Question No. 3 - IBO - 05 - International Marketing Logistics - Master of Commerce (M.Com)

Solutions to Assignments 

IBO - 05 - International Marketing Logistics

Master of Commerce (M.Com) - 1st Year

Question No. 3 - Briefly comment on the following: 
a) “Objectives and policies for functioning of the supply chain are usually in conflict both within and across operational units.” 

Supply Chain Management refers to handling of the entire production flow of goods and services to maximize quality, customer experience and profitability. It involves right from the raw components to delivering the final product to customers.  In this article we shall take a look at the objectives and functions of Supply Chain Management.

Objectives of Supply Chain Management

We have discussed some of the important objectives of SCM below.

1. To maximize overall value generated

The higher the SCM profitability, the higher is the success for supply chain. The Supply chain profitability is the difference between the amount paid by the customer to purchase a product and the cost incurred by an organization to produce and supply the product to the customer.

2. Cost quality improvement

This is another essential objective of SCM. It looks to achieve cost quality balance and optimization.

3. To look for sources of Cost and Revenue

Customer is the only source of revenue. Therefore there should be appropriate management of the flow of information, product or funds. It is a key to the success of supply chain.

4. Shortening the time to order

SCM aims to reduce the time required for ordering and fulfilling the same.

5. Delivery optimization

The SCM aims to meet the demands of the customer for guaranteed delivery of high quality and low cost with less lead time.

6. Demand fulfilment

Managing the demand and supply is a key yet challenging task for a company or management personnel. Its objective is to fulfil customer demand through efficient resources.

7. Flexibility

SCM aims for flexibility. A Well managed supply chain provides flexible planning and better control mechanism.

8. Better Distribution

SCM aims to ensure improved distribution. It can maximize the distribution side efficiency. Marketer or distributor can achieve optimized level distribution by using all resources that are available properly.

9. Cost Reduction

It’s another objective of SCM to reduce the system wide cost of a company to meet service level requirement.

Functions of Supply Chain Management

The functions of SCM include the following:

1. Purchasing

The first function of SCM is purchasing. During manufacturing process, raw materials are needed. It is essential that these materials are procured and delivered on time. Then only the production can begin. In order to make this happen, coordination with suppliers and delivery companies is needed to avoid delays.

2. Operations

Forecasting and demand planning is needed before materials are procured as the demand market shall dictate how many units are to be produced and how much material is needed for production.  This function in SCM is vital as organizations accurately forecast demand to avoid having too little or too much inventory that would lead to revenue losses. Therefore, forecasting and demand planning should be tied in with inventory management, production and shipping.

3. Logistics

Logistics is a part of SCM that co-ordinates all planning aspects, purchasing, production, and transportation aspects to ensure that products reach the end consumer without hindrances. It is essential to have co-ordination with multiple departments so that products are quickly shipped to customers. 

4. Resource Management

Resource management[1] ensures that right resources are allocated to the right activities and that too in an optimized way. It ensures that optimized production schedule is created to maximize operations efficiency.

5. Information workflow

Sharing information and distribution is that what keeps all other functions of supply chain management on track. If this information workflow and communication is poor, it can hurt the entire chain.

b) “The world economic situation and the world trade are very closely related.” 

The world economic situation and the world trade are very closely related and

consequently whatever developments, whether positive or negative, take place in the former have

a direct impact on the latter. Hence, with the changing economic trends, it is very likely that the

movement of trade will also be affected. This results in the creation of cyclical fluctuation in the

demand and supply for goods in the world trade. Since the ships carry a sizeable quantity of goods

traffic in world trade, the fluctuations will have an impact on the movement of seaborne trade.

The global economic recovery that began in 1993 continued till 1996, when the world output grew

by 2.8% over 1995, However, growth belied the hopes that the world economy would enter a new

era of sustained growth not in excess of 3% which was expected to be achieved by 1997, Growth

in the developed market economies sf the world, as a whole, was slower than what had been

expected.

The growth of world merchandise trade slowed down sharply in 1996, it was 4.6% as against 10%

in the preceding two years, falling more than what had been expected at the beginning of the year.

The divergence between trade and output growth, which had been increasing since 1990, was

greatly reduced in 1996.

An important factor leasing to a slowdown in the world trade was a sharp deceleration of import

growth in developed countries, which account for about two-thirds of the world import demand from

11% in 1994 to only 5.2% in 1996.

The industrial production of the OECD countries is also a fundamental indicator for the global

maritime transport sector. The diverging growth rates in OECD countries industrial production and

world seaborne trade in the period 1991 -93 was mainly attributed to the decrease in production of

crude steel, iron ore, cooking coal, petroleum products, nonferrous metals and fertilizer, and to the

decline in the prices of these commodities. However, increasing trade in other manufacturers

maintained the growth of world seaborne trade.

c) “Shippers-Ship owners consultation arrangements in India leave much scope for Improvement.” 

In India, All India Shipper's Council, regional level shipper's associations, and concerned Government department like the Ministry of Commerce regularly consult shippers. The US Government does the same through provisions of FMC( Federal Maritime Commission), established under the Shipping Act, 1916.

Currently, there are five association at the regional level for resolving shipper's problems:

a.) Eastern India Shipper Association (EISA), headquartered in Kolkata.

b.) Western India Shipper Association(WISA), headquartered in Mumbai.

c.) Southern India Shipper Association(SISA), headquartered in Chennai.

d.) South Western India Shipper Association(SWISA), headquartered in Cochin.

e.) North India Shipper Association(NISA), headquartered in New Delhi.

Shippers-shipowners consultation in India leaves much scope for improvement. The statement is true considering the following aspects:

1.) The consulting arrangements have been found to have inadequate secretarial staff and meeting space. These associations largely depending chambers for meeting space and staff.

2.) There is a lack of adequate resources to organize seminars, conferences, workshops for creating awareness.

3.) Not all shippers represent themselves in the association, hence negotiations and decisions represent only a part of the consultation.

4.) The association has no representative on the Board of trustees of ports.

5.) They lack the expertise to present the cases scientifically and objectively.

6.) At times, Shippers and Chamber of Commerce approach authorities directly. This hampers the growth and repute of associations.

d) The rate of return from warehousing business is low and the gestation period is rather long. 

The Rate of Return (ROR) from warehousing business is low and the gestation period is rather long. Warehousing has several strategic decisions like the number of warehouses, warehouse capacity, their location, and type of ownership. These involve heavy investments.

A warehouse is involved in various functions like assortment, storage of goods, etc. These start generating revenue over and above the investment made, as the warehouse change for consignment held, as per the time period.

The cost of ownership of a warehouse involves initial cost and financing the same. Similarly, owing more warehouses would mean better customer service but involves ownership and maintenance costs. By making the product available at the place where it is needed and when it is needed, the distribution system adds both time and place utilities to the product. For achieving this, the company must critically decide on the number of warehouses and the type of transport system to be used for product delivery.

Question No. 2 - IBO - 05 - International Marketing Logistics - Master of Commerce (M.Com)

Solutions to Assignments 

IBO - 05 - International Marketing Logistics

Master of Commerce (M.Com) - 1st Year

Question No. 2

(a) Discuss briefly the various constraints faced by Indian shipping industry. 

Transportation of shipment through means of shipping companies has numerous advantages like cost-effectiveness and being environmentally friendly. Shipping companies in India have not been able to realize their fullest capacity due to a few constraints. Let’s us check out a few challenges faced by shipping companies in India which deter growth in the logistics sector:

1. Institutional Challenges

The rigidity of the Indian bureaucracy and its reluctance to give up control adds to the delay. Multiple involvements of the central, state and local governments with overlapping powers add to the chaos. Lack of a single window clearance system has made it challenging for shipping companies in India.

2. Infrastructural Challenges

Capacities of all major and minor ports in India need to be increased urgently. Due to transhipment points in other countries, the cycle time of Indian cargoes has rendered the uncompetitive on a global scale. Besides this development of road network, electricity and overall infrastructural development is also the need of the hour.

3. Financial Challenges

Shipping companies in India do not have access to any lucrative government schemes that have been available to other channels. The burden of taxes like Customs Duty on Bunkers, Landing Fees, Income Tax etc. without negligible exemptions have made it difficult for shipping companies to thrive.

4. Slow Process

The shipment procedures undertaken by shipping companies is quite cumbersome in comparison to other modes of transportation. This, in turn, wastes valuable shipping time and labour time which goes into the logistic process.

5. Vessel Size

The sizes of vessels are getting bigger owing to the rise in demand for shipping services. While it might sound like an improved trend, many ports in India are still struggling to keep up, and many of these large vessels cannot be called on into most of the ports.

(b) What is Maritime Fraud? State the various factors that lead to commitment of maritime frauds.

Maritime fraud occurs when one of the parties involved in an international trade transaction like the buyer, seller, shipowner, charterer, ship’s master or crew, insurer, banker, broker or agent illegally secures money or goods from another party to whom, on the face of it, he has undertaken specific trade, transport and financial obligations. To check the c/p frauds all care should be taken by the master while issuing any b/l under that c/p to provide the true description of goods on the b/l. If any letter of authority is given to the agent for signing the B/L then such letter of authority should clearly mention the description of the goods so that he may not make any false declaration on behalf of the master

'Maritime fraud is a generic term commonly used to describe the obtaining of money, or services, or property in the goods, or a pecuniary advantage by one or more parties to a transaction from the other party or parties, by unjust or illegal means

Question No. 1 - IBO - 05 - International Marketing Logistics - Master of Commerce (M.Com)

Solutions to Assignments 

IBO - 05 - International Marketing Logistics

Master of Commerce (M.Com) - 1st Year

Question No. 1
(a) What are the various factors taken into consideration while selecting the mode of transportation for export cargo. Explain. 

1. Cost of Service:

The cost of transportation adds to the cost of the goods so it should always be kept in mind. Rail transport is comparatively a cheaper mode of transport for carrying heavy and bulky traffic over long distances. Motor transport is best suited and economical to carry small traffic over short distances. Motor transport saves packing and handling costs.

Water transport is the cheapest mode of transport. It is suitable to carry only heavy and bulky goods over long distances where time is not an important factor. Air transport is the most costly means of transport but is particularly suited for carrying perishable, light and valuable goods which require quick delivery.

2. Speed of Transport:

Air transport is the quickest mode of transport but it is costliest of all. Motor transport is quicker than railways over short distances. However, the speed of railways over long distances is more than that of other modes of transport except air transport and is most suitable for long distances. Water transport is very slow and thus unsuitable where time is an important factor.

3. Flexibility:

Railways, water and air transport are inflexible modes of transport. They operate services on fixed routes and at preplanned time schedules. The goods have to be carried to the stations, ports and airports and then taken from there. Motor transport provides the most flexible service because it is not tied to fixed routes or time schedules. It can operate at any time and can reach the business premises for loading and unloading.

4. Regularity of Service:

Railway service is more certain, uniform and regular as compared to any other mode of transport. It is not much affected by weather conditions. On the other hand, motor transport, ocean transport and air transport are affected by bad weather such as heavy rains, snow, fog, storms etc.

5. Safety:

Safety and security of goods in transit also influence the choice of a suitable means of transport. Motor transport may be preferred to railway transport because losses are generally less in motor transport. Water transport exposes the goods to the perils of sea and, hence from safety point of view, sea transport is thought of as a last resort.

6. Nature of Commodity:

Rail transport is most suitable for carrying cheap, bulk and heavy goods. Perishable goods which require quick delivery may be carried through motor transport or air transport keeping in mind the cost and distance.

7. Other Considerations:

A number of special services such as warehousing, packing, loading and unloading are also taken into consideration while deciding about a mode of transport. From the above discussion it is clear that each mode of transport is suited for a particular type of traffic.

The rail transport is particularly suited for carrying heavy and bulky goods over long distances. Motor transport is suitable for carrying small consignments over short distances. Air transport is suited to light and precious articles which are to be delivered quickly. Ocean transport is appropriate for carrying heavy bulky goods over long distances at the cheapest possible cost.

(b) Describe the responsibilities of ship owners and the charterers under different forms of chartering arrangements. 

IBO - 05 - International Marketing Logistics - Master of Commerce (M.Com)

Solutions to Assignments 

IBO - 05 - International Marketing Logistics

Master of Commerce (M.Com) - 1st Year

Question No. 1

(a) What are the various factors taken into consideration while selecting the mode of transportation for export cargo. Explain. 

(b) Describe the responsibilities of ship owners and the charterers under different forms of chartering arrangements.                                         CLICK HERE

Question No. 2

(a) Discuss briefly the various constraints faced by Indian shipping industry. 

(b) What is Maritime Fraud? State the various factors that lead to commitment of maritime frauds.

                                                                CLICK HERE

Question No. 3 - Briefly comment on the following: 

a) “Objectives and policies for functioning of the supply chain are usually in conflict both within and across operational units.” 

b) “The world economic situation and the world trade are very closely related.” 

c) “Shippers-Ship owners consultation arrangements in India leave much scope for Improvement.” 

d) The rate of return from warehousing business is low and the gestation period is rather long. 

                                                                CLICK HERE

Question No. 4 - Distinguish between the following: 

a) Domestic logistics and International logistics 

b) Inland container depots and Container fright stations 

c) Weight ton and Measurement ton. 

d) Reorder Level (ROL) and Reorder Quantity (ROQ)

                                                                CLICK HERE

Question No. 5 Write short notes on following: 

a) Public Warehouse. 

b) Commercial Shipping 

c) Multi-Modal Transport Document 

d) Privatisation of Ports                        CLICK HERE

Question No. 5 - IBO-06 - INTERNATIONAL BUSINESS FINANCE - Master of Commerce (M.Com)

Solutions to Assignments 

IBO-06 - INTERNATIONAL BUSINESS FINANCE

Master of Commerce (M.Com) - 1st Year

Question No. 5
a) Discuss the merits of foreign direct investment, portfolio investment and short term investment.

Foreign Direct Investment 

Foreign Direct Investment (FDI) is the investment of funds by an organisation from one country into another, with the intent of establishing ’lasting interest’. According to OECD (Organisation for Economic Co-operation and Development), lasting interest is determined when the organisation acquires a minimum of 10% of voting power in another organisation. For instance: the act of an Indian company such as Ola opening another headquarters in Sydney, Australia will be considered as bringing FDI into Australia. 

Reinvestment of profits from overseas operations, as well as intra - organisational loans and borrowings to overseas subsidiaries are also categorised as FDI.

The meaning of FDI is not restricted only to international movement of capital. Its definition also encompasses the international movement of elements that are complementary to capital - such as skills, processes, management, technology etc.

There is a difference between FDI and FPI (Foreign Portfolio Investments), wherein the investor purchases equity of foreign companies. FPI means only equity infusion, and does not imply the establishment of a lasting interest.

FDI can be Greenfield, wherein an organisation creates a subsidiary concern in another country and builds its business operations there from the ground up. Greenfield investments provide the highest degree of control to the organisation. It can construct the production plant as per its specifications, employ and train human resources as per company standards, as well as design and monitor its operational processes.  

Alternatively, FDI can be brownfield - wherein an organisation expands by way of cross-border mergers, acquisitions and joint ventures - by either leasing or purchasing existing facilities for its production. The clear advantage of brownfield investments is the savings in cost and time for starting up, as well as engaging in construction activities. Addition of equipment to an existing facility also qualifies as brownfield investment.

It is difficult to overstate the global and macroeconomic significance of FDI. As per UNCTAD (United Nations Conference on Trade and Development), global FDI amounted to around $ 1.8 tn in 2015. 

There are many ways in which FDI benefits the recipient nation:

1. Increased Employment and Economic Growth

Creation of jobs is the most obvious advantage of FDI. It is also one of the most important reasons why a nation, especially a developing one, looks to attract FDI. Increased FDI boosts the manufacturing as well as the services sector. This in turn creates jobs, and helps reduce unemployment among the educated youth - as well as skilled and unskilled labour - in the country. Increased employment translates to increased incomes, and equips the population with enhanced buying power. This boosts the economy of the country.

2. Human Resource Development

This is one of the less obvious advantages of FDI. Hence, it is often understated. Human Capital refers to the knowledge and competence of the workforce. Skills gained and enhanced through training and experience boost the education and human capital quotient of the country. Once developed, human capital is mobile. It can train human resources in other companies, thereby creating a ripple effect.  

3. Development of Backward Areas

This is one of the most crucial benefits of FDI for a developing country. FDI enables the transformation of backward areas in a country into industrial centres. This in turn provides a boost to the social economy of the area. The Hyundai unit at Sriperumbudur, Tamil Nadu in India exemplifies this process. 

4. Provision of Finance & Technology

Recipient businesses get access to latest financing tools, technologies and operational practices from across the world. Over time, the introduction of newer, enhanced technologies and processes results in their diffusion into the local economy, resulting in enhanced efficiency and effectiveness of the industry.

5. Increase in Exports

Not all goods produced through FDI are meant for domestic consumption. Many of these products have global markets. The creation of 100% Export Oriented Units and Economic Zones have further assisted FDI investors in boosting their exports from other countries.

6. Exchange Rate Stability

The constant flow of FDI into a country translates into a continuous flow of foreign exchange. This helps the country’s Central Bank maintain a comfortable reserve of foreign exchange. This in turn ensures stable exchange rates.

7. Stimulation of Economic Development

This is another very important advantage of FDI. FDI is a source of external capital and higher revenues for a country. When factories are constructed, at least some local labour, materials and equipment are utilised. Once the construction is complete, the factory will employ some local employees and further use local materials and services. The people who are employed by such factories thus have more money to spend. This creates more jobs. 

These factories will also create additional tax revenue for the Government, that can be infused into creating and improving physical and financial infrastructure. 

8. Improved Capital Flow

Inflow of capital is particularly beneficial for countries with limited domestic resources, as well as for nations with restricted opportunities to raise funds in global capital markets.

9. Creation of a Competitive Market

By facilitating the entry of foreign organisations into the domestic marketplace, FDI helps create a competitive environment, as well as break domestic monopolies. A healthy competitive environment pushes firms to continuously enhance their processes and product offerings, thereby fostering innovation. Consumers also gain access to a wider range of competitively priced products.

For a multinational corporation, FDI in India is a means to access new consumption and production markets, and thereby expand its influence and business operations. It can gain access not only to limited resources such as fossil fuels and precious metals, but also skilled and unskilled labour, management expertise and technologies. FDI also enables an organisation to lower its cost of production- by accessing cheaper resources, or going directly to the source of raw materials rather than buying them from third parties. Often, there are various tax advantages that accrue to a company undertaking FDI. This can occur when the home country allows tax deduction on foreign income, or when the recipient country allows tax deductions and benefits for organisations incurring FDI in that country. Additionally, this can happen when the recipient country has a more beneficial tax code than the home country.

Portfolio Investment

Unlike the investment approach of classic security analysis that focuses on individual security selection, portfolio investment is a modern investment method that involves asset allocation and diversification to construct a collection of investments. The biggest challenge in investing is the uncertainty of an investment's future performance and thus the risk of potential investment losses. Not counting on investment results of single investments, portfolio investment can hedge investment risks by canceling out different investment returns among component investments.

1. Risk Diversification and Reduction

Portfolio investment is about reducing risk rather than increasing return. It may well be that in certain years, individual investment returns based on security analysis exceed returns from portfolio investment. However, over the long run, portfolio investment is able to deliver a steady rate of return that is on average better than individual investment returns, because of the risk diversification among various investments inside a portfolio. Portfolio investment seeks out different asset classes that are less correlated or negatively correlated, such as combining stocks and bonds to even out volatility.

2. Minimal Security Analysis

Traditional security selection requires considerable efforts in terms of time and resources to perform the so-called three-step analysis of economy, industry and company. Although portfolio investment involves assembling a collection of individual securities, the focus is less about the merits of each security standing alone but more about how they may fit with the expected overall performance of the portfolio. Some portfolio investment, once constructed, can be left unadjusted regardless of the changing economic environment. When investment results are not solely dependent on an expected above-average performance of an individual security, a simple security analysis technique like security screening can keep the work of security analysis at a minimum.

3. Systematic Investment Approach

As portfolio investment moves away from mere individual security selections, it employs a systematic investment approach that is supposed to benefit the owner of the investment portfolio in the long run. To achieve such a positive, long-term goal, a portfolio investment starts with setting portfolio objectives followed by formulating an investment strategy. The level of expected rate of return and risk tolerance are assessed so that different weights can be assigned to different asset classes and categories. The future performance of portfolio investment hinges on the overall investment policy that strives to ensure that losses from one security are compensated by gains from the other.

4. Passive Investment Style

Active investment management of constant buying and selling increases transaction costs and has tax implications that can be especially worrisome when a short-term holding period results in capital gains taxed as ordinary income. While individual security selections rely on active stock picking to influence performance, portfolio investment is designed to be passively managed, minimizing portfolio turnovers to necessary portfolio rebalancing. The set percentage of weights assigned to different assets and securities does not have to respond to every move of the market and even the economy, as long as the total risk profile of the portfolio remains unchanged.

Short Term Investment 

Short-term investments are assets that can be converted into cash or can be sold within a short period of time, typically within 1-3 years. Common instruments for short-term investing include short-term bonds, Treasury bills, and other money market funds. Short-term trading or day trading entails a significant degree of speculation and, consequently, substantial risk.

Advantages of Short-Term Investing

• Short-term investing offers flexibility to the investor as they do not need to wait for the security to mature in order to get cash. On the other hand, long-term investments can be liquidated by selling in the secondary market, but the investor earns lower profits.
• Investors can make substantial profits in a very short amount of time.
• It is less risky as money invested per transaction is substantially lower.

b) Write short notes on for forfaiting.

Forfaiting is a means of financing that enables exporters to receive immediate cash by selling their medium and long-term receivables—the amount an importer owes the exporter—at a discount through an intermediary. The exporter eliminates risk by making the sale without recourse. It has no liability regarding the importer's possible default on the receivables.

The forfaiter is the individual or entity that purchases the receivables. The importer then pays the amount of the receivables to the forfaiter. A forfaiter is typically a bank or a financial firm that specializes in export financing.

How Forfaiting Works

A forfaiter's purchase of the receivables expedites payment and cash flow for the exporter. The importer's bank typically guarantees the amount.

The purchase also eliminates the credit risk involved in a credit sale to an importer. Forfaiting facilitates the transaction for an importer that cannot afford to pay in full for goods upon delivery. 

The importer's receivables convert into a debt instrument that it can freely trade on a secondary market. The receivables are typically in the form of unconditional bills of exchange or promissory notes that are legally enforceable, thus providing security for the forfaiter or a subsequent purchaser of the debt.

These debt instruments have a range of maturities from as short as one month to as long as 10 years. Most maturities fall between one and three years from the time of sale.

Advantages and Disadvantages of Forfaiting

Advantages

Forfaiting eliminates the risk that the exporter will receive payment. The practice also protects against credit risk, transfer risk, and the risks posed by foreign exchange rate or interest rate changes. Forfaiting simplifies the transaction by transforming a credit-based sale into a cash transaction. This credit-to-cash process gives immediate cash flow for the seller and eliminates collection costs. Additionally, the exporter can remove the accounts receivable, a liability, from its balance sheet.

Forfaiting is flexible. A forfaiter can tailor its offering to suit an exporter's needs and adapt it to a variety of international transactions. Exporters can use forfaiting in place of credit or insurance coverage for a sale. Forfaiting is helpful in situations where a country or a specific bank within the country does not have access to an export credit agency (ECA). The practice allows an exporter to transact business with buyers in countries with high levels of political risk.

Disadvantages

Forfaiting mitigates risks for exporters, but it is generally more expensive than commercial lender financing leading to higher export costs. These higher costs are generally pushed onto the importer as part of the standard pricing. Additionally, only transactions over $100,000 with longer terms are eligible for forfaiting, but forfaiting is not available for deferred payments.

Some discrimination exists where developing countries are concerned compared to developed countries. For example, only selected currencies are taken for forfaiting because they have international liquidity. Lastly, there is no international credit agency that can provide guarantees for forfaiting companies. This lack of guarantee affects long-term forfaiting.

Question No. 4 - IBO-06 - INTERNATIONAL BUSINESS FINANCE - Master of Commerce (M.Com)

Solutions to Assignments 

IBO-06 - INTERNATIONAL BUSINESS FINANCE

Master of Commerce (M.Com) - 1st Year

Question No. 4
a) Discuss the factors that influence the design of world wide corporate capital structure.

Some of the major factors influencing capital structure are as follows: 1. Financial Leverage or Trading on Equity 2. Expected Cash Flows 3. Stability of Sales 4. Control over the Company 5. Flexibility of Financial Structure 6. Cost of Floating the Capital 7. Period of Financing 8. Market Conditions 9. Types of Investors 10. Legal Requirements.

1. Financial Leverage or Trading on Equity:

The word ‘equity’ denotes the ownership of the company. Trading on equity means taking advantage of equity share capital to borrowed funds on reasonable basis. It refers to the additional profits that equity shares earn because of funds raised by issuing other forms of securities, viz., preference shares and debentures. It is based on the premise that if the rate of interest on borrowed capital and the rate of dividend on preference capital are lower than the general rate of company’s earnings, the equity shareholders will get advantage in the form of additional profits. Thus, by adopting a judicious mix of long-term loans (debentures) and preference shares with equity shares, return on equity shares can be maximized.

Trading on equity is possible under the following conditions:

(i) The rate of company’s earnings is higher than the rate of interest on debentures and the rate of dividend on preference shares.

(ii) The company’s earnings are stable and regular to afford payment of interest on debentures.

(iii) The company has sufficient assets which can be used as security to raise borrowed funds.

2. Expected Cash Flows:

Debentures and preference shares are often redeemable, i.e., they are to be paid back after their maturity. The expected cash flows over the years must be sufficient to meet the interest liability on debentures every year and also to return the maturity amount at the end of the term of debentures. Thus, debentures are not suitable for those companies which are likely to have irregular cash flows in future.

3. Stability of Sales:

Stability of sales turnover enhances the company’s ability to pay interest on debentures. If sales are rising, the company can use more of debt capital as it would be in a position to pay interest. But if sales are unstable or declining, it would not be advisable to employ additional debt capital.

4. Control over the Company:

The control of a company is entrusted to the Board of Directors elected by the equity shareholders. If the board of directors and shareholders of a company wish to retain control over the company in their hands, they may not allow to issue further equity shares to the public. In such a case, more funds can be raised by issuing preference shares and debentures.

5. Flexibility of Financial Structure:

A good financial structure should be flexible enough to have scope for expansion or contraction of capitalisation whenever the need arises. In order to bring flexibility, those securities should be issued which can be paid off after a number of years. Equity shares cannot be paid off during the life time of a company. But redeemable preference shares and debentures can be paid off whenever the company feels necessary. They provide elasticity in the financial plan.

6. Cost of Floating the Capital:

Cost of raising finance by tapping various sources of finance should be estimated carefully to decide which of the alternatives is the cheapest. Prevailing rate of interest, rate of return expected by the prospective investors, and administrative expenses are the various factors which affect the cost of financing. Generally, cost of financing by issuing debentures and preference shares for a reputed company is low. It is also essential to consider the floatation costs involved in the issue of shares and debentures, such as printing of prospectus, advertisement, etc.

7. Period of Financing:

When funds are required for permanent investment in a company, equity share capital is preferred. But when funds are required to finance expansion programme and the management of the company feels that it will be able to redeem the funds within the life-time of the company, it may issue redeemable preference shares and debentures.

8. Market Conditions:

The conditions prevailing in the capital market influence the determination of the securities to be issued. For instance, during depression, people do not like to take risk and so are not interested in equity shares. But during boom, investors are ready to take risk and invest in equity shares. Therefore, debentures and preference shares which carry a fixed rate of return may be marketed more easily during the periods of low activity.

9. Types of Investors:

The capital structure is influenced by the likings of the potential investors. Therefore, securities of different kinds and varying denominations are issued to meet the requirements of the prospective investors. Equity shares are issued to attract the people who can take the risk of investment in the company. Debentures and preference shares are issued to attract those people who prefer safety of investment and certainty of return on investment.

10. Legal Requirements:

The structure of capital of a company is also influenced by the statutory requirements. For instance, banking companies have been prohibited by the Banking Regulation Act to issue any type of securities except equity shares.

b) Describe adjusted present value method?

The adjusted present value is the net present value (NPV) of a project or company if financed solely by equity plus the present value (PV) of any financing benefits, which are the additional effects of debt. By taking into account financing benefits, APV includes tax shields such as those provided by deductible interest.

The Formula for APV Is: 

​Adjusted Present Value = Unlevered Firm Value + NE

where:

NE = Net effect of debt

​  

The net effect of debt includes tax benefits that are created when the interest on a company's debt is tax-deductible. This benefit is calculated as the interest expense times the tax rate, and it only applies to one year of interest and tax. The present value of the interest tax shield is therefore calculated as: (tax rate * debt load * interest rate) / interest rate.

How to Calculate Adjusted Present Value (APV)

To determine the adjusted present value:

• Find the value of the un-levered firm.
• Calculate the net value of debt financing.
• Sum the value of the un-levered project or company and the net value of the debt financing.

The adjusted present value helps to show an investor the benefits of tax shields resulting from one or more tax deductions of interest payments or a subsidized loan at below-market rates. For leveraged transactions, APV is preferred. In particular, leveraged buyout situations are the most effective situations in which to use the adjusted present value methodology.

The value of a debt-financed project can be higher than just an equity-financed project, as the cost of capital falls when leverage is used. Using debt can actually turn a negative NPV project into one that’s positive. NPV uses the weighted average cost of capital as the discount rate, while APV uses the cost of equity as the discount rate.

Example of How to Use Adjusted Present Value (APV)

In a financial projection where a base-case NPV is calculated, the sum of the present value of the interest tax shield is added to obtain the adjusted present value.

For example, assume a multi-year projection calculation finds that the present value of Company ABC’s free cash flow (FCF) plus terminal value is $100,000. The tax rate for the company is 30% and the interest rate is 7%. Its $50,000 debt load has an interest tax shield of $15,000, or ($50,000 * 30% * 7%) / 7%. Thus, the adjusted present value is $115,000, or $100,000 + $15,000.

The Difference Between APV and Discounted Cash Flow (DCF)

While the adjusted present value method is similar to the discounted cash flow (DCF) methodology, adjusted present cash flow does not capture taxes or other financing effects in a weighted average cost of capital (WACC) or other adjusted discount rates. Unlike WACC used in discounted cash flow, the adjusted present value seeks to value the effects of the cost of equity and cost of debt separately. The adjusted present value isn’t as prevalent as the discounted cash flow method.

Limitations of Using Adjusted Present Value (APV)

In practice, the adjusted present value is not used as much as the discounted cash flow method. It is more of an academic calculation but is often considered to result in more accurate valuations.

Question No. 3 - IBO-06 - INTERNATIONAL BUSINESS FINANCE - Master of Commerce (M.Com)

Solutions to Assignments 

IBO-06 - INTERNATIONAL BUSINESS FINANCE

Master of Commerce (M.Com) - 1st Year

Question No. 3
a)What are the different ways of managing political risk? Discuss.

The different ways in which Political Risk can be managed are as follows:

1) Avoiding Investment:

The simplest way to manage political risks is to avoid investing in a country ranked high on such risks. Where investment has already been made, plants may be wound up or transferred to some other country which is considered to be relatively safe.

This may be a poor choice as the opportunity to do business in a country will be lost.

2) Adaptation:

Another way of managing political risk is adaptation. Adaptation means incorporating risk into business strategies. MNCs incorporate risk by means of the following three strategies: local equity and debt, development assistance, and insurance.

i) Local Equity and Debt:

This involves financing subsidiaries with the help of local firms, trade unions, financial institutions, and government. As partners in local businesses, these groups ensure that political developments do not disturb operations. Localization entails modifying operations, product mix, or any such activity to suit local tastes and culture. When McDonald’s commenced franchisee operations in India, it ensured that sandwiches did not contain any beef.

ii) Developmental Assistance:

Offering development assistance allows an international business to assist the host country in improving its quality of life. Since the firm and the nation become partners, both stand to gain. In Myanmar, for instance, the US oil company Unocal and France’s Total have invested billions of dollars to develop natural gas fields and also spent $6 million on local education, medical care, and other improvements.

iii) Insurance:

This is the last means of adaptation. Companies buy insurance against the potential effects of political risk. Some policies protect companies when host governments restrict the convertibility of their currency into parent country currency. Others insure against losses created by violent events, including war and terrorism.

3) Threat:

Political risk can also be managed by trying to prove to the host country that it cannot do without the activities of the firm. This may be done by trying to control raw materials, technology, and distribution channels in the host country. The firm may threaten the host country that the supply of materials, products, or technology would be stopped if its functioning is disrupted.

4) Lobbying:

Influencing local politics through lobbying is another way of managing political risks. Lobbying is the policy of hiring people to represent a firm’s business interests as also its views on local political matters. Lobbyists meet with local public officials and try to influence their position on issues relevant to the firm. Their ultimate goal is getting favourable legislation passed and unfavourable ones rejected.

5) Terrorism Consultants:

To manage terrorism risk, MNCs hire consultants in counterterrorism to train employees to cope with the threat of terrorism.

6) Invaluable Status:

Achieving a status of indispensability is an effective strategy for firms that have exclusive access to high technology or specific products. Such companies keep research and development out of the reach of their politically vulnerable subsidiaries and, at the same time, enhance their bargaining power with host governments by emphasizing their contributions to the economy.

When Texas Instruments wanted to open an operation in Japan more than a decade ago, the company was able to resist pressures to take on a local partner because of its unique advanced technology. This situation occurred at a time when many other foreign companies were forced to accept local partners. The appearance of being irreplaceable obviously helps reduce political risk.

7) Vertical Integration:

Companies that maintain specialized plants, each dependent on the others in various countries, are expected to incur fewer political risks than firms with fully integrated and independent plants in each country. A firm practicing this form of distributed sourcing can offer economies of scale to a local operation. This strategy can become crucial for success in many industries.

If a host government were to take over such a plant, its output level would be spread over too many units, products, or components, thus, rendering the local company uncompetitive because of a cost disadvantage. Further risk can be reduced by having atleast two units engage in the same operation, thus, preventing the company itself from becoming hostage to over- specialization. Unless multiple sourcing exists, a company could be shut down almost completely if only one of its plants were affected negatively.

8) Local Borrowing:

One of the reasons why Cabot Corporation prefers local partners is that, it can then borrow locally instead of adding an additional level of risk with the investment funds being in a currency which is different from the currency of all the sales and costs of the venture. Financing local operations from indigenous banks and maintaining a high level of local accounts payable maximize the negative effect on the local economy if adverse political actions were taken.

Typically, host governments do not expropriate themselves, and they are reluctant to cause problems for their local financial institutions. Local borrowing is not always possible, however, because of restrictions placed on foreign companies, which otherwise crowd local companies out of the credit markets.

9) Minimizing Fixed Investments:

Political risk, of course, is always related to the amount of capital at risk. Given equal political risk, an alternative with comparably lower exposed capital amounts is preferable. A company can decide to lease facilities instead of buying them, or it can rely more on outside suppliers, provided they exist. In any case, companies should keep exposed assets to a minimum to limit the damage posed by political risk.

10) Political Risk Insurance:

As a final recourse, global companies can purchase insurance to cover their political risk. With the political developments in Iran and Nicaragua and the assassinations of President Park of Korea and President Sadat of Egypt all taking place between 1979 and 1981, many companies began to change their attitudes on risk insurance. Political risk insurance can offset large potential losses. For example, as a result of the UN Security Council’s worldwide embargo on Iraq until it withdrew from Kuwait, companies collected $100-$200 million from private insurers and billions from government-owned insurers.

b) What are foreign bonds and eurobonds. What are the advantages of eurobonds owner foreign bonds.

Foreign bonds: Foreign bonds are issued by foreign issuers in a foreign national market and are denominated in the currency of that market. Foreign bond issuance is regulated by the rules of the host national market. An example of a foreign bond is a bond denominated in US dollars issued by a German company in the United States. Foreign bonds bear distinct “street” names by which they are recognized as being traded in a particular country. Examples of foreign bonds are: Yankee bonds traded in the United States, Bulldog bonds traded in the United Kingdom, Samurai bonds traded in Japan, and Matador bonds traded in Spain.

A foreign bond may define as an international bond sold by a foreign borrower but denominated in the currency of the country in which it is placed. It underwrites and sells by a national underwriting syndicate in the lending country. Thus, a US company might float a bond issue in the London capital market, underwritten by a British syndicate and denominated in sterling.

The bond issue would sell to investors in the UK capital market, where it would quote and traded. Foreign bonds issued outside the USA call Yankee bonds, while foreign bonds issued in Japan are called Samurai bonds. Canadian entities are the major floaters of foreign bonds in the USA.

Euro bonds may define as an international bond underwritten by an international syndicate and sold in countries other than the country of the currency in which the issue denominates. In the Eurobond market, the investor holds a claim directly on the borrower rather than on a financial institution.

Eurobonds are generally issued by corporations and governments needing secure, long-term funds and are sold through a geographically diverse group of banks to investors around the world. Eurobonds are similar to domestic bonds in that they may issue with fixed or floating interest rates.

Advantages of Eurobonds:

The Eurobonds market possesses several advantages for borrowers and investors.

The advantages of Eurobonds to borrowers are:

• The size and depth of the market are such that it can absorb large and frequent issues.
• The Eurobond market has freedom and flexibility not found in domestic markets.
• The cost of the issue of Eurobonds, around 2.5 percent of the face value of the issue.
• Maturities in the Eurobond market are suited to long-term funding requirements.
• A key feature of the Eurobond market is the development of a sound institutional framework for underwriting, distribution, and the placing of securities.

The advantages of Eurobonds to investors are:

• Euro bonds are issued in such a form that interest can pay free of income or withholding taxes of the borrowing countries. Also, the bonds issued in bearer form and are held outside the country of the investor, enabling the investor to evade domestic income tax.
• Issuers of Eurobonds have a good reputation for creditworthiness.
• A special advantage to borrowers as well as lenders provides by convertible Eurobonds. Holders of convertible debentures give an option to exchange their bonds at a fixed price.
• The Eurobond market is active both as a primary and as a secondary market.

Bonds denominated in a particular currency that usually issues simultaneously in the capital markets of several nations. They differ from foreign bonds in that most nations do not have pre-offering registration or disclosure requirements for Eurobond issues. An Example of a Eurobond a bond issue by a Russian corporation in the European market that pays interest and principal in U.S. dollars.

Question No. 2 - IBO-06 - INTERNATIONAL BUSINESS FINANCE - Master of Commerce (M.Com)

Solutions to Assignments 

IBO-06 - INTERNATIONAL BUSINESS FINANCE

Master of Commerce (M.Com) - 1st Year

Question No. 2
a) Explain the mechanism of money market hedge for managing transaction exposure.

The money market hedge allows the domestic company to lock in the value of its partner’s currency (in the domestic company’s currency) in advance of an anticipated transaction. This creates certainty about the cost of future transactions and ensures the domestic company will pay the price that it wants to pay.

Without a money market hedge, a domestic company would be subject to exchange rate fluctuations that could dramatically alter the transaction’s price. While changes in exchange-rate rates could cause the transaction to become less expensive, fluctuations could also make it more expensive and possibly cost-prohibitive.

A money market hedge offers flexibility in regard to the amount covered. For example, a company may only want to hedge half of the value of an upcoming transaction. The money market hedge is also useful for hedging in exotic currencies, such as the South Korean won, where there are few alternate methods for hedging exchange rate risk.

A money market hedge is a technique for hedging foreign exchange risk using the money market, the financial market in which highly liquid and short-term instruments like Treasury bills, bankers’ acceptances, and commercial paper are traded.

Since there are a number of avenues such as currency forwards, futures, and options to hedge foreign exchange risk, the money market hedge may not be the most cost-effective or convenient way for large corporations and institutions to hedge such risk. However, for retail investors or small businesses looking to hedge currency risk, the money market hedge is one way to protect against currency fluctuations without using the futures market or entering into a forward contract.

Forward Exchange Rates

Let’s begin by reviewing some basic concepts with regard to forward exchange rates, as this is essential to understand the intricacies of the money market hedge.

A forward exchange rate is merely the spot exchange (benchmark) rate adjusted for interest rate differentials. The principle of “Covered Interest Rate Parity” holds that forward exchange rates should incorporate the difference in interest rates between the underlying countries of the currency pair, otherwise an arbitrage opportunity would exist. 

For example, assume U.S. banks offer a one-year interest rate on U.S. dollar (USD) deposits of 1.5%, and Canadian banks offer an interest rate of 2.5% on Canadian-dollar (CAD) deposits. Although U.S. investors may be tempted to convert their money into Canadian dollars and place these funds in CAD deposits because of their higher deposit rates, they obviously face currency risk. If they wish to hedge this currency risk in the forward market by buying U.S. dollars one year forward, covered interest rate parity stipulates that the cost of such hedging would be equal to the 1% difference in rates between the U.S. and Canada.

We can take this example a step further to calculate the one-year forward rate for this currency pair. If the current exchange rate (spot rate) is US$1 = C$1.10, then based on covered interest rate parity, US$1 placed on deposit at 1.5% should be equivalent to C$1.10 at 2.5% after one year. Thus, it would be shown as:

US$1 (1 + 0.015) = C$1.10 (1 + 0.025), or US$1.015 = C$1.1275

And the one-year forward rate is therefore:

US$1= C$1.1275 ÷ 1.015 = C$1.110837

Note that the currency with the lower interest rate always trades at a forward premium to the currency with the higher interest rate. In this case, the U.S. dollar (the lower interest rate currency) trades at a forward premium to the Canadian dollar (the higher interest rate currency), which means that each U.S. dollar fetches more Canadian dollars (1.110837 to be precise) a year from now, compared with the spot rate of 1.10.

Money Market Hedge

The money market hedge works in a similar manner as a forward exchange, but with a few tweaks, as the examples in the next section demonstrate.

Foreign exchange risk can arise either due to transaction exposure (i.e., due to receivables expected or payments due in foreign currency) or translation exposure, which occurs because assets or liabilities are denominated in a foreign currency. Translation exposure is a much bigger issue for large corporations than it is for small business and retail investors. The money market hedge is not the optimal way to hedge translation exposure – since it is more complicated to set up than using an outright forward or option – but it can be effectively used for hedging transaction exposure.

If a foreign currency receivable is expected after a defined period of time and currency risk is desired to be hedged via the money market, this would necessitate the following steps:

Borrow the foreign currency in an amount equivalent to the present value of the receivable. Why the present value? Because the foreign currency loan plus the interest on it should be exactly equal to the amount of the receivable.

Convert the foreign currency into domestic currency at the spot exchange rate.

Place the domestic currency on deposit at the prevailing interest rate.

When the foreign currency receivable comes in, repay the foreign currency loan (from step 1) plus interest.

Similarly, if a foreign currency payment has to be made after a defined period of time, the following steps have to be taken to hedge currency risk via the money market:

Borrow the domestic currency in an amount equivalent to the present value of the payment.

Convert the domestic currency into the foreign currency at the spot rate.

Place this foreign currency amount on deposit.

When the foreign currency deposit matures, make the payment.

Note that although the entity who is devising a money market hedge may already possess the funds shown in step 1 above and may not need to borrow them, there is an opportunity cost involved in using these funds. The money market hedge takes this cost into consideration, thereby enabling an apples-to-apples comparison to be made with forward rates, which as noted earlier are based on interest rate differentials.

b) What is economic exposure and transaction exposure? How is economic exposure different from transaction exposure? 

Economic exposure is a type of foreign exchange exposure caused by the effect of unexpected currency fluctuations on a company’s future cash flows, foreign investments, and earnings. Economic exposure, also known as operating exposure, can have a substantial impact on a company’s market value since it has far-reaching effects and is long-term in nature. Companies can hedge against unexpected currency fluctuations by investing in foreign exchange (FX) trading.

The degree of economic exposure is directly proportional to currency volatility. Economic exposure increases as foreign exchange volatility increases and decreases as it falls. Economic exposure is obviously greater for multinational companies that have numerous subsidiaries overseas and a huge number of transactions involving foreign currencies. However, increasing globalization has made economic exposure a source of greater risk for all companies and consumers. Economic exposure can arise for any company regardless of its size and even if it only operates in domestic markets.

Unlike transaction exposure and translation exposure (the two other types of currency exposure), economic exposure is difficult to measure precisely and hence challenging to hedge. Economic exposure is also relatively difficult to hedge because it deals with unexpected changes in foreign exchange rates, unlike expected changes in currency rates, which form the basis for corporate budgetary forecasts.

For example, small European manufacturers that sell only in their local markets and do not export their products would be adversely affected by a stronger euro, since it would make imports from other jurisdictions such as Asia and North America cheaper and increase competition in European markets.

Economic exposure can be mitigated either through operational strategies or currency risk mitigation strategies. Operational strategies involve diversification of production facilities, end-product markets, and financing sources, since currency effects may offset each other to some extent if a number of different currencies are involved. Currency risk-mitigation strategies involve matching currency flows, risk-sharing agreements, and currency swaps.

Economic exposure can be mitigated either through operational strategies or currency risk mitigation strategies. Operational strategies involve diversification of production facilities, end-product markets, and financing sources.

Currency effects may offset each other to some extent if a number of different currencies are involved. Currency risk-mitigation strategies involve matching currency flows, risk-sharing agreements, and currency swaps. Matching currency flow means matching cash outflows and inflows with the same currency, such as doing as much business as possible in one currency, including borrowings. Currency swaps allow two companies to effectively borrow each other’s currencies for a period of time. 

Assume that a large U.S. company that gets about 50% of its revenue from overseas markets has factored in a gradual decline of the U.S. dollar against major global currencies—say 2% per annum—into its operating forecasts for the next few years. If the dollar appreciates instead of weakening gradually in the years ahead, this would represent economic exposure for the company. The dollar’s strength means that the 50% of revenues and cash flows the company receives from overseas will be lower when converted back into dollars, which will have a negative effect on its profitability and valuation.

Transaction exposure is the level of uncertainty businesses involved in international trade face. Specifically, it is the risk that currency exchange rates will fluctuate after a firm has already undertaken a financial obligation. A high level of vulnerability to shifting exchange rates can lead to major capital losses for these international businesses.

Transaction exposure is also known as translation exposure or translation risk.

The danger of transaction exposure is typically one-sided. Only the business that completes a transaction in a foreign currency may feel the vulnerability. The entity that is receiving or paying a bill using its home currency is not subjected to the same risk.

Usually, the buyer agrees to buy the product using foreign money. If this is the case, the hazard comes if that foreign currency should appreciate, as this would result in the buyer needing to spend more than they had budgeted for the goods.

Question No. 1 - IBO-06 - INTERNATIONAL BUSINESS FINANCE - Master of Commerce (M.Com)

Solutions to Assignments 

IBO-06 - INTERNATIONAL BUSINESS FINANCE

Master of Commerce (M.Com) - 1st Year

Question No. 1
a) What were the distinctive features of Breton Woods System.

The Bretton Woods Agreement was negotiated in July 1944 by delegates from 44 countries at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire. Thus, the name “Bretton Woods Agreement.

Under the Bretton Woods System, gold was the basis for the U.S. dollar and other currencies were pegged to the U.S. dollar’s value. The Bretton Woods System effectively came to an end in the early 1970s when President Richard M. Nixon announced that the U.S. would no longer exchange gold for U.S. currency.

Approximately 730 delegates representing 44 countries met in Bretton Woods in July 1944 with the principal goals of creating an efficient foreign exchange system, preventing competitive devaluations of currencies, and promoting international economic growth. The Bretton Woods Agreement and System were central to these goals. The Bretton Woods Agreement also created two important organizations—the International Monetary Fund (IMF) and the World Bank. While the Bretton Woods System was dissolved in the 1970s, both the IMF and World Bank have remained strong pillars for the exchange of international currencies.

Though the Bretton Woods conference itself took place over just three weeks, the preparations for it had been going on for several years. The primary designers of the Bretton Woods System were the famous British economist John Maynard Keynes and American Chief International Economist of the U.S. Treasury Department Harry Dexter White. Keynes’ hope was to establish a powerful global central bank to be called the Clearing Union and issue a new international reserve currency called the bancor. White’s plan envisioned a more modest lending fund and a greater role for the U.S. dollar, rather than the creation of a new currency. In the end, the adopted plan took ideas from both, leaning more toward White’s plan.

Following were the features of Bretton Woods Agreement: 

i Bretton Woods agreement was signed among the world powers in 1944. 

ii This agreement established IMF and World Bank to preserve economic stability in the world. 

iii Decision making in Bretton Woods Institutions was controlled by the Western Industrial powers. 

iv National currencies followed the fixed exchange rates. 

v It led to an era of unprecedented growth of trade and incomes.

b) Briefly discuss the various money market instruments with their purpose.  

The term ‘Money Market’, according to the Reserve Bank of India, is used to define a market where short-term financial assets are traded. These assets are a near substitute for money and they aid in the money exchange carried out in the primary and secondary market. So, essentially, the money market is an apparatus which facilitates the lending and borrowing of short-term funds, which are usually for a duration of under a year. Short maturity period and high liquidity are two characteristic features of the instruments which are traded in the money market. Institutions like commercial banks, non-banking finance corporations (NBFCs) and acceptance houses are the components which make up the money market.

The money market is a part of the larger financial market and consists of numerous smaller sub-markets like bill market, acceptance market, call money market, etc. Money market deals are not carried out in money / cash, but other instruments like trade bills, government papers, promissory notes, etc. Also, money market transactions cannot be done via brokers but have to be carried out via mediums like formal documentation, oral or written communication.

Types Of Money Market Instruments

1. Treasury Bills (T-Bills)

Issued by the Central Government, Treasury Bills are known to be one of the safest money market instruments available. However, treasury bills carry zero risk. I.e. are zero risk instruments. Therefore, the returns one gets on them are not attractive. Treasury bills come with different maturity periods like 3-month, 6-month and 1 year and are circulated by primary and secondary markets. Treasury bills are issued by the Central government at a lesser price than their face value. The interest earned by the buyer will be the difference of the maturity value of the instrument and the buying price of the bill, which is decided with the help of bidding done via auctions. Currently, there are 3 types of treasury bills issued by the Government of India via auctions, which are 91-day, 182-day and 364-day treasury bills.

2. Certificate of Deposits (CDs)

A Certificate of Deposit or CD, functions as a deposit receipt for money which is deposited with a financial organization or bank. However, a Certificate of Deposit is different from a Fixed Deposit Receipt in two aspects. The first aspect of difference is that a CD is only issued for a larger sum of money. Secondly, a Certificate of Deposit is freely negotiable. First announced in 1989 by RBI, Certificate of Deposits have become a preferred investment choice for organizations in terms of short-term surplus investment as they carry low risk while providing interest rates which are higher than those provided by Treasury bills and term deposits. Certificate of Deposits are also relatively liquid, which is an added advantage, especially for issuing banks. Like treasury bills, CDs are also issued at a discounted price and their tenor ranges between a span of 7 days up to 1 year. However, banks issue Certificates of Deposits for durations ranging from 3 months, 6 months and 12 months. They can be issued to individuals (except minors), trusts, companies, corporations, associations, funds, non-resident Indians, etc.

3. Commercial Papers (CPs)

Commercial Papers are can be compared to an unsecured short-term promissory note which is issued by highly rated companies with the purpose of raising capital to meet requirements directly from the market. CPs usually feature a fixed maturity period which can range anywhere from 1 day up to 270 days. Highly popular in countries like Japan, UK, USA, Australia and many others, Commercial Papers promise higher returns as compared to treasury bills and are automatically not as secure in comparison. Commercial papers are actively traded in secondary market.

4. Repurchase Agreements (Repo)

Repurchase Agreements, also known as Reverse Repo or simply as Repo, loans of a short duration which are agreed upon by buyers and sellers for the purpose of selling and repurchasing. These transactions can only be carried out between RBI approved parties Repo / Reverse Repo transactions can be done only between the parties approved by RBI. Transactions are only permitted between securities approved by the RBI like treasury bills, central or state government securities, corporate bonds and PSU bonds.

5. Banker's Acceptance (BA)

Banker's Acceptance or BA is basically a document promising future payment which is guaranteed by a commercial bank. Similar to a treasury bill, Banker’s Acceptance is often used in money market funds and specifies the details of the repayment like the amount to be repaid, date of repayment and the details of the individual to which the repayment is due. Banker’s Acceptance features maturity periods ranging between 30 days up to 180 days.

IBO-06 - INTERNATIONAL BUSINESS FINANCE - Master of Commerce (M.Com)

Solutions to Assignments 

IBO-06 - INTERNATIONAL BUSINESS FINANCE

Master of Commerce (M.Com) - 1st Year

Question No. 1

a) What were the distinctive features of Breton Woods System.

b) Briefly discuss the various money market instruments with their purpose.     

                                                    CLICK HERE

Question No. 2

a) Explain the mechanism of money market hedge for managing transaction exposure.

b) What is economic exposure and transaction exposure? How is economic exposure different from transaction exposure?                CLICK HERE

Question No. 3

a)What are the different ways of managing political risk? Discuss.

b) What are foreign bonds and eurobonds. What are the advantages of eurobonds owner foreign bonds.

                                                    CLICK HERE

Question No. 4

a) Discuss the factors that influence the design of world wide corporate capital structure.

b) Describe adjusted present value method?

                                                        CLICK HERE

Question No. 5

a) Discuss the merits of foreign direct investment, portfolio investment and short term investment.

b) Write short notes on for forfaiting.    CLICK HERE

Question No. 5 - IBO - 04 - Export Import Procedure and Documentation - Master of Commerce (M.Com)

Solutions to Assignments 

IBO - 04 - Export Import Procedure and Documentation

Master of Commerce (M.Com) - 1st Year

Question No. 5 Write notes on the following: 
(a) General Provisions for imports.

The Ministry of Commerce and Industry and Directorate General of Foreign Trade and Investment (DGFT) implemented the foreign trade policy of the year 2015-2020, which contains the general provisions for import and export in Chapter 2. They are as follows:

1. Exports and imports are free unless regulated– Exports and Imports shall be free, except in cases where they are regulated by the provisions of this Policy or any other law for the time being in force. The item-wise export and import policy shall be, as specified in ITC(HS) published and notified by the Director-General of Foreign Trade, as amended from time to time.
2. Laws are to be complied– Every exporter or importer shall comply with the provisions of the Foreign Trade (Development and Regulation) Act, 1992, the Rules and Orders made thereunder, the provisions of this Policy, and the terms and conditions of any license/certificate/permission granted to him, as well as provisions of any other law for the time being in force. All imported goods shall also be subject to domestic Laws, Rules, Orders, Regulations, technical specifications, environmental and safety norms as applicable to domestically produced goods. No import or export of rough diamonds shall be permitted unless the shipment parcel is accompanied by Kimberley Process (KP) Certificate required under the procedure specified by the Gem & Jewellery Export Promotion Council (GJEPC).
3. Procedure– The DGFT specifies the procedure that has to be followed by the exporter and importer or by any other authority to follow any of the procedures which are laid down in any Acts, handbooks, etc. Once the procedure is being established it has to be published on public notice, and these procedures can be subjected to change as well.
4. Exemption- If due to any genuine reason, relaxation is needed in any procedure, the request can be made to the DGFT, who can pass orders on the same. The DGFT can relax certain procedures for public interest as well, such request may be considered only after consulting Advance Licensing Committee (ALC) if the request is in respect of a provision of Chapter-4 (excluding any provision relating to Gem & Jewellery sector) of the Policy/ Procedure. 
5. Restriction principles- The DGFT on notification can enforce any decision that is necessary for (a) protection of public morals (b) Protection of human, animal, or plant life or health (c)Protection of patents, trademarks, and copyrights and the prevention of deceptive practices (d) Prevention of use of prison labour (e) Protection of national treasures of artistic, historic or archaeological value (f) Conservation of exhaustible natural resources (g) Protection of trade of fissionable material or material from which they are derived (h) Prevention of traffic in arms, ammunition, and implements of war.
6. Goods which are restricted- Any goods which are restricted can only be imported and exported if there is a license for the same and a public notice has to be issued as well on this behalf.
7. Terms and conditions- There are certain terms and conditions which have to present while obtaining a license or a certificate, they include:(a) The quantity, description, and value of goods (b) Actual user condition (c) Export obligation (d) The value addition to be achieved (e) The minimum export price.
8. Penalty- If a license/certificate/permission holder violates any condition of the license/certificate/ permission or fails to fulfill the export obligation, he shall be liable for action in accordance with the Act, the Rules and Orders made thereunder, the Policy and any other law for the time being in force.
9. Permission to get license etc.- No person may claim a license/certificate/ permission as a right and the Director-General of Foreign Trade or the licensing authority shall have the power to refuse to grant or renew a license/certificate/permission in accordance with the provisions of the Act and the Rules made thereunder.
10. Import on export basis- New or second-hand capital goods, equipments, components, parts and accessories, containers meant for packing of goods for exports, jigs, fixtures, dies and mould, may be imported for export without a licence/certificate/permission on the execution of Legal Undertaking/Bank Guarantee with the Customs Authorities provided that the item is freely exportable without any conditionality/requirement of license/ permission as may be required under ITC (HS) Schedule II.

(b) Foreign Currency Account. 

A ‘Foreign Currency Account’ means an account held or maintained in a currency that is not the currency of India or Bhutan, or Nepal. Any person who is residing in India can open, hold and maintain a foreign account. ‘Person Resident in India’ is defined under Section 2(v) of the Foreign Exchange Management Act, 1999 (FEMA). 

‘Person resident in India’ means—

1. Every person residing in India for more than one hundred and eighty-two days during the preceding financial year but does not include –

• a person who has gone or stays outside India for taking up employment or carrying a business or vocation outside India or any other purpose where he/she indicates their intention to stay outside India for an uncertain period,
• a person who has come to or stays in India, otherwise than for taking up employment or carrying on business or vocation in India or any other purpose where he/she indicates their intention to stay for an uncertain period in India.

• Every person or body corporate incorporated or registered in India,
• An office, agency or branch in India that is owned or controlled by a person resident outside India, 

• An office, agency or branch outside India that is owned or controlled by a person resident in India.

(c) Financing under Deferred Payment Arrangement. 

Under Section 34 of the Care Act a universal Deferred Payment scheme has been established. A deferred payment scheme allows the person entering into it to delay making some or all of their payments to the Local Authority for the Care and Support services they receive. It allows them time to come to terms with their situation and consider their options without having to rush into selling their home. Some people enter into a deferred payment agreement until they die but others use it as a 'bridging loan' while they decide what best to do and explore options available for meeting the cost of care (for example, they may be able to arrange the release of another asset to meet the cost). How long a person has a deferred payment agreement for is entirely up to them.

When a Deferred Payment agreement is entered into the Local Authority usually secures its interests by arranging for a land registry charge to be placed upon the person's property for an amount known as the Equity Limit. They then defer all payments until this amount is reached or the agreement is terminated, whichever comes first. At this point the person's home is sold and the Local Authority receives payment for the care costs it has deferred under the agreement.

Payments that can be deferred

The person can defer the full amount of their care costs or an element of their care costs (if they choose to make a contribution from another source).

Payments must be deferred up to the personal budget amount (or what that amount would be likely to be where people have not been assessed by the Local Authority). If the person wishes to defer less than the personal budget amount this can be agreed but they need to be able to pay the difference between what is being deferred and the personal budget amount.

If a person has chosen to live in a care home that costs more than the personal budget amount the Local Authority does not have to defer the 'top-up' amount payable, although it has the power to do so if it wishes to. If the Local Authority does not decide to defer the top-up amount then top-up remains payable.

Payments relating to interest and charges made by the Local Authority can also be deferred if the person requests it and the Local Authority is in agreement.

Payments can only be deferred for costs charged by the Care and Support provider for services provided. Where the person lives in a care home provision this is likely to include associated accommodation costs but where the person lives in supported living and pays rent to a landlord (who may or may not be the care provider) these rental payments cannot be deferred.

(d) ISO 9000. 

ISO 9000 is a set of standards for quality management, developed as an internationally-acceptable baseline for performance by businesses and other organizations. It was created by the International Organization for Standardization (ISO) with input from standards professionals from many nations.

Quality management is the act of overseeing all of the processes that go into achieving and maintaining the desired level of excellence in the creation and delivery of a product or service. This includes the determination of a quality policy, creating and implementing quality planning and assurance, and quality control and improvement. It is also referred to as total quality management (TQM).

ISO 9000 standards were developed to help manufacturers effectively document the quality system elements that need to be implemented to maintain an efficient quality system. They are increasingly being applied to any organization or industry.

ISO 9001 is now being used as a basis for quality management—in the service sector, education, and government—to help organizations satisfy their customers, meet regulatory requirements, and achieve continual improvement.

The ISO 9000 series, or family of standards, was originally published in 1987 by the International Organization for Standardization (ISO). They first gained popularity in Europe, and then spread to the U.S. in the 1990s. As the world’s view of quality assurance has evolved, the standards have been revised.

Current versions of ISO 9000 and ISO 9001 were published in September 2015.