Paper/Subject Code: 86002/Finance: International Finance
TYBMS SEM 6:
Financial:
International Finance
(Q.P. April 2023 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):
(6) The risk of loss in purchasing power because the value of investments does not keep up with inflation is called as _______.
(a) Concentration Risk
(b) Inflation Risk
(c) Liquidity Risk
(d) Transaction Risk
(7) _______ is a way of trading non-U.S. stocks on the U.S. exchange.
(a) ADR
(b) GDR
(c) IDR
(d) FDI
(8) ________ is currency held on deposit outside its home market.
(a) Eurobond
(b) Eurocurrency
(c) Euro credit
(d) Zero Coupon Bond
(9) _______ is the process of assessing, in a structured way, the case for proceeding with a project or proposal, or the project's viability.
(a) Project Appraisal
(b) Project Finance
(c) Project Measurement
(d) Project Performance
(10) According to _______ technique of FOREX risk management, a company dealing in international transactions must make all its payments in its domestic currency and must have the policy of accepting only domestic currency from the debtors.
(a) Matching
(b) Leading and Lagging
(c) Hedging
(d) Invoice in Home Currency
Q.1.(B) State whether the following statements are True or False (any 7): (07)
1) The Balance of Payment identity is CA+FA+RA=0
Ans: True. The Balance of Payments identity is often expressed as CA (Current Account) + FA (Financial Account) + CA (Capital Account) = 0, indicating that total debits must equal total credits in a country's balance of payments
2) Gold standard has proved to be a "fair weather friend".
Ans: False. The gold standard was historically used as a stable system for linking currency values to the price of gold, but it faced challenges during economic downturns and periods of financial instability, leading to its abandonment by most countries.
3) Nostro account points at "Our account with you"
Ans: False. Nostro account actually points at "Our account with you." It's the account a bank holds in a foreign currency in another bank.
4) Exporters sell foreign currencies for domestic currencies.
Ans: False. Exporters typically sell domestic currencies for foreign currencies when conducting international trade.
5) If AFM is positive, it represents premium on base currency.
Ans: False. If AFM (All Forward Margin) is positive, it represents a premium on the counter currency, not the base currency.
6) The call option is the right to sell an asset at a fixed date and price.
Ans: False. A call option gives the holder the right to buy an asset at a fixed date and price, not sell it.
7) In case of FPI, entry and exit are difficult.
Ans: False. In the case of Foreign Portfolio Investment (FPI), entry and exit are relatively easier compared to Foreign Direct Investment (FDI).
8) Net Present Value Present Value of Cash Inflow + Present Value of Cash Outflow.
Ans: False. Net Present Value (NPV) is calculated by subtracting the present value of cash outflows from the present value of cash inflows.
9) India is a tax haven country.
Ans: False. India is not typically considered a tax haven country. Tax haven countries are those with favorable tax regimes and regulations that attract foreign individuals and businesses seeking to minimize their tax liabilities.
10) Dumping means selling goods at high price in international markets.
Ans: False. Dumping refers to selling goods at a lower price in international markets than in the domestic market, often with the intention of gaining market share or driving competitors out of the market.
Q.2.(A) What is Intonational Finance? Describe the emerging challenges in international finance.
Ans: It seems like you might be referring to "International Finance" rather than "Intonational Finance." International finance refers to the management of financial transactions that involve entities from different countries or jurisdictions. It encompasses various aspects such as currency exchange, international trade, foreign investment, and global financial markets.
Emerging challenges in international finance include:
1. Global Economic Uncertainty: Economic volatility and uncertainty in major economies can impact international trade and investment flows. Factors such as trade tensions, geopolitical conflicts, and natural disasters can contribute to economic instability.
2. Exchange Rate Volatility: Fluctuations in exchange rates can affect the competitiveness of exports and imports, as well as the value of international investments. Managing currency risk becomes crucial for multinational corporations and investors.
3. Regulatory Changes and Compliance: Evolving regulatory frameworks, including tax laws, trade policies, and financial regulations, pose challenges for businesses operating across borders. Compliance with diverse regulatory requirements adds complexity and costs to international transactions.
4. Technological Disruptions: Advances in technology, including fintech innovations and digitalization, are transforming the landscape of international finance. While digital platforms offer opportunities for efficiency and access to new markets, they also introduce cybersecurity risks and regulatory challenges.
5. Sustainability and ESG Factors: Environmental, Social, and Governance (ESG) considerations are increasingly shaping investment decisions and corporate strategies. Integrating sustainability goals into international finance practices requires addressing issues such as climate change, social inequality, and corporate governance standards.
6. Capital Flows and Financial Stability: Capital flows between countries can impact financial stability and economic growth. Challenges arise from the management of capital flows, including the risks associated with sudden capital outflows, speculative attacks, and excessive leverage in global financial markets.
7. Emerging Market Dynamics: Emerging markets face unique challenges in international finance, including currency volatility, political instability, and structural vulnerabilities. Managing risks and fostering sustainable development in emerging economies require tailored policy responses and international cooperation.
8. Debt Sustainability and Sovereign Risks: Rising levels of public and private debt in many countries raise concerns about debt sustainability and sovereign risks. Addressing debt challenges requires fiscal discipline, debt restructuring mechanisms, and collaboration between creditors and debtors.
9. Financial Inclusion and Access to Finance: Bridging the gap in financial inclusion remains a challenge in many regions, particularly in developing countries. Expanding access to financial services and promoting inclusive growth require innovative solutions and supportive policies.
10. Geopolitical Risks and Trade Tensions: Geopolitical tensions, trade disputes, and protectionist measures can disrupt global supply chains and trade flows, affecting economic prospects and financial market stability. Resolving geopolitical conflicts and promoting multilateral cooperation are essential for mitigating these risks.
(B) What are the components of Balance of Payment?
Ans: 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: IUSD INR 81.2125-82.2325
Is it a Direct Quote in India?
Find Mid Rate, Spread and Spread%
Calculate the inverse quote.
(Q) Identify if triangular arbitrage exists and calculate the same: (07)
USD CAD 1.1685-1.1695
USD CHF 1.3785-1.3795
CAD CHF 1.1885-1.1895
Note: Compare CAD CHF quotes for calculating Arbitrage & Assume Capital CAD 1 Million
Ans: To identify if triangular arbitrage exists, we can calculate the implied cross rate between CAD and CHF using the USD quotes, then compare it to the actual CAD/CHF rate. If there's a discrepancy, an arbitrage opportunity exists.
Q.3.(A) Explain global money market instruments.
Ans: Ans: Global money market instruments are short-term debt securities issued by governments, financial institutions, and corporations to raise funds in the global money markets. These instruments are characterized by their high liquidity, low risk, and short maturity periods, typically ranging from overnight to one year. They play a crucial role in facilitating short-term borrowing and lending activities, managing liquidity, and providing investors with safe and liquid investment options. Some common types of global money market instruments include:
1. Treasury Bills (T-Bills): Issued by governments, T-bills are short-term debt securities with maturities ranging from a few days to one year. They are considered risk-free instruments and are highly liquid, as they are backed by the creditworthiness of the issuing government. T-bills are typically sold at a discount to face value and do not pay periodic interest; instead, investors earn a return by purchasing them at a discount and receiving the full face value at maturity.
2. Certificates of Deposit (CDs): CDs are time deposits offered by banks and financial institutions with fixed maturity periods, ranging from a few days to several years. They pay a fixed rate of interest and are insured by deposit insurance schemes, making them relatively low-risk investments. CDs can be issued in domestic or foreign currencies, providing investors with flexibility and diversification options.
3. Commercial Paper (CP): CP is a short-term unsecured promissory note issued by corporations to raise funds for working capital needs and short-term financing requirements. CP typically has maturities ranging from one day to one year and is issued at a discount to face value. It is commonly used by large, creditworthy corporations with strong credit ratings to access the money markets and diversify their funding sources.
4. Repurchase Agreements (Repos): Repos are short-term collateralized lending agreements between parties, typically banks and financial institutions, where one party (the seller) sells securities to another party (the buyer) with an agreement to repurchase them at a later date at a slightly higher price. Repos provide temporary liquidity to investors and allow them to earn a return on their excess cash by lending securities as collateral.
5. Banker's Acceptances (BAs): BAs are short-term time drafts or bills of exchange issued by a borrower, typically a corporation, and guaranteed by a bank. They are used to finance international trade transactions, with the bank accepting responsibility for payment at maturity. BAs are considered relatively low-risk instruments due to the creditworthiness of the issuing bank and are often traded in the secondary market.
6. Money Market Funds (MMFs): MMFs are mutual funds that invest in a diversified portfolio of short-term money market instruments, such as T-bills, CDs, CP, and repos. MMFs offer investors a convenient way to access the money markets, diversify their investments, and earn a competitive yield on their cash holdings while maintaining liquidity and capital preservation.
(B) What is Euro bank? What are its competitive advantages?
Ans: Ans: The term "Eurobank" can refer to two different concepts:
1. Eurobanking System: This refers to banks that operate primarily in the Eurozone, which consists of countries that use the euro as their official currency. Eurobanks conduct financial transactions, provide banking services, and offer products denominated in euros. Examples of Eurobanks include major European financial institutions such as Deutsche Bank, BNP Paribas, and Santander.
2. Eurobank Group: This is a specific banking group headquartered in Greece, known as Eurobank Ergasias S.A. It is one of the largest financial institutions in Greece and operates internationally, offering a range of banking and financial services to individuals, businesses, and institutions.
Regardless of the specific interpretation, Eurobanks can have several competitive advantages:
1. Access to the Eurozone Market: Eurobanks have direct access to the Eurozone market, which consists of countries with a combined population of over 340 million people. This provides them with a large customer base and opportunities for business expansion and growth.
2. Currency Stability: Operating in the Eurozone provides Eurobanks and their customers with the benefits of currency stability and reduced currency exchange risk. The euro is a widely accepted and stable currency, which can simplify transactions and reduce transaction costs for businesses and individuals.
3. Eurozone Regulations: Eurobanks are subject to regulations and oversight by European Union (EU) authorities, such as the European Central Bank (ECB) and the European Banking Authority (EBA). While regulatory compliance can be burdensome, it can also enhance credibility, stability, and trust in Eurobanks among customers and investors.
4. Access to EU Financial Infrastructure: Eurobanks have access to the European Union's financial infrastructure, including payment systems, clearinghouses, and securities markets. This facilitates efficient and seamless financial transactions, fund transfers, and securities trading within the Eurozone and across EU borders.
5. Diversification and International Presence: Some Eurobanks, particularly larger institutions like Deutsche Bank and BNP Paribas, have established international operations and a global presence. This diversification allows them to generate revenue from multiple markets, geographies, and business lines, reducing reliance on any single market or region.
6. Financial Innovation and Expertise: Eurobanks often have access to advanced financial technologies, expertise in international finance, and innovative products and services. This enables them to offer sophisticated financial solutions, tailored investment strategies, and customized banking services to meet the diverse needs of their clients.
(P) Consider the following information;
Spot 1 USD = SGD 1.3320 1.3390
1 Month Forward 120 -- 220
2 Month Forward 820 -- 940
3 Month Forward 1120 -- 1220
6 Month Forward 1980 -- 2080
Calculate 1 Month Forward, 3 Month Forward and 6 Month Forward USD-SGD Rate.
(Q) 60 Days Forward USD-CHF 0.9508
Spot USD-CHF 0.9520
Calculate 60 Days AFM and interpret the results.
Ans:
To calculate the 60 Days Annualized Forward Margin (AFM), we first need to determine the Forward Points and then apply the formula to calculate the AFM.
Interpretation:
The negative value of the Annualized Forward Margin (-0.756%) indicates that the forward exchange rate (0.9508) is lower than the spot exchange rate (0.9520). This suggests that the USD is trading at a discount in the forward market relative to the CHF. In other words, the USD is expected to depreciate against the CHF over the 60-day period.
OR
Q.4.(A) What is FDI? How is it different from FPI?
Ans: Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) are both forms of investment made by entities or individuals from one country into assets or entities located in another country. However, they differ in several key aspects:
1. Nature of Investment:
- FDI involves the acquisition of a lasting interest in or effective control over an enterprise located in a foreign country. This usually implies ownership of at least 10% of the voting rights in the foreign business.
- FPI, on the other hand, involves the purchase of financial assets such as stocks, bonds, or other securities issued by foreign entities. FPI investors do not typically seek to exert significant control over the companies in which they invest.
2. Level of Control:
- FDI implies a higher level of control over the foreign enterprise, as the investor often becomes actively involved in the management and decision-making processes of the company.
- FPI usually does not involve any significant control over the management or operations of the invested entity. Investors in FPI primarily seek financial returns through capital gains, dividends, or interest payments.
3. Risk and Return:
- FDI is generally considered to be a long-term investment with potentially higher risks and rewards. It involves a greater commitment of resources and often requires substantial capital investment.
- FPI is more liquid and allows investors to easily enter and exit positions in financial markets. It typically offers lower returns compared to FDI but also carries lower associated risks.
4. Impact on Economy:
- FDI can contribute to economic growth by promoting technology transfer, job creation, infrastructure development, and productivity enhancement in the host country. It fosters long-term economic development and industrialization.
- FPI can provide short-term financing to countries and can help improve liquidity in financial markets. However, it can also lead to volatility and capital flight during times of market instability, which may pose challenges to economic stability.
(B) Describe the essential qualities of a FOREX manager.
Ans: Ans: A successful FOREX manager requires a combination of technical expertise, analytical skills, strategic vision, and interpersonal abilities to navigate the complexities of the foreign exchange market effectively. Here are some essential qualities that a FOREX manager should possess:
1. Deep Understanding of Financial Markets: A FOREX manager should have a comprehensive understanding of financial markets, including foreign exchange, interest rates, commodities, and equity markets. They should stay updated on market trends, economic indicators, geopolitical events, and central bank policies that can influence currency movements.
2. Technical Proficiency: Proficiency in technical analysis tools and trading platforms is crucial for analyzing price charts, identifying trends, patterns, support and resistance levels, and making informed trading decisions. FOREX managers should be adept at using technical indicators, chart patterns, and statistical models to forecast currency movements and manage risk.
3. Risk Management Skills: Effective risk management is essential for FOREX managers to protect capital, preserve profits, and minimize losses in volatile market conditions. They should have a disciplined approach to risk assessment, position sizing, stop-loss orders, and hedging strategies to mitigate exposure to market, credit, liquidity, and operational risks.
4. Financial Modeling and Analysis: Strong quantitative skills are necessary for conducting financial modeling, scenario analysis, and risk assessment in the FOREX market. FOREX managers should be proficient in statistical methods, econometric models, and financial valuation techniques to evaluate investment opportunities, assess market dynamics, and optimize trading strategies.
5. Strategic Thinking: FOREX managers need strategic thinking skills to develop and implement trading strategies that align with their investment objectives, risk tolerance, and market outlook. They should be able to anticipate market trends, identify opportunities, and adapt their strategies to changing market conditions to capitalize on profit opportunities and manage risks effectively.
6. Discipline and Emotional Control: Discipline and emotional control are essential for maintaining trading discipline, adhering to trading rules, and avoiding impulsive or emotional decisions driven by fear, greed, or overconfidence. FOREX managers should have the patience, resilience, and mental toughness to withstand market fluctuations, handle losses gracefully, and maintain focus on long-term goals.
7. Communication and Collaboration: Effective communication and collaboration skills are critical for FOREX managers to interact with clients, colleagues, and counterparties, convey complex ideas clearly, and build trust and credibility. They should be able to articulate their investment strategies, explain market dynamics, and address client concerns to ensure transparency and client satisfaction.
8. Continuous Learning and Adaptability: The FOREX market is dynamic and ever-evolving, requiring FOREX managers to continuously update their knowledge, skills, and strategies to stay competitive and successful. FOREX managers should be open-minded, curious, and adaptable to new technologies, market developments, and regulatory changes that can impact their trading activities.
OR
(P) Given:
6 Month Forward EUR/CAD 1.3493
EUR Interest Rate = 1.25% p.a..
USD Interest Rate = 1.75% p.a.
Calculate Spot EUR/CAD quotation
(Q) From the following data, find the best alternative for borrowing INR 20 Million for a temporary period of 6 Months. Exchange rates are against INR. (08)
Currency | Spot | 6 Months forward | Interest Rate |
EUR | 80.1250 | 80.8890 | 4.00% |
USD | 91.2750 | 91.8950 | 4.50% |
GBP | 98.3575 | 98.3675 | 5.00% |
Ans: To determine the best alternative for borrowing INR 20 million for a temporary period of 6 months, we need to compare the costs of borrowing in each currency using the forward rates and interest rates provided. The currency with the lowest cost of borrowing will be the best alternative.
Calculate the cost of borrowing 20 million INR in each currency:
Q.5.(A) What are tax havens? Explain their benefits.
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.
(B) A&N Ltd. is considering to invest in a project requiring a capital outlay of Rs. 6,00,000. Forecast for annual income after tax is as follows: (07)
|
Year |
1 |
2 |
3 |
4 |
5 |
|
Profit After Tax |
3,00,000 |
3,00,000 |
240,000 |
240,000 |
120,000 |
|
Discount factor @ 14% p,a, |
0.8772 |
0.7695 |
0.6750 |
0.5921 |
0.5194 |
Depreciation is 20% on Straight Line Basis.
Evaluate the project on the basis of Net Present Value and advise whether A&N Ltd. should invest in the project or not?
Ans:
1. Calculate Annual Cash Flow after Depreciation:
- Project life = 5 years
- Capital outlay = Rs. 6,00,000
- Depreciation rate = 20% on a straight-line basis
Recommendation:
Based on the NPV analysis, it's advisable for A&N Ltd. not to invest in this project. There are better investment opportunities available that would offer a higher return on their capital.
OR
Q.5. (P) Write Short Notes: (any three) [15]
i) Gold Standard
Ans:
The gold standard was a monetary system in which the value of a country's currency was directly linked to a specific quantity of gold. Under the gold standard, the currency could be freely converted into gold at a fixed price, and the supply of money was determined by the available gold reserves held by the government or central bank. Here are some key aspects of the gold standard:
1. Convertibility: One of the central features of the gold standard was convertibility, which allowed individuals and entities to exchange paper currency (such as banknotes or coins) for a fixed amount of gold. This convertibility ensured that the value of the currency remained stable and was backed by a tangible asset with intrinsic value.
2. Fixed Exchange Rates: Countries adhering to the gold standard maintained fixed exchange rates between their currencies based on the established gold price. This fixed exchange rate regime provided stability in international trade and investment, as exchange rate fluctuations were limited by the gold convertibility.
3. Discipline on Monetary Policy: The gold standard imposed discipline on monetary policy by restricting the ability of governments to expand the money supply arbitrarily. Since the supply of money was tied to the available gold reserves, countries had to maintain fiscal and monetary discipline to prevent inflation and maintain confidence in their currencies.
4. International Trade and Payments: The gold standard facilitated international trade and payments by providing a common standard of value and medium of exchange. Countries settled their trade imbalances by transferring gold reserves, which helped to adjust for trade deficits or surpluses and maintain equilibrium in the balance of payments.
5. Periods of Stability and Instability: The gold standard was associated with periods of both stability and instability in the global economy. During periods when the supply of gold increased steadily, such as the California Gold Rush in the 19th century, the gold standard contributed to stable economic growth and prosperity. However, the rigidity of the gold standard also exacerbated economic downturns and financial crises, as countries struggled to maintain fixed exchange rates in the face of external shocks or insufficient gold reserves.
6. Decline and Abandonment: The gold standard gradually declined in popularity during the 20th century due to its inflexibility and limitations in responding to economic crises, such as the Great Depression. Many countries abandoned the gold standard during World War I to finance wartime expenditures, and the system collapsed completely during the interwar period and the Great Depression. The Bretton Woods Agreement of 1944 established a new international monetary system based on fixed but adjustable exchange rates pegged to the US dollar, which was convertible into gold at a fixed price.
ii) Functions of FOREX market
Ans:
The foreign exchange (FOREX) market serves several important functions in the global economy, facilitating international trade, investment, and financial transactions. Some key functions of the FOREX market include:
1. Facilitating Currency Conversion: The primary function of the FOREX market is to facilitate the exchange of one currency for another. This allows individuals, businesses, and governments to convert their domestic currency into foreign currencies needed for international transactions, such as trade, investment, tourism, and remittances.
2. Providing Liquidity: The FOREX market is one of the most liquid financial markets in the world, with trading occurring 24 hours a day, five days a week across different time zones. It provides a platform for market participants to buy and sell currencies quickly and efficiently, ensuring continuous liquidity and price discovery.
3. Determining Exchange Rates: The FOREX market plays a crucial role in determining exchange rates, which represent the relative values of different currencies in the global marketplace. Exchange rates are influenced by supply and demand dynamics in the FOREX market, as well as macroeconomic factors such as interest rates, inflation, trade balances, and geopolitical developments.
4. Facilitating International Trade: The FOREX market enables international trade by providing the means for buyers and sellers from different countries to transact in their respective currencies. Importers use the FOREX market to purchase foreign currencies needed to pay for imports, while exporters use it to convert foreign currency receipts into their domestic currency.
5. Supporting Foreign Investment: The FOREX market facilitates foreign investment by allowing investors to exchange their domestic currency for foreign currencies needed to invest in overseas assets such as stocks, bonds, real estate, and businesses. It also enables repatriation of investment proceeds and remittance of profits and dividends back to investors' home countries.
6. Managing Currency Risks: The FOREX market provides tools and instruments for managing currency risks, such as exposure to exchange rate fluctuations. Market participants can use derivatives such as forwards, futures, options, and swaps to hedge against adverse currency movements and protect against potential losses in foreign currency-denominated assets and liabilities.
7. Promoting Financial Market Integration: The FOREX market promotes integration and interconnectedness among global financial markets by facilitating cross-border capital flows, arbitrage opportunities, and portfolio diversification. It allows investors to allocate capital efficiently across different countries and regions, based on relative risk-adjusted returns and investment opportunities.
8. Facilitating Central Bank Interventions: Central banks use the FOREX market to implement monetary policy objectives, such as influencing exchange rates, managing foreign exchange reserves, and stabilizing domestic currency values. Central bank interventions involve buying or selling foreign currencies to affect exchange rate levels and maintain macroeconomic stability.
iii) ADRs
Ans: ADRs, or American Depositary Receipts, are financial instruments that represent shares of foreign companies traded on U.S. stock exchanges. ADRs enable U.S. investors to invest in foreign companies without needing to directly purchase shares on foreign stock exchanges or navigate foreign market regulations. Here are some key points about ADRs:
1. Structure: ADRs are issued by U.S. depository banks, which purchase shares of foreign companies in the respective foreign markets and then issue ADRs to represent those shares. Each ADR typically represents a certain number of shares of the foreign company, with the ratio determined by the depository bank. ADRs are then traded on U.S. stock exchanges like regular stocks.
2. Types of ADRs:
- Sponsored ADRs: These are ADRs that are issued with the cooperation and involvement of the foreign company. Sponsored ADRs are subject to the reporting requirements of the U.S. Securities and Exchange Commission (SEC) and typically provide more information to investors about the foreign company.
- Unsponsored ADRs: These are ADRs that are issued without the involvement or cooperation of the foreign company. Unsponsored ADRs are typically issued by U.S. depository banks independently, based on demand from U.S. investors. They may not be subject to the same reporting requirements as sponsored ADRs.
3. Levels of ADRs:
- Level I ADRs: These are the simplest form of ADRs and are primarily used for companies that do not wish to list on a U.S. exchange but still want to have a presence in the U.S. market. Level I ADRs are traded over-the-counter (OTC) and do not require registration with the SEC or compliance with SEC reporting requirements.
- Level II ADRs: These ADRs are listed on U.S. stock exchanges and are subject to SEC reporting requirements. Level II ADRs offer greater visibility and access to U.S. investors compared to Level I ADRs.
- Level III ADRs: These are the highest level of ADRs and offer the most comprehensive access to U.S. investors. Level III ADRs are listed on U.S. stock exchanges, subject to SEC reporting requirements, and can be used for capital raising through public offerings.
4. Benefits:
- Diversification: ADRs allow U.S. investors to diversify their investment portfolios by gaining exposure to foreign markets and industries.
- Convenience: ADRs provide a convenient way for U.S. investors to invest in foreign companies without needing to open foreign brokerage accounts or deal with foreign market regulations.
- Transparency: Sponsored ADRs, in particular, provide U.S. investors with access to detailed financial information and disclosures about the foreign company, enhancing transparency and investor confidence.
5. Risks:
- Currency Risk: ADRs are denominated in U.S. dollars, so investors are exposed to currency fluctuations between the U.S. dollar and the foreign currency in which the underlying shares are traded.
- Political and Regulatory Risk: ADRs may be subject to political and regulatory risks specific to the foreign country where the underlying company is based, including changes in government policies, regulations, taxation, and economic conditions.
- Liquidity Risk: ADRs may have lower liquidity compared to domestic stocks, especially for smaller foreign companies or ADRs with low trading volumes.
iv) Role of FEDAI
Ans: Ans: FEDAI stands for Foreign Exchange Dealers Association of India. It is a self-regulatory body established in 1958 under the guidance of the Reserve Bank of India (RBI) to regulate and oversee the foreign exchange market in India. FEDAI aims to promote professionalism and ethical conduct among its member banks, which include authorized dealers (ADs) and money changers engaged in foreign exchange transactions.
Some key functions and responsibilities of FEDAI:
1. Setting of Rules and Regulations: FEDAI formulates rules, regulations, and guidelines governing foreign exchange transactions in India. These rules cover various aspects of forex trading, including dealing practices, documentation requirements, risk management, and compliance standards.
2. Dissemination of Information: FEDAI disseminates information, updates, and circulars to its member banks regarding changes in foreign exchange regulations, market developments, and best practices. It serves as a central source of information and guidance for market participants.
3. Training and Education: FEDAI conducts training programs, seminars, and workshops to enhance the knowledge and skills of forex market professionals. It promotes continuous learning and professional development among its members to ensure adherence to regulatory requirements and industry standards.
4. Dispute Resolution: FEDAI facilitates the resolution of disputes and grievances arising from foreign exchange transactions between member banks or between member banks and their customers. It provides a platform for arbitration and mediation to resolve conflicts in a fair and impartial manner.
5. Monitoring and Surveillance: FEDAI monitors foreign exchange market activities and conducts surveillance to detect any irregularities, malpractices, or violations of regulations. It works closely with the RBI and other regulatory authorities to ensure compliance with regulatory requirements and maintain market integrity.
6. Exchange Rate Fixing: FEDAI is responsible for fixing reference exchange rates for various currency pairs based on market quotations provided by member banks. These reference rates serve as benchmarks for pricing foreign exchange transactions and are used for accounting, reporting, and regulatory purposes.
FEDAI plays a vital role in promoting transparency, efficiency, and integrity in the Indian foreign exchange market. It serves as a liaison between market participants and regulatory authorities, fostering collaboration and cooperation to ensure the smooth functioning of the forex market and safeguard the interests of stakeholders.
v) Types of FOREX Risks
Ans: Ans: Foreign exchange (FOREX) risks, also known as currency risks or exchange rate risks, refer to the potential adverse effects of fluctuations in exchange rates on the financial performance and operations of individuals, businesses, and financial institutions. These risks can arise from various sources and impact different stakeholders in different ways. Some common types of FOREX risks include:
1. Transaction Risk: Transaction risk, also known as short-term or transaction exposure, arises from the uncertainty of future cash flows resulting from contractual obligations denominated in foreign currencies. This risk affects firms engaged in international trade or cross-border transactions, as changes in exchange rates between the transaction date and settlement date can lead to gains or losses in the value of transactions. Transaction risk can impact importers, exporters, and multinational corporations conducting business in multiple currencies.
2. Translation Risk: Translation risk, also known as accounting or long-term exposure, arises from the conversion of financial statements, assets, liabilities, and equity denominated in foreign currencies into the reporting currency of the entity. This risk affects multinational corporations with foreign subsidiaries, investments, or operations whose financial statements need to be consolidated or translated for reporting purposes. Changes in exchange rates between reporting periods can result in gains or losses in the translated financial statements, impacting the company's reported earnings, financial position, and shareholders' equity.
3. Economic Risk: Economic risk, also known as operating exposure or competitive risk, arises from the impact of exchange rate fluctuations on a firm's competitive position, market share, and profitability in international markets. This risk affects companies with international operations or exposure to foreign markets, as changes in exchange rates can influence the relative prices of goods and services, demand elasticity, and competitive dynamics. Economic risk can affect firms' revenues, costs, profit margins, and market share over the long term, impacting their overall financial performance and strategic decisions.
4. Translation Risk: Translation risk, also known as accounting or long-term exposure, arises from the conversion of financial statements, assets, liabilities, and equity denominated in foreign currencies into the reporting currency of the entity. This risk affects multinational corporations with foreign subsidiaries, investments, or operations whose financial statements need to be consolidated or translated for reporting purposes. Changes in exchange rates between reporting periods can result in gains or losses in the translated financial statements, impacting the company's reported earnings, financial position, and shareholders' equity.
5. Contingent Risk: Contingent risk arises from contingent liabilities or obligations denominated in foreign currencies, such as future contracts, warranties, guarantees, or legal claims. Changes in exchange rates can affect the value of these contingent liabilities and expose the firm to unexpected losses or gains. Effective risk management strategies, such as hedging or insurance, can help mitigate contingent FOREX risks and protect firms from adverse outcomes.
6. Strategic Risk: Strategic risk arises from the impact of exchange rate fluctuations on a firm's strategic decisions, business plans, and investment projects. Changes in exchange rates can influence the feasibility, profitability, and risk-return profile of strategic initiatives such as mergers and acquisitions, joint ventures, expansion into new markets, or diversification of product lines. Strategic risk assessment and scenario analysis are essential for managing strategic FOREX risks effectively and aligning business strategies with market dynamics and currency trends.
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) | |||
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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) | |||
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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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