Types of instruments used in international market.

Depositary Receipts More generally, depositary receipts (DRs) are negotiable securities that represent the underlying securities of foreign companies that trade in a domestic market. DRs enable domestic investors to buy the securities of a foreign company without the accompanying risks or inconveniences of crossborder and cross-currency transactions. Each DR is issued by a domestic depositary bank when the underlying shares are deposited in a foreign custodian bank, usually by a broker who has purchased the shares in the open market local to the foreign company. A DR can represent a fraction of a share, a single share, or multiple shares of a foreign security. The holder of an DR has the right to obtain the underlying foreign security that the DR represents, but investors usually find it more convenient to own the DR. The price of a DR generally tracks the price of the foreign security in its home market, adjusted for the ratio of DRs to foreign company shares. American Depositary Receipt (ADRs) An American Depositary Receipt (ADR) is a negotiable security that represents the underlying securities of a non-U.S. company that trades in the U.S. financial markets. Individual shares of the securities of the foreign company represented by an ADR are called American Depositary Shares (ADS). The stock of many non-U.S. companies trade on U.S. stock exchanges through the use of ADRs. ADRs are denominated, and pay dividends, in U.S. dollars, and may be traded like shares of stock of U.S.-domiciled companies. The first ADR was introduced by J.P. Morgan in 1927 for the British retailer Selfridges. There are currently four major commercial banks that provide depositary bank services: BNY Mellon, J.P. Morgan, Citi, and Deutsche Bank.
What is an ADR / GDR?

ADR stands for American Depository Receipt. Similarly, GDR stands for Global Depository Receipt. Lets understand these better. Every publicly traded company issues shares and these shares are listed and traded on various stock exchanges. Thus, companies in India issue

shares which are traded on Indian stock exchanges like BSE (The Stock Exchange, Mumbai), NSE (National Stock Exchange), etc. These shares are sometimes also listed and traded on foreign stock exchanges like NYSE (New York Stock Exchange) or NASDAQ (National Association of Securities Dealers Automated Quotation). But to list on a foreign stock exchange, the company has to comply with the policies of those stock exchanges. Many times, the policies of these exchanges in US or Europe are much more stringent than the policies of the exchanges in India. This deters these companies from listing on foreign stock exchanges directly. But many good companies get listed on these stock exchanges indirectly using ADRs and GDRs. This is what happens: The company deposits a large number of its shares with a bank located in the country where it wants to list indirectly. The bank issues receipts against these shares, each receipt having a fixed number of shares as an underlying (Usually 2 or 4). These receipts are then sold to the people of this foreign country (and anyone who is allowed to buy shares in that country). These receipts are listed on the stock exchanges. They behave exactly like regular stocks their prices fluctuate depending on their demand and supply, and depending on the fundamentals of the underlying company. These receipts, which are traded like ordinary stocks, are called Depository Receipts. Each receipt amounts to a claim on the predefined number of shares of that company. The issuing bank acts as a depository for these shares that is, it stores the shares on behalf of the receipt holders. What is the difference between ADR and GDR? Both ADR and GDR are depository receipts, and represent a claim on the underlying shares. The only difference is the location where they are traded. If the depository receipt is traded in the United States of America (USA), it is called an American Depository Receipt, or an ADR. If the depository receipt is traded in a country other than USA, it is called a Global Depository Receipt, or a GDR. How can you use an ADR / GDR? ADRs and GDRs are not for investors in India they can invest directly in the shares of various Indian companies. But the ADRs and GDRs are an excellent means of investment for NRIs and foreign nationals wanting to invest in India. By buying these, they can invest directly in Indian companies without going through the hassle of

understanding the rules and working of the Indian financial market since ADRs and GDRs are traded like any other stock, NRIs and foreigners can buy these using their regular equity trading accounts! Risk management in respect of their Integrated Treasury Operations cover different types of risks and how to hedge such risks? Risk - A risk is an uncertain/unplanned unanticipated event which might result in a loss or reduced earnings. Risk arises due to volatile movements happening in the markets on account of various reasons. 1) Credit Risk - Credit risk is also known as default risk. This risk arises due to the unwillingness or inability of the borrower to repay the loan. Higher the credit risk higher will be interest rate. Credit risk leads to other risk such as liquidity risk, interest risk and mismatch risk. Hedging a) Fixing counterparty limit b) Proper Credit administration documentation, Credit monitoring, communicated ahead of time as and when the principal/markup installment becomes due, Maintenance of Credit Files. c) Collateral and Security against credit. 2) Liquidity Risk Credit risk leads to liquidity risk as borrower is unable to pay on time result in short of availability of funds which leads to liquidity risk. Or a business will have insufficient funds to meet its financial commitments in a timely manner Liquidity risk is arises from - seasonal fluctuations, unplanned reduction in revenue, increase in operational cost, inadequate cash flow management Hedging a) Cash flow forecasting b) System should be in place to manage the funding C) Liquidity Ratio Analysis 3) Interest Rate Risk Change in price level of financial products which are borrowed or lent. Interest rate risk affects the value of bonds more directly than stocks, and it is a major risk to all bondholders. As interest rates rise, bond prices fall and vice versa. Interest rates of deposits/loans are basically determined by the

market forces (i.e., demand and supply for/of funds) While the major factor is demand and supply they are caused by various factors such as Government Policies and Speculation Hedging a) investment in floating rate rather than fixed rate securities b) Interest rate risk can be hedged using swaps and interest rate based derivatives. c) investing only in securities due to mature in the short term 4) Mismatch Risk - Mismatch risk is the risk that you are investing in something that is inappropriate for your investment needs. A category of risk that refers to the possibility that a swap dealer will be unable to find a suitable counterparty for a swap transaction Hedging Forward rate agreement is used 5) Cross Border Risk - This type of risk is also known as country risk. Forex markets operate on 24X7 time frame but all centers do not operate simultaneously and hence results in time zone difference and leads to risks associated with various centers which is popularly known as cross border risk.
Hedging Fix country wise exposure limits, continuously monitoring countries

6) Exchange Rate Risk - The price movement in terms of foreign Exchange deals is called exchange rate risk. The exchange rate movement is mainly due to floating rate system and price is decided by the demand and supply factors. The exchange rate moves depending on many Factors such as Government /Regulators policy, speculation and forecasting Hedging Use derivative technique such as Forward, future and options (Put and call) 7) Operational Risk - Operational risk can be summarized as human risk; it is the risk of business operations failing due to human error. Industries with lower human interaction are likely to have lower operational risk. Hedging Proper training and Real time information sharing 8) Reputation Risk - Reputation is damaged when something is done that causes stakeholders to lose trust in an organization. Hedging - Identify and prioritize the main causes of reputational risk. Understand interrelationships within the business

PESTEL ANALYSIS

Political factors. These refer to government policy such as the degree of intervention in the economy. What goods and services does a government want to provide? To what extent does it believe in subsidising firms? What are its priorities in terms of business support? Political decisions can impact on many vital areas for business such as the education of the workforce, the health of the nation and the quality of the infrastructure of the economy such as the road and rail system. Economic factors. These include interest rates, taxation changes, economic growth, inflation and exchange rates. As you will see throughout the "Foundations of Economics" book economic change can have a major impact on a firm's behaviour. For example: - higher interest rates may deter investment because it costs more to borrow - a strong currency may make exporting more difficult because it may raise the price in terms of foreign currency - inflation may provoke higher wage demands from employees and raise costs - higher national income growth may boost demand for a firm's products

Social factors. Changes in social trends can impact on the demand for a firm's products and the availability and willingness of individuals to work. In the UK, for example, the population has been ageing. This has increased the costs for firms who are committed to pension payments for their employees because their staff are living longer. It also means some firms such as Asda have started to recruit older employees to tap into this growing labour pool. The ageing population also has impact on demand: for example, demand for sheltered accommodation and medicines has increased whereas demand for toys is falling. Technological factors: new technologies create new products and new processes. MP3 players, computer games, online gambling and high definition TVs are all new markets created by technological advances. Online shopping, bar coding and computer aided design are all improvements to the way we do business as a result of better technology. Technology can reduce costs, improve quality and lead to innovation. These developments can benefit consumers as well as the organizations providing the products. Environmental factors: environmental factors include the weather and climate change. Changes in temperature can impact on many industries including farming, tourism and insurance. With major climate changes occurring due to global warming and with greater environmental awareness this external factor is becoming a significant issue for firms to consider. The growing desire to protect

the environment is having an impact on many industries such as the travel and transportation industries (for example, more taxes being placed on air travel and the success of hybrid cars) and the general move towards more environmentally friendly products and processes is affecting demand patterns and creating business opportunities.

Legal factors: these are related to the legal environment in which firms operate. In recent years in the UK there have been many significant legal changes that have affected firms' behaviour. The introduction of age discrimination and disability discrimination legislation, an increase in the minimum wage and greater requirements for firms to recycle are examples of relatively recent laws that affect an organizations actions. Legal changes can affect a firm's costs (e.g. if new systems and procedures have to be developed) and demand (e.g. if the law affects the likelihood of customers buying the good or using the service).

LIBOR - London Inter-Bank Offer Rate. The interest rate that the banks charge each other for loans (usually in Eurodollars). This rate is applicable to the short-term international interbank market, and applies to very large loans borrowed for anywhere from one day to five years. This market allows banks with liquidity requirements to borrow quickly from other banks with surpluses, enabling banks to avoid holding excessively large amounts of their asset base as liquid assets. The LIBOR is officially fixed once a day by a small group of large London banks, but the rate changes throughout the day. MIBOR - The interest rate at which banks can borrow funds, in marketable size, from other banks in the Indian interbank market. The Mumbai Interbank Offered Rate (MIBOR) is calculated everyday by the National Stock Exchange of India (NSEIL) as a weighted average of lending rates of a group of banks, on funds lent to first-class borrowers

Letter of Credit:Letter of credit is an arrangement by banks for settling international commercial transactions. It provides a form of security for the parties involved. Ensures payment, provided the terms and conditions of the letter of credit are fulfilled. Eliminate extensive credit investigation of the buyer, since the sellers credit risk has been assumed by the issuing and/or confirming bank.

Assures the buyer that it will only pay, when the conditions of the credit are met by the exporter. To receive payment exporter need to submit documents Financial Documents - Bill of Exchange, Co-accepted Draft Commercial Documents - Invoice, Packing list Shipping Documents - Transport Document, Insurance Certificate, Commercial, Official or Legal Documents Official Documents - License, Embassy legalization, Certificate, Inspection Certificate, Phytosanitary certificate Origin

Transport Documents - Bill of Lading (ocean or multi-modal or Charter party), Airway bill, Lorry/truck receipt, railway receipt, CMC Other than Mate Receipt, Forwarder Cargo Receipt, Deliver Challan...etc Insurance documents -Insurance policy, or Certificate but not a cover note. PARTIES TO THE LETTER OF CREDIT: 1. The Opener: The opener is the buyer(importer). The letter of credit is opened at the initiative and request of the buyer. 2. The Issuer: The issuer, also called the opening or issuing bank, is the bank in the importer's country issuing the letter of credit at the request of the importer.

3. The Beneficiary: The beneficiary is the party in whose favour the credit is issued; that is the beneficiary is the seller or exporter. 4. The confirming Bank: The confirming bank is a bank in the exporter's country, which guarantees the credit at the request of the issuing bank. The confirming bank undertakes all the obligations of the issuing bank as a primary party to the credit, and even if the issuing bank fails during the currency of the credit, the confirming bank is obliged to honor its commitment.

5. The Notifying Bank: The notifying bank is the bank, which, at the request of the issuing bank, notifies the beneficiary that the credit

has been opened in his favour. If the letter of credit is confirmed, the confirming the bank advises the beneficiary accordingly.

6. The Paying Bank: The paying bank is the bank on which the draft or bill of the exchange is to be drawn under the commercial credit. The paying bank may be the issuing bank, the confirming bank or the notifying bank 7. The Negotiating Bank: The negotiating bank is the bank, which pays or accepts the drafts of the exporter. If no paying bank is specified in the credit, the beneficiary may go the any bank and present the draft and related documents under the credit; and if the bank agrees to negotiate the documents, it becomes the negotiating bank.

Issuing Bank

Benefici Bank

Applicant/ Purchaser

Benefici Seller

5. Goods

In Letter of credit, normally four parties are involved, viz, the applicant for the credit (importer), the beneficiary of the credit (exporter), the issuing bank and the advising bank incase of unconfirmed credit or the confirming bank in case of confirmed credit. The step-by-step procedure involved can be discussed by taking an

example. M/S Rainbow limited. Chennai has secured a contract for the supply of 200 ceiling fans to a Nigerian importer. It has been decided that the terms of payment will be a confirmed irrevocable letter of credit. The total value of the contract is Rs.2, 00,000. Once the contract is duly signed the Nigerian bank then sends instructions to its correspondent bank to the credit and the advice the Rainbow limited accordingly. On receipt of this advice from the local correspondent bank in India, the Rainbow limited, makes the shipment of the cling fans and gets the shipping documents and other related documents. He presents these to the correspondent bank, which scrutinizes the documents. If these are in full conformity with the terms of the credit, it will accept the documents and make the payment to the exporter. The documents are then forwarded to the issuing bank, which reimburses the amount to the correspondent bank. The issuing bank in turn presents the documents to the importer and debits his account for the corresponding amount.

Types of Letter of Credit 1) Inland letter of credit - Inland Letter of Credit is issued to meet out the credit requirement for domestic trade. Or LC issued within a country is known as inland Letter of credit. 2) Back To Back LC - Two letters of credit (LCs) used together to help a seller finance the purchase of equipment or services from a subcontractor. With the original LC from the buyer's bank in place, the seller goes to his own bank and has a second LC issued, with the subcontractor as beneficiary. There are two LCs involved where with the first LC serving as collateral for the second. 3) Revolving LC - A revolving letter of credit functions much like a credit card; the borrower can request funds up to the limit, pay some or all of the borrowings back, and then borrow more funds from the line.

Single LC that covers multiple shipments over a long period of time. A revolving letter of credit, as the name implies, revolves in credit availability, meaning the borrower/buyer can draw down the funds multiple times on the same letter of credit 4) Confirmed LC - A second guarantee, in addition to a letter of credit, that commits to payment of the letter of credit. A confirmed letter of credit is typically used when the issuing bank of the letter of credit may have questionable creditworthiness and the seller seeks to get a second guarantee to assure payment. 5) Irrevocable LC - A letter of credit that can't be canceled without the agreement of both the parties. This guarantees that a buyer's payment to a seller will be received on time and for the correct amount. 6) Revocable LC - L/C that may be amended or canceled any time by the buyer (the account party) without the approval of the seller (the beneficiary). Since it does not provide any protection to the seller, it is rarely used. 7) Red Clause LC L/C that carries a provision which allows a seller to draw up to a fixed sum from the advising or paying-bank, in advance of the shipment or before presenting the prescribed documents. The buyer is extending an unsecured loan to the seller.