Master of Business Administration-MBA Semester 4 Assignment - MB0053 – International Business Management - Set 1

Q1. Define ‘Globalization’. What are its benefits? Ans. Globalisation is a process which consist of business dealings around the world in addition to the local and national markets. Business terminologies define globalisation as ‘the worldwide trend of businesses expanding beyond their domestic boundaries’. It is advantageous as it helps in promoting prosperity in the countries that embrace globalisation. Benefits of globalization We have moved from a world where the big eat the small to a world where the fast eat the slow, as observed by Klaus Schwab of the Davos World Economic Forum. All economic analysts must agree that the living standards of people have considerably improved through the market growth. With the development in technology and their introduction in the global markets, there is not only a steady increase in the demand for commodities but has also led to greater utilization. Investment sector is witnessing high infusions by more and more people connected to the world’s trade happenings with the help of computers. As per statistics, everyday more than $1.5 trillion is now swapped in the world’s currency markets and around one-fifth of products and services are generated per year are bought and sold. Buyers of products and services in all nations comprise one huge group who gain from world trade for reasons encompassing opportunity charge, comparative benefit, economical to purchase than to produce, trade’s guidelines, stable business and alterations in consumption and production. Compared to others, consumers are likely to profit less from globalization. Another factor which is often considered as a positive outcome of globalization is the lower inflation. This is because the market rivalry stops the businesses from increasing prices unless guaranteed by steady productivity. Technological advancement and productivity expansion are the other benefits of globalization because since 1970s growing international rivalry has triggered the industries to improvise increasingly. Some other benefits of globalization as per statistics • Commerce as a percentage of gross world product has increased in 1986 from 15% to nearly 27% in recent years. • The stock of foreign direct investment resources has increased rapidly as a percentage of gross world product in the past twenty years. • For the purpose of commerce and pleasure, more and more people are crossing national borders. Globally, on average nations in 1950 witnessed just one overseas visitor for every 100 citizens. By the mid-1980s it increased to six and ever since the number has doubled to 12. • Worldwide telephone traffic has tripled since 1991. The number of mobile subscribers has elevated from almost zero to 1.8 billion indicating around 30% of the world population. Internet users will quickly touch 1 billion. Impact of globalization in international business: • Trade: Developing countries as a whole have increased their share of world trade – from 19 percent in 1971 to 29 percent in 1999. But Chart 2b shows great variation among the major regions. For instance, the newly industrialized economies (NIEs) of Asia have done well, while Africa as a whole has fared poorly. The composition of what countries export is also important. The strongest rise by far has been in the export of manufactured goods. The share of primary commodities in world exports – such as food and raw materials – that are often produced by the poorest countries, has declined. • Capital movements: Chart 3 depicts what many people associate with globalization, sharply increased private capital flows to developing countries during much of the 1990s. It also shows that: Winter Drive – November 2011 Sikkim Manipal University 1

Master of Business Administration-MBA Semester 4 Assignment - MB0053 – International Business Management - Set 1
• The increase followed a particularly “dry” period in the 1980s; • Net official flows of “aid” or development assistance have fallen significantly since the early 1980s; and • The composition of private flows has changed dramatically. Direct foreign investment has become the most important category. Both portfolio investment and bank credit rose but they have been more volatile, falling sharply in the wake of the financial crises of the late 1990s. • Movement of people: Workers move from one country to another partly to find better employment opportunities. The numbers involved are still quite small, but in the period 1965-90, the proportion of labor forces round the world that was foreign born increased by about one-half. Most migration occurs between developing countries. But the flow of migrants to advanced economies is likely to provide a means through which global wages converge. There is also the potential for skills to be transferred back to the developing countries and for wages in those countries to rise. Spread of knowledge (and technology): Information exchange is an integral, often overlooked, aspect of globalization. For instance, direct foreign investment brings not only an expansion of the physical capital stock, but also technical innovation. More generally, knowledge about production methods, management techniques, export markets and economic policies is available at very low cost, and it represents a highly valuable resource for the developing countries.

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Master of Business Administration-MBA Semester 4 Assignment - MB0053 – International Business Management - Set 1
Q2. Discuss the impact of economic environment on international business Ans. The economic environment refers to the conditions under which a business operates and takes into account all factors that have affected it. It includes prime interest rates, legislation concerning employment of foreigners, return of profits, safety of country, political stability and so on. National economic policies National economic policies depend on that countrys socio-economic and cultural background. All governments aspire to achieve four major economic objectives: Full employment. A high economic growth rate. A low rate of inflation. Absence of deficit in the countrys balance of payments. The basic problem is that the first two objectives work against the last two. Measures such as low interest rates, tax cuts and increase in public spending creates jobs and stimulates growth but also causes inflation, increase in wage, and higher imports. Due to increased consumer expenditure the countrys balance of trade worsens. So the issue lies in balancing the effects of the policies to achieve the four given objectives. Foreign Direct Investment (FDI) Policy Foreign direct investment (FDI) is an investment made with an intention of establishing a long term interest by a business enterprise in another country. It is also required that such an enterprise holds directly or indirectly, an ownership of 10% or more of voting rights in the target enterprise. FDI policy, which is dictated by the Government of the host country, plays a vital role in the economic growth of that country. Attracting FDI inflows with constructive policy is a challenge for any nation. Developing countries offer a lot of incentives for FDI, particularly in capital intensive sectors like power, infrastructure, transport, construction. Effective FDI policies help the host country to portray itself as an attractive investment destination. Main objectives of FDI policy are to provide and facilitate investor friendly business environment, so that the foreign investors feel safe with the financial and legal framework of the country. The Government of the host countries often formulate new or special regulatory framework to attract FDI. The host country often needs to invest in development of domestic infrastructure to make it investor friendly. Economic structure IB managers need to understand and assess international economic forces at work. Key variables that need to be examined include Gross Domestic Product (GDP) per capita, regional distribution of GDP, levels of investment, consumer expenditure, labour costs, inflation and unemployment. Variables that are examined when assessing national economic environments include: Economic structure The structure of a nations economy is determined by the size and rate of its population growth, income levels and distribution of income, natural resources, agricultural, manufacturing and services sector. Economic infrastructure is the sum of all the external facilities and services that support the work of firms including communication, transportation, electricity supply, banking and financial services. Industry structure The structure of an industry is determined by factors such as:  Entry and exit barriers.  Number of competing firms.  Market share among firms in that sector.  Average size of competing units. Market growth It is measured in terms of local currency and adjusted for inflation. Local currency is used because conversions into other currencies are affected by exchange rate fluctuations. Winter Drive – November 2011 Sikkim Manipal University 3

Master of Business Administration-MBA Semester 4 Assignment - MB0053 – International Business Management - Set 1
Income levels It is taken as the Gross Domestic Product (GDP) per capita and GDP is directly proportional to the productivity of the country. Net income is another important variable and is without tax payments from individual gross incomes. Sector wise trends Growth activity in a country might vary significantly among certain industries. For example, India has a vibrant software services industry. Openness of the economy The ratio of a countrys imports and exports to its Gross National Product (GNP) indicates its vulnerability to fluctuations in international trade. A nation with a high foreign trade or GNP depends heavily on the economic well-being of the nations it exports to. Conversely, closed economies have a high degree of control of the economy. International debt - The comparison of a nations obligations to service and repay foreign debt with its forex earnings shows its ability to remain solvent. On the other hand, a high foreign debt servicing requirement maybe a positive indicator, suggesting that a country has borrowed heavily to invest in its future. Degree of urbanisation - This is an important factor because in most countries there are important differences in incomes and lifestyles between urban and rural areas. Major dissimilarities are: Shopping patterns - shopping frequency, average purchase value. Nature of goods bought. Expectations in quality and technical sophistication. Education levels. Ease of distribution. Balance of payments Importance - Balance of payments is a record of all transactions that occur between residents of that country and foreigners over a specific period of time. The balance is shown monthly, quarterly or annually. The accounts show the structure of the external trade, net position as a lender or borrower and trends in economic relationships with the world. The balance of payments is a good overall indicator of its economic health; the likelihood of the countrys government imposing forex controls, import restrictions and policies such as tax increases and interest rate hikes. Balance of payment account - These accounts attempt to identify the reasons behind various categories of international receipts and payments, making it possible to establish the values of payments by domestic residents to foreigners, and vice versa, for purchase of imports, use of services, lending, or direct foreign investment. The account is divided into categories for long and short term financial transactions which is initiated by the national monetary body, and involves goods and services. Deficits and surpluses - Current account deficit, records physical imports and exports along with international transactions in invisibles, that is non-physical items such as residents pensions, interest and royalties from abroad, domestic firms fees for the movement of goods in other countries, and so on. The balance of trade within the current account is the balance on physical (visible) imports and exports. The other major grouping is the capital account which shows the balance of transactions in financial assets, including direct investments in foreign financial instruments, movements in short-term assets, inter-governmental loans and changes in the countrys gold and forex reserves. Reserves will decline if there is, for example, a current account deficit which in turn affects the currency rate. To prevent the local currency from depreciating too far, some foreign currency reserves will be sold, but since it is limited, this is only a temporary measure.

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Master of Business Administration-MBA Semester 4 Assignment - MB0053 – International Business Management - Set 1
Q3. What is the need to understand cultural differences in international business context? Ans. Cultural differences affect the success or failure of multinational firms in many ways. The company must modify the product to meet the demand of the customers in a specific location and use different marketing strategy to advertise their product to the customers. Adaptations must be made to the product where there is demand or the message must be advertised by the company. The following are the factors which a company must consider while dealing with international business: The consumers across the world do not use same products. This is due to varied preferences and tastes. Before manufacturing any product, the organisation has to be aware of the customer choice or preferences. The organisation must manage and motivate people with broad different cultural values and attitudes. Hence the management style, practices, and systems must be modified. The organisation must identify candidates and train them to work in other countries as the cultural and corporate environment differs. The training may include language training, corporate training, training them on the technology and so on, which help the candidate to work in a foreign environment. The organisation must consider the concept of international business and construct guidelines that help them to take business decisions, and perform activities as they are different in different nations. The following are the two main tasks that a company must perform: Product differentiation and marketing - As there are differences in consumer tastes and preferences across nations; product differentiation has become business strategy all over the world. The kinds of products and services that consumers can afford are determined by the level of per capita income. For example, in underdeveloped countries, the demand for luxury products is limited. Manage employees - It is said that employees in Japan were normally not satisfied with their work as compared with employees of North America and European countries; however the production levels stayed high. To motivate employees in North America, they have come up with models. These models show that there is a relation between job satisfaction and production. This study showed the fact that it is tough for Japanese workers to change jobs. While this trend is changing, the fact that job turnover among Japanese workers is still lower than the American workers is true. Also, even if a worker can go to another Japanese entity, they know that the management style and practices will be quite alike to those found in their present firm. Thus, even if Japanese workers were not satisfied with the specific aspects of their work, they know that the conditions may not change considerably at another place. As such, discontent might not impact their level of production. The following are the three mega trends in world cultures:  The reverse culture influence on modern Western cultures from growing economies, particularly those with an ancient cultural heritage.  The trend is Asia centric and not European or American centric, because of the growing economic and political power of China, India, South Korea, and Japan and also the ASEAN.  The increased diversity within cultures and geographies. The following are the necessary implications in international business:  Avoid self reference criterion such as, ones own upbringing, values and viewpoints.  Follow a philosophical viewpoint that considers that many perspectives of a single observation or phenomenon can be true.  Discover and identify global segments and global niche markets, as national markets are diverse with growing mobility of products, people, capital, and culture.  Grow the total share market by innovating affordable products and services, and making them accessible so that, they are affordable for even subsistence level consumers rather than fighting for market share. Winter Drive – November 2011 Sikkim Manipal University 5

Master of Business Administration-MBA Semester 4 Assignment - MB0053 – International Business Management - Set 1

Organise global enterprises around global centres of excellence.

According to Dr. Geert Hofstede, Culture is more often a source of conflict than of synergy. Cultural differences are a trouble and always a disaster. Professor Hofstede carried out a detailed study of how values in the workplace are influenced by culture. He worked as a psychologist in IBM from 1967 to 1973. At that time he gathered and analysed data from many people from several countries. Professor Hofstede established a model using the results of the study which identifies four dimensions to differentiate cultures. Later, a fifth dimension called long-term outlook was added. The following are the five cultural dimensions:  Power Distance Index (PDI): This focuses on the level of equality or inequality, between individuals in the nations society. A country with high power distance ranking depicts that inequality of power and wealth has been allowed to grow within the society. These societies follow caste system that does not allow large upward mobility of its people. A country with low power distance ranking depicts the society and de-emphasises the differences between its peoples power and wealth. In these societies equality and opportunity is stressed for everyone.  Individualism This dimension focuses on the extent to which the society reinforces individual or collective achievement and interpersonal relationships. A high individualism ranking depicts that individuality and individual rights are dominant within the society. Individuals in these societies form a larger number of looser relationships. A low individualism ranking characterises societies of a more collective nature with close links between individuals. These cultures support extended families and collectives where everyone takes responsibility for fellow members of their group.  Masculinity This focuses on the extent to which the society supports or discourages the traditional masculine work role model of male achievement, power, and control. A country with high masculinity ranking shows the country experiences high level of gender differentiation. In these cultures, men dominate a major part of the society and power structure, with women being controlled and dominated by men. A country with low masculinity ranking shows the country, having a low level of differentiation and discrimination between genders. In low masculinity cultures, women are treated equal to men in all aspects of the society.  Uncertainty Avoidance Index (UAI) This focuses on the degree of tolerance for uncertainty and ambiguity within the society that is unstructured situations. A country with high uncertainty avoidance ranking shows that the country has low tolerance for uncertainty and ambiguity. A ruleoriented society that incorporates rules, regulations, laws, and controls is created to minimise the amount of uncertainty. A country with low uncertainty avoidance ranking shows that the country has less concern about ambiguity and uncertainty and has high tolerance for a variety of opinions. A society which is less rule-oriented, readily agrees to changes, and takes greater risks reflects a low uncertainty avoidance ranking.  Long-Term Orientation (LTO) Describes the range at which a society illustrates a pragmatic future oriented perspective instead of a conventional historic or short term point of view. The Asian countries are scoring high on this dimension. These countries have a long term orientation, believe in many truths, accept change easily, and have thrift for investment. Cultures recording little on this dimension, trust in absolute truth is conventional and traditional. They have a small term orientation and a concern for stability. Many western cultures score considerably low on this dimension. In India, PDI is the highest Hofstede dimension for culture with a rank of 77, LTO dimension rank is 61, and masculinity dimension rank is 62. ==============================X===============================X====================== Winter Drive – November 2011 Sikkim Manipal University 6

Master of Business Administration-MBA Semester 4 Assignment - MB0053 – International Business Management - Set 1
Q4. Explain country risk analysis. Ans. Country Risk Analysis (CRA) identifies imbalances that increase the risks in a cross-border investment. CRA represents the potentially adverse impact of a country's environment on the multinational corporation's cash flows and is the probability of loss due to exposure to the political, economic, and social upheavals in a foreign country. All business dealings involve risks. An increasing number of companies involving in external trade indicate huge business opportunities and promising markets. Since the 1980s, the financial markets are being refined with the introduction of new products. When business transactions occur across international borders, they bring additional risks compared to those in domestic transactions. These additional risks are called country risks which include risks arising from national differences in socio-political institutions, economic structures, policies, currencies, and geography. The CRA monitors the potential for these risks to decrease the expected return of a cross-border investment. For example, a multinational enterprise (MNE) that sets up a plant in a foreign country faces different risks compared to bank lending to a foreign government. The MNE must consider the risks from a broader spectrum of country characteristics. Some categories relevant to a plant investment contain a much higher degree of risk because the MNE remains exposed to risk for a longer period of time. Analysts have categorised country risk into following groups:  Economic risk: This type of risk is the important change in the economic structure that produces a change in the expected return of an investment. Risk arises from the negative changes in fundamental economic policy goals (fiscal, monetary, international, or wealth distribution or creation).  Transfer risk: Transfer risk arises from a decision by a foreign government to restrict capital movements. It is analysed as a function of a country's ability to earn foreign currency. Therefore, it implies that effort in earning foreign currency increases the possibility of capital controls.  Exchange risk: This risk occurs due to an unfavourable movement in the exchange rate. Exchange risk can be defined as a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.  Location risk: This type of risk is also referred to as neighborhood risk. It includes effects caused by problems in a region or in countries with similar characteristics. Location risk includes effects caused by troubles in a region, in trading partner of a country, or in countries with similar perceived characteristics.  Sovereign risk: This risk is based on a governments inability to meet its loan obligations. Sovereign risk is closely linked to transfer risk in which a government may run out of foreign exchange due to adverse developments in its balance of payments. It also relates to political risk in which a government may decide not to honor its commitments for political reasons.

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Master of Business Administration-MBA Semester 4 Assignment - MB0053 – International Business Management - Set 1
 Political risk: This is the risk of loss that is caused due to change in the political structure or in the politics of country where the investment is made. For example, tax laws, expropriation of assets, tariffs, or restriction in repatriation of profits, war, corruption and bureaucracy also contribute to the element of political risk. Risk assessment requires analysis of many factors, including the decision-making process in the government, relationships of various groups in a country and the history of the country. Country risk is due to unpredicted events in a foreign country affecting the value of international assets, investment projects and their cash flows. The analysis of country risks distinguishes between the ability to pay and the willingness to pay. It is essential to analyse the sustainable amount of funds a country can borrow. Country risk is determined by the costs and benefits of a countrys repayment and default strategies. The ways of evaluating country risks by different firms and financial institutions differ from each other. The international trade growth and the financial programs development demand periodical improvement of risk methodology and analysis of country risks.

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Master of Business Administration-MBA Semester 4 Assignment - MB0053 – International Business Management - Set 1
Q5. Write a brief note on international human resource management. Ans. International Human Resource Management (IHRM) is the process of recruiting and managing the services of an organisations personnel across the globe, to achieve its goals. Managing international human resource activity Employees are an asset to the organisation. HRM activities need to be designed to utilise the employees potential to the maximum. This can be achieved through their involvement with the organisation and by increasing the employees commitment to the business objectives of the organisation. The employees are trained to accept change, be innovative, and become quality conscious and flexible. HRMs task is to integrate personnel into the organisations corporate ideologies and to constantly help the workforce to be more productive and efficient, thereby making the business more productive. Some of the important activities involved in HRM.

As depicted, human resource planning, recruitment and selection, training and development, performance management, remuneration, repatriation and employee relations play an active role in the organisations efficiency. Let us now discuss some of the important activities. Human Resource Planning (HRP) - HRP is a very important aspect in the process of HRM. It is the process of assessing staffing requirement for the future and taking care of the adequate and timely supply of human resources for the same. In an international scenario, HRP plays a greater role in achieving the global objectives of the organisation, as the sourcing of HR is spread across countries. Some of the challenges in international HRP are as follows:  Identify the key top management executives.  Design organisational structure and responsibilities of international managers.  Provide adequate training to managers and equip them for a multicultural experience.  Maintain the career focus of the international managers by providing adequate developmental opportunities.  Integrate multiple business units across the globe to a common strategic objective.  Recruitment and selection - Hiring employees is a challenge for any international business. The international HR managers have to make sure that they hire the most suited candidates. This means that possessing the right skill is not the only criterion. They must also look at the adaptability of the potential employees to the corporate culture and beliefs of the organisation. The HR manager also Winter Drive – November 2011 Sikkim Manipal University 9

Master of Business Administration-MBA Semester 4 Assignment - MB0053 – International Business Management - Set 1
needs to make sure the organisation hires new employees with flexibility to adapt to foreign cultures. Domestic versus international human resource management Fundamentally, domestic HRM and IHRM have the same processes and objectives. IHRM differs from the domestic HRM in terms of its scope and its challenges because of the internationalisation of business and its managers. Some of the factors that differentiate IHRM from domestic HRM.  The scope of the HR activities is larger because the organisation deals with multiple countries and employees from several cultures.  International workforce requires greater involvement of management at a personal level.  The approach is complex because of the potential cultural mix in the workforce.  Risk management is an integral part of the IHRM policies.  Expatriates are subject to tax at home and in the host country. Hence, tax policies have to be devised in a way that they do not penalise the employee for moving to another country.  Relocation of staff involves providing immigration and travel services, providing housing, medical care, schooling for employees children, pre-departure training, international allowances and so on.  The laws in the host country vary from those in the parent country. The human resource department must be equipped to deal with all potential issues and ensure that the newly relocated employees and their families are able to function properly in the foreign country.  Differences in government policies of foreign countries requires the human resource team to ensure that all the expat employees adhere to the norms set by the government. Expatriate staff Expatriates play a major role in international businesses. Multinational companies place a lot of effort in selecting employees. By employing staff from the parent country in the companys various international locations, the senior management ensures that the foreign subsidiary runs according to the requirements of the head office. The senior management also ensures that experienced employees with the right attitude and capabilities are involved with foreign operations and are fully aware of company policies. Expatriates also tend to have greater product knowledge and managerial expertise than the locals. The following are some of the disadvantages in employing expatriates:  Problems with the local language, customs, culture, and business practices.  Time to settle in the new environment, which has a negative impact on the employees productivity.  Prejudices towards certain ethnic groups may arise during foreign posting.  Imposed management style that the host country employees are not comfortable with and may find inappropriate.  Obstruction of opportunities for local staff.  Expatriate selection  Selection of expatriate employees is a highly specialised function in HRM. The following factors are important while recruiting an expat employee:  Technical competency.  Interpersonal skills.  Ability to cope with the foreign environment.  Ability of the expatriates family to adjust to the foreign environment.

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Master of Business Administration-MBA Semester 4 Assignment - MB0053 – International Business Management - Set 1
Shown below are the different criterias for recruiting expatriate employees. The HR team must consider the candidates personal expectations, as well as the candidates family comfort, in moving to a foreign country.

After the HR team selects the right candidate, they provide proper support and information to the employee and family for a smooth transition. This step is critical to the success of employing the expatriate and in turn the success of the international business unit. Before posting the newly recruited employee to the international location, the company must do the following:  Provide the employee and family with cultural and language orientation with the intention of familiarising the new country to them.  Make provision for pre-assignment visits so that the employee, spouse and family can find appropriate accommodation, schools, recreational options and so on.  Assign mentors who are familiar with the experience of relocation, preferably from the home country.  Counsel the family about the challenges of moving to a new country so that they can prepare themselves. Expatriate failure Globally, there has been a failure rate of more than 25 percent amongst expat employees. Despite the training and efforts undertaken by the HRM, the expats underperformance and failure has been a matter of concern for the multinational companies. Most cases of expatriate failure have been due to the following reasons:  Spouses inability to adjust.  Marital stress.  Employees inability to adjust.  Home sickness.  Hostility towards host nationals.  Loss of confidence.  Family tension and conflict. Winter Drive – November 2011 Sikkim Manipal University 11

Master of Business Administration-MBA Semester 4 Assignment - MB0053 – International Business Management - Set 1
    

Personal or emotional maturity. Inability to cope with larger international responsibilities. Difficulties with new environment. Personal or emotional problems. Lack of technical competence.

The Three main dimensions of international human resources management are as follows:  Human resource activities - HR activities in an IHRM context involves procurement, allocation, and utilisation of workforce. These functions in turn cover all the six activities of human resources management, that is, human resource planning, hiring, training and development, remuneration, performance management, and employee relations.  Countries of operation - The countries of operation in an IHRM perspective involves the host country in which the overseas operation is located, the home country that houses the headquarters of the company, and other countries that supply labour and finance.  Origin of employees - The origin of the workforce of an international business can be classified into three types - parent country nationals, host country nationals, and third country nationals.

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Master of Business Administration-MBA Semester 4 Assignment - MB0053 – International Business Management - Set 1
Q6 Describe foreign currency derivatives. Ans. Currency derivative is defined as a financial contract in order to swap two currencies at a predestined rate. It can also be termed as the agreement where the value can be determined from the rate of exchange of two currencies at the spot. The currency derivative trades in markets correspond to the spot (cash) market. Hence, the spot market exposures can be enclosed with the currency derivatives. The main advantage from derivative hedging is the basket of currency available. The derivatives can be hedged with other derivatives. In the foreign exchange market, currency derivatives like the currency features, currency options and currency swaps are usually traded. The standard agreement made in order to buy or sell foreign currencies in future is termed as currency futures. These are usually traded through organised exchanges. The authority to buy or sell the foreign currencies in future at a specified rate is provided by currency option. These will help the businessmen to enhance their foreign exchange dealings. The agreement undertaken to exchange cash flow streams in one currency for cash flow streams in another currency in future is provided by currency swaps. These will help to increase the funds of foreign currency from the cheapest sources.

Some of the risks associated with currency derivatives are: Credit risk takes place, arising from the parties involved in a contract. Market risk occurs due to adverse moves in the overall market. Liquidity risks occur due to the requirement of available counterparties to take the other side of the trade. Settlement risks similar to the credit risks occur when the parties involved in the contract fail to provide the currency at the agreed time. Operational risks are one of the biggest risks that occur in trading derivatives due to human error. Legal risks pertain to the counterparties of currency swaps that go into receivership while the swap is taking place. ==============================X===============================X====================== Winter Drive – November 2011 Sikkim Manipal University 13

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