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Q.1 What is globalization? What are its benefits? How does globalization help

in international business? Give some instances.

Ans:-

Globalisation is a process where businesses are dealt in markets around the world, apart from the

local and national markets. According to business terminologies, globalisation is defined as theworldwide trend of businesses expanding beyond their domestic boundaries. It is advantageousfor the economy of countries because it promotes prosperity in the countries that embrace

globalisation. In this section, we will understand globalisation, its benefits and challenges.

Benefits of globalisation

The merits and demerits of globalisation are highly debatable. While globalisation creates

employment opportunities in the host countries, it also exploits labour at a very low costcompared to the home country. Let us consider the benefits and ill-effects of globalisation. Some

of the benefits of globalisation are as follows:

Promotes foreign trade and liberalisation of economies. Increases the living standards of people in several developing countries through capital

investments in developing countries by developed countries.

Benefits customers as companies outsource to low wage countries. Outsourcing helps thecompanies to be competitive by keeping the cost low, with increased productivity.

Promotes better education and jobs.

Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, best

practices, and culture. Provides better quality of products, customer services, and standardised delivery models across

countries.

Gives better access to finance for corporate and sovereign borrowers.

Increases business travel, which in turn leads to a flourishing travel and hospitality industryacross the world.

Increases sales as the availability of cutting edge technologies and production techniquesdecrease the cost of production.

Provides several platforms for international dispute resolutions in business, which facilitates

international trade.

Globalization help in international business

Global companies Companies, which invest in other countries for business and also operate

from other countries, are considered as global companies. They have multiple manufacturingplants across the globe, catering to multiple markets.

The transformation of a company from domestic to international is by entering just one market or

a few selected foreign markets as an exporter or importer. Competing on a truly global scalecomes later, after the company has established operations in several countries across continents

and is racing against rivals for global market leadership. Thus, there is a meaningful distinction

between a company that operates in few selected foreign countries and a company that operates

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and markets its products across several countries and continents with manufacturing capabilities

in several of these countries.

Companies can also be differentiated by the kind of competitive strategy they adopt whiledealing internationally. Multinational strategy and global competitive strategy are the two types

of competitive strategy.

Multinational strategy Companies adopt this strategy when each countrys market needs to be

treated as self contained. It can be for the following reasons: Customers from different countries have different preferences and expectations about a product

or a service.

Competition in each national market is essentially independent of competition in other national

markets, and the set of competitors also differ from country to country. A companys reputation, customer base, and competitive position in one nation have little or no

bearing on its ability to successfully compete in another nation.

Some of the industry examples for multinational competition include beer, life insurance, and

food products.

Global competitive strategy Companies adopt this strategy when prices and competitiveconditions across the different country markets are strongly linked together and have common

synergies. In a globally competitive industry, a companys business gets affected by the

changing environments in different countries. The same set of competitors may compete againsteach other in several countries. In a global scenario, a companys overall competitive advantage

is gauged by the cumulative efforts of its domestic operations and the international operations

worldwide.

A good example to illustrate is Sony Ericsson, which has its headquarters in Sweden, Research

and Development setup in USA and India, manufacturing and assembly plants in low wagecountries like China, and sales and marketing worldwide. This is made possible because of the

ease in transferring technology and expertise from country to country.

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Q.2 What is culture and in the context of international business environment

how does it impact international business decisions?

Ans:-

Culture is defined as the art and other signs or demonstrations of human customs, civilisation,

and the way of life of a specific society or group. Culture determines every aspect that is frombirth to death and everything in between it. It is the duty of people to respect other cultures, otherthan their culture. Research shows that national cultures generally characterise the dominant

groups values and practices in society, and not of the marginalised groups, even though the

marginalised groups represent a majority or a minority in the society.

Culture is very important to understand international business. Culture is the part ofenvironment, which human has created, it is the total sum of knowledge, arts, beliefs, laws,

morals, customs, and other abilities and habits gained by people as part of society.

The culture in an international business organisation.

1. Cross cultural management

Cross cultural management is defined as the development and application of knowledge aboutcultures in the practice of international management, when people involved have diverse cultural

identities.

International managers in senior positions do not have direct interaction that is face-to-face with

other culture workforce, but several home based managers handle immigrant groups adjustedinto a workforce that offers domestic markets.

The factors to be considered in cross cultural management are: Cross cultural management skills.

Handling cultural diversity. Factors controlling group creativity.

Ignoring diversity.

Cross cultural management skills

The ability to demonstrate a series of behaviour is called skill. It is functionally linked to

achieving a performance goal.

The most important aspect to qualify as a manager for positions of international responsibility is

communication skills. The managers must adapt to other culture and have the ability to lead its

members.

The managers cannot expect to force members of other culture to fit into their cultural customs,

which is the main assumption of cross cultural skills learning. Any organisation that tries to

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enforce its behavioural customs on unwilling workers from another culture faces conflict. The

manager has to possess the skills linked with the following:

Providing inspiration and appraisal systems. Establishing and applying formal structures.

Identifying the importance of informal structures.

Formulating and applying plans for modification. Identifying and solving disagreements.

Handling cultural diversity

Cultural diversity in a work group offers opportunities and difficulties. Economy is benefitedwhen the work groups are managed successfully. The organisations capability to draw, save,

and inspire people from diverse cultures can give the organisation spirited advantages in

structures of cost, creativity, problem solving, and adjusting to change.

Cultural diversity offers key chances for joint work and co-operative action. Group work is a

joint venture where, the production of two or more individuals or groups working in cooperationis larger than the combined production of their individual work.

Factors controlling group creativity

On complicated problem solving jobs diverse groups do better than identical groups. Diversegroups require time to solve issues of working together. In diverse groups, over time, the work

experience helps to overcome gender, racial, and organisational and functional discriminations.

But the impact cannot be evaluated and there is always risk in creating a diverse group. A

successful group is profitable with respect to quick results and the creation of concern for thefuture. Negative stereotypes are emphasised if it fails.

Factors related with the industry and company culture are also important. Diverse groups do well

when the members: Assist to make group decisions.

Value the exchange of different points of view.

Respect each others skills and share their own.

Value the chance for cross-cultural learning. Tolerate uncertainty and try to triumph over the inefficiencies that occur when members of

diverse cultures work together.

A diverse group is known to be more creative, where the members are tolerant of differences.The top management level provides its moral and administrative support, and gives time for the

group to overcome the usual process difficulties. They also provide diversity training, and the

group members are rewarded for their commitment.

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Ignore diversity

It may be difficult to manage diversity. It is better to ignore, which is an alternative. The

management must: Ignore cultural diversity within the employees.

Down-play the importance of cultural diversity.This rejection to identify diversity happens when management:

Fails to have sufficient awareness and skills to identify diversity. Identifies diversity but does not have the skill to manage the diversity.

Recognises the negative consequences of identifying diversity probably cause greater issues

than ignoring it. Thinks the likely benefits of identifying and managing diversity do not validate the expected

expenses.

Identifies that the job provides no chances for drawing advantages from diversity.Strategies to ignore diversity may be possible when culture groups are given various jobs, and

sharing required resources are independent in the workplace. Groups and group members are

equally incorporated and work together. In such cases, confusion occurs when the diverse valuesystems are not identified that are held by different staff groups.

Q.3 Cosmos Limited wants to enter international markets. Will country risk

analysis help Cosmos Limited to take correct decisions? Substantiate your

answer.

Ans:-Country Risk Analysis (CRA) identifies imbalances that increase the risks in a cross-border

investment. CRA represents the potentially adverse impact of a countrys environment on the

multinational corporations cash flows and is the probability of loss due to exposure to thepolitical, economic, and social upheavals in a foreign country. All business dealings involve

risks. An increasing number of companies involving in external trade indicate huge business

opportunities and promising markets. When business transactions occur across internationalborders, they bring additional risks compared to those in domestic transactions. These additional

risks are called country risks which include risks arising from national differences in socio-

political institutions, economic structures, policies, currencies, and geography. The CRAmonitors the potential for these risks to decrease the expected return of a cross-border

investment.

Analysts have categorised country risk into following groups:

Economic risk This type of risk is the important change in the economic structure that

produces a change in the expected return of an investment. Risk arises from the negative changes

in fundamental economic policy goals (fiscal, monetary, international, or wealth distribution orcreation).

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Transfer risk Transfer risk arises from a decision by a foreign government to restrict capital

movements. It is analysed as a function of a countrys ability to earn foreign currency. Therefore,

it implies that effort in earning foreign currency increases the possibility of capital controls.

Exchange risk This risk occurs due to an unfavourable movement in the exchange rate.

Exchange risk can be defined as a form of risk that arises from the change in price of onecurrency against another. Whenever investors or companies have assets or business operations

across national borders, they face currency risk if their positions are not hedged.

Location risk This type of risk is also referred to as neighborhood risk. It includes effects

caused by problems in a region or in countries with similar characteristics. Location risk includes

effects caused by troubles in a region, in trading partner of a country, or in countries with similar

perceived characteristics.

Sovereign risk This risk is based on a governments inability to meet its loan obligations.

Sovereign risk is closely linked to transfer risk in which a government may run out of foreign

exchange due to adverse developments in its balance of payments. It also relates to political riskin which a government may decide not to honor its commitments for political reasons.

Political risk This is the risk of loss that is caused due to change in the political structure or

in the politics of country where the investment is made. For example, tax laws, expropriation of

assets, tariffs, or restriction in repatriation of profits, war, corruption and bureaucracy alsocontribute to the element of political risk.

Risk assessment requires analysis of many factors, including the decision-making process in the

government, relationships of various groups in a country and the history of the country. Country

risk is due to unpredicted events in a foreign country affecting the value of international assets,

investment projects and their cash flows. The analysis of country risks distinguishes between theability to pay and the willingness to pay. It is essential to analyse the sustainable amount of funds

a country can borrow. Country risk is determined by the costs and benefits of a countrysrepayment and default strategies. The ways of evaluating country risks by different firms and

financial institutions differ from each other. The international trade growth and the financial

programs development demand periodical improvement of risk methodology and analysis of

country risks.

Country Risk

The historical brief helps to identify aspects that interfere in the future behavior of the country,

reducing the ability to payback any external commitment. The main historical data provides agood understanding of the key factors which draw the behaviour of the society, the government,the private sector, the legal environment, the economical, political, and the relationships to

neighbour nations and the world as a whole.

The organisation of the government and its features like political and administrative organisation

are also relevant aspects to be approached. The political forces which act in the country, theirrepresentatives and the main national issues must be focused. The other considerations include

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social aspects and their key-indicators like population growth rate, unemployment ratio, infant

mortality rate, composition of the population and life expectancy. The geographic positioning

and its related strengths and weaknesses are also critical aspects.

Q.4 How can managers in international companies adjust to the ethical

factors influencing countries? Is it possible to establish international ethical

codes? Briefly explain.

Ans:-

Ethics can be defined as the evaluation of moral values, principles, and standards of humanconduct and its application in daily life to determine acceptable human behaviour.

Business ethics pertains to the application of ethics to business, and is a matter of concern in the

corporate world. Business ethics is almost similar to the generally accepted norms and principles.Behaviour that is considered unethical and immoral in society, for example dishonesty, applies to

business as well.

Most countries have similar ethical values, but are practiced differently. This section deals with

the way individuals in different countries approach ethical issues, and their ethically acceptablebehaviour. With the rise in global firms, issues related to ethical values and traditions become

more common. These ethical issues create complications to Multi-National Companies (MNCs)

while dealing with other countries for business. Hence, many companies have formulated well-

designed codes of conduct to help their employees.

Two of the most prominent issues that managers in MNCs operating in foreign countries face arebribery and corruption and worker compensation.

Bribery and corruption Bribery can be defined as the act of offering, accepting, or soliciting

something of value for the purpose of influencing the action of officials in the discharge of theirduties. Corruption is the abuse of public office for personal gain. The issue arises when there are

differences in perception in different countries. For example, in the Middle East, it is perfectly

acceptable to offer an official a gift. In Britain it is considered as an attempt to bribe the official,and hence, considered unlawful.

Worker compensation Businesses invest in production facilities abroad because of the

availability of low-cost labour, which enables them to offer goods and services at a lower pricethan their competitors. The issue arises when workers are exploited and are underpaid comparedto the workers in the parent country who are paid more for the same job. The disparity arises due

to the differences in the regulatory standards in the two countries.

Companies use management techniques to encourage ethical behaviour at an organisational

level. Various techniques of managing ethics like practicing ethics at the top level management,

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special training on ethics, forming committees to oversee ethical issues, and defining and

implementing code of ethics are

1.Top management The senior management of a company must be committed to ensure thatethical standards are met. The chief executive of the company must not engage in business

practices harmful to employees, or the society. The top management must focus on ethicalpractices while informing employees of their intention.

2.Code of ethics One of the best practices for ethics is creating a corporate ethical statementand communicating it within the company. Such practices enhance the companys public image.

Almost all Fortune 500 companies have such codes.

3.Ethics committee There are ethics committees in many firms to help them deal with and

advise on work related ethical issues. The Chief Executive Officer can head the committee thatincludes the Board of Directors. Such a committee answers employee queries, helps the company

to establish policies in uncertain areas, advises the Board on ethical issues, and oversees the

enforcement of the code of ethics.

4.Ethics hotline A companys ethical hotline helps its employees report any ethical issues theyface at work. The ethics committee then investigates these issues. Such hotline calls are treated

confidential, where the callers identity is protected to encourage employees to report on ethical

issues.

5.Ethics training programs Most firms take ethics seriously and provide training for itsmanagers and employees. Such training programs help the employees become familiar with the

official policy on ethical issues. These programs demonstrate the use of these ethic policies in

everyday decision-making. Ethics training is most effective when conducted by managers and

when focused on work environment.

6.Ethics and law Both law and ethics focus on defining the perfect human behaviour, but they

are not the same. Law is the governments attempt to formalise rightful behaviour, but it is rarely

possible to enforce written laws. It depends on individual or business ethics to reduce unlawfulincidents. Ethical concepts are more complex than written rules since it deals with human

dilemmas that go beyond the formal language of law.

Code of conduct for MNCs

The code of conduct for MNCs refers to a set of rules that guides corporate behaviour. These

rules prescribe the duties and limitations of a manager. The top management must communicatethe code of conduct to all members of the organisation along with their commitment in enforcing

the code.

Some of the ethical requirements for international companies are as follows: Respect basic human rights.

Minimise any negative impact on local economic policies.

Maintain high standards of local political involvement. Transfer technology.

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Protect the environment.

Protect the consumer.

Employ labour practices that are not exploitative.When a manager of an international firm faces an ethical problem, certain models help in solving

these ethical issues. The first task is to consider the ethical and legal consequences of the issue

and whether the action or its consequences are in accordance with the law, both in the home andhost country.

Q.5 Discuss the international marketing strategies. How is it different from

domestic marketing strategies?

Ans:-

International marketing can be defined as marketing of goods and services outside the firmshome country. International marketing has the following two forms of marketing:

Multinational marketing.

Global marketing.

Multinational marketing is very complex as a firm engages in marketing operations in many

countries. In multinational marketing, a firm visualises different countries as one market andbuild their brand or service according to the business environment of the foreign countries.

Global marketing indicates the integrated and coordinated marketing activities across many

different markets.

Taking into account the various conditions on which markets vary and depend, appropriate

marketing strategies should be devised and adopted. Like, some countries prevent foreign firmsfrom entering into its market space through protective legislation. Protectionism on the long run

results in inefficiency of local firms as it is inept towards competition from foreign firms andother technological advancements. It also increases the living costs and protects inefficient

domestic firms.

The decision of a firm to compete internationally is strategic; it will have an effect on the firm,

including its management and operations locally. The decision of a firm to compete in foreignmarkets has many reasons. Some firms go abroad as the result of potential opportunities to

exploit the market and to grow globally. And for some it is a policy driven decision to globalise

and to take advantage by pressurising competitors.

1. Segmentation

Firms that serve global markets can be segregated into several clusters based on their similarities.

Each such cluster is termed as a segment. Segmentation helps the firms to serve the markets in an

improved way. Markets can be segmented into nine categories, but the most common method ofsegmentation is on the basis of individual characteristics, which include the behavioural,

psychographic, and demographic segmentations. The basis of behavioural segmentation is the

general behavioural aspects of the customers. Demographic segmentation considers the factors

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like age, culture, income, education and gender. Psychographic segmentation takes into account:

beliefs, values, attitudes, personalities, opinions, lifestyles and so on.

2. Market positioning

The next step in the marketing process is, the firms should position their product in the global

market. Product positioning is the process of creating a favourable image of the product against

the competitors products.In global markets product positioning is categorised as high-tech or hightouch positioning. The

classification of high-tech and high-touch products. One challenge that firms face is to make a

trade-off between adjusting their products to the specific demands of a country and gainingadvantage of standardisation such as the maintenance of a consistent global brand image and cost

savings.

3. International product policy

Some thinkers of the industry tend to draw a distinction between conventional products and

services, stressing on service characteristics such as heterogeneity, inseparability from

consumption, intangibility, and perishability. Typically, products are composed of some service

component like, documentation, a warranty, and distribution. These service components are anintegral part of the product and its positioning. Thus, it is important to consider the findings of

marketing research and determine customers desires, motives, and expectations in buying aproduct. Firms have a choice in marketing their products across markets. Many a times, firms opt

for a strategy which involves customisation, through which the firm introduces a unique product

in each country, believing that tastes differ so much between countries that it is necessary to

create a new product for each market. Standardisation proposes the marketing of one global product, with the belief that the same product can be sold in different countries without

significant changes. Finally, in most cases firms will go for some kind of adaptation. Here, when

moving a product between markets minor modifications are made to the product.

4. International pricing decisions

Pricing is the process of ascertaining the value for the product or service that will be offered forsale. In international markets, making pricing decisions is entangled in difficulties as it involves

trade barriers, multiple currencies, additional cost considerations, and longer distribution

channels. Before establishing the prices, the firm must know its target market well because whenthe firm is clear about the market it is serving, then it can determine the price appropriately. The

pricing policy must be consistent with the firms overall objectives. Some common pricing

objectives are: profit, return on investment, survival, market share, status quo, and product

quality.The strategies for international pricing can be classified into the following three types:

Market penetration: It is the technique of selling a new product at a lower price than the

current market price. Market holding: It is a strategy to maintain buy orders in order to maintain stability in a

downward trend.

Market skimming: It is a pricing strategy where price of the goods are set high initially toskim the revenue from the market layer by layer.

The factors that influence pricing decisions are inflation, devaluation and revaluation, nature of

product or industry and competitive behaviour, market demand, and transfer pricing.

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5. International advertising

International advertising is usually associated with using the same brand name all over the world.

However, a firm can use different brand names for historic reasons. The acquisition of localfirms by global players has resulted in a number of local brands. A firm may find it unfavourable

to change those names as these local brands have their own distinctive market. Therefore, the

company may want to come-up with a certain advertising approach or theme that has beendeveloped as a result of extensive global customer research. Global advertising themes are

advisable for marketing across the world with customers having similar tastes.

The purpose of international advertising is to reach and communicate to target audiences in morethan one country. The target audience differs from country to country in terms of the response

towards humour or emotional appeals, perception or interpretation of symbols and stimuli and

level of literacy. Standardisation is required for products by some firms. Standardisation helps to

achieve economies of scale and a consistent image can be established across markets.Standardisation also assists in utilising creative talent across markets, and facilitates good ideas

to be transplanted from one market to other. International advertising can be thought of as a

communication process that transpires in multiple cultures that vary in terms of communication

styles, values, and consumption patterns. International advertising is a business activity and notjust a communication process. It involves advertisers and advertising agencies that create ads and

buy media in different countries. International advertising is also reckoned as a major force thatmirrors both social values, and propagates certain values worldwide.

6. International promotion and distribution

Distribution of goods from manufacturer to the end user is an important aspect of business.Companies have their own ways of distribution. Some companies directly perform the

distribution service by contacting others whereas a few companies take help from other

companies who perform the distribution services. The distribution services include: The purchase of goods.

The assembly of an attractive assortment of goods.

Holding stocks. Promoting sale of goods to the customer.

The physical movement of goods.

In order to reach its target markets a company utilises a combination of sales promotion, personalselling, advertising and public relations, which is collectively called as promotion.

Advertising is a non-personal form of communication about an organisation or its products that

is propagated to a target audience through a broadcast medium. A firm can focus on a small,

clearly defined market segment by employing this type of promotion. This promotional methodis also cost efficient. A large number of prospective customers can be reached, at a minimal cost

per person.

The activity of catching the attention of prospects is known as sales promotion. It involvesactivities and materials that are meant to attract customers. One motive of promotion is to gain a

competitive edge; other objective is to concentrate on this method as it provides quick return.

The consumers also look forward for sales promotions before purchasing a product.People interested in a particular industry can be brought together by organising overseas product

exhibitions. These events have the potential to attract important visitors such as distributors,

agents, journalists, potential customers, politicians, and competitors. These events also provide

us with an ideal opportunity to get attention.

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Domestic vs. International marketing

Domestic marketing refers to the practice of marketing within a firms home country. Whereas

International or foreign marketing is the practice of marketing in a foreign country; themarketing is for the domestic operations of the firm in that country. Domestic marketing finds

the "how" and "why" a product succeeds or fails within the firms home country and how the

marketing activity affects the outcome. Whereas, foreign marketing deals with these questionsand tries to find answers according to the foreign market conditions and it provides a micro view

of the market at the firms level. In domestic marketing a firm has insight of the marketing

practices, culture, customer preferences, climate and so on of its home country, while it is nottotally aware of the policies and the market conditions of the foreign country.

The stages that have led to achieve global marketing are:

Domestic marketing Firms manufacture and sell products within the country. Hence, there is

no international phenomenon. Export marketing Firms start exporting products to other countries. This is a very basic

stage of global marketing. Here, the products are developed based on the companys domestic

market although the goods are exported to foreign countries.

International marketing Now, Firms start to sell products to various countries and theapproach is polycentric, that is, making different products for different countries.

Multinational marketing In this stage, the number of countries in which the firm is doingbusiness gets bigger than that in the earlier stage. And hence, the company identifies the regions

to which the company can deliver same product instead of producing different goods for

different countries. For example, a firm may decide to sell same products in India, Sri lanka and

Pakistan, assuming that the people living in this region have similar choice and at the same timeoffering different product for American countries. This approach is termed regiocentric

approach.

Global marketing Company operating in various countries opts for a common single productin order to achieve cost efficiencies. This is achieved by analysing the requirements and the

choice of the customers in those countries. This approach is called Geocentric approach.

The practice of marketing at the international stage does not designate any country as domesticor foreign. The firm is not considered as the corporate citizen of the world as it has a home base.

The firm must not have a single marketing plan, because there are differences between the

target markets (that is domestic or international markets). There should never be a rigidmarketing campaign. A firm that is successful internationally first obtains success locally.

Few approaches that you can consider for an international marketing are:

Advertise as a foreign product By doing so, the product will be considered as genuine and

original in some countries. Joint partnership with a local firm finding a firm that has already established credibility

will benefit a lot. The product will be considered as a local product by following this marketing

approach. Licensing You can sell the rights of your product to a foreign firm. Here the problem is that

the firm may not maintain the quality standard and therefore may hurt the image of the brand.

Culture is a major factor which influences marketing decisions and practices in a foreigncountry. For example, in the middle-eastern countries the prior approval of the governing

authorities should be taken if a firm plans to advertise a product related to womens apparel, as

showcasing some aspects of women clothing is considered immodest and immoral.

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Q.6 Explain briefly the international financial management components with

examples and applicability.

Ans:-

The International Financial Management (IFM) came to its existence when the countries all over

the world started opening their doors for each other. This phenomenon is also called asliberalisation. But after the end of the Second World War, the integration in terms of foreignactivities has grown substantially. The firms of all types are now opting to operate their business

and deploy their resources abroad. Furthermore, the differences between the countries have

persisted that has given rise to the prevalence of market imperfections. The main aim ofinternational finance management is to maximise the organisations value that in turn will

increase the impact on the wealth of the stockholders. When the doors of liberalisation opened,

entrepreneurs capitalised the opportunity to step their foot to conduct business in different partsof the world.

Components of International Financial Management

The components like foreign exchange market, foreign currency derivatives, internationalmonetary markets and international financial markets are essential to the international financialmanagement, which is discussed in this section.

1. Foreign exchange market

The Foreign exchange or the forex markets facilitates the participants to obtain, trade, exchange

and speculate foreign currency. The foreign exchange market consists of banks, central banks,commercial companies, hedge funds, investment management firms and retail foreign exchange

brokers and investors. It is considered to be the leading financial market in the world. It is vital to

realise that the foreign exchange is not a single exchange, but is created from a global network ofcomputers that connects the participants from all over the world.

The foreign exchange market is immense in size and survives to serve a number of functions

ranging from the funding of cross-border investment, loans, trade in goods, trade in services andcurrency speculation. The participant in a foreign exchange market will normally ask for a price.

The trading in the foreign exchange market may take place in the following forms:

Outright cash or ready foreign exchange currency deals that take place on the date of thedeal.

Next day foreign exchange currency deals that take place on the next working day.

Swap Simultaneous sale and purchase of identical amounts of currency for different

maturities. Spot and Forward contracts A Spot contract is a binding obligation to buy or sell a

definite amount of foreign currency at the existing or spot market rate. A forward contract is a

binding obligation to buy or sell a definite amount of foreign currency at the pre-agreed rate ofexchange, on or before a certain date.

The advantage of spot dealing has resulted in a simplest way to deal with all foreign currency

requirements. It carries the greatest risk of exchange rate fluctuations due to lack of certainty ofthe rate until the deal is carried out. The spot rate that is intended to receive will be set by current

market conditions, the demand and supply of currency being traded and the amount to be dealt.

In general, a better spot rate can be received if the amount of dealing is high. The spot deal will

come to an end in two working days after the deal is struck.

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A forward market needs a more complex calculation. A forward rate is based on the existing spot

rate plus a premium or discounts which are determined by the interest rate connecting the two

currencies that are involved. For example, the interest rates of UK are higher than that of US andtherefore a modification is made to the spot rate to reflect the financial effect of this differential

over the period of the forward contract. The duration will be up to two years for a forward

contract. A variation in foreign exchange markets can be affected to any company whether or notthey are directly involved in the international trade or not. This is often referred to as Economic

foreign exchange and most difficult to protect a business.

The three ways of managing risks are as follows: Choosing to manage risk by dealing with the spot market whenever the need of cash flow rises.

This will result in a high risk and speculative strategy since one will not know the rate at which a

transaction is dealt until the day and time it occurs. Managing the business becomes difficult if it

depends on the selling or buying the currency in the spot market. The decision must be made to book a foreign exchange contract with the bank whenever the

foreign exchange risk is likely to occur. This will help to fix the exchange rate immediately and

will give a clear idea of knowing the exact cost of foreign currency and the amount to be

received at the time of settlement whenever this due occurs. A currency option will prevent unfavourable exchange rate movements in the similar way as a

forward contract does. It will permit gains if the markets move as per the expectations. For thisbase, a currency option is often demonstrated as a forward contract that can be left if it is not

followed. Often banks provide currency options which will ensure protection and flexibility, but

the likely problem to arise is the involvement of premium of particular kind. The premium

involved might be a cash amount or it could also influence into the charge of the transaction.

2. Foreign currency derivatives

Currency derivative is defined as a financial contract in order to swap two currencies at apredestined rate. It can also be termed as the agreement where the value can be determined from

the rate of exchange of two currencies at the spot. The currency derivative trades in markets

correspond to the spot (cash) market. Hence, the spot market exposures can be enclosed with thecurrency derivatives. The main advantage from derivative hedging is the basket of currency

available. The derivatives can be hedged with other derivatives. In the foreign exchange market,

currency derivatives like the currency features, currency options and currency swaps are usuallytraded. The standard agreement made in order to buy or sell foreign currencies in future is

termed as currency futures. These are usually traded through organised exchanges. The authority

to buy or sell the foreign currencies in future at a specified rate is provided by currency option.

These will help the businessmen to enhance their foreign exchange dealings. The agreementundertaken to exchange cash flow streams in one currency for cash flow streams in another

currency in future is provided by currency swaps. These will help to increase the funds of foreign

currency from the cheapest sources.Some of the risks associated with currency derivatives are:

Credit risk takes place, arising from the parties involved in a contract.

Market risk occurs due to adverse moves in the overall market. Liquidity risks occur due to the requirement of available counterparties to take the other side of

the trade.

Settlement risks similar to the credit risks occur when the parties involved in the contract fail to

provide the currency at the agreed time.

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Operational risks are one of the biggest risks that occur in trading derivatives due to human

error.

Legal risks pertain to the counterparties of currency swaps that go into receivership while theswap is taking place.

3. International monetary systemsThe international monetary systems represent the set of rules that are agreed internationally

along with its conventions. It also consists of set of rules that govern international scenario,

supporting institutions which will facilitate the worldwide trade, the investment across cross-borders and the reallocation of capital between the states.

International monetary systems provide the mode of payment acceptable between buyers and

sellers of different nationality, with addition to deferred payment. The global balance can be

corrected by providing sufficient liquidity for the variations occurring in trade. Thereby it can beoperated successfully.

The gold and gold bullion standards

The gold standard was the first modern international system. It was operating during the late 19th

and early 20th centuries, the standard provided for the free circulation between nations of goldcoins of standard specification. The gold happened to be the only standard of value under the

system. The advantages of this system depend in its stabilising influence. Any nation whichexports more than its import would receive gold in payment of the balance. This in turn has

resulted in the lowered value of domestic currency. The higher prices lead to the decreased

demands for exports. The sudden increase in the supply of gold may be due to the discovery of

rich deposit, which in turn will result in the increase of price abruptly.This standard was substituted by the gold bullion standard during the 1920s; thereby the nations

no longer minted gold coins. Instead, reversed their currencies with gold bullion and determined

to buy and sell the bullion at a fixed cost. This system was also discarded in the 1930s.

The gold-exchange system

Trading was conducted internationally with respect to the gold-exchange standard following

World War II. In this system, the value of the currency is fixed by the nations with respect tosome foreign currency but not with respect to gold. Most of the nations fixed their currency to

the US dollar funds in the United States. With a view to maintain a stable exchange rate at the

global level, the International Monetary Fund (IMF) was created at the Bretton Woodsinternational Conference held in 1944. The drain on the US gold reserves continued up to the

1970s. Later in 1971, the gold convertibility was abandoned by the United States leaving the

world without a single international monetary system.

Floating exchange rates and recent development

After the abundance of the gold convertibility by the US, the IMF in 1976 decided to be in

agreement on the float exchange rates. The gold standard was suspended and the values of

different currencies were determined in the market. The Japanese yen and the GermanDeutschmark strengthened and turned out to be increasingly important in international financial

market, at the same time the US dollar diminished its significance. The Euro was set up in

financial market in 1999 as a replacement for the currencies. Hence, it became the second mostcommonly used currency after the dollar in the international market. Many large companies opt

to use euro rather than the dollar in bond trading with a goal to receive better exchange rates.

Very recently the some of the members of Organisation of Petroleum Exporting Countries

(OPEC) such as Saudi Arabia, Iraq have opted to trade petroleum in Euro than in Dollar.

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4. International financial markets

International foreign markets provide links connecting the financial markets of each country and

independent markets external to the authority of any one country. The heart of the internationalfinancial market is being governed by the market of currency where the foreign currency is

denominated by the international trade and investment. Hence the purchase of goods and services

is preceded by the purchase of currency.The purpose of the foreign currency markets, international money markets, international capital

markets and international securities markets are as follows:

The foreign currency markets The foreign currency market is an international market that isfamiliar in structure. This means that there exists no central place where the trading can take

place. The market is actually the telecommunications like among financial institutions around

the globe and opens for business at any time. The greater part of the worlds that deal in foreign

currencies is still taking position in the cities where international financial activity is centred. International money markets A money market can be conventionally defined as a market

for accounts, deposits or deposits that include maturities of one year or less. This is also termed

as the Euro currency markets which constitute an enormous financial market that is beyond the

influence and supervision of world financial and government authorities. The Euro currencymarket is a money market for depositing and borrowing money located outside the country

where that money is officially permitted tender. Also, Euro currencies are bank deposits andloans existing outside any particular country.

International capital markets The international capital provides links among the capital

markets of individual countries. It also comprises a separate market of their own, the capital

market that flows in to the Euro markets. The firms enjoy the freedom to raise capital, debit,fixed or floating interest rates and maturities varying from one month to thirty years in an

international capital markets.

International security markets The banks have experienced the greatest growth in the pastdecade because of the continuity in providing large portion of the international financial needs of

the government and business. The private placements, bonds and equities are included in the

international security market.The following are the reasons given for the enormous growth in the trading of foreign currency:

Deregulation of international capital flows Without the major government restrictions, it is

extremely simple to move the currencies and capital around the globe. The majority of thederegulation that has differentiated government policy over the past 10 to 15 years.

Gain in technology and transaction cost efficiency The advancements in technology is not

only taking place in the distribution of information, in addition to the performance of exchange

or trading. This has resulted greatly to the capacity of individuals on these markets to accomplishinstantaneous arbitrage.

Market upwings The financial markets have become increasingly unstable over recent years.

There are faster swings in the stock values and interest rates, adding to the enthusiasm formoving further capital at faster rates.