Inter bank deals in forex trading

Primary dealers quote two-way prices and are willing to deal either side, i.e. they buy and sell the base currency up to conventional amounts at those prices. However, in interbank markets this is a matter of mutual accommodation. A dealer will be shown a two-way quote only if he / she extends the privilege to fellow dealers when they call for a quote.

Communications between dealers tend to be very terse. A typical spot transaction would be dealt as follows:

BANK A : “ Bank A calling. Your price on mark – dollar please.”

BANK B : “ Forty forty eight.”

BANK A : “ Ten dollars mine at forty eight.”

Bank A dealer identifies and asks himself for B’s DEM/USD. Bank A is dealing at 1.4540/1.4548. The first of these, 1.4540, is bank B’s price for buying USD against DEM or its bid for USD; it will pay DEM 1.4540 for every USD it buys. The second 1.4548, is its selling or offer price for USD, also called ask price; it will charge DEM 1.4548 for very USD it sells. The difference between the two, 0.0008 or 8 points is bank B’s bid – offer or bid – ask spread. It compensates the bank for costs of performing the market making function including some profit. Between dealers it is assumed that the caller knows the big figure, viz. 1.45. Bank B dealer therefore quotes the last two digits (points) in her bid offer quote viz. 40 – 48.

Bank A dealer whishes to buy dollars against marks and he conveys this in the third line which really means “ I buy ten million dollars at your offer price of DEM 1.4548per US dollar.”

Bank B is said to have been “hit” on its offer side.… Read the rest

Different types of transactions in the Foreign Exchange Market

A very brief account of certain important types of transactions conducted in the foreign exchange market is given below

Spot and Forward Exchanges

Spot Market:

The term spot exchange refers to the class of foreign exchange transaction which requires the immediate delivery or exchange of currencies on the spot. In practice the settlement takes place within two days in most markets. The rate of exchange effective for the spot transaction is known as the spot rate and the market for such transactions is known as the spot market.

Forward Market:

The forward transactions is an agreement between two parties, requiring the delivery at some specified future date of a specified amount of foreign currency by one of the parties, against payment in domestic currency be the other party, at the price agreed upon in the contract. The rate of exchange applicable to the forward contract is called the forward exchange rate and the market for forward transactions is known as the forward market. The foreign exchange regulations of various countries generally regulate the forward exchange transactions with a view to curbing speculation in the foreign exchanges market. In India, for example, commercial banks are permitted to offer forward cover only with respect to genuine export and import transactions. Forward exchange facilities, obviously, are of immense help to exporters and importers as they can cover the risks arising out of exchange rate fluctuations be entering into an appropriate forward exchange contract. With reference to its relationship with spot rate, the forward rate may be at par, discount or premium.Read the rest

Different Challenges Faced by the Multinational Companies (MNC’s)

A multinational company (MNC) is an enterprise that manages production or delivers services in more than one country. There are some challenges faced by MNC’s that transact business in international markets which can hinder its competitiveness hence its controversies and these are as follows;

Market Imperfections

It may seem strange that a corporation has decided to do business in a different country, where it doesn’t know the laws, local customs or business practices of such a country is likely to face some challenges that can reduce the manager’s ability to forecast business conditions. The additional costs caused by the entrance in foreign markets are of less interest for the local enterprise. Firms can also in their own market be isolated from competition by transportation costs and other tariff and non-tariff barriers which can force them to competition and will reduce their profits. The firms can maximize their joint income by merger or acquisition which will lower the competition in the shared market. This could also be the case if there are few substitutes or limited licenses in a foreign market.

Tax Competition

Countries and sometimes subnational regions compete against one another for the establishment of MNC facilities, subsequent tax revenue, employment, and economic activity. To compete, countries and regional political districts must offer incentives to MNCs such as tax breaks, pledges of governmental assistance or improved infrastructure. When these incentives fail they are liable to face challenges which limit their chance of becoming more attractive to foreign investment. However, some scholars have argued that multinationals are engaged in a ‘race to the top.’ While multinationals certainly regard a low tax burden or low labor costs as an element of comparative advantage, there is no evidence to suggest that MNCs deliberately avail themselves of tax environmental regulation or poor labour standards.… Read the rest

Levels of international strategy

There are mainly three levels of international strategy. They are

  • Corporate Strategy
  • Business Strategy
  • Functional Strategies

Short description of these three are given bellow,

1. Corporate Strategy:

Corporate strategy attempts to define the domain of businesses the firm intends to operate. Consider three Japanese electronics firms: Sony competes in the global market for con­sumer electronics and entertainment but has not broadened its scope into home and kitchen appliances. Corporation focuses only on electronic audio and video products. Each firm has answered quite differently the question of what constitutes its business domain. Their divergent answers reflect their differing corporate strengths and weaknesses, as well as their differing assessments of the opportunities and threats produced by the global economic and political environments.

  • The single- Business Strategy: The single-business strategy calls for a firm to rely on a single business, product, or service for all its revenue. The most significant advan­tage of this strategy is that the fine can concentrate all its resources and expertise on that one product or service. However, this strategy also increases the firm’s vulnerability to its competition and to changes in the external environment. For example, for a firm producing only VCRs, a new innovation such as the DVD player makes the firm’s single product obso­lete, and it may be unable to develop new products quickly enough to survive.
  • Related Diversification: Related diversification, the most common corporate strategy,, calls for the firm to operate in several different but fundamentally related busi­nesses, industries, or markets at the same time. This strategy allows the firm to leverage a distinctive competence in one market in order to strengthen its competitiveness in others.
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Steps in conducting a foreign market analysis

International businesses have the fundamental goals of expanding market share, revenues, and profits. They often achieve these goals by entering new markets or by introducing new products into markets in which they already have a presence. A firm’s ability to do this effectively hinges on its developing a through understanding of a given geographical or product market. To successfully increase market share, revenue, and profits, firms must normally follow three steps,

  1. Assess alternative markets
  2. Evaluate the respective costs, benefits, and risks of entering each, and
  3. Select those that hold the most potential for entry or expansion.

1. Assessing alternative foreign markets

In assessing alternative foreign market a firm must consider a variety of factor including the current and potential sizes of the markets, the levels of competition the firm will face, their legal and political environment, and socio-cultural  factors that may affect the firm’s operations and performance. Information about some of these factors is relatively objective and easy to obtain.

  • Market potential: The first step in foreign market selection is assessing market potential. Many publications such as those listed in “Building Global Skills” provide data about population, GDP, per capita GDP, public infrastructure, and ownership of such goods as automobiles and televisions. The decisions a firm draws from these information often depend upon the positioning of its products relative to those of the competitors. A firm producing high quality products at premium prices will find richer market attractive but may have more difficulty penetrating a poorer market. Conversely a firm specializing in low priced, lower quality goods may find the poorer market even more lucrative than the richer market.
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Sustaining international competitive advantage

Competitive advantage occurs when a firm is using a strategy that is currently not being currently implemented by any of its present and potential competitors. Sustainable competitive advantage continues to exist after the efforts by competitors to copy tat advantage continues to exist after the efforts by competitors to copy that competitive advantage have ceased. That means, the inability of competitors to copy the strategy makes for a sustainable competitive advantage. It is difficult to sustain a significant competitive advantage over a time without periodically revisiting the firm’s identity and purpose. For instance, reducing costs is not a true strategy because it simply provides a breathing space for the organization to formulate an appropriate strategy. The length of time over which a firm can maintain its competitive advantage is dependent on: –

  • Replicability: how easy it is for the competitors to duplicate it.
  • Transferability: how easy it is for the competitors to acquire the same resources and capabilities.
  • Transparency: to what degree can the competition tell what a firm is doing strategically.
  • Durability: how long can the firm keep its competitive advantage.

The most important resources of a firm are those that are durable, difficult to identify and understand, not easily duplicated, and in areas over which the firm has clear control.

Sustainability of competitive advantage depends on the following characteristics of the critical resources involved: –

  • The resources need to be valuable to the firm in exploiting opportunities and neutralizing threats.
  • The resources should be rare and of such a nature that they cannot be reproduced individually.
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