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International Finance
Dec 2020
1. Elaborate ‘Hedging and Speculation are
important functions of derivatives’. Distinguish between exchange traded
derivatives and over the counter derivatives.
Answer: Hedging and speculation- Important
functions of derivatives
Hedging
Hedging the foreign currency is a risk
reducing strategy that helps everyone involved with foreign currencies. The
major issue with foreign currency is that exchange rates vary and are volatile.
This unstableness can transform into heavy losses if adverse changes occur in
exchange rates between the transaction date and the actual date of receipt or
payment. Foreign currency hedging targets to eliminate currency risk. The four
major hedging techniques are at times referred to as contractual hedges or market-based
hedges. They are future hedges, forward hedges, money market hedges and
currency option hedges. These are also generally referred as external
strategies dealing with external parties.
2. Elaborate on the various channels through
which a company can mobilize equity capital from the international market.
Answer: International Equity Markets
Equity markets are seen as an avenue
by a large number of investors both individual and institutional as an
investment source. Securities market includes the distribution of new issues of
securities by new or existing companies as well as the purchase and sale of old
securities in the stock exchange markets. A company always prefers equity to
debt because debt servicing is a compulsory commitment. Equity markets encourage
savings among the nationals and increases the efficiency
3. A country’s Balance of Payment includes two
components – Current account, Capital and financial account. Current account
measures the value of all goods and services imported and exported during a
given financial year. Current Account Deficit (CAD) arises when the value of
imported goods and services exceeds the value of exported goods and services.
As on June 30, 2020 RBI reported India’s current account deficit has been
reduced to 0.9% of the GDP in 2019-20 as compared to 2.1% in FY 2018-19 due to
curtailed imports.
a. Differentiate between Current account and
Capital account.
b. What measures can be taken to reduce the
disequilibrium in the balance of payments’ position?
Answer: a) Difference between current account and
capital account
Current account: The current account of the balance of
payments refers to the monetary value of all exports and imports of merchandise
and invisibles. All international flows associated with transactions in goods
and services, investment income, and unilateral transfers are included in this
account. It is divided into merchandise trade balance, the service balance and
the balance on unilateral transfers. All the entries that are made in these
accounts are of current value and they do
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