UNIT – 2

What is an Exchange Rate?

The a currency's exchange rate is defined as "the rate at which one country's currency may be
converted into another." It may fluctuate daily with the changing market forces of supply and
demand of currencies from one country to another. For these reasons; when sending or receiving
money internationally, it is important to understand how exchange rates are determined.

This article examines some of the leading factors that influence the variations and fluctuations in
exchange rates and explains the reasons behind their volatility, helping you learn the best time to
send money abroad. When you are ready to send money internationally online, you can use
our online comparison tool to find the best exchange rates today and lowest fees for your desired
transfer.

Factors Affecting Currency Exchange Rate

How is an exchange rate determined? There are several factors that contribute to a currency's
exchange rate. Here are some of the top factors that can affect an exchange rate:
1. Inflation Rates
Changes in market inflation cause changes in currency exchange rates. A country with a lower
inflation rate than another's will see an appreciation in the value of its currency. The prices of
goods and services increase at a slower rate where the inflation is low. A country with a
consistently lower inflation rate exhibits a rising currency value while a country with higher
inflation typically sees depreciation in its currency and is usually accompanied by higher interest
rates.

2. Interest Rates
How do interest rates affect money exchange rates? Changes in interest rate affect currency value
and dollar exchange rate. Forex rates, interest rates, and inflation are all correlated. Increases in
interest rates cause a country's currency to appreciate because higher interest rates provide higher
rates to lenders, thereby attracting more foreign capital, which causes a rise in exchange rates.

3. Country's Current Account/Balance of Payments

A country's current account reflects balance of trade and earnings on foreign investment. It
consists of total number of transactions including its exports, imports, debt, etc. A deficit in
current account due to spending more of its currency on importing products than it is earning
through sale of exports causes depreciation. Balance of payments fluctuates exchange rate of its
domestic currency.

4. Government Debt
Government debt is public debt or national debt owned by the central government. A country
with government debt is less likely to acquire foreign capital, leading to inflation. Foreign
investors will sell their bonds in the open market if the market predicts government debt within a
certain country. As a result, a decrease in the value of its exchange rate will follow.

5. Terms of Trade
A trade deficit also can cause exchange rates to change. Related to current accounts and balance
of payments, the terms of trade is the ratio of export prices to import prices. A country's terms of
trade improves if its exports prices rise at a greater rate than its imports prices. This results in
higher revenue, which causes a higher demand for the country's currency and an increase in its
currency's value. This results in an appreciation of exchange rate.

6. Political Stability & Performance

A country's political state and economic performance can affect its currency strength. A country
with less risk for political turmoil is more attractive to foreign investors, as a result, drawing
investment away from other countries with more political and economic stability. Increase in
foreign capital, in turn, leads to an appreciation in the value of its domestic currency. A country
with sound financial and trade policy does not give any room for uncertainty in value of its
currency. But, a country prone to political confusions may see a depreciation in exchange rates.
7. Recession
When a country experiences a recession, its interest rates are likely to fall, decreasing its chances
to acquire foreign capital. As a result, its currency weakens in comparison to that of other
countries, therefore lowering the exchange rate.

8. Speculation
If a country's currency value is expected to rise, investors will demand more of that currency in
order to make a profit in the near future. As a result, the value of the currency will rise due to the
increase in demand. With this increase in currency value comes a rise in the exchange rate as
well.

Top Exchange Rates Searched

These are the most common exchange rates that those who are looking to transfer or send money
are searching:

1. Dollar Peso Exchange Rate

2. Dollar Rupee Exchange Rate
3. Euro Exchange Rate
4. US Canada Exchange Rate

Exchange Rate Calculator

How do you convert exchange rates? When sending money overseas, you can use our compare
page to understand the current market exchange rate when sending money overseas.

Conclusion
All of these factors determine the foreign exchange rate fluctuations. If you send or receive
money frequently, being up-to-date on these factors will help you better evaluate the optimal
time for international money transfer. To avoid any potential falls in currency exchange rates, opt
for a locked-in exchange rate service, which will guarantee that your currency is exchanged at
the same rate despite any factors that influence an unfavorable fluctuation.

What are time-series forecasting models?

Time-series forecasting is the process of using past data to predict future events. Time-series
forecasting models are statistical models used to make predictions about future values based on
historical data points arranged in chronological order. These models analyze trends and patterns
in the data and extrapolate them to make predictions about future values. These models are
commonly used in business and finance to predict sales or stock prices, and in science to predict
weather patterns. Time-series forecasting models is a special class of predictive modeling that is
used to forecast future events.
There are many different types of time-series forecasting models, each with its own strengths and
weaknesses. Understanding the differences between these models is crucial for anyone looking
to use most appropriate modeling technique for the time-series data. In this blog post, we will
discuss the most common time-series forecasting machine learning models such as the following,
and provide examples of how they can be used to predict future events.
 Autoregressive (AR) model
 Moving average (MA) model
 Autoregressive moving average (ARMA) model
 Autoregressive integrated moving average (ARIMA) model
 Seasonal autoregressive integrated moving average (SARIMA) model
 Vector autoregressive (VAR) model
 Vector error correction (VECM) model

International Financing

International Financing is also known as International Macroeconomics as it deals with finance on a

global level. There are various sources for organizations to raise funds. To raise funds
internationally is one of them. With economies and the operations of the business
organizations going global, Indian companies have an access to funds in the global capital market.

International finance helps organizations engage in cross-border transactions with foreign

business partners, such as customers, investors, suppliers and lenders. Various international sources
from where funds may be generated include the following.

(i) Commercial Banks

Global commercial banks all over provide loans in foreign currency to companies. They are crucial
in financing non-trade international operations. The different types of loans and services provided
by banks vary from country to country. One example of this is Standard Chartered emerged as a
major source of foreign currency loans to the Indian industry. It is the most used source of
international financing.

(ii) International Agencies and Development Banks

Many development banks and international agencies have come forth over the years for the purpose
of international financing. These bodies are set up by the Governments of developed countries of
the world at national, regional and international levels for funding various projects. The more
industrious among them include International Finance Corporation (IFC), EXIM Bank and Asian
Development Bank.

(iii) International Capital Markets

Emerging organizations including multinational companies depend upon fairly large loans in rupees
as well as in foreign currency. The financial instruments used for this purpose are:
(a) American Depository Receipts (ADR’s)
This a tool often used for international financing. As the name suggests, depository receipts issued
by a company in the USA are known as American Depository Receipts. ADRs can be bought and
sold in American markets like regular stocks. It is similar to a GDR except that it can be issued only
to American citizens and can be listed and traded on a stock exchange of the United States of
America.

(b) Global Depository Receipts (GDR’s)

In the Indian context, a GDR is an instrument issued abroad by an Indian company to raise funds in
some foreign currency and is listed and traded on a foreign stock exchange. A holder of GDR can at
any time convert it into the number of shares it represents.

The holders of GDRs do not carry any voting rights but only dividends and capital appreciation.
Many renowned Indian companies such as Infosys, Reliance, Wipro, and ICICI have
raised money through issue of GDRs.

(c) Foreign Currency Convertible Bonds (FCCB’s)

Foreign currency convertible bonds are equity-linked debt securities that are to be converted into
equity or depository receipts after a specific period. A holder of FCCB has the option of either
converting them into equity shares at a predetermined price or exchange rate or retaining the bonds.
The FCCB’s are issued in a foreign currency and carry a fixed interest rate which is lower than the
rate of any other similar nonconvertible debt instrument.

FCCB’s resemble convertible debentures issued in India. It is true that businesses need funds but the
funds required in business are of different types — long term, short term, fixed and fluctuating. That
is the reason why business firms resort to different types of sources for raising funds.

Choice Of The Source Of Funds

Short-term borrowings offer the benefit of reduced cost due to the reduction of idle capital, but
long-term borrowings are considered a necessity on many grounds. Equally, equity capital has a role
to play in the scheme for raising funds in the corporate sector.

It is recommended to use combinations of sources as no source of funds is devoid of limitations,

instead of relying only on a single source. The factors that affect the choice of source of finance are
discussed below:
(i) Cost
There are two types of cost, the cost of obtaining of funds and cost of utilizing the funds. Both these
costs should be considered while deciding about the source of funds that will be used by an
organization.

(ii) Financial Strength

In the choice of source of funds, business should be in a good financial position to be able to repay
the amount and interest on the borrowed amount. When the earnings of the organization are not
stable, fixed charged funds like preference shares and debentures should be carefully selected as
these add to the financial strain on the organization.

(iii) A form of Organization and Reputation

Type of business organization and reputation in the market influences the choice of a source for
raising money. A partnership firm, for example, cannot raise money by issue of equity shares as
these can be issued only by a joint stock company.

(iv) Purpose and Duration

Business needs to plan according to the time period for which the funds are required. A short-term
need can be met through borrowing funds at a low rate of interest through trade credit, commercial
paper, etc. For long-term finance, sources such as the issue of shares and debentures required. Also,
the purpose for which funds have required the need to be considered so that the source is matched
with the user.

(v) Risk Involved

Business evaluates each of the source of finance in terms of the risk involved while issuing them.
For example, there is the least risk in equity as the share capital has to be repaid only at the time of
winding up and dividends need not be paid if no profits are available. Whereas, a loan has a
repayment schedule for both the principal and the interest. The interest is required to be paid
irrespective of the firm earning a profit or going through loss.

(vi) Control over Management

A particular source of the fund may affect the control and power of the owners on the management
of a firm. The issue of equity shares may mean a dilution of the control. For example, as equity
shareholders enjoy voting rights, financial institutions may take control of the assets or impose
conditions as part of the loan agreement.
(vii) Creditworthiness
The reliability of business on particular sources may affect its creditworthiness in the market. For
example, issue of secured debentures may affect the interest of unsecured creditors of the company
and may adversely affect their willingness to extend further loans to the company.

(viii) Flexibility
Another important aspect affecting the choice of finance is the flexibility and ease of obtaining
funds. Restrictive provisions, detailed investigation, and documentation in case of borrowings from
banks and financial institutions, for example, may be the reason that business organizations may not
prefer it if other options are readily available.

(ix) Tax benefits

Various sources may also be weighed in terms of their tax benefits. For example, while the dividend
on preference shares is not tax-deductible, interest paid on debentures and loan is tax deductible and
may, therefore, be preferred by organizations seeking tax advantage.

Fixed vs Floating Bonds

Fixed rate bonds are a type of debt instrument that guarantees a certain amount of money. These
bonds have a fixed maturity date and interest rate for the duration of the bond. As a result, fixed-
rate bonds provide investors with a consistent stream of income, referred to as coupon payments.
On the other hand, floating-rate bonds have a variable coupon rate that depends on the
benchmark rate (repo rate or reverse repo rate). Thus, the coupon rates are reset at regular
intervals.

Basis of Fixed Rate Bonds Floating Rate Bonds

Difference
Meaning Fixed rate bonds have a fixed interest rate For floating rate bonds, the interest rate
throughout the bond tenure. fluctuates during the bond tenure.
How Do Fixed-rate bonds are issued for a fixed tenure. Floating rate bonds have floating
They Furthermore, the bond issuer fixed the coupon coupons that move in line with the
Work? rate. Bondholders will receive interest annually, market rates. As a result, if interest rates
semi-annually, or monthly after the fixed-rate rise, the coupon rates also rise, but the
bonds are issued. The bondholder will get the face bond prices remain the same. As a
value when the bond matures (principal amount). result, the bondholder receives higher
returns.
Coupon You will get a predetermined coupon payment Throughout the bond tenure, you
Payments throughout the bond tenure, either monthly, half- receive a variable coupon rate. In other
yearly, or yearly. words, when the interest rate rises, so do
the coupon rates, and vice versa. Hence
the coupon payments vary.
Maturity Bondholders are well aware of the maturity Due to the changing interest rates, it is
Amount amount. In other words, before purchasing the difficult for you to predict the final
bond, you will know the amount you will be maturity amount.
receiving at the end of the bond tenure and also
the coupon payments.
Risk Fixed-rate bonds are extremely vulnerable to Floating rate bonds are not as sensitive
interest rate movements. as fixed-rate bonds to interest rates
movements.
Suitability Fixed rate bonds are suitable for investors who Floating rate bonds are suitable for
wish to know how much they receive at the end of investors who wish to take advantage of
the bond tenure. Furthermore, the regular fixed the changing interest rate movements.
coupon payments help them plan their financial
goals in a better way.
LOAN FINANCING (SYNDICATE LOANS)

A syndicated loan is a loan extended by a group of financial institutions (a loan syndicate) to a

single borrower. Syndicates often include both banks and non-bank financial institutions, such as
collateralized loan obligation structures (CLOs), insurance companies, pension funds, or mutual
funds. After origination, shares of syndicated loans can be traded in the secondary market,
changing the composition of the loan syndicate. Syndicated loans are included in the financial
accounts of the individual lenders, but are not identified specifically as syndicated loans.

Euro Notes

Euro Notes are like promissory notes issued by companies for obtaining short term funds. They
emerged in early 1980s with growing securitization in the international financial market.
They are denominated in any currency other than the currency of the country where they are
issued. They represent low cost funding route. Documentation facilities are the minimum. They
can be easily tailored to suit the requirements of different kinds of borrowers. Investors too
prefer them in view of short maturity.

When the issuer plans to issue Euro notes, it hires the services of facility agents or the lead
arranger. On the advice of the lead arranger, it issues the notes, gets them underwritten and sells
them through the placement agents. After the selling period is over the underwriter buys the
unsold issues.

Medium-term Euro Notes

Medium term Euro notes are just an extension of short term Euro notes as they fill the gap
existing in the maturity structure of international financial market instruments. They are a
compromise between short term Euro notes and long term Euro bonds as their maturity ranges
between one year and five to seven years.
Euro Commercial Papers

Another attractive form of short term debt instrument that emerged during mid – 1980s came to
be known as Euro commercial paper (ECP). It is a promissory note like the short term Euro
notes although it is different from Euro notes in some ways. It is not underwritten, while the
Euro notes are underwritten. The reason is that ECP is issued only by those companies that
possess a high degree of rating. Again, the ECP route for raising funds is normally investor
driven, while the Euro notes is said to be borrower driven.

Global Depositary Receipts (GDRs)

A global depositary receipt is one type of depositary receipt. Like its name, it can be offered in
several foreign countries globally. Depositary receipts only offered in a single foreign market
will typically be titled by that market’s name, such as American depositary receipts, discussed
below, and EDRs, LDRs, or IDRs.

American Depositary Receipts (ADRs)

American depositary receipts are shares issued in the U.S. from a foreign company through a
depositary bank intermediary. ADRs are only available in the United States. In general, a
foreign company will work with a U.S. depositary bank as the intermediary for issuing and
managing the shares.3

ADRs can be found on many exchanges in the U.S. including the New York Stock Exchange
and Nasdaq as well as over-the-counter (OTC). Foreign companies and their depositary bank
intermediaries must comply with all U.S. laws for issuing ADRs. This makes ADRs subject to
U.S. securities laws as well as the rules of exchanges.

KEY TAKEAWAYS

 Shares of foreign stocks offered in foreign markets are comprehensively known as

depositary receipts.
 ADRs and GDRs are two types of depositary receipts with other types including
European depositary receipts (EDRs), Luxembourg depositary receipts (LDRs), and
Indian depository receipts (IDRs).
 ADRs are shares of a single foreign company issued in the U.S.
 GDRs are shares of a single foreign company issued in more than one country as part of
a GDR program.
 Companies can issue depositary receipts in individual countries or they may choose to
issue their shares in multiple foreign markets at once through a GDR.

What Is a Loan Agreement?

A loan agreement, sometimes used interchangeably with terms like note payable, term loan,
IOU, or promissory note, is a binding contract between a borrower and a lender that formalizes
the loan process and details the terms and schedule associated with repayment. Depending on the
purpose of the loan and the amount of money being borrowed, loan agreements can range from
relatively simple letters that provide basic details about how long a borrower has to repay the
loan and what interest will be charged, to more elaborate documents, such as mortgage
agreements.

Why Is a Loan Agreement Important?

Loan agreements are beneficial for borrowers and lenders for many reasons. Namely, this legally
binding agreement protects both of their interests if one party fails to honor the agreement. Aside
from that, a loan agreement helps a lender because it:

 Legally enforces a borrower's promise to pay back the money owed

 Allows recourse if the borrower defaults on the loan or fails to make a payment

Borrowers benefit from loan agreements because these documents provide them with a clear
record of the loan details, like the interest rate, allowing them to:

 Keep the lender's agreement to the payment terms for their records
 Keep track of their payments

Important Legal Terms Found in Loan Agreements

Some of the key terms you should know and understand are:

 Entire agreement clause: This clause means that the final agreement supersedes any
previous written or oral agreements that were made during negotiations.
 Severability clause: The severability clause states that the contract's terms function
independently, meaning the other conditions are still enforceable even if part of the
contract is deemed unenforceable.
 Choice of law: This determines which state or jurisdiction's laws will govern the
agreement.