2014

1. Forex Market Participants

Consumers and Travelers

Consumers may purchase goods in a foreign country or via the internet with
their credit card.

The amount consumers pay in the foreign currency will be converted to their
home currency on their credit card statement.

Travelers must go to a bank or currency exchange bureau to convert one

currency (their "home" currency) into another (the "destination" currency)
when using cash to pay for goods and services in a foreign country.

Travelers need to be aware of exchange rates to ensure they receive a fair

deal.

Businesses

Businesses often need to convert currencies when they conduct trade outside
their home country.

Large companies need to convert huge amounts of currency; a multinational

company such as General Electric (GE) for instance, converts tens of billions
of dollars each year.

Investors and Speculators

Investors and speculators require currency exchange whenever they deal in

any foreign investment, be it equities, bonds, bank deposits, or real estate.

Investors and speculators also trade currencies in an attempt to benefit from

movements in the currency exchange markets.

Commercial and Investment Banks

Commercial and investment banks trade currencies as a service to their

commercial banking, deposit, and lending customers.

These institutions also participate in the currency market for hedging and
speculative purposes.

Governments and Central Banks

Governments and central banks trade currencies to improve economic

conditions or to intervene in an attempt to adjust economic or financial
imbalances.
 Because they are non-profit, governments and central banks do not trade with
the intention of earning a profit, but because they tend to trade on a long-
term basis, it is not unusual for some trades to earn revenue.

2. Why SDRs Are Needed

According to the IMF, SDRs (or XDR) are an international reserve asset to supplement its
member countries' official money reserves. Technically, the SDR is neither a currency,
nor a claim on the IMF itself. Instead, it is a potential claim against the currencies of IMF
members.

An SDR allocation is a low-cost method of adding to member nations' international

reserves, allowing members to reduce their reliance on more expensive domestic
or external debt. Developing nations can use SDRs as a cost-free alternative to
accumulating foreign currency reserves through more expensive means, such as
borrowing or running current account surpluses.

The SDR is also used by some international organizations as a unit of account

where exchange rate volatility would be too extreme. Such organizations include
the African Development Bank, Arab Monetary Fund, Bank for International Settlements,
and the Islamic Development Bank. By using SDRs, local currency fluctuations do not
have as large of an impact. SDRs can only be held by IMF member countries and not by
individuals, investment companies, or corporations.

An SDR is essentially an artificial currency used by the IMF and is basket of national
currencies. The IMF uses SDRs for internal accounting purposes. SDRs are allocated by
the IMF to its member countries and are backed by the full faith and credit of the
member countries' governments.

3. Significance for developing countries(fdi)

FDI has become an important source of private external finance for developing countries.
It is different from other major types of external private capital flows in that it is
motivated largely by the investors' long-term prospects for making profits in production
activities that they directly control. Foreign bank lending and portfolio investment, in
contrast, are not invested in activities controlled by banks or portfolio investors, which
are often motivated by short-term profit considerations that can be influenced by a
variety of factors (interest rates, for example) and are prone to herd behavior. These
differences are highlighted, for instance, by the pattern of bank lending and portfolio
equity investment, on the one hand, and FDI, on the other, to the Asian countries
stricken by financial turmoil in 1997: FDI flows in 1997 to the five most affected
countries remained positive in all cases and declined only slightly for the group, whereas
bank lending and portfolio equity investment flows declined sharply and even turned
negative in 1997.

While FDI represents investment in production facilities, its significance for developing
countries is much greater. Not only can FDI add to investible resources and capital
formation, but, perhaps more important, it is also a means of transferring production
technology, skills, innovative capacity, and organizational and managerial practices
between locations, as well as of accessing international marketing networks. The first to
benefit are enterprises that are part of transnational systems (consisting of parent firms
and affiliates) or that are directly linked to such systems through nonequity
arrangements, but these assets can also be transferred to domestic firms and the wider
economies of host countries if the environment is conducive. The greater the supply and
distribution links between foreign affiliates and domestic firms, and the stronger the
capabilities of domestic firms to capture spillovers (that is, indirect effects) from the
presence of and competition from foreign firms, the more likely it is that the attributes of
FDI that enhance productivity and competitiveness will spread. In these respects, as well
as in inducing transnational corporations to locate their activities in a particular country
in the first place, policies matter.

4. $1,000,000/$.70 = C$1428571.429 (1.05)

= C$1,500,000 $.69
= $1,035,000

Yield = ($1,035,000 - $1,000,000)/$1,000,000 = 3.5%, which is equal to the yield in

the U.S. over the 90 day period.

The Canadian dollar's spot rate should rise, and its forward rate should fall; in addition,
the Canadian interest rate may fall and the U.S. interest rate may rise.

8. Mispriced Derivatives Scandals

Derivatives are sometimes deliberately mispriced in order to conceal losses or to make

profits by fraud.

Mispriced options were used by NatWest Capital Markets to conceal losses and the British
Securities and Futures Authority concluded its disciplinary action against the firm and
two of its employees, Kyriacos Papouis and Neil Dodgson, in May 2000.

In March 2001 a Japanese court fined Credit Suisse First Boston 40 million yen because a
subsidiary had used complex derivatives transactions to conceal losses.

In Seeing Tomorrow: rewriting the rules of risk by Ron S. Dembo and Andrew Freeman,
a case in which "clever but criminal staff got inside an options pricing model and used
tiny changes to skim off a few million dollars of profits for themselves" is described on
page 23. The culprits were not prosecuted because the bank feared that the revelation
could wipe out hundreds of millions of dollars of its overall value.

Another possible case came to light in January 2006 when Anshul Rustagi, a London-
based derivatives trader at Deutsche Bank was suspended after allegedly overstating
profits on his own trading book by 30 million. He was subsequently dismissed.

9. GDRs are the best way of raising finance from USA and other European countries'
investors. No Indian company has right to sell their shares in foreign capital
market without GDRs. So, it is very necessary to know the procedure of issue GDRs.
Only GDRs connects foreign investors with Indian Companies.

Following are the simple steps of issuing GDRs :

1st Step

To find the Depository bank

Depository bank has only right to issue the GDRs. So, it is necessary to find depository
bank in USA and other European countries.

2nd Step

Issue the Shares to Depository bank

Shares can not issued to foreign investors. But shares are issued to depository bank and
depository bank will accept the shares of Indian companies as the custodian of foreign
investors.

3rd Step

Deposit the fees

For issuing GDRs, either investors or Company has to deposit the fees for issuing the
certificate named global depository receipt.

4th Step

Issue of GDRs and Record

Depository bank has right to issue one GDR certificate for 2 to 10 shares. The issue of
GDRs to those investors who will pay the amount of shares of Indian companies. After
this, it will be assumed that USA or other foreign countries' investors have acquired the
shares of Indian companies. Indian company gets money of shares through depository
banks. On the other side, foreign investors' name registered and they will get dividend
through this bank in USA Dollar. Not only Indian companies but many other developing
countries' companies are using same procedure for getting fund through GDRs. This
year, a Kuwaiti investment company successfully issued shares in the form of Global
Depository Receipts (GDRs) to foreign investors. After issuing GDRs, these shares can
deal in any foreign stock exchange and GDRs will be one of the security type in stock
exchange list of stocks.

10.
 2015

1. INTERNATIONAL MONETARY FUND :-

International Monetary Fund was established in 1947. Following were the main
objectives of this fund.

1. To promote exchange rate stability among the different countries.

2. To make an arrangement of goods exchange between the countries.

3. To promote short term credit facilities to the member countries.

4. To assist in the establishment of International Payment System.

5. To make the member countries balance of payment favourable.

6. To facilitate the foreign trade.

7. To promote The international monetary corporation.

2. Businesses need BOP data to anticipate changes in host countrys economic policies
driven by BOP events. BOP data may be important for the following reasons:

1. BOP indicates a countrys financial position vis--vis foreign countries, thereby a

countrys ability to buy foreign goods or services.
2. BOP is important indicator of pressure on a countrys exchange rate, and thus on
the potential of a firm trading with or investing in that country to experience foreign
exchange gains or losses. Changes in BOP may presage the impositions of foreign
exchange controls.
3. BOP data helps in knowing the changes in a countrys BOP may also signal
imposition (or removal) of controls over payments, dividends, and interest, license
fees, royalty fees, or other cash disbursements to foreign firms or investors.
4. BOP data helps to forecast a countrys market potential, especially in the short-
run. A country experiencing a serious BOP deficit is not likely to import as much as it
would if it were running a surplus.
5. BoP data can also signal increased riskiness of lending to particular country and it
also helps to in the formulation of trade and fiscal policies.

3. Transaction exposure is the risk, faced by companies involved in international

trade, that currency exchange rates will change after the companies have already
entered into financial obligations. Such exposure to fluctuating exchange rates can lead
to major losses for firms.
A company that has agreed to but not yet settled a cross-currency contract that has
transaction exposure. The greater the time between the agreement and the settlement
of the contract, the greater the risk associated with exchange rate fluctuations.

Transaction Exposure Management

A company engaging in cross-currency transactions can protect against transaction

exposure by hedging. The company can protect against the transaction risk by
purchasing foreign currency, by using currency swaps, by using currency futures, or by
using a combination of these hedging techniques. Any one of these techniques can be
used to fix the value of the cross-currency contract in advance of its settlement.

7. Purchasing Power Parity

Purchasing power parity expresses the idea that a bundle of goods in one country should
cost the same in another country after exchange rates are taken into account. Suppose
that with existing relative prices and exchange rates, a basket of goods can be
purchased for fewer U.S. dollars in Canada than in the United States. We would then
expect U.S. consumers to buy those goods in Canada. Even if this is not possible from a
transportation or cost viewpoint, some businesses will have an incentive to buy the
goods cheaply in Canada and remarket them in the United States. Such actions would
cause U.S. dollars to be sold in exchange for Canadian dollars. As a result, the U.S.
dollar would depreciate in relation to the Canadian dollar. We would expect the currency
depreciation to continue until the bundle of goods costs the same in both countries.
Interest Rate Parity
Interest rate parity has to do with the idea that money should (after adjusting for risk)
earn an equal rate of return. Suppose that an investor can earn 6% interest with a dollar
deposit in a United States bank, or can earn 4% interest with a British pound deposit in
a London bank. The investor can earn greater interest income by keeping funds in dollars
and, therefore, one might expect all of his investment funds to flow to U.S. banks.
However, exchange rate expectations also come into play. Suppose the investor expects
the British pound to appreciate at the rate of 2% in terms of the dollar. That investor
would then be indifferent to either investment choice, as both are expected to earn 6%.

10.

2013

1. Functions of imf

The principal function of the IMF is to supervise the international monetary system.
Several functions are derived from this. These are: granting of credit to member
countries in the midst of temporary balance of payments deficits, surveillance over the
monetary and exchange rate policy of member countries, issuing policy recommen-
dations. It is to be noted that all these functions of the IMF may be combined into three.

These are: regulatory, financial, and consultative functions:

Regulatory Function:

The Fund functions as the guardian of a code of rules set by its (AOA Articles of
Agreement).
Financial Function:

It functions as an agency of providing resources to meet short term and medium term
BOP disequilibrium faced by the member countries.

Consultative Function:

It functions as a centre for international cooperation and a source of counsel and

technical assistance to its members.

The main function of the IMF is to provide temporary financial support to its members so
that fundamental BOP disequilibrium can be corrected. However, such granting of credit
is subject to strict conditionality. The conditionality is a direct consequence of the IMFs
surveillance function over the exchange rate policies or adjustment process of members.

Merchant Of Currencies :-
IMF main function is to purchase and sell the member countries currencies.

Helpful For The Debtor Countries :-

If any country is facing adverse balance of payment and facing the difficulty to get the
currency of creditor country, it can get short term credit from the fund to clear the debt.
The IMF allows the debtor country to purchase foreign currency in exchange for its own
currency upto 75% of its quota plus an addition 25% each year. The maximum limit of
the quota is 200% in special circumstances.

Declared Of Scarce Currency :-

If the demand of any particular country currency increases and its stock with the fund
falls below 75% of its quota, the IMF can declare it scare.

To promote exchange stability :- The main aim of IMF is to promote exchange

stability among the member countries. So it advises the member countries to conduct
exchange transactions at agreed rates. On the other hand one country can change the
parity of the currency without the consent of the IMF but it should not be more than
10%. If the changes are on large scale and IMF feels that according the circumstances of
the country these are essential then it allows. The country can not change the exchange
rate if IMF does not allow.

To avoid exchange depreciation :- IMF is very useful to avoid the competitive

exchange depreciation which took place before world war 2.

2. Foreign Exchange Market is the market where the buyers and sellers are involved
in the buying and selling of foreign currencies. Simply, the market in which the
currencies of different countries are bought and sold is called as a foreign exchange
market.
The foreign exchange market is commonly known as FOREX, a worldwide network, that
enables the exchanges around the globe.

Transfer Function: The basic and the most visible function of foreign exchange market
is the transfer of funds (foreign currency) from one country to another for the settlement
of payments. It basically includes the conversion of one currency to
another, wherein the role of FOREX is to transfer the purchasing power from one
country to another.

For example, If the exporter of India import goods from the USA and the payment is to
be made in dollars, then the conversion of the rupee to the dollar will be facilitated by
FOREX. The transfer function is performed through a use of credit instruments, such as
bank drafts, bills of foreign exchange, and telephone transfers.

Credit Function: FOREX provides a short-term credit to the importers so as to

facilitate the smooth flow of goods and services from country to country. An importer can
use credit to finance the foreign purchases. Such as an Indian company wants to
purchase the machinery from the USA, can pay for the purchase by issuing a bill of
exchange in the foreign exchange market, essentially with a three-month maturity.

Hedging Function: The third function of a foreign exchange market is to hedge

foreign exchange risks. The parties to the foreign exchange are often afraid of the
fluctuations in the exchange rates, i.e., the price of one currency in terms of another. The
change in the exchange rate may result in a gain or loss to the party concerned.

Thus, due to this reason the FOREX provides the services for hedging the anticipated or
actual claims/liabilities in exchange for the forward contracts. A forward contract is
usually a three month contract to buy or sell the foreign exchange for another currency
at a fixed date in the future at a price agreed upon today. Thus, no money is exchanged
at the time of the contract.

There are several dealers in the foreign exchange markets, the most important amongst
them are the banks. The banks have their branches in different countries through which
the foreign exchange is facilitated, such service of a bank are called as Exchange
Banks.

6. Advantages of fixed exchange rates

Certainty - with a fixed exchange rate, firms will always know the exchange rate
and this makes trade and investment less risky.

Absence of speculation - with a fixed exchange rate, there will be no

speculation if people believe that the rate will stay fixed with no revaluation or
devaluation.

Constraint on government policy - if the exchange rate is fixed, then the

government may be unable to pursue extreme or irresponsible macro-economic
policies as these would cause a run on the foreign exchange reserves and this
would be unsustainable in the medium-term.
Disadvantages of fixed exchange rates

The economy may be unable to respond to shocks - a fixed exchange rate means
that there may be no mechanism for the government to respond rapidly to
balance of payments crises.

Problems with reserves - fixed exchange rate systems require large foreign
exchange reserves and there can be international liquidity problems as a result.

Speculation - if foreign exchange markets believe that there may be a

revaluation or devaluation, then there may be a run of speculation. Fighting this
may cost the government significantly in terms of their foreign exchange
reserves.

Deflation - if countries with balance of payments deficits deflate their economies

to try to correct the deficits, this will reduce the surpluses of other countries as
well as deflating their own economies to restore their surpluses. This may give
the system a deflationary bias.

Policy conflicts - the fixed exchange rate may not be compatible with other
economic targets for growth, inflation and unemployment and this may cause
conflicts of policies. This is especially true if the exchange rate is fixed at a level
that is either too high or too low.

Advantages of floating exchange rates

Protection from external shocks - if the exchange rate is free to float, then it
can change in response to external shocks like oil price rises. This should reduce
the negative impact of any external shocks.

Lack of policy constraints - the government are free with a floating exchange
rate system to pursue the policies they feel are appropriate for the domestic
economy without worrying about them conflicting with their external policy.

Correction of balance of payments deficits - a floating exchange rate can

depreciate to compensate for a balance of payments deficit. This will help restore
the competitiveness of exports. There is a link to Figure 1 below which illustrates
the operation of the automatic adjustment mechanism under a floating exchange
rate system.

Disadvantages of floating exchange rates

Instability - floating exchange rates can be prone to large fluctuations in value

and this can cause uncertainty for firms. Investment and trade may be adversely
affected.
 No constraints on domestic policy - governments may be free to pursue
inappropriate domestic policies (e.g. excessively expansionary policies) as the
exchange rate will not act as a constraint.

Speculation - the existence of speculation can lead to exchange rate changes

that are unrelated to the underlying pattern of trade. This will also cause
instability and uncertainty for firms and consumers.

7. higher interest rates increase the value of a given country's currency. The higher
interest rates that can be earned tend to attract foreign investment, increasing the
demand for and value of the home country's currency. Conversely, lower interest rates
tend to be unattractive for foreign investment and decrease the currency's relative value.
If a country can manage to achieve a successful balance of increased interest rates
without an accompanying increase in inflation, then the value and exchange rate for its
currency is more likely to rise.

Inflation is more likely to have a significant negative effect, rather than a significant
positive effect, on a currency's value and foreign exchange rate. A very low rate of
inflation does not guarantee a favorable exchange rate for a country, but an extremely
high inflation rate is very likely to impact the country's exchange rates with other nations
negatively.

Inflation is closely related to interest rates, which can influence exchange rates.
Countries attempt to balance interest rates and inflation, but the interrelationship
between the two is complex and often difficult to manage. Higher interest rates tend to
attract foreign investment, which is likely to increase the demand for a country's
currency. However, higher interest rates often cause increasing inflation rates, a negative
influence on the country's currency. Low interest rates spur consumer
spending and economic growth, and generally positive influences on currency value, but
they do not commonly attract foreign investment.