INTERNATIONAL MONETARY AND FINANCIAL ENVIRONMENT

MONETARY POLICY
• Monetary policy is an important tools or instrument for the macro economic management of a
INTERNATIONAL country which is supervised and controlled by the central bank based on the related acts and
regulations in close association with finance ministry.
MONETARY AND • Monetary policy is the management of money supply, price, interest rate and foreign exchange
management to achieve macro economic stability in the areas like inflation, consumption,
FINANCIAL SYSTEM growth and liquidity.
• Monetary forces are the instruments of government economic policies used for achieving the
objectives like:
CHAPTER 4
A. Economic and price stability to reduce inflationary pressure and economic deflation.
B. Employment
C. Foreign Exchange
D. Economic Bygrowth of the country
Gupta Bdr. Chhetri 2

MONETARY INSTRUMENTS MONETARY INSTRUMENTS contd…

A. MONEY SUPPLY
Money can be anything that is generally accepted as a means of exchange and that at the same
MONEY time acts as a measure of value and as a store of value.
SUPPLY
Money supply is the total currency in circulation in the market and demand deposit with the
financial institutions.
INTERNATIONAL Money supply;
FOREIGN MONETARY INFLATION (M)= Total currency in circulation (C) + Demand Deposit with Banks (D)
EXCHANGE
SYSTEM AND Money Supply has equi-proportional relation with the change in the price level and inverse
ENVIRONMENT relation with the purchasing power of the money.
If price level increases, money supply also needs to be increased.
CREDIT
AVAILABILITY AND
If there is increase in money supply , purchasing power of the money will decrease.
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INTEREST RATES By Gupta Bdr. Chhetri

MONETARY INSTRUMENTS contd…

B. INFLATION
Inflation is commonly featured by rise in consumer price and depletion of purchasing power of the
money.
Inflation causes rise in demand for an increase in supply of money, increase in government budget,
increase in price of almost everything, increase in interest rate.
Higher the inflation in a country less become the goods and services competitive in the foreign market.
It will discourage the investment also.
The government reduces the rate of taxes, reduces its expenditures and reduces the supply of money in
order to minimize the negative effects of inflation.
Inflation makes expenditure plan more risky.
Inflation rate determines the cost of borrowing as normally interest rate remains higher than the rate of
inflation, therefore if the inflation is high the cost of capital also increases leading to a possibility of
reduction in profit.
Inflation encourages borrowing and discourages lending as money value remains low after a certain
time period. The business persons
By Gupta Bdr. Chhetri therefore try to borrow money and investment on raw materials 5or By Gupta Bdr. Chhetri 6

plants or foreign exchange whose values are likely to increase in an immediate future.

1
 MONETARY INSTRUMENTS contd…
C. Credit availability and interest rates
• Credit availability and interest rates are related to saving and investment propensity of the
people in an economy.
• Higher savings will lead to higher credit availability.
• Higher supply of money in the market leads to lower interest rates and vice versa.
• Higher credit availability leads to lower interest and lower credit availability results in higher
interest rates.
• An IB manager should be able to assess the credit availability and cost of such credit (Interest)
situations of the host country and make strategies for utilization of credit facilities as
economically as possible.

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MONETARY INSTRUMENTS contd… Currencies and exchange rate system

D. Foreign Exchange Foreign exchange can be defined as a system of conversion of a national currency into other foreign currencies or
an exchange of one money for another.
Foreign Exchange can be defined as a system of conversion of a national currency into other Foreign exchange rate is the number of units of one currency needed to buy one unit of another currency. It is the
foreign currencies or an exchange of one money for another. price of one currency expressed in terms of another currency.

Foreign exchange policy is related to regulatory control, balance of payment, external debt,
reserves and market.
Foreign exchange is the payment mechanism for international transactions.
When transactions are affected between two countries having different currency systems
payments are made through an agreed foreign currency.
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The value of the currency is determined depending upon the demand of the currency, current market condition
(Demand and supply) and the economic condition of the country to which a currency belong.
Exchange rates are not only the means of exchange of a national currency into foreign currency but also they
enable conversions, calculations and comparisons of costs and prices of goods and services being traded
internationally.
There are more than 180 countries each country has its own currency with few exceptions like Euro, shared so far
by 27 European countries and CFA Franc of 8 French speaking West African countries.
The most important currencies that are floating in the international markets are US Dollars, EU Euros, British
Pounds, Japanese Yens, Canadian Dollar, Swiss Francs, Australian Dollars, Chinese Yuan and Swedish Krona.
Payments for foreign transactions involve foreign exchange because
(i) There is no common money acceptable to all countries;
9 (ii) Almost all countries depend on foreign transactions as none of them are self-sufficient; and
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(iii) Globalization has enlarged social, economic and political relationships between nations.

Currencies and exchange rate system Reason for Fluctuation in Currency Value
International or cross border transactions of goods, services, intellectual properties (IPs) and In the long In the short
capital investment go above US Dollar 25 Trillion every year. run run
There is no single international money which is acceptable worldwide for such transactions.
Political factors Demand and supply
If the world's nations agree to make a universal currency the foreign exchange, foreign
exchange rates and foreign exchange market systems will be eliminated.
Macro Economic
There are many financial institutions, brokers, investors, and speculators in the world who are Factors
Production, productivity and employment
involved in daily foreign exchange transactions.
In 1971 the par value system of fixed exchange rates and convertibility of the US Dollar into Fiscal and Monetary policies Inflation rates
gold was suspended by the United States. In other words "gold standard" system under which
countries used to define their currencies in term of US Dollar or gold standard was withdrawn,.
After this freely floating currencies fluctuate against each other depending on currency market Balance of Payment
(demand and supply) and the economic conditions of a country to which a currency belong.
By Gupta Bdr. Chhetri 11 By Gupta Bdr. Chhetri 12

Speculation

2
 Currencies and exchange rate system Currencies and exchange rate system
Reasons for Fluctuation in Currency Value
f. Increase in inflation rate - means decrease in a currency's value as purchasing power parity (PPP) of a
1. In the long-run currency also decreases.
(a) Political, g. Favourable BOPs situation - will result in an increase in the value of domestic currency. For example if
there is export surplus (>X <M), or if there is current account surplus the demand
(b) Macro-economic,
for domestic currency remains high and consequently the currency value increases.
(c) Fiscal,
h. Speculations of the leading players in the foreign exchange market - will also result the fluctuation in the
(d) Monetary environmental forces are highly responsible factors in the determination and fluctuation in the value of a value of a currency.
currency.
What an IB manager has to understand on aspect of exchange rate and foreign market?
2. In the medium and short runs
1. How foreign exchange market is operated?
a. Increase in per capita GNI - will result in an increase in currency's value as there will be greater demand for currency
and adversely decrease in per capita GNI will lead to a decrease in a currency's value. 2. What are the terminologies used in the foreign exchange system?
b. Increase in money supply - will result in a decrease in currency's value and decrease in money supply will increase in 3. What are the policy and control system?
currency value. 4. How are the changes in balance of payments, external debts and foreign exchange reserve situations?
c. Increase in nominal interest rate - will decrease in currency's value. 5. How the rates of foreign exchanges are determined?
d. Increase in real interest rate - will increase in currency's value. 6. And how the risks that may arise from the fluctuations in foreign exchange can be managed?
(Real interest rate = Nominal interest rate - expected rate of inflation).
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A manager's prudent decisions in this matters helps to foresee, minimize and avoid losses that might result from
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e. Increase in production, productivity and employment - will increase in currency's value but decrease in these will fluctuations of currency values.
decrease the value of a currency.

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3
FOREIGN EXCHANGE RATE DETERMINATION SYSTEM- THEORITICAL BASES FOREIGN EXCHANGE RATE DETERMINATION SYSTEM- THEORITICAL BASES
1. Equilibrium Foreign Exchange Rate or General Theory of Value: 2. Purchasing power parity theory:
 Foreign exchange rate in the free and competitive market is determined The rate of exchange between two currencies must stand essentially on the quotient of internal
by the interaction two factors: The demand for and the supply of
exchange in a particular country. purchasing powers of these currencies.
The Equilibrium exchange rate is that rate at which demand for foreign Therefore the value of a country’s currency is based on the internal purchasing power of the
exchange and the supply of foreign exchange are equal. country’s currency
The exchange rate between US dollars and Euro can be determined by
demand for and supply of US dollars in Europe by Europeans. The price The equilibrium rate of
of US $ is fixed in Euro.
exchange between the two
The exchange rate between Euro and USS can be determined by demand
for and supply of Euro by Americans in USA. The price of Euro is currencies is determined by
determined in US Dollar.
The demand for foreign exchange comes from increase in imports of
the ratio between the
goods and services, FDI outflows, repatriation of capital and profits by respective home purchasing
foreign investors, etc.
Supply of foreign exchange increase in the country through exports of power of the two countries.
goods and services, inflow of FDI, payments received as foreign aids and
By Gupta Bdr. Chhetri 19 By Gupta Bdr. Chhetri 20
grants, remittance received from citizens working abroad, repatriation of
capital and profits by investors abroad, etc.

FOREIGN EXCHANGE RATE DETERMINATION SYSTEM- THEORITICAL BASES FOREIGN EXCHANGE RATE DETERMINATION SYSTEM- THEORITICAL BASES
3. Balance of Payment Theory: The effects of these variables on the future value of a currency and the reasons for these effects
An unfavorable situation in the balance of payment (BoPs) leads to a fall in value of currency or depreciation in are hypothesized below:
the exchange rate and a favorable situation in the BOPs will strengthen the value of currency or appreciate the rate
of exchange. • GNP increase: will increase in currency's value: with the increase in transactions also.
4. Determinants of Currency Value in the Medium to Long-run • Ms increase: will decrease a currency's value, as there will be high inflation.
In the short run the currency trading and speculation are driven almost entirely by technical considerations. • Md increase: will increase a currency's value.
But in the medium to long run the following are the major determinants of the direction in which currency values • rn increase: will decrease a currency's value, through uncovered interest parity.
move are :
• A country's level of economic activities (GDP,GNP),
• rr Increase: will increase a currency's value, through inflation adjusted yield.
• Money supplies (Ms) and demand (Md), • n Increases: will increase a currency's value, with the increase in productivity and the
• Nominal and real interest rates (r n AND r r),
GNP also increases
• Productivity (n), • ir decrease will decrease in a currency's value because it signals GNP increase and RR
• Inflation rates (i r),
Increase
• Trade and current account
By Gupta Bdr. Chhetri balances (X-M), etc. 21
• X-M increase: will increase a currency's value, since it increases the demand for the22
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currency and decreases the demand for the other country's currency.

Determinants of currency value Foreign Exchange Terminologies

In the Short Run In the Long Run

1. Trading of currencies 1. Level of economic activities

2. Speculation of value of currencies 2. Money supply and demand’
3. Interest rates
4. Productivity
5. Inflation rates
6. Balance of Payment

By Gupta Bdr. Chhetri 23 By Gupta Bdr. Chhetri 24

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 Foreign Exchange Terminologies Foreign Exchange Terminologies
1. Fixed Exchange Rate: 5. Foreign exchange quotation:
It is also known as par value or pegged exchange rate. It is the amount necessary to buy or sell a unit of another currency.
It ensures certainty and confidence on the currency and thereby promotes foreign business, long term investment
etc. Direct Quote (e) is to quote in terms of units of national currency it takes to buy each unit of foreign currency.
Since 1993 Nepal has pegged the currency with India at the rate NRs. 160 = IRs. 100. For example, Nepalese Rupees 115 = US Dollar 1.00.
2. Floating or Flexible Exchange Rate: Indirect Quote is the number of units of foreign currency it takes to pay each unit of home currency.
It is determined by the market conditions of demand for and supply of foreign exchange. For example, US Dollar per Nepalese Rupee, that means US Dollar 0.0087 per Nepalese Rupee one
It is simple to operate as exchange rate moves automatically, and it helps promotion of foreign trades. (Rs.1.00).
However, frequent changes in rates cause uncertainty in business and investment, and risk taking capability of 6. Currency Depreciation:
entrepreneurs are reduced.
3. Instruments of Payments: Currency depreciation is the loss of value of a country's currency with respect to one or more foreign reference
currencies, typically in a floating exchange rate system in which no official currency value is maintained.
Gold, Paper money, bank draft, telegraphic transfer, electronic transfer, cheques, Letter of Credit, traveller’s
cheque, credit cards, etc. If direct quote (e) increases it is called depreciation of currency value.
4. Foreign exchange rate: 7. Currency Appreciation:
The nominal price of one nation’s money in terms of another. Currency appreciation is an increase in the value of the currency with respect to other currency.
For example, it is the number of Nepalese Rupees we pay to buy each US Dollar or say Rs. 115.00 we pay to buy
By Gupta Bdr. Chhetri 25 By Gupta Bdr. Chhetri 26
Us Dollar one.

Foreign Exchange Terminologies Currency Convertibility

8. Currency Devaluation and Revaluation:
• Currency convertibility means free and unrestricted convertibility of a national currency into any foreign
Devaluation is the deliberate lowering of the exchange rate. currency for trade, services or capital flows between the two countries for any kind of transaction.
If the government of Nepal or NRB decides to change the prevailing fixed exchange rate to Rs. 175 for Indian Rs. • Currency convertibility is important in foreign exchange market and international business as it has the
100 then it is devaluated by 9.375%.
advantages in promoting export, import, remittance, investment, reduction of trade deficits etc.
Revaluation is the deliberate rise of the exchange rate. • When a currency is inconvertible, it poses risk and barriers to international trade and investment.
If the government of Nepal or NRB decides to change the prevailing fixed exchange rate to Rs. 150 for Indian Rs.
100 then it is revaluated by 6.25%. • There are two types of currency convertibility:
9. Arbitrage: 1. Current account convertibility:
Arbitrage is the simultaneous buying and selling of foreign currencies in different markets for making profits from - means foreign exchange will be available only for the purpose of payments for export
the differences in exchange rates. and import.
For example, if the exchange rate in Hong Kong is Euro 1.00 = US $ 1.50 and in Dubai or Bahrain Euro 1.00 - US 2. Capital Account convertibility:
$ 1.55. In this situation you can purchase Euro at your bank in Hong Kong and transfer it to your bank account in
Bahrain or Dubai where you can receive US Dollar 1.55 for each Euro. - means flows of portfolio capital, direct investment flows, flows of borrowed funds
and dividends and interest payable on them etc.
The most important challenge is just to find out the rates prevailing in different markets, market trends and make
quick decision on transfer ofBdr.currency
By Gupta Chhetri from one bank in one market to another bank in another market. 27 • Nepal has no regulatory provisions
By Gupta Bdr. Chhetri for free capital account convertibility which has restricted Nepalese
28

form investing in the foreign countries.

Instruments in For-Ex Markets Instruments in For-Ex Markets

The most important instruments used in the foreign exchange market for transactions are Trading at Discount
i. Spot Rate / spot transaction: - When a currency's forward rate quote is weaker than the spot rate then the trade is at discount.
Spot rate is the exchange rate between two currencies for their immediate trade or delivery within 2 business days. - In the above case if the spot rate after 90 days is Rs.110 per each Dollar your forward quote is weaker so the
trade is at discount.
It means transfer become effective within 2 business days it means transaction is settled within two business days
after the deal is finalized or spot transaction is entered into. ii. Swap transactions:
ii. Outright forward transactions/rates: Swap transactions involve an agreement to buy or sell in the spot market, with a simultaneous agreement to reserve
the trade in outright forward market.
Outright forward transactions/rates involve agreement on a price today for settlement at some date in the future.
It is the exchange rate available today from your bank for transactions that you may wish to make at a fixed future When a company anticipates periodic cash flows over an extended period of time, swap is a suitable instrument for
the financial hedging.
date that is delivery in future and normally maturities are 30, 90, 180, or 360 days.
Let us say we enter into an agreement with a bank today to buy US Dollar 100,000 at Nepalese Rupees 120 per US A single swap replaces a set of forward contracts written for every cash flow. This makes a swap similar to a
portfolio of forward contracts with varying maturities.
Dollar at 90 days forward rate. But no money will be changed till 90 days. At the maturity date you will have to
pay Nepalese Rupees 120 for each Dollar and buy US $ 100,000. A swap between two counterparties involves an agreement to buy (swap) foreign currency using home currency at
today's spot exchange rate and a simultaneous agreement to buy back home currency with the same foreign
Trading at Premium
currency at some particular future date and at a specified exchange rate.
- When a currency's forward rate quote is stronger than the spot rate then the trade is at premium.
By Gupta Bdr. Chhetri 29
Thus the parties agree to swap a stream of cash flows with another stream of cash flows.
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- In the above case if the spot rate after 90 days is Rs. 125 per each Dollar your forward rate is stronger so trade is
at premium.

5
 Instruments in For-Ex Markets Instruments in For-Ex Markets
There are two types of Swap: Currency swap and exchange rate swap. v. Foreign Exchange Options:
iii. Currency Swap Currency options have asymmetric payoffs and thus allow the firms to benefit from an opposite
It is a swap of cash flows with fixed or floating interest payments with another foreign cash movement in exchange rates.
flows having fixed or floating interest payments. There are two options: call option and put option.
The terms swap means simultaneous sale of spot currency for the forward purchase of the same A currency call option gives the holder the right but not the obligation to buy an underlying
currency or purchase of spot for the forward sale of the same currency.
currency at a particular predetermined price known as the strike price (in this case the exchange
Let us suppose a U.S. based company needs to acquire Swiss francs and a Swiss-based rate) on or before the maturity date
company needs to acquire US. dollars. These two companies could arrange to swap currencies
by establishing an interest rate, an agreed upon amount and a common maturity date for the A currency put option gives the holder the right but not the obligation to sell an underlying
exchange. currency at a particular predetermined price known as the strike price on or before maturity.
iv. Exchange rate swap: It is possible for companies to incur zero cost in their use of currency options to hedge
It involves swapping exclusively cash flows without the associated interest payments. currency exposure.
Swaps are frequently used by multinational firms because they are flexible in terms of amount
31 32
and maturity and are inexpensive.
By Gupta Bdr. Chhetri By Gupta Bdr. Chhetri

By Gupta Bdr. Chhetri 33 By Gupta Bdr. Chhetri 34

Currency Risk Management Currency Risk Management

There are basically three kinds risks of currency fluctuation risk:
1. Transaction Exposure:
It occurs due to the exchange rate fluctuations between the time when the contract is done and
the time when payment is made.
For example, an order for shirts is placed to Nepal Garment Company by an American
company for payment in 90 days in US $ 100,000 (Rupees 11,000,000 at the prevailing
exchange rate of Rs.110 per US Dollar). By chance if the Dollar value is depreciated in the
market or become weak after 90 days against Nepalese rupees to reach Rs.105 per US Dollar,
Nepal Garment Company will get loss of Rs, 500,000 affecting its cash flow.
If the negotiation was done in terms of Nepali Rupees Nepal Garment Company would not
have to incur any loss.
Such type of transaction risk does not occur in case of domestic business.
By Gupta Bdr. Chhetri 35
The international business always involves payments in foreign exchange and rates of
By Gupta Bdr. Chhetri 36

exchange fluctuate anytime leading to such type of transaction risks to a company.

6
 Currency Risk Management contd… Currency Risk Management contd…
Techniques to hedge transaction risk 3. Money market hedge:
1. Forward market hedge: A company hedge foreign currency fluctuation or exposure by borrowing and lending in the domestic or foreign
money markets.
In forward market hedging foreign currency can be sold or bought forward in order to protect against currency
fluctuation. In the earlier case, Surya Nepal can borrow US Dollar 100,000 in an US bank for a period of 90 days that matches
the payable due dates for sale of garments or shirts.
A company can sell in advance (forward) its foreign currency receivables matching the time forward to the due
date of the receivables. It can invest the same for three months till the payment receivable is due.
For example if Surya Nepal has to receive US $ 100,000 from the sale of garments from US in 90 days it can 4. Swap contract:
hedge the risk of possible depreciation of US Dollar by negotiating with the bank for forward contract (at a
specified forward rate) to sale its receivables of S 100,000 after 90 days.
Swap contract is a simultaneous agreement to buy and sell currencies at specified rates and on a specified date or
sequence of dates so as to hedge the foreign currency fluctuation risk.
2. Currency option hedge:
Foreign currency option means a company has option to buy or sell a specific amount of currency at a specific
time, but the option can be exercised or not.
These hedges are calls - or contracts with an option to buy - for foreign currency payables and puts - or contracts to
sell - for foreign currency receivables.
By Gupta Bdr. Chhetri 37 By Gupta Bdr. Chhetri 38

These are options; if the market is not favourable for a company it can use the contract. But it the market if
favourable a company don't need to use the option.

Measures to reduce transaction exposure risk Currency Risk Management contd…

Swap contract: simultaneous agreement to buy
and sell currencies at specified rates on a specified
date to hedge foreign currency fluctuation risk.
Forward Market Hedge: Currency can be bought
and sold forward in order to protect against
currency fluctuation.
Transaction Exposure Currency Option hedge: It means a company has
option to buy or sell a specific amount of currency at a
specific time.
Money Market Hedge: A company can
hedge the foreign currency fluctuation by
borrowing and lending in the domestic or
foreign market
By Gupta Bdr. Chhetri
2. Translation Exposure:
They are the potential changes in the value of a company’s financial records that arise during the account
consolidation process.
When the financial records are translated into home currency to prepare company’s consolidated financial status,
the exchange rate fluctuations will have substantial impacts on the values of such financial statements.
A company's subsidiaries are working in different countries and they operate business in different currencies, when
the subsidiary's financial records are translated into home currency to prepare company's consolidated financial
status the exchange rate fluctuations will have substantial impacts on the values of such financial statements.
The currency rate fluctuations highly affect the earnings, expenditures and values of the assets or liabilities.
There are two basic approaches: the current rate method and temporal method.
Current rate method: under the current rate method assets and liabilities are translated at the rate in effect the day
the balance sheet is prepared and non-current assets are liabilities translated at their historic exchange rate.
Temporal method monetary items such as cash, receivables, and payables are translated at current exchange
rates.
Normally translation exposures are not hedged.
39 By Gupta Bdr. Chhetri 40

Measure to Currency Risk Management Currency Risk Management

Current Rate Method: Assets and liabilities are
translated at the rate in effect the balance sheet
is prepared and non current assets and liabilities
ae translated at their historic exchange rate
Translation Exposure
Temporal method: Monetary items such as cash,
receivables and payables are translated at current
exchange rates.
By Gupta Bdr. Chhetri 41
3. Economic Exposure:
The impact of currency fluctuation can be seen on trade.
The impacts of currency fluctuations or movements on price, cost, competitive, or cost flow are
concerned with economic exposure of foreign exchange market.
Economic exposure occurs at the operational level.
Its effects are of long term in nature.
For example, when US dollar become weak exports from US become more attractive and imports
become costlier.
It is difficult to take any measures to hedge the economic loss from the risk of currency fluctuation.
According to Sundaram and Black a company can manage economic exposure through
(a) revenue and pricing decision abroad,
(b) cost and sourcing decisions abroad and
By Gupta Bdr. Chhetri 42

(c) competitive strategies.

7
 Measure to Currency Risk Management
Competitive strategy: Fluctuation on
currency affects competition in the
international market. If we can sustain
the competition, we can manage the
currency risk
Cost and Sourcing strategy: Production
Economic is affected by the cost of import. So cost
Exposure of sourcing should be managed to
reduce currency risk
Revenue and Pricing strategy: Pricing of the
product is affected by the currency fluctuation
By Gupta Bdr. Chhetri in the international market, so pricing should be
adjusted as per need to manage currency risk
By Gupta Bdr. Chhetri
Modes of payment in international trade
By Gupta Bdr. Chhetri
Modes of payment in international trade
1. Cash in advance (CIA):
The buyer makes payment first and waits for the seller to forward the goods.
This is not an attractive option for the buyer because it creates cash-flow problems and the goods may
not be sent if payment is made in advance.
2. Letter of Credit (L/C):
It is one of the most secured method of payment.
An LC is a commitment by a bank on behalf of the buyer that payment will be made to the exporter
upon meeting all terms and conditions and presentation of all required documents.
 An L/C is useful when reliable credit information about a foreign buyer is difficult to obtain, but the
exporter is satisfied with the creditworthiness of the buyer's foreign bank.
The L/C can be opened with goods shipment validity of 45, 90 or 180 days.
There are two types of L/C viz. revocable and irrevocable.
43
Revocable is unreliable as it can be revoked at any time by the importer without any prior notice to the
By Gupta Bdr. Chhetri 44
exporter but irrevocable L/C can’t be revoked without the permission of the exporter.
Modes of payment in international trade
3. Documentary collection (DC):
A documentary collection (D/C) is a transaction whereby the exporter entrusts the collection of payment through
importer’s bank with the help of certain documents like Drafts.
Drafts are generally less expensive than L/Cs.
4. Open account (OA):
It is the credit sales facility to the buyer from the seller.
Buyers after purchasing goods can pay within 30 to 90 days.
Obviously, this option is the most advantageous option to the importer in terms of cash flow and cost, but it is
consequently the highest risk option for an exporter.
5. Consignment:
Consignment in international trade is a variation of open account in which payment is sent to the exporter only
after the goods have been sold by the foreign distributor to the end customer.
 An international consignment is transaction based on the contractual arrangement in which the foreign distributor
45 receives, manages andBysells theChhetri
Gupta Bdr. goods for the exporter who retains the title to the goods until they are sold. 46
It is risky to the exporter as the sale of the products are not guaranteed which means the chances of receiving the
payment has no any certainty.
Selecting the Correct Method of Payment
1. The country Risk
- Many developing nations may implement import regulations and exchange control
mechanism that can make the payment in hard currency for maintaining the reserve of
the certain currencies.
2. The buyer’s Bank’s Reputation:
3. The credit worthiness of the buyer
4. The competition
5. The volume and the value of the shipment
- larger the shipment the higher the value/costing and vice-versa.
6. Availability of the methods of payment
47 By Gupta Bdr. Chhetri 48
7. Speed, security and reliability.
8
 Rules for any mode and sea/waterways transport Rules for Any Mode or Mode of Transport
a. EXW/Ex Works (named place):
"Ex Works" means that the seller delivers when it places the goods at the disposal of the buyer at the
seller's premises or at another named place (i.e. works, factory, warehouse, etc.).
The seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods
for export, where such clearance is applicable.
The buyer arranges the pickup of the freight from the supplier's designated ship site, owns the in-transit
freight, and is responsible for clearing the goods through Customs.
The buyer is also responsible for completing all the export documentation..
b. FCA Free Carrier (named place of delivery):
"Free Carrier" means that the seller delivers the goods to the carrier or another person nominated by the
buyer at the seller's premises or another named place.
The parties are well advised to specify as clearly as possible the point within the named place of
delivery, as the risk passes to the buyer at that point.
By Gupta Bdr. Chhetri 49
The seller delivers the goods, cleared for export, at a named place. This can be to a carrier nominated by
By Gupta Bdr. Chhetri 50

the buyer, or to another person nominated by the buyer.

Rules for Any Mode or Mode of Transport contd…
c. CPT Carriage Paid To (named place of destination):
"Carriage Paid To" means that the seller delivers the goods to the carrier or another person nominated
by the seller at an agreed place (if any such place is agreed between parties) and that the seller must
contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.
The Shipper is responsible for origin costs including export clearance and freight costs for carriage to
named place (usually a destination port or airport).
d. CIP Carriage And Insurance Paid To (named place of destination):
"Carriage and Insurance Paid to" means that the seller delivers the goods to the carrier or another person
nominated by the seller at an agreed place (if any such place is agreed between parties) and that the
seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of
destination.
'The seller also contracts for insurance cover against the buyer's risk of loss of or damage to the goods
during the carriage.
The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover.
Should the buyer wish to have more insurance protection, it will need either to agree as much expressly
By Gupta Bdr. Chhetri 51
Rules for Any Mode or Mode of Transport contd…
e. DAT Delivered At Terminal (named terminal at port or place of destination):
"Delivered at Terminal" means that the seller delivers when the goods, once unloaded from the arriving means of
transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination.
"Terminal" includes a place, whether covered or not, such as a warehouse, container yard or road, rail or air cargo
terminal.
The seller bears all costs and risks involved in bringing the goods to and unloading them at the terminal at the
named port or place of destination.
f. DAP Delivered At Place (named place of destination):
"Delivered at Place" means that the seller delivers when the goods are placed at the disposal of the buyer on the
arriving means of transport ready for unloading at the named place of destination.
The seller bears all risks involved in bringing the goods to the named place.
Duties are not paid by the seller under this term.
Insurance is also not covered under this term.
By Gupta Bdr. Chhetri 52

with the seller or to make its own extra insurance arrangements

Rules for Any Mode or Mode of Transport contd… Rules for Sea and Inland Waterway Transport
g. DDP Delivered Duty Paid (named place of destination): The four rules defined by Incoterms 2010 for international trade where transportation is entirely conducted by water
are as per the below.
"Delivered Duty Paid" means that the seller delivers the goods when the goods are placed at the disposal of the
buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. h. FAS Free Alongside Ship (named port of shipment):
The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an "Free Alongside Ship" means that the seller delivers when the goods are placed alongside the vessel nominated by
obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and the buyer at the named port of shipment.
to carry out all customs formalities.
The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all
The seller is not responsible for unloading. costs from that moment onwards.
The FAS term requires the seller to clear the goods for export, which is a reversal from previous Incoterms
versions that required the buyer to arrange for export clearance.
i. FOB Free On Board (named port of shipment):
"Free On Board" means that the seller delivers the goods on board the vessel nominated by the buyer at the named
port of shipment or procures the goods already so delivered.
The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all
By Gupta Bdr. Chhetri 53
costs from that momentBy Gupta
onwards.
Bdr. Chhetri 54

9
 Rules for Sea and Inland Waterway Transport Rules for Sea and Inland Waterway Transport
The seller must instruct the buyer the details of the vessel and the port where the goods are to be loaded, and there k. CIF Cost, Insurance and Freight (named port of destination):
is no reference to, or provision for, the use of a carrier or forwarder.
Exactly the same as CFR except that the seller must in addition procure and pay for the insurance.
The passing of risk occurs when the goods are in buyer account. "Cost, Insurance and Freight" means that the seller delivers the goods on board the vessel or procures the goods
The buyer arranges for the vessel and the shipper has to load the goods and the named vessel at the named port of already so delivered.
shipment with the dates stipulated in the contract of sale as informed by the buyer.
The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of
j. CFR Cost and Freight (named port of destination): destination.
"Cost and Freight" means that the seller delivers the goods on board the vessel or procures the goods already so The seller also contracts for insurance cover against the buyer's risk of loss of or damage to the goods during the
delivered. carriage.
The risk of loss of or damage to the goods passes when the goods are on board the vessel. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover.
Seller must pay the costs and freight to bring the goods to the port of destination. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the
seller or to make its own extra insurance arrangements."
However, risk is transferred to the buyer once the goods are loaded on the vessel.
Insurance for the goods is NOT included.
By Gupta Bdr. Chhetri 55 By Gupta Bdr. Chhetri 56

By Gupta Bdr. Chhetri 57 By Gupta Bdr. Chhetri 58

International Financial Environment and system

• Global Capital Market and Financial Institutions
• Euro Currency Markets: Euro currency is any currency banked outside of its country of origin where the
customers can use the foreign currency to deposit or to take loan.

• International Bond Market:

• Foreign Bonds: are sold outside of the country of the borrower but in the currency of the country of issue
• Euro Bonds: are sold in the countries other than the one in whose currency of the bond is denominated.

• Equity Securities and stock exchange Markets (SEM):Companies can raise new
capital by listing their shares on a stock exchange markets at home and foreign countries.

• International Financial Institutions:

• Cost of Borrowing-Interest Rates:
By Gupta Bdr. Chhetri 59
• Higher the interest rates lower is the attractiveness of a country for a foreigner to invest
By Gupta Bdr. Chhetri 60

10
 International Financial Institutions

A. World Bank (WB)

• The World Bank was established on July 1, 1944 by a conference of 44 governments held in
Bretton Woods, New Hampshire, USA.
• Initially it was popular with the name of International Bank for Reconstruction and
Development (IBRD) as it was established with the primary objective to reconstruct the Western
European countries that were devastated and destructed by the World War II.
• The World Bank (WB) is an international financial institution owned by 184 developed and
developing member countries.
• WB lends at little or no interest at all to the member countries unable to raise the fund for
carrying out developmental activities. The borrowing nation need not start to repayment before a
By Gupta Bdr. Chhetri 61 decade. By Gupta Bdr. Chhetri 62

International Financial Institutions contd… International Financial Institutions contd…

There are Five associated Institutions of the WB-Called the World Bank Group, they are:
Mission of WB: 1. IBRD: International Bank for Reconstruction and Development:
i. Introduce poverty free world and improve the standard of living of people in the - Assists developing countries by providing low interest loans, interest free credits and development
developing world, supports.
ii. Fight poverty with passion and professionalism for lasting results, and 2. IDA: International Development Association:
iii. Help people help themselves and their environment by providing resources, sharing - Provides interest free loans and other services to poor countries to help poverty reduction.
knowledge, building capacity and forging partnerships in the public and private sectors. 3. IFC: International Finance Corporation:
Objective: - Supports growth in developing countries by financing and providing advices and technical
- Provide financial assistance to reduce poverty through promotion of sustainable growth in assistance to private sector investment and private-public partnership ventures.
developing countries. 4. MIGA: Multilateral Investment Guarantee Agency:
Challenges: - Provides information on investment opportunities and provides guarantee to foreign investors
against loss.
(i) The World population is estimated to double within the next five decades, and 5. ICISD: International Centre for settlement of Investment Disputes:
(ii) Resources of the rich or developed countries have to be mobilized for the overall63
By Gupta Bdr. Chhetri - Facilitates investment
By Gupta disputes.
Bdr. Chhetri 64
economic growth of poor countries.

International Financial Institutions contd…

The World Bank's functions are focused on:
1. Investment in people (Human Development):
- Health care, nutrition, childcare, primary education, social security, pension system, etc.;
2. Agricultural development and environment protection:
- For poverty reduction in partnership with other regional and international agencies;
3. Private sector growth:
- Creating investment friendly climate in member countries;
4. Promote economic policy reforms:
- By technical advices;
5. Fighting corruption for good governance:
- Through better regulations and transparency;
6. Infrastructure development; and
7. Others, including resolving conflicts, combating HIV/AIDS and leveraging investment.
By Gupta Bdr. Chhetri 65 By Gupta Bdr. Chhetri 66

11
 International Financial Institutions contd… International Financial Institutions contd…
Fund Generation of WB B. International Monetary Fund (IMF)
IBRD lending to developing countries is primarily financed by selling AAA-rated bonds in the
world's financial markets.
While IBRD earns a small margin on this lending, the greater proportion of its income comes
from lending out its own capital.
IDA is the world's largest source of interest-free loans and grant assistance to the poorest
countries.
IDA's funds are replenished every three years by 40 donor countries.
Additional funds are regenerated through repayments of loan principal on 35-to-40-year, no-
interest loans, which are then available for re-lending.
IDA accounts for more than 40% of WB lending.
By Gupta Bdr. Chhetri 67 By Gupta Bdr. Chhetri 68

International Financial Institutions contd… B. International Monetary Fund (IMF) contd…

B. International Monetary Fund (IMF)
The International Monetary Fund (IMF) was conceived in July 1944, when representatives of
45 governments meeting in the town of Bretton Woods, New Hampshire, in the United States,
agreed on a framework for international economic and monetary cooperation.
They believed that such a framework was necessary to avoid a repetition of the disastrous
economic policies that had led to the Great Depression of the 1930s.
The IMF came into existence in December 1945, as a UN specialized agency when its first 29
member countries signed its Articles of Agreement.
Headquartered in Washington, D.C., it is governed by its global membership of 184 countries.
It is the central institution of the international monetary system—the system of international
payments and exchange rates among national currencies - that enables the members and their
business communities and citizens to undertake global business among them.
By Gupta Bdr. Chhetri 69 By Gupta Bdr. Chhetri 70

B. International Monetary Fund (IMF) contd… Functions of IMF

1. Advice on policies and global oversight:
 Country surveillance
 Global surveillance
 Regional surveillance
2. Lending in hard currency to resolve the balance of payment and to ensure sustainable growth.
The purposes of lending are
(i) to resolve the balance of payments problems of a member,
(ii) to ease the adjustment to bring its spending in line with its income so as to correct its balance of payments
problem, and
(iii) to support policies, including structural reforms, that will ensure sustainable growth.
The IMF's lending falls into three different categories:
a. Stand-By Arrangements
- It is designed to deal mainly with short-term balance of payments problems.
- The IMF's largest loans fall into this category.
By Gupta Bdr. Chhetri 71 - In 1997, the IMF introduced
By Gupta Bdr. Chhetri the Supplemental Reserve Facility, under which it can quickly provide 72large
loans with very short maturities to countries going through a capital account crisis.

12
 Functions of IMF contd…
b. Extended Fund Facility
- To help countries address balance of payments difficulties related
partly to structural problems that may take longer to correct than
macroeconomic imbalances.
c. Under its Poverty Reduction and Growth Facility, the IMF provides
concessional loans —loans with an annual interest rate of 0.5 percent and
a maturity of 10 years—to its poorest member countries.
IMF also provides Emergency Assistance to countries coping with
balance of payments problems caused by natural disasters or military
conflicts. By Gupta Bdr. Chhetri
Functions of IMF contd…
3. Strengthening the Monetary and financial system
The IMF collaborates with the World Bank, the regional development banks, the World Trade
Organization, United Nations agencies, and other international bodies for strengthening the
world monetary and financial system, poverty reduction, social policies, and assessments of
member countries' financial sectors, development of standards and codes, and improvement of
the quality, availability, and coverage of data on external debt.
The IMF is also a member of the Financial Stability Forum, which brings together government
officials responsible for financial stability in the major international financial centers,
international regulatory and supervisory bodies, committees of central bank experts, and
international financial institutions.
It also works with standard-setting bodies such as the Basel Committee on Banking
Supervision and the International Association of Insurance Supervisors.
73 By Gupta Bdr. Chhetri 74

Functions of IMF contd… B. International Monetary Fund (IMF) contd…

4. Technical assistance in the field of monetary and financial policies.
Banking system supervision, and restructuring;
- Foreign management and operations, clearing settlement systems for payments, and
structure development of central banks.
 Fiscal policy and management:
- Tax and customs policies and administration, budget formulation, expenditure management,
design of social safety nets, and management of domestic and foreign debt.
 Compilation, management, dissemination, and improvement of statistical data and
Economic and financial legislations.

By Gupta Bdr. Chhetri 75 By Gupta Bdr. Chhetri 76

International Financial Institutions contd…

C. Asian Development Bank (ADB)
• ADB is a multilateral financial institution established in 1966 as a regional development bank
to promote economic and social development in Asia and Pacific regions.
• It is driven by an inspiration and dedication to improve people’s life by targeting wise
investment which can alleviate poverty.
• It has subscribed capital of US$ 162.8 Billion.
• It has 67 member nations with almost 2 billion population who live on less than $2 a day
resulting into two-third of worlds poor people.
• ADB raises fund through bond issues on the world’s capital market along with the contribution
from member nations and earnings for lending.

By Gupta Bdr. Chhetri 77 By Gupta Bdr. Chhetri 78

13
ADB's Strategy 2020
• The Long-Term Strategic Framework of the Asian Development Bank 2008-2020 reaffirms both ADB's
vision of an Asia and Pacific free of poverty and its mission to help developing member countries
improve the living conditions and quality of life of their people.
• Strategy 2020 promotes three complementary agendas on inclusive economic growth, environmentally
sustainable growth, and regional integration.
• To achieve these goals, Strategy 2020 identifies drivers of change that will be stressed in all its
operations - developing the private sector, encouraging good governance, supporting gender equity,
helping developing countries gain knowledge, and expanding partnerships with other development
institutions, the private sector, and with community-based organizations.
• Under Strategy 2020 selectivity and focus would be achieved by concentrating 80% of ADB's operations
in five core operational areas: infrastructure, environment, regional cooperation and integration (RCI),
finance sector development, and education.
• Support for other areas of operations, such as health, agriculture, and disaster and emergency assistance,
By Gupta Bdr. Chhetri 79 By Gupta Bdr. Chhetri 80
is to be selectively provided.

International Financial Institutions contd… Asian Infrastructure Investment Bank (AIIB)

D. Asian Infrastructure Investment Bank (AIIB) • AIIB is a multilateral development bank established in January 2016 and with the objective of
improving social and economic outcomes in Asia.
• Its headquarter is in Beijing and has 93 approved members in the world till 2019.
• It aims at investing in sustainable infrastructure and productive sectors in Asia and beyond for
better connectivity to people, service and markets.
• An administrative budget of $ 149.9 million has been approved to support the realization of
AIIB’s institutional priorities and work programs as outlined in the Business Plan 2019.

By Gupta Bdr. Chhetri 81 By Gupta Bdr. Chhetri 82

14