SOA UNIVERSITY

NAME : GUNJAN DAS

REGESTRATION NO : 2161301135

Subject: INTERNATIONAL FINANCE

ASSIGNMENT
CASE STUDY

SUBMMITED TO: RAMAKRISHNA SIR

1. Explain in details the challenges. Of International Financial

Management in emerging economy.
1. Challenge of Protection of Natural Resources

When there is more international finance, its growth will

affect the natural resources. For example, after increasing
the number of banks in India, ACs are used at large scale
due to this, there is increasing the temperature of India. Who
is responsible for this. Surely international banks are
responsible who are opening the branches in India. Every
increase in the number of bank branch means, 5 new
installation of ACs which increases open environmental
temperature. So, this is big challenge of international
finance. It has to reduce by planting the tree and not to use
ACs in office.

2. Terrorism

Terrorism is also main challenge of International Finance. If

any country will increase the terrorism in other country, its
international finance will affected. Motherland is first and
then, there is any international finance. India should ban all
international finance and business relating to the countries
which are promoting terrorism in India. Other countries
which have the problem of terrorism, should strict ban on it if
it has to increase its international finance with other
countries.

3. Culture

International finance has also challenge of culture of each

country. India is veg. country. So, McDonnell and other non-
veg. country should ban to produce the non-veg. in India.

4. Follow the Political Policies and Law of Nation

 If business people have to grow international finance in any
country, they have to make their policy according to the law
and political policy of same country.

5. International Currencies

International finance also affects from international

currencies.You have some foreign currency if you have to
deal with foreign country. At the time of dealing, you know
what is the current market rate of forex. If your own currency
is low value, you should wait for business, otherwise, your
own capital will decrease at fast rate.

2. What is Exchange rate? Explain it the details of Exchange rate

mechanism

An exchange rate is a rate at which one currency will be

exchanged for another currency and affects trade and the
movement of money between countries.

Exchange rates are impacted by both the domestic currency

value and the foreign currency value. In July 2022, the
exchange rate from U.S. Dollars to the Euro was 1.02,
meaning it takes $1.02 to buy €1.

Understanding Exchange Rates

The exchange rate between two currencies is commonly determined
by the economic activity, market interest rates, gross domestic
product, and unemployment rate in each of the countries.
Commonly called market exchange rates, they are set in the global
financial marketplace, where banks and other financial institutions
trade currencies around the clock based on these factors. Changes
in rates can occur hourly or daily with small changes or in large
incremental shifts.

An exchange rate is commonly quoted using an acronym for the

national currency it represents. For example, the acronym USD
represents the U.S. dollar, while EUR represents the euro. To quote
the currency pair for the dollar and the euro, it would be EUR/USD.
In the case of the Japanese yen, it's USD/JPY, or dollar to yen. An
exchange rate of 100 means that 1 dollar equals 100 yen.

How Exchange Rates Fluctuate

Exchange rates can be free-floating or fixed. A free-floating
exchange rate rises and falls due to changes in the foreign
exchange market. A fixed exchange rate is pegged to the value of
another currency. The Hong Kong dollar is pegged to the U.S. dollar
in a range of 7.75 to 7.85.3 This means the value of the Hong Kong
dollar to the U.S. dollar will remain within this range.

Exchange rates have what is called a spot rate, or cash value,

which is the current market value. Alternatively, an exchange rate
may have a forward value, which is based on expectations for the
currency to rise or fall versus its spot price.

Forward rate values may fluctuate due to changes in expectations

for future interest rates in one country versus another. If traders
speculate that the eurozone will ease monetary policy versus the
U.S., they may buy the dollar versus the euro, resulting in a
downward trend in the value of the euro.
Exchange Rate Example
That is, the exchange rate is the price of a country's currency in
terms of another currency. For example, if the exchange rate
between the U.S. dollar (USD) and the Japanese yen (JPY) is 120
yen per dollar, one U.S. dollar can be exchanged for 120 yen in
foreign currency markets.
Case Study. 3. Explain briefly the interest rate parity and
Purchasing power parity.

Interest rate parity (IRP) is a theory according to which the interest

rate differential between two countries is equal to the differential
between the forward exchange rate and the spot exchange rate.
Understanding Interest Rate Parity (IRP)
Interest rate parity (IRP) plays an essential role in foreign exchange
markets by connecting interest rates, spot exchange rates, and
foreign exchange rates.

IRP is the fundamental equation that governs the relationship

between interest rates and currency exchange rates. The basic
premise of IRP is that hedged returns from investing in different
currencies should be the same, regardless of their interest rates.

IRP is the concept of no-arbitrage in the foreign exchange markets

(the simultaneous purchase and sale of an asset to profit from a
difference in the price). Investors cannot lock in the current
exchange rate in one currency for a lower price and then purchase
another currency from a country offering a higher interest rate.

For all forms of the equation: St(a/b) = The Spot Rate (In Currency A
Per Currency B) ST(a/b) = Expected Spot Rate at time T (In Currency
A Per Currency B)

Interest rate parity (IRP) is a theory according to which the interest

rate differential between two countries is equal to the differential
between the forward exchange rate and the spot exchange rate.

 Purchasing power parity (PPP) is a popular metric used by

macroeconomic analysts that compares different countries'
currencies through a "basket of goods" approach.
 Purchasing power parity (PPP) allows for economists to
compare economic productivity and standards of living
between countries.
 Some countries adjust their gross domestic product (GDP)
figures to reflect PPP.
Calculating Purchasing Power Parity
The relative version of PPP is calculated with the following formula:

S=P2P1where:S= Exchange rate of currency 1 to currency 2P1

= Cost of good X in currency 1P2= Cost of good X in currency 2

Drawbacks of Purchasing Power Parity

Since 1986, The Economist has playfully tracked the price of
McDonald's Corp.’s (MCD) Big Mac hamburger across many
countries. Their study results in the famed "Big Mac Index". In
"Burgernomics"—a prominent 2003 paper that explores the Big Mac
Index and PPP—authors Michael R. Pakko and Patricia S. Pollard
cited the following factors to explain why the purchasing power
parity theory is not a good reflection of reality.6

Transport Costs
Goods that are unavailable locally must be imported, resulting in
transport costs. These costs include not only fuel but import duties
as well. Imported goods will consequently sell at a relatively higher
price than do identical locally sourced goods.7

Tax Differences
Government sales taxes such as the value-added tax (VAT) can
spike prices in one country, relative to another.7

Government Intervention
Tariffs can dramatically augment the price of imported goods, where
the same products in other countries will be comparatively
cheaper.7

Non-Traded Services
The Big Mac's price factors input costs that are not traded. These
factors include such items as insurance, utility costs, and labor
costs. Therefore, those expenses are unlikely to be at parity
internationally.7
Market Competition
Goods might be deliberately priced higher in a country. In some
cases, higher prices are because a company may have
a competitive advantage over other sellers. The company may have
a monopoly or be part of a cartel of companies that manipulate
prices, keeping them artificially high.8

The Bottom Line

While it's not a perfect measurement metric, purchase power parity
does allow for the possibility of comparing pricing between countries
that have differing currencies.