Master of Business Administration - Semester 4 MB0053: International Business Management (4 credits) (Book ID: B1315) ASSIGNMENT- Set 1 Marks

60 Q1. What is globalisation and what are its benefits?

Globalization (or globalisation) in its literal sense is the process or transformation of local or regional phenomena into global ones. It can be described as a process by which the people of the world are unified into a single society and function together. This process is a combination of economic, technological, sociocultural and political forces. Globalization is often used to refer to economic globalization, that is, integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology In other words, Globalisation is a process where businesses are dealt in markets around the world, apart from the local and national markets. According to business terminologies, globalisation is defined as the worldwide trend of businesses expanding beyond their domestic boundaries. It is advantageous for the economy of countries because it promotes prosperity in the countries that embrace globalisation
In short, Globalisation means the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology. Globalisation affect and is influence by may many factors paremaount among them is illustrated in the diagram below.

In the late 1980s and early 1990s, the business model termed the "globalised" financial market came to be seen as an entity that could have more than just an economic impact on the parts of the world it touched.
There are many benefits of globalisation. Firstly Globalisation creates employment opportunities in the host countries, it also exploits labour at a very low cost compared to the home country and this canlead to low prices of goods and commodities.
Globalisation makes it possible for customers to buy product from other countries. By buying products from other nations customers are offered a much wider choice of goods and services

Thirdly, globalization promotes foreign trade and liberalisation of economies.

Globalisation eliminates tariffs; this is sometimes done through the creation of free trade zones with small or no tariffs. It does creates competition for local firms and thus keeps costs down It also helps reduced transportation costs, especially resulting from development of containerization for ocean shipping. This benefits customers as companies outsource to low wage countries.

Outsourcing helps the companies to be competitive by keeping the cost low, with increased
Reduction or elimination of capital controls is another import benefit of globalisation. Gives better access to finance for corporate and sovereign borrowers. This helps iincreases the

living standards of people in several developing countries through capital investments in developing countries by developed countries which in most cases is as resulting of free from governmental control.
Again, globalisation harmonises intellectual property laws across the majority of states or nations, with more restrictions Globalisation promotes specialisation. Countries can begin to specialise in those products they are best at making. It kind of promotes better education and jobs. This is because some business

invest in the manpower to help them hold on into the bigger market share and by these they indirectly or directly promote education.
Globalisations Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, best practices, and culture. It therefore enhance eeconomic interdependence among different nations which can build improved political and social links

Provides better quality of products, customer services, and standardised delivery models across countries. Globalalisation, increases business travel, which in turn leads to a flourishing travel and hospitality industry across the world. Increases sales as the availability of cutting edge technologies and production techniques decrease the cost of production. Provides several platforms for international dispute resolutions in business, which facilitates international trade.

In summary, International business involves cross border movement of goods and services. It includes exporting, importing, franchising and licensing. International business dates back to the Babylonians who plied their goods across distant lands. International business differs from domestic business in some important features like the financial management of the business, the legal and regulatory framework, and the market forces that dictate the demand of products. Some of the entry points for international business include FDIs and exports.

Globalisation is a process which consist of business dealings around the world in addition to the local and national markets. Business terminologies define globalisation as the worldwide trend of businesses expanding beyond their domestic boundaries. It is advantages or benefits are many as it helps in promoting prosperity in the countries that embrace globalisation.

http://dineshbakshi.com/igcse-business-studies/external-environment/revision-notes/141globalisation-its-benefits-and-drawbacks http://in.answers.yahoo.com/question/index?qid=20081001075018AAcjhK4 http://www.free-eco.org/insights/articles/the-benefits-of-globalization.html http://en.wikipedia.org/wiki/Globalization http://www.guardian.co.uk/world/2002/oct/31/globalisation.simonjeffery http://www.radford.edu/~mthong/benefits_of_globalization.htm

1 CCEUCC (208) International Business, Cape Coast 2 .SMU (Spring, 2010) International Business Management, Manipal-India 3. (methods tps://www.shsu.edu/~eco_hkn/CRISK_revised04.pdf) 4.(http://wiki.answers.com/Q/What_ is_ Adam _Smiths_ Absolute _Advantage_Theory)

Q2. Discuss in brief the Absolute and comparative cost advantage theories.

Absolute advantage and comparative advantage are two basic concepts to international trade. Under absolute advantage, one country can produce more output per unit of productive input than another.

Adam Smith (a social philosopher and a pioneer of politicl economics) argued that nations differ in their ability to manufacture goods efficiently and he saw that a country gains by trading. If the two countries exchanged two goods at a ratio of 1:1, country I gets one unit of goods B by sacrificing only 10 units of labour, whereas it has to give up 20 units of labour if it produced the goods itself. In the same manner, country II gives up only 10 units of labour to get one unit of goods A, whereas it has to give up 20 units of labour if it was made by itself. Hence, it was understood that both countries had large amount of both goods by trading.

The main concept of absolute advantage is generally attributed to Adam Smith for his 1776 publication An Inquiry into the Nature and Causes of the Wealth of Nations in which he countered mercantilist ideas. Smith argued that it was impossible for all nations to become rich simultaneously by following mercantilism because the export of one nation is another nations import and instead stated that all nations would gain simultaneously if they practiced free trade and specialized in accordance with their absolute advantage. Smith also stated that the wealth of nations depends upon the goods and services available to their citizens, rather than their gold reserves. While there are possible gains from trade with absolute advantage, the gains may not be mutually beneficial. A country has an absolute advantage economically over another, in a particular good, when it can produce that good at a lower cost. Using the same input of resources a country with an absolute advantage will have greater output. Assuming this one good is the only item in the market, beneficial trade is impossible. An absolute advantage is one where trade is not mutually beneficial, as opposed to a comparative advantage where trade is mutually beneficial. David Ricardo (1772-1823), in his theory of comparative costs suggested that countries will specialise and trade in goods and services in which they have a comparative advantage. It is easy to see that if countries have an absolute advantage there are advantages to trade. However, what happens if one country has an absolute advantage over its trading partners in the production of a number of goods. Specialisation and trade can still result in there being welfare gains made from trade. A country has comparative advantage if it can produce a good for less cost than any other nation.
Ricardo (english political economist) questioned Smiths theory stating that if one country is more productive than the other in all lines of production and if country I can produce all goods with less labour costs, will there be a need for the countries to trade. The reply was affirmative. He used England and Portugal as examples in his demonstration, the two goods they produced being wine and cloth. This case is explained using table 1 and .2. Table 1: Cost Comparison Countries/cost of Production Portugal England Labour cost of production (in hours) 1 unit of wine I unit of cloth 70 80 110 90

According to him, Portugal has an advantage in both areas of manufacture. To demonstrate that trade between both countries will lead to gains, the concept of opportunity cost (OC) is introduced. The OC for good X is the amount of other goods that have to be given up in order to produce one additional unit of X.

Table 2: Opportunity Cost Countries/opportunity cost of Production Portugal England Opportunity cost for Wine 70/80 = 7/8 110/90 = 11/9 Cloth 80/70 = 8/7 90/110 = 9/11

A country has a comparative advantage in producing goods if the OC is lower at home than in the other country. The table shows that Portugal has the lower OC of the 2 countries in wine-making while England has the lower OC in making cloth. Thus Portugal has the comparative advantage in the production of wine whereas England has one one in the production of cloth.

With comparative advantage, if one country has an absolute (dis)advantage in every type of output, the other might benefit from specializing in and exporting those products, if any exist. A country has a comparative advantage in the production of a good if it can produce that good at a lower opportunity cost relative to another country. The theory of comparative advantage explains why it can be beneficial for two parties (countries, regions, individuals and so on) to trade if one has a lower relative cost of producing some good. What matters is not the absolute cost of production but the opportunity cost, which measures how much production of one good, is reduced to produce one more unit of the other good. Comparative advantage focuses on the range of possible mutually beneficial exchanges. A country has an absolute advantage over it trading partners if it is able to produce more of a good or service with the same amount of resources or the same amount of a good or service with fewer resources. In the case of Zambia, the country has an absolute advantage over many countries in the production of copper. This occurs because of the existence of reserves of copper ore or bauxite. We can see that in terms of the production of goods, there are obvious gains from specialisation and trade, if Zambia produces copper and exports it to those countries that specialise in the production of other goods or services. A country has a comparative advantage in the production of a good or service that it produces at a lower opportunity cost than its trading partners. Some countries have an absolute advantage in the production of many goods relative to their trading partners. Some have an absolute disadvantage. They are inefficient in producing anything, relative to their trading partners. The theory of comparative costs argues that, put simply, it is better for a country that is inefficient at producing a good or service to specialise in the production of that good it is least inefficient at, compared with producing other goods. Bringing the discussion to a close, Absolute advantage - Adam Smith (a social philosopher and a pioneer of political economics) argued that nations differ in their ability to manufacture goods efficiently and he saw that a country gains by trading. Comparative advantage - Ricardo (English political economist) questioned Smiths theory stating that if one country is more productive than the other in all lines of production and if country 1 can produce all goods with less labour costs, will there be a need for the countries to trade.

A country has an absolute advantage economically over another, in a particular good, when it can produce that good at a lower cost. Using the same input of resources a country with an absolute advantage will have greater output. Assuming this one good is the only item in the market, beneficial trade is impossible. An absolute advantage is one where trade is not mutually beneficial, as opposed to a comparative advantage where trade is mutually beneficial. With comparative advantage, if one country has an absolute (dis)advantage in every type of output, the other might benefit from specializing in and exporting those products, if any exist.

http://wiki.answers.com/Q/What_are_the_differences_between_absolute_advantage_and_compara tive_advantage#ixzz238mivoAX http://wiki.answers.com/Q/What_are_the_differences_between_absolute_advantage_and_compara tive_advantage http://en.wikipedia.org/wiki/Absolute_advantage http://www.preservearticles.com/2011092013773/brief-notes-on-the-modifications-ofcomparative-cost-theory.html 1 CCEUCC (208) International Business, Cape Coast 2 .SMU (Spring, 2010) International Business Management, Manipal-India 3. (methods tps://www.shsu.edu/~eco_hkn/CRISK_revised04.pdf) 4.(http://wiki.answers.com/Q/What_ is_ Adam _Smiths_ Absolute _Advantage_Theory)

Q3. How is culture an integral part of international business. What are its elements?

Though technology has connected us to almost everywhere in the world, the effectiveness of these connections depends greatly on creating a common perspective. Technology alone cannot handle the complex task of interfacing with people of different cultures. A corporations website, for example, cannot give you insight to the way decisions are being made on the other side of the world. This is only possible when we understand the people with whom we are dealing. And in order to understand people we need to understand the cultural context in which they are operating. In order to bring home contracts that lead to mutual benefit and sustainable business growth, expatriate personnel have to become skilled cross-cultural negotiators, managers, and team builders. Over the next two decades, Africa is primed to become a leading destination for the global market in areas such as offshoring and outsourcing services. But for a global enterprise to compete successfully in Africa, a customer service representative in Ghana has to be able to communicate effectively with counterparts in the United States. Factory managers in Kenyas textile mills have

to be able to respond accurately to the requests of European clothing buyers. And marketing people in London must be able to negotiate with Nigerian distributors in Lagos. In short, a culturally competent expatriate can save themselves and their companies the cost of expensive mistakes simply by embracing cross-cultural skills as part of a broad strategic focus
Cultural elements that relate business: -The most important cultural components of a country which relate business transactions are: Language: - Language is something more than just spoken and written words. Gestures, non-verbal communication, facial expressions, and body language all communicate a message. An interpreter is used when two people do not speak common language. Failure in understanding the cultural context when non-verbal communication takes place or failure in reading the person across the table results in sending a wrong signal. Religion: - The dominant religious beliefs within a culture have a great impact on a persons approach to business than most people expect, even if that person is not a follower of a specific culture. Conflicting attitudes: -Cultural values have a massive effect on the way business is carried out. The cultural values that are evident in everyday life are not only shown in business but they are exaggerated. If the cultural basics are not understood, then there is possibility that a deal ends even before the negotiations start. Some of the additional cultural elements which must be known are the customs and manners, arts, education, humour, and social organisation of a society.

One of the major considerations before you start business with overseas partners is building relationships. In fact, there aren't many people eager to get down to business at once, which means you should take time to get to know better your international clients before rushing to business. Business relations should be built on respect and trust, especially with people from Latin America and Asia. Another important element of the international business etiquette is business attire. While Americans like to dress for comfort and fashion, business people from other parts of the world are regarded as more conservative. Choosing your business clothes, you should always keep in mind that it shows your respect for other business-persons and organizations. QUESTION 3 Culture is viewed as the sum total of the beliefs, rules, techniques, institutions and artifacts that characterize human population. Culture is the art of demonstrating human customs, civilisation and the way of life of a specific society. It determines every aspect of life from birth to death and everything in between it. People must respect other cultures in addition to their own culture. The dominant groups, values and the practices on the society are characterised by national cultures. Edward Taylor (1870s) as cited by CCEUCC (2008) defined culture as that complex whole which includes knowledge, beliefs, arts, Moral, laws, customs and other capabilities acquired by man as a member of society.

Culture is the most significant factor in international business. Culture is the part of environment created by humans, which is the aggregation of knowledge, arts, beliefs, laws, morals, customs and other abilities gained by people as a part of society. Professor Hofstede carried out a detailed study of how culture influences the values in the workplace. Every society has a unique culture and an individual should not be forced to follow any other particular culture Culture is an integral part of international business because it affects all business functions ranging from accounting to finance and from production to service. It affects the degree to which the population is made up of people from varied national, ethical, racial and religious backgrounds. Cultural differences usually show up in employees social values, ideals of status, decision-making habits, and attitudes toward time, use of space cultural context, body language, manners and ethical behaviour. Norms are the social rules that govern the actions of people toward one another. They are social rules and guidelines that prescribe appropriate behaviour in particular situations. Fronm the above definitions one can see that a lot affect the internation business and for that tmater there are a lot of questions on the factors and assumptions that related to the impact of global business culture that are asked and assessed. For instance the national cultures are not the same and the impact of globalisation on diverse culture is not easily predicted. However the significant cultural components of a country that are related to business transactions are: Language It is something more than just spoken and written words. Gestures, non-verbal communication, facial expressions and body languages all communicate a message. An
interpreter is used when two people do not speak common language. Failure in understanding the cultural context when non-verbal communication takes place or failure in reading the person across the table results in sending a wrong signal.

Language is one defining characteristics of a culture. It has both spoken and unspoken dimensions. In countries with more than one spoken language, we tend to find more than one culture. Spoken language enables people to communicate with each other. It structures the way we perceive the world. The nature of a language of a society can direct its members attention to certain features of the world. When many spoken languages exist in a single country, one foreign language usually serves as the principal vehicle for commutation across cultures. This foreign language becomes a lingua franca or link language. International businesses that do not understand the local language can make major blunders through improper translations. Language Unspoken language refers to nonverbal communication. Nonverbal communication encompasses all unwritten and unspoken message, whether intended or not. In short, it is communication that does not use words. It includes voice quality, body language, space, time and other miscellaneous matters such as clothing, colour and age.

Thoughts and feelings can be conveyed either consciously or unconsciously by facial expressions such as smiles, yawns, grimaces, frowns, raised eyebrows etc.and by verity of gestures. A failure to understand the nonverbal cues of another culture can lead to miscommunication. Religion The dominant religious beliefs within a culture have a great impact on a persons approach to business than most people expect, even if that person is not a follower of a specific culture. Religion is a system of shared beliefs and rituals that are concerned with the sacred and ethical systems are set of moral principles or values that are used to guide and shape human behaviour. We can therefore talk about Christian, Islamic Hinduism and Budduism ethics and all these beliefs influnencces ones behavior and actions which have effect on their general actions and inactions. Conflicting attitudes Cultural values have a massive effect on the way business is carried out. The cultural values that are evident in everyday life are not only shown in business but they are exaggerated. If the cultural basics are not understood, then there is possibility that a deal ends even before the negotiations start. Some of the additional cultural elements which must be known are the customs and manners, arts, education, humour and social organisation of a society. The economic and legal systems in a country are often shaped by its political system. Political system means the system of government in a nation. This can be assessed according to two related dimensions. First, the degree to which they emphasize collectivism as opposed to individualism. Second, is the degree to which they are democratic or authoritarian/totalitarian and all these are influence by attitude of the people. In countries where individual goals are given premium over collective goals, we are more likely to find a free market economic system. There are four economic systems. A market economy is an economic system in which the interaction of demand and supply determines the quality in which goals and services are produced, the quantities produced and the price at which they are sold are all planned by the government. An economy in which some sectors are left to private ownership and a free market mechanism in which there is significant state ownership and government planning in other sectors is known as mixed economy. A state directed economy is one in which the state plays a significant role in directing the investment activities of private enterprise through industry policy and in otherwise regulating business activity in accordance with national goals..
Some of the additional cultural elements which must be known are the customs and manners, arts, education, humour, and social organisation of a society. Social structure refers to societys

social organization.
In conclusion, Culture is the art of demonstrating human customs, civilisation and the way of life of a specific society. It determines every aspect of life from birth to death and everything in between it. .Culture is an important factor for practising international business. Culture affects all the business functions ranging from accounting to finance and from production to service. It is important for an individual to have knowledge of the impact of cultural differences when working in the global commercial environment. The following are the cultural elements which affect business transactions: Language, Religion and Conflicting attitudes

http://www.bized.co.uk/virtual/dc/trade/theory/th2.htm http://africabusinessreview.net/why-culture-should-be-an-integral-part-of-bus http://www.syl.com/travel/internationalbusinessetiquetteanintegralpartofsuccessfulbusiness relations.html

http://www.worldbusinessculture.com/ - Retrieved on 3rd November, 2010

1 CCEUCC (208) International Business, Cape Coast 2 .SMU (Spring, 2010) International Business Management, Manipal-India 3. (methods tps://www.shsu.edu/~eco_hkn/CRISK_revised04.pdf) 4.(http://wiki.answers.com/Q/What_ is_ Adam _Smiths_ Absolute _Advantage_Theory)

Q4. Describe the tools and methods of country risk analysis.

QUESTION 4
Country Risk Analysis (CRA) identifies imbalances that increase the risks in a cross-border investment. Country Risk Analysis represents the potentially adverse impact of a country's environment on the multinational corporation's cash flows and is the probability of loss due to exposure to the political, economic, and social upheavals in a foreign country. All business dealings involve risks. An increasing number of companies involving in external trade indicate huge business opportunities and promising markets. Since the 1980s, the financial markets are being refined with the introduction of new products. When business transactions occur across international borders, they bring additional risks compared to those in domestic transactions. These additional risks are called country risks which include risks arising from national differences in socio-political institutions, economic structures, policies, currencies, and geography. The CRA monitors the potential for these risks to decrease the expected return of a crossborder investment. For example, a multinational enterprise (MNE) that sets up a plant in a foreign country faces different risks compared to bank lending to a foreign government. The MNE must consider the risks from a broader spectrum of country characteristics. Some categories relevant to a plant investment contain a much higher degree of risk because the MNE remains exposed to risk for a longer period of time. Country detailed risk refers to the

unpredictability of returns on international business transactions in view of information associated with a particular country.
The Country Risk Analysis represents the loss probability due to the political, economic and social disturbances in a foreign country and can be categorised into six. See the diagram below for the details

Economic risk This type of risk is the important change in the economic structure that produces a change in the expected return of an investment. Risk arises from the negative changes in fundamental economic policy goals (fiscal, monetary, international, or wealth distribution or creation). Transfer risk Transfer risk arises from a decision by a foreign government to restrict capital movements. It is analysed as a function of a country's ability to earn foreign currency. Therefore, it implies that effort in earning foreign currency increases the possibility of capital controls. Exchange risk This risk occurs due to an unfavourable movement in the exchange rate. Exchange risk can be defined as a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. Location risk This type of risk is also referred to as neighborhood risk. It includes effects caused by problems in a region or in countries with similar characteristics. Location risk includes effects caused by troubles in a region, in trading partner of a country, or in countries with similar perceived characteristics. Sovereign risk This risk is based on a governments inability to meet its loan obligations. Sovereign risk is closely linked to transfer risk in which a government may run out of foreign exchange due to adverse developments in its balance of payments. It also relates to political risk in which a government may decide not to honor its commitments for political reasons. Political risk This is the risk of loss that is caused due to change in the political structure or in the politics of country where the investment is made. For example, tax laws, expropriation of assets, tariffs, or restriction in repatriation of profits, war, corruption and bureaucracy also contribute to the element of political risk.

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Country detailed risk refers to the unpredictability of returns on international business transactions in view of information associated with a particular country. The techniques used by the banks and other agencies for country risk analysis can be classified as qualitative or quantitative. Many agencies merge both qualitative and quantitative information into a single rating. A survey conducted by the US EXIM bank

classified the various methods of country risk assessment used by the banks into four types. They are: Fully qualitative method - The fully qualitative method involves a detailed analysis of a country. It includes general discussion of a countrys economic, political, and social conditions and prediction. Fully qualitative method can be adapted to the unique strengths and problems of the country undergoing evaluation.

Structured qualitative method The structured method uses a uniform format with predetermined scope. In structured qualitative method, it is easier to make comparisons between countries as it follows a specific format across countries. This technique was the most popular among the banks during the late seventies. Checklist method - The checklist method involves scoring the country based on specific variables that can be either quantitative, in which the scoring does not need personal judgment of the country being scored or qualitative, in which the scoring needs subjective determinations. All items are scaled from the lowest to the highest score. The sum of scores is then used to determine the country risk. Delphi technique The technique involves a set of independent opinions without group discussion. As applied to country risk analysis, the MNC can assess definite employees who have the capability to evaluate the risk characteristics of a particular country. The MNC gets responses from its evaluation and then may determine some opinions about the risk of the country. Inspection visits Involves travelling to a country and conducting meeting with government officials, business executives, and consumers. These meetings clarify any vague opinions the firm has about the country. Other quantitative methods The quantitative models used in statistical studies of country risk analysis can be classified as discriminant analysis, principal component analysis, logit analysis and classification and regression tree method.

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The risk management demands a regular follow up regarding governmental policies, external and internal environment, outlook provided by rating agencies, and so on. Following are the tools recommended: Chain of value - Includes the main countries that sustain trade relationships with the nation, broken by sectors and products. Strength and weakness chart - Focus the key aspects that warn the country. Table of financial markets performance - Follow up the behavior of bonds and stocks already issued and to be issued. Table of macroeconomic variables - Provides alert signals when the behavior of any ratio presents a relevant change.

Country risk is an indispensable tool for asset management as it requires the assessment of economic opportunity against political odds. The list of factors to be analysed in a country risk analysis study varies from forecaster to forecaster. For our discussion here, we can group the relevant factors into two important categories: political factors and economic factors. The various indicators of political factors are discussed first, followed by the indicators of economic factors. Country risk may also be defined as the risk of investing in a country, dependent on changes in the business environment that may adversely affect operating profits or the value of assets in a specific country. For example, financial factors such as currency controls, devaluation or regulatory changes, or stability factors such as mass riots, civil war and other potential events contribute to companies' operational risks. This term is also sometimes referred to as political risk; however, country risk is a more general term that generally refers only to risks affecting all companies operating within a particular country. Country Risk Analysis (CRA) identifies the differences between the countries involved in cross-border investment that increase the risks. Country credit risk ratings are used by the rating agencies to provide a periodical and organised skill of data. There are various categories and purposes of country risk analysis and various tools are used to conduct the risk in each country.

http://www.google.com.gh/search? q=Describe+the+tools+and+methods+of+country+risk+analysis.&ie=utf-8&oe=utf8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a http://www.gwu.edu/~ibi/minerva/spring2001/renato.ribeiro.pdf http://en.wikipedia.org/wiki/Country_risk Q5. Write short notes on: a. Spot and forward contracts b. Foreign currency derivatives

A spot contract is an agreement that secures a currency at a current live rate with a view to take delivery of the required currency within two days. The funds are for immediate delivery on receipt of the clients cleared funds. These contracts are typically used for immediate requirements, such as: deposition cards property deposits and purchases, emigration and immigration transfers and most commercial use. Example. The transactions of the forex bureau in Ghana are spot contract. A forward contract on the other hand is an agreement to exchange currency at some time in the future.

In other words, currencies are bought or sold now for future delivery. Payment is made up on delivery but exchange rate is agreed upon at the time of contract. The delivery date is called the value date. The rate may be quoted for 30, 90,150 or 360 days. The exchange rate of exchange used is forward exchange rate. Currency derivative is defined as a financial contract in order to swap two currencies at a predestined rate. It can also be termed as the agreement where the value can be determined from the rate of exchange of two currencies at the spot. The currency derivative trades in markets correspond to the spot (cash) market. Hence, the main advantage from derivative hedging is the basket of currency available.
It can also be termed as the agreement where the value can be determined from the rate of exchange of two currencies at the spot. The currency derivative trades in markets correspond to the spot (cash) market. Hence, the spot market exposures can be enclosed with the currency derivatives. The main advantage from derivative hedging is the basket of currency available. Figure 1.1 describes the examples of currency derivatives. The derivatives can be hedged with other derivatives. In the foreign exchange market, currency derivatives like the currency features, currency options and currency swaps are usually traded. The standard agreement made in order to buy or sell foreign currencies in future is termed as currency futures. These are usually traded through organised exchanges. The authority to buy or sell the foreign currencies in future at a specified rate is provided by currency option. These will help the businessmen to enhance their foreign exchange dealings. The agreement undertaken to exchange cash flow streams in one currency for cash flow streams in another currency in future is provided by currency swaps. These will help to increase the funds of foreign currency from the cheapest sources.

Figure 1.1: Example for Foreign Currency Derivatives

Derivatives can be hedged with other derivatives. in the foreign exchange market, currency derivatives like the currency features, currency option and currency swaps are usually traded. The standard agreement made in order to buy or sell foreign currencies in future is termed as currency futures. These are usually traded through organized exchange. The authority to buy or sell the foreign currencies in future at a specified rate is provided by exchange dealing. The agreement undertaken to exchange cash flow streams in one currency for cash flow streams in another currency In future is provided by currency swaps. These will help to increase the funds of foreign currency from the cheapest sources.

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

Spot Contract A spot contract secures a currency at a current live rate with a view to take delivery of the required currency within two days. The funds are for immediate delivery on receipt of the client's cleared funds. These contracts are typically used for immediate requirements, such as: deposits on cards, property deposits and purchases, emigration and immigration transfers and most commercial uses. Forward Contract A forward contract allows you to buy at a fixed exchange rate for delivery of the currency at some specific date in the future. You can book a fixed rate for most currencies for delivery at some stage in the future. This is normally only sensible for money needed within the next 12 months. The exchange rate is agreed between you and your dealer. You will have to pay a deposit ranging from 5% to 15% of the amount you wish to buy. The exact amount depends on the currency, the volatility and the duration of the contract i.e. the longer the time, the larger the deposit.

The balance is paid when you draw down the currency. You may do this at any time during the period of the contract and in any size quantities (up to the value of the contract). To a purchase a contract, you will first have to open an account with the dealer, usually providing 2 forms of ID such as a passport and a utility bill, sign the contract and pay the deposit. Funds will then be paid to you directly from the dealers client account. You do not have to take the currency if you do not wish to do so. However, the currency that you have bought would then be sold at its value at that time. Any loss then suffered would be deducted from your deposit, with the balance returned to you. Additionally, there is normally a cancellation fee payable. If the currency sells for more than you paid for it, you should directly benefit from any profit. b. A foreign exchange derivative is a financial derivative whose payoff depends on
the foreign exchange rate(s) of two (or more) currencies. These instruments are commonly used for currency speculation and arbitrage or for hedging foreign exchange risk.

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

The financial manager must first understand the basics of the structure and pricing of these tools. It must be noted that the financial derivatives are powerful tools in the hands of careful and competent financial managers. However, they can also be very destructive devices when used recklessly.
http://currency.themovechannel.com/guide/spot-forward-contract.aspx http://en.wikipedia.org/wiki/Foreign_exchange_derivative http://www.scribd.com/doc/26848912/Foreign-Currency-Derivatives

Q6. Discuss the importance of transfer pricing for MNCs.

QUESTION 6 Transfer pricing for MNCs The international monetary systems represent the set of rules that are agreed internationally along with scenario, supporting institutions which will facilitate the worldwide trade, the investment across cross-borders and the reallocation of capital between the states. Transfer pricing means the value or price of goods and services, tangible and intangible prosperities, arrived at between , or by two taxable entities being related parties or closely-held companies in the course of their internal transactions involving transfer of such goods or rendering of services across different tax jurisdictions worldwide where the related entities may be located. The accounting and allocation of costs may be so manipulated as to shift the profit and tax base of the host country such that it might confer under benefit to the nonresident associate, to the detriment of the host countrys revenue. Or Transfer pricing is the pricing of goods in such a manner that the profits are shifted to the transferee and, consequently, the tax burden on the profits is lightened in the hands of the transferor. The profits may not be parked indefinitely with the transferee, if the transferee is assessed to tax in a hang-tax regime. The process may be repeated and the profit-spread continues the same way till the destination is reached in a low- tax regime. Transfer pricing: this is another method by which the home countrys terms of trade could be deteriorated. Transfer pricing refers to the recorder prices on intra firm international trade. If one subsidiary or branch plant of a multinational company sell. Inputs to another subsidiary or branch plant of the same firm in another country, no market pre-exists; the firm arbitrarily records a price for the transaction on the books of the two subsidiaries, leaving room for manipulation of the prices. If a subsidiary in a developing country is prevented from sending profits home directly or is subject to high taxes on its profits, then the subsidiary can reduce its recorded profits in the developing country by understating the value of its exports to other subsidiaries in other countries and by overstating the valve of its impost from other subsidiaries. What happens is that the countrys recorded terms of trade are worse than they would have been if a true market price were used for these transactions.

Hence transfer pricing is important for MNCs because MNCs are free to charge whatever price they choose to with regard to such transactions concerning the parent firm and their affiliate. The transfer prices arbitrarily set to: a. Reduce taxes b. Reduce tariffs c. Avoid exchange controls d. Optimize global profits by reducing taxes and tariffs to the minimum or nil levels.

REFERENCES 1 CCEUCC (208) International Business, Cape Coast 2 .SMU (Spring, 2010) International Business Management, Manipal-India 3. (methods tps://www.shsu.edu/~eco_hkn/CRISK_revised04.pdf) 4.(http://wiki.answers.com/Q/What_ is_ Adam _Smiths_ Absolute _Advantage_Theory)

http://cmaindia.informe.com/forum/cost-and-management-accounts-finance-and-cost-andmanagement-audit-f13/mnc-transfer-pricing-management-a-cg-theory-v-practicet4217.html http://www.investopedia.com/terms/t/transferprice.asp http://lexicon.ft.com/Term?term=transfer-pricing