International Finance

September 11, 2017

International Finance

Module 1- Written Assignment

Chapter 1

Q.1 Some of the risk or issues that are associated with the growing globalization are….

Foreign Exchange Risks.

        These are the risks associated with the change in valuation of an investment due to change in the currency of the country in which such an investment has been made. The unanticipated and aggressive change in valuation of currencies can deeply and directly or indirectly affect the operation of a multi-national enterprise.

Fiscal Deficits

        It can be defined as the excess of expenditures of a government over the revenues. Large fiscal deficits in a nation’s economy lead to complications of fiscal and monetary policies of the nation. Such a scenario leads to crowding out of private investments, increase in the borrowing rates, and levy of higher taxes.

Privatization

        The ownership, control, and governance of business entities vary dynamically across the world. Private multi-nation enterprises are the driving force in the process of globalization.

        The goals and objectives of such enterprises are mainly self-driven and such enterprises exploit the natural and human resources of the host countries that is the countries in which they operate.

Dependence

Local economies of a nation have a major dependence on the global markets for the availability of raw materials, supply of labor, and for the market of sale of products. Any change in the international markets can significantly affect the financial viability of the enterprise as the economies have less dependence on the local markets.

Environmental Changes

Globalization leads to the industrialization of the economies which were earlier non-existent or had low share in the business segments. In developing nations, the industrialization may create enormous environmental changes hampering the ecological balances and loss of fauna. The repercussions of such changes might be irreconcilable for the existence of the human population.

Capital Markets

        The capital markets exist to enable the corporations to raise finance. Globalization had greatly augmented the ease of flow of capital into and out of both industrial and developing markets. The easy access to capital markets has vividly complicated the financial management process.

Q.2

Globalization defines as process where an organization increases in proportion of various activities such as social, economic and cultural outside the national borders of the company’s home country. It is a process, which increases the interdependence on the World markets and increases the connectivity between the countries. The process of globalization results various changes in markets and business such as:

• Increases the trade of goods and services between various countries.
• Increases internationalization of various goods, brands, and services. It also expands and assist the company developing its brands internationally.
• A shift in the consumer behavioral and consumption pattern that results a shift in production and consumption.
• Increases labor migration

Q.3

The financial assets which are available in international financial markets for trading plays the most critical role in linking the major institutions that make up the global financial marketplace, in general these are debt securities issued by governments. Because government debt securities are risk-free, or at least low-risk, they form the basis for the creation, trading, and pricing of other financial assets. These financial assets could include bank loans, corporate bonds, and equities/stock of high reputed corporate houses and financial institutions.

Q.4

As these days, the trading of the currencies is usually done with the help of electronic and digital trading platforms the symbols or currency signs are uniformly not available on the digital platforms. So, for ease of access and clarity, such symbols have been replaced with ISO-4217 codes that are three letter currency codes such as USD for United States, EUR for Euro and GBP for Great Britain and INR for Indian Rupee. Hence, usage of electronic mediums had led to change in representation of currencies.

Q.5

Eurocurrencies and LIBOR have remained the centerpiece of the global financial marketplace because they are large international money markets that are mostly free from governmental regulation or interference. Additionally, depositors and borrowers are attracted to Eurocurrency loan markets because there is a spread of less than 1% between deposit and loan rates. This low spread is a result of the Eurocurrency market being a wholesale market with large deposits and loans of more than $500,000. Typical borrowers are government bodies and large corporations, which receive low rates because of their high credit standing and the large sums that they borrow. Additionally, deposit rates are higher because the market is not subject to regulations, reserve requirements, or deposit insurance fees, therefore minimizing competitive pressure.