UNIT-4

1. Define balance of payments. Why would it be useful to examine a

country's balance of payments data? Explain how a country can run
an overall deficit or surplus on its balance of payments.

 Define balance of payments

The balance of payment is the statement that files all the transactions
between the entities, government anatomies, or individuals of one
country to another for a given period of time. All the transaction details
are mentioned in the statement, giving the authority a clear vision of the
flow of funds.

After all, if the items are included in the statement, then the inflow and
the outflow of the fund should match. For a country, the balance of
payment specifies whether the country has an excess or shortage of
funds. It gives an indication of whether the country’s export is more than
its import or vice versa.

Balance of Payments (BOP) refers to a systematic record of all economic

transactions between residents of a country and the rest of the world
during a specific time period, typically a year. It provides a
comprehensive overview of a country's economic interactions with other
countries, encompassing both international trade in goods and services
and financial transactions.

 Why would it be useful to examine a country's balance of payments

data
Examining a country's balance of payments data is useful for several
reasons:

1. Economic Performance Assessment: The balance of payments

provides insights into a country's economic performance and its
interactions with the global economy. By analyzing the components of
the current account, such as trade in goods and services, income from
investments, and transfers, one can assess the country's
competitiveness, export/import patterns, and overall economic activity.
2. Trade and Competitiveness Analysis: The balance of payments data
helps evaluate a country's trade position and competitiveness. By
examining the trade balance (exports minus imports), one can
determine whether the country has a trade surplus (exports exceed
imports) or a trade deficit (imports exceed exports). This information is
crucial for understanding a country's export capabilities, import
dependency, and competitiveness in the global market.

3. Currency Stability Evaluation: The balance of payments provides

insights into a country's currency stability. By examining the financial
account, which includes capital flows and changes in reserves, one can
assess the demand for a country's currency and its ability to maintain
stable exchange rates. A healthy balance of payments suggests
confidence in the country's currency, while imbalances may indicate
potential vulnerabilities or the need for policy adjustments.

4. External Debt and Financing Monitoring: The balance of payments

data helps monitor a country's external debt and financing needs. By
analyzing the financial account and capital flows, one can assess the
inflow and outflow of foreign investment, the accumulation or depletion
of foreign reserves, and the country's reliance on external financing. This
information is crucial for assessing a country's ability to meet its debt
obligations and manage its external financial risks.

5. Policy Formulation Support: The balance of payments data serves as a

foundation for policy formulation. Governments and policymakers use
this data to assess the impact of economic policies, design strategies to
promote export growth, manage currency fluctuations, attract foreign
investment, and maintain overall economic stability. By understanding
the country's balance of payments position, policymakers can make
informed decisions to address potential imbalances and support
sustainable economic growth.

6. International Comparisons and Benchmarking: The balance of

payments data allows for international comparisons and benchmarking.
By comparing a country's balance of payments with those of other
 countries, policymakers and economists can gain insights into relative
economic performance, identify best practices, and assess the country's
position in the global economy.

In summary, examining a country's balance of payments data is crucial

for understanding its economic performance, trade position, currency
stability, external financing needs, and policy formulation. It provides a
comprehensive overview of a country's economic interactions with the
rest of the world and assists in identifying areas of strength,
vulnerability, and potential policy adjustments.

 Explain how a country can run an overall deficit or surplus on its

balance of payments.
A country can run an overall deficit or surplus on its balance of
payments through the equation:

Current Account Balance + Capital Account Balance + Financial Account

Balance = 0

1. Deficit on the Balance of Payments:

If a country's total payments in the current account, capital account, and
financial account exceed its total receipts, the country will have a deficit
on its balance of payments. Mathematically, this can be represented as:
Current Account Balance + Capital Account Balance + Financial Account
Balance < 0

A deficit on the balance of payments implies that the country is

spending more on imports of goods and services, income payments,
and transfers than it is receiving from exports, income receipts, and
transfers. This deficit can be financed by borrowing from foreign sources
or utilizing its foreign exchange reserves.

2. Surplus on the Balance of Payments:

If a country's total receipts in the current account, capital account, and
financial account exceed its total payments, the country will have a
surplus on its balance of payments. Mathematically, this can be
represented as:
 Current Account Balance + Capital Account Balance + Financial Account
Balance > 0

A surplus on the balance of payments indicates that the country is

earning more from exports, income receipts, and transfers than it is
spending on imports, income payments, and transfers. This surplus
leads to an increase in the country's foreign exchange reserves or can
be used to repay foreign debts.

It's important to note that the balance of payments equation is an

accounting identity and is always balanced. If one component shows a
deficit, another component must show a surplus to maintain the
equation's equality. Thus, a deficit or surplus in one account is offset by
a surplus or deficit in other accounts to ensure the equation holds true.

Overall, a country can run an overall deficit or surplus on its balance of

payments based on the net inflows or outflows of funds in the current
account, capital account, and financial account. These imbalances reflect
the country's economic transactions with the rest of the world and have
implications for the country's economic stability, currency value, and
external financing needs.

2. How is international financial management different from domestic

financial management? Discuss the major trends that have
prevailed in international business during the cost two decades
with special reference to India?

 How is international financial management different from domestic

financial management

International Financial
Aspect Management Domestic Financial Management

Scope Deals with financial Focuses on financial decisions and

decisions and operations operations within the boundaries of a
involving cross-border single country and its domestic currency.
transactions and multiple
 International Financial
Aspect Management Domestic Financial Management

currencies.

Needs to manage
exposure to exchange rate
fluctuations due to Typically not concerned with exchange
Exchange international transactions rate risk as transactions are conducted in
Rate Risk and currency conversions. the domestic currency.

Must consider various

country-specific factors
such as foreign
Country- regulations, taxation, Primarily focused on understanding and
Specific political stability, and complying with domestic regulations and
Factors cultural differences. factors affecting the local market.

Must navigate and comply

Legal and with different legal and
Regulatory regulatory frameworks Operates within the legal and regulatory
Framework across countries. framework of a single country.

Considers foreign
investment opportunities,
cross-border acquisitions,
Capital and evaluating projects Focuses on evaluating domestic
Budgeting with different currencies investment projects within the domestic
Decisions and country-specific risks. market.

May involve sourcing

funds from international
markets, managing foreign
exchange exposure in
Financing financing decisions, and Primarily relies on domestic sources of
and Capital considering international financing, such as local banks, equity
Structure debt and equity offerings. markets, and domestic debt instruments.

Taxation Needs to understand and Primarily concerned with domestic

comply with tax laws and taxation laws and regulations.
 International Financial
Aspect Management Domestic Financial Management

regulations in multiple
countries, including tax
implications of repatriating
profits and cross-border
transactions.

Must assess and manage

risks associated with
economic fluctuations,
political instability, and
Economic changes in international Focuses on managing risks associated
and Political trade policies across with the domestic economy and political
Risks different countries. environment.

Requires compliance with

international accounting
standards and potentially
different reporting
Financial requirements across Adheres to domestic accounting
Reporting countries. standards and reporting requirements.

 Discuss the major trends that have prevailed in international

business during the cost two decades with special reference to India

Over the past two decades, international business has witnessed significant
trends and transformations globally. India, as a major player in the global
economy, has experienced its own unique set of trends and developments.
Here are some major trends that have prevailed in international business, with
special reference to India:

1. Globalization and Trade Liberalization: The increasing integration of

economies and liberalization of trade have been prominent trends. India
has actively participated in trade liberalization initiatives, such as joining
the World Trade Organization (WTO) in 1995 and signing various free
trade agreements (FTAs) and regional trade agreements. This has
 opened up opportunities for Indian businesses to expand their
international presence and access new markets.

2. Growth of Emerging Markets: Emerging markets, including India, have

emerged as significant players in the global economy. Rapid economic
growth, demographic advantages, and market potential have attracted
foreign investments and facilitated India's integration into global supply
chains. Indian companies have also expanded their operations into other
emerging markets, forming strategic partnerships and investments.

3. Technological Advancements: The digital revolution and

advancements in technology have revolutionized international business.
E-commerce, digital platforms, and cloud computing have enabled
seamless cross-border transactions and access to global markets. Indian
companies, particularly in the IT and software sectors, have capitalized
on these technologies, becoming major players in global technology
services and software development.

4. Services Sector Dominance: India has experienced a shift towards a

services-dominated economy. The services sector, including IT and IT-
enabled services, business process outsourcing (BPO), financial services,
and healthcare, has witnessed significant growth. Indian companies have
leveraged their expertise in these areas, offering services to global
clients and establishing India as a preferred outsourcing destination.

5. Foreign Direct Investment (FDI) Inflows: India has seen an increase in

FDI inflows over the past two decades. Liberalization measures,
economic reforms, and government initiatives to improve the ease of
doing business have attracted foreign investors to various sectors such
as manufacturing, retail, e-commerce, and infrastructure. This has
contributed to the expansion and internationalization of Indian
businesses.
6. Sustainable and Responsible Business Practices: There has been a
growing emphasis on sustainability and responsible business practices
in international business. Stakeholders, including consumers, investors,
and governments, are increasingly concerned about environmental and
social impacts. Indian companies have adopted sustainable practices,
implemented corporate social responsibility initiatives, and aligned with
global sustainability standards to meet stakeholder expectations.

7. Regional Integration: India has actively participated in regional

integration initiatives. It is a member of regional organizations such as
the South Asian Association for Regional Cooperation (SAARC) and the
Bay of Bengal Initiative for Multi-Sectoral Technical and Economic
Cooperation (BIMSTEC). Additionally, India has promoted regional
economic cooperation through initiatives like the International North-
South Transport Corridor (INSTC) and connectivity projects such as the
Chabahar Port in Iran.

8. Shift towards Knowledge-Based Industries: There has been a shift

towards knowledge-based industries driven by innovation and
intellectual property. India, with its strong base in science, technology,
and research, has witnessed the growth of knowledge-based sectors
such as pharmaceuticals, biotechnology, software development, and
research and development (R&D). Indian companies have focused on
innovation and intellectual property protection to stay competitive in
the global market.

These trends have shaped the international business landscape, and

India has embraced these changes to leverage its strengths and
enhance its global presence. The government has implemented policies
and reforms to facilitate international trade, attract investments, and
promote entrepreneurship. Indian companies have expanded their
footprint globally, entered into strategic alliances, and capitalized on
emerging opportunities. Overall, India's participation in international
 business has been characterized by adaptability, technological
advancements, and a focus on knowledge-based industries.

3. What do you mean by Foreign Exchange Market? State the factors

which may influence and control such markets?

 What do you mean by Foreign Exchange Market

The foreign exchange market, also known as the forex market or FX

market, is a global decentralized marketplace where currencies are
traded. It is the largest financial market in the world, with daily trading
volumes exceeding trillions of dollars. The primary purpose of the
foreign exchange market is to facilitate the exchange of one currency for
another, enabling international trade and investment.

Participants in the foreign exchange market include central banks,

commercial banks, investment banks, hedge funds, corporations, retail
traders, and individual investors. These participants engage in buying
and selling different currencies to facilitate international trade,
investment, speculation, and hedging activities.

 State the factors which may influence and control such markets
Several factors influence and control the foreign exchange market.
These factors can broadly be categorized into two types:
macroeconomic factors and market sentiment factors. Here are some
key factors that can influence and control the foreign exchange market:

1. Macroeconomic Factors:
a. Interest Rates: Divergence in interest rates between countries affects
currency values. Higher interest rates tend to attract foreign
investors, increasing demand for the currency and potentially
strengthening its value.

b. Inflation Rates: Differentials in inflation rates impact currency values.

Countries with lower inflation rates generally have stronger currencies as
their purchasing power is relatively higher.
c. Economic Indicators: Economic data such as GDP growth,
employment figures, trade balances, and consumer price indices can
affect currency values. Positive economic indicators often strengthen a
currency.

d. Central Bank Policies: Monetary policy decisions, including changes

in interest rates, quantitative easing programs, and intervention in the
foreign exchange market, can significantly impact currency values.
e. Political Stability and Geopolitical Events: Political stability or
instability, geopolitical tensions, and major political events can influence
market sentiment and currency values.

2. Market Sentiment Factors:

a. Investor Confidence: Investor sentiment and confidence in a

country's economic prospects can drive currency movements.
Positive sentiment attracts investment and strengthens the currency,
while negative sentiment can lead to capital outflows and currency
depreciation.

b. Speculation and Market Participants: Speculators, institutional

investors, hedge funds, and other market participants can influence
currency movements through their trading activities and market
sentiment.

c. Risk Appetite: Market participants' willingness to take on risk can

affect currency values. During times of market uncertainty or risk
aversion, safe-haven currencies may strengthen.
d. Technical Factors: Technical analysis, including chart patterns, support
and resistance levels, and other technical indicators, can influence short-
term trading decisions and contribute to currency movements.

It is important to note that these factors do not operate in isolation and

can interact with each other, amplifying or offsetting their effects.
Additionally, unexpected events and shocks, such as natural disasters,
political crises, or policy surprises, can introduce volatility and disrupt
established trends in the foreign exchange market.
 Market participants closely monitor these factors and assess their
potential impact on currency values. Economic data releases, central
bank announcements, political developments, and shifts in market
sentiment can trigger significant movements in exchange rates. Traders,
investors, and policymakers use this information to make informed
decisions, manage risks, and formulate strategies in the foreign
exchange market.

4. Write an essay on International Monetary System

5. Write a note on Balance of Payment.
6. What is International Banking? Discuss the factors leading to the
growth of International Banking.

 What is International Banking

International banking refers to the banking activities conducted by
banks across national borders. It involves providing financial services
and conducting transactions that facilitate international trade, cross-
border investments, and global financial flows. International banks play
a crucial role in supporting the global economy by providing a wide
range of services to individuals, businesses, and governments engaged
in international transactions.

International banking is a type of banking that provides financial

services across different countries. It can serve both individuals and
businesses that need to transact or invest in foreign currencies or
markets. Some of the features and benefits of international banking are:

 Flexibility: You can deal in multiple currencies, such as euro, dollar,

pounds, sterling, and rupee.
 Accessibility: You can access your money and use banking services
anywhere in the world.
 International Bank Transfers/Transactions: You can make and
receive payments in foreign currencies, and avail of benefits like
overdraft facilities, loans, deposits, etc.
 Accounts Maintenance: You can maintain records of your global
accounts and transactions with the help of international banks.
 Some of the international banks that operate in India are Citibank,
HSBC, Standard Chartered, Deutsche Bank, DBS, Bank of America,
Barclays, etc.2 However, not all of them offer retail customer services or
allow non-Indian residents to open bank accounts locally. You may need
to check the specific services and requirements of each bank before
choosing one.

 Discuss the factors leading to the growth of International Banking.

The growth of international banking can be attributed to several factors
that have shaped the global financial landscape. These factors include:

1. Globalization: The process of globalization has led to increased

interconnectedness and integration of economies. As businesses
expand their operations globally, the need for international banking
services has grown. International banks provide the infrastructure
and expertise to facilitate cross-border transactions, foreign
investments, and global financial flows.

2. Trade Liberalization: The liberalization of trade has facilitated the

growth of international banking. Reduced trade barriers and the
expansion of global supply chains have increased the demand for
trade finance services offered by international banks. These services
include letters of credit, export financing, and trade risk mitigation
tools, enabling businesses to engage in international trade with
confidence.

3. Foreign Direct Investment (FDI): The surge in foreign direct

investment has been a significant driver of international banking
growth. As businesses seek to expand their operations into foreign
markets, they rely on international banks for financing, advisory
services, and support in navigating the complexities of foreign
investment regulations and capital flows.

4. Technological Advancements: Technological advancements,

particularly in information technology and telecommunications, have
revolutionized the international banking industry. The advent of
 electronic banking, online platforms, and digital payment systems
has facilitated seamless cross-border transactions and enhanced
accessibility to international banking services. These technological
advancements have also increased the efficiency and speed of global
financial operations.

5. Financial Market Integration: The integration of global financial

markets has fueled the growth of international banking. The ability to
raise capital internationally, access diverse sources of funding, and
invest across borders has become increasingly important for
businesses and investors. International banks provide the
infrastructure and expertise to facilitate cross-border capital flows
and investment opportunities.

6. Regulatory and Legal Frameworks: The establishment of

international regulatory and legal frameworks has supported the
growth of international banking. Institutions like the Basel Committee
on Banking Supervision and the International Monetary Fund have
developed standards and guidelines to ensure the stability and
soundness of the global financial system. These frameworks provide
a level of confidence and assurance to participants in international
banking activities.

7. Financial Innovation: Financial innovation has played a role in

expanding international banking services. The development of new
financial instruments, such as derivatives, securitization, and
structured products, has allowed banks to offer a broader range of
services and cater to the evolving needs of clients engaged in
international business.

8. Global Monetary Policies: The monetary policies of central banks,

particularly those of major economies, influence international
banking activities. Changes in interest rates, exchange rate policies,
and monetary stimulus measures impact global financial markets and
drive the demand for international banking services.
 These factors have created a conducive environment for the growth of
international banking, enabling banks to expand their reach, diversify
their operations, and provide a comprehensive suite of services to
clients engaged in cross-border transactions and global financial
activities.

7. Discuss the structure and functions of International Banks.

The structure and functions of international banks can vary depending
on their size, scope of operations, and geographical reach. However,
they generally share some common characteristics. Here is an overview
of the typical structure and functions of international banks:

Structure of International Banks:

a. Head Office: International banks have a head office or headquarters

where key strategic decisions, risk management, and overall supervision
of operations take place. The head office coordinates the activities of
different branches, subsidiaries, and representative offices.

b. Branches: International banks establish branches in different

countries to provide a range of banking services to local clients.
Branches operate under the same legal entity as the head office,
following the bank's policies and guidelines.

c. Subsidiaries: International banks may set up subsidiaries in foreign

countries, which are legally independent entities but are owned by the
parent bank. Subsidiaries operate under the regulatory framework of the
host country and offer a wide range of banking services.

d. Representative Offices: Representative offices are typically

established in foreign countries to conduct market research, promote
the bank's services, and facilitate communication with local clients.
Representative offices usually have limited banking functions and do not
engage in direct banking activities.

Functions of International Banks:

a. Corporate and Investment Banking: International banks offer a
range of services to corporate clients, including financing solutions,
mergers and acquisitions advisory, capital raising, and treasury services.
They provide specialized services for multinational corporations,
assisting them in managing their global operations, capital structure,
and international cash flows.

b. Trade Finance: International banks play a critical role in facilitating

global trade by providing trade finance services. They issue letters of
credit, provide export financing, offer guarantees, and manage trade-
related risks for importers and exporters. Trade finance enables
businesses to mitigate payment risks and optimize cash flow in
international transactions.

c. Foreign Exchange and Treasury Services: International banks offer

foreign exchange services, allowing clients to convert currencies and
manage currency risks associated with international transactions. They
provide hedging instruments, such as forward contracts, options, and
swaps, to protect against adverse exchange rate movements. Treasury
services help clients manage liquidity, cash flow, and risk associated with
their international operations.

d. Retail and Consumer Banking: International banks may offer retail

and consumer banking services in certain countries, providing financial
products and services to individual customers. These services include
savings and current accounts, loans, credit cards, and wealth
management solutions.

e. Asset Management: Many international banks have asset

management divisions that offer investment management services to
institutional and individual clients. They provide portfolio management,
advisory services, and investment products tailored to meet the specific
needs of clients across different markets.

f. Private Banking: International banks often have private banking

divisions that cater to high-net-worth individuals and families. Private
 banking services include personalized investment management, estate
planning, wealth preservation, and tailored financial solutions.

g. Risk Management and Compliance: International banks have

dedicated risk management and compliance functions to ensure
adherence to regulations, manage financial risks, and maintain the
bank's overall stability. This includes monitoring credit risk, market risk,
operational risk, and compliance with anti-money laundering and know-
your-customer regulations.

h. International Financial Services: International banks provide a range

of financial services, including fund management, insurance, capital
market services, custody services, and international payment solutions.
They act as intermediaries in global financial markets, connecting
investors, issuers, and counterparties across borders.

The structure and functions of international banks are designed to serve

the needs of clients engaged in cross-border transactions and global
financial activities. They provide comprehensive banking services,
financial expertise, and global connectivity, contributing to the
facilitation of international trade, investments, and economic growth.

8. WRITE A SHORT NOTES ON IMS

IMS, or the International Monetary System, refers to the framework of
rules, institutions, and procedures that govern international monetary
relations among countries. It provides a structure for conducting global
financial transactions, determining exchange rates, and facilitating
international trade and investment. The IMS plays a crucial role in
promoting economic stability, facilitating cross-border transactions, and
fostering cooperation among countries.

Key aspects and features of the International Monetary System include:

1. Exchange Rate Regimes: The IMS encompasses different

exchange rate regimes, which determine how exchange rates
between currencies are determined. These regimes can be fixed,
 floating, or managed, and they impact the stability of exchange
rates, international trade flows, and capital movements.

2. International Monetary Fund (IMF): The IMF is a vital institution

within the IMS. It serves as a global financial organization that
provides financial assistance, policy advice, and technical
assistance to its member countries. The IMF also plays a role in
surveillance of global economic and financial developments,
promotes monetary cooperation, and helps countries resolve
balance of payments issues.

3. Convertibility: The IMS facilitates currency convertibility, allowing

currencies to be freely exchanged for other currencies or goods
and services. Convertibility enables international trade and
investment, as it allows for the easy transfer of funds between
countries.

4. Balance of Payments: The IMS addresses balance of payments

imbalances among countries. It provides mechanisms for
countries to finance deficits or surpluses, manage their
international reserves, and maintain stability in their external
accounts.

5. International Capital Flows: The IMS governs international

capital flows, including foreign direct investment (FDI), portfolio
investment, and loans. It helps regulate the flow of capital
between countries, ensuring stability and minimizing risks
associated with excessive capital inflows or outflows.

6. International Monetary Cooperation: The IMS promotes

cooperation among countries to address global economic
challenges, such as financial crises, currency volatility, and
imbalances. Cooperation can involve coordination of monetary
policies, exchange rate management, and financial assistance to
countries in need.
 7. Global Economic Governance: The IMS contributes to global
economic governance by providing a platform for countries to
discuss and coordinate policies that impact international
monetary relations. Forums such as the Group of 20 (G20) and the
IMF's Annual Meetings provide opportunities for policymakers to
discuss global economic issues and work towards consensus on
key policy matters.

The IMS has evolved over time, with various stages and changes
reflecting shifts in economic and political dynamics. Major milestones
include the Bretton Woods system established in 1944, the transition to
flexible exchange rates in the 1970s, and ongoing discussions on
currency arrangements and reform of the IMS.

Overall, the International Monetary System is a framework that enables

countries to manage their international monetary relations, facilitates
international trade and investment, and promotes economic stability. It
relies on cooperation, institutions, and agreed-upon rules to ensure
smooth functioning of the global financial system and support
sustainable economic growth.