INDEX

NAME : - Anish Appukuttan

SUB : - International Finance
SUB CODE : - 10
ROLL NO : - 124
STD : - M.B.A 2nd Year
SEM : - III
COLLEGE : - Pratibha Institute of
Business Management
PROFESSOR: - Prof. Mahima Singh Mam
 Q.1 Explain in detail the benefits of FDI to the host and home countries.
Answer: -
Introduction: -
Foreign Direct Investment plays an important part in global entrepreneurs and businesses. The
FDI can easily provide a firm with new business environments and markets, cheaper production
facilities, usage chances of newest technologies, cheaper financing and skills. There is a
significant difference between FDI and foreign portfolio investment (FPI). Foreign portfolio
investment means investing of individuals, companies, or policy makers of a nation in foreign
fiscal tools (for example government bonds, foreign stocks) making an important wealth piece
in a foreign entrepreneurship is not involved.

Benefits of FDI to Host Countries: -

In order to get more positives from FDI freely, improving countries have started to dilate and
make more suitable laws and FDI policies and attempted to reach most suitable arrangement to
get interest the FDI makers. Supporters of the liberal market perspective suggest that the gain
of FDI to a landlord country so preponderate the costs that practical nationalism is an ideology
which has been unable to imply.
Three determined benefits will be studied on this part for the landlord country: effects on
resource - transfer, the effect on employment and effect on balance of payments.
 Effects on Resource - Transfer: -
Foreign direct investment can add great amount of value to a landlord economy with providing
cash and capital, innovative technology, and governance sources that might the directly
invested country does not have and with the help of three important resource the country’s
economy’s expanding rate can be increased. That type of source transport can contribute to the
stimulating the fiscal expanding of the landlord economy. There are three elements in Resource
— Transfer Effect, which are Capital, Technology and Management.
1. Capital: -
When we get to talk about the capital, multinational enterprises (MNEs) spend money and
make investment for long term basis, get into jeopardy and use their corporate identities only
when the projects make money well. After the free capital transfer across nations regulations,
capital-holders are very likely to seek highest rate of return. It causes that the countries which
are in need of capital, try to attract MNEs to invest. A lot of MNEs, with the help of their big size
and financial strength, get accessibility to fiscal instruments and opportunities which may not
be ready to use to companies of landlord nation. These funds are likely to be ready to use for
MNEs. That situation is caused by the multinational enterprises’ popularity, huge MNEs more
easily access to money from capital markets than host country firms would. That situation helps
 MNEs to invest their money to host country and get higher return rate with the help of the
MNEs, the host country gets the investment.
Studies suggests three general advantages of FDI on capital, these are;
1) Company presidents have less risk with the help of free flow of capital around the world.
With the different financial instruments, president can distribute the risk.
2) If the money and capital markets become worldwide, that situation increase the quality of
capital and money governance and management, gathers more modern regulations.
3) With the integration to international system of capital flowing, country’s governments must
have some limit to make bad policies.
2. Technology: -
If a company wants to grow, must be able to use and follow technology very well. That
sentence is generally approved by the authorities. Technology can create a movement and
mobility in the economy which may be able to facilitate economic improvement and
industrialization. There are two different ways of effect of technology to take place in landlord
country. Both of them are very valuable and cannot be ignored. Technology may take place in a
process of production or it can take place in final product (for example., smart phones we use).
Although, there are too many nations which do not have enough technology and innovation,
they also have to have their own research and improvement for their economic growth. Last
sentences are also specifically accurate for less improved nations. It is evident that the having
appropriate technology has a great amount of correlation with being improved country or not.
If a country has enough technology, they can directly evacuate their technology to different
country and make great money. Because technology is an expensive resource. Technologies
which are taken from improved countries are more willing to bring modernism and liberalism to
the landlord country.
3. Management: -
Foreign expertise for management which are gained by FDI is very helpful for the landlord
country. The mentioned benefits take place with different ways. First, the investing MNE can
train the host country’s citizen to expertise on their respectively occupation. This way is
thought to be cheaper. Secondly, the investing MNE can bring their own employees from their
company’s nation and with making this, the invested company’s brunch may has already
trained employees to manage the business in landlord company. These benefits sometimes get
less if the mentioned benefits are unique for the investing MNE’s company. That problem
causes ineffective in management and governance of the landlord’s branch of the company.
With creating suitable management team is accepted to increase the efficiency of the company
and also the landlord country’s nation’s management traditions. For this concept, one study
offers three benefits in managerial way. Such as more accurate training and high level of
regulations can help to increase effectiveness of management, being skilful on investment
possibilities can be increased by entrepreneurial soul, the employees who get training, takes
arising externalities.

 Employment Effects: -
Employment is effected by foreign direct investment (FDI) directly and also indirectly.
Facilitating of employment is most important effect of FDI in the countries with high working
power but having less capital to invest. This kind of impact takes place when the MNE hires a lot
of host country’s citizen. This is the direct effect of employment. The indirect effect of
employment is creating jobs in domestic resource provider as an outcome of FDI of the MNE
and increased local spending. Some argue that that not all the “newly created employments”
established by FDI shows net additions in employment. For example; If we think about FDI by
German chemical company in the Greece, some argue that the employment established by this
FDI have been less than break even with creating employment lost in chemical companies from
Greece, which have started to lose market share to foreigner chemical investor. As a result of
this kind of substitution effects the real number of the employment which is created by FDI of
the German chemical company may be less than it is expected. That employment effect helps
and creates leverage for the investing MNEs when the MNE and the landlord country’s
government negotiate about a conflict. Create employment is always important task for a
government.
 Balance of Payments Effects: -
Balance of Payment is the difference between the payments to and receipts from other
countries. FDI can have beneficial and negative effects on a country’s balance of payment. FDIs
effect on a country’s balance of payment accounts is a significant regulation topic for most
landlord policy makers. There are three possible balance of payments outcome of FDI.
Initial Capital Inflow: - If a MNE invest directly on a country, that multinational enterprise
gathers their own money to spend and invest. Substitute for Imports: If a MNE produce goods
in a country and If these goods were imported earlier, this kind of situation will look good on
balance of payments. Inflow of payments from export of goods and services: If a MNE produce
goods in a country and If these goods are exported, this kind of situation creates good values on
balance of payments.

Benefits of FDI to Home Countries: -

1. Economic growth: -

The creation of jobs is the most obvious advantage of FDI, one of the most important reasons
why a nation (especially a developing one) will look to attract foreign direct investment. FDI
boosts the manufacturing and services sector which results in the creation of jobs and helps to
reduce unemployment rates in the country. Increased employment translates to higher
incomes and equips the population with more buying powers, boosting the overall economy of
a country.

2. Human capital development : -

Human capital involved the knowledge and competence of a workforce. Skills that employees
gain through training and experience can boost the education and human capital of a specific
country. Through a ripple effect, it can train human resources in other sectors and companies.

3. Technology: -

Targeted countries and businesses receive access to the latest financing tools, technologies,
and operational practices from all across the world. The introduction of newer and enhanced
technologies results in company’s distribution into the local economy, resulting in enhanced
efficiency and effectiveness of the industry.

4. Increase in exports: -

Many goods produced by FDI have global markets, not solely domestic consumption. The
creation of 100% export oriented units help to assist FDI investors in boosting exports from
other countries.

5. Exchange rate stability: -

The flow of FDI into a country translates into a continuous flow of foreign exchange, helping a
country’s Central Bank maintain a prosperous reserve of foreign exchange which results in
stable exchange rates.

6. Improved Capital Flow: -

Inflow of capital is particularly beneficial for countries with limited domestic resources, as well
as for nations with restricted opportunities to raise funds in global capital markets.

7. Creation of a Competitive Market : -

By facilitating the entry of foreign organizations into the domestic marketplace, FDI helps
create a competitive environment, as well as break domestic monopolies. A healthy
competitive environment pushes firms to continuously enhance their processes and product
offerings, thereby fostering innovation. Consumers also gain access to a wider range of
competitively priced products.

8. Climate: -
The United Nations has also promoted the use of FDI around the globe to help combat climate
change.

Q.2 Define exchange rate. What are the fundamental factors affecting exchange
rate and capital market?
Answer: -
Definition of Exchange rate: -
In finance, an exchange rate is the rate at which one currency will be exchanged for another
currency. Currencies are most commonly national currencies, but may be sub-national as in the
case of Hong Kong or supra-national as in the case of the euro. The exchange rate is also
regarded as the value of one country's currency in relation to another currency. Each country
determines the exchange rate regime that will apply to its currency. For example, a currency
may be floating, pegged (fixed), or a hybrid. Governments can impose certain limits and
controls on exchange rates. Countries can also have a strong or weak currency. There is no
agreement in the economic literature on the optimal national exchange rate (unlike on the
subject of trade where free trade is considered optimal). Rather, national exchange rate
regimes reflect political considerations.
In floating exchange rate regimes, exchange rates are determined in the foreign exchange
market, which is open to a wide range of different types of buyers and sellers, and where
currency trading is continuous: 24 hours a day except weekends (i.e. trading from
20:15 GMT on Sunday until 22:00 GMT Friday). The spot exchange rate is the current exchange
rate, while the forward exchange rate is an exchange rate that is quoted and traded today but
for delivery and payment on a specific future date.
In the retail currency exchange market, different buying and selling rates will be quoted by
money dealers. Most trades are to or from the local currency. The buying rate is the rate at
which money dealers will buy foreign currency, and the selling rate is the rate at which they will
sell that currency. The quoted rates will incorporate an allowance for a dealer's margin (or
profit) in trading, or else the margin may be recovered in the form of a commission or in some
other way. Different rates may also be quoted for cash, a documentary transaction or for
electronic transfers. The higher rate on documentary transactions has been justified as
compensating for the additional time and cost of clearing the document. On the other hand,
cash is available for resale immediately, but incurs security, storage, and transportation costs,
and the cost of tying up capital in a stock of banknotes (bills).
Factors affecting Exchange Rate: -
1. Inflation Rates: -
Changes in market inflation cause changes in currency exchange rates. A country with a lower
inflation rate than another's will see an appreciation in the value of its currency. The prices of
goods and services increase at a slower rate where the inflation is low. A country with a
consistently lower inflation rate exhibits a rising currency value while a country with higher
inflation typically sees depreciation in its currency and is usually accompanied by higher interest
rates.

2. Interest Rates: -

Changes in interest rate affect currency value and dollar exchange rate. Forex rates, interest
rates, and inflation are all correlated. Increases in interest rates cause a country's currency to
appreciate because higher interest rates provide higher rates to lenders, thereby attracting
more foreign capital, which causes a rise in exchange rates.

3. Country’s Current Account / Balance of Payments: -

A country’s current account reflects balance of trade and earnings on foreign investment. It
consists of total number of transactions including its exports, imports, debt, etc. A deficit in
current account due to spending more of its currency on importing products than it is earning
through sale of exports causes depreciation. Balance of payments fluctuates exchange rate of
its domestic currency.

4. Government Debt: -

Government debt is public debt or national debt owned by the central government. A country
with government debt is less likely to acquire foreign capital, leading to inflation. Foreign
investors will sell their bonds in the open market if the market predicts government debt within
a certain country. As a result, a decrease in the value of its exchange rate will follow.

5. Terms of Trade: -

Related to current accounts and balance of payments, the terms of trade are the ratio of export
prices to import prices. A country's terms of trade improve if its exports prices rise at a greater
rate than its imports prices. This results in higher revenue, which causes a higher demand for
the country's currency and an increase in its currency's value. This results in an appreciation of
exchange rate.

6. Political Stability & Performance: -

A country's political state and economic performance can affect its currency strength. A country
with less risk for political turmoil is more attractive to foreign investors, as a result, drawing
investment away from other countries with more political and economic stability. Increase in
foreign capital, in turn, leads to an appreciation in the value of its domestic currency. A country
with sound financial and trade policy does not give any room for uncertainty in value of its
currency. But, a country prone to political confusions may see a depreciation in exchange rates.

7.Recession: -
 When a country experiences a recession, its interest rates are likely to fall, decreasing its
chances to acquire foreign capital. As a result, its currency weakens in comparison to that of
other countries, therefore lowering the exchange rate.

8. Speculation: -

If a country's currency value is expected to rise, investors will demand more of that currency in
order to make a profit in the near future. As a result, the value of the currency will rise due to
the increase in demand. With this increase in currency value comes a rise in the exchange rate
as well.

Conclusion: -
All of these factors determine the foreign exchange rate fluctuations. If you send or receive
money frequently, being up-to-date on these factors will help you better evaluate the optimal
time for international money transfer. To avoid any potential falls in currency exchange rates,
opt for a locked-in exchange rate service, which will guarantee that your currency is exchanged
at the same rate despite any factors that influence an unfavourable fluctuation.

Factors affecting Capital Market: -

1. Government Policies: -
Economy and business are largely affected by Government policies. The Government has to
implement new policies in regard to the economic condition of the country. Any new change in
policy can be profitable for the economy or tighten the grip around. This creates a possibility of
the stock market being affected due to any change or introduction of the new policy by the
Government. For instance, the increase in corporate taxes impacts the industry severely as
their profits will take a hit and at the same time the stock price will fall.

2. Monetary Policy of RBI and Regulatory Policies of SEBI: -

Reserve Bank of India (RBI) is the apex body which regulates the monetary policy in India. RBI
keeps on reviewing its monitory policy. Any increase or decrease in Repo and Reverse Repo
rates impacts the stock prices. If RBI raises the key rates it reduces the liquidity in the banks.
This makes borrowing costlier for them and in turn, they increase the lending rates. Ultimately,
this makes borrowing highly expensive for the business community and may find it difficult to
service their debt obligations. Investors see it as a barrier in the expansion of business activities
and start selling the shares of the company which reduces its stock price. A reverse of this
happens when RBI follows a dovish monetary policy. Banks reduces the lending rates which
leads to credit expansion. Investors consider it as a positive step and stock price starts
improving. Similarly, any changes in trading and investment policies done by the Securities
Exchange Board of India (SEBI) who keeps an eye on the entire stock market activities impacts
the performance of the shares of the listed companies on the stock exchanges (NSE, BSE).
Nifty50 and Sensex are two major benchmark indices in India.
3. Exchange Rates: -
The exchange rates of Indian Rupee keep fluctuating vis-à-vis other currencies. When the rupee
hardens in respect to other currencies it causes Indian goods to become expensive in foreign
markets, Companies that are highly affected are the ones involved in overseas operations.
Companies dependent on exports experience a drop in demand for their goods abroad. Thus,
revenue from exports decline and stock prices of such companies in the home country fall.
On the other hand, softening of rupee vis-à-vis other currencies results in opposite effect, in
this, the stock price of exporters rises whereas, that of importer drops.

4. Interest Rate and Inflation: -

Whenever the interest rates go up, banks raise the lending rates which increases the cost for
corporates and individuals alike. The rising cost will tend to create an impact on the profit levels
of the business affecting the stock prices of the company. Inflation is a surge in the pricing of
goods and services over a period of time. High inflation discourages investment and long-term
economic growth. The listed companies in the stock market may postpone their investment and
halt production, leading to negative economic growth. The fall in the value of money could also
lead to a fall in the value of savings. The stocks of luxurious companies also tend to suffer as
nobody will want to invest in them. This not only adversely affects one's purchasing power but
also the investing power.

5. Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs) : -

FIIs and DIIs activities highly impact the stock market. As they have a prominent role in the
stocks of the company, their entry or exit will create a huge impact on the equity market and
will influence the stock prices.

6. Politics: -
Factors like election, budget, government intervention, stability, and other factors have a huge
impact on the economy and the financial markets. The political events and budget
announcements create tremendous levels of volatility in the market influencing the stock
market deeply.

7. Natural Disasters: -
Natural disasters hamper the lives and the market equally. It impacts the company’s
performance and the capacity of people to spend the money. This will lead to lower levels of
consumption, lower sales and revenues ultimately hitting the company’s stock performance.

8. Economic Numbers: -
Various economic indicators affect the overall economy, ultimately creating an impact on the
financial market. The movement of oil prices and GDP have a huge impact on the stock market.
A country that is dependent on imported oil, any price change is likely to impact the economy.
The movement of oil prices is one of the key determinants of the stock market. As and when
the prices rise, the expenses will increase and will lower the buyers’ ability to invest in the
market. Similarly, Gross Domestic Product (GDP) looks at the aspect of total economic
production of the country and its overall economic health. It helps to showcase the economic
 developments and the future direction of the market. A healthy GDP status will create a
positive impact on financial markets and investment.

9. Gold Prices and Bonds: -

There is no established theory that expresses the relationship between stock price and gold &
Bonds. Usually, stocks are considered a risky investment whereas gold & bonds are considered
as a safe investment havens. So at the time of any major crisis in the economy, investor prefers
to invest in safe instruments. As a result, gold and bond prices increase while the stock price
tumbles.

Conclusion: -
Stock prices of the company may rise or fall due to different factors. Ideally, the investor should
have a solid allocation strategy in place after a thorough understanding of the above factors. It
will ensure that the investor makes the right investment decision and generate magnificent
returns in the long-run.

Q.3 Differentiate: -
I) ADR & GDR
Answer: -
Difference between ADR and GDR: -
What is ADR?
ADR stands for American Depository Receipts, which are a kind of negotiable security
instrument that is issued by a US Bank representing a specific number of shares in a foreign
company that trades in US financial markets. ADRs make it easy for US investors to purchase
stock in foreign companies.
What is GDR?
GDR stands for Global Depositary receipts. It is a type of bank certificate that acts as shares in
foreign companies. It is a mechanism by which a company can raise equity from the
international market. GDR is issued by a depository bank located overseas or in other words,
GDR is issued by a depository bank which is located outside the domestic boundaries of the
company to the residents of that country. GDR is mostly traded in the European Market. Issuing
GDR is one of the best ways to raise equity from overseas.
Following are some of the points of difference between ADR and GDR

ADR GDR

Stands For
 American Depository Receipts Global Depository Receipts

Definition

American Depository Receipts (ADR) is a type of Global Depository Receipts (GDR) are a type of
negotiable security instrument that is issued by a negotiable instruments that are issued by a foreign
US bank on behalf of a non-US company, which is depository bank for trading of shares of a company
trading on the US stock exchange. in an international market

Currency traded in

US Dollars US Dollars, Euro

Purpose

To acquire resources in the US Market To acquire resources in the International Market

Listed in

NASDAQ Listed in Non-US stock exchanges such as LSE

(London Stock Exchange) and Euronext (France)

Issued By

US Capital Market European Capital Market

II) Forward Hedge & Money Market Hedge: -

Answer: -
A potentially significant difference between using a forward hedge and a money market
hedge is that the: -
A) Forward Hedge: -

1. Forward hedge is less risky.

2. Money market hedge produces less cash flow.
3. Forward hedge produces less cash flow.
4. Money market hedge involves greater transaction costs.

B) Money Market Hedge: -

1. The price that the parties negotiate the option price when the option is exercised.
2. The set price at which the option is exercised.
3. Not relevant.
4. Set by the seller of the currency subject to the option.
III) Zero Coupon Bonds & Dual Currency Bonds: -
The difference between a regular bond and a zero-coupon bond is the payment of interest,
otherwise known as coupons. A regular bond pays interest to bondholders, while a zero-coupon
bond does not issue such interest payments. Instead, zero-coupon bondholders merely receive
the face value of the bond when it reaches maturity. Regular bonds, which are also called
coupon bonds, pay interest over the life of the bond and also repay the principal at maturity.
1) A regular bond pays interest to bondholders, while a zero-coupon bond does not issue such
interest payments.
2) A zero-coupon bond will usually have higher returns than a regular bond with the same
maturity because of the shape of the yield curve.
3) Zero-coupon bonds are more volatile than coupon bonds, so speculators can use them to
profit more from anticipated short-term price movements.
4) Zero-coupon bonds can help investors to avoid gift taxes, but they also create phantom
income tax issues.

IV) Write any five points of differentiation between International Financial

Reporting Standards and Indian Accounting Standard.

Answer: -

IFRS stands for International Financial Reporting Standards, it is prepared by the IASB
(International Accounting Standards Board). It is used in around 144 countries and is regarded
as one of the most popular accounting standards.
IND AS is also known as Indian Accounting Standards or Indian version of IFRS. Indian AS or IND
AS is used in the context of Indian companies.
Let us look at some of the points of difference between the IFRS and IND AS.

IFRS IND AS

Definition

IFRS stands for International Financial Reporting IND AS stands for Indian Accounting Standards, it
Standards, it is an internationally recognised is also known as India specific version of IFRS
accounting standard

Developed by
 IASB (International Accounting Standards Board) MCA (Ministry of Corporate Affairs)

Followed by

144 countries across the world Followed only in India

Disclosure

Companies complying with IFRS have to disclose as Such a disclosure is not mandatory for companies
a note that the financial statements comply with complying with Indian Accounting Standards or
IFRS IND AS

Financial Statement Components

It includes the following It includes the following:

1. Statement of financial position
2. Statement of profit and loss
3. Statement of changes in equity for the period
4. Statement of cash flows for the period
1. Balance Sheet
2. Profit and loss account
3. Cash flow statement
4. Statement of changes in equity
5. Notes to financial statements
6. Disclosure of accounting policies

Balance Sheet Format

Companies complying with IFRS need have specific Companies complying with IND AS need have no
guidelines for preparing balance sheet with assets such requirements for balance sheet format, but
and liabilities to be classified as current and non- the guidelines are defined for presenting balance
current sheet

Q.4 Discuss the functions and activities of the FATF.

Answer: -
Meaning of FATF: -
FATF expanded as Financial Action Task Force was established during the G7 summit that was
conducted in Paris in the year 1989. The stakeholders in this organization include the heads of
the G7 countries, the heads of eight other countries and the President of the European
Commission.
Functions of FATF: -
The principal objective of FATF is to evolve the standards and norms pertaining to the
regulatory measures to combat money laundering, terrorist financing and a range of other
related threats that pose a risk tot eh health of the international financial system. FATF works
with the nation states to encourage some legislative changes and reforms in the sectors
discussed above. Also, FATF provides policy recommendations that comply with the
international standards in the line of combating money laundering, proliferation of the
weapons of mass destruction, and terrorism funding. Since 1990, FATF has revised its
recommendations four times.

Activities of FATF: -
FATF Issues Revised Recommendations: -
The FATF Recommendations are the international standards set by the FATF to combat money
laundering, terrorist financing, and more recently, the financing of proliferation. They cover the
comprehensive set of measures that countries should have in place within their criminal justice
and regulatory systems; the preventive measures to be taken by financial institutions and other
businesses and professions; measures to ensure transparency on the ownership of legal
persons and arrangements; the establishment of competent authorities with appropriate
functions, and powers and mechanism for cooperation; and arrangements to cooperate with
other countries.
On Feb. 16, 2012, the FATF issued revised Recommendations. A number of significant and
important changes have been made to the FATF Recommendations. These have strengthened
the standards in the following key areas:

 The risk-based approach to implementing AML/CFT measures has been clarified and more
fully elaborated within the Standards. This would allow countries to adopt an effective and
appropriate response commensurate to the risks.
 The requirements to ensure timely access to adequate and accurate information on the
beneficial ownership of legal persons and arrangements have been strengthened and
clarified.
 Tax offenses have been made predicate offenses for money laundering.
 The powers and responsibilities of law enforcement and the FIU has been elaborated and
the scope for international cooperation strengthened.
 The definition of politically exposed persons (PEPs) has been broadened to include domestic
PEPs and PEPs from international organizations.
 The scope for financial group (or consolidated) supervision has been elaborated and
enhanced.
 The transparency of wire transfers has been enhanced.
 A new standard has been added concerning the implementation of targeted financial
sanctions related to the proliferation of weapons of mass destruction.