Paper/Subject Code: 86002/Finance: International Finance
TYBMS SEM 6:
Finance:
International Finance
(Q.P. November 2019 with Solution)
Q.P. November 2019 with Solution
IMP write a short note with Solution
Note: 1) All questions are compulsory subject to internal choice.
2) Figures to the right indicate full marks.
3) Use of simple calculator is allowed
Q.1.(a) Multiple Choice Questions (any 8): [8]
(1) The term Euro currency market refers to ________.
a) The countries which have adopted Euros as their country,
b) the market in which Euro is exchanged for other countries,
c) the market where the borrowings and lending of currencies take place outside the country of issue.
d) the international foreign exchange market
(2) Bond issued simultaneously in several global financial centre is __________
a) Domestic Bond
b) Foreign Bond
c) Global Bond
d) Euro Bond
(3) IMF is a Firm of ________
a) 190 members countries
b) 182 members countries
c) 186 members countries
d) 183 members countries
(4) In a quote exchange rate, the currency that is to purchase with another currency is called
a) Liquid Currency
b) Foreign Currency
c) Local Currency
d) Base Currency
(5) US dollar denominated bond issued in US domestic market is known as _________
a) Yankee Bond
b) Bull dog Bond
c) Samurai Bond
d) Dual Bond
(6) IMF is headquartered in _______
a) Washington United States
b) New York United States
c) Geneva Switzerland
d) Avenue Du Mont Blanc Switzerland
(7) Japanese Yen denominated bond issued in Japan domestic market is ________
a) Yankee Bond
b) Bull dog Bond
c) Samurai Bond
d) Dual Bond
(8) An option at the money when ______
a) The strike price is greater than the spot price, in the case of call option
b) The strike price is greater than the spot price, in the case of put option
c) The option has a ready market
d) The strike price and the spot price are the same
(9) EURO is the official currency of ______.
a) All the states of Europe
b) All the states of European Union
c) Only 12 of the states of European Union
d) Only 10 of the states of European Union
(10) Forward contract is an agreement to buy or sell an asset on ______
a) Specified Price:
b) Specified Time
c) Specified Date
d) Specified Volume
Q.1.(B) Match the following:
|
Column
“A” |
Column
“B” |
||
|
1. |
ADR |
a |
Issued in European Capital Market |
|
2 |
Pip |
b |
Interest Rate Futures |
|
3 |
PPP Theory |
c |
Money transfer
system at international level |
|
4 |
LORO |
d. |
Negotiated only in America |
|
5 |
IRF |
e. |
Japanese Currency |
|
6 |
GDR |
f. |
Price Interest Point |
|
7 |
YEN |
g. |
One Price Theory |
|
8 |
SWIFT |
h. |
Interbank rate offer |
|
9 |
Ask Rate |
i. |
"Theirs" |
|
10 |
LIBOR |
j. |
Selling rate |
Ans:
|
Column
“A” |
Column
“B” |
||
|
1. |
ADR |
i |
"Theirs" |
|
2 |
Pip |
f |
Price Interest Point |
|
3 |
PPP Theory |
g |
One Price Theory |
|
4 |
LORO |
j |
Selling rate |
|
5 |
IRF |
h. |
Interbank rate offer |
|
6 |
GDR |
a. |
Issued in European Capital Market |
|
7 |
YEN |
e, |
Japanese Currency |
|
8 |
SWIFT |
c, |
Money transfer system at international level |
|
9 |
Ask Rate |
d. |
Negotiated only in America |
|
10 |
LIBOR |
b |
Interest Rate Futures |
Q.2. (A) Describe the scope of International Finance.
Ans: The scope of international finance encompasses a broad range of activities, transactions, and interactions that involve the movement of funds, investments, and financial assets across national borders. It encompasses both the theory and practice of managing financial resources in a global context. Here are some key aspects that define the scope of international finance:
1. Foreign Exchange Markets: International finance involves the study and analysis of foreign exchange markets, where currencies are traded. This includes understanding exchange rate determination, currency trading mechanisms, and the impact of exchange rate movements on international trade, investments, and economies.
2. International Capital Markets: International finance examines the functioning of international capital markets, where various financial instruments such as stocks, bonds, derivatives, and commodities are traded across borders. This includes understanding capital flows, portfolio investment strategies, and the role of international financial institutions in capital market development.
3. Cross-Border Investments: International finance involves the analysis of cross-border investments, including foreign direct investment (FDI), portfolio investment, and mergers and acquisitions (M&A). This includes assessing investment opportunities, managing risks associated with foreign investments, and understanding the regulatory environment in different countries.
4. Global Financial Institutions: International finance explores the roles and functions of global financial institutions such as commercial banks, investment banks, central banks, multilateral development banks, and international organizations like the International Monetary Fund (IMF) and World Bank. This includes understanding their operations, policies, and influence on global financial markets and economies.
5. International Trade Finance: International finance encompasses trade finance, which involves the financing of international trade transactions. This includes understanding trade financing instruments such as letters of credit, trade finance facilities, export-import financing, and trade credit insurance.
6. Risk Management: International finance involves managing various types of risks associated with cross-border transactions, including currency risk, interest rate risk, political risk, sovereign risk, and market risk. This includes employing hedging strategies, derivatives, and other risk management techniques to mitigate exposure to such risks.
7. Financial Regulation and Compliance: International finance involves compliance with regulatory frameworks and laws governing financial transactions and institutions in different countries. This includes understanding regulatory requirements related to foreign exchange controls, capital controls, anti-money laundering (AML) regulations, and international tax laws.
8. Global Economic and Financial Policy: International finance examines the formulation and implementation of global economic and financial policies by governments, central banks, and international organizations. This includes analyzing monetary policy, fiscal policy, trade policies, and international agreements that affect financial markets and economic conditions globally.
9. Financial Innovation and Technology: International finance explores the role of financial innovation and technology in shaping global financial markets and practices. This includes the use of financial technology (fintech), blockchain technology, digital currencies, and other innovations to enhance efficiency, transparency, and accessibility in international financial transactions.
(B) Explain the components of Balance of Payments.
Ans: The balance of payments (BoP) is a systematic record of all economic transactions between residents of a country and the rest of the world during a specific time period, typically one year. It is divided into several components, each representing different types of transactions. The main components of the balance of payments include:
1. Current Account: The current account records the transactions of goods, services, primary income, and secondary income between a country and the rest of the world.
a. Trade Balance: The trade balance represents the difference between the value of exports and imports of goods. If exports exceed imports, the country has a trade surplus; if imports exceed exports, it has a trade deficit.
b. Services: This includes transactions related to services such as transportation, tourism, financial services, and business services. It also encompasses income from services provided by residents of one country to residents of other countries.
c. Primary Income: Primary income includes earnings from investments abroad (such as dividends, interest, and profits) received by residents of a country, as well as payments made to foreign investors with investments in the country.
d. Secondary Income: Secondary income includes transfers of money between countries that are not directly linked to the provision of goods or services. This includes remittances from foreign workers, international aid, and transfers between governments.
2. Capital Account: The capital account records transactions related to financial assets and liabilities, as well as capital transfers between a country and the rest of the world.
a. Financial Assets: This includes transactions involving the purchase and sale of financial assets such as stocks, bonds, and currencies. It also encompasses foreign direct investment (FDI), portfolio investment, and other types of capital flows.
b. Capital Transfers: Capital transfers represent the transfer of ownership of fixed assets or the forgiveness of liabilities between residents and non-residents. Examples include debt forgiveness, migrants' transfers of assets when changing residence, and the transfer of ownership of fixed assets due to privatization.
3. Financial Account: The financial account records changes in ownership of financial assets and liabilities between residents and non-residents during a specific period.
a. Direct Investment: Direct investment refers to investments made by residents of one country in physical assets or business operations in another country, with the objective of establishing a lasting interest and significant influence.
b. Portfolio Investment: Portfolio investment involves the purchase and sale of financial assets such as stocks and bonds issued by foreign entities, without establishing a significant degree of control or influence over the assets.
c. Other Investment: Other investment includes transactions related to loans, deposits, trade credits, and other financial instruments not classified as direct or portfolio investment. It also encompasses changes in reserve assets held by central banks.
4. Reserves Account: The reserves account records changes in a country's official reserves held by its central bank, such as foreign currency reserves and gold reserves. These reserves are used to intervene in foreign exchange markets to stabilize the domestic currency's value or to meet external payment obligations.
The balance of payments is said to be in equilibrium when total credits (inflows) equal total debits (outflows) across all components. However, it is common for countries to have imbalances in certain components, resulting in surpluses or deficits that need to be financed through adjustments in other components or through borrowing from the rest of the world.
OR
(P) The following quote is given in Mumbai
1USD=Rs. 64.7250-Rs. 64,7300
- Is this quote "Direct" or "Indirect" in Mumbai?
- Calculate Mid-rate, Spread and Spread %
- Find the inverse quote.
(Q) The following quotations are available in New York:
1 USD GBP 0.6530-0.6540
1 USD CAD 1.0408-1.0418
The following quotation is available in Toronto:
1 GBP CAD 1.5898-1.5908
- From the quotes, given in New York, Calculate the cross-currency quotation for 1 GBP in terms of CAD.
- Compare the derived GBP/CAD quote with the quote given in Toronto and find the arbitrage gain if any on GBP 1 Million.
Q. 3. (A) What are currency options? Explain its types? (08)
Ans: Currency options are financial derivatives that give the holder the right, but not the obligation, to buy (call option) or sell (put option) a specified amount of a currency at a predetermined exchange rate (strike price) within a specified period of time (expiration date). These options provide flexibility to manage currency risk and speculate on exchange rate movements.
There are two main types of currency options:
1. Call Options: A call option gives the holder the right to buy a specified amount of currency at the predetermined exchange rate (strike price) on or before the expiration date. Call options are typically used when the holder expects the value of the underlying currency to appreciate relative to another currency. If the exchange rate increases above the strike price, the holder can exercise the option and buy the currency at the lower strike price, realizing a profit.
2. Put Options: A put option gives the holder the right to sell a specified amount of currency at the predetermined exchange rate (strike price) on or before the expiration date. Put options are commonly used when the holder anticipates the value of the underlying currency to depreciate relative to another currency. If the exchange rate falls below the strike price, the holder can exercise the option and sell the currency at the higher strike price, realizing a profit.
Currency options can further be classified based on their exercise styles:
1. European Style Options: European-style options can only be exercised on the expiration date. The holder cannot exercise the option before the expiration date.
2. American Style Options: American-style options can be exercised at any time between the purchase date and the expiration date. This flexibility provides more control over timing and allows the holder to capitalize on favorable exchange rate movements before the expiration date.
Additionally, currency options can be categorized based on their settlement methods:
1. Physical Delivery Options: With physical delivery options, upon exercise, the holder either buys or sells the underlying currency at the predetermined exchange rate. This involves the actual exchange of currencies.
2. Cash Settlement Options: In cash settlement options, upon exercise, the holder receives or pays the cash equivalent of the option's intrinsic value (the difference between the spot exchange rate and the strike price) rather than exchanging the underlying currencies. This method eliminates the need for physical currency exchange and is more common in currency options trading.
(B) State the differences between futures and options. (07)
Ans: Futures and options are both derivative financial instruments, but they have distinct characteristics and operate differently. Here are the key differences between futures and options:
1. Obligation vs. Right:
- Futures: In a futures contract, both parties (buyer and seller) are obligated to fulfill the terms of the contract. The buyer is obligated to purchase the underlying asset, and the seller is obligated to sell the asset, at the agreed-upon price and date.
- Options: In an options contract, the buyer has the right but not the obligation to buy (call option) or sell (put option) the underlying asset at the agreed-upon price within a specified period. The seller (writer) of the option is obligated to fulfill the terms of the contract if the buyer decides to exercise their right.
2. Risk and Reward:
- Futures: Futures trading involves unlimited profit potential but also unlimited risk. Both the buyer and seller are exposed to the risk of adverse price movements in the underlying asset.
- Options: Options trading offers limited risk and unlimited profit potential for the buyer. The maximum loss for the buyer is limited to the premium paid for the option, while the potential profit can be substantial if the price movement is favorable. However, for the seller, the risk is potentially unlimited, while the profit is limited to the premium received.
3. Flexibility:
- Futures: Futures contracts are standardized agreements traded on exchanges, with fixed contract sizes, expiration dates, and settlement methods. They offer less flexibility compared to options.
- Options: Options contracts provide more flexibility for investors. They can choose from various strike prices and expiration dates to tailor their strategies based on market expectations and risk tolerance.
4. Liquidity:
- Futures: Futures markets tend to be more liquid than options markets, especially for widely traded commodities and financial instruments. This liquidity ensures tighter bid-ask spreads and easier execution of trades.
- Options: Options markets may have lower liquidity compared to futures markets, particularly for less-traded assets or options with distant expiration dates and strike prices. Lower liquidity can lead to wider bid-ask spreads and potential difficulties in executing trades at desired prices.
5. Margin Requirements:
- Futures: Futures trading typically requires the posting of margin, which serves as collateral to cover potential losses. Margin requirements are set by exchanges and clearinghouses and vary based on the volatility and risk associated with the underlying asset.
- Options: Options trading generally requires the payment of a premium upfront to purchase the option contract. There are no ongoing margin requirements for holding long option positions (except for certain strategies like writing uncovered options). However, options writers are required to post margin to cover potential losses.
OR
(P) Following is the GBP/USD spot rate: 1.2192/1.2290
1 month forward points are: 100/150
3 month forward points are: 300/500
6 months forward points are: 500/800
Calculate 1, 3 and 6 months outright forward quote
(Q) Spot EUR/JPY 119.3525
1 month forward rate 119,3625
Calculate 1 Month AFM and interpret the results.
Q.4. (A) Discuss the elements of International Equity Market.
Ans: Ans: The international equity market refers to the global marketplace where stocks or shares of publicly traded companies are bought and sold. This market allows investors from different countries to trade securities issued by companies located in various parts of the world. Several key elements contribute to the functioning and dynamics of the international equity market:
1. Stock Exchanges: Stock exchanges serve as the primary platforms for trading equities. Major international stock exchanges include the New York Stock Exchange (NYSE), NASDAQ in the United States, the London Stock Exchange (LSE) in the United Kingdom, the Tokyo Stock Exchange (TSE) in Japan, and the Shanghai Stock Exchange (SSE) in China. These exchanges provide infrastructure, rules, and regulations for trading securities.
2. Listed Companies: The international equity market consists of companies that list their shares on various stock exchanges to raise capital from investors. These companies come from diverse industries and sectors, including technology, finance, healthcare, energy, consumer goods, and more. Multinational corporations often have listings on multiple exchanges, allowing them to access a broader investor base.
3. Investors: Investors in the international equity market include individuals, institutional investors (such as mutual funds, pension funds, and hedge funds), and other financial entities. These investors buy and sell stocks with the aim of generating returns through capital appreciation and dividends. Institutional investors often play a significant role in the market due to their large-scale investments and influence on stock prices.
4. Market Participants: Market participants in the international equity market include brokers, market makers, investment banks, and regulatory authorities. Brokers facilitate trades between buyers and sellers, while market makers provide liquidity by quoting bid and ask prices for securities. Investment banks play roles in underwriting initial public offerings (IPOs), mergers and acquisitions (M&A), and other financial services.
5. Trading Mechanisms: Various trading mechanisms are employed in the international equity market, including traditional floor-based trading and electronic trading systems. Electronic trading platforms, such as electronic communication networks (ECNs) and algorithmic trading systems, have become increasingly prevalent, enabling faster execution of trades and greater liquidity.
6. Market Regulations: Regulatory frameworks govern the international equity market to ensure transparency, fairness, and investor protection. Regulatory bodies, such as the Securities and Exchange Commission (SEC) in the United States, the Financial Conduct Authority (FCA) in the United Kingdom, and the Securities and Exchange Board of India (SEBI), enforce rules related to disclosure, trading practices, corporate governance, and market manipulation.
7. Market Indices: Market indices, such as the S&P 500, FTSE 100, Nikkei 225, and DAX, track the performance of specific segments of the international equity market. These indices serve as benchmarks for investors and provide insights into overall market trends and investor sentiment.
8. Globalization and Interconnectedness: The international equity market reflects the increasing globalization and interconnectedness of economies and financial markets worldwide. Factors such as trade, geopolitics, economic indicators, and monetary policies can impact stock prices and market dynamics across borders.
(B) Describe the features of FEMA.
Ans: Ans: The Foreign Exchange Management Act (FEMA) is an Indian law enacted in 1999 to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and promoting the orderly development and maintenance of the foreign exchange market in India. FEMA replaced the Foreign Exchange Regulation Act (FERA), 1973, and aimed to liberalize and simplify foreign exchange transactions in India. Here are the key features of FEMA:
1. Liberalization: FEMA significantly liberalized foreign exchange transactions in India compared to its predecessor, FERA. It introduced a more flexible and market-oriented approach to foreign exchange management, allowing greater freedom for individuals and entities to deal in foreign exchange.
2. Current Account Transactions: FEMA distinguishes between current account transactions and capital account transactions. Current account transactions, which involve routine international trade and payments, are largely liberalized under FEMA. Individuals and businesses can undertake current account transactions without prior approval from the Reserve Bank of India (RBI), subject to certain conditions.
3. Capital Account Transactions: Capital account transactions, which involve investments, borrowings, and transfers of capital, are regulated more closely under FEMA. Certain capital account transactions require approval from the RBI or the government of India, while others are subject to specific regulations and limits.
4. Authorized Persons: FEMA empowers the RBI to authorize certain individuals, banks, and financial institutions to deal in foreign exchange on behalf of others. These authorized persons, such as authorized dealers (banks) and authorized money changers, play a crucial role in facilitating foreign exchange transactions and complying with FEMA regulations.
5. Foreign Exchange Management Regulations: FEMA provides a framework for the regulation and supervision of foreign exchange transactions in India. The RBI issues regulations, notifications, and guidelines under FEMA to govern various aspects of foreign exchange, including capital flows, external commercial borrowings, foreign investments, and overseas remittances.
6. Enforcement and Penalties: FEMA includes provisions for enforcement and penalties to ensure compliance with its provisions. Violations of FEMA regulations, such as unauthorized foreign exchange transactions or non-compliance with reporting requirements, may result in penalties, fines, or other enforcement actions imposed by the RBI or other competent authorities.
7. Adjudication and Appeals: FEMA establishes mechanisms for adjudication of contraventions and appeals against decisions of adjudicating authorities. Adjudicating officers appointed under FEMA have the authority to inquire into alleged violations, impose penalties, and adjudicate disputes related to foreign exchange transactions.
8. Amendments and Updates: Over the years, FEMA has been amended and updated to reflect changes in the regulatory environment, evolving market conditions, and international developments. The government and the RBI periodically revise FEMA regulations to streamline procedures, enhance transparency, and address emerging challenges in foreign exchange management.
OR
(P) The following data is available to decide on the best alternative for borrowing INR 5 Million for a temporary period of three months on a risk free basis. Exchange rates are against INR.
Currency | Spot | 6 Months forward | Interest Rate |
EUR | 65.1450 | 65.2550 | 4.00% |
USD | 81.1859 | 81.2350 | 4.50% |
GBP | 91.1600 | 91.8500 | 5.00% |
(Q) Hinduja Ltd. is considering investing in a project requiring a capital outlay of Rs. 2,00,000. Forecast for annual income after tax is as follows:
|
Year |
1 |
2 |
3 |
4 |
5 |
|
Profit After Tax |
1,00,000 |
1,00,000 |
80,000 |
80,000 |
40,000 |
Depreciation is 20% on Straight Line basis. Evaluate the project on the basis of NPV taking 14% discounting factor and advise whether Hinduja Ltd. should invest in the project or not. The present value of Re. 1 at 14% discounting rate are 0.8772, 0.7695, 0.6750, 0.5921 and 0.5194.
Ans:
|
Year |
Profit after tax |
Depreciation:
20% |
Cash
flow after tax = PAT + Depreciation |
Discount
factors |
Present
value |
|
1 |
1,00,000 |
40,000 |
1,40,000 |
0.8772 |
1,22,808.80 |
|
2 |
1,00,000 |
40,000 |
1,40,000 |
0.7695 |
1,07,730.00 |
|
3 |
80,000 |
40,000 |
1,20,000 |
0.6750 |
81,000.00 |
|
4 |
80,000 |
40,000 |
1,20,000 |
0.5921 |
71,052.00 |
|
5 |
40,000 |
40,000 |
80,000 |
0.5194 |
41,552.00 |
|
|
|
|
|
|
Rs.
4,23,142.80 |
|
|
|
|
|
|
|
Finally, we calculate the Net Present Value (NPV): NPV = Total
Present Value - Initial Investment NPV = Rs. 4,23,142.80 - Rs. 2,00,000 = Rs.
2,23,142.80
Since the NPV is positive, the project is considered financially viable. Therefore, Hinduja Ltd. should invest in the project.
Q.5. (A) Explain the benefits of doing business internationally.
Ans: Doing business internationally can offer numerous benefits for companies looking to expand their operations beyond their domestic markets. Some of these benefits include:
1. Access to New Markets: International expansion opens up opportunities to tap into new customer bases and markets that may have different needs, preferences, and demands compared to the domestic market.
2. Diversification: Operating in multiple countries can help spread risk and reduce dependence on any single market. This diversification can cushion businesses from the impacts of economic downturns or fluctuations in specific regions.
3. Increased Revenue Potential: By reaching a global audience, businesses can potentially increase their revenue streams and profitability. Expanding into markets with higher demand or less competition can lead to higher sales volumes and increased revenue.
4. Economies of Scale: Operating on a larger scale can lead to cost efficiencies through economies of scale. Bulk purchasing, production optimization, and distribution streamlining can all contribute to lower per-unit costs and improved profit margins.
5. Access to Resources: International expansion can provide access to valuable resources such as raw materials, skilled labor, technology, and expertise that may not be readily available in the domestic market. This access can enhance competitiveness and innovation.
6. Competitive Advantage: Being present in multiple markets can provide a competitive advantage over rivals who are limited to a single market. It allows businesses to adapt to changes in consumer preferences, regulations, and market conditions more effectively.
7. Brand Building and Reputation: Expanding internationally can enhance brand recognition and reputation on a global scale. Successfully penetrating new markets and meeting the needs of diverse customer bases can strengthen brand loyalty and credibility.
8. Learning and Innovation: Operating in different cultural and regulatory environments encourages businesses to adapt and innovate. This cross-cultural exchange of ideas and practices can foster creativity and new ways of doing business.
9. Strategic Alliances and Partnerships: International expansion often involves forming strategic alliances, partnerships, or joint ventures with local businesses. These collaborations can provide access to local knowledge, networks, and distribution channels, facilitating market entry and growth.
10. Government Incentives: Many governments offer incentives, tax breaks, or support programs to encourage businesses to expand internationally. These incentives may include grants, subsidies, or preferential treatment for foreign investment, making international expansion more financially attractive.
(B) What are Tax Havens? Explain their advantages.
Ans: Ans: Tax havens are jurisdictions or countries that offer favorable tax treatment to individuals and businesses, often characterized by low or zero taxation on certain types of income. These jurisdictions typically have lenient tax laws and regulations, as well as banking secrecy provisions that facilitate the avoidance or reduction of taxes.
Advantages of tax havens include:
1. Low or Zero Taxes: Tax havens often impose little to no taxes on certain types of income, such as capital gains, dividends, interest, or corporate profits. This allows individuals and businesses to reduce their overall tax burden significantly.
2. Financial Privacy and Secrecy: Many tax havens have strict banking secrecy laws that protect the identity and financial information of account holders. This confidentiality can help individuals and businesses maintain privacy regarding their financial affairs and assets.
3. Asset Protection: Tax havens may offer legal structures such as trusts, foundations, or offshore corporations that provide asset protection benefits. These structures can shield assets from creditors, lawsuits, or government seizure in the home country.
4. Diverse Investment Opportunities: Tax havens often have well-developed financial sectors with access to a wide range of investment opportunities, including offshore funds, hedge funds, and other financial instruments. This diversity can allow investors to diversify their portfolios and potentially achieve higher returns.
5. International Business Operations: Tax havens are commonly used for international business activities, such as global trade, investment, and holding intellectual property rights. Operating in a tax haven can offer tax advantages and facilitate cross-border transactions.
6. Reduced Regulatory Burden: Some tax havens have less stringent regulatory requirements and reporting obligations compared to other jurisdictions. This reduced regulatory burden can simplify compliance for businesses and individuals operating in these jurisdictions.\
7. Economic Stability: Tax havens often have stable political and economic environments, making them attractive locations for wealth preservation and investment. Additionally, many tax havens have strong legal systems and institutions that provide investor confidence and protection.
OR
Q.5 C) Write Short Notes on (any three): 15
1) FDI VS. FPI
Ans: Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are two distinct forms of investment made by foreign entities in a country's economy. While both involve investments from abroad, they differ in their objectives, nature, and scope. Here's a comparison of FDI and FPI:
1. Definition:
- Foreign Direct Investment (FDI): FDI refers to the investment made by a foreign entity (individual, company, or government) in the ownership or control of physical assets or production facilities in another country. FDI involves a long-term commitment and is typically associated with acquiring substantial ownership stakes in companies, establishing new subsidiaries or branches, or engaging in joint ventures.
- Foreign Portfolio Investment (FPI): FPI refers to the investment made by foreign investors in financial assets such as stocks, bonds, money market instruments, and other securities of a country's financial markets. FPI involves a passive investment approach and does not entail ownership or control of underlying assets or companies.
2. Nature:
- FDI: FDI involves a direct and active involvement in the management, operations, and strategic decision-making of the invested company or project. FDI investors seek to establish a long-term presence in the host country, often with the aim of gaining access to new markets, resources, technologies, or strategic assets.
- FPI: FPI involves an indirect and passive investment approach, where investors purchase financial assets in a country's capital markets without acquiring ownership or control over the underlying companies. FPI investors focus on maximizing returns by capitalizing on short to medium-term fluctuations in asset prices, interest rates, or currency exchange rates.
3. Objectives:
- FDI: The primary objectives of FDI include expanding market presence, accessing new markets or resources, diversifying operations, leveraging technology or managerial expertise, and achieving strategic objectives such as global expansion or vertical integration.
- FPI: The primary objectives of FPI include maximizing investment returns, capitalizing on market opportunities, diversifying investment portfolios, managing risks, and taking advantage of short-term market inefficiencies or mispricing.
4. Investment Horizon:
- FDI: FDI typically involves a long-term investment horizon, with investors committing capital over several years or decades. FDI investors are focused on building sustainable business operations, generating steady returns, and creating long-term value for shareholders.
- FPI: FPI involves a relatively short to medium-term investment horizon, with investors buying and selling financial assets based on market conditions, economic indicators, and investment strategies. FPI investors are more sensitive to changes in market sentiment, interest rates, and geopolitical events.
5. Impact on the Economy:
- FDI: FDI can have significant positive impacts on the host economy, including job creation, technology transfer, infrastructure development, capacity building, export promotion, and economic growth. FDI often contributes to the development of local industries, improves productivity, and enhances competitiveness.
- FPI: FPI can provide liquidity to financial markets, support capital formation, facilitate investment in infrastructure and projects, and enhance market efficiency. However, FPI can also increase market volatility, amplify financial market fluctuations, and pose risks to financial stability, especially in emerging markets with less developed regulatory frameworks.
2) Participants of Foreign Exchange
Ans: The foreign exchange (FOREX) market involves various participants, each playing a crucial role in the trading and functioning of the market. Here are the main participants of the foreign exchange market:
1. Commercial Banks: Commercial banks are key participants in the FOREX market, both as market makers and as intermediaries for their clients. They facilitate currency transactions for businesses, individuals, and other financial institutions, provide liquidity to the market, and engage in proprietary trading to profit from exchange rate fluctuations.
2. Central Banks: Central banks play a significant role in the FOREX market through their monetary policy actions, interventions, and management of foreign exchange reserves. Central banks use FOREX market operations to influence exchange rates, maintain monetary stability, and achieve macroeconomic objectives such as price stability, economic growth, and balance of payments equilibrium.
3. Investment Banks: Investment banks are active participants in the FOREX market, providing liquidity, market-making services, and trading opportunities for institutional clients, hedge funds, corporations, and governments. They engage in proprietary trading, currency hedging, and risk management activities to generate profits and manage currency exposures.
4. Hedge Funds and Asset Managers: Hedge funds and asset managers are significant participants in the FOREX market, trading currencies on behalf of their clients or investment funds to generate returns, hedge risks, and diversify portfolios. They use various trading strategies, including trend following, carry trades, arbitrage, and macroeconomic analysis, to capitalize on currency market opportunities.
5. Corporations: Multinational corporations are active participants in the FOREX market, engaging in currency transactions to manage foreign exchange exposures arising from international trade, cross-border investments, and global business operations. Corporations use currency hedging strategies, such as forward contracts, options, and swaps, to mitigate risks and protect profit margins from adverse exchange rate movements.
6. Retail Traders: Retail traders, including individual investors, speculators, and small-scale traders, participate in the FOREX market through online trading platforms offered by brokers and financial institutions. Retail traders engage in currency trading for profit, speculation, and portfolio diversification, using leverage, margin trading, and technical analysis to execute trades in the spot and derivatives markets.
7. Governments and Sovereign Wealth Funds: Governments and sovereign wealth funds participate in the FOREX market to manage foreign exchange reserves, stabilize exchange rates, and support monetary policy objectives. They intervene in the currency markets through direct interventions, foreign exchange market operations, and policy announcements to influence exchange rate movements and maintain macroeconomic stability.
8. Interdealer Brokers: Interdealer brokers facilitate currency trading among financial institutions, acting as intermediaries between banks, investment firms, and other market participants. They provide electronic trading platforms, price discovery services, and liquidity aggregation for trading spot, forward, and derivative instruments in the interbank FOREX market.
3) Fixed Vs. Flexible Exchange Rate System
Ans: Ans; Fixed Exchange Rate System:
1. Definition: In a fixed exchange rate system, the value of a currency is fixed or pegged to the value of another currency, a basket of currencies, or a commodity like gold.
2. Central Bank Intervention: Central banks actively intervene in the foreign exchange market to maintain the fixed exchange rate by buying or selling their currency as needed.
3. Stability: Fixed exchange rate systems provide stability and predictability in currency values, which can promote international trade and investment.
4. Less Flexibility: Countries operating under a fixed exchange rate system have limited flexibility in adjusting their exchange rates to respond to economic shocks or changes in market conditions.
5. Vulnerability to Speculation: Fixed exchange rate systems are vulnerable to speculative attacks if investors believe that the fixed exchange rate is unsustainable.
Flexible Exchange Rate System:
1. Definition: In a flexible exchange rate system, the value of a currency is determined by market forces of supply and demand in the foreign exchange market.
2. Minimal Central Bank Intervention: Central banks may intervene occasionally to stabilize extreme fluctuations or to achieve specific policy objectives, but the exchange rate is primarily determined by market forces.
3. Market-driven Adjustments: Flexible exchange rate systems allow currencies to adjust freely in response to changes in economic fundamentals, such as inflation, interest rates, and trade balances.
4. Increased Flexibility: Countries with flexible exchange rates have more flexibility in adjusting their exchange rates to absorb economic shocks and maintain competitiveness in international trade.
5. Reduced Vulnerability to Speculation: Flexible exchange rate systems are less susceptible to speculative attacks since the exchange rate is determined by market forces rather than being fixed by government policy.
4) Fisher Effect
Ans: The Fisher Effect, named after economist Irving Fisher, is an economic theory that describes the relationship between nominal interest rates, real interest rates, and inflation. According to the Fisher Effect, there is a direct relationship between changes in nominal interest rates and changes in expected inflation rates. In other words, when inflation expectations rise, nominal interest rates also rise, and vice versa.
The Fisher Effect can be expressed through the following equation:
i = r + pi
Where:
- i represents the nominal interest rate,
- r represents the real interest rate (the nominal interest rate adjusted for inflation), and
- pi represents the expected rate of inflation.
The Fisher Effect implies that nominal interest rates adjust to compensate for expected changes in inflation so that real interest rates remain relatively stable over time. For example, if investors expect inflation to increase in the future, they will demand higher nominal interest rates to maintain their purchasing power and achieve the same real return on their investments.
Central banks and policymakers often consider the Fisher Effect when formulating monetary policy, as changes in nominal interest rates can influence inflation expectations and economic behavior. By adjusting nominal interest rates, central banks aim to achieve their inflation targets and maintain price stability in the economy.
5) Hedging
Ans: Hedging is a risk management strategy used by individuals, businesses, and investors to protect against potential losses from adverse movements in the value of assets or liabilities. The primary purpose of hedging is to reduce or mitigate exposure to financial risk by offsetting the impact of unfavorable price fluctuations.
In financial markets, hedging typically involves taking a position in a derivative instrument or a related asset that has an inverse price relationship with the asset being hedged. For example, investors may use futures contracts, options, forwards, or swaps to hedge against fluctuations in the prices of stocks, currencies, commodities, interest rates, or other financial instruments.
The key principle behind hedging is to establish a counterbalancing position that can offset potential losses from the underlying risk exposure. By hedging, investors can protect their portfolios, minimize downside risk, and preserve capital in volatile market conditions. However, hedging strategies may also limit potential gains if the hedged risk does not materialize or if the hedging instrument incurs costs.
Hedging is widely used in various industries and sectors to manage risks associated with currency fluctuations, interest rate changes, commodity price volatility, and other market uncertainties. For example, multinational corporations hedge currency risk to protect against exchange rate fluctuations affecting their international transactions and cash flows. Similarly, farmers hedge commodity price risk to mitigate losses from adverse changes in crop prices.
Elective: Operation Research (CBCGS) | |||
Year | Month | Q.P. | Link |
IMP Q. |
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Obj. Q |
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2019 | April | ||
2019 | November | ||
2022 | November | ||
2023 | April | ||
2023 | November | ||
2024 | April | ||
2024 | November | ||
2025 | April |
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Elective: International Finance (CBCGS) | |||
Year | Month | Q.P. | Link |
IMP Q. |
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Obj. Q |
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2019 | April | ||
2019 | November | ||
2022 | November | Solution | |
2023 | April | ||
2024 | April | ||
2024 | November | Solution | |
2025 | April |
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Elective: Brand Management (CBCGS) | |||
Year | Month | Q.P. | Link |
IMP Q. |
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Obj. Q |
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2019 | April | ||
2019 | November | ||
2023 | April | ||
2024 | April | ||
2024 | November | Solution | |
2025 | April | Solution | |
Elective: HRM in Global Perspective (CBCGS) | |||
Year | Month | Q.P. | Link |
IMP Q. |
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Obj. Q |
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2019 | April | ||
2019 | November | ||
2023 | April | ||
2024 | April | ||
2024 | November | Solution | |
2025 | April | ||
Elective: Innovation Financial Service (CBCGS) | |||
Year | Month | Q.P. | Link |
IMP Q. |
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Obj. Q |
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2019 | April | ||
2019 | November | ||
2023 | April | Solution | |
2024 | April | ||
2024 | November | Solution | |
2025 | April | Solution | |
Elective: Retail Management (CBCGS) | |||
Year | Month | Q.P. | Link |
IMP Q. |
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Obj. Q |
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2019 | April | ||
2019 | November | ||
2023 | April | ||
2024 | April | ||
2024 | November | ||
2025 | April | ||
Elective: Organizational Development (CBCGS) | |||
Year | Month | Q.P. | Link |
IMP Q. |
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Obj. Q |
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2019 | April | ||
2019 | November | ||
2023 | April | ||
2024 | April | ||
2024 | November | Solution | |
2025 | April |
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Elective: Project Management (CBCGS) | |||
Year | Month | Q.P. | Link |
IMP Q. |
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Obj. Q |
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2019 | April | ||
2019 | November | Solution | |
2023 | April | ||
2024 | April | ||
2024 | November | Solution | |
2025 | April |
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Elective: International Marketing (CBCGS) | |||
Year | Month | Q.P. | Link |
IMP Q. |
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Obj. Q |
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2019 | April | ||
2019 | November | ||
2023 | April | ||
2024 | April | ||
2024 | November | ||
2025 | April |
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Elective: HRM in Service Sector Management (CBCGS) | |||
Year | Month | Q.P. | Link |
IMP Q. |
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Obj. Q |
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2019 | April | ||
2019 | November | ||
2023 | April | ||
2024 | April | ||
2024 | November | ||
2025 | April |
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Elective: Strategic Financial Management (CBCGS) | |||
Year | Month | Q.P. | Link |
IMP Q. |
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Obj. Q |
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2019 | April | ||
2019 | November | ||
2023 | April | ||
2024 | April | ||
2024 | November | Solution | |
2025 | April |
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Elective: Media Planning (CBCGS) | |||
Year | Month | Q.P. | Link |
IMP Q. |
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Obj. Q |
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2019 | April | ||
2019 | November | ||
2023 | April | ||
2024 | April | ||
2024 | November | Solution | |
2025 | April |
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Elective: Workforce Diversity (CBCGS) | |||
Year | Month | Q.P. | Link |
IMP Q. |
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Obj. Q |
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2023 | April | ||
2024 | April | ||
2024 | November | ||
2025 | April |
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Elective: Financing Rural Development (CBCGS) | |||
Year | Month | Q.P. | Link |
IMP Q. |
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Obj. Q |
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2023 | April | ||
2024 | April | ||
2024 | November | ||
2025 | April |
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Elective: Sport Marketing (CBCGS) | |||
Year | Month | Q.P. | Link |
IMP Q. |
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Obj. Q |
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2023 | April | ||
2024 | April | ||
2024 | November | ||
2025 | April |
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Elective: HRM Accounting & Audit (CBCGS) | |||
Year | Month | Q.P. | Link |
IMP Q. |
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Obj. Q |
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2019 | April | ||
2019 | November | ||
2023 | April | ||
2024 | April | ||
2024 | November | Solution | |
2025 | April |
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Elective: Indirect Tax (CBCGS) | |||
Year | Month | Q.P. | Link |
IMP Q. |
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Obj. Q |
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2019 | April | ||
2019 | November | ||
2023 | April | ||
2024 | April | Solution | |
2024 | November | Solution | |
2025 | April |
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Elective: Marketing of Non-Profit Organization (CBCGS) | |||
Year | Month | Q.P. | Link |
IMP Q. |
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Obj. Q |
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2019 | April | Solution | |
2019 | November | Solution | |
2023 | April | Solution | |
2024 | April | ||
2024 | November | Solution | |
2025 | April |
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Elective: Indian Ethos in Management (CBCGS) | |||
Year | Month | Q.P. | Link |
IMP Q. |
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Obj. Q |
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2019 | April | ||
2019 | November | ||
2023 | April | ||
2024 | April | ||
2024 | November | Solution | |
2025 | April |
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