intl FIN

intl business relates to nosiness transaction carried out across borders & includes 5 Is –

i) Import & export of goods & services

ii) Investment of K in plant & machinery
iii) Investment in intl services
iv) Investment in human K
v) IPR

Risk involved is relatively higher in intl trade rather than domestic trade. Hence risk mgmnt in intl fin
is a necessity. Risk mgmnt is organization & allocation of scarce fin resources at disposal of firms to
fulfil its objectives, strategies & goals for optimum utilization of resources.

 Forex means foreign curr & includes all deposits, credits, balances payable in foreign curr.
 All DDs, travel checks, LC, BOE drawn by Indn institution and/or banks outside ind but payable in
Indn rupees.
 All DDs, TC, LC, BOE expressed in INR but payable in foreign curr.

Exch rate control

Exch control - govt-imposed controls & restrictions on pvt trans conducted in foreign curr. govt’s aim
- manage or prevent adverse BOP position on national accounts. managing shortages of freely
convertible foreign curr. govts = correct negative balances of payments= by restrictions on free flow
of K in & out of country & on curr exch rates. K restrictions - control exch rates of their native
currencies on global mkts. controls raise domestic price of imp. = hurts trade. influences trade
through - cost of trans, exch rates, forex risk hedging, & financing trade. IN IND - FERA 1973 to
regulate forex trans. response to concerns about outflow of forex reserves= essential for country’s
economic stability & growth. curb unauth forex trans, prevent K flight, & ensure proper utilization of
forex resources. tightly controlled & regulated - acquisition & holding of foreign curr, securities, &
immovable property outside Ind. FEATURES - 1. RBI Permission for Dealing in Forex: FERA required
indi & corp to obtain permission from RBI to engage in forex trans = forex dealings - regulated
framework. 2. Review & Cancellation by RBI: if there was non-compliance with regulations. 3.
Money Changers & Curr Conversion: FERA allowed money changers to convert currencies at rates
set by RBI = facilitating legitimate curr conversion for individuals & businesses. 4. Import/Export
Restrictions on Currencies: To control flow of foreign curr & prevent undue pressure on country’s
forex reserves. Conclusion –1999 changed- FEMA - more liberalized & mkt-friendly approach to
forex regulations - maintaining essential controls to prevent illegal activities

Forex mkt
Forex mkt- ‘a’ place wherever fin papers of relatively short maturity r traded– flow of goods followed
by flow of money. All DD, BOE, LC, TC r traded. OTC mkt - runs continuously 24 hr/ day - no
open/close time. decentralized mktplace- fin instruments r traded directly b/w parties. All countries -
diff currencies - highly globalised - bone of contention. When you deal in another country’s curr, you
need forex mkt to convert this to domestic curr or vice versa. If all countries would have transacted in
1 curr, there wouldn’t be a need for forex mkt.
Nature of trans - purchase & sale of foreign curr now for 1. Spot - immediate dealing 2. Forward -
future delivery at contracted rate & debt

Participants – create dd & ss for foreign curr

1. CB – Earlier CB was main intervening body in forex mkt, obj- to stabilize dd & ss dynamics in forex
mkt.
2. Govt –plays role in forex trans by setting out exim policies like imp subs
3. Banks – NBFI, cooperative or comm banks. authorized dealers that transact in IR, OR, exp & imp,
encashment of travel checks & issuance of curr loans.
4. Corp– main goal - pft maxi, enter in foreign mkt to carry out such trans
5. Indi – anyone can create dd & ss for foreign curr when dealing intlly
6. Money changers – they exch their curr at counters of banks. restricted or full fledged

3 important players-

7. Speculators –risk taking activities with hope of making a profit. buy & sell fin assets(stocks,
bonds, derivatives) based on their expectations of future price movements.
8. Hedgers –risk-averse participants – techniques(derivatives or ins) to protect themselves from
potential fin losses. Ex= farmer might hedge against falling crop prices using commodity futures
contracts.
9. Arbitrators – engage in arbitrage activities, adv of price differences for same or similar assets in
diff mkts.

Risk mkt –

o "exch rate mkt" = "risk mkt" - exch rates subject to fluctuations = pose risks to individuals,
businesses, & investors. inherent risks in exch rate movements, entities involved in intl trans
often employ hedging strategies to protect themselves from adverse curr fluctuations.
Hedging typically involves using fin instruments like curr derivatives to mitigate risk.
o Risk mgmnt involves identifying, assessing, & mitigating potential risks associated with fin
assets, investments, or trans. tools to help mitigate risk in Forex mkt:
 Derivatives: Derivatives r fin instruments whose value is derived from an underlying
asset or reference rate. Common derivatives include options, futures, & swaps.
 Stop-Loss & Take-Profit Orders: Implement stop-loss & take-profit orders when
opening a trade. These orders automatically sells a security once it reaches
predetermined price level, limiting potential losses & locking in profits.
 Lock Rate: Locking in a rate refers to securing a fixed price for a future transaction, to
protect against potential price fluctuations.
 Futures Contracts: Futures contracts r standardized agreements to buy or sell an
underlying asset or fin instrument at a predetermined price & date in future. Futures
can be used for hedging & speculation, making them a key component of risk mkts.
o
o Forex mkt is an OTC mkt, where trans r not carried out on floor of exch & hence counter
party risk is gone. Ex- commodity futures.
o Forex risk is risk associated with change in value. As compared to exposure, which is risk
associated with absolute value of an asset.
o
Statutory basis of CBT
Cross-border trade in terms of international finance involves the financial aspects and transactions
that occur when goods and services are exchd between entities in different countries. This type of
trade requires careful consideration of various financial factors to ensure smooth and profitable
transactions.

Naturally there is risk involved in international transactions. And conflicts between parties may arise
in the control of forex for such CBT. To settle these disputes, All countries involved in CBT will have
their own laws which are a result of their unique culture, customs and practices. Whether statutes
governed by domestic country’s CB (seller) or foreign country’s CB (buyer) to be followed becomes a
matter of debate. There cannot be one common law for all nations. Therefore ICC situated in paris
fulfilled this need for an international agency to provide guidelines on CBT.

With focus on legal & regulatory compliance, CBT is governed by various statutory & regulatory
frameworks that differ from one country to another. In Ind, statutory basis for CBT is divided into 2
sects:

A] statues framed by country from where transaction is originated

Statues of IND- set of rules

1. Handbook of EXIM procedure: comprehensive guide - valuable resource for individuals &
businesses involved in exp activities within Ind. - Regulatory Frame: Foreign Trade Policy &
procedures, Customs regulations, & compliance requirements - Exp Promo Schemes: MEIS, EPCG
their eligibility criteria & benefits. - Doc & Procedures: required for exim – B/L, certificates of origin +
Information on legal & compliance aspects (control regulations, IPR & exp incentives- such as duty
drawback & GST refunds)- Trade Agreements: Infp on trade agreements that Ind is part of, FTA, PTA-
Customs Procedures: Details on customs clearance processes, customs valuation, doc req at Indn
ports & airports. Guidance on exp fin options, intl payment methods, & managing forex risk.

2. FTP: GOI - EXIM policy- rules & regulations. trade promo, exp incentives, & restrictions on certain
goods. DGFT = statutory authority responsible for admin of FTP in Ind & issuance of IEC.
- exp promo councils in Ind- responsible for promo & regulating exps of specific products, such as
Apparel Exp Promo Council (AEPC) for textiles & garments.

3. FERA & FEMA: FEMA replaced FERA in 1999 - governing exch control. Fera had strict controls to
make forex available and its violation was treated as criminal offence. FEMA -relaxed legal
framework for regulating forex trans(+ inward & outward remittances, trade in forex, & holding of
forex assets), violation- civil offence- promo trade without fear

4. non resident external rules

5. Customs Act, 1962: governs customs procedures, exim controls, tariffs, & admin of customs duties.
legal framework for functioning of Indn customs authorities

6. exch control department of RBI – issues circulars regularly, exch control manual published yearly

7. banking rules
[B] guidelines for all countries(framed by ICC)
ICC- provides guidelines for CBT - operates under own statutory basis & rules, not govt org. provides
statutory basis for ICC's in intl trade:
1. intl Court of Arb: leading inst for resolution of intl comm disputes.

2. Uniform Rules for Demand Guarantees 758: framework for demand guarantees used in intl trade.
sets forth rules & best practices for issuance, use, & demand for guarantees, ensuring that they r
clear, specific, & enforceable.

3. Incoterms: set of intl rules for interpretation of commonly used trade terms in intl trade contracts.

4. Uniform Customs & Practice for Documentary Credits 600: set of rule - govern use of LOC in intl
trade. standardized framework for issuance, negotiation, & financing of letters of credit, which r
crucial for intl trade fin.