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International Financial Management
International Financial Management
Foreign exchange markets and exchange rates are quite sensitive to movements
in interest rates. This is because financial markets were becoming more closely
linked due to
(i) Growing interest in international investment;
(ii) Elimination or constraints on mobility of capital to a large extent;
(iii) More rapid means of communications.
B) Explanation of factors that influence exchange rates: The following are the factors which
influence exchange rates:
i) Focus on the Demand-Supply Model
The demand factor: At the most primary level, a change in the price of a currency will
occur because of more or less demand for it.
The supply side factor: A basic economic principle of supply says that a currency's value
will change with the rise and fall of the levels of supply.
ii) Long term vs. short term
A time period of a year or more signifies a long-term supply and demand. Short-term
is generally thirty days or less than that. The currency prices in both the
time periods can be affected by the same factors.
Q4. Explain the concept of Depository receipts. Write down the difference between American
Depository Receipts (ADR) and Global Depository Receipts (GDR) also mention the issues
involved in ADR/GDR.
A) Explanation of Depository Receipts: Depository receipts are securities that are traded in
foreign currency. These receipts are issued by the foreign bank or institution which acts
as a depository of shares issued by a domestic company. Depository receipts can be
classified into sponsored and unsponsored ones.
1. Sponsored depository receipts: It is created by a single depository which is appointed
by the issuing company under rules provided in a deposit agreement. The issues of
sponsored ADR/GDR require prior approval of the Ministry of Finance.
2. Unsponsored depository receipts: These are issued without any formal agreement
between the issuing company and the depository, although the issuing company must
consent to the creation of the ADR/GDR facility.
B) Differences between ADR and GDR: The following are the main points of difference
between ADRs and GDRs.
(i) The ADRs are issued by the companies to raise funds from the US markets and
GDRs are issued by the companies to raise funds from international markets.
(ii) Even though both are negotiable instruments, ADRs are negotiable in the US
markets only and GDRs are negotiable in international markets.
(iii) The GDRs can be used as a substitute of ADRs, but ADRs cannot be substituted
for GDRs.
(iv) Companies prefer to issue GDRs in comparison to ADRs due to wider scope to
access the international markets by GDRs.
(v) ADRs are found in three forms from level-I to level-III, but GDRs are already
called in high preference receipt of level-II and level-III.
C) Issues involved in ADR/GDR:
A) Measuring and explanation of Online Trading: Online trading is one of the crucial
financial services provided by financial institutions and merchant bankers. Online
trading is completed through Bombay Stock Exchange (BSE) and National Stock
Exchange (NSE). Online trading leads to smoother and quicker transaction on these
exchanges. In 1995, in a span of fifty days BSE was converted into an electronic trading
system from an open outcry floor trading exchange system. In the new electronic trading
system, there is an automated screen-based trading platform which is known as BOLT
(i.e. BSE online trading system) and at present it has an ability of eight million orders a
day. This system enables an investor to trade from any part of the world. This system is
the world’s first centralized exchange-based internet trading system called
BSEWEBx.co.in.
Both NSE and BSE have switched over to computerized online trading system from
open outcry trading system. BSE has BOLT (BSE Online Trading) and NSE has NEAT
(National Exchange Automated Trading). With these highly efficient online trading
systems, efficiency and transparency of BSE and NSE have increased dramatically.
With the online trading systems it is very easy to do online trading with just a PC and an
internet connection. All an investor needs to do is open a demat account and a trading
account with a depository participant or DP. DP connects a depository to investors.
Depository is the individual who stores shares in an electronic form. In India, there are
two depositories, NSDL and CDSL.