INTERNATIONAL FINANCE

By MR.HASSAN KAMRAN
LETTER OF CREDIT, THE SPIRIT OF INTERNATIONAL TRADE

International trade demands a flow of goods from seller

to buyer and of payment from buyer to seller. The goods
movement may be evidenced by appropriate documents.
Payment, however, is influenced by trust between the
commercial parties, their need for finance and,
possibly, by governmental trade and exchange control
regulations.

Consequently, the documentary credit is frequently the

method of payment. The buyer’s bank pays the seller
against presentation of documents and compliance with
conditions stipulated by the buyer.

A world-wide use, with an immense daily turnover in

transactions and value, necessitates a universal
standard of practice. The International Chamber of
Commerce (ICC) provides this with its Uniform and
Practice for Documentary Credits(UCP), but their
effectiveness is reduced unless the commercial parties
and the banks involved understand the basics of the
operations.

POSSIBLE PROBLEMS

The seller says,

“We want to be certain that the buyer is able to pay on

time once the goods have been shipped. How can we
minimize risk of non-payment?”

The buyer says,

“We do not know the seller… can we be sure that he will
deliver on time?”

The seller worries,”

We are supplying the buyer with goods that we ourselves

have bought from a sub-contractor.

How can we prevent the buyer from finding out and

contacting our supplier directly?”

The buyer thinks,

“Before we pay, how can we check that the goods are

exactly those we ordered?”

BOTH THE PARTIES WANT:

"How can the banks help us in the practical

arrangements for these transactions, specially by
assisting us with all the necessary documentation?”

Additional services desired:

“We would prefer to delay paying for the goods until we

have sold them. Will our bank provide credit for the
intervening period?”

“Where can we get information on currency restrictions,

and import or export licenses?”

What the seller wants

Contract Fulfillment
Assurance that he will be paid in full within the
agreed time limit.

Convenience

The convenience of receiving payment at his own bank or

through a bank in his own country.

Prompt Payment

Prompt payment for the sale of the goods, so as to

improve the liquidity of his business.

Advice

The knowledge necessary to conduct complex trade

transactions.

What the buyer wants

Contract Fulfillment

Assurance that he does not have to pay the seller until

he is certain that the seller has fulfilled his
obligations correctly.

Convenience

The convenience of using an intervening third party in

whom both buyer and seller have confidence-such as a
bank with its documentary expertise-when making
payment.

Credit

A managed cash-flow, by the possibility of obtaining

bank finance.

Expert assistance
Expert assistance and facilities in dealing with often
complex transactions, particularly with the specific
procedures to be followed.
 TIME FOR PAYMENT

SELLER

In advance

He needs payment before shipment, as he cannot

otherwise finance production of the goods the buyer has
ordered.

At time of Shipment

He wants assurance of payment as soon as the goods are

shipped.

He has to meet regulations stipulating payment at time

of shipment rather than before or after it.

After shipment

He is prepared to wait for payment for a certain time

after shipment, as he trusts the buyer and appreciates
his position.

BUYER

In advance

He trusts the seller, knowing that the contract will be

carried out as agreed, and he is therefore prepared to
pay in advance.

At time of Shipment

He does not want to take the risk of paying before

being certain that the goods are shipped on time and
that they are as stipulated in his contract with the
seller.
He has to meet regulations stipulating payment at time
of shipment rather than before or after it.

After shipment

He possibly wants to sell the goods before he pays the

seller.
 DOCUMENTARY CREDITS

Definition

In simple terms, a documentary credit/letter of credit

is a conditional bank undertaking of payment.

Expressed more fully, it is a written undertaking by a

bank (issuing bank) given to the seller (beneficiary)
at the request, and on the instructions, of the buyer
(applicant) to pay at sight or at a determinable future
date up to a stated sum of money, within a prescribed
time limit and against stipulated documents.

These stipulated documents are likely to include those

required for commercial, regulatory, insurance, or
transport purposes, such as commercial invoice,
certificate of origin, insurance policy or certificate,
and a transport document of a type appropriate to the
mode(s) of transport used.

Documentary credits offer both parties to a transaction

a degree of security, combined with a possibility, for
a creditworthy party, of securing financial assistance
more easily.

Buyer

Because the documentary credit is a conditional

undertaking, payment is, of course, made on behalf of
the buyer against documents which may represent the
goods and give him rights in them.

However, according to arrangements made between him and

the bank-and, in some cases, by reason of local laws or
regulations-he may have to make an advance deposit at
the time of requesting the issuance of the credit, or
he may be required to place the issuing bank in funds
at the time documents are presented to the overseas
banking correspondent of the issuing bank.

Seller

Because the documentary credit is a bank undertaking,

the seller can look to the bank for payment, instead of
relaying upon the ability or willingness of the buyer
to pay subject to fulfillment of certain terms and
conditions.

ISSUING A CREDIT

The buyer and the seller conclude a sales contract

providing for payment by documentary credit.

The buyer instructs his bank-the “issuing” bank-to

issue a credit in favour of the seller (beneficiary).

The advising or confirming bank informs the seller that

the credit has been issued.

The issuing bank asks another bank, usually in the

country of the seller, to advise or confirm the credit.

Advising/ confirming bank

There are usually two banks involved in a documentary

credit operation. The issuing bank is the bank of the
buyer. The second bank, the advising bank, is usually a
bank in the seller’s country.

The second bank can be simply an advising bank, or it

can also assume the more important role of a confirming
bank.

In either case, it undertakes the transmission of the

credit. Article 8 (UCP) requires the advising bank to
take “reasonable care to check the apparent
authenticity of the credit which it advises”.
Issuing bank

If the second bank is simply “advising the credit”, it

will mention this fact when it forwards the credit to
the seller. Such a bank is under no commitment to make
payment to the seller, even though it may be nominated
in the credit as the bank authorized to pay, to accept
drafts, or to negotiate.

If the advising bank is also “confirming the credit”,

it will so state. This means that the confirming bank,
regardless of any other consideration, must pay,
accept, or negotiate without recourse to the seller,
provided all the documents are in order and the credit
requirements are met.

SOME IMPORTANT RELEVANT SCHEDULE OF BANK CHARGES

IMPORTS:

Sr.# Annual Quarterly Minimum

amount payment payment for
one LC
1 Upto Rs.25M 0.40% per Rs.1,400
quarter or
negotiable
2 Upto Rs.50M 0.35% per
quarter
3 Upto 0.29% per
Rs.100M quarter
4 Above Negotiable
5 LC Negotiable
amendment
& handling
charges
6 One off Normal mark
transaction up rate
7 Documents No
retired commission
with 10
 days
8 If retired From 0.29%
during 15 to 0.46%
days or i.e.
more negotiable

EXPORTS:

1 LC advising Rs.1,400
per
quarter
2 LC advising Rs.1,200 $ =Rs.19.32 in
amendment
3 LC Minimum
1989.
confirmation Rs.1,400 IMF Support
Arrangements to Pakistan
(1980-2004)
Amo
Date of
unt Disburse
Arrange Signed
Arrange (SD ment
ment during
ment R (SDR
(expirati rule of
milli million)
on)
on)
EFF 24-11- 1268. 1079.00 Ziaul
80 00 Haq
(23-11-
83)
SBA 28-12- 273.1 194.48 Benazi
88 5 r
(7-3-90) Bhutto
SAF 28-12- 382.4 382.41 Benazi
88 1 r
(27-12- Bhutto
91)
SBA 16-9-93 265.4 88.00 Nawaz
EFF/ (15-9- 0 123.20 Sharif
ESAF 94) 379.1 172.20
22-2-94 0
(21-2- 606.6
97) 0
22-2-94
(21-2-
97)
SBA 13-12- 562.5 294.69 Benazi
95 9 r
(31-3- Bhutto
97)
EFF/ 20-10- 454.9 113.75 Nawaz
ESAF 97 2 265.37 Sharif
(19-10- 682.3
2000) 8
SBA 29-11- 465.0 465.00 Pervez
2000 0 Musha
(30-9- rraf
2001)
PRGF 7-12- 1033. 861.42 Pervez
2001 70 Musha
(5-12- rraf
2004)

LATEST LOAN:

Stand-By Arrangement (SBA) 2008-10

Main Features

a) Pakistan submitted to the IMF a Request for Stand-By

Arrangement on 20 November, 2008 amounting SDR 5.17
billion ($ 7.6 billion) equal to 500% of Pakistan's
quota in the Fund. It has increased to $11.7B. Pakistan
has requested to extend it upto 31-12-10 as it was
expired on 30-09-10.

b) The Arrangement is for a period of 23 months.

c) It is on interest rate of 3.51-4.51%. The amount

will be disbursed in seven tranches - the first tranche
of SDR 2.067 billion has been received on 29 November,
2008 and the balance amount will be disbursed in six
quarterly instalments during 2009-10. The amount and
interest will be repaid in five Years from 2011.

IMF NEW LOAN OF USD6.47B: UNDER STRICT

MONITORING & RELEASE IN INSTALLMENTS
CONDITIONS:
a) GAS tax to be levied at 0.4% of GDP which comes
to Rs.94B in December.
b) Currently, The GDP size is USD235B
c) Subsidy on electricity will be reduced to o% in
three years.
d) For domestic consumers, 30% rise in electricity
tariff from 01 oct, 2013
e) Budget deficit to come down from 8.5% to 3.5% in
3 years.
f) Tax net to be broadened.
g) Tax evasion should be controlled.
h) PIA, Steel Mill & Railway to be improved or
privatized.
i) If any condition is not met, the further release
of installment will be stopped.
 PART-B: FOREIGN EXCHANGE

BALANCE OF PAYMENT:

It is a measurement of all transactions across the

borders over a specified time period.

FOREIGN EXCHANGE TRANSACTIONS

i)     Current Transactions:

a) Goods and services during one financial year

i.e. visible items & it is called balance of
trade also. It includes non visible items like
services also & factor income i.e. dividend
payment & interest payments across the borders.

b) Receipt and payments which do not create new

capital items or cancel previous such items
(visible or invisible).

ii)   Capital Transactions:

a) Receipts and payments of capital nature

which do not pertain to current year.
It includes DFI, portfolio investment &
other capital investments.

b) Long term capital claims.

iii)    Short term financial Transaction:

a) Citizen of a country can transfer their

foreign exchange recourses to another country
due to political or economic reasons.
 iv)   Working Balances: The commercial Banks
maintain foreign currency deposit with Banks in
some other countries to avoid various
disturbances.

FOREIGN CURRENCY ACCOUNTS:

Banks play a vital role in the international trade

settlement. This settlement is made with the help of
“NOSTRO” and “VOSTRO”

NOSTRO:Latin word means OUR:

a)        A bank can have relationship

with foreign correspondents.
b)        In UK, can have sterling nostro
a/c and so on.
c)        They are in current account and
do not earn interest.

VOSTRO: a) Latin word means “YOUR”.

   b) Convertible Pak.RS. accounts maintained by
foreign Banks.   
       
EXCHANGE CONTROL

OBJECTIVES OF EXCHANGE CONTROL

Exchange control is management of available resources

in foreign currency. It refers to following points:

i)  OVERVALUATION: More than the value determined by

market forces.

ii) UNDER VALUATION: Less than the value determined

by market forces.

iii)STABILITY OF EXCHANGE RATES: Conversion at

official rate of exchange to stabilize value.
 iv) PREVENTION OF CAPITAL FLIGHT: Gold and foreign
currency cannot be exported without Permission.
 
v)  PROTECTION TO DOMESTIC INDUSTRY: To encourage
business
environment in the country.

vi) CHECKING NONESSENTIAL IMPORTS: To control import

of luxury items.

vii) HELP TO PLANNING PROCESS: How to spend foreign

currency on result oriented items.

viii) BALANCE OF PAYMENT PROBLEMS: With prudent

policies BOP problem can be controlled.

ix)  EARNING REVENUE: Foreign exchange is sold

to Businessmen, traders etc. at a certain rate.

x)   REPAYING FOREIGN DEBT: By earning and

conserving Foreign exchange.

xi)  RETALIATION: Monopoly power and better

bargaining terms.

FORMS OF EXCHANGE CONTROL

a)EXCHANGE RATIONING:

i) To face foreign exchange difficulties, the citizens

will be required to surrender foreign exchange
earnings to SBP fully.

ii) Partial rationing

iii) Different official rate for different
transactions

  b)BLOCKED ACCOUNTS:
  It refers to the following:

i)    Bank deposits and other assets held by

foreigners in controlling country.
ii)   The interest and dividend can be used for
reinvestment in the same country but will not
be allowed to transfer or convert funds.
iii)  Allowed to be utilized within the country, if
essential.
iv)   For export purposes.
v)    Sometimes for traveling purposes.

c)PAYMENT AGREEMENTS:

It refers to the following points:

 
i)                    Can be made through agreement
between two countries, which want rationing.
ii)            Can be made through agreement between
debtor and creditor countries.
iii)    Sometimes forced to be formed by creditor
for encouragement of their exports.

CLEARING AGREEMENTS:

i)   Direct bilateral exchange of goods.

ii)  May be between individuals and firms located in
different countries.
ii) More comprehensive as designed to settle debt in
shortest possible time.
iv)  The transactions are settled at an official rate
of exchange.
v)   Quantity and specification of goods is also pre-
defined.
vi)   Results are always not fruitful.

Precisely can be done by Government intervention i.e.

purchasing of foreign currency by selling local
currency as being done in Pakistan.
 PREREQUISITES OF EXCHANGE CONTROL:

i)    Full control of Government over import and

export of gold and bullion.
ii)   Buying and selling of Government securities
should be controlled so that foreign
transactions are restricted.
iii)  Stock market operations must be monitored
closely so that conversion of foreign assets
into interest bearing foreign securities may be
avoided.
iv)    An effective custom agency is required
to control import and export.
v) Trade control may be exercised
                   

to ensure early repatriation of

export proceeds while free
imports may be controlled for a
favourable BOP.

The above mentioned methods are DIRECT

METHODS in which we can call the
OVERVALUATION as PEGGING UP and
UNDERVALUATION as PEGGING DOWN.
Besides, following are other direct
methods:
a) EXCHANGE RESTRICTIONS:
       

As per rules of SBP, forex is

released and kept by the
Government.
b) ALLOCATION AS PER PRIORITY
       

c) MULTIPLE EXCHANGE RATE.

       
INDIRECT METHODS:
a)QUANTITATIVE RESTRICTIONS:
 
  There is import embargoes, import
  quota and other restrictions to 
  control disequilibrium in BOP.

b)EXPORT BOUNTIES: To encourage

exports,  provided funds are  
available with SBP.

c)RAISING INTEREST RATE: It will

attract the inflow of deposits in
foreign exchange.

THE FINANCIAL MARKETS:

It is a set of facilities that makes it

possible to exchange money for goods or
goods for money on regular basis.
Securities are the goods.

Major functions of financial markets:

 a) Shifting of credit: Mobilize
the funds for users.

b) Liquefying securities.
Customer should be confident
about sale/purchase.

c) Pricing: Mark-up rates.

d) Foreshadowing future:
Forecasting of future for
financial management.

e) Allocating resources:
Considering growth, safety and
yield.

CLASSIFICATION OF FINANCIAL MARKET:

a) Primary market.
b) Secondary market
c) Money market
d) Capital market

FUNCTIONS OF FOREIGN EXCHANGE

MARKET
Currently operating in London, Paris,
Brussels, Zurich, New York, Hong Kong
and Tokyo.                  

MOTIVES FOR INVESTING IN FOREIGN

EXCHANGE MARKETS:

a) Economic Conditions: The

investors can invest in a
currency where economy is stable
so return can be higher.
b) Exchange rate expectataions: The
securities in a currency may be
bought where appreciation is
higher than the domestic
currency.
c) International Diversification:
Risk & fluctuations can be
managed by investing in other
currencies.

MOTIVES FOR PROVIDING CREDIT IN FOREIGN

EXCHANGE MARKETS:

a) Higher interest rates: Due to

shortage of forex reserves the
country may offer better rates on
foreign currency deposits.
 b) Exchange rate expectations: One
can make investment in a country
currency which is expected to
appreciate against domestic
currency.
c) International Diversification: The
chances of risk & fluctuations can
be avoided. The economic
conditions of the concerned
country are very important.

MOTIVES FOR BORROWING IN FOREIGN

EXCHANGE MARKETS:

a) Low interest rates: Many countries

have bulk supply of foreign
reserves so rate of interest are
relatively low.
b) Exchange rate expectations: The
risk & return can be managed.

FUNCTIONS:
i) To transfer purchasing power
                   

from one country to another.

ii) It takes place by debiting and
           

crediting accounts of each Bank.

 iii) No physical delivery of currency
   

takes place usually.

iv) It provides credit also to the
           

business community.
v) HEDGING:
                    Hedging means
avoidance of foreign exchange
risk or covering of an position
without buying or tying up funds.
This process is carried out in
forward Market. This promotes
foreign trade.

vi)             SPECULATION:

   a)It is opposite of hedging.
b)The speculator takes the risk   
  Of any transaction.
 c)Speculation can take place in 
   forward or spot market.
 d)If the speculator buys a 
currency in expectation of
reselling it on profit it will
be called” LONG POSITION” it
will have STABILIZING EFFECT
otherwise it will be called
“SHORT POSITION” or
DESTABILIZING EFFECT.
VII)SWAP TRANSACTIONS:
It refers to following:
i) Simultaneous buying and selling
                   

of foreign currency for different

delivery dates in opposite
direction.
ii) May cover spot against forward.
           

iii) May take

    place between
commercial parties or Bank etc.
iv) May be for a limited period of
           

time.
v) May be lesser risky.
                   

vi) Very popular with speculators,

           

as well.

FOREIGN EXCHANGE POSITION

MANAGEMENT:

OVER BOUGHT/SOLD AND SQUARE

POSITION:

i)                    In order to facilitate foreign

exchange transaction the Bank
buy/sell currency in spot of
forward.
ii) The difference between buy and
           

sell shows the commitment

position of the Bank.
iii) If purchase side is more than
   

sale side it is called overbought

and the opposite one is called
oversold.
iv) If both positions are equal it
           

is called SQUARE.
v) If both positions are nearly
                   

equal, it is called near square.

vi) Sometimes delay in transmitting
           

takes place, which may disturb

position.

LEADS AND LAGS:

If a foreign currency weakens or it
is devalued, the importers stand to
gain on their spot purchases from the
Bank while the exporter will lose.
The importer and exporter will move
accordingly and this pressure will
weaken the currency. If a currency is
strong and is expected to be revalued
exporter will delay shipment and the
importer will expedite payment. This
will make the currency actually
strong.
THIS PHENOMENON OF DELAYING AND
EXPEDITING SETTLEMENT BY CUSTOMERS IN
ANTICIPATION OF CURRENCY’S
DEVALUATION AND REVALUATION IS CALLED
“LEADS AND LAGS”.

SYSTEM OF EXCHANGE RATE

TWO major systems:

FIXED RATE: Remains fixed in terms

of foreign unit of currency with the
home currency. This system has a
demerit that when there is adverse
BOP, substantial foreign exchange
reserves will be needed to maintain
the rate at fixed level.
FLOATING(FREE)RATE: It moves in a
following direction:
i) Demand and
                    supply of the
currency.
ii) Places a currency at the mercy
           

of world’s judgment.
iii) May give rise to speculation.
   
TYPES OF EXCHANGE RATE:

DIRECT QUOTATION:
Rate of exchange is expressed in
units of national currency in most
currencies:

Rs.60=US$1

INDIRECT QUOTATION:
It values the currencies in terms of
the other currencies than in national
currencies.

US$ 0.5=Rs.1

CROSS RATES:
i) The rate of exchange between any
                   

two currencies is kept the same

in different money centers by
“ARBITRAGE”.
ii) Sale and purchase is made in and
           

from money centers where the

 currency is available at lower or
higher rates respectively.
iii) When two currencies and two
   

centers are involved it is called

“TWO POINT ARBITRAGE’.
iv) When three currencies and three
           

centers are involved it is called

“THREE POINT ARBITRAGE’ OR
TRIANGULAR.
v) When national currency is not
                   

used in the transaction and

exchange rate is calculated on
the basis of a third currency, it
is called CROSS RATE.
vi) It is known as calculated parity
           

between two money centers through

a third e.g.

The chain rule is followed….

We can buy EURO in London against GBP

then can use EURO to
buy $ in France then we can sell $ in
UK.
 
SPOT RATE:
The spot rate of the currency is the
value quoted for the nearest settlement
date for the purchase and sale of the
currency against another one. The
transaction may be settled in two to
three working days.

FORWARD RATE:
It covers following concepts:

i) Rate at which the currency can

                   

be bought or sold for

    the delivery on a future date.
ii) Agreement to buy or sell at a
           

specified future date at rate

agreed today.
iii) No payment will be made except
   

security deposit at the time of

signing of contract.
iv) No consideration for spot rate
           

at the time of settlement.

v) May be for one to six months or
                   

longer.
vi) Longer period contracts are not
           

common due to uncertainties

involved.
 vii) If forward rate is less than
   

spot, it is called “FORWARD

DISCOUNT” otherwise it will be
called “FORWARD PREMIUM”.

viii) With its          help

the importer/exporter can avoid
      fluctuations.

ix)             The Bank can take help from

speculators.
x)
                   There can be BULL or BEAR run.
   
OTHER SYSTEM OF EXCHANGE RATE:

i) Dirty float:

a) To avoid sharp changes in rates

under any system.
b) It is a compromise between fixed
& floating rate system.
c) Can be done with interest rate
policy.
d) The objective is to stabilize
rate of exchange.

ii) Wider band:

a) The rate can be moved in 2.25% range
on either side of
official rate of exchange.
b) It was allowed by IMF in 1971 for
the first time.
c) Total variation comes to 4.5%.
d) It helps in avoiding currency
uncertainty.

iii) Crawling Peg:

a) The value of currency is revised

automatically.
b) There is a support point when it
reaches then the central
bank intervenes.
c) According to previous agreed weeks
or months the support
point is changed based on currency
average.
d) If new support point is near to low
point then it will be
set downward otherwise upward.
e) It gives certainty to rate of
exchange.

CURRENCY DERIVATIVES
A forward contract is an agreement
between a company & a commercial bank
to exchange a specified amount of
currency at specified exchange rate
(forward rate) on a specified date in
the future. The normal period is 30, 60
& multiple. Initial deposit may be
needed.

BID/ASK RATE:
The ask rate is the selling rate
whereas bid rate is the purchase rate.
The spread between bid & ask rate is
wider in forward contracts.

How to calculate BID & ASK rate in %:

Ask rate-Bid rate/Ask rate

A future contract refers to a specific

settlement date for a particular
currency’s volume. It is popular with
speculators.

DIFFERENCE BETWEEN FORWARD & FUTURE

CONTRACTS:
 FORWARD FUTURE
Size of Tailored to Standardized
contract individual
needs
Delivery Tailored to Standardized
date individual
needs
Participants Bankers, Bankers,
brokers, brokers,
MNC, MNC,
speculators qualified
not speculators
encouraged
Security Not Needed
deposit essential
Transaction Set by Negotiable
cost spread
  
CURRENCY CALL OPTIONS:

It grants right to buy specific

currency at a designated price within a
specific period of time. The currency
options are desirable when one wishes
to lock in a maximum price to be paid
for the currency in the future. The
price at which the person is allowed to
buy that currency is known as
exercise/strike price.
Call options are desirable when….

a) One wishes to lock maximum price

to be paid for a currency in the
future.
b) If the spot rate of currency rises
above strike price owners of call
options can exercise option by
purchasing it at strike price.
c) Future contract is obligatory but
currency option is not.
d) Owners of call option loses
premium paid by them initially but
that is maximum.

A currency call option is said to be in

the money when present exchange rate
exceeds strike price, at the money when
both are equal & out of money present
exchange rate is less that strike
price. Higher premium is there in the
money option.

FACTORS AFFECTING CURRENCY CALL OPTION

PREMIUM:
 a) Higher the spot rate relative to
strike price, higher the option
price will be. This will be due to
higher probability of buying
currency at lower rate than what
you could sell it for.
b) The relationship of expiration
date & premium is there.
c) If time is long then chances of
raising the spot rate will be
higher as compared with strike
price.
d) The volatility of currency can
increase spot price more rapidly.

CURRENCY PUT OPTIONS:

It grants right to sell specific

currency at a designated price (strike
price) within a specific period of
time. It is also not obligatory like
call option.
The owners of put option loses premium
paid by them initially but that is
maximum.
A currency put option is said to be in
the money when present exchange rate is
less than strike price, at the money
when both are equal & out of money when
present exchange rate exceeds the
strike price. For a given currency &
expiration date, an in the money put
option will require a higher premium
than options that are there in at the
money or out of money.

EXAMPLE FOR CALL OPTION:

Call option premium on C$=$.01/unit

Strike price=$0.70
One option contract represents C$
50,000
Amount in C$
Narration Per unit Per
price contract
Selling 0.74 37,000
price of C$
Purchase -0.70 -35,000
price of C$
Premium -.01 -500
paid for
option
Net Profit 0.03 1,500

If the seller does not purchase the

C$ till option was about to be
exercised the net profit of seller
will be as follows:
Amount in C$
Narration Per unit Per
price contract
Selling 0.70 35,000
price of C$
Purchase -0.74 -37,000
price of C$
Premium .01 +500
received
for option
Net Profit -0.03 -1,500

EXAMPLE FOR PUT OPTION:

Put option premium on GBP=0.04/unit

Strike price=GBP1.40
One option contract represents GBP
31,250
Amount in GBP
Narration Per unit Per
price contract
Selling 1.40 43,750
price of
GBP
Purchase 1.30 40,625
price of C$
Premium -.04 -1,250
paid for
option
Net Profit 0.06 1,875

If the seller does not purchase the

GBP till option was about to be
exercised the net profit of seller
will be as follows:
Amount in GBP
Narration Per unit Per
price contract
Selling 1.30 40,625
price of C$
Purchase -1.40 -43,750
price of C$
Premium .04 +1,250
received
for option
Net Profit -0.06 -1,875

EURO CURRENCY MARKETS: They exist in

all countries to transfer surplus
units (savers) to deficit units
(borrowers).So out side USA demand of
$ will be called EURO DOLLARS & so on
for long term it will be EURO BONDS.

DIRECT FOREIGN INVESTMENT:

Investment in real assets like land,

buildings etc in the foreign
countries are called DFI.

MOTIVES:

Normally the objectives are to

maximize share holders’ wealth & to
improve profitability but they can be
interested in boosting revenue,
reducing costs or both.

REVENUE RELATED MOTIVES:

a) Attract new source of demand: This

can be done to avoid domestic
competition & to increase growth.
b) Enter profitable markets: When the
other market is profitable MNC can
take its benefit.
c) Exploit monopolistic advantages:
More chances for technically
advanced MNCs & products in other
markets.
d) React to trade restrictions: May
enter in other markets where trade
restrictions are no there.

COST REALTED BENEFITS:

a) Fully benefit from economies of

scale: Lower average cost with
more production.
b) Use foreign factors of
production: Set up where factors
are available at cheap rates.
c) Use foreign raw material: Let us
set up factory where raw material
is available. This is to avoid
many hindrances.
d) Use foreign technology: Advanced
technology can be used & can be
imported to home country of MNC.
e) React to exchange movements: When
the currency is undervalued then
MNC can go for FDI to take
benefit of initial low outlay.
OFFSHORE BANKING:

i) Bank decides
                    to deal with
foreign nationals.
ii) In the non-tariff area.
           

iii) May be free from legislations.

   
IMF NEW LOAN OF USD6.47M: UNDER
STRICT MONITORING & RELEASE IN
INSTALLMENTS

CONDITIONS:

j) GAS tax to be levied at 0.4% of GDP which comes

to Rs.94B in December.
k) Currently, The GDP size is USD235B
l) Subsidy on electricity will be reduced to o% in
three years.
m) For domestic consumers, 30% rise in electricity
tariff from 01 oct, 2013
n) Budget deficit to come down from 8.5% to 3.5% in
3 years.
o) Tax net to be broadened.
p) Tax evasion should be controlled.
q) PIA, Steel Mill & Railway to be improved or
privatized.
r) If any condition is not met, the further release
of installment will be stopped.