EXCHANGE RATE EXPOSURE

Exchange Rate Exposure:

   The degree of risk face by the company due to the fluctuation of the exchange rate.

• Transaction Exposure
• Economic Exposure
• Translational Exposure

Transaction Exposure:

      The degree of the risk face by the company on its cash inflows and outflows due to exchange rate fluctuation.

Economic Exposure:

     The degree of the risk face by the company due to the economic condition of the country which effects the exchange rate and it effect the company.

Translational Exposure:

    The degree of risk face by the sub-branch when it convert its profit or low in the parents country currency.

DERIVATIVE SECURITIES

DERIVATIVE SECURITIES:
 The securities whose values are derived from available under line securities.

• Forward Contracts
• Future Contracts
• Optional Contracts

Forward Contracts:

         A contract in which the prices of the commodities and assets decided today and transaction will take place in future at specified rate.

Future Contracts:

        A contract in which the prices of the commodities and assets decided today and transaction will take place in future at specified rate.

                                                           

                                    Difference between forward and future contracts

                      Forward contract                                Future contract

•             Not standard                                      Standardized
•             Over the counter market                   Standardized market
•             No advanced payment                       Advanced payment
•             Unsecure                                             Secure

Optional Contracts:

         Optional contract is a financial instrument in which the person have right to purchase and sell commodities and securities.

FORECASTING EXCHANGE RATES

FORECASTING TECHNIQUES

• MARKET BASED FORECASTING
• TECHNICAL FORECASTING
• FUNDAMENTAL FORECASTING
• MIXED FORECASTING

MARKET BASED FORECASTING:

     In this method we check the current market conditions of any country and on the basis of those 

condition we predict the exchange rate of that country.

TECHNICAL FORECASTING:

    In this method we took the pass data of the currency exchange rate at on the basis of past data we predict the future rate.

FUNDAMENTAL FORECASTING:

   we check the fundamental factors of any country and the basis of these factors we predict the exchange rate.

MIXED FOR CASTING:

  In this method we use the different combination of different forecasting methods and then predict the exchange rate.

FACTOR EFFECTING EQUILIBRIUM EXCHANGE RATE

FACTOR EFFECTING EQUILIBRIUM EXCHANGE RATE

• Inflation 
• Interest rate
• Income level
• Government Restriction
• Forecasting & prediction
• News Effects

EXCHANGE RATE DETERMINENT

Exchange Rate Movement:

•  Appreciation

          When the value of currency is increased with the respect of other currency value is called appreciation

• Depreciation

          When the value of currency is decreased with the respect of other currency value is called depreciation

        Example: 

             1$=80RS  and next day 1$= 86RS  it mean the Rupee value is decrease than dollar

        Formula:

                              current rate -  previous rate

                                     previous rate

        

According to left side

    If increase appreciation

    If decrease depreciation                   

INTERNATIONAL CREDIT AND BOND MARKETS

International Credit Markets:
It provide the medium term loans maximum duration 5 years

• Syndicate Loans

         one or more than one bank provides the funding to other head is one 

International Bonds Markets:

• Euro Bonds 

           If a domestic company issue bonds in the foreign country in its own domestic currency than that bond is called the euro bonds

• Foreign Bonds

         If a domestic company issue bond in the foreign country in the currency of that foreign country is called foreign bonds.

ATTRIBUTES OF A GOOD BANK

THE FOLLOWING ARE THE ATTRIBUTES OF A GOOD BANK

• Speed of Excuation of Transaction
• Less Fees
• Forecasting Services
• Good Will

Bid/Ask Spread:

     The difference between ask price and bid price is called bid/ask spread.

Formula:  ask rate - bid rate     *100

                        ask rate

       answer=  ..........%

INTERNATIONAL FINANCIAL MARKETS

Motives of Financial Markets:

• Economic Growth
• Expectation of Exchange Rate
• International Diversification

Motives for Providing Credit to International Market:

• High Interest Rate
• Exchange Rate
• Diversification

History of Exchange Markets:

Exchange Rate Definition:

          The value of one currency with the respect of other currency of country.

1. Gold Standard:

           (1876-1913) before world war 

       The currency should be converted into gold.

   

     2.  Fixed Exchange Rate:

               

              (1971-1973) according to smith son agreement the currency was made to exchange.

     3.  Floating Exchange: 

        After to (1973) the currency have been exchange according to law of demand and supply.

DIRECT FOREIGN INVESTMENT (DFI)

OBJECTIVES

• Increase The Revenues

    Revenues Related Motives

1.              Monopolistic Advantage
2.              Diversification
3.              Attract New Sources of Demand
4.              React to Trade Restriction

• Cost Related Motives

1.   Factors of Production
2.   Use of Technology
3.   Use of Material

 Barriers to DFI

1. Red Tape Barriers
2.  Political Instability
3. Industry Influnce

Incentives of DFI

1. Reduce Taxes
2. Facilitation
3. Employment Increase
4. Economic Growth
5. New Technology

INTERNATIONAL FUND FlOW 2

Factors Affecting Current Account:

• Inflation
• Income level
• Govt. Restriction
• Exchange Rate

Factors Affecting Capital Account:

• Govt. Restriction Changes
•  Economic Growth
•  Exchange rate
•  Tax Rate

Factors Affecting Portfolio:

• Tax rate
• Interest Rate
• Dividend 
• Exchange Rate

International Agencies:

• IMF (International Monitory Fund)
• IBRD (International Bank for Reconciliation & Development)
• IDA (International Development Association)
• WTO (World Trade Organization)
• BIS (Bank for International Settlements)