal
cul
ateAUDperSGDquot
ati
on.

c)USD/INR46.0485–35
USD/SEK5.8525–25
Cal
culat
eINR/SEKQuotat
ion.

d)EUR0.7135–45perUSD
USD1.6767–77perGBP
Cal
cul
ateGBPperEURquot
ati
on.

e)USD1.6990–00perGBP
EUR1.
2470–80perGBP
Cal
cul
ateUSDperEURquot
ati
on.

f)USD/INR46.6375–25
EUR/USD1.2870–80
Cal
culat
eINR/EURquotat
ion.

g)Cal
cul
atet
herateoffol
l
owingcur
renciesagai
nstI
ndi
anRupee.
BI
D OFFER
1USD = Rs.44.
20 44.
30
1GBP = USD1.8100 1.8110
1EURO = USD1.2050 1.2060
1USD = JPY113.80 113.
90
1USD = CHF1.2970 1.2980(SWISSFRANKS)

h)Cal
cul
atet
herateoffol
l
owingcur
renciesagai
nstI
ndi
anRupee.
BI
D OFFER
1USD = Rs.39.
80 39.
90
1GBP = USD2.0300 2.0310
1EURO = USD1.4090 1.4100
1USD = JPY114.80 114.
90
1USD = CHF1.1700 1.1710(SWISSFRANKS)

i
)Calcul
atet
herateoffol
l
owingcur
renciesagai
nstI
ndi
anRupee.
BI
D OFFER
1USD = Rs.38.
60 38.
90
1GBP = USD2.0300 2.0311
1EURO = USD1.4090 1.3100
I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC

1USD = JPY114.
804 114.
803

j
)Calcul
atet
herateoffol
l
owingcur
renciesagai
nstI
ndi
anRupee.
BI
D OFFER
1USD = Rs.46.
80 46.
90
1GBP = USD2.0400 2.0420
1EURO = USD1.5080 1.5100
1USD = JPY214.80 214.
90
1USD = CHF1.1800 1.1810

k)Cal
cul
atet
herateoffol
l
owingcur
renciesagai
nstIndi
anRupee.
BI
D OFFER
1USD = Rs.44.
80 44.
90
1CAD = USD1.0230 1.0240 Canadi
anDol l
ar
1SGD = USD0.8090 0.8100 Si
ngaporeDollar
1USD = ZAR6.7690 6.7700 SouthAfr
icanRand
1USD = THB30.28 30.
29 ThaiBaht

l
)Cal
cul
atet
her
ateoffol
lowi
ngcur
renciesagai
nstIndianRupees.
Bid Offer
1USDI NR 46.8090 46.9010
1CADUSD 1.
0240 1. 0250
1SGDUSD 0.
8080 0. 8120
IUSDZAR 7.
6090 7. 6200
1USDGBP 0.
7080 0. 7090

m)
Cal
cul
atet
her
ateoff
oll
owingcur
renci
esagainstIndianRupees.
Bid Offer
1USDI NR 60.80 60.90
1GBPUSD 2.0300 2. 0310
1EURUSD 1.4090 1. 4100
1USDJPY 114. 80 114.890
1USDCHF 1.1700 1. 1710

n)Cal
cul
atet
her
ateoff
oll
owi
ngcur
renciesagai
nstIndi
anRupees.
Bid Offer
1USDINR 60.15 60.16
1GBPUSD 1.6500 1. 6600
1EURUSD 1.3680 1. 3700
1USDJPY 103.9000 103.9300
1USDCHF 0.8800 0. 8900

o)Compl
etet
hef
oll
owi
ngt
abl
e:
1USD= 1GBP= 1CAD=

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC

USD 1 1.
6667 0.
9069
GBP ? 1 0.
5441
CAD ? ? 1

p)
1USD= 1GBP= 1CAD=
USD 1 1.6667 ?
GBP ? 1 ?
CAD 1.1027 ? 1
GEOGRAPHI CALARBI
TRAGE
a) 1USD=CAD1.
1293–03
1USD=CAD1.
1275–85

b) 1GBP=CHF2.
4326-36
1GBP=CHF2.
4345–55

c) USD1.
2448-
58perEUR
EUR0.
8050-
60perUSD

d) GBP/SEK8.
9950-
50
SEK/
GBP0.1090–00

e) 100I
NR/USD2.1583-
88
USD/
INR46.
3375-
25

f
) 100JPY/I
NR40.
2450-
50
100I
NR/JPY248.
4850-
50

g) CAD/I
NR32.7850-
00
100I
NR/CAD3.0425-
50

h) EUR/
AUD1.5998-
08
AUD/EUR0.
6223-
33

i
) SGD1.
8737-
47perEUR
EUR0.
5355-
65perSGD

j
) CHF2.
4189-
99/
GBP
GBP0.
4110-
17/
CHF

k) Twobanksar equoti
ngthefol
lowingUS$r
ates:
BankA:Rs.47.9810-
48.
1110
BankB:Rs.48.
0110-48.
2350
Fi
ndoutthearbitr
ageoppor
tunit
y.

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC

TRI
ANGULARARBI
TRAGE
1)GBP/USD1.
6985
USD/
AUD1.1875
GBP/
AUD2.0195

2)EUR/USD1.
2398
USD/
CHF1.2298
CHF/
EUR0.6598

3)USD/SEK5.
9935
GBP/
SEK9.8735
GBP/
USD1.6435

4)EUR/SGD1.
9578
EUR/
CHF1.6478
CHF/
SGD1.1878

5)CAD1.
8900–10/GBP
CAD1.
1245–55/
USD
GBP0.
5930–35/
USD

6)GBP/INR74.8525–75
USD/GBP0.5625–30
100I
NR/USD2. 3715–20

7)EUR/AUD1.
4892-02
EUR/
USD1.2390-
00
USD/
AUD1.1990-
00

8)SEK8.
0050–00=1EUR
SGD1.
7130–40=1EUR
SEK4.
6775–25=1SGD

9)EUR/CHF1.
6197–07
EUR/
SGD1.9197–07
SGD/CHF0.
8397–07

10)Thef
oll
owi
ngquotesarefr
om NewYor
k:-
1GBP=USD1.5975/6010
1EUR=USD1.2375/90

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC

Fi
ndthecrossrateGBPEUR
Thefoll
owingquoteisfr
om Fr
ankfur
t:
-
1GBP=EUR1. 2950/65
Fi
ndwhet hert
hereisar
bitr
ageopport
uni
ty.I
far
bit
ragei
spossi
blef
indt
hear
bit
ragepr
ofi
tfor
1mill
ionEuro.

11)Thef ol
lowingf orei
gnexchangequot ear eav ai
l
abl
einNewYor k.
USD1=GBP0. 6542/ 0.6547
USD1=CHF1. 05530/ 1.5535
Calculatethecr osscur rencyquotef or1GBPi nter
msofCHF
Thef oll
owingquot eisav ail
abl
ei nZurich.
GBP1=CHF2. 3722/ 2.3745
Compar et hiswi t
ht hecalculatedcrosscur rencyquoteandstat
ewhet herar
bit
rage
oppor t
unityexists.Calculatethesame( ifany )for1mil
li
onGBP.(Apri
l2011)

12)Thef ol
lowingf oreignexchangequot esareavai
lablei
nNewYork.
AUD1=USD0. 7602/ 0.7613
CAD1=USD0. 6732/ 0.6741
Calculatethecr osscur rencyquot efor1CADi ntermsofAUD.
Thef oll
owingquot eisav ai
labl
einSy dney.
CAD1=AUD0. 8895/ 0.8915
Compar et hiswi t
ht hecal culat
edcrosscur r
encyquoteandstat
ewhetherarbi
tr
age
oppor t
unityexist.Calcul atethesame( ifany)f
or1mi ll
i
onCAD.(Oct2011)

13)Giv
en:-
USD/CAD1.1685-1.
1695
USD/CHF1.3785-1.
3795
CAD/CHF1.1885-1.
1895
I
denti
fyandcalcul
atetr
iangul
arar
bit
ragepr
ofi
t.(
Assumey
ouhav
e1mi
l
li
onCAD)

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC

SPREAD
1) 1USD=CAD1.
1290–00Cal
cul
ate%agespr
ead.

2) 100I
NR=USD2.
1605–10Cal
cul
ate%agespr
ead.

3) USD/SGD1. 4395-
05
GBP/SGD2. 6865-
75
Cal
cul
ateGBP/ USDQuot
ati
on.
Est
abl
i
shrelati
onshi
pbetweent
het
hreequot
ati
onsi
nter
msof%agespr
ead.

4) Meanrat
eGBP/INR78.
6500ANDSPREAD=0.0030
Cal
cul
ate%agespr
eadandGBP/
INRquot
ati
on.

5) Fl
atrateUSD/AUD1.1785andspread=10point
s
Cal
culate%agespr
eadandEUR/ SEKquot
ati
on.

6) Averagerat
eEUR/SEK8.0025andspr
ead=80point
s.
Calcul
ate%agespreadandEUR/SEKquot
ati
on.

7) AskrateUSD/CHF1.2318andspread=12poi
nts.
Cal
culateUSD/CHFquotat
ionand%agespr
ead.

8) Bi
drat
eEUR/CHF1.
6873andspr
ead=0.0014
Cal
cul
ateEUR/
CHFquot
ati
onand%agespread.

9) MidrateUSD/EUR0.7108
Per
centagespread=0.0520%
Cal
culatespr
eadandUSD/ EURquot
ati
on.

10) Spr
ead=0.0014and%spr
ead=0.0810%
Cal
cul
atemidrat
eandt
heUSD/CHFquotat
ion.

11) Thefoll
owingquot eisgiveninMumbai.
1USD=Rs.44. 7250–Rs.44. 7300
I
sitadirectquoteori ndi
rectquot
e?
Fi
ndthemi drate,spreadandt hespr
eadper
cent
age.
Cal
culatetheinversequote.

12) St
udyt
hef
oll
owingquote:
-
1USD=NZD1.5510/
1.5560

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC

i
.Fi
ndt
hemidrate,
spreadandper
cent
age.
i
i
.Fi
ndthei
nversequote.

13) Thefoll
owingquoteisgi
ven.
USD1=CAD1. 1630/50
I
denti
fythemidrate,spr
eadandt
hespr
eadper
cent
age.
Cal
culatet
heinversequote.

14) Thefoll
owingquot eisgi veninNewYork.
EUR1=USD1. 2596/ 1.2620
I
sitadirectorindirectquote?
I
denti
fythemi drate, spreadandthespr
eadper
cent
age.
Cal
culatetheinversequot e.

FORWARDRATESCALCUATI
ONS:
(TABLE/
SCHEDULEMETHOD)
1)SpotUSD/I NR55.8325–50 USD/CHF1.
0275–85
1mont hfor
ward735–765 12-07
3mont hfor
ward2635–2715 32-27
6mont hfor
ward5545–5675 107-77
Cal
culate1,
3,6monthCHF/INRquot
ati
ons.

2)SpotGBP/USD1. 5890–00 USD/CAD1.

1298-02
1mont hfor
ward15–05 05-10
2mont hfor
ward27–12 12-20
3mont hfor
ward37-17 22-32
Cal
culate1,
2,3mont
hGBP/USDquot
ati
ons.

3)SpotGBP/INR78. 3250–75 GBP/USD1.6813-23

1mont hfor
ward150-175 12-07
3mont hfor
ward390–475 32-23
6mont hfor
ward840–1015 59-41
Cal
culate50daysforwardUSD/INRquotat
ions.
Cal
culate100daysforwardUSD/INRQuotati
ons.

4)SpotEUR/SEK8. 0215–90 EUR/CAD1.

3715–25
1mont hfor
ward425–475 15–25
3mont hfor
ward1425–1575 35–55
Cal
culate42daysf
or war
dCAD/SEKquot
ati
on.
Cal
culate72daysf
or war
dCAD/SEKquot
ati
on.

5)SpotUSD/INR55.6320–50
Spot/Jan 615–645
Spot/Feb 1495–1545
Spot/March 2425–2630
Cal
culat
eUSD/INRquot at
ionf
or13Feb
Cal
culat
eUSD/INRquot at
ionf
or19March.

6)Datapr
ovi
dedbyBank‘
A’on18Mar
ch2013
SpotEUR/DKK7.5380–90
Spot/March 30–35
I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC

Spot/Apr 105–125
Spot/May 198–249
Cal
culat
eEUR/DKKquot
eofbank‘
A’f
or1mont
h6day
sfor
war
d.
Cal
culat
eEUR/DKKquot
eofbank‘
A’f
or2mont
h2day
sfor
war
d.

7)SpotGBP/EUR1.
2118–28
Spot/Sept 35–25
Spot/Oct 65–55
Spot/Nov 96–86
Spot/Dec 126–116
Cal
culat
eGBP/EURquotat
ionf
or11Oct
.
Cal
culat
eGBP/EURquotat
ionf
or24Nov.

8)On10JuneBank‘ A’quotes:
SpotEUR/USD1. 2935–45
Spot/July 08–03
Spot/August 28–18
Spot/September 48–33
Cal
culat
e1mont h5day sforwardEUR/USDquotati
on
Cal
culat
e2mont h10day sforwardEUR/USDquotati
on.

FORWARDRATESCALCUATI
ONS:
(FORMULAMETHOD)
1) SpotGBP/USD1. 6835
USDinterestr
ate:3.
25%p.
a.
GBPinterestr
ate:3.
65%p.
a.
Cal
culate3mont hsfor
war
dGBP/
USDr
ate.

2) 73daysf orwardUSD/CAD1. 1363

CADinterestrate:
3.6250%p.
a.
USDinterestrat
e:2.8750%p.
a.
Cal
culatespotUSD/CADr at
e.

3) SpotEUR/ SGD1.9382
60daysf orwardrat
e: 1.
9402
EURinterestrat
e;2.25%p.a.
Cal
culateSGDi nter
estrate.

4) SpotEUR/CHF1. 4982
219daysf orwardr ate:
1.4918
CHFinterestrat
e: 1.35%p. a.
Cal
culateEURi nterestrate.

5) 120daysf orward100I NR/USD2.

1695
I
NRinterestrate:4.25%p. a.
USDinterestrate:2.65%p. a.
Cal
culatespotUSD/I NRrate.

6) SpotGBP/SEK9. 8835
6mont hsforwar drate:10.0085
GBPinterestrate:3.1250%p. a.
Cal
culateSEKi nterestrate.

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC

7) 4mont hsforwar dUSD/INRrat

e46.
0035
I
ncl
udespr emi um onUSD1165poi
nts
USDinterestrate:2.
5%p.a.
Cal
culateINRi nter
estr
ate.

8) SpotUSD/JPY91. 2200
JPYinterestr
ate0.35%p.a.
USDInterestr
ate:2.65%p.a.
Cal
culate292daysf orwardUSD/JPYr
ate.
CALCULATI
ONOFSWAPPOI
NTS
1) SpotEUR/CHF1.
5735–1.
5745
EURI
nter
estr
ates:
2.25-2.
50%p.
a.
CHFI
nter
estr
ates:
1.00–1.
25%p.
a.
Cal
cul
ate6mont
hsf
orwar
dquot
ati
onsandswappoi
nts.
2) SpotGBP/I
NR78.
3525–75
3mont
hsf
orwar
d78.
4980–78.
6005
I
NRdeposi
tInt
erestr
ate:
4.00%p.
a.
GBPdeposi
tInt
erestr
ate:
3.00%p.
a.
Cal
cul
atet
hear
bit
ragef
reeLendi
ngr
atesf
orGBPandI
NR.
3) SpotUSD/CHF1.
2360–70.
73day
sfor
war
d1.
2325–1.
2345
USDLendi
ngI
nter
estr
ate:
2.50%p.
a.
CHFLendi
ngI
nter
estr
ate:
1.25%p.
a.
Cal
cul
atet
hear
bit
ragef
reedeposi
trat
esf
orUSDandCHF.
4) SpotUSD/AUD1.
1885–95
6mont
hsf
orwar
dswappoi
nts15–49
AUDdeposi
tint
erestr
ate:
3.00%p.
a.
USDdeposi
tint
erestr
ate:
2.50%p.
a.
Cal
cul
atet
hear
bit
ragef
reel
endi
ngI
nter
estr
atesf
orAUDandUSD.
5) SpotGBP/SEK9.
0335–9.
0385
4mont
hsf
orwar
dswappoi
nts74–224
SEKLendi
ngi
nter
estr
ate:
3.75%p.
a.
GBPLendi
ngi
nter
estr
ate:
3.25%p.
a.
Cal
cul
atet
hear
bit
ragef
reedeposi
tint
erestr
atesf
orSEKandGBP.
6) SpotGBP/USD : 1.
9845–1.
9855
USDI
nter
estr
ate : 4.
1250-
4.3750%p.
a.
GBPI
nter
estr
ate : 5.
8750–6.
1250%p.
a.
Cal
cul
atet
heswappoi
nts(
for
war
dmar
gins)f
ort
hreemont
hs.
I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC

ANNUALI
SEDFORWARDMARGI
N(AFM)
1)SpotUSD/SEK5. 9715
3mont hfor
war
dr at
e:6.0085
Cal
culate3monthAFM.

2)SpotUSD/INR45.3820
6mont hAFM:(
+)2.
25%
Cal
culate6monthf
orwardUSD/I
NRr
ate.

3)60daysf
orwardGBP/SGD2.
8038
60daysAFM:(-
)1.25%
Cal
cul
ateSpotGBP/SGDrat
e.

4)SpotEUR/JPY119. 3525
1mont hf orwar
dr ate:118.9745
Cal
culate1mont hAFM.
I
fJPYi nterestr
ate=0. 25%p. a.
Cal
culateEURi nterestrate.

5)SpotGBP/EUR1. 2118
3mont hfor
war
dr at
e:1.2118
Cal
culate3monthAFM andinter
prett
her
esul
t.

6)SpotEUR/AUD1. 3932
3mont hAFM: premium 1.
75%
Cal
culate3mont hforwardEUR/AUDr ate.
I
fAUDi nter
estrate=3.25%p.a.cal
cul
ateEURi
nter
estr
ate.

7)SpotUSD/JPY90. 2500–91. 2500

6mont hfor
war
dr at
e:89.1800–90. 1800
Cal
culate6monthAFM andi nt
erpretther
esul
t.

8)SpotUSD/I NR45.3825–75
3mont hforwar
d100I NR/USD2. 2002–2.2005
Cal
culate3mont hAFM andinterprett
heresul
t.
I
fUSDi nter
estrat
e=2. 35%p.a.calcul
ateI
NRinter
estr
ate.

9)Thefoll
owingquotesaref r
om Mumbai Spot1USD=Rs.49.
5600/5700:
-
1monthf orwar
d600/700
2monthf orwar
d1500/1600
i
.Writ
ethequot einout
rightform.
i
i.Whatisthepremium ordiscountpercentageonbi
dandaskr
atesf
oronemont
h?
i
ii
.whatisforwardquotefor50day s?

10)Thef
oll
owi
ngquot
esar
egi
veni
nMumbai
.

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
USD1=I NR47.7000/7200(spot)
2monthsforward240/300
Wri
tet
hef or
wardquotati
onsint
heoutr
ightf
orm.
Cal
cul
atetheannuali
zedfor
wardpremi
um/discountf
orthebi
dandof
ferr
ates.
Whati
sthelikel
yfor
wardquotefor1monthsand10days.

COVEREDI
NTERESTARBI
TRAGE
1)SpotUSD/
CAD1.
0315

6mont
hFor
war
dRat
e:1.
0360
USDI
nter
estRat
e:1.
00%p.
a.
CADI
nter
estRat
e:1.
50%p.
a.
2)SpotEUR/
SEK8.
6335

3mont
hFor
war
dRat
e:8.
6815
SEKI
nter
estRat
e:4.
00%p.
a.
EURI
nter
estRat
e:1.
60%p.
a.
3)SpotGBP/
AUD1.
6240

60day
sFor
war
dRat
e:1.
6280
Annual
i
sed60day
sGBPI
nter
estRat
e:1.
20%.
Annual
i
sed60day
sAUDI
nter
estRat
e:3.
00%.
4)SpotEUR/
SGD1.
7148

73day
sFor
war
dRat
e:1.
7173
EURI
nter
estRat
e:1.
50%p.
a.
SGDI
nter
estRat
e:0.
50%p.
a.
5)SpotUSD/
CHF0.
9318

120day
sFor
war
dRat
e:0.
9283
USDI
nter
estRat
e:1.
20%p.
a.
CHFI
nter
estRat
e:0.
30%p.
a.
6)SpotSEK/
GBP0.
1012

146day
sFor
war
dRat
e:0.
0995
GBPI
nter
estRat
e:1.
50%p.
a.
SEKI
nter
estRat
e:5.
00%p.
a.
7)Spot100I
NR/
USD1.
8115

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
6mont
hsFor
war
dRat
e:1.
7865
Annual
i
sedI
NRI
nter
estRat
e:4.
20%p.
a.
Annual
i
sedUSDI
nter
estRat
e:1.
20%p.
a.
8)SpotUSD/
EUR0.
8013

219day
sFor
war
dRat
e:0.
7988
USDI
nter
estRat
e:1.
50%p.
a.
EURI
nter
estRat
e:1.
00%p.
a.
9)SpotEUR/
USD1.
2470-
80

270day
sFor
war
dRat
e:1.
2565-
75
USDI
nter
estRat
e:1.
40-
1.60%p.
a.
EURI
nter
estRat
e:1.
00-
1.20%p.
a.
10)SpotGBP/
CAD1.
8832-
42

6mont
hInt
erestRat
e:1.
8900-
10
CADI
nter
estRat
es:
2.00-
2.20%p.
a.
GBPI
nter
estRat
e:0.
80-
1.00%p.
a.

BORROWI
NG&I
NVESTMENTDECI
SION
1)Gi
v ent
hef ol
l
owingopt
ions,
establ
i
shwhi
chcur
rencywoul
dbeusedt
obor
row6mi
l
li
onI
NRf
or
atemporaryperi
odof3months?
I
NRi nt
erestrat
e:5%p.
a.
CURRENCY SPOTRATE I
NTERESTRATE 3MONTHFWDRATE

USD 44.
7535 2.
25%p.
a. 45.
0600

GBP 78.
7275 3.
50%p.
a. 79.
0200

CHF 38.
3525 1.
50%p.
a. 38.
7000

2)Gi
vent
hefol
lowingopt
ionsest
abl
i
shwhi
chcur
rencywoul
dbeusedt
oinv
estI
NR8Mi
l
li
onf
ora
t
empor
aryperi
odof6mont hs.

I
NTERNATI
ONALFI
NANCE
TYBAF SEM V JMPC
I
NRI
nter
estr
ate:
5%p.
a.
CURRENCY SPOTRATE I
NTERESTRATE 3MONTHFWDRATE

USD 44.
7535 2.
25%p.
a. 45.
3700

GBP 78.
7275 3.
50%p.
a. 79.
3100

CHF 38.
3525 1.
50%p.
a. 39.
0200

3)Giventhefol
lowi
ngoptions,
est
abl
ishwhi
chcur
rencywoul
dbeusedt
obor
rowI
NR12mi
l
li
on
foratemporaryper
iodof3months.
I
NRI nter
estrat
e:4%p.a.
CURRENCY SPOTRATE I
NTERESTRATE 3MONTHFWDRATE

USD 44.
7535–65 2.
25%p.
a. 44.
9450–00

GBP 78.
7275–25 3.
50%p.
a. 78.
8250–00

CHF 38.
3525-75 1.
50%p.
a. 38.
5850–00

4)Gi
vent
hef ol
l
owi ngopt
ionsest
abl
i
shwhi
chcur
rencywoul
dbeusedt
oInv
estI
NR8mi
l
li
onf
ora
t
emporar
yperiodof6mont hs.
I
NRInt
erestRate:4%p.a.
CURRENCY SPOTRATE I
NTERESTRATE 3MONTHFWDRATE

USD 44.
7535–85 2.
25%p.
a. 45.
1500–50

GBP 78.
7275–00 3.
50%p.
a. 79.
9400–50

CHF 38.
3525-55 1.
50%p.
a. 38.
8375–25

5)Giventhefollowingopt
ionsest
abl
i
shwhi
chcur
rencywoul
dbeusedt
obor
rowI
NR12mi
l
li
on
foratempor aryperi
odof60days.
I
nterestRate: 4.
00–4.25%p.a.
CURRENCY SPOTRATE I
NTERESTRATE 3MONTHFWDRATE

USD 44.
7535–85 2.
25–2.
50%p.
a. 44.
8750–00

GBP 78.
7275–25 3.
50–3.
75%p.
a. 78.
7950–00

CHF 38.
3525-75 1.
50–1.
75%p.
a. 38.
5050 –00

6)Gi
vent
hef ol
l
owi ngopt
ionsestabl
ishwhi
chcur
rencywoul
dbeusedt
oInv
estI
NR8mi
l
li
onf
ora
t
emporar
yperiodof90day s.
I
NRInt
erestRate:4.
00–4. 25%p.a.
CURRENCY SPOTRATE I
NTERESTRATE 3MONTHFWDRATE

USD 44.
7535–85 2.
25–2.
50%p.
a. 44.
9800–50

GBP 78.
7275–00 3.
50–3.
75%p.
a. 78.
8700–50

CHF 38.
3525-55 1.
50–1.
75%p.
a. 38.
5900-50

I
NTERNATI
ONALFI
NANCE